NOTE 6 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND NOTES PAYABLE

Debentures

The Company has Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) with two holders in the aggregate amount of $165,000 as of September 30, 2020 and December 31, 2019, and which currently are convertible at $2.50 per share and were due July 1, 2019. All assets of the Company are secured under the Debentures. The Debentures contain certain anti-dilutive protection provisions in the instance that the Company issues stock at a price below the stated conversion price of the Debentures, as well as other standard protections for the holder. The Debentures are currently in default and the Company is in negotiations with the holders to reach a new modification agreement or other resolution. If a resolution cannot be reached, the holder can accelerate all payments due, demand default interest, foreclose on the assets of the Company, or pursue other legal remedies available to it.

Convertible Bridge Notes

In 2017 and 2018, the Company issued a total of $2,771,908 in a convertible promissory note (the “Bridge Notes”) offering (collectively, the “Bridge Offering”), which included three of the Company’s directors converting $156,368 and one shareholder converting $11,784 of prior notes and cash advances, including interest thereon, into the Bridge Offering. In 2019, an additional $30,000 Bridge Note was issued to one investor. In June 2018, one of the original Bridge Notes for $50,000 plus $7,664 accrued interest was converted by its holder into 24,538 shares of common stock. Maturity is 36 months from issuance (24 months for the Bridge Notes issued in 2018 and 2019) with 15% annual interest which is capitalized each year into the principal of the Bridge Notes and paid in kind.

As of September 30, 2020, $1,777,516 of principal and accrued capitalized interest under the Bridge Notes was in default; and $2,511,975 in principal and accrued and capitalized interest under additional Bridge Notes was settled during the period ended September 30, 2020, with the holders of these notes converting their debt into 11,418,069 shares of common stock of the Company with a fair value of $2,397,794 based on the stock price of the Company on the date of conversion. The Company recorded a loss on extinguishment of these Bridge Notes of $503,762 as presented on the unaudited condensed consolidated financial statements. After September 30, 2020, an additional $130,000 of Bridge Notes including accrued and capitalized interest that was previously in default was also settled for the issuance of 590,909 shares of common stock (see Note 11). The Company is currently in discussions with the holders of the remaining Bridge Notes in an effort to reach a similar settlement.

Pursuant to ASC 825-10-25-1, Fair Value Option, the Company made an irrevocable election at the time of issuance to report the Bridge Notes at fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations as other income (expense) in each reporting period. The estimated fair value of the remaining outstanding Bridge Notes as of September 30, 2020 and December 31, 2019 was $2,981,000 and $2,473,000 (see Note 7), and the principal amount due was $1,093,415 and $2,801,908, respectively. During the nine months ended September 30, 2020 and 2019, the change in fair value resulted in a (loss) gain of ($1,666,422) and $490,079, respectively, which is presented as change in fair value of convertible bridge notes on the unaudited condensed consolidated statements of operations (see Note 6).

Paycheck Protection Program

On April 14, 2020, the Company received $142,942 under the Paycheck Protection Program (PPP) overseen by the U.S. Small Business Administration. The loan has an annual interest rate of 1% with loan payments being deferred six months from the date of the loan with a maturity date of April 14, 2022. The Company used these funds for payroll costs only and will apply for forgiveness of the loan under the program once the U.S. Small Business Administration starts accepting the forgiveness applications. As of September 30, 2020, the amount due on the loan of $142,929 has been presented in current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Convertible Notes Payable

On June 8 through September 9, 2020, the Company received a total of $142,500 under a promissory note with an unrelated third party with multiple tranches with interest payable at 8% annually. All outstanding principal and interest accrued and unpaid on the note shall be due and payable twelve (12) months after the respective tranche date. The principal and accrued interest is convertible into the Company’s equity on the same terms, conditions and other rights provided to investors in the next equity offering in an amount of at least $1 million. As of September 30, 2020, $142,500 remains due under these convertible notes payable and has been presented as such on the accompanying unaudited condensed consolidated balance sheets.

See Note 5 for notes payable outstanding with the Company’s related parties.