Quarterly report pursuant to Section 13 or 15(d)

Notes Payable

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Notes Payable
9 Months Ended
Sep. 30, 2018
Notes to Financial Statements  
Note 7 - Notes Payable

The Company has the following notes payable outstanding as of September 30, 2018 and December 31, 2017:

 

    September 30     December 31  
    2018     2017  
             
Secured convertible promissory notes which mature on December 15, 2018, bear interest at 10% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.   $ 990,000     $ 1,550,000  
                 
Secured promissory note which matures on December 15, 2018 and bears interest at 15% per annum.     271,686       1,146,686  
                 
Unsecured promissory note which matures on December 15, 2020, and bears interest at LIBOR + 500 per annum.     13,000,000       13,000,000  
                 
Unsecured convertible promissory notes which mature on June 15, 2023, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.   $ 760,000     $ -  
                 
Total convertible notes payable before discount     15,021,686       15,696,686  
                 
Less discounts     (1,392,361 )     (1,841,867 )
Less debt issuance costs     (65,747 )     (160,041 )
                 
Total notes payable     13,563,578       13,694,778  
                 
Less current portion     3,865,000       4,050,000  
                 
Notes payable, net of current portion   $ 9,698,578     $ 9,644,778  

 

As of September 30, 2018, scheduled principal payments due on convertible notes payable are as follows:

 

Twelve months ended September 30,      
2019   $ 3,865,000  
2020     3,000,000  
2021     7,396,686  
2022     -  
2023     760,000  
    $ 15,021,686  

 

From July 30, 2013 through December 24, 2013, the Company sold convertible notes (the “2013 Notes”) and warrants to unaffiliated accredited investors totaling $1,902,500. The 2013 Notes had an original term of three years which was extended to July 31, 2018, bear interest at 10% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. For each dollar invested, the investor received two warrants to purchase one shares of common stock of the Issuer at an exercise price of $0.75 per share. The 2013 Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. Notwithstanding the extended maturity date indicated above, the holders of the 2013 Notes are required, pursuant to an Intercreditor Agreement entered into on August 14, 2014, to stand still and not take any action with respect to their 2013 Notes or the previously entered security agreements or pledge agreement securing the same (even in the event of default or maturity), except for the right to convert the 2013 Notes to common stock in their sole discretion until the AC Midwest secured debt (see below) is paid in full. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the nine months ended September 30, 2018 and 2017, was $117,258 and $116,875, respectively. A discount on the notes payable of $841,342 was recorded based on the value of the warrants issued using a Black-Scholes options pricing model. Amortized interest expense for the nine months ended September 30, 2018 and 2017 on this discount was $80,269 and $115,182, respectively. As of September 30, 2018 and December 31, 2017, total principal of $990,000 and $1,550,000 was outstanding on these notes.

  

During the second quarter of 2018, the Company commenced and continues to make a private placement offering exempt from registration under the Securities Act, of up to $3,500,000 12.0% unsecured convertible promissory notes (the “2018 Unsecured Notes”) and warrants, to certain (i) accredited investors and (ii) holders of the 2013 Notes in the aggregate principal amount of $1,550,000 which holders have been given the opportunity to exchange their current notes for the new unsecured notes and warrants. The information provided herein does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein. Such securities have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements.

 

On June 15, 2018, the Company issued 2018 Unsecured Notes totaling $560,000 and warrants to certain holders of the 2013 Notes in exchange for their secured 2013 Notes (see description above of the private placement offering commenced during the second quarter of 2018). The 2018 Unsecured Notes have a term of five years, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. For each dollar exchanged, the investor received a warrant to purchase one share of common stock of the Company at an exercise price of $0.70 per share. The 2018 Unsecured Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. Loss on this debt exchange was $44,036. Interest expense for the nine months ended September 30, 2018 and 2017, was $22,140 and $0, respectively. A discount on the notes payable of $45,464 was recorded based on the value of the fair value of the note and warrants exchanged. On August 31, 2018, the Company issued an additional 2018 Note totaling $200,000 and warrants to an unaffiliated accredited investor. A discount on the notes payable of $28,900 was recorded based on the fair value of the warrants issued with this note. Amortized interest expense for the nine months ended September 30, 2018 and 2017 on this discount was $3,822 and $0, respectively. These securities were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act as well as under Section 3(a)(9) under the Securities Act. As of September 30, 2018 and December 31, 2017, total principal of $760,000 and $0 was outstanding on the 2018 Unsecured Notes.

 

New AC Midwest Secured Note

 

On November 29, 2016 the Company closed on the transactions contemplated by a new Amended and Restated Financing Agreement (the “Restated Financing Agreement”) entered into with AC Midwest Energy LLC (“AC Midwest”) on November 1, 2016 whereby at closing AC Midwest, which held various warrants to acquire shares of the Company’s common stock, exercised on a cashless basis a portion of its warrants for 10,000,000 shares of the Company’s common stock and exchanged previous AC Midwest Notes, together with all accrued and unpaid interest thereon, and the remaining unexercised portion of its warrants, for (i) a new secured note in the principal amount of $9,646,686 (the “New AC Midwest Secured Note”), and (ii) a subordinated unsecured note in the principal amount of $13,000,000 (the “AC Midwest Subordinated Note”). The New AC Midwest Secured Note, which was to mature on December 15, 2018 and is guaranteed by MES, is nonconvertible and bears interest at a rate of 12.0% per annum, payable quarterly in arrears on or before the last day of each fiscal quarter beginning December 31, 2016. Commencing on June 15, 2017 and continuing on each September 15, December 15, March 15 and June 15 thereafter, the Company shall pay principal on the New AC Midwest Secured Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 on March 15, 2018, (iii) with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest under the New AC Midwest Secured Note on the maturity date.

  

On June 14, 2018, the Company along with MES entered into Amendment No. 1 (“Amendment No. 1”) to the Restated Financing Agreement with AC Midwest. Pursuant to Amendment No. 1, the parties agreed that the remaining principal balance ($521,686) due under the New AC Midwest Secured Note referenced therein (which prior to Amendment No. 1 was due on June 15, 2018) would be paid as follows: (a) $250,000 on or prior to June 15, 2018 (which was paid on that date), and (ii) the balance thereof on or prior to September 1, 2018. In addition, the parties agreed that following June 15, 2018, the New AC Midwest Secured Note shall bear interest on the unpaid principal balance thereof at a rate equal to the current interest rate provided therein plus 3.0% per annum until the remaining principal balance is paid in full.

 

On September 12, 2018, the Company along with MES entered into Amendment No. 2 (“Amendment No. 2”) to the Restated Financing Agreement with AC Midwest. Pursuant to Amendment No. 2, the parties agreed that the remaining principal balance of $271,686 due under the New AC Midwest Secured Note referenced therein would be paid on or prior to December 15, 2018.

 

The New AC Midwest Secured Note is secured, like the previous AC Midwest Notes which were exchanged and cancelled, by all of the assets of the Company and MES. Interest expense for the nine months ended September 30, 2018 and 2017 was $56,127 and $220,182, respectively. As of September 30, 2018 and December 31, 2017, total principal of $271,686 and $1,146,686 was outstanding on this note.

 

AC Midwest Subordinated Note

 

The AC Midwest Subordinated Note, which will mature on December 15, 2020 and is guaranteed by MES, is nonconvertible and bears interest equal to the three-month LIBOR rate plus 5.0% per annum, payable quarterly on or before the last day of each fiscal quarter beginning December 31, 2016. The interest rate shall be subject to adjustment each quarter based on the then current LIBOR rate. Commencing on June 15, 2017 and continuing on each September 15, December 15, March 15 and June 15 thereafter, the Company shall pay principal on the AC Midwest Subordinated Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 per quarter for the 2018 calendar year, and (iii) thereafter $750,000 per quarter, with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest on the maturity date. Notwithstanding the foregoing, until the New AC Midwest Secured Note and a letter of credit note issued by the Company to AC Midwest on January 28, 2016 in the amount of $2,000,000 (the “LC Note”) are paid in full, AC Midwest will not be entitled to receive any payment on account of the AC Midwest Subordinated Note (other than regularly scheduled interest payments). Interest expense on the AC Midwest Subordinated Note for the nine months ended September 30, 2018 was $698,563. As of September 30, 2018 and December 31, 2017, total principal of $13,000,000 and $13,000,000, respectively, was outstanding on this note. The Company determined that the rate of interest on the AC Midwest Subordinated Note was a below market rate of interest and determined that a discount of $2,400,000 should be recorded. This discount is based on an applicable market rate for unsecured debt for the Company of 15% and will be amortized as interested expense over the life of the loan. Amortized discount recorded as interest expense for the nine months ended September 30, 2018 was $294,110. The LC Note was issued to evidence any indebtedness owed by the Company arising from any draws made under a letter of credit arranged for the Company by AC Midwest with its bank. Although no amounts have yet to be drawn on the letter of credit, the letter of credit remains available.