(9) Convertible Debt and Other Debt

Conversion of Notes

We issued 5,075.40 shares of our Series AA Convertible Preferred Stock in satisfaction of $12,688,635 of convertible promissory notes, Revolving Note and short-term loans issued:

Senior Secured Convertible Debentures and Warrants

We entered into Subscription Agreements (the “Subscription Agreement”) with various individuals (each, a “Purchaser”) between July 23, 2015 and March 31, 2016, pursuant to which the Company sold Senior Secured Convertible Debentures (the “Debentures”) and warrants to purchase shares of common stock equal to 50% of the number of shares issuable pursuant to the subscription amount (the “Warrants”) for an aggregate purchase price of $6,329,549 (the “Purchase Price”).

The Company issued a principal aggregate amount of $6,962,504 in Debentures which includes a 10% original issue discount on the Purchase Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance. The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares of the Company’s common stock at a fixed conversion price equal to $8.40 per share, subject to applicable adjustments. In the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock, at the Company’s discretion. On September 11, 2017, we notified Debenture holders that their Debentures will be extended 180 days beyond the original maturity date as permitted in the Debenture agreement. We will continue to pay interest on the Debentures until the extended maturity date. We accounted for the Debenture extensions as debt modifications and not extinguishment of debt since the changes in fair value are not substantial in accordance with ASC 470-50. We started amortizing the remaining unamortized discount as of September 11, 2017 over the new term, which extends 180 days beyond the original maturity date.

In connection with the Debentures issued, the Company issued warrants exercisable into a total of 376,759 shares of our common stock. The Warrants issued in this transaction are immediately exercisable at an exercise price of $12.00 per share, subject to applicable adjustments including full ratchet anti-dilution if we issue any securities at a price lower than the exercise price then in effect. The Warrants have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits, stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise price.

On May 2, 2018, the Company entered into a Securities Purchase Agreement with an existing shareholder pursuant to which the Company sold an aggregate of 100 shares of Series AA Convertible Preferred Stock for an aggregate Purchase Price of $250,000. We issued to the shareholder a new warrant to purchase 100,000 shares of common stock with an exercise price of $3.50 per share.

The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the Debentures and Warrants to purchase Common Stock held by the Debenture Holders entered into between July 22, 2015 and March 31, 2016 as first disclosed in the Company’s Current Report on Form 8-K filed on July 28, 2015. The fair value of $207,899 relating to the reduction in exercise price was treated as a deemed dividend and recorded as a charge against additional paid-in capital within equity. The amended Debenture conversion price was exempt from revaluation because a beneficial conversion feature had already been recorded on the Debenture at issuance.

Subject to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTCQB (or other primary trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise price of the Warrants for 15 out of 20 consecutive trading days.

In connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, Warrants and the other Transaction Documents. On May 14 and June 11, 2018, the Company signed letter agreements with the Debenture holders as explained below that discharged all of the Company’s obligations within the Debenture Agreement

Conversion of Debentures

On May 14, 2018, we entered into letter agreements (the “Letter Agreements”) with 22 investors (each a “Debenture Holder” and together the “Debenture Holders”) holding convertible debentures (collectively the “Debentures”) and warrants to purchase common stock (the “Debenture Warrants”) whereby the Debenture Holders agreed to convert a total of $6,220,500 in principal and original issue discount due them under the Debentures into 2,448.20 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 2,448,200 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained in the Debentures. The fair value of $29,865 relating to the adjustment in exercise price was treated as a loan modification and recorded as a gain toward the extinguishment of debt.

On June 11, 2018, the Company entered into additional Letter Agreements with 15 Debenture Holders whereby the Debenture Holders agreed to convert a total of $742,135 in principal and original issue discount due them under the Debentures into 296.80 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Debenture Holders were also: (a) issued amended Debenture Warrants such that the exercise price will be $3.50 per share; and (b) issued a new warrant with an exercise price of $3.50 per share to purchase 296,800 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the Debenture conversions). The Debenture Holders also agreed to waive any and all defaults or events of default by the Company with respect to any failure by the Company to comply with any covenants contained in the Debentures. The fair value of $3,155 relating to the adjustment in exercise price was treated as a loan modification and recorded as a gain toward the extinguishment of debt.

In connection with the above Debenture conversions and cancellation of the debt term, the Company recorded the full amount of the remaining unamortized Debenture discounts of $157,908 as interest expense by June 11, 2018. The Company recorded $287,676 of the Debenture discounts during 2018 through the cancellation date of June 11, 2018.

On various dates for the year ended December 31, 2018, the Company issued 56,007 shares of common stock based on the 10-day VWAP prior to quarter end to holders of the Debentures in payment of the quarterly interest accrued from the Debentures first anniversary date through June 11, 2018 for an aggregate amount of $211,047. We recognized a $9,615 gain on extinguishment of debt for the year ended December 31, 2018 by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through June 11, 2018. The Company, pursuant to a price protection provision triggered on May 2, 2018 with the sale of Series AA units, amended the conversion price of a March 12, 2018 loan to $2.50 per share. The fair value of $253,000, limited to the face value of the loan, relating to the reset in the conversion price was recorded as a debt discount and amortized as interest expense over the remaining loan term.

On various dates during the year ended December 31, 2019, the Company issued convertible notes for net proceeds of approximately $6.6 million which contained varied terms and conditions as follows: a) maturity dates ranging from seven days to 12 months; b) interest rates that accrue per annum ranging from 3% to 15%; c) convertible to the Company’s common stock at issuance at a fixed rate of $2.50 to $7.50 or convertible at variable conversion rates either after 6 months after issuance or in the event of a default. Certain of these notes were issued with shares of common stock or warrants to purchase common stock that were fair valued at issuance dates. The aggregate relative fair value of the shares of common stock or warrants to purchase common stock issued with the notes of $448,589 was recorded as a debt discount and amortized over the term of the notes. During the year ended December 31, 2019 we have also evaluated our convertible notes (upon issuance or modification) for any beneficial conversion feature (“BCF”) reporting the BCF as additional paid in capital and debt discount of $558,903. Finally, we evaluated our convertible notes for derivative liability treatment on an on-going basis and have determined that all our notes did not qualify for derivative accounting treatment at December 31, 2019. In the year ended December 31, 2019 the amortization of debt discount on convertible notes was $1,257,567.

The specific terms of the convertible notes and outstanding balances as of December 31, 2019 are listed in the tables below.

For the year ended December 31, 2019, the Company recognized amortization expense related to the debt discounts indicated above of $1,257,567. The unamortized debt discounts as of December 31, 2019 related to the convertible debentures and other convertible notes amounted to $619,227.

Standstill and Forbearance Agreements

On December 13, 2019, the Company entered into Standstill and Forbearance Agreements with lenders who hold convertible promissory notes with a total principal of $2,267,066. Pursuant to the Standstill and Forbearance Agreements, the lenders agreed to not convert any portion of their notes into shares of common stock at a variable rate until either January 30^th or January 31^st of 2020, and to waive, through January 30^th or January 31^st of 2020, all of the Company’s defaults under their notes including, but not limited to, the late filing of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019. The Company issued a total of 229,359 shares of common stock with a Securities Act restrictive legend (value $242,211) and warrants to acquire 300,000 shares of common stock (value $193,009) to the lenders in connection with the entrance into the Standstill and Forbearance Agreements. The value of these issuances was reported as Loss on extinguishment of liabilities. These securities were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.

Conversion of October 26, 2016 Revolving Note and May 19, 2017 Promissory Note

On June 11, 2018, the Company entered into a Letter Agreement with the Investor to convert a total of $5,500,000 in principal and interest due to the Investor pursuant to the Revolving Note and the May 19, 2017 promissory note into 2,200 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share. The Company also amended the Line of Credit Warrants held by the Investor. The Company lowered the Line of Credit Warrants’ exercise price from $12.00 per share to $3.50 per share. The fair value of $82,904 relating to the reduction in exercise price was treated as a loan modification and recorded as a charge against the extinguishment of debt.

The Company also issued a new warrant to the Investor with an exercise price of $3.50 per share to purchase 2,200,000 shares of common stock (the number of shares of common stock issuable upon conversion of the Series AA Convertible Preferred Stock shares received as a result of the conversion of a total of $5,500,000). In connection with the Letter Agreement, the Investor also waived $520,680 of interest and fees owed as of September 30, 2018. We recognized $520,680 as a gain on extinguishment of debt.

Convertible Loan Modifications and Extinguishments

We refinanced certain convertible loans during the years ended December 31, 2019 and 2018 at substantially the same terms for extensions ranging over a period of three to six months. We amortized any remaining unamortized debt discount as of the modification date over the remaining, extended term of the new loans. We applied ASC 470 of modification accounting to the debt instruments which were modified during the period or those settled with new notes issued concurrently for the same amounts but different maturity dates. The terms such as the interest rate, prepayment penalties, and default rates will be the same over the new extensions. According to ASC 470, an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a present value basis is less than 10 percent, the debt instruments are not considered to be substantially different and will be accounted for as modifications.

The cash flows of new debt exceeded 10% of the remaining cash flows of the original debt on several loans in 2019 and 2018. We recorded losses on extinguishment of liabilities of $795,089 in 2019 and gains on extinguishment of liabilities of $260,454 in 2018. Our gains and losses were measured by calculating the difference of the fair value of the new debt and the carrying value of the old debt.

The following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discounts, during 2019:

Other Notes

On September 9, 2019 we received a non-convertible loan for $400,000 from a private investor. This loan includes $45,000 of interest and fees through October 9, 2019. The loan is currently past due and the Company and the investor are negotiating in good faith to extend the loan.

On October 1, 2019, the Company and the holder of the $170,000 convertible loan issued in May 2017 agreed to extend the term of the loan to December 31, 2019. The Company agreed to issue 1,200 shares of its common stock per month while the note remains outstanding. The note will continue to earn 10% annual interest. The loan is currently past due and the Company and the investor are negotiating in good faith to extend the loan.

On October 11, 2019 we received a non-convertible loan with a one month term and a 2% interest charge for $25,000 from a private investor. The loan is past due and the Company and the investor are negotiating in good faith to extend the loan.

Conversion of Non-Convertible Notes

On June 11, 2018, the Company entered into Letter Agreements with certain private investors to convert a total of $176,000 in principal and interest due to the private investors pursuant to certain loan documents into 70.4 Series AA Units representing 70.4 shares of Series AA Convertible Preferred Stock with a conversion price of $2.50 per share and warrants to purchase 70,400 shares of common stock.

Merchant Agreements

During the years ended December 31, 2019 and 2018 we signed various Merchant Agreements which are secured by second position rights to all customer receipts until the loan has been repaid in full and subject to interest rates of 6% - 76%. As illustrated in the following table, under the terms of these agreements, we received the disclosed Purchase Price and agreed to repay the disclosed Purchase Amount, which is collected by the Merchant lenders at the disclosed Daily Payment Rate. The following table shows our Merchant Agreements as of December 31, 2019:

The following table shows our Merchant Agreements as of December 31, 2018:

We have accounted for the Merchant Agreements as loans under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts. The difference between the Purchase Amount and the Purchase Price is imputed interest that is recorded as interest expense when paid each day.

We amortized $95,916 and $112,429 of debt discounts during the year ended December 31, 2019 and 2018, respectively for all non-convertible notes. The total unamortized discount for all non-convertible notes as of December 31, 2019 was $1,769.

On November 15, 2019 the Company and its Merchant lenders agreed to a temporary reduction in the Daily Payment Rate from $10,745 to $2,500.

The Company’s Chief Executive Officer is personally guaranteeing $1,082,435 of loans outstanding as of December 31, 2019 under our Merchant Agreements.

Related Party Notes

In June 2018, we received a non-convertible loan of $15,000 from a private investor. The loan includes a one-year term and 15% guaranteed interest. This loan remains outstanding at December 31, 2019 and is currently past due.

During the year ended December 31, 2019, we received short-term non-convertible loans of $259,500 from related parties. The loans were repaid in full as of December 31, 2019, except for $66,500.