Convertible Debt and Other Debt
|9 Months Ended|
Sep. 30, 2020
|Debt Disclosure [Abstract]|
|Convertible Debt and Other Debt||
On various dates during the nine months ended September 30, 2020, the Company issued convertible notes for net proceeds of approximately $7.0 million which contained varied terms and conditions as follows: a) 12 month maturity date; b) interest rate of 10%; c) convertible to the Company’s common stock at issuance at a fixed rate of $2.50. These notes were issued with common stock and warrants to purchase common stock that were fair valued at issuance date. The aggregate relative fair value of common stock issued with the notes of $0.15 million was recorded as a debt discount to be amortized over the term of the notes. The aggregate relative fair value of the warrants issued with the notes of $4.0 million was also recorded as a debt discount to be amortized over the term of the notes. We then computed the effective conversion price of the notes, and recorded a $1.4 million beneficial conversion feature as a debt discount to be amortized over the term of the notes. We also evaluated the convertible notes for derivative liability treatment and determined that the notes did not qualify for derivative accounting treatment at September 30, 2020.
The specific terms of the convertible notes and outstanding balances as of September 30, 2020 are listed in the tables below.
As of September 30, 2020 one lender holds approximately $8.7 million of the $11.8 million convertible notes outstanding.
For the nine months ended September 30, 2020, the Company recognized amortization expense related to the debt discounts indicated above of $3,100,990. The unamortized debt discounts as of September 30, 2020 related to the convertible debentures and other convertible notes amounted to $4,738,724.
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 30th or January 31st of 2020, and to waive, through January 30th or January 31st 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.
On January 31, 2020 and again on March 3, 2020, April 6, 2020, April 30, 2020, May 15, 2020, May 31, 2020, June 15, 2020, June 30, 2020, July 15, 2020, July 31, 2020, August 15, 2020, August 31, 2020, September 15, 2020 and September 30, 2020 the Company extended these Standstill and Forbearance Agreements until dates ranging from November 16, 2020 to December 31, 2020. For the nine months ended September 30, 2020, the Company incurred fees of approximately $2.1 million to extend the agreements.
Convertible Loan Modifications and Extinguishments
We refinanced certain convertible loans during the nine months ended September 30, 2020 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 quarter 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. During the nine months ended September 30, 2020 we recorded losses on extinguishment of liabilities of approximately $3.2 million by calculating the difference of the fair value of the new debt and the carrying value of the old debt. The reported loss on extinguishment of liabilities includes $1,036,638 of non-cash expenses for common stock and warrants issued and writeoffs of any unamortized discount at the date of modification.
The following table provides a summary of the changes in convertible debt, net of unamortized discounts, during 2020:
On September 9, 2019 and February 28, 2020 we received a total of $966,500 unsecured non-convertible loans from a private investor with a one-month term. During the nine months ended September 30, 2020, the Company received net proceeds of $463,500, issued 150,000 warrants to purchase common stock (five-year term and $3.50 exercise price) and repaid $275,000. The relative fair value of $185,660 of the warrants issued with the note was recorded as a debt discount to be amortized over the term of the notes. As of September 30, 2020 the Company owes $691,500 on these notes which are past due. The Company and the investor are negotiating in good faith to extend the loans.
On October 1, 2019, the Company and the holder of the $170,000 non-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.
For the nine months ended September 30, 2020, the Company recognized amortization expense related to debt discounts attributable to other notes of $353,480.
During 2020 we had signed various Merchant Agreements which were secured by second position rights to all customer receipts until the loan has been repaid in full and subject to interest rates ranging from 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:
On November 15, 2019 the Company and its Merchant lenders agreed to a temporary reduction in the Daily Payment Rate. Subsequently, on January 31, 2020, March 2, 2020 and April 6, 2020 the Company and its Merchant lenders agreed to extend the term of the reduction of its Daily Payment Rate, ultimately to April 30, 2020. The Company issued 495,000 warrants to lenders (valued at $969,745) as compensation for these agreements. The warrants have a three year life and a $3.50 exercise Price. During the nine months ended September 30, 2020 the Company repaid these loans in full for $970,028 in cash, 112,885 shares of common stock (valued at $225,770) and 56,442 warrants that have a three year life and a $3.50 exercise price (valued at $97,654) and the loss incurred from the settlements is $58,476.
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 September 30, 2020 and is currently past due.
As of September 30, 2020 we also hold $90,000 of short-term non-convertible loans from related parties. These notes bear interest ranging from 0% to 15% interest and are due upon demand.
Long term debt
During the nine months ended September 30, 2020, the Company borrowed $527,039 through COVID-19 programs that were sponsored by the United States and administered by the Small Business Administration (the “SBA”). The most notable programs were the Payroll Protection Program (or “PPP”) and the Economic Injury Disaster Loan program (or “EIDL”). The Company’s PPP loan, $377,039, has a two- year term and bears interest at 1% per annum. Under the PPP, the Company can be granted forgiveness for all or a portion of these loans based on the Company’s spending on payroll, mortgage interest, rent and utilities. The Company’s EIDL loan, $150,000, accrues interest at 3.75% and requires monthly payments of $731 for principal and interest beginning in June 2021. The balance of the principal will be due in 30 years. In connection with the EIDL loan the Company entered into a security agreement with the SBA, whereby the Company granted the SBA a security interest in all of the Company’s right, title and interest in all of the Company’s assets.
The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef