Annual report pursuant to Section 13 and 15(d)

Convertible Debt and Other Debt

v3.21.1
Convertible Debt and Other Debt
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Convertible Debt and Other Debt

(9) Convertible Debt and Other Debt

 

Convertible Debt

 

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. We have also evaluated our convertible notes (upon issuance or modification) for any beneficial conversion feature (“BCF”) and recorded a BCF of $558,903 as a debt discount with a corresponding credit to additional paid in capital to be amortized over the term of the notes.

 

On various dates during the year ended December 31, 2020, the Company issued convertible notes for net proceeds of approximately $8.3 million which contained varied terms and conditions as follows: a) 6-12 month maturity date; b) interest rates of 10-12% per annum c) convertible to the Company’s common stock at issuance at a fixed rate of $2.50. 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 issued with the notes of $214,419 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 $4.9 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 BCF of $1.8 million as a debt discount to be amortized over the term of the notes. 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, 2020. In the year ended December 31, 2020 the amortization of debt discount on convertible notes was $5,118,222.

 

The specific terms of the convertible notes and outstanding balances as of December 31, 2020 are listed in the tables below.

 

Inception Date   Term     Loan Amount     Outstanding balance with OID     Original Issue Discount (OID)     Interest Rate     Conversion Price     Deferred Finance Fees     Discount for conversion feature and warrants/shares  
                                                 
May 17, 2018 (2)     12 months     $ 380,000     $ 166,703     $ 15,200       8 %   $ 2.50     $ 15,200     $ 332,407  
June 8, 2018 (1) (4)     6 months     $ 50,000     $ 50,000     $ 2,500       2 %   $ 7.50     $ 2,500     $ 3,271  
October 19, 2018 (1)     6 months     $ 100,000     $ 100,000     $ -       5 %   $ 7.50     $ -     $ -  
November 13, 2018 (1 (3) (4)     6 months     $ 200,000     $ 220,000     $ -       5 %   $ 2.50     $ -     $ 168,634  
January 3, 2019 (1) (4)     6 months     $ 50,000     $ 50,000     $ 2,500       24 %   $ 7.50     $ 2,500     $ -  
February 21, 2019 (2)     12 months     $ 215,000     $ 215,000     $ -       4 %   $ 2.50     $ 15,000     $ 107,709  
March 18, 2019 (1)     6 months     $ 100,000     $ 100,000     $ -       4 %   $ 7.50     $ -     $ 10,762  
June 4, 2019 (2)     9 months     $ 500,000     $ 302,484     $ -       8 %   $ 2.50     $ 40,500     $ 70,631  
June 19, 2019 (2)     12 months     $ 105,000     $ 105,000     $ -       4 %   $ 2.50     $ 5,000     $ 2,646  
May 20, 2019 (1) (4)     3 months     $ 100,000     $ 91,250     $ -       5 %   $ 2.50     $ -     $ 13,439  
June 7, 2019 (1) (4)     6 months     $ 125,000     $ 110,000     $ -       5 %   $ 7.50     $ -     $ 18,254  
July 1, 2019 (2)     12 months     $ 107,500     $ 107,500     $ -       4 %   $ 2.50     $ 7,500     $ 85,791  
July 19, 2019 (2)     12 months     $ 115,000     $ 115,000     $ -       4 %   $ 2.50     $ 5,750     $ 15,460  
July 19, 2019 (2)     12 months     $ 130,000     $ 130,000     $ -       6 %   $ 2.50     $ 6,500     $ -  
August 14, 2019 (1) (4)     6 months     $ 50,000     $ 50,000     $ -       2 %   $ 7.50     $ -     $ -  
September 27,2019 (2)     12 months     $ 78,750     $ 78,750     $ -       4 %   $ 2.50     $ 3,750     $ 13,759  
October 24, 2019 (2)     12 months     $ 78,750     $ 78,750     $ -       4 %   $ 2.50     $ 3,750     $ -  
November 1, 2019 (2)     12 months     $ 270,000     $ 270,000     $ -       6 %   $ 2.50     $ 13,500     $ -  
November 15, 2019 (1)     12 months     $ 385,000     $ 320,000     $ 35,000       10 %   $ 2.50     $ 35,000     $ 90,917  
January 2, 2020 (1)     12 months     $ 330,000     $ 330,000     $ 30,000       10 %   $ 2.50     $ 30,000     $ 91,606  
January 24, 2020 (1)     12 months     $ 247,500     $ 247,500     $ 22,500       10 %   $ 2.50     $ 22,500     $ 89,707  
January 29, 2020 (1)     12 months     $ 363,000     $ 363,000     $ 33,000       10 %   $ 2.50     $ 33,000     $ 297,000  
February 12, 2020 (1)     12 months     $ 275,000     $ 275,000     $ 25,000       10 %   $ 2.50     $ 25,000     $ 225,000  
February 19, 2020 (1)     12 months     $ 165,000     $ 165,000     $ 15,000       10 %   $ 2.50     $ 15,000     $ 135,000  
March 11, 2020 (1)     12 months     $ 330,000     $ 330,000     $ 30,000       10 %   $ 2.50     $ 30,000     $ 232,810  
March 13, 2020 (1)     12 months     $ 165,000     $ 165,000     $ 15,000       10 %   $ 2.50     $ 15,000     $ 60,705  
March 26, 2020 (1)     12 months     $ 111,100     $ 111,100     $ 10,100       10 %   $ 2.50     $ 10,100     $ 90,900  
April 8, 2020     12 months     $ 276,100     $ 276,100     $ 25,100       10 %   $ 2.50     $ 25,000     $ 221,654  
April 17, 2020     12 months     $ 143,750     $ 143,750     $ 18,750       10 %   $ 2.50     $ -     $ 96,208  
April 30, 2020     12 months     $ 546,250     $ 546,250     $ 71,250       10 %   $ 2.50     $ 47,500     $ 427,500  
May 6, 2020     12 months     $ 460,000     $ 460,000     $ 60,000       10 %   $ 2.50     $ 40,000     $ 360,000  
May 18, 2020     12 months     $ 546,250     $ 221,250     $ 46,250       10 %   $ 2.50     $ 35,500     $ 439,500  
June 2, 2020     12 months     $ 902,750     $ 652,750     $ 92,750       10 %   $ 2.50     $ 58,900     $ 708,500  
June 12, 2020     12 months     $ 57,500     $ 57,500     $ 7,500       10 %   $ 2.50     $ 5,000     $ 45,000  
June 22, 2020     12 months     $ 138,000     $ 138,000     $ 18,000       10 %   $ 2.50     $ 12,000     $ 108,000  
July 7, 2020     12 months     $ 586,500     $ 586,500     $ 76,500       10 %   $ 2.50     $ 51,000     $ 400,234  
July 17, 2020     12 months     $ 362,250     $ 362,250     $ 47,250       10 %   $ 2.50     $ 31,500     $ 185,698  
July 29, 2020     12 months     $ 345,000     $ 345,000     $ 45,000       10 %   $ 2.50     $ 30,000     $ 241,245  
July 21, 2020 (5)     12 months     $ 115,000     $ 115,000     $ 15,000       10 %   $ 2.50     $ 10,000     $ 24,875  
August 14, 2020     12 months     $ 762,450     $ 462,450     $ 69,450       10 %   $ 2.50     $ 66,300     $ 580,124  
September 10, 2020     12 months     $ 391,000     $ 391,000     $ 51,000       10 %   $ 2.50     $ 34,000     $ 231,043  
September 21, 2020 (5)     12 months     $ 345,000     $ 345,000     $ 45,000       10 %   $ 2.50     $ 30,000     $ 66,375  
September 23, 2020 (5)     12 months     $ 115,000     $ 115,000     $ 15,000       10 %   $ 2.50     $ 10,000     $ 20,500  
September 25, 2020 (5)     12 months     $ 115,000     $ 115,000     $ 15,000       10 %   $ 2.50     $ -     $ 19,125  
December 3, 2020     12 months     $ 299,000     $ 299,000     $ 39,000       10 %   $ 2.50     $ 26,000     $ 197,882  
December 21, 2020     6 months     $ 100,000     $ 100,000     $ 5,000       12 %   $ 2.50     $ 29,964     $ 24,400  
October 22, 2020 (5)     12 months     $ 115,000     $ 115,000     $ 15,000       10 %   $ 2.50     $ 10,000     $ 18,875  
December 23, 2020 (5)     6 months     $ 1,000,000     $ 1,000,000     $ 100,000       10 %   $ 2.50     $ -     $ 833,536  
                                                                 
                    $ 11,493,837     $ 1,113,600                     $ 889,714     $ 7,406,682  

 

  (1) The Note is past due. The Company and the lender are negotiating in good faith to extend the loan.
  (2) As of December 31, 2020 lender entered into a Standstill and Forbearance agreement (as described below). Loan is convertible at $2.50 until the expiration of the agreement.
  (3) Interest was capitalized and added to outstanding principal.
  (4) During the year ended December 31, 2020 the Company entered into Rate Modification Agreements with these lenders.
  (5) The Company has agreed to issue shares of common stock or warrants to lenders if their notes are not repaid by a defined date.

 

As of December 31, 2020 one lender holds approximately $7.2 million of the $11.5 million convertible notes outstanding.

 

In the year ended December 31, 2020, the Company issued three loans for $875,000 to its pending merger partner, Cannaworx who agreed to repay the loans directly to the Company’s lender, on the Company’s behalf. In the fourth quarter, the Company netted the $875,000 of the receivables against loans payable to this lender following confirmation of a right of offset agreement.

 

For the year ended December 31, 2020, the Company recognized amortization expense related to the debt discounts indicated above of $5,118,222. The unamortized debt discounts as of December 31, 2020 related to the convertible debentures and other convertible notes amounted to $3,948,167 (net of a $73,750 discount to the $875,000 loan receivable). For the year ended December 31, 2019, the Company recognized amortization expense related to the debt discounts indicated above $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 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, September 30, 2020, October 15, 2020, October 31,2020, November 15, 2020, November 30, 2020, December 15, 2020 and December 31,2020 the Company extended these Standstill and Forbearance Agreements until dates ranging from November 16, 2020 to January 15, 2021. For the year ended December 31, 2020, the Company incurred fees of approximately $2.5 million to extend the agreements. 

 

Convertible Loan Modifications and Extinguishments

 

We refinanced certain convertible loans during the years ended December 31, 2020 and 2019 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 2020 and 2019. We recorded losses on extinguishment of liabilities of $3,575,878 in 2020 and $795,089 in 2019. 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 2020:

 

    2020  
Balance at January 1,   $ 6,121,338  
Issuance of convertible debt, face value     10,202,150  
Deferred financing cost     (1,905,350 )
Beneficial conversion feature on convertible note     (1,756,311 )
Debt discount from shares and warrants issued with debt     (4,874,250 )
Conversion of debt into equity     (1,701,872 )
Payments     (2,857,007 )
Accretion of interest and amortization of debt discount to interest expense through December 31     5,118,222  
Note receivable netted against loan     (801,250 )
Balance at December 31     7,545,670  
Less: current portion     7,545,670  
Convertible debt, long-term portion   $ -  

 

Other Notes

 

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 year ended December 31, 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 December 31, 2020 and 2019 the Company owes $691,500 and $400,000, respectively 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.

 

Merchant Agreements

 

During the years ended December 31, 2020 and 2019 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, 2020:

 

Inception Date  

Purchase

Price

    Purchased Amount     Outstanding Balance    

Daily Payment

Rate

   

Deferred Finance

Fees

 
November 5, 2020   $ 200,000     $ 275,800     $ 163,955       1,724.00     $ -  
November 19, 2020     100,000       137,900       85,013       985.00       -  
    $ 300,000     $ 413,700     $ 248,968     $ 2,709.00     $             -  

 

The following table shows our Merchant Agreements as of December 31, 2019:

 

Inception Date  

Purchase

Price

    Purchased Amount     Outstanding Balance    

Daily Payment

Rate

   

Deferred Finance

Fees

 
August 5, 2019   $ 600,000     $ 816,000     $ 421,024       4,533.33     $ 6,000  
August 19, 2019     350,000       479,500       272,315       2,664.00       3,000  
August 23, 2019     175,000       239,750       132,284       1,410.00       1,750  
September 19, 2019     275,000       384,275       256,812       2,137.36       5,000  
    $ 1,400,000     $ 1,919,525     $ 1,082,435     $ 10,744.69     $ 15,750  

 

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 $318,641 and $95,916 of debt discounts during the years ended December 31, 2020 and 2019, respectively for all non-convertible notes. The total unamortized discount for all non-convertible notes as of December 31, 2020 and 2019 was $0 and $1,769, respectively.

 

On November 15, 2019 the Company and its Merchant lenders agreed to a temporary reduction in the Daily Payment Rate for the four loans outstanding during 2019 (and as of December 31, 2019). 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 year ended December 31, 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.

 

The new loans with Merchant lenders were executed in November 2020, as illustrated in the table as of December 31, 2020.

 

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, 2020 and is currently past due.

 

During the year ended December 31, 2020, we received short-term non-convertible loans of $283,700 from related parties and repaid $199,200 of related party loans. These notes bear interest ranging from 0% to 15% interest and are due upon demand.

 

Long term debt

 

During the year ended December 31, 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.