Convertible Debt

On various dates during the nine months ended September 30, 2021, the Company issued convertible notes for a total of $5,857,375 which contained varied terms and conditions as follows: a) 6-12 month maturity date; b) interest rates of 10-18%; c) convertible to the Company’s common stock at issuance at a fixed rate of $2.50 or at variable conversion rates upon the Company’s up-listing to NASDAQ or NYSE or an event of default. These notes were issued with either shares of common stock or warrants to purchase common stock that were fair valued at issuance date. The aggregate relative fair value of the shares of common stock and warrants issued with the notes of $1,954,744 was 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 $1,231,528 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, 2021.

The specific terms of the convertible notes and outstanding balances as of September 30, 2021 are listed in the tables below.

Schedule of Convertible Debts and Outstanding Balances 

As of September 30, 2021 one lender holds approximately $9.4 million of the $14.5 million convertible notes outstanding.

For the nine months ended September 30, 2021, the Company recognized amortization expense related to the debt discounts indicated above of $5,260,151. The unamortized debt discounts as of September 30, 2021 related to the convertible debentures and other convertible notes amounted to $2,692,163.

Standstill and Forbearance Agreements

The Company has entered into Standstill and Forbearance Agreements with lenders who hold  variable-rate  convertible notes with a total principal as of June 30, 2021 of $1.57 million. 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 March 31, 2021 for convertible notes with a principal balance of $469,000  and until April 16, 2021 for convertible notes with a principal balance of $1.1 million. During the third quarter of 2021, the Company settled three lenders (five Notes) with total principal of  $827,500, leaving two final lenders (five Notes) with total principal of $741,500 outstanding. For the nine months ended September 30, 2021, the Company incurred  interest, penalties, and fees of approximately $1.25 million in connection with Standstill and Forbearance Agreements. 

Convertible Loan Modifications and Extinguishments

We refinanced certain convertible loans during the nine months ended September 30, 2021 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, 2021 we recorded losses on extinguishment of liabilities of approximately $1.9 million 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, net of unamortized discounts, during 2021:

 Summary of Changes in Convertible Debt and Revolving Note Payable, Net of Unamortized Discounts

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 September 30, 2021, 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. During the quarter ended September 30, 2021 the Company issued 17 shares of Series AA preferred stock and 17,000 warrants to acquire common stock (five year term and $3.50 exercise price) to the investor to settle principal and interest on this loan. See Note 6.

Merchant Agreements

We have 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 9.3% - 14% per month. 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 Company’s Chief Executive Officer is personally guaranteeing the performance of the merchant loans.

The following table shows our Merchant Agreements as of September 30, 2021:

 Schedule of Merchant Agreements

The following table shows our Merchant Agreements as of December 31, 2020:

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.

Related Party Notes

During the nine months ended September 30, 2021, we received short-term non-convertible loans of $194,600 from related parties, which bear interest ranging from 10% to 15% and are due upon demand. In this time, we repaid 2021 and prior loans for $256,600 in cash and issued 69.5 shares of Series AA preferred stock and 69,450 warrants to acquire common stock (five year term and $3.50 exercise price) to settle $66,000 principal and $107,625 interest. See Note 6.

Long term debt

During the nine months ended September 30, 2021, the Company borrowed $367,038 through a COVID-19 Payroll Protection Program (or “PPP”) that was sponsored by the United States and administered by the Small Business Administration (the “SBA”). The PPP loan has a 1% interest rate and a five-year term. During this period, a prior PPP loan to the Company, borrowed in 2020 ($367,039) was forgiven by the SBA. This gain was reported in losses on extinguishment of liabilities on the consolidated statements of operations.

The Company also entered into another COVID-19 government loan in 2020, the Economic Injury Disaster Loan (or “EIDL”). 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.