(9) Convertible Debt and Other Debt

Convertible Debt

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 10-18% 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 fairly 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.

On various dates during the year ended December 31, 2021, the Company issued convertible notes for net proceeds of approximately $5.5 million which contained varied terms and conditions as follows: a) 6-12 month maturity date; b) interest rates of 10-18% per annum and c) convertible to the Company’s common stock at issuance at fixed rates of $2.50 and $3.00 or at a variable conversion rates upon the Company’s up-listing to NASDAQ or NYSE or an event of default. 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 $646,718 was recorded as a debt discount to be amortized over the term of the notes. The aggregate relative fair value of $1.4 million for the warrants issued with the notes 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 BCF of $1.3 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, 2021. In the year ended December 31, 2021 the amortization of debt discount on convertible notes was approximately $6.7 million.

The specific terms of the convertible notes and outstanding balances as of December 31, 2021 are listed in the tables below.

 Schedule of Convertible Debts and Outstanding Balances

As of December 31, 2021 one lender holds approximately $9.4 million of the $14.4 million convertible notes outstanding.

For the year ended December 31, 2021, the Company recognized amortization expense related to the debt discounts indicated above of $6,689,238. The unamortized debt discounts as of December 31, 2021 related to the convertible debentures amounted to $1,536,649. For the year ended December 31, 2020, the Company recognized amortization expense related to the debt discounts indicated above $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.

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 year ended December 31, 2021, the Company incurred interest, penalties, and fees of approximately $1.47 million in connection with Standstill and Forbearance agreements. (See Note 11)

Convertible Loan Modifications and Extinguishments

 We refinanced certain convertible loans during the years ended December 31, 2021 and 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 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 2021 and 2020. We recorded losses on extinguishment of liabilities of $1,795,150 in 2021 and $3,575,878 in 2020. 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, 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 December 31, 2021 and 2020 the Company owes $691,500 and $691,500, 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. In the year ended December 31,2021 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 10).

Merchant Agreements

During the years ended December 31, 2021 and 2020 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 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 personally guarantees the performance of the loan issued December 21, 2021.

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

We amortized $49,564 and $318,641 of debt discounts during the years ended December 31, 2021 and 2020, respectively for all non-convertible notes. The total unamortized discount for all non-convertible notes as of December 31, 2021 and 2020 was $0 and $0, respectively.

Related Party Notes

During the year ended December 31, 2021, we received short-term non-convertible loans of $254,600 from related parties and repaid $354,600 of related party loans. These notes bear interest ranging from 0% to 15% interest and are due upon demand. In this period we also 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 10).

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 “2020 PPP”) and the Economic Injury Disaster Loan program (or “EIDL”). Under the 2020 PPP, the Company borrowed $367,039 (two-year term and 1% interest rate per annum). 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.

During the year ended December 31, 2021, the Company borrowed $367,039 through a second Payroll Protection program (or “2021 PPP”) and extended the monthly payment date on the EIDL loan to December 2022. During the year ended December 31,2021 the 2020 PPP was forgiven by the United States and SBA and in 2022 the 2021 PPP was similarly forgiven.