Quarterly report pursuant to Section 13 or 15(d)

Convertible Debt and Other Debt

v3.20.2
Convertible Debt and Other Debt
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Convertible Debt and Other Debt
  6) Convertible Debt and Other Debt

 

Convertible Debt

 

On various dates during the six months ended June 30, 2020, the Company issued convertible notes for net proceeds of approximately $4.4 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 warrants to purchase common stock that were fair valued at issuance date. The aggregate relative fair value of the warrants issued with the notes $2,705,996 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 $982,097 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 quality for derivative accounting treatment at June 30, 2020.

  

The specific terms of the convertible notes and outstanding balances as of June 30, 2020 are listed in the tables below.

 

Lender   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  
Vision #1   February 15, 2018 (2)(3)(4)   6 months   $ 100,000     $ 115,000     $ -       5 %     2.50     $ 9,000     $ 17,738  
Auctus   May 17, 2018 (2)   12 months   $ 380,000     $ 166,703     $ 15,200       8 %     2.50     $ 15,200     $ 332,407  
Carlino   June 8, 2018 (1)(4)   6 months   $ 50,000     $ 50,000     $ 2,500       2 %     7.50     $ 2,500     $ 3,271  
GS   June 16, 2018 (2)   9 months   $ 130,000     $ 79,000     $ -       5 %     2.50     $ -     $ -  
GS   June 16, 2018 (2)   6 months   $ 110,000     $ 79,000     $ -       5 %     2.50     $ -     $ -  
Vision #4   June 26, 2018 (1)(2)(3)(4)   3 months   $ 150,000     $ 86,250     $ -       5 %     2.50     $ -     $ 30,862  
Vision #5   July 17, 2018 (1) (2)(3)(4)   3 months   $ 100,000     $ 105,000     $ 15,000       5 %     2.50     $ -     $ 52,897  
BHP   July 19, 2018 (2)   12 months   $ 184,685     $ 150,000     $ 34,685       10 %     2.50     $ -     $ -  
Casale   October 19, 2018 (1)   6 months   $ 100,000     $ 100,000     $ -       5 %     7.50     $ -     $ -  
Vision #6   November 13, 2018 (1) (2)(3)(4)   6 months   $ 200,000     $ 220,000     $ -       5 %     2.50     $ -     $ 168,634  
James Gathard   January 3, 2019 (1)(4)   6 months   $ 50,000     $ 50,000     $ 2,500       24 %     7.50     $ 2,500     $ -  
Eagle Equities LLC   February 21, 2019 (2)   12 months   $ 215,000     $ 215,000     $ -       4 %     2.50     $ 15,000     $ 107,709  
Crossover   February 22, 2019 (2)   9 months   $ 115,563     $ 115,562     $ 8,063       7 %     2.50     $ 2,500     $ -  
Casale   March 18, 2019 (1)   6 months   $ 100,000     $ 100,000     $ -       4 %     7.50     $ -     $ 10,762  
Auctus   June 4, 2019 (2)   9 months   $ 500,000     $ 302,484     $ -       8 %     2.50     $ 40,500     $ 70,631  
LG Capital   April 30, 2019 (2)   12 months   $ 105,000     $ 80,000     $ -       4 %     2.50     $ 5,000     $ 3,286  
LG Capital   June 19, 2019 (2)   12 months   $ 105,000     $ 105,000     $ -       4 %     2.50     $ 5,000     $ 2,646  
Morningview Financial   April 9, 2019 (2)   12 months   $ 118,800     $ 88,800     $ 8,800       4 %     2.50     $ 3,000     $ -  
Vision #9   May 20, 2019 (1) (2)(4)   3 months   $ 100,000     $ 100,000     $ -       5 %     2.50     $ -     $ 13,439  
Vision #10   June 7, 2019 (1) (2)(4)   6 months   $ 125,000     $ 125,000     $ -       5 %     7.50     $ -     $ 18,254  
Eagle Equities LLC   July 1, 2019 (2)   12 months   $ 107,500     $ 107,500     $ -       4 %     2.50     $ 7,500     $ 85,791  
C and B Holdings NY   July 29, 2019 (2)   6 months   $ 250,000     $ 250,000     $ -       4 %     2.50     $ -     $ 36,835  
LG Capital   July 19, 2019 (2)   12 months   $ 115,000     $ 115,000     $ -       4 %     2.50     $ 5,750     $ 15,460  
Odyssey Capital   July 19, 2019 (2)   12 months   $ 130,000     $ 130,000     $ -       6 %     2.50     $ 6,500     $ -  
Morningview Financial   August 6, 2019 (2)   12 months   $ 108,000     $ 108,000     $ -       4 %     2.50     $ 11,000     $ -  
Sheila Bloom-Rosenberg   August 14, 2019 (1)(4)   6 months   $ 50,000     $ 50,000     $ -       2 %     7.50     $ -     $ -  
LG Capital   September 27, 2019 (2)   12 months   $ 78,750     $ 78,750     $ -       4 %     2.50     $ 3,750     $ 13,759  
LG Capital   October 24, 2019 (2)   12 months   $ 78,750     $ 78,750     $ -       4 %     2.50     $ 3,750     $ -  
GW   October 25, 2019   12 months   $ 105,000     $ 105,000     $ -       8 %     2.50     $ 5,000     $ -  
Odyssey Capital   November 1, 2019 (2)   12 months   $ 270,000     $ 270,000     $ -       6 %     2.50     $ 13,500     $ -  
C&B Holdings   October 8, 2019   6 months   $ 100,000     $ 100,000     $ -       4 %     7.50     $ -     $ 5,725  
Clay 11/15/2019 Loan 1   November 15, 2019   12 months   $ 385,000     $ 385,000     $ 35,000       10 %     2.50     $ 35,000     $ 90,917  
Clay 12/4/2019 Loan 2   December 4, 2019   12 months   $ 495,000     $ 495,000     $ 45,000       10 %     2.50     $ 45,000     $ 56,387  
Clay 12/20/2019 Loan 4   December 20, 2019   12 months   $ 275,000     $ 275,000     $ 25,000       10 %     2.50     $ 25,000     $ 40,601  
Clay 1/2/2020 Loan   January 2, 2020   12 months   $ 330,000     $ 330,000     $ 30,000       10 %     2.50     $ 30,000     $ 91,606  
Clay 1/24/2020 Loan   January 24, 2020   12 months   $ 247,500     $ 247,500     $ 22,500       10 %     2.50     $ 22,500     $ 89,707  
Clay 1/29/2020 Loan   January 29, 2020   12 months   $ 363,000     $ 363,000     $ 33,000       10 %     2.50     $ 33,000     $ 297,000  
Clay 2/12/20 Loan   February 12, 2020   12 months   $ 275,000     $ 275,000     $ 25,000       10 %     2.50     $ 25,000     $ 225,000  
Clay 2/21/20 Loan   February 19, 2020   12 months   $ 165,000     $ 165,000     $ 15,000       10 %     2.50     $ 15,000     $ 135,000  
Clay 3/11/20   March 11, 2020   12 months   $ 330,000     $ 330,000     $ 30,000       10 %     2.50     $ 30,000     $ 232,810  
Clay 3/13/20   March 13, 2020   12 months   $ 165,000     $ 165,000     $ 15,000       10 %     2.50     $ 15,000     $ 60,705  
Clay 3/26/20 Loan   March 26, 2020   12 months   $ 111,100     $ 111,100     $ 10,100       10 %     2.50     $ 10,100     $ 90,900  
Clay 4/8/20 Loan   April 8, 2020   12 months   $ 276,100     $ 276,100     $ 25,100       10 %     2.50     $ 25,000     $ 221,654  
Clay 4/17/20 Loan   April 17, 2020   12 months   $ 143,750     $ 143,750     $ 18,750       10 %     2.50     $ -     $ 96,208  
Clay 4/22/20 Loan   April 30, 2020   12 months   $ 546,250     $ 546,250     $ 71,250       10 %     2.50     $ 47,500     $ 427,500  
Clay 5/4/20 Loan   May 7, 2020   12 months   $ 460,000     $ 460,000     $ 60,000       10 %     2.50     $ 40,000     $ 360,000  
Clay 5/11/20 Loan   May 18, 2020   12 months   $ 546,250     $ 546,250     $ 71,250       10 %     2.50     $ 35,500     $ 439,500  
Clay 5/20/20 Loan   June 2, 2020   12 months   $ 902,750     $ 902,750     $ 117,750       10 %     2.50     $ 58,900     $ 708,500  
Geer 6/1/20 Loan   May 29, 2020   12 months   $ 110,000     $ 110,000     $ 10,000       10 %     2.50     $ -     $ -  
Clay 6/12/20 Loan   June 12, 2020   12 months   $ 57,500     $ 57,500     $ 7,500       10 %     2.50     $ 5,000     $ 45,000  
Clay 6/22/20 Loan   June 22, 2020   12 months   $ 138,000     $ 138,000     $ 18,000       10 %     2.50     $ 12,000     $ 108,000  
                    $ 10,147,999     $ 771,948                     $ 666,450     $ 4,807,101  

 

  (1) The Note is past due. The Company and the lender are negotiating in good faith to extend the loan.
  (2) As of June 30, 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 six months ended June 30, 2020 the Company entered into Rate Modification Agreements with these lenders. In these agreements five lenders agreed to reduce their interest rate and were granted the right to convert loans using a variable conversion price if other variable rate lenders converted at a variable rate.

 

For the six months ended June 30, 2020, the Company recognized amortization expense related to the debt discounts indicated above of $1,397,121. The unamortized debt discounts as of June 30, 2020 related to the convertible debentures and other convertible notes amounted to $3,923,549.

  

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 and June 15, 2020 the Company extended these Standstill and Forbearance Agreements until June 30, 2020. For the three months ended June 30, 2020, the Company incurred fees of approximately $1,660,000 to extend the agreements.

 

Convertible Loan Modifications and Extinguishments

 

We refinanced certain convertible loans during the six months ended June 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 six months ended June 30, 2020 we recorded losses on extinguishment of liabilities of approximately $2.8 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 $977,622 of non-cash expenses for warrants issued and writeoff, 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: 

 

    2020  
Balance at January 1,   $ 6,121,338  
Issuance of convertible debt, face value     5,435,950  
Deferred financing cost     (1,013,350 )
Beneficial conversion feature on convertible note     (982,097 )
Debt discount from warrants issued with debt     (2,705,996 )
Payments     (1,257,250 )
Conversion of debt into equity     (771,266 )
Accretion of interest and amortization of debt discount to interest expense     1,397,121  
Balance at June 30,     6,224,450  
Less: current portion     6,224,450  
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 six months ended June 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 June 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 six months ended June 30, 2020, the Company recognized amortization expense related to debt discounts attributable to other notes of $353,790.

 

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 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 June 30, 2020:

 

Inception Date   Purchase Price     Purchased Amount     Outstanding Balance     Daily Payment Rate     Deferred
Finance Fees
 
August 5, 2019   $ 600,000     $ 816,000     $ 174,943     $ 4,533     $ 6,000  
August 19, 2019     350,000       479,500       245,355       2,664       3,000  
August 23, 2019     175,000       239,750       87,192       1,410       1,750  
September 19, 2019     275,000       384,275       183,348       2,138       5,000  
    $ 1,400,000     $ 1,919,525     $ 690,838     $ 10,745     $ 15,750  

 

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     $ 6,000  
August 19, 2019     350,000       479,500       272,315       2,664       3,000  
August 23, 2019     175,000       239,750       132,284       1,410       1,750  
September 19, 2019     275,000       384,275       256,812       2,138       5,000  
    $ 1,400,000     $ 1,919,525     $ 1,082,435     $ 10,745     $ 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.

 

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 six months ended June 30, 2020, $152,552 of interest was capitalized into principal (and recorded as interest expense).

 

The Company’s Chief Executive Officer is personally guaranteeing $690,838 of loans outstanding as of June 30, 2020 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 June 30, 2020 and is currently past due.

 

As of June 30, 2020 we also hold $75,000 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 six months ended June 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.