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SHORT TERM CONVERTIBLE DEBT

6 Months Ended

Jun. 30, 2022

9. SHORT-TERM CONVERTIBLE DEBT, INCLUDING NON-CONVERTIBLE PENALTY

Short-term Convertible Notes Payable, Including Debt in Default and Penalties

Auctus

On December 17, 2019, the Company entered into a securities purchase agreement and convertible note with Auctus. The convertible note issued to Auctus was for a total of $2.4 million. The note may not have been prepaid in whole or in part except as otherwise explicitly allowed. Any amount of principal or interest on the note which was not paid when due shall bore interest at the rate of the lessor of 24% or the maximum permitted by law (the “default interest“). The variable conversion prices equaled the lesser of: (i) the lowest trading price on the issue date, and (ii) the variable conversion price. The variable conversion price was 95% multiplied by the market price (the market price means the average of the five lowest trading prices during the period beginning on the issue date and ending on the maturity date), minus $0.04 per share, provided however that in no event could the variable conversion price be less than $0.15. If an event of default under this note occurred and/or the note was not extinguished in its entirety prior to December 17, 2020, the $0.15 price floor no longer applied.

The first tranche of $700,000 was received on December 2019, matured on December 17, 2021, and accrued interest at a rate of ten percent (10%). In connection with the first tranche of $700,000, the Company issued 7,500,000 warrants to purchase common stock with an exercise price of $0.20. The fair value of the warrants at the date of issuance was $745,972; $635,000 was allocated to the warrant liability and a loss of $110,972 was recorded at the date of issuance for the amount of the fair value in excess of the net proceeds received of $635,000. The $700,000 proceeds were received net of debt issuance costs of $65,000 (net proceeds of $635,000, after administrative and legal expenses Company received $570,000). The Company used $65,000 of the proceeds to make a partial payment of the $89,250 convertible promissory note issued on July 3, 2018 to Auctus. The Company made a $700,000 payment on June 1, 2021, which resulted in a prepayment penalty of $350,000 being assessed to the Company, which remained outstanding as of June 30, 2022 and is not convertible. The Company recorded this prepayment penalty as a loss on extinguishment of debt. The prepayment penalty does not incur interest. As of June 30, 2022 and December 31, 2021, the outstanding amount of the note was nil.

On May 27, 2020, the Company received the second tranche in the amount of $400,000, from the December 17, 2019 securities purchase agreement and convertible note with Auctus. The net amount paid to the Company was $313,000. The note matured on May 27, 2022 and accrued interest at a rate of ten percent (10%). The note may not have been prepaid in whole or in part except as otherwise explicitly allowed. Any amount of principal or interest on the note which was was not paid when due incurred interest at the rate of the lessor of 24% or the maximum permitted by law (the “default interest“). The variable conversion prices shall equal the lesser of: (i) the lowest trading price on the issue date, and (ii) the variable conversion price. The variable conversion price shall mean 95% multiplied by the market price (the market price means the average of the five lowest trading prices during the period beginning on the issue date and ending on the maturity date), minus $0.04 per share. During the six months ended June 30, 2022, the Company incurred a default penalty of $225,444 for nonpayment of the note at maturity, which remained outstanding as of June 30, 2022. The Company recorded this default penalty as interest expense. The penalty incurs interest at the default rate of 24%.

As of June 30, 2022 and December 31, 2021, $625,444 and $400,000 of principal remained outstanding, respectively. Accrued interest as of June 30, 2022 and December 31, 2021 was $13,760 and $64,778, respectively. Further, as of June 30, 2022 and December 31, 2020, the Company had unamortized debt issuance costs of nil and $13,586. As of June 30, 2022 and December 31, 2021, the estimated fair value of the derivative liability for the bifurcated conversion option was $23,825 and $31,889, respectively.

On June 30, 2020, we entered into a securities purchase agreement with Auctus Fund, LLC for the issuance and sale to Auctus of $112,750 in aggregate principal amount of a 12% convertible promissory note. On June 30, 2020, we issued the note to Auctus and issued 250,000 five-year common stock warrants at an exercise price of $0.16. On April 3, 2020, we received net proceeds of $100,000. The note matured on January 26, 2021 and accrued interest at a rate of 12% per year. We may not have prepaid the note, in whole or in part. After the 90^th calendar day after the issuance date and ending on the later of maturity date and the date of payment of the default amount, Auctus may convert the note, at any time, in whole or in part, provided such conversion does not provide Auctus with more than 4.99% of the outstanding common share stock. The conversion may be converted into shares of the our common stock, at a conversion price equal to the lesser of: (i) the lowest Trading Price during the twenty-five (25) trading day period on the last trading prior to the issue date and (ii) the variable conversion price (55% multiplied by the market price, market price means the lowest trading price for the common stock during the twenty-five (25) trading day period ending on the latest complete trading day prior to the conversion date). Trading price is the lowest trade price on the trading market as reported. The note includes customary events of default provisions and a default interest rate of 24% per year. As of June 30, 2022 and December 31, 2021, the outstanding balance on the note was $161,184 (which includes a default penalty of $48,434). Accrued interest as of June 30, 2022 and December 31, 2021 was $55,877 and $36,428, respectively.

The following table summarizes the Short-term Convertible Notes Payable, including debt in default (in thousands):

	Short-term convertible notes payable , including debt in default
	June 30, 2022		December 31, 2021
Auctus Tranche 2	$	400	$	400
Auctus Tranche 2 default penalty		225		-
Auctus prepayment penalty		350		350
Auctus (March 31, 2020 Note)		161		161
Debt discount and issuance costs to be amortized		-		(14	)
Convertible notes payable - short-term	$	1,136	$	897

As of June 30, 2022, the $350,000 prepayment penalty was included in “Short-term convertible notes payable, including non-convertible penalty“ while the remaining outstanding balances were included in “Convertible notes payable in default“ within the unaudited consolidated balance sheet. As of December 31, 2021, the $161,000 Auctus note was included in “Convertible notes payable in default“ while the remaining balances were included in “Short-term convertible notes payable, including non-convertible penalty“ within the consolidated balance sheet.