Convertible Debt and Other Debt | (8) Convertible Debt and Other Debt Senior Secured Convertible Debentures and Warrants We entered into Subscription Agreements (the “ Subscription Agreement Purchaser Debentures Warrants Purchase Price The Company issued a principal aggregate amount of $6,962,504 in Debentures which includes a 10% original issue discount on the Purchase Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance. The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares of the Company’s common stock at a fixed conversion price equal to $0.28 per share, subject to applicable adjustments. In the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock, at the Company’s discretion. At any time after the Issuance Date, the Company has the option, subject to certain conditions, to redeem some or all of the then outstanding principal amount of the Debenture for cash in an amount equal to the sum of (i) 120% of the then outstanding principal amount of the Debenture, (ii) accrued but unpaid interest and (iii) any liquidated damages and other amounts due in respect of the Debenture. The Company issued warrants exercisable into a total of 11,302,766 shares of our common stock. The Warrants issued in this transaction are immediately exercisable at an exercise price of $0.40 per share, subject to applicable adjustments including full ratchet anti-dilution in the event that we issue any securities at a price lower than the exercise price then in effect. The Warrants have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits, stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise price. Subject to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTCQB (or other primary trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise price of the Warrants for 15 out of 20 consecutive trading days. In connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, Warrants and the other Transaction Documents. The Company determined that the conversion feature of the Debentures met the definition of a liability in accordance with ASC 815-40 and therefore bifurcated the conversion feature on each debt agreement and accounted for it as a derivative liability. The fair value of the conversion feature was accounted for as a note discount and are amortized to interest expense over the life of the loan. The fair value of the conversion feature was reflected in the conversion option liability line in the condensed consolidated balance sheets. The proceeds from these convertible debts were allocated between the host debt instrument and the convertible option based on the residual method. The estimated fair value of the convertible option was determined using a binomial formula, resulting in allocations to the convertible option and accounted for as a liability in the Company’s condensed consolidated balance sheet. In accordance with the provisions of ASC 815-40, the gross proceeds are offset by debt discounts, which are amortized to interest expense over the expected life of the debt. ASC 470-20 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the debt and warrants on the basis of their relative fair market values. The debt discount will be amortized to interest expense over the two-year term of these loans. We amortized $3,740,746 of the debt discount to interest expense in 2016. The warrants issued in connection with the convertible debentures are classified as warrant derivative liabilities because the warrants are entitled to certain rights in subsequent financings and the warrants contain “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). Since “down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $2,847,624 to the total warrants out of the gross proceeds of $6,329,549. The fair value will be affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability, whichever comes first. Other convertible notes On May 13, 2016, one lender converted an outstanding note issued on April 28, 2015 and the related accrued interest totaling $117,837 to 420,849 common shares. As of December 31, 2016, the outstanding balance on the note was zero. On May 24, 2016, we sold an additional convertible note for $107,000 with warrants to purchase 50,000 shares of common stock at an exercise price of $0.55 per share. The purchaser has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to $0.45 per share, subject to applicable adjustments. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $12,406 to the total warrants and the recognition of a beneficial conversion feature of $7,962, both of which were recorded as a discount to the note. We evaluated the convertible note and warrants for derivative liability treatment and determined that these instruments do not include certain rights such as price protection like our previous debt financings. Accordingly, we concluded that this financing arrangement did not qualify for derivative accounting treatment. On June 14, 2016, we sold an additional convertible note for $115,000 and issued 30,667 common shares to compensate the lender. On July 1, 2016, the note was modified to increase the principal amount to $200,000 and we received the remaining proceeds of $85,000 on the same date and issued 34,333 common shares as compensation to the lender. The lender has the right to convert the note into shares of the Company’s common stock at fixed conversion price equal to $0.45 per share, subject to applicable adjustments. We valued the total 65,000 common shares using the stock prices at the respective dates the note proceeds were received and recorded the relative fair value of the shares amounting to $26,000 as a debt discount to be amortized over the term of the loan. We then computed the effective conversion price of the note, noting that no beneficial conversion feature exists. We also evaluated the convertible note for derivative liability treatment and determined that the instrument does not include certain rights such as price protection like our previous debt financing. Accordingly, we concluded that this financing arrangement did not qualify for derivative accounting treatment. On July 29, 2016, we sold an additional convertible note for $100,000 and issued 32,500 common shares to compensate the lender. The lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to $0.45 per share, subject to applicable adjustments. The proceeds were allocated between the convertible note and shares of common stock based on their relative fair values. The relative fair values of the convertible note and the common shares was $87,241 and $12,759, respectively. We then computed the effective conversion price of the note, noting that the convertible debt gave rise to a beneficial conversion feature (BCF) of $12,759. The sum of the relative fair value of the common shares and the BCF of $25,518 was recorded as a debt discount to be amortized over the term of the loan. We also evaluated the convertible note for derivative liability treatment and determined that the instruments does not include certain rights such as price protection like our previous debt financings. Accordingly, we concluded that this financing arrangements did not qualify for derivative accounting treatment. On September 15, 2016, we sold an additional convertible note for $500,000 and issued 200,000 common shares to compensate the lender. The lender has the right to convert the notes into shares of the Company’s common stock at a fixed conversion price equal to $0.45 per share, subject to applicable adjustments. The convertible note includes an original issue discount of $40,541 and is subject to a one-time interest of 9% or $45,000 which was recorded as a debt discount and amortized over the term of the loan. The proceeds were allocated between the convertible note and shares of common stock based on their relative fair values. The relative fair value of the convertible note was $434,028. The allocation of the gross proceeds to the shares of common stock was $65,972 and recorded as a debt discount to be amortized over the term of the loan. We then computed the effective conversion price of the note, noting that no beneficial conversion feature exists. We also evaluated the convertible note for derivative liability treatment and determined that the instrument does not include certain rights such as price protection like our previous debt financings. Accordingly, we concluded that this financing arrangement did not qualify for derivative accounting treatment. The specific terms of the convertible notes and outstanding balances as of December 31, 2016 are listed in the tables below. Fixed Rate Convertible Notes Inception Date Term Loan Amount Outstanding Balance Original Issue Discount Interest Rate Deferred Finance Fees Discount related to fair value of conversion feature and warrants/shares July 22, 2015 24 months $ 2,180,000 $ 2,180,000 $ 218,000 1 10 % 2 $ 388,532 $ 2,163,074 September 25, 2015 24 months 1,100,000 1,100,000 110,000 1 10 % 2 185,956 1,022,052 October 2, 2015 24 months 150,000 150,000 15,000 1 10 % 2 26,345 140,832 October 6, 2015 24 months 30,000 30,000 3,000 1 10 % 2 5,168 26,721 October 14, 2015 24 months 50,000 50,000 5,000 1 10 % 2 8,954 49,377 November 2, 2015 24 months 250,000 250,000 25,000 1 10 % 2 43,079 222,723 November 10, 2015 24 months 50,000 50,000 5,000 1 10 % 2 8,790 46,984 November 12, 2015 24 months 215,000 215,000 21,500 1 10 % 2 38,518 212,399 November 20, 2015 24 months 200,000 200,000 20,000 1 10 % 2 37,185 200,000 December 4, 2015 24 months 170,000 170,000 17,000 1 10 % 2 37,352 170,000 December 11, 2015 24 months 360,000 360,000 36,000 1 10 % 2 75,449 360,000 December 18, 2015 24 months 55,000 55,000 5,500 1 10 % 2 11,714 55,000 December 31, 2015 24 months 100,000 100,000 10,000 1 10 % 2 20,634 100,000 January 11, 2016 24 months 100,000 100,000 10,000 1 10 % 2 24,966 80,034 January 20, 2016 24 months 50,000 50,000 5,000 1 10 % 2 9,812 40,188 January 29, 2016 24 months 300,000 300,000 30,000 1 10 % 2 60,887 239,113 February 26, 2016 24 months 200,000 200,000 20,000 1 10 % 2 43,952 156,048 March 10, 2016 24 months 125,000 125,000 12,500 1 10 % 2 18,260 106,740 March 18, 2016 24 months 360,000 360,000 36,000 1 10 % 2 94,992 265,008 March 24, 2016 24 months 106,667 106,667 10,667 1 10 % 2 15,427 91,240 March 31, 2016 24 months 167,882 167,882 16,788 1 10 % 2 2,436 165,446 April 5, 2016 24 months 10,000 10,000 1,000 1 10 % 2 - 10,000 May 24, 2016 7 months 100,000 100,000 7,000 0 % - 20,368 June 15, 2016 6 months 40,000 40,000 - 12 % - 3,680 June 17, 2016 6 months 40,000 40,000 - 12 % - 3,899 June 22, 2016 6 months 35,000 35,000 - 12 % - 3,373 July 6, 2016 6 months 85,000 85,000 - 12 % - 15,048 July 29, 2016 6 months 100,000 100,000 - 12 % - 25,518 September 15, 2016 8 months 500,000 500,000 85,541 9 % - 65,972 $ 7,229,549 $ 7,229,549 $ 725,496 $ 1,158,408 $ 6,060,837 1. The original issue discount is reflected in the first year. 2. The annual interest started accruing in the second year. As of December 31, 2016, a total of approximately $291,000 convertible debentures were purchased by related parties who were members of the Company’s Board of Directors and management and their family members. Deferred finance fees included cash commissions amounting to $621,500 and the fair value of the 2,101,786 warrants issued to the placement agent amounting to $536,908. For the year ended December 31, 2016, the Company recognized amortization expense related to the debt discounts indicated above of $3,876,622. The unamortized debt discounts as of December 31, 2016 related to the convertible debentures and other convertible notes amounted to $3,142,078. Revolving Note Payable On October 28, 2016, an accredited investor (the “ Investor Revolving Note Maturity Date In the event that a Qualified Offering occurs on or prior to the six (6) month anniversary of October 28, 2016, within seven (7) Business Days of the closing of the Qualified Offering, the Company shall pay a cash fee equal to five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering divided by (y) the purchase price provided by the documents governing the Qualified Offering. A Qualified Offering In the event that a Qualified Offering occurs following the six (6) month anniversary of October 28, 2016, but prior to the Maturity Date, within seven(7) Business Days of the closing of the Qualified Offering, the Company shall pay a cash fee equal to five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering divided by (y) the purchase price provided by the documents governing the Qualified Offering. Interest on the principal balance of the Revolving Note shall be paid in full on the Maturity Date, unless otherwise paid prior to the Maturity Date. Interest shall be assessed as follows: (i) a one-time interest of 10% on all principal amounts advanced prior to April 28, 2017; (ii) the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between April 28, 2017 and July 28, 2017; or (iii) both of the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between July 28, 2017 and October 28, 2017. Broker fees amounting to $116,500, the one-time interest of $125,000 and the fair value of the 3,125,000 warrants issued to the Investor amounting to $479,730 were recorded as debt discounts and amortized over the term of the revolving note. For the year ended December 31, 2016, the Company recognized amortization expense related to the debt discounts indicated above of $84,200. The unamortized debt discounts as of December 31, 2016 related to the convertible debentures amounted to $637,030. The following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discounts, during 2016: 2016 Balance at January 1, $ 277,342 Issuance of convertible debt, face value 2,509,045 Issuance of revolving note payable, face value 1,250,000 Original issue discount (189,496 ) Debt discount from derivative liabilities (embedded conversion option and warrants) (1,153,817 ) Debt discount from beneficial conversion feature (20,721 ) Deferred financing fees (385,371 ) Debt discount related to one-time interest charge (170,000 ) Repayment of convertible debt (107,000 ) Conversion of convertible debt into common stock (100.000 ) Debt discount from shares and warrants issued with the notes (596,867 ) Accretion of interest and amortization of debt discount to interest expense 3,960,822 Balance at December 31, 5,273,937 Less: revolving note payable 612,970 Less: current portion of convertible debt 4,005,702 Convertible debt, long-term portion $ 655,265 Other Notes On January 15, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $150,000 in exchange for rights to all customer receipts until the lender was paid $187,500, which was collected at the rate of $744 per business day. The payments were secured by essentially all tangible assets of the Company. $67,925 of the proceeds were used to pay off the outstanding balance of a previous loan from this lender. The Company paid $1,875 in fees in connection with this loan. The note was paid off in its entirety prior to December 31, 2015. On January 29, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $200,000 in exchange for rights to all customer receipts until the lender was paid $278,000, which was collected at the rate of $1,985 per business day. The payments were secured by essentially all tangible assets of the Company. The Company paid $999 in fees in connection with this loan. The note was paid off in its entirety prior to December 31, 2015. On March 17, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $50,000 in exchange for rights to all customer receipts until the lender was paid $67,450, which was collected at the rate of $559 per business day. The payments were secured by essentially all tangible assets of the Company. The Company paid $999 in fees in connection with this loan. The note was paid off in its entirety prior to December 31, 2015. On May 29, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $100,000 in exchange for rights to all customer receipts until the lender was paid $132,000, which was collected at the rate of $1,098 per business day. The Company paid $3,999 in fees in connection with this loan. The note was paid off in its entirety prior to December 31, 2015. On August 28, 2015 we signed a Merchant Agreement with a lender. Under the agreement, we received $300,000 in exchange for rights to all customer receipts until the lender is paid $384,000, to be collected at the rate of $2,560 per business day. The payments are not secured. On the closing date, $131,710 of the proceeds were used to pay off the outstanding balances of two existing Notes. The Company paid $6,000 in fees in connection with this loan. The loan was paid off in its entirety prior to December 31, 2016. During the year ended December 31, 2015, we signed three ninety-day notes with an investor. Under the terms of the notes, the Company received a total of $600,000. The investor converted these loans, plus $60,000 in accrued interest into the Company’s $5 million PIPE offering on July 21, 2015. There was no gain or loss on the conversion. During the year ended December 31, 2015, the Company made payments of $587,949 in total on the non-convertible debt from non-related parties. On January 6, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $250,000 in exchange for rights to all customer receipts until the lender is paid $322,500, which is collected at the rate of $1,280 per business day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. $138,840 of the proceeds were used to pay off the outstanding balance of a previous loan from another lender. The Company recognized a gain on the settlement of the previous loan of $5,044 which was credited to interest expense. The Company paid $2,500 in fees in connection with this loan. We received an additional $93,161 in June 2016 under the existing Merchant Agreement. The note was still outstanding as of December 31, 2016 with a balance of $157,287. On January 20, 2016 we borrowed $50,000 from an individual with no interest or fees. We paid back the loan in March 2016. On February 8, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for third position rights to all customer receipts until the lender is paid $129,900, which is collected at the rate of $927 per business day. The Company paid $2,000 in fees in connection with this loan. We received an additional $125,000 in June 2016 under the existing Merchant Agreement of which $48,420 was used to pay off the prior loan. The lender provided an additional $70,000 on August 16, 2016. We repaid a portion of the $70,000 with $32,430 remaining as outstanding as of December 31, 2016. On May 9, 2016 we signed a promissory note with a lender. Under the agreement we received $200,000 net of a $6,000 original issue discount and we repaid $206,000 on August 25, 2016. In connection with this promissory note, we issued warrants exercisable into 100,000 shares of our common stock. The warrants issued in this transaction are immediately exercisable at an exercise price of $0.55 per share. The warrants have an expiration period of three years from the original issue date. The warrants are subject to adjustment for stock splits, stock dividends or recapitalizations. The warrants were recorded as a component of our Stockholders’ Equity. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $27,349 to the total warrants and recorded as a discount to the note to be amortized over the term of the loan. We evaluated the warrants for derivative liability treatment and determined that these instruments do not include certain rights such as price protection like our previous debt financings. Accordingly, we concluded that these instruments did not qualify for derivative accounting treatment. In August 2016, the lender extended the maturity date of the note from August 11, 2016 to August 25, 2016. Consequently, a penalty interest of $41,200 was added to the principal amount and settled through the issuance of 100,049 common shares. As of December 31, 2016, the outstanding balance on this note was zero. On August 26, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $122,465 net proceeds in exchange for rights to all customer receipts which is collected at the rate of $1,386 per business day. The note was still outstanding as of December 31, 2016 with a balance of $48,440. Related Party Notes During the year ended December 31, 2016, the Company received advances from certain officers of the Company amounting to $20,000. These advances were non-interest bearing and payable on demand. As of December 31, 2016 there are no outstanding notes to related parties. |