Convertible Debt and Other Debt | 6) Convertible Debt and Other Debt 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 $8.40 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. On various dates for the nine months ended September 30, 2017, the Company issued 38,606 shares of common stock based on the 10-day VWAP prior to quarter end to holders of the Debentures in payment of the quarterly interest accrued from the Debentures first anniversary date through March 31, 2017 for an aggregate amount of $309,465. We recognized a $123,862 gain on extinguishment of debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through March 31, 2017. At any time after the Issuance Date until the maturity 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. On September 11, 2017, we notified Debenture holders that their Debentures will be extended 180 days beyond the original maturity date as permitted in the Debenture agreement. We will continue to pay interest on the Debentures until the extended maturity date. We accounted for the Debenture extensions as debt modifications and not extinguishment of debt since the changes in fair value are not substantial in accordance with ASC 470-50. We started amortizing the remaining unamortized discount as of September 11, 2017 over the new term which extends 180 days beyond the original maturity date. Warrants The Company issued warrants exercisable into a total of 376,757 shares of our common stock. The Warrants issued in this transaction are immediately exercisable at an exercise price of $12.00 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. The warrants were issued pursuant to an exemption to the registration requirements of the Securities Act and are considered restricted securities. Upon exercise, the warrant shares will be considered restricted securities and will be issued with a restrictive legend unless the shares have been registered or the legend can be removed pursuant to Rule 144 promulgated pursuant to the Securities Act. 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. Security Agreement 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. 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 $4,736,571 of the debt discount to interest expense through the third quarter of 2017. 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 reclassified the fair value of the warrant derivative liabilities to stockholders’ equity when we adopted ASU 2017-11. The specific terms of the convertible debts and outstanding balances as of September 30, 2017 are listed in the table below. 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 30 months 1 $ 2,180,000 $ 2,180,000 $ 218,000 2 10 % 3 $ 388,532 $ 2,163,074 September 25, 2015 30 months 1 1,100,000 1,100,000 110,000 2 10 % 3 185,956 1,022,052 October 2, 2015 30 months 1 150,000 150,000 15,000 2 10 % 3 26,345 140,832 October 6, 2015 30 months 1 30,000 30,000 3,000 2 10 % 3 5,168 26,721 October 14, 2015 30 months 1 50,000 50,000 5,000 2 10 % 3 8,954 49,377 November 2, 2015 30 months 1 250,000 250,000 25,000 2 10 % 3 43,079 222,723 November 10, 2015 24 months 50,000 50,000 5,000 2 10 % 3 8,790 46,984 November 12, 2015 24 months 215,000 215,000 21,500 2 10 % 3 38,518 212,399 November 20, 2015 24 months 200,000 200,000 20,000 2 10 % 3 37,185 200,000 December 4, 2015 24 months 170,000 170,000 17,000 2 10 % 3 37,352 170,000 December 11, 2015 24 months 360,000 360,000 36,000 2 10 % 3 75,449 360,000 December 18, 2015 24 months 55,000 55,000 5,500 2 10 % 3 11,714 55,000 December 31, 2015 24 months 100,000 100,000 10,000 2 10 % 3 20,634 100,000 January 11, 2016 24 months 100,000 100,000 10,000 2 10 % 3 24,966 80,034 January 20, 2016 24 months 50,000 50,000 5,000 2 10 % 3 9,812 40,188 January 29, 2016 24 months 300,000 300,000 30,000 2 10 % 3 60,887 239,113 February 26, 2016 24 months 200,000 200,000 20,000 2 10 % 3 43,952 156,048 March 10, 2016 24 months 125,000 125,000 12,500 2 10 % 3 18,260 106,740 March 18, 2016 24 months 360,000 360,000 36,000 2 10 % 3 94,992 265,008 March 24, 2016 24 months 106,667 106,667 10,667 2 10 % 3 15,427 91,240 March 31, 2016 24 months 177,882 177,882 17,788 2 10 % 3 2,436 175,446 June 15, 2016 6 months 40,000 - - 12 % - 3,680 June 17, 2016 6 months 40,000 - - 12 % - 3,899 June 22, 2016 6 months 35,000 - - 12 % - 3,373 July 6, 2016 6 months 85,000 - - 12 % - 15,048 July 29, 2016 6 months 100,000 - - 12 % - 25,518 September 15, 2016 8 months 500,000 - 85,541 9 % - 65,972 April 3, 2017 8 months 50,000 - - 10 % - - $ 7,179,549 $ 6,329,549 $ 718,496 $ 1,158,408 $ 6,040,469 1 The loan term was extended by 180 days. 2 The original issue discount is reflected in the first year. 3 The annual interest starts accruing in the second year. The closings above included a total of approximately $291,000 of convertible debentures purchased by related parties who were members of the Company’s Board of Directors and management and their family members. At any time after six months from the original Issue Date until the maturity date, the Company has the right to prepay the above Debentures in cash for 120% of the principal amount outstanding and any accrued interest. In January 2017, we executed an amendment to the July 6, 2016 convertible note that was due on January 6, 2017. We received an extension of up to three months on the note’s due date. In exchange for the extension, we agreed to issue 1,667 shares of restricted common stock and pay the investor $10,000 for each 30-day extension. The shares issued for the extension were valued at $10,000 and recorded as interest expense. We made a payment of $34,000 in January 2017 for the first one-month extension and 12% annual interest on the note from the initial close date through February 6, 2017. The Investor had the right, at any time, to convert all or part of the outstanding and unpaid principal sum and accrued interest into shares of common stock at the conversion price of $13.50. On February 28, 2017, the note was paid in full. We accounted for the loan extension as a debt modification. On April 3, 2017, we signed a six-month agreement with an investor relations firm. The agreement includes a cash payment of $10,000 plus a convertible 8-month note for $50,000 with the following significant terms: (i) convertible at $12.00/share, (ii) bears 10% annual interest, (iii) a 20% pre-payment penalty if the Company wants to pre-pay the Note, and (iv) a default rate of 18%. We terminated the agreement on June 7, 2017 and the investor relations firm agreed to forgive the loan. Since we did not receive any cash in connection with the note and neither did the IR firm provide any services, the forgiveness did not result in any gain upon termination of the agreement. Revolving Note Payable On October 28, 2016, an accredited investor (the “ Investor Revolving Note Maturity Date The Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000, to issue 16,667 shares of our Common Stock to the Investor, to decrease the exercise price per share of the warrants to the lower of (i) $12.00 or (ii) the per share purchase price of the shares of our Common Stock sold in the Qualified Offering, and to change the references in the Revolving Note from “the six (6) month anniversary of October 28, 2016” to “July 25, 2017.” The fair value of the 16,667 shares issued was accounted for as a note discount and are amortized to interest expense over the life of the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did not have a material impact on our consolidated financial statements. The Revolving Note was further amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 with all other terms unchanged. In the event that a Qualified Offering had occurred after July 25, 2017, but prior to the Maturity Date, within seven (7) Business Days of the closing of the Qualified Offering, the Company was to 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 had not occurred after July 25, 2017, 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 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 Maturity Date divided by (y) the VWAP of the Company’s common stock for the last ten trading days preceding the Maturity Date. A Qualified Offering did not occur on or prior to the Maturity Date. 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 $296,500, the one-time interest of $350,000 and the fair value of the 250,000 warrants issued to the Investor amounting to $1,148,275 were recorded as debt discounts and amortized over the term of the revolving note. The unamortized debt discounts as of September 30, 2017 related to the Revolving Note amounted to $335,833. The Revolving Note was still outstanding as of October 28, 2017. We continue to accrue interest on the note. The following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discount, during 2017: 2017 Balance at January 1, $ 5,273,937 Adjustment due to ASU 2017-11 923,468 Issuance of convertible debt, face value 2,300,000 Forgiveness of Debt (50,000 ) Deferred financing cost (180,000 ) Debt discount related to one-time interest charge (225,000 ) Debt discount from incentive shares to increase the Revolving Note aggregate principal limit (150,000 ) Debt discount from shares and warrants issued with the notes (668,544 ) Payments (840,541 ) Accretion of interest and amortization of debt discount to interest expense through September 30, 3,322,736 Balance at September 30, 9,706,056 Less: current portion 9,706,056 Convertible debt, long-term portion $ - Other Notes On January 6, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $250,000 in exchange for second position 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 is no longer outstanding as of September 30, 2017. 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. As of September 30, 2017, 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 third position rights to all customer receipts which is collected at the rate of $1,386 per business day. As of September 30, 2017, the outstanding balance on this note was zero. On February 6, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $125,000. The Company paid $1,250 in fees in connection with this loan. Under the agreement, $16,180 was used to pay off the prior loan. The loan was no longer outstanding as of September 30, 2017. On February 15, 2017, we received six-month, non-convertible loans in the aggregate of $220,000 from two accredited investors. We agreed to issue each investor 5,667 shares of restricted common stock. The loans earn no interest but carry a 10% original issue fee. We recorded the fair value of the shares amounting to $43,616 as debt discounts that will be amortized to interest expense during the term of the loans. We received a one-month extension on one loan and two one-month extensions on the other. Each extension required a 10% fee to the lender. We treated these extensions as loan extinguishments and accordingly wrote off the original debt and recorded new debt to include the extension fees as part of the principal amount. The extension fees of $33,000 were recorded as losses on extinguishment of debt in the consolidated financial statements. One loan remains outstanding as of September 30, 2017 with a balance of $132,000 that was subsequently paid off entirely by October 31, 2017. We amortized $59,794 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discounts as of September 30, 2017 were $3,822. On March 2, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,750. The Company paid no fees in connection with this loan. The loan was no longer outstanding as of September 30, 2017. On March 14, 2017, we received an eight-month, non-convertible loan of $250,000 from a privately-held investment firm. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 8,333 shares of restricted common stock. We recorded the fair value of the shares amounting to $46,748 as a debt discount that will be amortized to interest expense during the term of the loan. The loan still remains outstanding as of September 30, 2017 with a balance of $250,000. We amortized $62,651 of the debt discount in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $14,097. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the lowest closing stock price for the 15 trading days prior to conversion. On March 21, 2017, we received an eight-month, non-convertible loan of $170,000 from an accredited investor. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 5,667 shares of restricted common stock. We recorded the fair value of the shares amounting to $35,079 as a debt discount that will be amortized to interest expense during the term of the loan. The loan still remains outstanding as of September 30, 2017 with a balance of $170,000. We amortized $41,025 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $11,054. On April 19, 2017, we received a 7-month non-convertible loan of $250,000 from a privately-held investment firm. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We agreed to issue 833 shares at closing. Until the loan was repaid, we agreed that over the next one hundred eighty (180) days to issue 2,500 shares to the Investor every sixty (60) days for a total issuance of 8,333 shares. The loan remains outstanding and we have issued 5,833 shares including the closing shares since inception of the loan. We recorded the fair value of the 5,833 shares amounting to $32,684 as a debt discount that will be amortized to interest expense during the term of the loan. We amortized $45,264 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $12,420. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the lowest closing stock price for the 15 trading days prior to conversion. On May 19, 2017, we received a 45-day non-convertible loan of $630,000 from a private investor. The loan provides guaranteed interest of $63,000 and has an origination fee of $32,000. We paid a broker $31,500 in connection with this loan. The unamortized debt discount as of September 30, 2017 was zero. We used these proceeds to pay off in full our September 2016 loan of $589,189. The loan remains outstanding and accrues interest at a 20% annual rate from the maturity date. On June 6, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $250,000. The lender is entitled to receipts which are collected at the rate of $1,833 per business day. The Company paid $6,250 in fees in connection with this loan. Under the agreement, $119,021 was used to pay off three prior loans. The unamortized debt discount as of September 30, 2017 was $2,357. The loan remains outstanding as of September 30, 2017 with a balance of approximately $157,820. On June 21, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $150,000. The lender is entitled to receipts which are collected at the rate of $1,361 per business day. The Company paid $1,498 in fees in connection with this loan. The unamortized debt discount as of September 30, 2017 was $509. The loan remains outstanding as of September 30, 2017 with a balance of approximately $81,000. We accounted for the Merchant Agreement as a loan under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts. On July 17, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $125,000. The lender is entitled to receipts which are collected at the rate of $1,250 per business day. The Company paid $1,250 in fees in connection with this loan. The loan remains outstanding as of September 30, 2017 with a balance of approximately $82,000. On August 1, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,000. The loan includes $18,750 representing an original issue discount, interest and fees resulting in a total payable of $93,750. The loan remains outstanding as of September 30, 2017 with a balance of approximately $56,000. On September 12, 2017, we received a 9-month non-convertible loan of $225,000 from a privately-held investment firm. The loan earns an annual interest rate of 10%. The Company paid total fees of $25,000 including original issue discount and other costs related to this loan. We agreed to issue 3,333 shares at closing. We recorded the fair value of the shares as a debt discount that will be amortized to interest expense during the term of the loan. We amortized $2,505 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $35,495. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the average of the two lowest daily volume weighted average closing stock price for the 20 trading days prior to conversion. |