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Convertible Notes Payable

6 Months Ended

Jun. 30, 2018

Debt Disclosure [Abstract]

Convertible Notes Payable

7. Convertible Notes Payable

8% Convertible Notes Payable

On June 6, 2018, the Company entered into a securities purchase agreement with L2 Capital, LLC (“L2”), pursuant to which L2 purchased from the Company a promissory note, issuable in tranches, in the aggregate principal amount of $1,681,668 for an aggregate purchase price of $1,500,000 (the “Consideration”). On June 11, 2018, an initial tranche of $570,556, which included $15,000 of L2’s legal expenses, was purchased for a price of $500,000, reflecting an original issue discount of $70,556.

L2 may pay, in its sole discretion, additional amounts of the Consideration, at such dates as L2 may choose; provided, however, that L2’s option to pay any additional amount of Consideration terminates on the date that the Company consummates a financing transaction (or series of interconnected financing transactions) after the date hereof, which results in the Company’s receipt of an aggregate amount of $5,000,000 (a “Qualified Financing”). If any portion of the Consideration remains unfunded on the date that the Company consummates a Qualified Financing (the “Remaining Consideration”), then L2 may choose, in its sole discretion, to participate in the Qualified Financing and fund an amount up to the remaining unfunded Consideration on the terms of the Qualified Financing. Further, at any time prior to the consummation of the Qualified Financing, L2 may choose, in its sole discretion, to exchange all or a portion of the outstanding balance of the note for an equivalent portion of the Qualified Financing pursuant to the terms of the Qualified Financing. In the event that the Company has not consummated a Qualified Financing within 45 days after the date hereof (or an event of default occurs under the note), then the note, including accrued interest, shall, at L2’s option, be convertible at any time into shares of the Company’s common stock at a conversion price equal to the lowest Volume Weighted Average Price (“VWAP”) during the ten trading day period ending on the issue date of the note. As of June 30, 2018, the 8% Convertible Notes Payable were convertible into 970,787 shares of the Company’s common stock.

The note bears interest at 8% per annum and the maturity date for each tranche funded is seven months from the date of issuance. The note also requires an increasing premium for any prepayment from 20% for the first 90 days to 38% after 181 days, an increased conversion rate to a 40% discount if in default, a default rate of 18% plus a repayment premium of 40%, plus 5% for each additional default, and liquidated damages in addition to the default rates, ranging from 30% to 100% for certain breaches of the Note. The note is subject to mandatory prepayment, including the above described premiums, equal to 50% of new funds raised by the Company in excess of $11,600,000 in the private placement of its securities.

In addition, on June 11, 2018, the Company issued a warrant to L2, exercisable for 216,120 shares of the Company’s common stock, provided, that at the time of L2’s funding of each additional tranche under the note, if any, the number of shares issuable under the warrant shall increase by the quotient of 50% of the face value of the respective tranche and 110% multiplied by the VWAP of the Company’s common stock on the trading day immediately prior to the funding date of the respective tranche. The warrant is exercisable for a period of five years at an exercise price equal to 110% of the VWAP of the Company’s common stock on the trading day immediately prior to the funding date of the respective tranche, subject to customary anti-dilution adjustments, and may, in the event there is no effective registration statement covering the re-sale of the warrant shares, be exercised on a cash-less basis. As of June 30, 2018, the June 11, 2018 warrant was exercisable into 216,120 shares of the Company’s common stock at an exercise price of $1.30 per share.

On June 15, 2018, a second tranche of $555,556 was purchased for a price of $500,000, an original issue discount of $55,556. In connection with the second tranche, the Company issued a warrant to L2, exercisable for 210,438 shares of the Company’s common stock. As of June 30, 2018, the June 15, 2018 warrant was exercisable into 210,438 shares of the Company’s common stock at an exercise price of $1.20 per share.

As a result of the closing of the 10% Convertible Debenture offering on June 15, 2018 (see “10% Convertible Debentures” below), L2 no longer has the right to invest in the Company under the L2 securities purchase agreement.

The Company accounts for the warrants and embedded conversion feature of the notes as derivative liabilities, as the Company is required to adjust downward the exercise price of the warrants and the conversion price of the note under certain circumstances, which requires that the Company carry such amounts in its consolidated balance sheet as liabilities at fair value, as adjusted at each period-end.

During the three months and six months ended June 30, 2018, interest of $14,660 was charged to expense, which consisted of $10,159 from the accretion of original issue discount and $4,501 from the accrual of interest payable.

The 8% Convertible Notes Payable consists of the following at June 30, 2018:

Principal amount of notes payable		$	1,000,000
Add:
Accreted original issue discount			10,159
Accrued interest payable			4,501
			1,014,660
Less unamortized discounts:
Warrants			547,627
Embedded conversion feature			145,431
Total unamortized discounts			693,058
		$	321,602

During the three months and six months ended June 30, 2018, $67,529 was charged to interest expense from the amortization of debt discounts.

See “Note 13. Subsequent Events” regarding the repayment of the 8% Convertible Notes Payable on September 6, 2018.

10% Senior Convertible Debenture

On June 15, 2018, the Company entered into a securities purchase agreement with four accredited investors to purchase an aggregate of $4,775,000 in principal amount of the Company’s 10% Senior Convertible Debenture, due on June 30, 2019 (the “Debenture”). Included in the aggregate total of $4,775,000 is $1,025,000 from two of the Company’s executives. The Debenture is convertible into an aggregate of 3,698,110 shares of the Company’s common stock based on a conversion price of $1.2912 per share. The Debenture bears interest at the rate of 10% per annum, payable in cash semi-annually on December 31 and June 30, beginning on December 31, 2018 and is not convertible. Upon the occurrence of certain events, the holders of the Debenture also will be entitled to receive an additional payment, if necessary, to provide the holders with a 20% annual internal rate of return on their investment, as further described in the Debenture.

At any time after the later of (i) March 31, 2019 and (ii) the date that the VWAP (as that term is defined in the Debenture) for any 20 trading days (out of 30 consecutive trading days) is 120% or more of the then conversion price, the Company has the option to redeem some or all of the outstanding principal amount of the Debenture for an amount equal to the principal amount (plus accrued but unpaid interest thereon) being redeemed plus any other amounts due under the Debenture. Otherwise, the Company may not prepay any portion of the principal amount of a Debenture without the prior written consent of the holders of the Debenture.

If the Company undertakes subsequent financings for gross proceeds of at least $20,000,000 (a “Qualified Offering”), the Company has the option to cause the holders to convert their Debenture at a conversion price equal to the lesser of (i) the then conversion price and (ii) the price per share paid for in the Qualified Offering.

As long as any portion of the Debenture remain outstanding, unless investors holding at least 51% in principal amount of the then outstanding Debenture otherwise agree, the Company shall not, among other things enter into, incur, assume or guarantee any indebtedness, except for certain permitted indebtedness, as set forth in the Debenture.

Additionally, pursuant to a Registration Rights Agreement entered into in connection with the purchase agreement, the Company agreed to register the shares issuable upon conversion of the Debenture for resale by the holders of the Debenture. The Company has committed to file the registration statement by no later than 45 days after June 15, 2018 and to cause the registration statement to become effective by no later than 120 days after June 15, 2018 (or, in the event of a full review by the staff of the Securities and Exchange Commission, 150 days following June 15, 2018). The Registration Rights Agreement provides for liquidated damages upon the occurrence of certain events up to a maximum amount of 6% of the aggregate amount invested by such holder of the Debenture pursuant to the purchase agreement. Liquidated damages were waived as part of the roll-over of the Debenture into Series H Convertible Preferred Stock.

The Securities Purchase Agreement also included a provision that requires the Company to maintain its periodic filings with the SEC in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any reason to satisfy the current public information requirement (a “Public Information Failure”), then the Company will be obligated to pay to each holder a cash payment equal to 1.0% of the amount invested as partial liquidated damages, up to a maximum of six months. Such payments are subject to interest at the rate of 1.0% per month until paid in full. The Debenture was rolled over into Series H Convertible Preferred Stock before the due date for the commencement of liquidated damages.

The Company accounts for the embedded conversion feature of the Debenture as a derivative liability, as the Company is required to adjust downward the conversion price of the Debenture under certain circumstances, which requires that the Company carry such amount in its consolidated balance sheet as a liability at fair value, as adjusted at each period-end.

During the three months and six months ended June 30, 2018, the Company recognized interest expense of $20,844 from the accrual of interest payable.

The 10% Senior Convertible Debenture consists of the following at June 30, 2018:

Principal amount of notes payable, including $1,025,000 to officers		$	4,775,000
Add accrued interest payable			20,844
			4,795,844
Less unamortized discount:
Embedded conversion feature			452,410
Total unamortized discount			452,410
		$	4,343,434

During the three months and six months ended June 30, 2018, $18,592 was charged to interest expense from the amortization of debt discount.

See “Note 13. Subsequent Events” for information regarding the conversion of the 10% Senior Convertible Debenture into Series H Convertible Preferred Stock.