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Convertible Debt

12 Months Ended

Dec. 31, 2019

17. Convertible Debt

12% Convertible Debentures

The Company issued various financings under the 12% senior secured subordinated convertible debentures during 2018 and 2019 which are due and payable on December 31, 2020 (collectively the “12% Convertible Debentures”). Interest accrues at the rate of 12% per annum, payable on the earlier of conversion or December 31, 2020. The Company’s obligations under the 12% Convertible Debentures are secured by a security agreement, dated as of October 18, 2018, by and among the Company and each investor thereto. The holders’ ability to convert the 12% Convertible Debentures are subject to the Company receiving stockholder approval to increase its authorized shares of common stock. The outstanding principal amounts of the 12% Convertible Debentures are convertible into shares of common stock, at the option of the holder at any time prior to December 31, 2020, at a per-share conversion price of either $0.33, in the case of the 12% Convertible Debentures issued in 2018, or $0.40, in the case of the 12% Convertible Debentures issued in 2019, subject to adjustment for stock splits, stock dividends and similar transactions, and beneficial ownership blocker provisions. Further, if the Company does not perform certain of its obligations in a timely manner, it must pay Liquidated Damages to the investors (see Note 23 and Note 26).

The 12% Convertible Debentures were issued as follows:

On December 12, 2018, the Company entered into a securities purchase agreement with three accredited investors, pursuant to which the Company issued to the investors 12% Convertible Debentures in the aggregate principal amount of $13,091,528, which included (i) the roll-over of an aggregate of $3,551,528 in principal and interest of the 10% OID Convertible Debentures issued to two of the investors on October 18, 2018, and (ii) a placement fee, payable in cash, of $540,000 to the Company’s placement agent, B. Riley FBR, in the offering. After taking into account legal fees and expenses of the investors, the Company received net proceeds of $8,950,000. This financing of the 12% Convertible Debentures was subject to an issuance limitation (further details subsequent to the date of these consolidated financial statements are provided under the heading 12% Convertible Debentures in Note 28), which limited the conversion of the 12% Convertible Debentures into shares of the Company’s common stock by the holders in excess of 566,398, proportional to the holders convertible shares to the total convertible shares under such debentures (outside of the issuance limitation these 12% Convertible Debentures were convertible into 39,671,297 shares of the Company’s common stock), subject to certain conditions as described below.

On March 18, 2019, the Company entered into a securities purchase agreement with two accredited investors, including John Fichthorn, the Company’s Executive Chairman of the Board of Directors (the “Board”), pursuant to which the Company issued 12% Convertible Debentures in the aggregate principal amount of $1,696,000, which included a placement fee of $96,000 paid to B. Riley FBR in the form of a 12% Convertible Debenture, for acting as the Company’s placement agent in the offering. The Company received net proceeds of $1,600,000 and paid legal fees and expenses of $10,000 in cash. This financing of the 12% Convertible Debentures was subject to an issuance limitation (further details subsequent to the date of these consolidated financial statements are provided under the heading 12% Convertible Debentures in Note 28), which fully limited the conversion of the 12% Convertible Debentures into shares of common stock by the holders (outside of the issuance limitation these 12% Convertible Debentures were convertible into 4,240,000 shares of the Company’s common stock), subject to certain conditions as described below.

On March 27, 2019, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company issued 12% Convertible Debentures in the aggregate principal amount of $318,000, which included a placement fee of $18,000 paid to B. Riley FBR in the form of a 12% Convertible Debenture for acting as the Company’s placement agent in the offering. The Company received net proceeds of $300,000. This financing of the 12% Convertible Debentures was subject to an issuance limitation (further details subsequent to the date of these consolidated financial statements are provided under the heading 12% Convertible Debentures in Note 28), which fully limited the conversion of the 12% Convertible Debentures into shares of common stock by the holder (outside of the issuance limitation these 12% Convertible Debentures were convertible into 795,000 shares of the Company’s common stock), subject to certain conditions as described below.

On April 8, 2019, the Company entered into a securities purchase agreement with an accredited investor, Todd D. Sims, a member of the Board, pursuant to which the Company issued a 12% Convertible Debenture in the aggregate principal amount of $100,000 and received $100,000 from the proceeds. This financing of the 12% Convertible Debenture was subject to an issuance limitation (further details subsequent to the date of these consolidated financial statements are provided under the heading 12% Convertible Debentures in Note 28), which fully limited the conversion of the 12% Convertible Debentures into shares of common stock by the holder (outside of the issuance limitation this 12% Convertible Debenture was convertible into 250,000 shares of the Company’s common stock), subject to certain conditions as described below.

Upon issuance of the various financings of the 12% Convertible Debentures, the Company recognized the following embedded derivative liabilities that were bifurcated from the note instruments:

	●	Conversion option – (1) At any time after the original issue date until the 12% Convertible Debenture is no longer outstanding, the 12% Convertible Debenture is convertible, in whole or in part, into shares of common stock at the option of the holder at the aforementioned conversion price, and (2) at any time and from time to time subject to: (i) an issuance limitation until the Company has an authorized share increase, and (ii) a beneficial ownership limitations, which prevents conversion if the common stock shares held by the holder exceeds 4.99% of the common stock outstanding (subject to increase by the holder to 9.99%).

	●	Buy-in feature – (1) The 12% Convertible Debenture is puttable for a certain buy-in amount where it gives the holder the right, if the Company fails for any reason to deliver to the holder the conversion shares, to a cash settlement for the difference between the cost of the Company’s common stock in the open market and the conversion price; and (2) the put is contingent if the Company fails to deliver conversion shares pursuant to a buy-in event.

	●	Default remedy feature – (1) The 12% Convertible Debenture is puttable in the event of default where it gives the holder the right to repayment, in cash, the greater of (i) the outstanding principal amount due divided by the then conversion price times the daily volume weighted average price of the common stock; or (ii) the outstanding principal debt amount, plus unpaid but accrued interest and other amounts owing in the notes; and (2) the put is contingent upon a Change of Control (as described below) or Fundamental Transaction (as described below).

Change in Control – Change in Control, in general, means: (a) an acquisition in excess of 50% of the voting securities of the Company; (b) the Company merges into or consolidates whereby the Company stockholders own less than 50% of the aggregate voting power after the transaction; (c) the Company sells or transfers all or substantially all of its assets to whereby the Company stockholders own less than 50% of the aggregate voting power after the transaction; (d) a replacement at one time or within a three year period of more than one-half of the Board, which is not approved by a majority of those individuals who are members of the Board on the original issue date, subject to certain conditions; or (e) the execution by the Company of an agreement for any of the events set forth in clauses (a) through (d) above.

Fundamental Transaction – Fundamental Transaction, in general, means: (a) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation; (b) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions; (c) any, direct or indirect, purchase offer, tender offer or exchange offer is completed pursuant to which the Company common stock holders are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the Company’s outstanding common stock; (d) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Company’s common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property, or (e) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination whereby such transaction results in an acquisition of more than 50% of the outstanding shares of the Company’s common stock, subject to certain other conditions. Further, if a Fundamental Transaction occurs, the holders have the right to their conversion shares as if the beneficial ownership limitation or the issuance limitation was not in place, subject to certain terms as additional consideration.

As long as any portion of the 12% Convertible Debentures remain outstanding, unless investors holding at least 51% in principal amount of the then-outstanding 12% Convertible Debentures otherwise agree, the Company cannot, among other things enter into, incur, assume or guarantee any indebtedness, except for certain permitted indebtedness.

Pursuant to the registration rights agreements entered into in connection with the securities purchase agreements, the Company agreed to register the shares issuable upon conversion of the 12% Convertible Debentures for resale by the holders. The Company committed to file the registration statement the later of (i) the 30th calendar day following the date the Company files its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 with the SEC, but in no event later than May 15, 2019, and (ii) the 30th calendar day after all the common stock issuable on the conversion of the Series H Preferred Stock have been registered pursuant to a registration statement under a certain registration rights agreement, dated as of August 9, 2018. The registration rights agreements provide for Registration Rights Damages (presented as liquidated damages payable on the consolidated balance sheets) upon the occurrence of certain events up to a maximum amount of 6% of the aggregate amount invested.

The securities purchase agreements 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, then the Company will be obligated to pay Public Information Failure Damages (presented as liquidated damages payable on the consolidated balance sheets) to each holder, consisting of a cash payment equal to 1% of the amount invested as partial liquidated damages, up to a maximum of six months, subject to interest at the rate of 1% per month until paid in full.

The Company recognized a portion of the Public Information Failure Damages pursuant to the securities purchase agreements in connection with the 12% Convertible Debentures at the time of issuance as it was deemed probable the obligations would not be satisfied when the financings were completed (see Note 14 and Note 23).

Upon issuance of the various financings, the Company accounted for the embedded conversion option feature, buy-in feature, and default remedy feature as embedded derivative liabilities, which requires the Company carry such amount on its consolidated balance sheets as a liability at fair value, as adjusted at each period-end (see Note 15). The Company also incurred additional debt issuance cost. The embedded derivative liabilities and debt issuance cost were treated as a debt discount and amortized over the term of the debt.

The following table represents the various financings of the 12% Convertible Debentures recognized during the year ended December 31, 2019 and carrying value as of December 31, 2019:

	Issuance Date												Total 12%
	December 12, 2018			March 18, 2019			March 27, 2019			April 8, 2019			Convertible Debentures
Principal amount of debt	$	9,540,000		$	1,696,000		$	318,000		$	100,000		$	11,654,000
Less issuance costs		(590,000	)		(96,000	)		(18,000	)		-			(704,000	)
Net cash proceeds received	$	8,950,000		$	1,600,000		$	300,000		$	100,000		$	10,950,000
Principal amount of debt (excluding original issue discount)	$	9,540,000		$	1,696,000		$	318,000		$	100,000		$	11,654,000
Add conversion of debt from 10% OID Convertible Debentures		3,551,528			-			-			-			3,551,528
Add: accrued interest		1,711,273			164,083			29,754			8,933			1,914,043
Principal amount of debt including accrued interest		14,802,801			1,860,083			347,754			108,933			17,119,571
Debt discount:
Allocated embedded derivative liabilities		(4,760,000	)		(822,000	)		(188,000	)		(64,000	)		(5,834,000	)
Liquidated Damages recognized upon issuance		(706,944	)		(67,200	)		(12,600	)		(4,200	)		(790,944	)
Issuance costs		(590,000	)		(106,000	)		(18,000	)		-			(714,000	)
Subtotal debt discount		(6,056,944	)		(995,200	)		(218,600	)		(68,200	)		(7,338,944	)
Less amortization of debt discount		2,927,248			414,465			89,422			27,200			3,458,335
Unamortized debt discount		(3,129,696	)		(580,735	)		(129,178	)		(41,000	)		(3,880,609	)
Carrying value at December 31, 2019		11,673,105			1,279,348			218,576			67,933			13,238,962
Less current portion		(534,993	)		-			(206,204	)		-			(741,197	)
Carry value at December 31, 2019, net of current portion	$	11,138,112		$	1,279,348		$	12,372		$	67,933		$	12,497,765

As of December 31, 2020, there was no longer any principal or accrued but unpaid interest outstanding under the 12% Convertible Debentures (further details are provided under the heading 12% Convertible Debentures in Note 28).

For additional information for the year ended December 31, 2018 with respect to debt components and interest expense related to the 12% Convertible Debentures is provided below under the heading of Convertible Debt and Debt Components and Interest Expense in Note 18.

8% Promissory Notes

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 convertible promissory note (the “8% Promissory Notes”), issuable in tranches, in the aggregate principal amount of $1,681,668 for an aggregate purchase price of $1,500,000, with interest at 8% per annum and the maturity date for each tranche funded is seven months from the date of issuance. The 8% Promissory Notes required 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 8% Promissory Notes, 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.

On June 11, 2018, a first 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 and debt discount of $70,556. 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 first and second tranche, the Company issued warrants to L2, exercisable for 216,120 and 210,438 shares of the Company’s common stock at an exercise price of $1.30 and $1.20 per share, respectively (the “L2 Warrants”).

L2 had the sole discretion to purchase additional 8% Promissory Notes, in certain circumstances, which expired. The 8% Promissory Notes and any accrued but unpaid interest were convertible into common stock, at any time, 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 a result of the closing of the 10% Convertible Debenture offering on June 15, 2018 (refer to 10% Convertible Debentures below), L2 no longer has the right to invest in the Company under the securities purchase agreement.

The L2 Warrants included a reset provision, which provided that the number of shares issuable under the L2 Warrants would 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 (see Note 20).

The Company accounted for the L2 Warrants and embedded conversion features of the 8% Promissory Notes as derivative liabilities, as the Company was required to adjust downward (a reset provision) the exercise price of the L2 Warrants (floor price of $0.50 per share) and the conversion price of the 8% Promissory Note under certain circumstances, which required the Company to carry such amounts on its consolidated balance sheets as liabilities at fair value, as adjusted at each period-end. Upon issuance, the Company recognized derivative liabilities of $760,587 ($600,986 for the L2 Warrants and $159,601 for the embedded conversion feature). The Company also incurred an additional debt issuance cost of $15,000.The embedded derivative liabilities and debt issuance costs were treated as a debt discount and amortized over the term of the debt. During the year ended December 31, 2019, the Company recognized a gain of $29,860 upon extinguishment of debt for the embedded conversion feature derivative liabilities and a change in fair value of $129,741 immediately before the extinguishment (see Note 15).

On September 6, 2018, the Company repaid the 8% Promissory Notes. The total amount borrowed was $1,015,000, and under the terms of the loan agreement the Company repaid $1,372,320 to satisfy the debt obligation resulting in a loss on extinguishment of debt which is presented in interest expense on the consolidated statements of operations.

Information for the year ended December 31, 2018 with respect to debt components and interest expense related to the 8% Promissory Notes is provided below under the heading of Convertible Debt and Debt Components and Interest Expense in Note 18.

10% Convertible Debentures

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% Convertible Debenture, due on June 30, 2019 (the “10% Convertible Debentures”). Included in the aggregate total of $4,775,000 was $1,025,000 from two of the Company’s executive officers. The 10% Convertible Debentures were 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 10% Convertible Debentures were interest bearing at the rate of 10% per annum, that was payable in cash semi-annually on December 31 and June 30, beginning on December 31, 2018. Upon the occurrence of certain events, the holders of the 10% Convertible Debentures were also entitled to receive an additional payment, if necessary, to provide the holders with a 20% annual internal rate of return on their investment. The Company had the option, under certain circumstances, to redeem some or all of the outstanding principal amount for an amount equal to the principal amount (plus accrued but unpaid interest thereon) or the option to cause the holders to convert their debt at a certain conversion price, otherwise, the Company was not permitted to prepay any portion of the principal amount without the prior written consent of the debt holders.

Additionally, pursuant to a registration rights agreement entered into in connection with the securities purchase agreement, the Company agreed to register the shares issuable upon conversion of the 10% Convertible Debentures for resale by the holders of the 10% Convertible Debentures. The Company had 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 SEC, 150 days following June 15, 2018). The registration rights agreement provided for Liquidated Damages upon the occurrence of certain events up to a maximum amount of 6% of the aggregate amount invested by such holders. Liquidated Damages were waived as part of the roll-over of the 10% Convertible Debentures into Series H Preferred Stock.

The securities purchase agreement also included a provision that required 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 failed for any reason to satisfy the current public information requirement, then the Company would have been 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 were subject to interest at the rate of 1.0% per month until paid in full. The 10% Convertible Debentures was rolled over into Series H Preferred Stock before the due date for the commencement of the Liquidated Damages.

Upon issuance, the Company accounted for an embedded conversion feature of the 10% Convertible Debentures as a derivative liability totaling $471,002, as the Company was required to adjust downward the conversion price of the debt under certain circumstances, which required that the Company carry such amount on its consolidated balance sheet as a liability at fair value, as adjusted at each period-end. The embedded derivative liability was treated as a debt discount and amortized over the term of the debt. During the year ended December 31, 2019, the Company recognized a gain of $1,042,000 upon extinguishment of debt for the embedded conversion feature derivative liabilities and a change in fair value of $570,998 immediately before the extinguishment (see Note 15).

On August 10, 2018, the 10% Convertible Debentures with an aggregate principal amount of $4,775,000 plus obligations of $955,000 were converted into 5,730 shares of Series H Preferred Stock resulting in a loss on extinguishment of debt upon conversion, which is presented in interest expense on the consolidated statements of operations.

Information for the year ended December 31, 2018 with respect to debt components and interest expense related to the 10% Convertible Debentures is provided below under the heading of Convertible Debt and Debt Components and Interest Expense in Note 18.

10% OID Convertible Debentures

On October 18, 2018, the Company entered into a securities purchase agreement with two accredited investors, B. Riley and an affiliated entity of B. Riley, pursuant to which the Company issued to the investors 10% original issue discount senior secured convertible debentures (the “10% OID Convertible Debentures”) in the aggregate principal amount of $3,500,000, which, after taking into account the 5% original issue discount, and legal fees and expenses of the investors, resulted in the Company receiving net proceeds of $3,285,000. The Company issued warrants to the investors to purchase up to 875,000 shares of the Company’s common stock in connection with this securities purchase agreement. The debt proceeds were bifurcated between the debt and warrants, with the warrants accounted for as a derivative liability (see Note 20). The 10% OID Convertible Debentures were due and payable on October 31, 2019. Interest accrued on the 10% OID Convertible Debentures at the rate of 10% per annum, payable on the earlier of conversion, redemption, or October 31, 2019.

The 10% OID Convertible Debentures were convertible into shares of the Company’s common stock at the option of the investor at any time prior to October 31, 2019, at a conversion price of $1.00 per share, subject to adjustment for stock splits, stock dividends, and similar transactions, and were subject to certain redemption rights by the Company. Further, the agreement provided a buy-in and default remedy feature (which were similar to the features described below for the 12% Convertible Debentures), which were both bifurcated from the debt instrument as an embedded derivative liability as referenced in the table Convertible Debt and Debt Components below.

Upon issuance, the Company accounted for the embedded buy-in and default remedy features of the 10% OID Convertible Debentures as a derivative liability totaling $49,000. The Company also incurred an additional debt issuance cost of $40,000. The embedded derivative liabilities and debt issuance costs were treated as a debt discount and amortized over the term of the debt. During the year ended December 31, 2019, the Company recognized a gain of $25,000 upon extinguishment of debt for the embedded derivative liabilities and a change in fair value of $24,000 immediately before the extinguishment (see Note 15).

On December 12, 2018, there was a roll-over of the 10% OID Convertible Debentures into the 12% Convertible Debentures (as further described below) resulting in a loss on extinguishment of debt upon the roll-over which is presented in interest expense on the consolidated statements of operations.

Information for the year ended December 31, 2018 with respect to debt components and interest expense related to the 10% Original Issue Discount Convertible Debentures is provided below under the heading of Convertible Debt and Debt Components and Interest Expense in Note 18.

Convertible Debt and Debt Components

	8% Promissory Notes			10% Convertible Debentures			10% OID Convertible Debentures			12% Convertible Debentures			Total Convertible Debt and Debt Components
Principal amount of debt	$	1,126,112		$	4,775,000		$	3,500,000		$	9,540,000		$	18,941,112
Less original issue discount		(111,112	)		-			(175,000	)		-			(286,112	)
Less issuance costs		(15,000	)		-			(40,000	)		(590,000	)		(645,000	)
Net cash proceeds received	$	1,000,000		$	4,775,000		$	3,285,000		$	8,950,000		$	18,010,000
Principal amount of debt (excluding original issue discount)	$	1,015,000		$	4,775,000		$	3,325,000		$	9,540,000		$	18,655,000
Add conversion of debt from 10% OID Convertible Debentures		-			-			-			3,551,528			3,551,528
Add accrued interest		20,986			69,920			28,009			82,913			201,828
Principal amount of debt including accrued interest		1,035,986			4,844,920			3,353,009			13,174,441			22,408,356
Debt discount:
Allocated warrant derivative liabilities for B. Riley Warrants		-			-			(382,725	)		-			(382,725	)
Allocated warrant derivative liabilities for L2 Warrants		(600,986	)		-			-			-			(600,986	)
Allocated embedded derivative liabilities		(159,601	)		(471,002	)		(49,000	)		(4,760,000	)		(5,439,603	)
Liquidated Damages recognized upon issuance		-			-			-			(706,944	)		(706,944	)
Issuance costs		(15,000	)		-			(40,000	)		(590,000	)		(645,000	)
Subtotal debt discount		(775,587	)		(471,002	)		(471,725	)		(6,056,944	)		(7,775,258	)
Less amortization of debt discount		315,309			64,452			68,637			153,442			601,840
Less write off unamortized debt discount upon extinguishment of debt		460,278			406,550			403,088			-			1,269,916
Unamortized debt discount		-			-			-			(5,903,502	)		(5,903,502	)
Debt components:
Accretion of original issue discount		44,133			-			25,463			-			69,596
Loss on extinguishment of debt		292,201			885,080			173,056			-			1,350,337
Conversion of debt to 12% Convertible Debentures		-			-			(3,551,528	)		-			(3,551,528	)
Conversion of debt to Series H Preferred Stock		-			(5,730,000	)		-			-			(5,730,000	)
Repayment of convertible debt		(1,372,320	)		-			-			-			(1,372,320	)
Total debt components		(1,035,986	)		(4,844,920	)		(3,353,009	)		-			(9,233,915	)
Carrying value at December 31, 2018	$	-		$	-		$	-		$	7,270,939		$	7,270,939