XML 23 R14.htm IDEA: XBRL DOCUMENT

Notes Payable and Long-Term Debt

9 Months Ended

Sep. 30, 2016

9 NOTES PAYABLE AND LONG-TERM DEBT

As of September 30, 2016 and December 31, 2015, notes payable and long-term debt consists of:

	September 30, 2016		December 31, 2015
On October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest, past due	$	68,973	$	91,706

Convertible Promissory Note - Non-interest bearing; on January 19, 2016, the Company modified the terms of a secured note payable in the original amount of $950,000 and made the $700,000 balance convertible¹		456,363		720,000

Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year, non-interest bearing; past due in 2016		101,250		101,250

Notes payable to seller of DigitizeIQ, LLC due as noted below²		485,000		747,140

Senior Secured Credit Facility dated February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments of $28,306 monthly³		128,290		-

Note payable to Pinz Capital International, LP dated May 25, 2016 with interest at 18%⁴		100,000		-

Convertible note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into common stock at 60-75% of lowest trading price in the previous 30 trading days⁵		10,752		-

Convertible promissory note payable to Salksanna, LLC dated September 13, 2016 with interest at 10% per annum; due March 13, 2018; convertible into common stock at 60-70% of lowest trading price in previous 20 trading days⁶		1,569		-
		1,352,197		1,660,096
Less current portion		1,300,003		1,104,159
Long-term debt	$	52,194	$	555,937

¹ The Convertible Promissory Note was modified to release the pledge of the holder’s former membership units in Ksix and BMG, to make the note convertible into the Company’s common stock and to require an extra payment of $100,000 due within 90 days. The terms of the Convertible Note provided in the event the Note was not paid prior to the Maturity Date (January 1, 2017) or that payments are not made to the holder by the due date ($10,000 on the 1^st and 15^th of each month), the holder shall have the right thereafter, exercisable in whole or in part, to convert the outstanding principal or payment then due into shares of the common stock of the Company. The Convertible Promissory Note provided the note conversion price was determined by taking the lowest closing price of the Company’s common stock in the previous ten trading days and then applying a 45% discount. On March 23, 2016, the parties entered into an Addendum to the Convertible Promissory Note to allow an immediate conversion of the $20,000 payments due in April 2016 at the 45% discount rate; to modify the conversion discount rate from 45% to 35% for any future conversions; and to require an additional payment of $30,000 within sixty days. The Company evaluated the embedded conversion feature for derivative treatment and recorded the following.

Face value of note	$	590,000
Derivative liability		(311,819	)
Amortize debt discount		178,182
Balance at September 30, 2016	$	456,363

The original note and the convertible promissory note provide for semi-monthly payments of $10,000 due on the 1^st and 15^thof the month, with any unpaid balance due on January 1, 2017. If the Company paid the unpaid balance on December 31, 2016, they were allowed a discount of $200,000 from the remaining balance. In addition, the modification and addendum, provided for two additional payments during 2016. Within 90 days of January 19, 2016, the Company was required to make an additional payment of $100,000 and within 60 days of March 23, 2016, the Company was required to make an additional payment of $30,000. As of September 30, 2016, the $100,000 and the $30,000 extra payments have not been made and seven payments of $10,000 are past due.

² Notes due seller of DigitizeIQ, LLC includes a series of notes as follows:

	●	Issue a non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on November 12, 2015; (Paid February 26, 2016).

	●	Issue a second non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on January 12, 2016;

	●	Issue a third non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on March 12, 2016.

The $250,000 notes due January 12, 2016 and March 12, 2016 have an unpaid balance of $485,000 at September 30, 2016. The Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).

The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was amortized to interest expense until the due date of the notes. The net carrying value of the notes follows.

	September 30, 2016		December 31, 2015

Face value of notes	$	485,000	$	750,000
Unamortized debt discount		-		(2,860	)
Carrying value of notes	$	485,000	$	747,140

³SENIOR SECURED CREDIT FACILITY AGREEMENT

On February 24, 2016, the Company executed a Senior Secured Credit Facility Agreement (“Senior Credit Facility”) in the maximum amount of $5,000,000 together with a Convertible Promissory Note (“Convertible Note”) in the amount of $750,000 with TCA Global Credit Master Fund, LP (“TCA”). The initial loan advance was $400,000 and requires monthly interest only payments for two months and then sixteen monthly payments of $28,306, including interest at 18% per annum. The obligation is secured by substantially all assets of the Company and its subsidiaries. The payment due Augsust 29, 2016 was acquired by Salksanna LLC on September 13, 2016 (See ⁶ below). The payment due September 29, 2016 was acquired by Salksanna, LLC on October 7, 2016. See Note 12.

The Senior Credit Facility includes a provision for advisory fees in the amount of $300,000 which was paid when the Company issued 1,782,000 shares of its common stock to TCA (the “Advisory Shares”) on or about March 24, 2016. If TCA is unable to collect the $300,000 from sales of the Advisory Shares within twelve months, the Company is obligated to issue additional shares to TCA until TCA is able to collect the full $300,000. Should TCA still be unable to collect the full $300,000, and after at least one year, TCA can require the Company to redeem any remaining shares for an amount equal to $300,000 less the sales proceeds that TCA has collected. In the event TCA sells the Advisory Shares for more than $300,000, the excess proceeds, together with unsold common shares will be returned to the Company. As long as there is no default under the terms of the Senior Credit Facility, TCA is limited to weekly sales of the Advisory Shares equal to no more than 20% of the average weekly volume of the Company’s common stock on its principal trading market. The stock was valued at the trading price on the date of the agreement and the resulting $300,000 was included as a direct reduction from the carrying amount of the debt liability and is being amortized to interest expense over the eighteen month loan payment period.

The Convertible Note is convertible into the Common Stock of the Company upon the event of: (1) a default under any of the loan documents between the Company and TCA; or (2) mutual agreement between the Company and TCA, at which time TCA may convert all or a portion of the outstanding principal, accrued and unpaid interest into shares of the Common Stock of the Company calculated by the conversion amount divided by 85% of the lowest of the daily weighted average price of the Company’s Common Stock during five business days immediately prior to the date of the request of conversion (the “Conversion”). Pursuant to the terms of the Convertible Note, TCA is limited to beneficial ownership of not more than 4.99% of the issued and outstanding Common Stock of the Company after taking into effect the Common Stock to be issued pursuant to the Conversion.

Pursuant to ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” and issued by the FASB in April 2015, debt issuance costs related to a recognized debt liability should be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The carrying value of the note at September 30, 2016 is as follows:

	Current			Non-current		Total

Face value of notes	$	308,748		$	-	$	308,748
Unamortized loan costs		(180,458	)		-		(180,458	)
Carrying value of notes	$	128,290		$	-	$	128,290

The Company is also responsible for other transaction, due diligence and legal fees of $42,500 if it draws the remaining $350,000 initially committed.

The proceeds from the loan were used to pay a $250,000 note to the seller of DIQ and for working capital.

⁴Pinz Capital International, L.P. Note – The Pinz Capital note payable is due in installments of $25,000 plus accrued interest on November 25, 2016; $18,750 plus accrued interest on December 25, 2016; $14,063 plus accrued interest on January 25, 2017 and a final payment of the unpaid balance plus accrued interest on May 25, 2017. A prepayment before November 25, 2016 would require a 5% prepayment penalty. The agreement provides for limitations on additional indebtedness. If an event of default, as defined in the agreement, occurs and if not cured within ten days, the note becomes convertible into the Company’s common stock at a rate equal to 65% of the average VWAP over the previous 5 trading days. If the event of default is for non-payment of any installment due, the amount convertible is limited to the amount of the unpaid installment. Prinz Capital is controlled by a director of the Company.

⁵The convertible promissory note was determined to have a beneficial conversion feature which is being amortized to interest expense over the nine month term of the loan. The note is summarized as follows:

Cash received	$	25,000
OID		2,500
Face amount of note		27,500
Derivative liability		(23,190	)
Original carrying value of note		4,310
Amortization of debt discount		6,442
Carrying value of note at September 30, 2016	$	10,752

The Company has entered into a number of agreements with River North Equity, LLC (“RNE”) wherein RNE has agreed to invest up to $3,000,000 in the common stock of the Company. These agreements require an effective Registration Statement to be on file by the Company and would allow the Company to require RNE to purchase the Company’s common stock at 90% of the lowest trading price of the Company’s common stock during the previous five trading days. The Company has not yet filed a Registration Statement with the SEC.

⁶The convertible promissory note dated September 13, 2016 is convertible into common stock at a 30% discount to the lowest trading price in the most recent twenty trading days plus other discounts if applicable. The convertible note replaces a payment due to TCA on August 29, 2016. The note includes loan cost and the carrying value is summarized as follows:

	Loan cost			Carrying value
Principal acquired from TCA				$	23,325
Accrued interest owed to TCA					4,981
					28,306
Loan cost					25,146
Total value of note					53,452
Derivative liability					(28,306	)
Amortize debt discount					786
					25,932
Loan cost	$	25,146
Loan cost amortization		(783	)
Unamortized loan cost	$	24,363			(24,363	)
Carrying value of convertible note				$	1,569

Derivative liability

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded immediately to interest expense at inception. The above notes are presented net of an initial discount of $363,315 at September 30, 2016 and $0 at December 31, 2015, on the accompanying balance sheet.