Notes to Condensed Consolidated Financial Statements (Unaudited)
The unaudited interim condensed consolidated financial statements of ActiveCare, Inc. (the "Company" or "ActiveCare") have been prepared in accordance with Article 8 of Regulation S-X, promulgated by the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with US generally accepted accounting principles ("US GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position as of December 31, 2016 and September 30, 2016, and the results of its operations for the three months ended December 31, 2016 and 2015 and its cash flows for the three months ended December 31, 2016 and 2015. These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company's Annual Report on Form 10-K for the year ended September 30, 2016. The results of operations for the three months ended December 31, 2016 may not be indicative of the results for the full fiscal year ending September 30, 2017.
Going Concern
The Company continues to incur negative cash flows from operating activities and net losses. The Company had minimal cash, negative working capital and negative total equity as of December 31, 2016 and September 30, 2016, and is in default with respect to certain debt. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In order for the Company to eliminate substantial doubt about its ability to continue as a going concern, it must achieve profitability, generate positive cash flows from operating activities and obtain the necessary debt or equity funding to meet its projected capital investment requirements. Management's plans with respect to this uncertainty consist of raising additional capital by issuing debt or equity securities and increasing the sales of the Company's services and products. There can be no assurance that the Company will be able to raise sufficient additional capital or that revenues will increase rapidly enough to achieve operating profits. If the Company is unable to increase revenues or obtain additional financing, it will be unable to continue the development of its products and services and may have to cease operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The Company measures the fair values of its assets and liabilities using the US GAAP hierarchy. The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, accounts payable, and accrued liabilities approximate fair values due to the short-term nature of these financial instruments. Derivative financial instruments are recorded at fair value based on current market pricing models. The carrying amounts reported for notes payable approximate fair values because the underlying instruments are at interest rates which approximate current market rates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period's presentation. The reclassifications had no effect on the previously reported net loss.
2.
|
Net Loss per Common Share
|
Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss available to common stockholders by the sum of the weighted average number of common shares outstanding and the weighted-average dilutive potential common shares outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Potential common shares consist of shares issuable upon the exercise of common stock warrants and options, shares issuable from restricted stock grants, and shares issuable pursuant to convertible notes and convertible Series D, Series E and Series F preferred stock.
As of December 31, 2016 and 2015, there were certain outstanding potential common shares that were not included in the computation of Diluted EPS as their effect would be anti-dilutive for the periods then ended. The potential common shares outstanding consist of the following as of December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Common stock options and warrants
|
|
|
84,074
|
|
|
|
18,999
|
|
Series D convertible preferred stock
|
|
|
450
|
|
|
|
450
|
|
Series E convertible preferred stock
|
|
|
961
|
|
|
|
961
|
|
Series F convertible preferred stock
|
|
|
-
|
|
|
|
32,131
|
|
Convertible debt
|
|
|
137,140
|
|
|
|
47,200
|
|
Restricted shares of common stock
|
|
|
15
|
|
|
|
15
|
|
Liability to issue common stock
|
|
|
154,881
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total common stock equivalents
|
|
|
377,521
|
|
|
|
99,756
|
|
3.
|
Recent Accounting Pronouncements
|
In May 2014, August 2015 and May 2016, the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Revenue from Contracts with Customers
, ASU 2015-14
Revenue from Contracts with Customers, Deferral of the Effective Date
, and ASU 2016-12
Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients
, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein, which will be effective for the Company for the quarter ending December 31, 2018. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
. This standard sets forth management's responsibility to evaluate, each reporting period, whether there is substantial doubt about the Company's ability to continue as a going concern, and if so, to provide related disclosures. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its evaluation of going concern.
In July 2015, the FASB issued ASU 2015-11,
Inventory: Simplifying the Measurement of Inventory
. The purpose of ASU 2015-11 is to more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 requires entities to measure most inventory at the "lower of cost or net realizable value." Additionally, some of the amendments are designed to more clearly articulate the requirements for the measurement and disclosure of inventory. ASU 2015-11 is effective for fiscal years and interim periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, which will be effective for the Company for the quarter ending December 31, 2019. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. The purpose of ASU 2016-09 is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equities or liabilities, and classification of amounts in the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017, which will be effective for the Company for the quarter ending December 31, 2018. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. Specific reserves are estimated by management based on certain assumptions and variables, including the customer's financial condition, age of the customer's receivables and changes in payment histories. Accounts receivable are written off when management determines the likelihood of collection is remote. A receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual payment date. Interest is not charged on accounts receivable that are past due. The Company recorded an allowance for doubtful accounts of $97,668 and $75,161 as of December 31, 2016 and September 30, 2016, respectively.
Inventory is recorded at the lower of cost or market value, cost being determined using the first-in, first-out ("FIFO") method. Inventory consists of diabetic supplies. Inventory held by distributors is reported as inventory until the supplies are shipped to the end user by the distributor. The Company estimates an inventory reserve for obsolescence and excessive quantities. Due to competitive pressures and technological innovation, it is possible that estimates of net realizable values could change in the near term. Inventory consists of the following as of:
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
Finished goods
|
|
$
|
393,091
|
|
|
$
|
206,444
|
|
Inventory reserve
|
|
|
(1,708
|
)
|
|
|
(1,708
|
)
|
|
|
|
|
|
|
|
|
|
Net inventory
|
|
$
|
391,383
|
|
|
$
|
204,736
|
|
6.
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consisted of the following as of:
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
Prepaid legal and professional fees
|
|
$
|
454,451
|
|
|
$
|
333,741
|
|
Line of credit acquisition fees
|
|
|
104,824
|
|
|
|
30,978
|
|
Other
|
|
|
78,624
|
|
|
|
112,117
|
|
Prepaid information technology services
|
|
|
27,486
|
|
|
|
57,073
|
|
Prepaid insurance
|
|
|
15,040
|
|
|
|
14,602
|
|
Research and development
|
|
|
-
|
|
|
|
96,346
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
680,425
|
|
|
$
|
644,857
|
|
7.
|
Property and Equipment
|
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, which range between 3 and 7 years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the terms of the lease. Expenditures for maintenance and repairs are expensed as incurred. Upon the sale or disposal of property and equipment, any gains or losses are included in operations. Property and equipment consisted of the following as of:
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
Software
|
|
$
|
47,974
|
|
|
$
|
47,974
|
|
Leasehold improvements
|
|
|
98,023
|
|
|
|
98,023
|
|
Furniture
|
|
|
68,758
|
|
|
|
68,758
|
|
Equipment
|
|
|
49,772
|
|
|
|
49,772
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
264,527
|
|
|
|
264,527
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(188,928
|
)
|
|
|
(177,793
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
75,599
|
|
|
$
|
86,734
|
|
Assets to be disposed of are reported at the lower of the carrying amounts or fair values, less the estimated costs to sell or dispose. During the three months ended December 31, 2015, the Company recorded a gain on the disposal of property and equipment of $600. Depreciation expense for the three months ended December 31, 2016 and 2015, was $11,314 and $
13,745
, respectively.
Accrued expenses consisted of the following as of:
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
Liability to issue warrants for the purchase shares
of common stock
|
|
$
|
2,141,254
|
|
|
$
|
-
|
|
Interest
|
|
|
1,556,675
|
|
|
|
1,206,387
|
|
Payroll expense
|
|
|
266,550
|
|
|
|
207,052
|
|
Liability to issue common stock
|
|
|
240,000
|
|
|
|
240,000
|
|
Warranty liability
|
|
|
184,875
|
|
|
|
134,330
|
|
Other
|
|
|
130,734
|
|
|
|
89,828
|
|
Commissions and fees
|
|
|
112,739
|
|
|
|
52,311
|
|
Deferred revenue
|
|
|
101,027
|
|
|
|
111,803
|
|
Severance
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
4,793,854
|
|
|
$
|
2,101,711
|
|
The Company had the following notes payable outstanding as of:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
Unsecured notes payable with interest at 10% per annum, due November 2018. The notes may go into default in the event other notes payable go into default subsequent to the effective date of the note. In February 2016, the Company redeemed all 5,361 shares of its Series F Convertible Preferred Stock ("Series F preferred") plus accrued dividends of $673,948 for 20,005 shares of common stock with a fair value of $1,600,000 containing certain temporary restrictions, and $5,900,000 of notes payable. Payments on the notes are partially or fully convertible at the Company's option at the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $25 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering to a maximum of 39,334 shares of common stock. The conversion rate is adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments, with the exception of certain other raises. A note may only be converted if the holder owns less than 4.99% of the Company's common stock after conversion. The Company recorded a derivative liability of $2,461,899 related to the conversion feature of the notes. In connection with the redemption of the Series F preferred stock, the Company issued new warrants in exchange for warrants held by the Series F preferred stockholders for the purchase of 11,070 shares of common stock at an exercise price of the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $25 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering, adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments, with the exception of certain other raises. The Company is also required to issue additional warrants for the purchase of up to 16,000 shares of common stock exercisable at $0.50 per share, also adjustable, that vest upon certain events of default. The fair value of $1,344,608 related to the new warrants was recorded as a derivative (see Notes 12 and 15). The fair value of the stock, conversion feature, warrants and $25,000 of fees, in excess of the carrying value of the Series F preferred stock were recorded as a deemed dividend of $6,484,236. Subsequent to December 31, 2016, the Company entered into letter agreements related to the note to convert the outstanding principal and interest into shares of common stock contingent upon the Company's contemplated public offering of securities (the "Offering"), which also removes the maximum share limitation conversion (see Note 18).
|
|
$
|
5,900,000
|
|
|
$
|
5,900,000
|
|
Unsecured note payable with a vendor with interest at 0.65% per annum, due January 2018, issued in March 2016 upon the conversion of $2,523,937 in accounts payable to the vendor.
|
|
|
2,073,937
|
|
|
|
2,223,937
|
|
|
|
|
|
|
|
|
|
|
Secured note payable to a third party with interest at 12.75% per annum, due February 2019. The note is secured by the assets of the Company and may go into default in the event other notes payable go into default subsequent to the effective date of the note. The Company entered into the note payable agreement in conjunction with a line of credit. The Company initially borrowed $1,500,000 and may borrow additional amounts under the note payable agreement up to a total balance of $3,000,000 as the Company meets certain milestones. The interest rate may also reduce to 11.25% per annum as the Company meets certain milestones. In conjunction with the note and related line of credit, the Company issued warrants to the lender to purchase 24,032 shares of common stock at $32.50 per share with a fair market value of $3,732,100 (see Notes 12 and 15), which resulted in a loss on derivative of $2,309,461. The Company has recorded discounts of $1,500,000, which are being amortized to interest expense over the term of the note. In April 2016, the Company borrowed an additional $500,000 on the note and incurred additional fees of $25,000, which are being amortized to interest expense over the remaining term of the note. In September 2016, the Company entered into a forbearance agreement where the lender will forbear from exercising remedies with regard to certain breaches through October 31, 2016 and consented to the Company entering into a purchase agreement with another party and issue the note and the warrant thereunder. Effective November 1, 2016, the Company and the lender entered into a forbearance and consent under loan and security agreement. Pursuant to the terms of the forbearance agreement, the lender will forbear from exercising remedies with regard to certain breaches of agreements between the Company and the lender, including the existing agreements as well as the previous forbearance agreement. Additionally, the lender has provided the Company with the consent required under the existing agreements and previous forbearance agreement to make certain payments to other debt holders from the proceeds of the offering. The lender also consented to the issuance of the Company's proposed Series G Preferred Stock to certain affiliates of the Company (see Note 18). In consideration for the new forbearance, the Company has agreed to issue the lender warrants to purchase 130,000 shares of common stock at an exercise price equal to the per share price of the common stock in the offering, which shall be subject to a 6-month lock-up agreement. The forbearance was in effect through December 31, 2016. The Company has included the $1,932,577 estimated fair value of the warrants in accrued expenses. The Company recorded a loss on extinguishment of debt of $2,043,715 on the note and its related line of credit in relation to the forbearance agreement. Effective December 31, 2016, the Company and the lender entered into a third forbearance and consent under loan and security agreement. Pursuant to the terms of the third forbearance, the lender will forbear from exercising remedies with regard to certain breaches of agreements between the Company and the lender, including the existing agreements as well as the previous two forbearances. Additionally, pursuant to the third forbearance, the lender has provided the Company with the consent required under the existing agreements and prior two forbearances to make certain payments from the proceeds of the offering. In consideration for the third forbearance, the Company has agreed to issue the lender warrants to purchase 10,000 shares of common stock at an exercise price equal to the per share price of the common stock in the offering and $50,000 of common stock at 80% of the at the same issue price in of the offering, which shall be subject to a lock-up agreement. The forbearance set forth in the December Forbearance will be in effect through February 15, 2017. The Company has included the $148,677 estimated fair value of the warrants and $60,000 fair value related to the shares of common stock in accrued expenses. $104,824 of the fair value of the warrants and common stock associated with the note is recorded as a discount and is being amortized to interest expense over the remaining life of the note. Subsequent to December 31, 2016, the lender extended the December Forbearance period through March 31, 2017.
|
|
|
1,486,111
|
|
|
|
1,652,778
|
|
Secured borrowings from a third party that purchased $1,555,750 of customer receivables for $1,125,000, with due dates ranging from April 2017 to June 2017, and payable in daily payments ranging from $1,500 to $4,000. The $430,750 difference between the customer receivables and cash received is being amortized to interest expense over the term of the respective notes. The secured borrowings are guaranteed by two officers of the Company and are subordinated to other notes payable.
|
|
|
1,072,984
|
|
|
|
689,318
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable with a third party with no interest, was due the earlier of November 2016 or the third business day after the closing of a proposed offering on Form S-1 filed on July 19, 2016. Pursuant to the note, the Company may borrow up to $1,500,000 upon meeting certain milestones. The note required a payment of common stock on the 5th trading day after the pricing of the proposed offering, but no later than December 15, 2016. The number of common shares will equal $200,000 divided by the lowest of (i) the lowest daily closing price of the common stock during the ten days prior to delivery of the common shares or during the ten days prior to the date of the Purchase Agreement, (ii) 80% of the common stock offering price of the offering, (iii) 80% of the unit price offering price of the offering, or (iv) the exercise price of any warrants issued in the offering. The estimated fair value of $240,000 of the stock is included in accrued liabilities and is being amortized to interest expense over the life of the note. In connection with the issuance of the note, the Company also issued 20,000 warrants to purchase shares of common stock at an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock in the offering, (ii) $25 per share, (iii) 80% of the unit price in the offering, or (iv) the exercise price of any warrants issued in the offering and the number of shares will reset upon the closing of the offering. The warrants may only be exercised to the extent the holder would own a maximum of 9.99% of the Company's common stock after exercise. The fair value of $493,590 related to the replacement warrants was recorded as a derivative (see Notes 12 and 15). Of this fair value amount, $220,000 was recorded as a debt discount and is being amortized over the life of the note and the remaining $273,590 was recorded as a loss on derivative liability. In the event of borrowing in excess of an initial $500,000, the Company will be required to issue additional warrants with an aggregate exercise amount equal to 100% of the additional amount borrowed with similar terms to the initial warrants issued. In November 2016, the Company borrowed an addition $250,000 on the note and issued an additional warrant for the purchase of 10,000 shares of common stock with similar terms to the original warrants. The fair value of $286,171 related to the November 2016 warrants was recorded as a derivative (see Notes 12 and 15). The fair value was recorded as a debt discount and is being amortized over the remaining life of the note. In November 2016, the Company amended the note to extend the maturity date to the earlier of March 31, 2017 or the third business day after the closing of the offering. In addition, the amendment adjusted the origination shares to equal 20% of the note divided by the lowest of (i) the lowest daily closing price of the common stock during the ten days prior to delivery of the shares or during the ten days prior to the date of the agreement, (ii) 80% of the common stock offering price of the offering, (iii) 80% of the unit price offering price (if applicable), or (iv) 80% of the exercise price of any warrants issued in the offering. In December 2016. the Company borrowed an addition $250,000 on the note and issued an additional warrant for the purchase of 10,000 shares of common stock with similar terms to the original warrants. The fair value of $349,819 related to the December 2016 warrants was recorded as a derivative (see Notes 12 and 15). The fair value was recorded as a debt discount and is being amortized over the remaining life of the note. Subsequent to December 31, 2016, the Company borrowed the remaining $500,000 on the note and extended the maturity date (see Note 18).
|
|
|
1,000,000
|
|
|
|
500,000
|
|
Secured line of credit with a third party with interest at 12.25% per annum, due February 2018. The note is secured by the assets of the Company and may go into default in the event other notes payable go into default subsequent to the effective date of the note. The Company entered into the line of credit agreement in conjunction with a note payable. The Company may draw up to the lesser of 80% of certain accounts receivable or $1,500,000 and increase the maximum it may borrow under the agreement up to a total balance of $3,000,000 at $500,000 per increase as the Company meets certain milestones. The interest rate may also reduce to 10.75% per annum as the Company meets certain milestones. In conjunction with the line of credit and related note, the Company issued warrants to purchase 24,032 shares of common stock at $32.50 per share with a fair market value of $3,732,100 (see Notes 12 and 15), which resulted in a loss on derivative of $2,309,461. The Company has recorded prepaid expenses of $44,665, which are being amortized to interest expense over the term of the line of credit. In September 2016, the Company entered into a forbearance agreement where the lender will forbear from exercising remedies with regard to certain breaches through October 31, 2016 and consented to the Company entering into a purchase agreement with another party and issuance of the note and the warrant thereunder. Effective November 1, 2016, the Company and the lender entered into a forbearance and consent under loan and security agreement. Pursuant to the terms of the forbearance agreement, the lender will forbear from exercising remedies with regard to certain breaches of agreements between the Company and the lender, including the existing agreements as well as the previous forbearance agreement. Additionally, the lender has provided the Company with the consent required under the existing agreements and previous forbearance agreement to make certain payments to other debt holders from the proceeds of the offering. The lender also consented to the issuance of the Company's proposed Series G Preferred Stock to certain affiliates of the Company (see Note 18). In consideration for the new forbearance, the Company has agreed to issue the lender warrants to purchase 130,000 shares of common stock at an exercise price equal to the per share price of the common stock in the offering, which shall be subject to a 6-month lock-up agreement. The forbearance was in effect through December 31, 2016. The Company has included the $1,932,577 estimated fair value of the warrants in accrued expenses. The Company recorded a loss on extinguishment of debt of $2,043,715 on the line of credit and its related secured note payable in relation to the forbearance agreement. Effective December 31, 2016, the Company and the lender entered into a third forbearance and consent under loan and security agreement. Pursuant to the terms of the third forbearance, the lender will forbear from exercising remedies with regard to certain breaches of agreements between the Company and the lender, including the existing agreements as well as the previous two forbearances. Additionally, pursuant to the third forbearance, the lender has provided the Company with the consent required under the existing agreements and prior two forbearances to make certain payments from the proceeds of the offering. In consideration for the third forbearance, the Company has agreed to issue the lender warrants to purchase 10,000 shares of common stock at an exercise price equal to the per share price of the common stock in the offering and $50,000 of common stock at 80% of the at the same issue price in of the offering, which shall be subject to a lock-up agreement. The forbearance set forth in the December Forbearance will be in effect through February 15, 2017. The Company has included the $148,677 estimated fair value of the warrants and $60,000 fair value related to the shares of common stock in accrued expenses. $104,824 of the fair value of the warrants and common stock associated with the line of credit is recorded in prepaid expenses and other assets and is being amortized to interest expense over the remaining life of the line of credit. Subsequent to December 31, 2016, the lender extended the December Forbearance period through March 31, 2017.
|
|
|
929,518
|
|
|
|
929,518
|
|
Note payable previously secured by CareServices customer contracts. In January 2015, the note was amended to reduce the outstanding principal to $375,000, interest at 9% per annum, and payable in 15 monthly installments beginning in February 2015. The amendment released the collateralized customer contracts and the note payable is guaranteed by both a former Executive Chairman of the Board of Directors and a member of the Board of Directors. A gain on the extinguishment of the old note of $769,449 was recorded in other income. In December 2015, the note was amended to extend maturity to January 2018 payable in monthly installments beginning in July 2016, convert $31,252 from accrued interest into principal, interest at 10% per annum, and provide that the note is convertible into common stock at its fair value per share. The Company recorded a derivative in connection with the convertible feature of the note (see Note 12) and is amortizing the initial $302,690 fair value of the derivative liability over the life of the note. In February 2016, the note was amended to subordinate to other notes payable also issued during February 2016. In July 2016, the note was amended to extend the maturity date to the earlier of an equity raise in excess of $10,000,000 or November 2016 and included additional default penalties and payment terms. In October 2016, the note was amended to extend the maturity date to the earlier of an equity raise in excess of $10,000,000 or December 31, 2016 and included additional default penalties and payment terms. In December 2016 and February 2017, the note was further amended to extend the maturity date to the earlier of an equity raise in excess of $10,000,000 or February 15, 2017 and March 31, 2017, respectively.
|
|
|
334,464
|
|
|
|
334,464
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable with interest at 12% per annum, due February 2016, convertible into common stock at $150 per share. In connection with the issuance of the note, the Company repriced previously issued warrants to purchase shares of common stock. The $22,397 increase in relative fair value of the warrants was included as a loss on the extinguishment of the old note in other expense in fiscal 2015. The note also required a payment of 6,000 shares of common stock. The fair value of $780,000 was included as a loss on the extinguishment of the old note in other expense in fiscal 2015. The maturity date was subsequently extended on two occasions for a total of 500 shares of common stock and the note was due May 2016. The $31,250 fair value of these shares was being amortized over the extension period. In February 2016, the note was amended to subordinate to other notes payable also issued during February 2016, and the conversion price was reduced to $30 per share, which was below the fair value of the Company's common stock on the date of the amendment. The note may only be converted if the holder owns less than 9.99% of the Company's common stock after conversion. The Company recorded the value of the beneficial conversion feature of $381,299 to loss on termination of debt as a result of the modification. In May 2016, the note was amended to extend the maturity date to the earlier of an equity raise of $10,000,000 or October 2016 which required a payment of 600 shares of common stock. The $28,500 fair value of these shares has been included in accrued liabilities and was amortized over the extension period. In October 2016, the Company extended the maturity date of the note month-by-month through no later than April 30, 2017 for a fee of $5,000 per month extended.
|
|
|
300,000
|
|
|
|
300,000
|
|
Unsecured note payable with interest at 12% per annum, due September 2016, subordinated to other notes payable. In connection with the issuance of the note, the Company issued 2,000 shares of common stock. The $100,000 fair value of the stock was amortized to interest expense over the term of the note. Subsequent to December 31, 2016, the Company entered into a letter agreement related to the note to convert the outstanding principal and interest into shares of common stock contingent upon the completion of the Offering (see Note 18).
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable to a third party with interest at 18% per annum, due June 2017. The note is secured by shares of the Company's common stock held by, and other assets of an entity controlled by, a former Executive Chairman of the Board of Directors. The note is guaranteed by a former Executive Chairman of the Board of Directors and his related entity and may go into default in the event other notes payable go into default subsequent to the effective date of the note. Payments on the note are convertible at the holder's option into common stock at 75% of its fair value if not paid by its respective due date, which is subject to a 20 trading day true-up and is adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments, with the exception of other certain raises. The note may only be converted if the holder owns less than 4.99% of the Company's common stock after conversion. The Company recognized a derivative liability related to the conversion feature with a fair value of $181,670, which was recognized as a loss on termination of debt. In June 2016, $13,713 of principal and $11,287 of accrued interest converted into 953 shares of common stock, pursuant to the terms of the note. In August 2016, $64,654 of principal and $10,346 of accrued interest converted into 9,203 shares of common stock, pursuant to the terms of the note. This note was terminated subsequent to December 31, 2016 (see Note 18).
|
|
|
109,488
|
|
|
|
162,539
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes with interest at 18% per annum, due April 2013, in default. The Company issued 20,000 shares of Series D preferred stock as loan origination fees. The $195,000 fair value of the preferred stock was amortized over the original term of the note. Principal of $50,000 and accrued interest of $13,333 were converted to common stock in December 2013. Subsequent to December 31, 2016, the Company entered into a letter agreement related to the remainder of the note to convert the outstanding principal and interest into shares of common stock contingent upon the completion of the Offering (see Note 18).
|
|
|
64,261
|
|
|
|
64,261
|
|
|
|
|
|
|
|
|
|
|
Total notes payable before discount
|
|
|
13,520,763
|
|
|
|
13,006,815
|
|
|
|
|
|
|
|
|
|
|
Less discount
|
|
|
(1,852,642
|
)
|
|
|
(1,930,060
|
)
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
11,668,121
|
|
|
|
11,076,755
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(4,562,248
|
)
|
|
|
(3,722,899
|
)
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
$
|
7,105,873
|
|
|
$
|
7,353,856
|
|
10.
|
Related-Party Notes Payable
|
The Company had the following related-party notes payable outstanding as of:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
Secured borrowings from entities controlled by an officer who purchased a $2,813,175 customer receivable for $1,710,500. The Company repurchased the receivable for $1,950,000 less cash received by the entities through March 2015. The $239,500 difference between the buyback and cash received plus $253,500 of loan origination fees was amortized to interest expense through March 2015. In September 2015, the note was modified to extend the maturity date to January 2017, with interest at 18% per annum. The Company added $81,600 of extension fees and issued 6,000 shares of common stock to a lender as part of the modification. The note is convertible into common stock at $150 per share. The $540,000 fair value of the common stock was recognized as a loss on extinguishment of debt in fiscal 2015. In February 2016, the note was amended to subordinate to other notes payable also issued during February 2016, and the conversion price was reduced to $30 per share, which was below the fair value of the Company's stock on the date of the amendment. The conversion of the note is now limited to a maximum of 40,000 common shares in combination with other convertible notes payable held by the lenders. The note has a default penalty of 8,407 shares of common stock, in combination with other convertible notes held by the lenders, if not paid by maturity. The Company recorded the value of the combined beneficial conversion features of $1,400,000 to loss on termination of debt as a result of the amendment. Subsequent to December 31, 2016, the Company entered into a letter agreement related to the secured borrowings to convert the outstanding principal and interest into shares of common stock contingent upon the completion of the Offering (see Note 18).
|
|
$
|
1,721,100
|
|
|
$
|
1,721,100
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to an entity controlled by an officer with interest at 18% per annum, due January 2017, convertible into common stock at $150 per share. The Company issued 6,000 shares of common stock to a lender as loan origination fees. The $540,000 fair value of the common stock was recognized as a loss on extinguishment of debt in fiscal 2015. In February 2016, the note was amended to subordinate to other notes payable also issued during February 2016, and reduced the conversion price to $30 per share, which was below the fair value of the Company's stock on the date of the amendment. The conversion of the note is now limited to a maximum of 40,000 common shares in combination with other convertible notes payable held by the lender. The note has a default penalty of 8,407 shares of common stock, in combination with other convertible notes held by the lender, if not paid by maturity. The Company recorded the value of the combined beneficial conversion features of $1,400,000 to loss on termination of debt as a result of the amendment. Subsequent to December 31, 2016, the Company entered into a letter agreement related to the note to convert the outstanding principal and interest into shares of common stock contingent upon the completion of the Offering (see Note 18).
|
|
|
1,303,135
|
|
|
|
1,303,135
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to an entity controlled by a former Executive Chairman of the Board of Directors with interest at 18% per annum, due January 2017. In February 2016, notes payable to the same entity, with outstanding balances of $511,005 plus accrued interest of $30,999 combined into this note. The note is subordinated to notes payable to unrelated parties and is convertible into shares of common stock at $30 per share, which was below the fair value of the Company's stock on the date of the agreement. The conversion of the note is limited to a maximum of 18,500 common shares. The Company recorded the value of the beneficial conversion feature of $632,339 to loss on termination of debt. The note has a default penalty of 1,469 shares of common stock if not paid by maturity. The note may only be converted if the holder owns less than 4.99% of the Company's common stock after conversion. Subsequent to December 31, 2016, the Company entered into a letter agreement related to the note to convert the outstanding principal and interest into shares of common stock contingent upon the completion of the Offering (see Note 18).
|
|
|
542,004
|
|
|
|
542,004
|
|
Unsecured note payable to an entity controlled by an officer with interest at 12% per annum, due September 2016, subordinated to other third party notes payable. In connection with the issuance of the note, the Company issued 2,000 shares of common stock. The $70,000 fair value of the stock is being amortized to interest expense over the term of the note. Subsequent to December 31, 2016, the Company entered into a letter agreement related to the note to convert the outstanding principal and interest into shares of common stock contingent upon the completion of the Offering (see Note 18).
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to a former officer with interest at 12% per annum, due September 2013. This note is in default and is convertible into common stock at $375 per share.
|
|
|
26,721
|
|
|
|
26,721
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to an entity controlled by an officer with interest at 18% per annum, due on demand. In February 2016, the note was amended to subordinate the note to other notes payable also issued during February 2016. The note is convertible into shares of common stock at $30 per share, which was below the fair value of the Company's stock on the date of the amendment. The conversion of the note is now limited to a maximum of 40,000 common shares in combination with other convertible notes payable held by the entity. The note has a default penalty of 8,407 shares of common stock, in combination with other convertible notes held by the entity, if not paid by maturity. The Company recorded the value of the combined beneficial conversion features of $1,400,000 to loss on termination of debt as a result of the amendment. Subsequent to December 31, 2016, the Company amended the note to extend the maturity date to March 31, 2017 (see Note 18).
|
|
|
25,463
|
|
|
|
25,463
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to a former officer with interest at 15% per annum, due June 2012, in default. The note included a $3,000 loan origination fee added to the principal and is convertible into common stock at $250 per share.
|
|
|
11,863
|
|
|
|
17,227
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable to a former officer with interest at 12% per annum, due on demand.
|
|
|
2,432
|
|
|
|
12,474
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, related-party
|
|
|
3,882,718
|
|
|
|
3,898,124
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(3,882,718
|
)
|
|
|
(3,898,124
|
)
|
|
|
|
|
|
|
|
|
|
Notes payable, related-party, net of current portion
|
|
|
-
|
|
|
|
-
|
|
11.
|
Fair Value Measurements
|
The Company measures the fair values of its assets and liabilities using the US GAAP hierarchy levels as follows:
Level 1
|
The Company does not have any Level 1 inputs available to measure its assets.
|
Level 2
|
Certain of the Company's embedded derivative liabilities are measured on a recurring basis using Level 2 inputs.
|
Level 3
|
Certain of the Company's embedded derivative liabilities are measured on a recurring basis using Level 3 inputs.
|
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Items measured at fair value on a recurring basis include embedded derivatives related to the Company's warrants and notes payable. During the three months ended December 31, 2016, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The following fair value hierarchy table presents information about the Company's financial liabilities measured at fair value on a recurring basis:
|
|
Quoted Prices in Active Markets for Identical Items (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives liability
|
|
$
|
-
|
|
|
$
|
301,181
|
|
|
$
|
2,327,325
|
|
|
$
|
2,628,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives liability
|
|
|
-
|
|
|
|
281,613
|
|
|
|
1,772,458
|
|
|
|
2,054,071
|
|
The following is a reconciliation of the opening and closing balances for the derivatives liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended December 31, 2016:
|
|
Derivatives
Liability
|
|
Balance, September 30, 2016
|
|
$
|
1,772,458
|
|
Issuance of warrants recorded as derivatives
|
|
|
635,990
|
|
Gain on termination of debt resulting from
payments on notes payable
|
|
|
(39,497
|
)
|
Gain on derivatives liability resulting
from changes in fair value
|
|
|
(41,626
|
)
|
Balance, December 31, 2016
|
|
$
|
2,327,325
|
|
The Company's embedded derivative liabilities are re-measured to fair value as of each reporting date. See Note 12 for more information about the valuation methods of derivatives and the inputs used for calculating fair value.
12.
|
Derivatives Liability
|
The derivatives liability as of December 31, 2016 and September 30, 2016, was $2,628,506 and $2,054,071, respectively. The derivatives liability as of December 31, 2016 and September 30, 2016 is related to a variable conversion price adjustment on outstanding notes payable and warrants. A portion of derivatives liability as of December 31, 2015, and all of the derivatives outstanding as of September 30, 2015, were eliminated during February 2016, due to the conversion of notes payable into shares of common stock.
During the three months ended December 31, 2016, the Company estimated the fair value of some of the embedded derivatives upon issuance at the end of each reporting period using a binomial option-pricing model with the following assumptions, according to the instrument: exercise price of $21 per share; risk free interest rate of 0.85%; expected life of 1.03 years; expected dividends of 0%; volatility factor of 260.57%; and stock price of $21. During the three months ended December 31, 2016, the Company estimated the fair value of the remaining embedded derivatives upon issuance and at the end of each reporting period using a Monte Carlo valuation model with the following assumptions: exercise prices ranging from $5 to $25 per share; risk free interest rates ranging from 0.44% to 1.99%; expected lives ranging from 0.09 to 4.88 years; expected dividends of 0%; volatility factors of 151%; and stock prices ranging from $5 to $25.
During fiscal year 2016, the Company estimated the fair value of some of the embedded derivatives upon issuance, at the end of each reporting period and prior to their conversion and elimination using a binomial option-pricing model with the following assumptions, according to the instrument: exercise prices ranging from $14.50 to $46.75 per share; risk free interest rates ranging from 0.16% to 1.06%; expected lives ranging from 0.05 to 2.09 years; expected dividends of 0%; volatility factors ranging from 125.33% to 510.03%; and stock prices ranging from $15 to $70. During fiscal 2016, the Company estimated the fair value of the remaining embedded derivatives upon issuance and at the end of each reporting period using a Monte Carlo valuation model with the following assumptions: exercise prices ranging from $10 to $200 per share; risk free interest rates ranging from 0.18% to 1.44%; expected lives ranging from 0.04 to 6.40 years; expected dividends of 0%; volatility factors of 129% to 189%; and stock prices ranging from $10 to $200 per share. The expected lives of the instruments were equal to the average term of the conversion option or expected exercise period of the warrants. The expected volatility is based on the historical price volatility of the Company's common stock. The risk-free interest rate represents the US Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option. The Company recognized a gain on derivatives liability for the three months ended December 31,
2016 and 2015, of $22,057 and $46,311, respectively.
The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.00001 per share. Pursuant to the Company's Certificate of Incorporation, the Board of Directors has the authority to amend the Company's Certificate of Incorporation, without further stockholder approval, to designate and determine the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock, fix the number of shares of each such series, and determine the preferences, limitations and relative rights of each series of preferred stock, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, and liquidation preferences.
Series D Convertible Preferred Stock
The Board of Directors has designated 1,000,000 shares of preferred stock as Series D Convertible Preferred Stock ("Series D Preferred "). The Series D Preferred votes on an as-converted basis. The Series D Preferred has a dividend rate of 8%, payable quarterly. The Company may redeem the Series D Preferred at a redemption price equal to 120% of the original purchase price with 15 days' notice. During the three months ended December 31, 2015, the Company accrued $6,251 of dividends on Series D Preferred
.
Subsequent to September 30, 2016, the Company entered into agreements with each of the Series D Preferred stockholders to stop accruing dividends effective July 1, 2016 (see Note 18), accordingly,
the Company did not accrue dividends on Series D Preferred during the three months ended December 31, 2016.
Series E Convertible Preferred Stock
During fiscal year 2013, the Board of Directors designated shares of preferred stock as Series E Convertible Preferred Stock ("Series E Preferred"), convertible into common stock at $500 per share, adjustable if there are distributions of common stock or stock splits by the Company. The Series E Preferred is non-voting and receives a monthly dividend of 3.322% for 25 to 32 months. In addition, the convertibility and the redemption price of the Series E Preferred is gradually reduced by dividend payments over 25 to 32 months. After the dividend payment term, the redemption price of Series E Preferred is $0, the Series E Preferred has no convertibility to common stock and the holders are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company's gross profits payable quarterly for a two-year period.
During the three months ended December 31, 2016 and 2015, the Company accrued dividends of $34,178 and $84,572, respectively, payable to Series E Preferred. As of December 31, 2016 and September 30, 2016, the aggregate redemption price for the Series E Preferred was $477,829. Subsequent to December 31, 2016, the Company entered into a letter agreement with a director, who owns 13,843 of Series E Preferred who agreed to convert his Series E Preferred into shares of common stock, contingent upon the Company's completion the Offering (see Note 18).
Series F Convertible Preferred Stock
During fiscal year 2014, the Board of Directors designated 7,803 shares of preferred stock as Series F Convertible Preferred Stock ("Series F Preferred"). In April 2014, the Company increased the authorized shares of Series F Preferred to 10,000. Series F Preferred is non-voting, has a stated value of $1,000 per share and is convertible into common stock at $166.85 per share (see Note 12). Series F Preferred has a dividend rate, payable quarterly, of 8% until April 30, 2015, 16% from May 1, 2015 to July 31, 2015, 20% from August 1, 2015 to October 31, 2015, and 25% thereafter. In February 2016, the Company redeemed all 5,361 outstanding shares and $673,848 of accrued dividends for 20,005 shares of common stock, $5,900,000 of notes payable and exchanged warrants for the purchase of 11,070 shares of common stock held by Series F Preferred stockholders for new warrants with new terms for the purchase of the same number of shares (see Note 15). The Company recorded a deemed dividend of $6,484,236 as a result of the transactions.
During the three months ended December 31, 2015, the Company accrued dividends of $312,725 payable to Series F Preferred stockholders.
Liquidation Preference
Upon any liquidation, dissolution or winding up of the Company, before any distribution or payment may be made to the holders of the common stock, the holders of the Series D Preferred, Series E Preferred, and Series F Preferred are entitled to be paid out of the assets an amount equal to $1.00 per share plus all accrued but unpaid dividends. If the assets of the Company are insufficient to make payment in full to all holders of preferred stock, then the assets shall be distributed among the holders of preferred stock ratably in proportion to the full amounts to which they would otherwise be entitled.
In April 2014, the Company amended its Certificate of Incorporation increasing the total number of authorized shares of common stock from 50,000,000 shares to 200,000,000 shares.
During the three months ended December 31, 2016, the Company did not issue any shares of common stock.
15.
|
Common Stock Options and Warrants
|
The fair value of each stock option or warrant is estimated on the date of grant using a binomial option-pricing model or the Monte Carlo valuation model. The expected life of stock options or warrants represents the period of time that the stock options or warrants are expected to be outstanding, based on the simplified method. Expected volatilities are based on historical volatility of the Company's common stock, among other factors. The Company uses the simplified method within the binomial option-pricing valuation model due to the Company's short trading history. The risk-free rate related to the expected term of the stock options or warrants is based on the US Treasury yield curve in effect at the time of grant. The dividend yield is zero.
During fiscal 2016, the Company granted warrants to purchase 24,032 common shares with an exercise price of $32.50 per share in connection with the acquisition of a note payable and line of credit; warrants for the purchase of 14,786 shares vested immediately, 3,696 vested upon the disbursement of the second tranche of the related note payable, and 5,550 vest evenly in the event of three available increases on the related line of credit (see Note 9). The warrants expire in February 2023, may be exercised via cashless exercise and are puttable upon expiration or liquidation for the greater of $500,000 or up to 6.5% of the equity value of the Company, depending on the number of warrants vested. The fair value of the warrants upon grant of $3,731,969 was recorded as a derivative and the Company received cash of $2,967 upon issuance of the warrants. The Company recognized $1,419,541 as debt discount for the portion allocated to the note payable and the debt discount is being amortized over the life of the note payable to interest expense. During September 2016, the Company entered into a conditionally effective warrant cancellation agreement with the warrant holders (see Note 17).
During February 2016, the Company exchanged warrants held by the holders of its Series F Preferred for the purchase of 11,070 shares of common stock in connection with the redemption of Series F Preferred for new warrants for the purchase of the same number of shares on different terms. The new warrants were initially exercisable for $150 per share, adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments, with the exception of certain other raises. During September 2016, the Company issued warrants for the purchase of common stock that adjusted the warrants to have an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $25 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering. The new warrants expire in February 2021, and may be exercised via cashless exercise . Additional warrants for the purchase of 16,000 shares of common stock may be issued in the event of default on the related notes payable, exercisable at $0.50 per share, with 25% issuable upon the first event of default, 37.5% upon the second event, and 37.5% upon the third event. The warrants issuable upon default expire in February 2026 (if issued), may be exercised via cashless exercise , and are puttable upon expiration or liquidation with the primary warrants. The new warrants may only be exercised to the extent the respective holder would own a maximum of 4.99% of the Company's common stock after exercise, but the holders may elect to increase the maximum to 9.99%. The Company recognized a deemed dividend of $6,484,236 as a result of the exchange and related redemption of Series F Preferred.
During September 2016, the Company granted warrants to purchase 20,000 shares in connection with the acquisition of a note payable at an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $25 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering. Upon the closing of the offering, the number of shares issuable under the warrant will reset to an amount of shares equal to the aggregate exercise amount of the warrants (as defined therein) divided by the exercise price then in effect. The warrants expire in September 2021, and may be exercised via cashless exercise. The warrants may only be exercised to the extent the holder would own a maximum of 9.99% of the Company's common stock after exercise. The Company recognized $220,000 of the $493,590 fair value of the warrants as a debt discount, which is being amortized over the life of the borrowing, and recognized the remaining $273,590 as a loss on derivatives liability. In the event the Company borrows additional amounts above the initial $500,000 under the note payable, the Company will be required to issue additional warrants with an aggregate exercise amount equal to 100% of the additional amount borrowed with similar terms to warrants issued as part of the initial borrowing. During the three months ended December 31, 2016, the Company borrowed an additional $500,000 on the note and issued warrants for the purchase of 20,000 shares of common stock with the same terms as the initial warrants. The Company recognized the $635,990 fair value of the warrants as a debt discount, which is being amortized over the remaining life of the borrowing. Subsequent to December 31, 2016, the Company borrowed the remaining $500,000 on the note and issued warrants for the purchase of 20,000 shares of common stock with the same terms as the initial warrants.
During the three months ended December 31, 2016, the Company measured the fair value of warrants classified as liabilities on the date of issuance and on each re-measurement date using the Monte Carlo valuation model. For this liability, the Company and specialist developed their own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company's common stock, stock price volatility, the contractual term of the warrants, risk–free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants uses Level 3 measurements. The following assumptions were used:
Exercise price
|
|
$
|
5 - $25
|
|
Expected term (years)
|
|
|
4.03 - 4.88
|
|
Volatility
|
|
|
151
|
%
|
Risk-free rate
|
|
|
1.22% - 1.99
|
%
|
Dividend rate
|
|
|
0
|
%
|
Common stock price
|
|
$
|
5 - $25
|
|
The following table summarizes information about stock options and warrants outstanding as of December 31, 2016:
Options and Warrants
|
|
Number of Options and Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding as of October 1, 2016
|
|
|
65,045
|
|
|
$
|
35.06
|
|
Granted
|
|
|
20,000
|
|
|
|
25.00
|
|
Forfeited
|
|
|
(971
|
)
|
|
|
679.92
|
|
Outstanding as of December 31, 2016
|
|
|
84,074
|
|
|
|
48.50
|
|
Exercisable as of December 31, 2016
|
|
|
75,365
|
|
|
|
41.23
|
|
As of December 31, 2016, the outstanding warrants have an aggregate intrinsic value of $0 and the weighted average remaining term of the warrants was 4.84 years. The total compensation cost related to unvested awards not yet recognized (options, warrants, and shares) was $57,775.
16.
|
Related-Party Transactions Not Otherwise Disclosed
|
In February 2016, the Company amended a consulting agreement dated September 2015, with an entity controlled by a former Executive Chairman of the Board of Directors, effective January 2016. The amendment extended the agreement through December 2016, with monthly automatic renewals, changing the monthly compensation of $6,000 to an hourly rate of $250 per hour, and eliminated the previously included bonus structure.
In July 2016, the Company entered into a Consulting Agreement with a former Executive Chairman and Chief Executive Officer of the Company. This Consulting Agreement is for an initial period of one year, and shall automatically renew for consecutive one month periods unless terminated by the Company or the former Executive Chairman and Chief Executive Officer. As consideration for the services previously described, the Company shall pay the former Executive Chairman and Chief Executive Officer at the rate of $250 per hour, but such compensation may not exceed $20,000 during any calendar month.
In August 2016, the Company received a cash advance for $135,000 from a former Executive Chairman and Chief Executive Officer of the Company. During the three months ended December 31, 2016, the Company repaid $50,000 of the advance. Subsequent to December 31, 2016, the Company repaid an additional $80,000 of the advance.
17.
|
Commitments and Contingencies
|
During the three months ended December 31, 2016, the Company leased office space under a non-cancelable operating lease. In February 2015, the Company entered into a sublease agreement for part of the office space under the non-cancelable operating lease through the end of the original lease period. Payments under the sublease were made by the sublessee directly to the Company's landlord. The non-cancelable operating lease was terminated during June 2015.
During June 2015, the Company entered into a new non-cancelable operating lease for its existing office space, excluding the previously subleased space, with payments beginning in July 2015. Future minimum rental payments under the non-cancelable operating lease as of December 31, 2016, were as follows:
Years Ending September 30,
|
|
|
|
|
|
|
|
2017
|
|
$
|
98,086
|
|
2018
|
|
|
111,340
|
|
|
|
|
|
|
|
|
$
|
209,426
|
|
The Company's rent expense under the new non-cancelable operating lease for three months ended December 31, 2016 and 2015, was approximately $32,000 and $31,000, respectively.
During February 2016, the Company entered into an agreement with one if its vendors to purchase a minimum of $200,000 of inventory per quarter through January 2018.
During February 2016, the Company redeemed all of its Series F preferred stock in exchange for 20,005 shares of common stock and $5,900,000 of notes payable (see Note 9). As part of the redemption, the Company exchanged warrants held by the Series F Preferred stockholders for the purchase of 11,070 shares of common stock for new warrants to purchase the same number of shares with different terms. As part of the redemption, the Company may be required to issue additional warrants for the purchase of up to 16,000 shares of common stock upon three events of default on the notes payable (see Note 15).
During February 2016, the Company converted notes payable and accrued interest payable to an entity controlled by a former Executive Chairman of the Board of Directors into a convertible note payable (see Note 10). The Company may be required to issue 1,469 shares of common stock if the note is not paid by maturity.
During February 2016, the Company amended notes payable to an entity controlled by an officer of the Company to subordinate to notes payable also issued during February 2016, reduced the conversion price per share to $30 per share and limited the shares into which it is convertible (see Note 10). The Company may be required to issue 8,407 shares of common stock if the note is not paid by maturity.
During September 2016, the Company issued a note payable to a third party for up to $1,500,000. The Company initially borrowed $500,000 under the note and may borrow up to $1,500,000 upon meeting certain milestones. The Company subsequently drew an additional $500,000 under the note and issued additional warrants for the purchase of 20,000 shares of common stock at similar terms to warrants issued as part of the initial borrowing. In the event the Company borrows any part of the remaining $500,000 available, the Company will be required to issue additional warrants with an aggregate exercise amount equal to 100% of the additional amount borrowed with similar terms to warrants issued as part of the initial borrowing. Subsequent to December 31, 2016, the Company borrowed the remaining $500,000 on the note and issued an additional warrant for the purchase of 20,000 shares of common stock (see Note 18).
During September 2016, the Company entered into a conditionally effective warrant cancellation agreement (the "Warrant Cancellation Agreement") with certain warrant holders who were issued the warrants in connection with a secured note payable and line of credit. Pursuant to the terms of the Warrant Cancellation Agreement, upon the Company's consummation of an equity financing of at least $15,000,000, the warrant holders agree to terminate and cancel the warrants they currently hold. As an inducement to enter into the Warrant Cancellation Agreement, the warrant holders will receive upon termination and cancelation of the warrants an aggregate of 10,800 shares of the Company's common stock, which will be subject to a 6-month lock-up agreement. Additionally, if the warrant holders terminate and cancel the warrants, the Company will issue the related note holder a new unsecured promissory note with an initial principal amount of $180,000, no cash interest, and a three-year term. In lieu of cash interest, the principal of the note will increase in the amount $3,333 each month not to exceed a maximum of $300,000.
During November 2016, the Company and a lender entered into a forbearance and consent under a loan and security agreement (the "November Forbearance Agreement"). Pursuant to the terms of the November Forbearance Agreement, the lender will forbear from exercising remedies (the "November Forbearance") with regard to certain breaches of agreements between the Company and the lender, including the existing agreements as well as the September Forbearance Agreement. Additionally, pursuant to the November Forbearance Agreement, the lender has provided the Company with the consent required under the Existing Agreements and September Forbearance Agreement to make certain payments from the proceeds of the Offering. These payments include, but are not limited to (i) payments to holders of the Company's Series E Preferred, (ii) third party note and receivable payments and (iii) repayment of an unsecured note payable issued in September 2016. The lender also consented to the issuance of the Company's Series G Preferred Stock to certain affiliates of the Company. In consideration for the November Forbearance, the Company has agreed to issue the lender warrants to purchase 130,000 shares of common stock at an exercise price equal to the per share price of the common stock in the offering, which shall be subject to a 12-month lock-up agreement. The $1,932,577 estimated fair value of the warrants has been included in accrued expenses as of December 31, 2016. The Forbearance set forth in the November Forbearance Agreement will be in effect through December 31, 2016. Effective December 31, 2016, the Company and the lender entered into a forbearance and consent under loan and security agreement (the "December Forbearance"). Pursuant to the terms of the December Forbearance, the lender will forbear from exercising remedies with regard to certain breaches of agreements between the Company and the lender, including the existing agreements as well as the September Forbearance and November Forbearance. Additionally, pursuant to the December Forbearance, the lender has provided the Company with the consent required under the Existing Agreements, September Forbearance and November Forbearance to make certain payments from the proceeds of the Company's Offering. In consideration for the December Forbearance, the Company has agreed to issue the lender warrants to purchase 10,000 shares of common stock at an exercise price equal to the per share price of the common stock in the offering and $50,000 of common stock at 80% of the at the same issue price in of the offering, which shall be subject to a lock-up agreement. The $148,677 estimated fair value of the warrants and $60,000 fair value of the stock has been included in accrued expenses as of December 31, 2016. The forbearance set forth in the December Forbearance will be in effect through February 15, 2017. Subsequent to December 31, 2016, the lender extended the December Forbearance period through March 31, 2017.
Effective November 1, 2016, the Board approved the 2016 Incentive Stock Option plan providing for the issuance of options to purchase up to 377,250 shares. No shares have been approved under the Plan as of December 31, 2016.
On October 5, 2016, the Company entered into an agreement with a vendor to convert the total outstanding accounts payable balance of $73,667 into shares of the Company's common stock at a rate equal to the amount offered under a proposed offering, contingent upon the completion of the Offering. In connection with the conversion agreement, the Company terminated a service agreement with the vendor where no additional amounts are owed under the agreement. The agreement expires if the offering is not completed by March 31, 2017.
On May 28, 2015, an investor of the Company filed a lawsuit claiming damages of $1,000,000 exclusive of interest and costs against the Company, a former Executive Chairman, an entity controlled by another former Executive Chairman, and 4G Biometrics, a wholly owned subsidiary of the Company, for breach of contract. The Company has engaged legal counsel regarding the matter. It is not possible to predict the outcome of the matter at this time. The Company intends to vigorously dispute the claims and believes it has meritorious defenses.
On November 4, 2015, the Company received a demand for payment of $275,000 from a former employee of the Company and former principal of 4G Biometrics whose employment was terminated for cause. On December 4, 2015, the Company filed a complaint against the former owners of 4G Biometrics, including this former employee, seeking damages in excess of $300,000 related to alleged misrepresentations made to induce the Company to acquire 4G Biometrics. Between February 4, 2016 and February 8, 2016, the Company settled the complaint with each of the former owners of 4G Biometrics and all parties released each other from all outstanding claims, including any current monetary obligations to each party, excluding one former owner of 4G Biometrics who continues to be employed by the Company. A Stipulation for Order of Dismissal with Prejudice of all Claims and Counterclaims has been filed and is in the process of being approved. The settlement resulted in the termination of $39,863 of related-party accounts payable.
Subsequent to December 31, 2016, the Company entered into the following agreements and transactions:
(1)
|
On January 27, 2017, the Company effected a 1-for-500 reverse stock split of its outstanding common stock, which caused the then outstanding common stock to decrease from 115,112,802 to 232,100 while keeping the authorized capitalization unchanged.
|
|
|
(2)
|
On January 12, 2017, the Company entered into letter agreements (together the "Note Holder Letter Agreements") with eight (8) investors (each a "Note Holder" and together the "Note Holders") holding convertible notes payable whereby the Note Holders agreed to convert all monies due them under the Notes into restricted shares of common stock (the "Note Conversion Shares") and warrants to purchase common stock (the "Note Conversion Warrants" and together with the Note Conversion Shares, the "Note Conversion Securities"), all contingent upon the completion of the Company's contemplated public offering of securities. As incentive to enter into the Note Holder Letter Agreements, the Company agreed to add approximately $1,687,811 to the outstanding principal and interest as of October 31, 2016, effectively making the total obligation due to Note Holders an aggregate of $8,000,000 (the "Total Note Obligation"). Pursuant to the Note Holder Letter Agreements, the Total Note Obligation will automatically convert upon consummation of the offering into the Note Conversion Securities at the combined price per share and warrant paid by investors in the offering (the "Conversion Price"). The terms of the Note Conversion Warrants will be substantially similar to the Warrants being included in the offering, except such Note Conversion Warrants will be a restricted security and will not publicly trade on NASDAQ. In addition, the Note Holders currently hold warrants to purchase an aggregate of 11,070 shares that will be terminated upon the consummation of the offering. In consideration of such termination, the Note Holders will be issued new warrants to purchase an identical number of shares of Common Stock at an exercise price equal to the Conversion Price, as defined in the agreements. Each person entering into the Note Holder Letter Agreements have entered into lock-up agreements prohibiting the sale or other transfer of any securities of the Company owned by such persons for a period of 6 months. If such offering is not completed by February 15, 2017, the Note Holder Letter Agreements and lock-up agreements will terminate. During February 2017, prior to the expiration of the existing agreements, the Note Holders signed amendments to their respective Note Holder Letter Agreements and lock-up agreements to extend the expiration dates to March 31, 2017.
|
|
|
(3)
|
On January 12, 2017, the Company entered into a letter agreement with a third-party lender, whereby the lender agreed to convert all monies due under that certain subordinated promissory note into common stock of the Company, contingent upon the completion of the Offering. As of September 30, 2016, the aggregate amount of $101,814 was owed pursuant to the note. Pursuant to the letter agreement, the aggregate amount owed, together with interest accruing subsequent to September 30, 2016, will automatically convert upon consummation of the offering into such number of restricted shares of the Company's common stock calculated by dividing the aggregate amount owed by 80% of the per share price of the common stock in the Offering. The lender has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned for a period of 6 months. If such offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 13, 2017, the Company signed an amendment to the letter agreement and signed a new lock-up agreement to extend the expiration dates to March 31, 2017.
|
(4)
|
On January 12, 2017, the Company entered into a letter agreement with a third-party lender, whereby the lender agreed to convert all monies due him under that certain subordinated promissory note into common stock of the Company, contingent upon the completion of the offering. As of September 30, 2016 the aggregate amount of $265,616 was owed pursuant to the note. Pursuant to the letter agreement, the aggregate amount owed, together with interest accruing subsequent to September 30, 2016, will automatically convert upon consummation of the offering into such number of restricted shares of the Company's common stock calculated by dividing the aggregate amount owed by 80% of the per share price of the common stock in the offering. The lender has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by him for a period of 6 months. The letter agreement extends the due date of the note to the earlier of the completion of the Offering or February 15, 2017. On February 10, 2017, the Company signed an amendment to the letter agreement and lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(5)
|
On January 12, 2017, the Company entered into a letter agreement with a third-party vendor, whereby such vendor agreed to convert all monies due from the Company pursuant to certain accounts payable into common stock of the Company, contingent upon the completion of the offering. As of September 30, 2016, the aggregate amount of $73,667 was owed to the vendor. Pursuant to the letter agreement, the aggregate amount owed will automatically convert upon consummation of the Offering of securities into such number of restricted shares of the Company's common stock calculated by dividing the aggregate amount owed by the per share price of the common stock in the offering. The vendor has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by it for a period of 6 months. If such offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 13, 2017, the Company signed an amendment to the letter agreement and signed a new lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(6)
|
On January 12, 2017, the Company entered into a letter agreement with a director of the Company whereby the director agreed to convert all monies due him from the Company from unpaid board service fees into common stock of the Company, contingent upon the completion of the Offering. As of October 31, 2016, the aggregate amount of $42,500 was owed to the director. Pursuant to the letter agreement, the unpaid fees will automatically convert upon consummation of the offering into such number of restricted shares of the Company's common stock calculated by dividing the unpaid fees by $17.50 or 2,426 shares. The director has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by him for a period of 12 months. If such offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 10, 2017, the Company signed an amendment to the letter agreement and lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(7)
|
On January 12, 2017, the Company entered into a second letter agreement with the director, whereby the director agreed to convert 13,843 shares of Series E Preferred of the Company owned into common stock of the Company, contingent upon the completion of the Offering. As of September 30, 2016, the aggregate amount of $181,297 consisting of accrued dividends, royalty and interest was owed to the director with respect to his Series E Preferred. Pursuant to the second letter agreement, the aggregate amount will automatically convert upon consummation of the Offering into such number of restricted shares of the Company's common stock calculated by dividing the aggregate amount by $17.72 or 10,223 shares. The director has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned for a period of 12 months. If such offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 10, 2017, the Company signed an amendment to the letter agreement and lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(8)
|
On January 12, 2017, the Company entered into a letter agreement with entities controlled by the Chief Executive Officer, whereby each of such parties agreed to convert all monies due pursuant to three separate promissory notes into common stock of the Company, contingent upon the completion of the offering. As of September 30, 2016, the aggregate amount of $3,876,737 was owed to the holders pursuant to the notes payable. Pursuant to the letter agreement, the aggregate amount owed, together with interest accruing subsequent to September 30, 2016, will automatically convert upon consummation of the offering into such number of restricted shares of the Company's common stock calculated by dividing the aggregate amount owed by $22.50, or 172,300 shares, exclusive of interest accruing subsequent to September 30, 2016. Each of the parties subject to the letter agreement have entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by such parties for a period of 12 months. The letter agreement extends the due date of the notes to the earlier of the offering or February 15, 2017. On February 10, 2017, the Company signed an amendment to the letter agreement and signed a new lock-up agreement to extend the expiration dates to March 31, 2017.
|
(9)
|
On January 12, 2017, the Company entered into a letter agreement with an entity controlled by a former Executive Chairman and a current consultant to the Company, whereby the entity agreed to convert all monies due it under a promissory note into common stock of the Company, contingent upon the completion of the Offering. As of September 30, 2016, the aggregate amount of $602,145 was owed to the entity pursuant to the promissory note. Pursuant to the letter agreement, the aggregate amount owed, together with interest accruing subsequent to September 30, 2016, will automatically convert upon consummation of the Offering into such number of restricted shares of the Company's common stock calculated by dividing the redemption value by 80% of the per share price of the common stock in the Offering, exclusive of interest accruing subsequent to September 30, 2016. The entity has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by it for a period of 6 months. If the Offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 13, 2017, the Company signed an amendment to the letter agreement and signed a new lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(10)
|
On January 12, 2017, the Company entered into a letter agreement with a third-party investor, whereby the investor agreed to convert 20,000 shares of Series D Preferred of the Company owned into common stock of the Company based on current redemption value contingent upon the completion of the Offering. As of the date hereof, the current redemption value of such Series D Preferred was $72,000. Pursuant to the letter agreement, the redemption value will automatically convert upon consummation of the Offering into such number of restricted shares of the Company's common stock calculated by dividing the redemption value by 80% of the per share price of the common stock in the offering and all dividends cease accruing beginning July 1, 2016. The investor has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by him for a period of 12 months. If the Offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 13, 2017, the Company signed an amendment to the letter agreement and lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(11)
|
On January 12, 2017, the Company entered into a letter agreement with an entity affiliated with the Chief Executive Officer, whereby the entity agreed to convert 25,000 shares of Series D Preferred of the Company owned into common stock of the Company based on current redemption value, contingent upon the completion of the Offering. As of the date hereof, the current redemption value of such Series D Preferred was $300,000. Pursuant to the letter agreement, the redemption value will automatically convert upon consummation of the Offering into such number of restricted shares of the Company's common stock calculated by dividing the redemption value by $22.50 or 13,334 shares and all dividends cease accruing beginning July 1, 2016. The entity has entered into a lock-up agreement prohibiting the sale or other transfer of all securities of the Company owned by it for a period of 12 months. If the Offering is not completed by February 15, 2017, the letter agreement and lock-up agreement will terminate. On February 10, 2017, the Company signed an amendment to the letter agreement and lock-up agreement to extend the expiration dates to March 31, 2017.
|
|
|
(12)
|
On January 3, 2017, the Company drew an additional $200,000 on a note payable where it may borrow up to $1,500,000. The Company issued warrants to purchase 8,000 shares of common stock at an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock of the Offering, (ii) $25 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the Offering.
|
|
|
(13)
|
On August 19, 2016, the Company received a cash advance from an entity controlled by a former Executive Chairman and consultant in the amount of $135,000 and $80,000 of this amount was repaid subsequent to December 31, 2016
|
|
|
(14)
|
During January 2017, the Company received cash advances from third parties in the amount of $100,000 and repaid $103,000, inclusive of fees.
|
|
|
(15)
|
On January 3, 2017, the Company terminated a secured note payable with a principal balance of $162,539 as of September 30, 2016. No additional consideration was given as part of the termination.
|
(16)
|
On January 31, 2017, the Company filed a certificate of designations, preferences and rights (the "Certificate of Designation") with the Secretary of State of the State of Delaware with respect to a newly authorized class of its Series G Preferred Stock (the "Series G Preferred"). The Stated Value of one share of Series G Preferred is $500. The Series G Preferred will automatically convert ("Automatic Conversion") the Stated Value of such shares (the "Conversion Amount") into fully paid and non-assessable shares of common stock of the Company ("Series G Conversion Shares") upon (i) the Company's receipt of Fifty Million Dollars (US$50,000,000) or more in gross revenue in a single fiscal year, (ii) the sale of the Company via asset purchase, stock sale, merger or other business combination in which the Company and/or its stockholders receive aggregate gross proceeds of Twenty-Five Million Dollars (US$25,000,000) or more, or (iii) the closing of an underwritten offering (the "Qualified Offering") by the Company pursuant to which the Company receives aggregate gross proceeds of at least Ten Million Dollars (US$10,000,000) in consideration of the purchase of shares of common stock and/or which results in the listing of the Company's common stock on the Nasdaq National Market, the Nasdaq Capital Market, the New York Stock Exchange, or the NYSE MKT. The number of Series G Conversion Shares issuable upon conversion of the Conversion Amount shall equal the Conversion Amount divided by the Conversion Price then in effect. The "Conversion Price" of the Series G Preferred is $22.50. Upon the trigger of an Automatic Conversion, all of the shares of Series G Preferred owned by such Holders will convert into common stock at the Conversion Price then in effect.
|
|
|
(17)
|
On January 31, 2017, the Company issued 32,415 shares of Series G Preferred to an entity affiliated with the Chief Executive Officer and 10,805 shares of Series G Preferred to a former Chief Executive Officer and consultant to the Company. The consideration for such issuance relates to services rendered to the Company. As a result of the foregoing, the Series G Preferred held by these parties will convert to an aggregate of 960,445 shares of common stock upon the consummation of the Offering. Each of the holders have entered into lock-up agreements prohibiting the sale or other transfer of all securities of the Company owned by each of them for a period of 12 months. Additionally, each of the holders entered into a second lock-up agreement further restricting the public sale of the their shares of common stock upon the triggering of an Automatic Conversion until the earlier of (i) the Company's receipt of $25,000,000 or more in gross revenue in a single fiscal year (but in no event prior to twelve (12) months from the date of the final prospectus with respect to the offering, if any, even if such gross revenue threshold is attained prior to such date), or (ii) eighteen (18) months from the date thereof. The lock-up agreements initially expired if the offering was not completed by February 15, 2017, whose expirations were extended to March 31, 2017 with new agreements signed during February 2017.
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(18)
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On January 27, 2017, the Company sold $280,000 of future customer receipts to a third party for $200,000 in cash. The $80,000 difference between the future customer receipts and cash received by the Company is being amortized to interest expense over the term of the note. The note is subordinated to another note.
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(19)
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On February 14, 2017, the Company amended a note payable with principal balance of $334,464 to extend the maturity date to the earlier of the Offering or March 31, 2017.
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(20)
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During January 2017, the Company amended a note payable to an entity controlled by the Chief Executive Officer with principal balance of $25,463 extend the maturity date to February 15, 2017. The note was further amended during February 2017 to extend the maturity date to March 31, 2017.
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(21)
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During February 2017, a lender extended the period covered in a forbearance agreement signed during December 2016 was extended through March 31, 2017.
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