We entered into Subscription Agreements (the “Subscription Agreement”) with various individuals (each, a “Purchaser”) between July 23, 2015 and March 31, 2016, pursuant to which the Company sold Senior Secured Convertible Debentures (the “Debentures”) and warrants to purchase shares of common stock equal to 50% of the number of shares issuable pursuant to the subscription amount (the “Warrants”) for an aggregate purchase price of $6,329,549 (the “Purchase Price”).

The Company issued a principal aggregate amount of $6,962,504 in Debentures which includes a 10% original issue discount on the Purchase Price. The Debenture does not accrue any additional interest during the first year it is outstanding but accrues interest at a rate equal to 10% per annum for the second year it is outstanding. The Debenture has a maturity date of two years from issuance. The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into shares of the Company’s common stock at a fixed conversion price equal to $8.40 per share, subject to applicable adjustments. In the second year that the Debenture is outstanding, any interest accrued shall be payable quarterly in either cash or common stock, at the Company’s discretion.

On various dates for the nine months ended September 30, 2017, the Company issued 38,606 shares of common stock based on the 10-day VWAP prior to quarter end to holders of the Debentures in payment of the quarterly interest accrued from the Debentures first anniversary date through March 31, 2017 for an aggregate amount of $309,465. We recognized a $123,862 gain on extinguishment of debt by calculating the difference of the shares valued on the issuance date and the amount of accrued interest through March 31, 2017.

At any time after the Issuance Date until the maturity date, the Company has the option, subject to certain conditions, to redeem some or all of the then outstanding principal amount of the Debenture for cash in an amount equal to the sum of (i) 120% of the then outstanding principal amount of the Debenture, (ii) accrued but unpaid interest and (iii) any liquidated damages and other amounts due in respect of the Debenture.

On September 11, 2017, we notified Debenture holders that their Debentures will be extended 180 days beyond the original maturity date as permitted in the Debenture agreement. We will continue to pay interest on the Debentures until the extended maturity date. We accounted for the Debenture extensions as debt modifications and not extinguishment of debt since the changes in fair value are not substantial in accordance with ASC 470-50. We started amortizing the remaining unamortized discount as of September 11, 2017 over the new term which extends 180 days beyond the original maturity date.

Warrants

The Company issued warrants exercisable into a total of 376,757 shares of our common stock. The Warrants issued in this transaction are immediately exercisable at an exercise price of $12.00 per share, subject to applicable adjustments including full ratchet anti-dilution in the event that we issue any securities at a price lower than the exercise price then in effect. The Warrants have an expiration period of five years from the original issue date. The Warrants are subject to adjustment for stock splits, stock dividends or recapitalizations and also include anti-dilution price protection for subsequent equity sales below the exercise price. The warrants were issued pursuant to an exemption to the registration requirements of the Securities Act and are considered restricted securities. Upon exercise, the warrant shares will be considered restricted securities and will be issued with a restrictive legend unless the shares have been registered or the legend can be removed pursuant to Rule 144 promulgated pursuant to the Securities Act.

Subject to the terms and conditions of the Warrants, at any time commencing six months from the Final Closing, the Company has the right to call the Warrants for cancellation if the volume weighted average price of its Common Stock on the OTCQB (or other primary trading market or exchange on which the Common Stock is then traded) equals or exceeds three times the per share exercise price of the Warrants for 15 out of 20 consecutive trading days.

Security Agreement

In connection with the Subscription Agreement and Debenture, the Company entered into Security Agreements with the Purchasers whereby the Company agreed to grant to Purchasers an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, Warrants and the other Transaction Documents.

ASC 470-20 states that the proceeds from the issuance of debt with detachable stock warrants should be allocated between the debt and warrants on the basis of their relative fair market values. The debt discount will be amortized to interest expense over the two year term of these loans. We amortized $4,736,571 of the debt discount to interest expense through the third quarter of 2017. The warrants issued in connection with the convertible debentures are classified as warrant derivative liabilities because the warrants are entitled to certain rights in subsequent financings and the warrants contain “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). Since “down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815. The estimated fair value of the warrants was determined using the binomial model, resulting in an allocation of $2,847,624 to the total warrants out of the gross proceeds of $6,329,549. The fair value will be affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. We reclassified the fair value of the warrant derivative liabilities to stockholders’ equity when we adopted ASU 2017-11.

The specific terms of the convertible debts and outstanding balances as of September 30, 2017 are listed in the table below.

1 The loan term was extended by 180 days.

2 The original issue discount is reflected in the first year.

3 The annual interest starts accruing in the second year.

The closings above included a total of approximately $291,000 of convertible debentures purchased by related parties who were members of the Company’s Board of Directors and management and their family members.

At any time after six months from the original Issue Date until the maturity date, the Company has the right to prepay the above Debentures in cash for 120% of the principal amount outstanding and any accrued interest.

In January 2017, we executed an amendment to the July 6, 2016 convertible note that was due on January 6, 2017. We received an extension of up to three months on the note’s due date. In exchange for the extension, we agreed to issue 1,667 shares of restricted common stock and pay the investor $10,000 for each 30-day extension. The shares issued for the extension were valued at $10,000 and recorded as interest expense. We made a payment of $34,000 in January 2017 for the first one-month extension and 12% annual interest on the note from the initial close date through February 6, 2017. The Investor had the right, at any time, to convert all or part of the outstanding and unpaid principal sum and accrued interest into shares of common stock at the conversion price of $13.50. On February 28, 2017, the note was paid in full. We accounted for the loan extension as a debt modification.

On April 3, 2017, we signed a six-month agreement with an investor relations firm. The agreement includes a cash payment of $10,000 plus a convertible 8-month note for $50,000 with the following significant terms: (i) convertible at $12.00/share, (ii) bears 10% annual interest, (iii) a 20% pre-payment penalty if the Company wants to pre-pay the Note, and (iv) a default rate of 18%. We terminated the agreement on June 7, 2017 and the investor relations firm agreed to forgive the loan. Since we did not receive any cash in connection with the note and neither did the IR firm provide any services, the forgiveness did not result in any gain upon termination of the agreement.

Revolving Note Payable

On October 28, 2016, an accredited investor (the “Investor”) purchased from us a promissory note in the aggregate principal amount of up to $2,000,000 (the “Revolving Note”) due and payable on the earlier of October 28, 2017 (the “Maturity Date”) or on the seventh business day after the closing of a Qualified Offering (as defined in the Revolving Note). The Investor is obligated to provide us with advances of $250,000 under the Revolving Note, but the Investor shall not be required to advance more than $250,000 in any individual fifteen (15) day period and no more than $500,000 in the thirty (30) day period immediately following the date of the initial advance. We received $3,500,000 pursuant to the Revolving Note as amended and we issued to the Investor warrants to purchase 250,000 shares of our Common Stock at an exercise price per share equal to $12.00 per share. The terms of the Warrants are identical except for the exercise date, issue date, and termination date which are based on the advance date.

The Revolving Note was amended on May 2, 2017 to increase the aggregate principal amount to $3,000,000, to issue 16,667 shares of our Common Stock to the Investor, to decrease the exercise price per share of the warrants to the lower of (i) $12.00 or (ii) the per share purchase price of the shares of our Common Stock sold in the Qualified Offering, and to change the references in the Revolving Note from “the six (6) month anniversary of October 28, 2016” to “July 25, 2017.” The fair value of the 16,667 shares issued was accounted for as a note discount and are amortized to interest expense over the life of the loan. We evaluated the accounting impact of the Revolving Note amendment and deemed that the amendment did not have a material impact on our consolidated financial statements.

The Revolving Note was further amended on August 18, 2017 to increase the aggregate principal amount to $3,500,000 with all other terms unchanged.

In the event that a Qualified Offering had occurred after July 25, 2017, but prior to the Maturity Date, within seven (7) Business Days of the closing of the Qualified Offering, the Company was to pay a cash fee equal to five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering or, at the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the closing date of the Qualified Offering divided by (y) the purchase price provided by the documents governing the Qualified Offering. A Qualified Offering means the completion of a public offering of the Company’s securities pursuant to which the Company receives aggregate gross proceeds of at least Seven Million United States Dollars (US$7,000,000) in consideration of the purchase of its securities and resulting in, pursuant to the effectiveness of the registration statement for such offering, the Company’s common stock being traded on the NASDAQ Capital Market, NASDAQ Global Select Market or the New York Stock Exchange. A Qualified Offering did not occur on or prior to the Maturity Date.

In the event that a Qualified Offering had not occurred after July 25, 2017, but prior to the Maturity Date, within seven (7) Business Days of the closing of the Qualified Offering, the Company shall pay a cash fee equal to five percent (5%) of the total outstanding amount owed by the Company to the Holder or, at the option of the Company, issue to the Holder a number of restricted shares of the Company’s common stock equal to (x) five percent (5%) of the total outstanding amount owed by the Company to the Holder as of the Maturity Date divided by (y) the VWAP of the Company’s common stock for the last ten trading days preceding the Maturity Date. A Qualified Offering did not occur on or prior to the Maturity Date.

Interest on the principal balance of the Revolving Note shall be paid in full on the Maturity Date, unless otherwise paid prior to the Maturity Date. Interest shall be assessed as follows: (i) a one-time interest of 10% on all principal amounts advanced prior to April 28, 2017; (ii) the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between April 28, 2017 and July 28, 2017; or (iii) both of the foregoing and 4% on any amount remaining outstanding if the principal amount is repaid between July 28, 2017 and October 28, 2017.

Broker fees amounting to $296,500, the one-time interest of $350,000 and the fair value of the 250,000 warrants issued to the Investor amounting to $1,148,275 were recorded as debt discounts and amortized over the term of the revolving note. The unamortized debt discounts as of September 30, 2017 related to the Revolving Note amounted to $335,833.

The Revolving Note was still outstanding as of October 28, 2017. We continue to accrue interest on the note.

The following table provides a summary of the changes in convertible debt and revolving note payable, net of unamortized discount, during 2017:

Other Notes

On January 6, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $250,000 in exchange for second position rights to all customer receipts until the lender is paid $322,500, which is collected at the rate of $1,280 per business day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. $138,840 of the proceeds were used to pay off the outstanding balance of a previous loan from another lender. The Company recognized a gain on the settlement of the previous loan of $5,044 which was credited to interest expense. The Company paid $2,500 in fees in connection with this loan. We received an additional $93,161 in June 2016 under the existing Merchant Agreement. The note is no longer outstanding as of September 30, 2017.

On February 8, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for third position rights to all customer receipts until the lender is paid $129,900, which is collected at the rate of $927 per business day. The Company paid $2,000 in fees in connection with this loan. We received an additional $125,000 in June 2016 under the existing Merchant Agreement of which $48,420 was used to pay off the prior loan. The lender provided an additional $70,000 on August 16, 2016. As of September 30, 2017, the outstanding balance on this note was zero.

On August 26, 2016 we signed a Merchant Agreement with a lender. Under the agreement we received $122,465 net proceeds in exchange for third position rights to all customer receipts which is collected at the rate of $1,386 per business day. As of September 30, 2017, the outstanding balance on this note was zero.

On February 6, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $125,000. The Company paid $1,250 in fees in connection with this loan. Under the agreement, $16,180 was used to pay off the prior loan. The loan was no longer outstanding as of September 30, 2017.

On February 15, 2017, we received six-month, non-convertible loans in the aggregate of $220,000 from two accredited investors. We agreed to issue each investor 5,667 shares of restricted common stock. The loans earn no interest but carry a 10% original issue fee. We recorded the fair value of the shares amounting to $43,616 as debt discounts that will be amortized to interest expense during the term of the loans. We received a one-month extension on one loan and two one-month extensions on the other. Each extension required a 10% fee to the lender. We treated these extensions as loan extinguishments and accordingly wrote off the original debt and recorded new debt to include the extension fees as part of the principal amount. The extension fees of $33,000 were recorded as losses on extinguishment of debt in the consolidated financial statements. One loan remains outstanding as of September 30, 2017 with a balance of $132,000 that was subsequently paid off entirely by October 31, 2017. We amortized $59,794 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discounts as of September 30, 2017 were $3,822.

On March 2, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,750. The Company paid no fees in connection with this loan. The loan was no longer outstanding as of September 30, 2017.

On March 14, 2017, we received an eight-month, non-convertible loan of $250,000 from a privately-held investment firm. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 8,333 shares of restricted common stock. We recorded the fair value of the shares amounting to $46,748 as a debt discount that will be amortized to interest expense during the term of the loan. The loan still remains outstanding as of September 30, 2017 with a balance of $250,000. We amortized $62,651 of the debt discount in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $14,097. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the lowest closing stock price for the 15 trading days prior to conversion.

On March 21, 2017, we received an eight-month, non-convertible loan of $170,000 from an accredited investor. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We also agreed to issue the investor 5,667 shares of restricted common stock. We recorded the fair value of the shares amounting to $35,079 as a debt discount that will be amortized to interest expense during the term of the loan. The loan still remains outstanding as of September 30, 2017 with a balance of $170,000. We amortized $41,025 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $11,054.

On April 19, 2017, we received a 7-month non-convertible loan of $250,000 from a privately-held investment firm. The loan earns an annual interest rate of 10% and includes a 10% original issue discount. We agreed to issue 833 shares at closing. Until the loan was repaid, we agreed that over the next one hundred eighty (180) days to issue 2,500 shares to the Investor every sixty (60) days for a total issuance of 8,333 shares. The loan remains outstanding and we have issued 5,833 shares including the closing shares since inception of the loan. We recorded the fair value of the 5,833 shares amounting to $32,684 as a debt discount that will be amortized to interest expense during the term of the loan. We amortized $45,264 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $12,420. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the lowest closing stock price for the 15 trading days prior to conversion.

On May 19, 2017, we received a 45-day non-convertible loan of $630,000 from a private investor. The loan provides guaranteed interest of $63,000 and has an origination fee of $32,000. We paid a broker $31,500 in connection with this loan. The unamortized debt discount as of September 30, 2017 was zero. We used these proceeds to pay off in full our September 2016 loan of $589,189. The loan remains outstanding and accrues interest at a 20% annual rate from the maturity date.

On June 6, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $250,000. The lender is entitled to receipts which are collected at the rate of $1,833 per business day. The Company paid $6,250 in fees in connection with this loan. Under the agreement, $119,021 was used to pay off three prior loans. The unamortized debt discount as of September 30, 2017 was $2,357. The loan remains outstanding as of September 30, 2017 with a balance of approximately $157,820.

On June 21, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $150,000. The lender is entitled to receipts which are collected at the rate of $1,361 per business day. The Company paid $1,498 in fees in connection with this loan. The unamortized debt discount as of September 30, 2017 was $509. The loan remains outstanding as of September 30, 2017 with a balance of approximately $81,000. We accounted for the Merchant Agreement as a loan under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts.

On July 17, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $125,000. The lender is entitled to receipts which are collected at the rate of $1,250 per business day. The Company paid $1,250 in fees in connection with this loan. The loan remains outstanding as of September 30, 2017 with a balance of approximately $82,000.

On August 1, 2017, we signed a Merchant Agreement with a lender. Under the agreement we received a loan of $75,000. The loan includes $18,750 representing an original issue discount, interest and fees resulting in a total payable of $93,750. The loan remains outstanding as of September 30, 2017 with a balance of approximately $56,000.

On September 12, 2017, we received a 9-month non-convertible loan of $225,000 from a privately-held investment firm. The loan earns an annual interest rate of 10%. The Company paid total fees of $25,000 including original issue discount and other costs related to this loan. We agreed to issue 3,333 shares at closing. We recorded the fair value of the shares as a debt discount that will be amortized to interest expense during the term of the loan. We amortized $2,505 of debt discounts in the nine months ended September 30, 2017. The unamortized debt discount as of September 30, 2017 was $35,495. In the event of default and at the option of the holder, the loan is convertible into common stock at a 35% discount to the average of the two lowest daily volume weighted average closing stock price for the 20 trading days prior to conversion.