Notes Payable

9 Months Ended

Sep. 30, 2018

Notes Payable [Abstract]

Notes Payable

Note 3. Notes Payable

The following table reflects our third party debt activity, including our convertible debt, for the nine months ended September 30, 2018:

December 31, 2017	$	7,098,138
Repayments of third party notes		(20,944	)
Borrowings from third parties		795,100
Debt discounts due to stock, warrants and derivative liabilities		(130,569	)
Amortization of debt discounts		219,641
Effect of currency exchange		(281	)
September 30, 2018	$	7,961,085

During the nine months ended September 30, 2018, the Company borrowed $282,000 from a third party lender at 10% interest per annum, and the Company made total payments of $20,944 on notes payable to third parties.

During the nine months ended September 30, 2018, the Company issued promissory notes to third party lenders in the aggregate principal amount of $470,000 for loans made by these lenders in the same amount to the Company. These notes bear interest at 10% per annum and are due within 90 days of the date the respective note was issued and on demand. In connection with the loans, the Company issued 1-year to 3-year warrants to purchase an aggregate total of 2,700,000 shares of VCSY common stock at a purchase price of $0.10-$0.20 per share to certain third party lenders.

During the nine months ended September 30, 2018, the Company extended the term of certain warrants to purchase a total of 12,100,000 shares of VCSY common stock (at $0.10 per share) for an additional 1-year period and granted a total of 320,199 shares of the common stock of Ploinks, Inc. to third party lenders in connection with certain extensions of convertible debentures in the aggregate principal amount of $1,210,000 that were issued from 2015 through 2017. The aggregate fair market value of the Ploinks shares was determined to be $99,102 and was recorded as debt discount and is being amortized through the term of the convertible debenture. The incremental change in the fair value of the extended warrants was immaterial and did not change the conclusion of the debt modification. The due dates for all these convertible debentures were extended until October 1, 2018.

During the nine months ended September 30, 2018, NOW Solutions issued a note payable in the principal amount of $43,100, to a third party bearing interest at 10% annum for advances made on behalf of NOW Solutions in 2013.

On July 25, 2018, Taladin executed an amendment to a pledge agreement (the “Amended Pledge Agreement”) with a third party lender. In connection with the Amended Pledge Agreement, the Company and NOW Solutions also executed an amendment of certain promissory notes (the “Taladin Pledged Notes”) issued to the lender by the Company and NOW Solutions to a third party lender in the aggregate principal amount of $715,000. The outstanding balance due under the Notes as of June 30, 2018, including interest, was $2,093,334 (plus $280,000 in penalties).

Under the original pledge agreement, Taladin pledged 20,000,000 shares (the “Taladin Pledged Shares”) of the Company’s common stock to the lender to secure obligations under the Taladin Pledged Notes, as amended, consisting of (a) promissory note issued by NOW Solutions in the principal amount of $215,000 issued on September 4, 2003 and assigned to the lender effective on January 4, 2004, (b) the promissory note issued by VCSY in the principal amount of $200,000 issued on October 24, 2006 and (c) the promissory note issued by VCSY in the principal amount of $300,000 issued on March 5, 2007.

Terms of the Amended Pledge Agreement. Under the terms of the Amended Pledge Agreement, in lieu of selling the Taladin Pledged Shares pursuant to the original terms of the pledge agreement, Taladin and the lender agreed that Taladin, or a party acting on Taladin’s behalf, had the right to purchase a total of 10,000,000 shares of the Taladin Pledged Shares from Taladin at a purchase price of $0.015 per share over a certain period of time. The Company made $150,000 in payments to the lender and all rights to the 10,000,000 shares of the Pledged Stock have been retained by Taladin.

Terms of the Amendment of the Notes. Under the terms of the amendment to the Taladin Pledged Notes, all defaults under these notes were cured; however, the default interest rate of 16% continues to apply, subject to the terms of the amendment of the Taladin Pledged Notes. The Taladin Pledged Notes have been amended as follows: (a) $125,000 will applied to the currently outstanding penalties in the amount of $280,000, which were deemed to be paid in full (and the remaining $155,000 in penalties were cancelled) and (b) a payment of $25,000 was applied toward the Taladin Pledged Notes; (c) beginning on September 1, 2018, and continuing on the first day of each month thereafter, the Company shall make $25,000 monthly installments payments until January 31, 2020 (the “Maturity Date”) at which time all outstanding amounts under the Taladin Pledged Notes will be due; (d) upon an additional payment of $175,000, the annual interest rate for all of the Taladin Pledged Notes will be reduced to an annual interest rate of 12%, provided that if, at any time the delinquent monthly payments exceed $75,000, the annual interest rate will be raised to an annual interest rate of 16%.

Lakeshore Financing

On January 9, 2013, the Company and several of its subsidiaries entered into a loan agreement (the “Loan Agreement”), dated as of January 9, 2013 with Lakeshore Investment, LLC (“Lakeshore”) under which NOW Solutions issued a secured 10-year promissory note (the “Lakeshore Note”) bearing interest at 11% per annum to Lakeshore in the original amount of $1,759,150 and payable in equal monthly installments of $24,232 until January 31, 2022. Upon the payment of any prepayment principal amounts, the monthly installment payments will be adjusted proportionately on an amortized rata basis. 

The Lakeshore Note was originally secured by the assets of the Company’s subsidiaries, NOW Solutions, Priority Time, SnAPPnet, Inc. (“SnAPPnet”) and the Company’s SiteFlash™ technology, which were all cross-collateralized. Upon full payment of the Lakeshore Note, Lakeshore will be obligated to release the NOW Solutions collateral.

As additional consideration for the loan, the Company granted a 5% interest in Net Claim Proceeds (less any attorney’s fees and direct costs) from any litigation or settlement proceeds related to the SiteFlash™ technology to Lakeshore which was increased to 8% under an amendment to the Loan Agreement in 2013. In addition, until the Note is paid in full, NOW Solutions agreed to pay Lakeshore a royalty of 6% of its annual gross revenues in excess of $5 million dollars up to a maximum of $1,759,150. Management has estimated the fair value of the royalty to be nominal as of its issuance date and no royalty was owed as of December 31, 2017 or December 31, 2016. 

Under an amendment of the Lakeshore Note and the Loan Agreement executed on January 31, 2013, Vertical was obligated to transfer 25% of its ownership interest in NOW Solutions in the event certain principal payments were not timely made to Lakeshore. When the last forbearance agreement with Lakeshore expired, Lakeshore became a 25% minority owner of NOW Solutions on October 1, 2013.

In December 2014, the Company and Lakeshore entered into an amendment of the Lakeshore Note and the Loan Agreement. In consideration of an extension Lakeshore granted to NOW Solutions to cure the default under the Lakeshore Note and the Loan Agreement, the Company transferred a 20% ownership interest in two subsidiaries to Lakeshore: Priority Time Systems, Inc., and SnAPPnet, Inc.

In December 2017, the Vertical and NOW Solutions and Lakeshore entered into an amendment (the “2017 Lakeshore Loan Amendment “) to the Loan Agreement and the Lakeshore Note issued to Lakeshore. Pursuant to the terms of this amendment, the principal balance of the Note was amended to $2,291,395, which included (a) all unpaid dividends and outstanding attorneys’ fees in the amount of $250,000 and (b) all outstanding accrued interest in the amount of $414,364. Under the 2017 Lakeshore Loan Amendment, any existing defaults under the Lakeshore Note and related security agreements were cured, the interest rate reverted to the non-default rate of 11% interest per annum, the Lakeshore Note was re-amortized and the term of the Lakeshore Note was extended for an additional 10 years, with monthly installment payments consisting of $31,564 due on the 10^th day of each month, beginning on January 10, 2018. In addition, the security agreements for the SiteFlash assets, the assets of Priority Time, and the assets of SnAPPnet were cancelled and Lakeshore agreed to file notices of termination of all UCC lien statements in connection with these assets. The security agreement concerning the assets of NOW Solutions remain in effect and upon full payment of the Lakeshore Note, Lakeshore will release the NOW Solutions collateral. Furthermore, the interest in “Net Claim Proceeds” from the SiteFlash Assets was increased from 8% to 20% under this amendment.

The 2017 Lakeshore Loan Amendment also provides that if NOW Solutions makes any advance toward net income (less Vertical’s management fee and management allocations) to Vertical, then NOW Solutions shall pay Lakeshore 25% share of such an advance no later than one business day after Vertical receives its 75% percent share. In the event NOW Solutions does not make payment to Lakeshore, the loan will be in default and NOW Solutions has five business days from discovery and notice by Lakeshore to make payment plus a penalty in the amount of 20% of the unpaid 25% share amount.

In order to facilitate the execution of the 2017 Lakeshore Loan Amendment which resulted in the cure of any existing defaults under the Loan Agreement and the Note, as well as the release by Lakeshore of the security interests in the SiteFlash assets and the assets of SnAPPnet and Priority Time, the Company issued 2,500,000 VCSY common shares at a fair market value of $35,400 and 300,000 Ploinks common shares at a fair market value of $92,850 to certain third party purchasers of 600,000 shares of VHS Series A Preferred Stock from a member of Lakeshore. The Company recorded a loss on debt extinguishment of $128,250 during the year ended December 31, 2017.

During the nine months ended September 30, 2018, the Company, through its subsidiary, declared dividends to Lakeshore of $90,332 of which $89,090 were paid and $1,242 were left accrued. During the nine months ended September 30, 2017, the Company, through its subsidiary, declared dividends to Lakeshore of $65,000 which were added to the note balance as part of the December 2017 amendment discussed above.

For additional transactions and updates concerning notes payable after September 30, 2018, please see “Subsequent Events” in Note 9.