12. Debt

9 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Debt

12. DEBT

Convertible Debentures

The following tables set forth the components of the Company’s, convertible debentures as of September 30, 2019, and December 31, 2018:

	September 30, 2019			December 31, 2018
Redeemable unsecured convertible note - TeleMate	$	1,000,000			1,000,000
Principal value of secured convertible notes		6,738,708			2,822,708
Loan discounts		(446,388	)		(735,871	)
Less: Current portion		(7,050,901	)		(676,223	)
Total convertible notes, net - noncurrent	$	241,419		$	2,410,614

Redeemable Convertible Note – Variable Conversion Price

On July 9, 2019, the Company entered into a convertible note payable with an unrelated party for $100,000 of which included $5,000 in third party fees resulting in net cash proceeds to the Company of $95,000. The convertible note payable carries interest at a rate of 10% per annum, is due on July 9, 2020 and is convertible into common stock of the Company at the option of the noteholder six months after issuance at a rate equal to a 30% discount from the lowest volume weighted average price of the Company’s common stock in the preceding 20 trading days.

The Company analyzed the conversion feature of the agreement for a beneficial conversion feature, for which the Company concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and its fair value was determined to be $51,730. This amount is recorded as a debt discount and is amortized as interest expense over the term of the related convertible note.

The Company analyzed the conversion feature of the agreement for derivative accounting consideration and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate.

The aggregate fair value of the derivative at the issuance date of the note was $85,410 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $43,270 which was up to the face value of the convertible note with the excess fair value at initial measurement of $42,140 being recognized as derivative expense.

At September 30, 2019, the Company remeasured the fair value of its derivative liability at $98,883 and recorded a $13,473 loss from change in fair value for the nine months ended September 30, 2019. The fair value of the embedded derivative was determined using a Black-Scholes option pricing model based on the following assumptions: (1) expected volatility of 107%, (2) risk-free interest rate of 1.75%, (3) an exercise price of $0.084, and (4) an expected life of 0.78 of a year.

First Amendment of TDH Share Sale Agreement

On January 3, 2018, we entered into an amendment (the “First Amendment”) to the TDH share sale agreement with the individuals that sold TDH to the Company (“TDH Sellers”). Under the terms of the First Amendment:

· the maturity date of the $4.0 million promissory note issued to the TDH Sellers by the Company on June 20, 2016 as part of the acquisition of TDH by the Company (the “TDH Note”), was extended from July 1, 2018 until July 1, 2019 (the “Note Extension Period”);

· the interest rate on the TDH Note was increased from 5% to 10% during the Note Extension Period;

· during the Note Extension Period, the interest payments terms were changed to be paid quarterly in arrears, instead of annually in arrears; and

· the period eligible for additional consideration to be earned by the TDH Sellers contingent upon the achievement of certain milestones, as defined in the TDH share sale agreement, was extended to December 31, 2019.

As consideration for the First Amendment, the Company issued an additional 800,000 shares of its common stock to the TDH Sellers.

Second Amendment of the TDH Share Sale Agreement

On January 15, 2019, we entered into a second amendment to the TDH share sale agreement (the “Second Amendment”). Under the terms of the Second Amendment:

· the maturity date of the TDH Note was extended from July 1, 2019, to April 2, 2020.

· in the event the TDH Note is not repaid prior to July 2, 2019: (i) no management fee shall be paid by TDA to the Company as provided in the share sale agreement in which the Company acquired TDH.

· the TDH Sellers shall have the right to convert the TDH Note at a conversion price of $0.27 per share, either in whole or in part at any time prior to the maturity, subject to the terms and conditions set forth in the Second Amendment 

As a result of the inclusion of a $0.27 conversion feature, under the guidelines of ASC 470-20-40-7 through 40-9, this element of the Second Amendment was considered an extinguishment and subsequent reissuance of the TDH Note as a convertible promissory note. As a result, the Company recorded a loss from the extinguishment of debt of $363,468 related to the Second Amendment during the nine months ended September 30, 2019.

Redeemable Unsecured Convertible Note - TeleMate

On January 1, 2017, the Company issued a three-year 0.68% redeemable convertible note for $1,000,000 (the “Telemate Note”) to Telemate.Net Software LLC (“Telemate”) in connection with the acquisition of the NetSpective Webfiltering assets. All Telemate Note principal and accrued interest is payable January 1, 2020. The Telemate Note is convertible at the election of the noteholders into the Company’s’ common stock at a conversion rate of $0.78 per share. Furthermore, if not previously converted by the noteholders, the Telemate Note may be converted by the Company into shares of the Company’s common stock at a rate of $0.48 per share commencing on November 1, 2019.

Under the terms of the asset purchase agreement, dated January 1, 2017, between Telemate and the Company, in which TeleMate had the obligation to collect certain monies on behalf of the Company, TeleMate failed to remit $146,882 it had collected on the Company’s behalf from NetSpective customers. As a result of TeleMate’s non-payment, and to avoid litigation, on January 12, 2018, we entered into a First Modification to the asset purchase agreement (the “Modification”).

Under the terms of the Modification, TeleMate agreed:

· to pay the Company $10,000 per month against their outstanding balance of $146,822;

· not to exercise the conversion feature of its $1.0 million promissory note, nor will any of the $362,500 earnout shares (464,744) be issued until all payments are made in full;

· to extend the December 31, 2019 maturity date of the Telemate Note indefinitely until all payments are made in full; and

· that all interest payments ($6,800 annually) due from the Company to TeleMate under the Telemate Note be suspended indefinitely until all payments are made in full.

Telemate completed repaying its obligation to the Company in full in April 2019. In the event that TeleMate converts the Telemate Note, the number of shares converted thereunder will be subject to a one-year leakout agreement. In the event that TeleMate does not convert the Telemate Note by October 1, 2019, the Company has the right to force conversion at a conversion price of $0.48 per share.

Newbridge Offering

On November 30, 2018, the Company closed a private offering in which it sold 12% secured convertible promissory notes in an aggregate principal amount of $552,000 and issued an aggregate of 730,974 shares of its common stock to nine accredited investors pursuant to a private placement memorandum and subscription agreement. The Notes which are due and payable two years from issuance are secured by certain assets of the Company and rank senior to all other indebtedness of the Company except for the $4,000,000 promissory notes (the “TD Notes”) issued to TD Holdings in connection with the Share Sale Agreement, dated June 30, 2016, as amended. Messrs. Marks and Leiner also pledged an aggregate of 10,000,000 shares pursuant to a pledge and security agreement to secure the timely payment of the Notes. The Notes are convertible, in whole or in part, by the note holder at a conversion rate of $0.40 if the Company’s common stock trades or is quoted at more than $0.40 per share for 10 consecutive days. The conversion price is subject to an adjustment resulting from certain corporate actions including the subdivision or combination of stock, payment of dividends, reorganization, reclassification, consolidations, merger or sale of the Company.

Interest on the Note is payable monthly in 21 equal installments commencing four months after the issuance of the Notes. Upon the occurrence of an “event of default” as described in the Notes, the interest rate will increase to 15% and the Notes shall become immediately due and payable. The Company may prepay the Notes in full at any time by paying accrued interest and 110% of the outstanding principal balance. Newbridge Securities Corporation acted as exclusive placement agent for the offering and received (i) $55,200, (ii) 113,586 shares of common stock; and (iii) $11,040, representing a non-accountable expense allowance, for its services.

Secured Convertible Notes 2018

During the year ended December 31, 2018, the Company issued to accredited investors in private offerings two-year secured, convertible, original issue discount (“OID”) notes for aggregate gross proceeds of $1,238,485. The notes were issued with OID discounts of 20%, or $247,697, have an interest rate of 10% per annum, are payable semiannually in cash, and are convertible into shares of common stock at a fixed conversion price of $0.50 per share if converted within one year of issuance and $0.78 per share thereafter.

During the year ended December 31, 2017, the Company privately placed a series of secured, convertible, original issue discount (OID) notes with accredited investors for gross proceeds of $601,223. The Notes were issued with OID discounts of 10.0%, or $60,122. The notes carried an interest rate of 10% per annum, payable semiannually in cash, for a two-year term with a fixed conversion price of $0.78.

In connection with the issuance of the above convertible notes, the Company also issued an aggregate of 150,305 shares of common stock as an inducement to lend. These shares were valued at $78,321 with share prices ranging between $0.38 and $0.54 per share. The Company recorded the value of these shares as a loan discount to be amortized as interest expense over the term of the related convertible notes.

Maturities of the Company’s borrowings for each of the next two years are as follows:

2019	$	676,223
2020	$	7,062,485