CONVERTIBLE DEBT

3 Months Ended

Mar. 31, 2021

NOTE 8 – CONVERTIBLE DEBT

PIK Notes

The Company raised $23 million of financing through the issuance of two series of Paid-In-Kind (“PIK”)-Election Convertible Notes in 2013 (“Series 2023 Notes”) and 2014 (“Series A Notes”). The original terms of the Series A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of the Series 2023 Notes included among other things: (i) a maturity of August 1, 2023, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $1.40, adjusted downward based on an anti-dilution provision. On December 14, 2017, an amendment agreement, entered into between the Company and the holders of the Series A Notes and Series 2023 Notes, went into effect. The agreement resulted in changes to certain terms of the Series A and Series 2023 Notes. The key terms of the Series A and Series 2023 Notes, as amended, are highlighted in the table below:

Key Terms	Series 2023 Notes	Series A Notes
Inception Date	08/01/2013	11/03/2014
Cash Received	$10,500,000	$12,500,000
Principal (Initial Liability)	$10,500,000	$19,848,486
Maturity (Term)	Matures on August 1, 2023, but convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;	Matures on May 1, 2023 but extends to August 1, 2023 if the Series 2023 Notes are still outstanding. Convertible into shares of the Company’s common stock at the discretion of the holder or by the Company based on the market price of the Company’s stock;
Exercise Price	$0.57, adjusted downward based on anti-dilution provisions/down-round protection	$0.37, adjusted downward based on anti-dilution provisions/down-round protection;
Stated Interest	10% per annum through December 14, 2017, 3% per annum thereafter, due semi-annually;	10% per annum through December 14, 2017, 3% per annum thereafter, due semi-annually;
Derivative Liability	$2,055,000 established at inception due to the existence of down-round protection; revalued every quarter using Monte Carlo model.	$9,212,285 established at inception due to existence of down-round protection; revalued every quarter using a Monte Carlo model.

In April 2019 the Company entered into a settlement agreement with the holders of the Series A Notes and Series 2023 Notes (the “PIK Notes”). Per the terms of the agreement the Company will pay to holders of PIK Notes on a pro rata basis the following percentages of revenue booked during a fiscal quarter: (a) three percent (3%) of gross revenues if cash or cash equivalents on the Company’s balance sheet or otherwise is less than $3 million on the last day of the fiscal quarter; or (b) five percent (5%) of gross revenues if cash or cash equivalents on the Company’s balance sheet or otherwise is greater than $3 million but less than $5 million the last day of the fiscal quarter; or (c) twelve percent (12%) of gross revenues if cash or cash equivalents on the Company’s balance sheet or otherwise is greater than $5 million.

As of March 31, 2021, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes		Series A Notes			Total
PIK Note Payable, Gross	$	17,509,741	$	29,209,832		$	46,719,573
Less: Discount		-		(984,487	)		(984,487	)
PIK Note Payable, Net	$	17,509,741	$	28,225,345		$	45,735,086

As of December 31, 2020, the liability components of the PIK Notes on the Company’s balance sheet are listed in the following table:

	Series 2023 Notes		Series A Notes			Total
PIK Note Payable, Gross	$	17,249,430	$	29,069,548		$	46,318978
Less: Discount		-		(1,082,988	)		(1,082,988	)
PIK Note Payable, Net	$	17,249,430	$	27,986,560		$	42,235,990

Series A Notes (Amended)

On November 3, 2014 (“Issue Date”), the Company issued, in a private placement pursuant to investment agreements, $19,848,486 principal amount of 10% PIK-Election Convertible N

tes due 2018 ("Series A Notes") in exchange for $12,500,000 in cash and the cancellation of previously-issued warrants held by one investor.

The original terms of the Series A Notes included among other things: (i) a maturity of November 1, 2018 with an option to extend to November 1, 2019, (ii) a stated interest rate of 10% paid semi-annually and (iii) a conversion price of $0.90, adjusted downward based on an anti-dilution provision. The original terms of both the Series A notes and Series 2023 Notes can be as exhibits to Forms 8-K filed on November 5, 2014.

During the three months ended March 31, 2021, the Company amortized $98,501 of debt discount relating to the Series A Notes Payable and issued additional PIK Notes of $263,386 in lieu of cash interest payments. The carrying value of the Series A Notes Payable as of March 31, 2021 was $28,225,345.

As of March 31, 2021, the Company was in compliance with the covenants of the Series A Notes.

As of March 31, 2021, The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. owned $1,392,764, $2,796,820 and $271,748, respectively, of principal of the Series A Notes. The IBS Turnaround Fund, LP, The IBS Turnaround (QP) (A Limited Partnership) and The IBS Opportunity Fund, Ltd. are managed by IBS Capital, LLC. At March 31, 2021, IBS Capital, LLC owned 13% of the shares of the common stock of the Company

Series 2023 Notes (Amended)

In August 2013, the Company received $10,500,000 of financing through the private placement of 10% mandatory convertible Notes due 2023 ("Series 2023 Notes"). The principal amount of the Notes is due on maturity. The Company can elect to pay semi-annual interest on the Series 2023 Notes with additional PIK Notes containing the same terms as the Series 2023 Notes, except interest will accrue from issuance of such notes. The Company can also elect to pay interest in cash.

During the three months ended March 31, 2021, the Company issued additional PIK Notes of $145,509 in lieu of cash interest payments. The carrying value of the Series 2023 Notes Payable was $17,509,741 as of March 31, 2021.

As of March 31, 2021, the Company was in compliance with the covenants of the Series 2023 Notes.