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Note 8. Note Payable - Related Party
9 Months Ended
Sep. 30, 2015
Debt Disclosure [Abstract]  
Note Payable - Related Party

On August 22, 2013, in connection with and to partially fund the acquisition and simultaneously with the Acquisition of PIR, the Company entered into a Securities Purchase Agreement   (the “8% Note Purchase Agreement”) relating to the sale of $2,500,000 aggregate principal amount of the Company’s 8% convertible secured promissory note (“8% Note”) with Red Oak Partners LP (“Red Oak”). The 8% Note paid interest on each of March 31, June 30, September 30, and December 31, beginning on September 30, 2013, at a rate of 8% per year, however would increase to 18% upon an event of default. The maturity date of the 8% Note was August 22, 2015.  The 8% Note was secured by all of the assets of the Company and is subordinated to the Company’s obligations to its primary financial institution. Furthermore, in connection with the 8% Note Purchase Agreement, a partner of Red Oak was appointed to the Company’s Board of Directors. On November 10, 2014, Red Oak assigned the 8% Note between the Red Oak Fund, LP; Pinnacle Opportunities, LP; and the Red Oak Long Fund, LP; all of which are under management by Red Oak.

 

Beginning immediately upon the date of issuance, Red Oak or its assignees had the right to convert the 8% Note into shares of the Company’s common stock at a conversion price of $3.99 per share.  On the date the Company entered into the 8% Note Purchase Agreement, the Company’s stock price was $8.20 per share, and therefore the Company assigned a value of $2,500,000 to the common stock conversion feature and recorded this as debt discount and additional paid-in capital.  This instrument also created a deferred tax liability of $1,000,000 that reduced the value recorded as additional paid in capital, and therefore the net amount recorded to stockholders' equity was $1,500,000.  The debt discount of $2,500,000 was amortized over the two-year life of the loan as non-cash interest expense.  

 

On November 12, 2014, Red Oak converted $833,327 of principal and $23,369 of accrued interest payable on the 8% Note into 214,710 shares of the Company’s common stock at the conversion price of $3.99.  Following this transaction, the principal balance of the note was $1,666,673.  As a result of this transaction, the company recorded $323,250 of non-cash interest expense due to the acceleration of debt discount on the portion of the 8% Note that was converted.

 

Effective August 22, 2015 upon the maturity of the 8% Note, Red Oak converted the remaining $1,666,673 of principal into 417,712 shares of the Company’s common stock at the conversion price of $3.99.

  

During the three and nine-month periods ended September 30, 2015, the Company recorded non-cash interest expense of $118,728 and $535,397, respectively. During the three and nine-month periods ended September 30, 2014, the Company recorded non-cash interest expense of $312,500 and $937,500, respectively. During the three and nine-month periods ended September 30, 2015, the Company recorded cash interest expense of $19,203 and $85,870, respectively. During the three and nine-month periods ended September 30, 2014, the Company recorded cash interest expense of $50,000 and $150,000, respectively.