5. Notes Payable

Notes Payable Prior to Asset Contribution Agreement

During 2011, three of GP’s members advanced an aggregate of $126,000 to the Company. The advances bear interest at 5% per annum, and were due and payable on December 31, 2012.

In June 2011, GP entered into a $300,000 note payable agreement with one of its members. The note bears interest at 5% per annum, with interest-only payments commencing on May 1, 2011 through the maturity date, April 1, 2013. The note was secured by substantially all of GP’s assets.

In July 2011, three of GP’s members provided short-term loans to GP in the aggregate amount of $40,000. The loans bear interest at 5% per annum and were scheduled to mature on December 31, 2011. The loans were convertible into Class A Units of GP at a conversion price of $1.60 per unit. The difference between the effective conversion price of the loans into Class A Units, and the fair value of the Class A Units on the date of issuance of the loans, did not result in the recognition of a beneficial conversion feature since the fair value of the Class A Units was significantly lower than the then effective conversion price.

In connection with the Asset Contribution Agreement, the above aggregate indebtedness of $466,000 was amended, as follows:

Two Notes payable, each in the amount of $78,543 to certain officers, directors and beneficial owners of a majority of the capital stock of the Company. The notes bear PIK interest annually at 5% and are due and payable on the earlier of (i) the consummation of a debt or equity financing with gross proceeds to the Company of at least $10,000,000 or (ii) the date subsequent to March 31, 2013 that the Company achieves EBITDA equal to or greater than $2,500,000. The note is subordinate to certain other debt obligations of the Company.

Note payable in the amount of $308,914 to a director and beneficial owner of a majority of the capital stock of the Company. The note bears PIK interest annually at 5% and is due and payable on the earlier of (i) the consummation of a debt or equity financing with gross proceeds to the Company of at least $10,000,000 or (ii) April 1, 2013. However, no payments are required to be paid until the Company achieves EBITDA equal to or greater than $2,500,000.

In July 2011, GP issued a zero coupon note payable to a consultant. The note provided $225,000 to GP in exchange for repayment of $275,000 on August 30, 2012, the maturity date of the note. The discount from the maturity value of $275,000, initially $50,000, is being amortized to interest expense by the effective interest method over the life of the note, with an effective interest rate of 20.04%. The note is convertible into Class A Units of GP at a conversion price of $1.60 per unit, provided the note is not repaid in full on the maturity date. This note was assumed by the Company in connection with the Asset Contribution Agreement. This note was repaid in full on the maturity date.

In December 2011, GP consummated a $500,000 bridge loan with the Company (predecessor) and executed a Letter of Intent with the Company for a contribution of all the assets and liabilities of GP into the Company in a transaction to be accounted for as a reverse acquisition. At the time of the transaction, the Company’s assets consisted exclusively of $2.3 million in cash (unaudited). GP simultaneously executed an engagement agreement with an investment bank to effect a private placement of $3 million, on a best efforts basis, of the Company’s equity securities, to be closed at the same time as the reverse acquisition. The reverse acquisition and private placement transactions were consummated on February 23, 2012, with the bridge loan being repaid out of the closing cash in the Company. See Note 1.

During the year ended December 31, 2011, GP paid a fee of $50,000 per month to one of its members for management services provided to GP. A total of $600,000 was charged to expense for the year ended December 31, 2011, of which $87,500 was paid and $512,500 was recorded as accrued management fees in the balance sheet at December 31, 2011. In connection with the Asset Contribution Agreement, management fees accrued through the transaction date totaling $612,500 were converted into a promissory note payable to the GP member. The note bears PIK interest annually at 5% and is due and payable on the earlier of (i) the consummation of a debt or equity financing with gross proceeds to the Company of at least $10,000,000 or (ii) the date subsequent to March 31, 2013 that the Company achieves EBITDA equal to or greater than $2,500,000. The note is subordinate to certain other debt obligations of the Company.

12% Convertible Notes

In December 2012 and January 2013, the Company issued five (5) separate 12% Secured Convertible Notes totaling $950,000 (the “Original 12% Secured Convertible Notes”) pursuant to a note purchase agreement dated December 7, 2012 (the “Original Note Purchase Agreement”). Two (2) of these notes (in the aggregate principal amount of $100,000) were issued in January 2013. All of the Original 12% Secured Convertible Notes accrued interest at 12% per annum. The Original 12% Secured Convertible Notes were contingently convertible into shares of the Company’s common stock at a conversion price of 75% of the price per share issued by the Company in a Qualified Financing (defined as an equity financing of not less than $7,000,000). The difference between the effective conversion price of the Original 12% Secured Convertible Notes into shares of the Company’s common stock, and the fair value of the Company’s common stock on the date of issuance of the Original 12% Secured Convertible Notes, resulted in a beneficial conversion feature in the amount of $287,500. In accordance with ASC 470-20, because the Original 12% Secured Convertible Notes were convertible upon the occurrence of a contingent future event (the Qualified Financing), the contingent beneficial conversion feature has been measured at the issuance date, but is not reflected in the statement of operations until the occurrence of the contingent event.

In May 2013, the holders of the Original 12% Secured Convertible Notes transferred, in separate transactions, all of their respective rights, title and interests in the Original 12% Secured Convertible Notes to a third party (the “Current Holder”) pursuant to various note purchase agreements by and between each original holder and the Current Holder. Also in May 2013, immediately following the Current Holder’s acquisition of the Original 12% Secured Convertible Notes, the Company and the Current Holder entered into an Amended and Restated Note Purchase Agreement to amend and restate Original Note Purchase Agreement. Pursuant to the Amended and Restated Note Purchase Agreement, all of the Original 12% Secured Convertible Notes were automatically deemed null and void. In addition, the Company issued to the Current Holder a new convertible promissory note (the “New 12% Convertible Note”) in the original principal amount of $1,002,800, which amount reflects the outstanding principal amount and unpaid accrued interest due under the Original 12% Secured Convertible Notes as of the date of the Amended and Restated Note Purchase Agreement. The New 12% Convertible Note is unsecured and accrues interest at the rate of 12% per annum and will mature on June 2, 2014. At the option of the Current Holder, upon written notice to the Company at any time prior to the maturity date, all of the outstanding principal amount and unpaid accrued interest of the New 12% Convertible Note may be converted into shares of the Company’s common stock at a conversion price equal to $0.1875 per share. The Company may prepay, upon five (5) business days written notice, any amounts owed under the New 12% Convertible Note in whole or in part at any time without the prior written consent of the Current Holder.

As to the Original 12% Secured Convertible Notes, because no transaction or occurrence of a contingent future event (the Qualified Financing) was consummated pursuant to the terms of the Original Note Purchase Agreement, the warrants issued to the original holders in connection with the Original 12% Secured Convertible Notes were reduced by one-half, to purchase an aggregate 475,000 shares of the Company’s common stock.

Promissory Notes

In November 2012, the Company issued two (2) separate promissory notes totaling $450,000 (the “November Notes”). The November Notes are unsecured and accrue interest at 10% per annum. One of the November Notes in the principal amount of $250,000 was paid in full prior to maturity in December 2012. The other November Note has been amended and restated and currently matures on the earlier of (i) December 31, 2013, or (ii) receipt by the Company of $1,500,000 in aggregate gross proceeds arising from debt and/or equity financings after July 1, 2013. In July 2013, the Company paid $100,000 of the principal amount of such November Note. The remaining outstanding principal amount of such November Note is $100,000.

In February 2013, the Company issued four (4) promissory notes totaling $400,000 (the “February Notes”). The February Notes are unsecured, accrue interest at a rate of 10% per annum and mature on the earlier of March 1, 2014 or the closing of a single transaction (whether debt, equity or a combination of both) that results in aggregate gross proceeds to the Company of $10,000,000.

In June 2013, the Company issued three (3) demand promissory notes in the aggregate amount of $75,000. Each demand promissory note has an original principal amount of $25,000, bears interest at a rate of ten percent (10%) per annum, is unsecured, and is payable upon demand. These notes were repaid in-full during July 2013.

Warrants Issued in connection with Notes Payable

In connection with the issuances of the Original 12% Secured Convertible Notes and the February Notes, the Company issued five-year warrants to purchase an aggregate of 1,350,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The Company has accounted for the warrants issued in connection with the Original 12% Secured Convertible Notes and the February Notes in accordance with the provisions of ASC 370-20 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. The warrants were valued at their fair value of $0.15 to $0.27 per warrant using the Black-Scholes method with the following assumptions: share price = $0.17 to $0.30, volatility = 156%, risk-free rate = 1.82%. The relative fair values of the warrants, based on an allocation of the value of the notes payable and the value of the warrants issued in connection with the notes payable, was recorded as a debt discount (with a corresponding increase to additional paid-in capital) in the amount of $404,515, and is being amortized to interest expense over the expected term of the notes payable.

In connection with the issuance of the New 12% Convertible Note, the Company issued five-year warrants to purchase an aggregate of 1,002,800 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company has accounted for the warrants in accordance with the provisions of ASC 370-20 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. The warrants were valued at their fair value of $0.20 per warrant using the Black-Scholes method with the following assumptions: share price = $0.22 volatility = 155%, risk-free rate = 1.03%. The relative fair values of the warrants, based on an allocation of the value of the notes payable and the value of the warrants issued in connection with the notes payable, was recorded as a debt discount (with a corresponding increase to additional paid-in capital) in the amount of $201,563, and is being amortized to interest expense over the expected term of the note payable.

The interest expense for the three-and-nine months ended September 30, 2013 attributable to the debt discount of warrants was $67,823 and $377,253, respectively.

Interest expense charged to operations amounted to $125,138 and $22,439 for the three-months and $541,802 and $69,735 for the nine-months ended September 30, 2013 and 2012. The future principal maturities related to all notes payable obligations is estimated as follows at September 30, 2013 (excluding debt discount of $162,230 at September 30, 2013):

For the Years Ending December 31,
2013	$	1,178,500
2014		1,402,800
	$	2,581,300