SEPTEMBER 2015 CONVERTIBLE NOTES AND SERIES G PREFERRED STOCK

6 Months Ended

Jun. 30, 2016

SEPTEMBER 2015 CONVERTIBLE NOTES AND SERIES G PREFERRED STOCK

DEBT

On February 8, 2008, the Company acquired a manufacturing and office facility in Thornton, Colorado, for approximately $5.5 million. The purchase was financed by a promissory note, deed of trust and construction loan agreement (the “Construction Loan”) with the Colorado Housing and Finance Authority (“CHFA”), which provided the Company borrowing availability of up to $7.5 million for the building and building improvements. In 2009, the Construction Loan was converted to a permanent loan pursuant to a Loan Modification Agreement between the Company and CHFA (the “Permanent Loan”). The Permanent Loan, collateralized by the building, has an interest rate of 6.6% and the principal will be amortized through its term to January 2028. Further, pursuant to certain negative covenants in the Permanent Loan, the Company may not, among other things, without CHFA’s prior written consent (which by the terms of the deed of trust is subject to a reasonableness requirement): create or incur additional indebtedness (other than obligations created or incurred in the ordinary course of business); merge or consolidate with any other entity; or make loans or advances to the Company’s officers, shareholders, directors or employees. The outstanding balance of the Permanent Loan was $5,633,054 as of June 30, 2016.

The Company is currently not in compliance with certain covenants under the terms of the Permanent Loan as a result of a late real-estate tax payment due to Adams County in the amount of approximately $177,000 plus accrued interest. Under the terms of the Permanent Loan, CHFA may accelerate payments due under the Permanent Loan, take possession of the premises or require future real-estate taxes be paid in monthly installments to CHFA. The Company is currently in communication with CHFA to explore all possible options to cure the covenant breach.

As of June 30, 2016, future principal payments on long-term debt are due as follows:




2016	$	190,860
2017	344,730
2018	368,183
2019	393,232
2020	419,985
Thereafter	3,916,064
	$	5,633,054

SEPTEMBER 2015 CONVERTIBLE NOTES AND SERIES G PREFERRED STOCK

September 2015 Convertible Notes Extinguishment

On September 4, 2015, the Company entered into a note purchase agreement between the Company and the Accredited Investors. Pursuant to the note purchase agreement, the Company issued to the Accredited Investors $1.5 million original principal amount of secured subordinated convertible notes on September 4, 2015, and an additional $0.5 million original principal amount of secured subordinated convertible notes on September 28, 2015 (collectively, the “September 2015 Convertible Notes”). The September 2015 Convertible Notes bear interest at a rate of 8% per annum.

All amounts due under the September 2015 Convertible Notes were convertible at any time, in whole or in part, at the option of the Accredited Investors, into shares of Common Stock at a fixed conversion price, which was subject to adjustment for stock splits, stock dividends, combinations or similar events, of $2.40 per share (the “Conversion Price”). The Company, however, was prohibited from issuing shares of Common Stock pursuant to the September 2015 Convertible Notes unless stockholder approval of such issuance of securities was obtained as required by applicable NASDAQ listing rules. The Company received stockholder approval of such share issuances at a special stockholders meeting held on December 18, 2015. This provision resulted in a contingent beneficial conversion feature that was recognized once the contingency was resolved based on its intrinsic value at the commitment date. Accordingly, a beneficial conversion feature in the amount of $1.38 million was recorded as a debt discount on December 18, 2015. The debt discount was recognized as additional interest expense over the life of the September 2015 Convertible Notes.

There were no registration rights applicable to the September 2015 Convertible Notes. Accordingly, any shares of Common Stock issued upon conversion of the September 2015 Convertible Notes would be restricted and could only be sold in compliance with Rule 144 or in accordance with another exemption from registration.

On April 29, 2016, the Company entered into Exchange Agreements (the “Exchange Agreements”) with the Accredited Investors. Under the terms of the Exchange Agreements, the September 2015 Convertible Notes (approximately $2.10 million of outstanding principal and accrued interest) were cancelled. In exchange, the Company has issued to the Accredited Investors rights to receive a fixed number of shares of common stock of the Company in accordance with the terms of Rights to Receive Common Stock dated April 29, 2016 (the “April 2016 Rights”). The April 2016 Rights obligate the Company to issue to the holders (without the payment of any additional consideration) an aggregate of approximately 2.10 million shares of common stock (the "April 2016 Rights Shares"). The number of April 2016 Rights Shares is fixed, and is only subject to customary non-price based ratable adjustments. The April 2016 Rights are immediately exercisable and expire on April 29, 2021.

A net loss on extinguishment of $0.89 million was recorded to "Change in fair value of derivatives and gain/(loss) on extinguishment of liabilities, net" in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 as a result of the cancellation of the September 2015 Convertible Notes and issuance of the April 2016 Rights. During the three months ended June 30, 2016, the Accredited Investors exercised their April 2016 Rights to receive and the Company has delivered 1,552,865 shares of common stock.

Series G Convertible Preferred Stock Financing

On April 29, 2016, the Company entered into securities purchase agreements with the Accredited Investors for the private placement of $2,000,000 of the Company’s newly designated Series G Preferred Stock. The Company issued a total of 500 shares of Series G Preferred Stock to the Accredited Investors in exchange for $500,000 at closing. The Company sold an additional 1,500 shares of Series G Preferred Stock to the Accredited Investors during the months of May and June 2016, which resulted in additional gross proceeds to the Company of $1,500,000.

Shares of the Series G Preferred Stock (including the amount of any accrued and unpaid dividends thereon) will be convertible at the option of the Accredited Investors into common stock at a fixed conversion price of $1.00 per share. Holders of the Series G Preferred Stock will be entitled to dividends in the amount of 10% per annum. One year after issuance, the Company is required to redeem for cash all or any portion of the outstanding shares of the Series G Preferred Stock at a price per share equal to $1,000 plus any accrued but unpaid dividends thereon. Except as otherwise required by law (or with respect to approval of certain actions), the Series G Preferred Stock does not have voting rights.

A beneficial conversion feature in the amount of $196,000 was recorded as a debt discount. The debt discount will be recognized as additional interest expense over the life of the Series G Preferred Stock.

There are no registration rights applicable to the Series G Preferred Stock. Accordingly, any shares of Common Stock issued upon conversion of the Series G Preferred Stock are restricted and can only be sold in compliance with Rule 144 or in accordance with another exemption from registration.