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Notes Payable

12 Months Ended

Dec. 31, 2016

Notes payable consisted of the following:

	December 31,
	2016		2015

Senior Note	$	1,200,000	$	891,089
Promissory Note		100,000		100,000

	$	1,300,000	$	991,089

Senior Note

The Company is a party to a Loan and Security Agreement dated March 28, 2013 (the "Loan Agreement") with Melrose Capital Advisors (the "Lender"). Under the terms of the Loan Agreement, the Company has borrowed an aggregate of $1,200,000 from the Lender, including $308,911 and $250,000 during the years ended December 31, 2016 and 2015, respectively. The Loan is evidenced by a promissory note (the "Senior Note") in the face amount of $1,200,000 (as amended). The Company also borrowed and repaid $50,000 from the Lender in a separate transaction during the third quarter 2016.

The Senior Note bears interest on the unpaid principal balance of the Note until the full amount of principal has been paid at a floating rate equal to the Prime Rate plus four and one-quarter percent (4.25%) per annum (7.75%) as of December 31, 2016). Under the terms of the Loan Agreement, the Company has agreed to make monthly payments of accrued interest. On November 30, 2016, the Company and the Lender entered into a Fourth Amendment to Amended and Restated Promissory Note, pursuant to which the Lender agreed to extend the maturity date of the Senior Note from November 30, 2016 to February 28, 2017. The principal amount and all unpaid accrued interest on the Senior Note was payable on February 28, 2017, or earlier in the event of default or a sale or liquidation of the Company. The Loan may be prepaid in whole or in part at any time by the Company without penalty. See Note 13 – Subsequent Events for additional information related to the Note's maturity date extension.

The Company granted the Lender a first priority security interest in all of the Company's assets, in order to secure the Company's obligation to repay the Loan, including a Deposit Account Control Agreement, dated as of July 8, 2016, which grants the Lender a security interest in certain bank accounts of the Company. The Loan Agreement contains customary negative covenants restricting the Company's ability to take certain actions without the Lender's consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. Upon the occurrence of an event of default, the Lender has the right to impose interest at a rate equal to eight percent (8.0%) per annum above the otherwise applicable interest rate (the "Default Rate"). The repayment of the Loan may be accelerated prior to the maturity date upon certain specified events of default, including failure to pay, bankruptcy, breach of covenant, and breach of representations and warranties.

The investor rights agreement of the Company's Series B preferred shares limits the total debt of the Company to $1 million. The Company has received waivers to temporarily exceed the limit in connection with the extensions of the Senior Note. The Senior Note contained financial covenants through June 30, 2016, which required the Company to meet certain minimum targets for earnings before interest, taxes and non-cash expenses, including depreciation, amortization and stock-based compensation ("EBITDAS").

On August 27, 2015, a supplier of the Company was granted an order of garnishment against the Company's funds held in a bank account in the amount of $83,766 for an unpaid debt, accordingly, such amount was classified as restricted cash. On September 16, 2015, the Company's Lender filed a motion with the court to intercede in the garnishment action on the grounds that it has a superior lien on the funds which was granted at a hearing on October 6, 2015. In addition, as a result of the garnishment action, the Lender notified the Company that an event of default has occurred on the Senior Note and the Loan is in default and immediately payable. On November 30, 2015, the court issued an order that the Company's Lender was the priority lienholder with regard to the funds being held in the bank account. Subsequent to receiving the court's order, the funds were released by the bank to the Company's Lender and the funds were applied against the Loan balance. The funds applied against the loan balance were advanced back to the Company in 2016. The Lender waived the events of default related to the garnishment in December 2015.

In connection with the Loan Agreement, the Company granted the Lender five-year warrants to purchase an aggregate of 1,875,000 shares of common stock at an exercise price ranging from $0.10 to $0.35 per share, of which 750,000 warrants were issued during the year ended December 31, 2015. The warrants contain customary anti-dilution provisions. The warrants had an aggregate grant date relative fair value of $472,100, of which $69,600 was recorded as debt discounts during the year ended December 31, 2015, and were amortized using the effective interest method over the term of the Senior Note. In addition, the Company agreed to modify the exercise price on 375,000 previously issued warrants from $0.35 to $0.12 effective November 11, 2015 which resulted in an additional debt discount of $1,800. The Company amortized $114,434 of the debt discount as interest expense during the year ended December 31, 2015. The debt discounts were fully amortized as of December 31, 2015. Including the value of warrants issued in connection with Senior Note and subsequent amendments, the Senior Note had an effective interest rate of 37% per annum.

Promissory Note

On October 30, 2013, the Company issued a note payable with a principal amount of $100,000 to a lender. The note bears interest on the unpaid principal balance until the full amount of principal has been paid at a floating rate equal to the Prime Rate plus four and one-quarter percent (4.25%) per annum (7.75% as of December 31, 2016). Under the terms of the note, the Company has agreed to make monthly payments of accrued interest. The Company's obligations are unsecured and are subordinate to its obligations pursuant to the Senior Note described above. The Loan may be prepaid in whole or in part at any time by the Company without penalty. The principal amount and all unpaid accrued interest was payable on October 31, 2016 (as amended). See Note 13 – Subsequent Events for additional information.

On January 11, 2016, the Company entered into an amendment to the Promissory Note which extended the maturity date of the note payable from November 1, 2015 to October 31, 2016. In consideration of the extension of the maturity date of the note payable, the Company issued to the lender a five-year warrant to purchase 75,000 shares of common stock at an exercise price of $0.25 per share. The warrants had a fair value of $15,500 using the Black-Scholes model which was established as debt discount and was amortized using the effective interest method over the remaining term of the Promissory Note. Including the value of the warrants issued in connection with the extension of the maturity date of the Promissory Note, the Promissory Note had an effective interest rate of 23% per annum during the extension period.

The Company amortized $15,500 and $15,333 of the debt discounts as interest expense during the years ended December 31, 2016 and 2015 and as of December 31, 2016, the debt discount was fully amortized.