NOTE F – LINES OF CREDIT

Line of Credit with Imperium Commercial Finance, LLC (“Imperium”)

On January 16, 2013 (the “Imperium Closing Date”), the Company entered into a 3-year Loan and Security Agreement (“LSA”) with Imperium, a new Senior Lender, to refinance its Line of Credit with Medallion Financial Corp (“Medallion”), see below for information on the Medallion Line of Credit.

Under the LSA, Imperium agreed to provide the Company with up to a maximum amount of $1,500,000 (“Maximum Funding Amount”) under a revolving secured loan facility (the “Imperium Line of Credit”), which is secured by a first security interest in all of the Company’s receivables, inventory, and intellectual property rights along with a second security interest in the Company’s machinery and equipment (together the “Collateral”). The Maximum Funding Amount is subject to a discretionary borrowing base comprised of: 85% of eligible accounts receivables (excluding, without limitation, receivables remaining unpaid for more than 90 days from invoice date or 60 days from due date, contra receivables, and affiliated receivables), up to the lesser of 60% of eligible finished goods inventory at cost or 75% of appraised net orderly liquidation value of inventory, and a receivable dilution rate of less than 5% (the “Borrowing Base”).

In addition to the Imperium Line of Credit, the Imperium facility included a discretionary Supplemental Advance of up to $500,000 (the “Imperium Supplemental Advance”). Supplemental advances, once repaid, could not be re-borrowed, and advances were secured with the same Collateral as the Imperium Line of Credit.

The Imperium Line of Credit is used for working capital and general corporate purposes, and the Imperium Supplemental Advance was used for costs associated with obtaining marketing clearance of our oral fluid products and costs associated with other new market opportunities.

On the Imperium Closing Date, the Company paid a closing fee of $10,000 to Imperium, and granted Imperium a 7-year warrant to purchase 2,000,000 common shares of the Company at an exercise price of $0.18 (the “Imperium Warrants”). The Company also paid an early termination fee of $25,000 to Medallion on the Imperium Closing Date, a finder’s fee of 3% of the gross proceeds from the Imperium financing, or $60,000, and a 5-year warrant (the “Monarch Warrant”) to purchase 60,000 common shares of the Company at an exercise price of $0.18 to Monarch Capital Group, LLC.

The Company also pays Imperium an Unused Line Fee in an amount equal to 2% (a) from and after the Imperium Closing Date through and including March 31, 2013, the Maximum Revolving Amount less the aggregate amounts outstanding to Imperium and (b) at all time from and after April 1, 2013, the Maximum Amount of $2,000,000 less the aggregate amounts outstanding to Imperium. The Unused Line Fee for each month (except for the month in which the termination occurs) is payable on the first day of each calendar month following the Imperium Closing Date; the final monthly installment of the Unused Line Fee is payable on the termination date. The Company also pays to Imperium a Collateral monitoring fee of $2,500 on the first day of each month during the term of the LSA.

A success fee of $175,000 (“Success Fee”) is due and payable if Imperium terminates due to an event of default, or if the Company terminates and pre-pays all amounts due to Imperium prior to the stated expiration date of January 16, 2016, however, the Success Fee is not due and payable if Imperium has exercised all its rights under the Imperium Warrant and sells all of the common shares underlying the Imperium Warrant on or before January 16, 2016 and if on the date that Imperium completes such sale(s), the price per share of the Company’s common shares is at least $0.70 per common share.

Under the LSA, interest on the Imperium Line of Credit and the Imperium Supplemental Advance is in cash at a rate equal to eight percent (8%) per annum and (ii) in kind (i.e., “PIK” interest) at a rate equal to two percent (2%) per annum (collectively, the “Interest Rate”), all of which “PIK” interest shall be added to and constitute a part of the aggregate principal amount of outstanding Line of Credit borrowing or aggregate principal amount of outstanding Supplemental Advances, as applicable, as and when such “PIK” interest becomes due and payable hereunder. Interest is payable on the Line of Credit and Supplemental Advance in arrears for the preceding calendar month on the first day of each calendar month.

So long as any obligations are due to Imperium under the LSA, the Company must maintain Net Borrowing Availability of not less than $100,000 (Net Borrowing Availability is defined as borrowing availability less the amounts due under the Imperium Line of Credit). There are also certain minimum EBITDA (Earnings Before Interest, Taxes Depreciation and Amortization) requirements. More specifically, the Company must have EBITDA of not less than (a) $25,000 for the Fiscal Quarter ended on or about March 31, 2013, (b) $100,000 for the Fiscal Quarter ended on or about June 30, 2013, (c) $200,000 for the Fiscal Quarter ending on or about September 30, 2013, and (d) $300,000 for the Fiscal Quarter ending on or about December 31, 2013 and for each of the Fiscal Quarters thereafter.

The Company incurred $435,000 in costs related to the Imperium Line of Credit, which included the costs noted previously as well as $39,000 to Imperium for their legal fees, $2,000 for the Company’s legal fees and $9,000 in capitalized deferred financing costs and $290,000 as debt discount associated with the warrants issues to Imperium and Monarch. With the exception of the early termination fee of $25,000 paid to Medallion (which was fully recognized in the three months ended March 31, 2013), these costs are being amortized over the term of the facility (3 years). The Company recognized $257,000 of these costs in Fiscal 2013, of which $193,000 was debt discount recorded against the line of credit, and $0 in costs in Fiscal 2012 (as the Company didn’t enter into the LSA with Imperium until January 2013). The Company incurred $122,000 in interest expense in Fiscal 2013, and $0 in interest expense in Fiscal 2012 (as the Company did not enter into the LSA with Imperium until January 2013).

In an event of default, which includes but is not limited to, failure of the Company to make any payment when due, and non-compliance with the Net Borrowing Availability and minimum EBITDA requirements, the interest rate can be increased by 4% for as long as the event of default occurs. Imperium’s other remedies include, but are not limited to, termination or suspension of Imperium’s obligation to make further advances to the Company, declaration of all amounts owed to Imperium due and payable. The Company did not comply with the minimum EBITDA requirement for the quarter ending March 31, 2013, however, upon conferences with Imperium, on May 20, 2013, Imperium waived the EBITDA requirement for the quarter ended March 31, 2013. Imperium was paid $10,0000 for costs related to account review. The Company also did not comply with the EBITDA requirement for the quarter ended June 30, 2013 or September 30, 2013, and as of the date of this report, the Company is not in compliance with the EDBITDA requirement for the quarter ended December 31, 2013 (to be measured upon the filing of this Form 10-K). EBITDA non-compliance constitutes an event of default under the Imperium Line of Credit. The increase in interest rate, given the Company’s current advances under the Imperium Line of Credit would not be material, however, if Imperium were to suspend or terminate further advances, or declare all amounts due and payable, this would have a material adverse effect on the Company’s business and negatively impact the Company’s ability to continue operations.

In late July 2013, Imperium notified the Company that it was reducing the Maximum Funding Amount on the Imperium Line of Credit from $1,500,000 to $1,100,000 (however, the Company must continue to maintain minimum Net Borrowing Availability of $100,000 so in essence the maximum amount available under the Imperium Line of Credit is $1,000,000) and that no further advances would be made under the Imperium Supplemental Advance. We are currently in discussions with Imperium related to the EBITDA non-compliance and any further actions they may take.

The balance on the Imperium Line of Credit was $980,000, and the balance on the supplemental advance was $200,000, for a total loan balance of $1,180,000 at December 31, 2013. There was a debt discount recorded in the amount of $193,000 in Fiscal 2013 related to securities issued in connection with the Imperium Line of Credit. There was $0 outstanding to Imperium at December 31, 2012, as the Company did not enter into the LSA with Imperium until January 2013. As of December 31, 2013, additional loan availability on the line of credit was $20,000 and since Imperium suspended further advances under the Supplemental Advance, there was $0 in availability under the Supplemental Advance, for a total Loan Availability of $20,000 at December 31, 2013.

Loan and Security Agreement with Medallion

On April 20, 2012 (the “Medallion Closing Date”), the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Medallion to refinance its Line of Credit with Rosenthal and Rosenthal, Inc (“Rosenthal”; see below for information on the Rosenthal Line of Credit).

Under the Loan Agreement, Medallion provided the Company with up to $1,000,000 under a revolving secured line of credit (the “Medallion Line of Credit”), which was secured by a first security interest in all of the Company’s receivables, inventory, and intellectual property rights along with a second security interest in the Company’s machinery and equipment. The maximum amount available under the Medallion Line of Credit was subject to an Advance Rate that consisted of: 85% of eligible accounts receivable and up to 30% of eligible inventory (not to exceed $150,000).

From the loan availability on the Medallion Closing Date, the Company drew approximately $566,000 to pay off our Line of Credit with Rosenthal. The Company was charged a facility fee of 1% of the balance of the Medallion Line of Credit on the Medallion Closing Date and the same facility fee of 1% would be charged on each anniversary of the Medallion Closing Date. Under the Loan Agreement, interest on outstanding borrowings was payable monthly and was charged at an annual rate equal to 4% above the Wall Street Journal Prime rate as published from time to time. The Company was subject to two audits per year by Medallion (provided we were not in default) at a rate of $950.00 per person per day. Prior to the Medallion Closing Date, the Company also paid a non-refundable fee in the amount of $10,000 to Medallion for field exam and due diligence costs.

The Company incurred $20,000 in costs related to the Medallion Line of Credit. These costs were fully expensed in Fiscal 2012 so, although the Medallion Line of Credit was in place for a few weeks in January 2013, there was $0 in cost expensed in Fiscal 2013. The Company incurred $8,000 in interest expense in Fiscal 2013 (as the Medallion Line of Credit was only in place for a few weeks in January 2013) and $42,000 in interest expense in Fiscal 2012.

The amount outstanding on the Medallion Line of Credit at the end of Fiscal 2013 was $0 since, on January 16, 2013, all indebtedness due to Medallion was paid in full and Medallion’s security interest in the Company’s assets were terminated. The amount outstanding on the Medallion Line of Credit at the end of Fiscal 2012 was $321,000.

Line of Credit with Rosenthal and Rosenthal, Inc. (“Rosenthal”)

In July 2009, the Company entered into a Financing Agreement (the “Financing Agreement”) with Rosenthal. Under the Financing Agreement, Rosenthal provided the Company with up to $1,500,000 under a revolving secured line of credit (“Rosenthal Line of Credit”). The Rosenthal Line of Credit was collateralized by a first security interest in all of the Company’s accounts receivables, inventory, and intellectual property, and a second security interest in the Company’s machinery and equipment, leases, leasehold improvements, furniture and fixtures. The maximum availability of $1,500,000 was subject to an availability formula based on certain percentages of accounts receivable and inventory, and elements of the availability formula were subject to periodic review and revision by Rosenthal. Under the Financing Agreement, the Company paid Rosenthal an administrative fee of $1,500 per month and an annual fee of $15,000. Under the Financing Agreement, interest was payable monthly, and was charged at variable rates (based on the Prime Rate), with minimum monthly interest of $4,000.

On February 28, 2012, the Company gave Rosenthal written notice of non-renewal as provided under the Financing Agreement, and in April 2012, the Company drew approximately $566,000 from our Medallion Line of Credit to pay off the Rosenthal Line of Credit.

The Company incurred $41,000 in costs related to the Rosenthal Line of Credit. These costs were amortized over the three-year term of the Rosenthal Line of Credit. The Company amortized $0 of these costs in Fiscal 2013 (given the Rosenthal Line of Credit was terminated on May 30, 2012), and $7,000 of these costs in Fiscal 2012.

The Company incurred $0 in interest expense in Fiscal 2013 (again, given the May 2013 termination date), and $19,000 in Fiscal 2012. There was $0 outstanding on the Rosenthal Line of Credit at the end of Fiscal 2013 and Fiscal 2012.