NOTE E – DEBT AND LINE OF CREDIT

The Company’s Line of Credit and Debt consisted of the following as of December 31, 2016 and December 31, 2015:

	December 31, 2016		December 31, 2015
Loan and Security Agreement with Cherokee Financial, LLC: 5 year note at an annual interest rate of 8% plus a 1% annual oversight fee, interest only and oversight fee paid quarterly with first payment being due on May 15, 2015, annual principal reduction payment of $75,000 due each year beginning on February 15, 2016, with a final balloon payment being due on February 15, 2020. Loan is collateralized by a first security interest in building, land and property	$	1,125,000	$	1,200,000
Crestmark Line of Credit: 3 year line of credit with interest payable at a variable rate based on WSJ Prime plus 2% with a floor of 5.25%; loan fee of 0.5% annually & monthly maintenance fee of 0.3% on actual loan balance from prior month. Early termination fee of 3% if terminated in year 1 and 2% if terminated in year 2 or after (and prior to natural expiration). Loan is collateralized by first security interest in receivables and inventory.		639,000		777,000
		1,764,000		1,977,000

Less debt discount & issuance costs (Cherokee Financial, LLC loan)		(297,000)		(291,000)
Total debt, net	$	1,467,000	$	1,686,000

Current portion	$	714,000	$	852,000
Long-term portion, net of current portion	$	753,000	$	834,000

At December 31, 2016, the following are the debt maturities for each of the next five years:

2017	$	714,000	⁽¹⁾
2018		75,000
2019		75,000
2020		603,000
2021		0
	$	1,467,000

(1) Although the Crestmark Line of Credit does not mature until June 29, 2018, the balance on the line of credit is included in the debt maturity for 2017 given the “demand” nature of the line of credit.

LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC.

On March 26, 2015, the Company entered into a LSA with Cherokee Financial, LLC (“Cherokee”). The purpose of the Cherokee Loan and Security Agreement (the “Cherokee LSA”) was to refinance, at a better interest rate, the Company’s Series A Debentures and Cantone Asset Management Bridge Loan as well as the Company’s Mortgage Consolidation Loan with First Niagara Bank. The Cherokee loan is collateralized by a first security interest in the Company’s real estate and machinery and equipment. Under the Cherokee LSA, the Company was provided the sum of $1,200,000 in the form of a 5-year Note at an annual interest rate of 8%. The Company is making quarterly interest only payments on the Cherokee Note, with the first interest payment paid on May 15, 2015. The Company is also required to make an annual principal reduction payment of $75,000 on each anniversary of the date of the closing; with the first principal reduction payment being paid on February 15, 2016. A final balloon payment is due on March 26, 2020. In addition to the 8% interest, the Company pays Cherokee a 1% annual fee for oversight and administration of the loan. This oversight fee is paid in cash and is paid contemporaneously with the quarterly interest payments. The Company can pay off the Cherokee Note at anytime with no penalty; except that a 1% administration fee would be required to be paid to Cherokee to close out all participations.

The Company issued 1.8 million restricted shares of the Company’s common stock to Cherokee for payment of fees. In addition, if the loan was not repaid in full as of March 19, 2016, the Company was required to issue another 600,000 restricted shares of common stock to Cherokee. The Company issued these additional shares as required.

As placement agent for the transaction, Cantone Research, Inc. (“CRI”) received a 5% cash fee on the $1.2 million, or $60,000, and 200,000 restricted shares of the Company’s common stock. In addition, if the loan was not repaid in full as of March 19, 2016, the Company was required to issue another 196,000 restricted shares of common stock to CRI. The Company issued these additional shares as required.

The Company received net proceeds of $80,000 after $1,015,000 of debt payments, $60,000 in placement agent fees, $19,000 in legal fees, $19,000 in expenses, $3,000 in state filing fees and $4,000 in interest expense (for 8% interest on $511,000 in new participations received from February 24, 2015 through March 25, 2015). With the adoption of ASU 2015-03 in the first quarter of Fiscal 2016, these transaction costs (with the exception of the interest expense) are now being deducted from the balance on the Cherokee LSA, and are being amortized over the term of the debt. Both Fiscal 2016 and Fiscal 2015 include reclassifications to reflect the new presentation required under ASU 2015-03.

From these net proceeds, in April 2015, the Company also paid $15,000 in interest expense related to 15% interest on $689,000 in Series A Debentures and CAM Bridge Loan for the period of February 1, 2015 through March 25, 2015.

The Company recognized $186,000 in interest expense related to the Cherokee LSA in Fiscal 2016 (of which $90,000 is debt issuance cost amortization recorded as interest expense as a result of the adoption of new accounting standards in the first quarter of Fiscal 2016), and $143,000 in interest expense in Fiscal 2015 (of which $58,000 is debt issuance costs reclassified as interest expense).

The Company had $18,000 in accrued interest expense at December 31, 2016, and the Company had $13,000 in accrued interest expense at December 31, 2015.

As of December 31, 2016, the balance on the Cherokee LSA was $1,125,000, however the discounted balance was $828,000. As of December 31, 2015, the balance on the Cherokee LSA was $1,200,000, however the discounted balance was $909,000.

LINE OF CREDIT WITH CRESTMARK BANK (“CRESTMARK”)

On June 29, 2015 (the “Closing Date”), the Company entered into a three-year Loan and Security Agreement (“LSA”) with Crestmark, a new Senior Lender, to refinance the Company’s Line of Credit with Imperium Commercial Finance, LLC (“Imperium”). The Crestmark Line of Credit is used for working capital and general corporate purposes.

Under the LSA, Crestmark is providing the Company with a Line of Credit of up to $1,500,000 (“Maximum Amount”) with a minimum loan balance requirement of $500,000. The Line of Credit is secured by a first security interest in the Company’s inventory, and receivables and security interest in all other assets of the Company (in accordance with permitted prior encumbrances).

The Maximum Amount is subject to an Advance Formula comprised of: 1) 90% of Eligible Accounts Receivables (excluding, receivables remaining unpaid for more than 90 days from the date of invoice and sales made to entities outside of the United States), and 2) up to 40% of eligible inventory plus up to 10% of Eligible Generic Packaging Components not to exceed the lesser of $500,000 (“Inventory Sub-Cap Limit”), or 100% of the Eligible Accounts Receivable. Starting August 1, 2015, the Inventory Sub-Cap Limit has been reduced by $10,000 per month. This reduction of $10,000 per month continued until October 1, 2016, when the Inventory Sub-Cap Limit reached $350,000; where it will stay fixed.

So long as any obligations are due to Crestmark, the Company must comply with a minimum Tangible Net Worth (“TNW”) Covenant. Under the LSA, as amended, the Company must maintain a TNW of at least $650,000. Additionally, if a quarterly net income is reported, the TNW covenant will increase by 50% of the reported net income. If a quarterly net loss is reported, the TNW covenant will remain the same as the prior quarter’s covenant amount. TNW is defined as: Total Assets less Total Liabilities less the sum of (i) the aggregate amount of non-trade accounts receivables, including accounts receivables from affiliated or related persons, (ii) prepaid expenses, (iii) deposits, (iv) net lease hold improvements, (v) goodwill and (vi) any other asset that would be treated as an intangible asset under GAAP; plus Subordinated Debt. Subordinated Debt means any and all indebtedness presently or in the future incurred by the Company to any creditor of the Company entering into a written subordination agreement with Crestmark. The Company is in compliance with this covenant at December 31, 2016.

If the Company terminates the LSA at any time prior to June 29, 2018 (the 3-year anniversary of the LSA), an early exit fee of 2% of the Maximum Amount (plus any additional amounts owed to Crestmark at the time of termination) would be due.

In the event of a default of the LSA, which includes but is not limited to, failure of the Company to make any payment when due and non-compliance with the TNW covenant, Crestmark is permitted to charge an Extra Rate. The Extra Rate is the Company’s then current interest rate plus 12.75% per annum.

Under the LSA, interest on the Crestmark Line of Credit is at a variable rate based on the Wall Street Journal Prime Rate plus 2% with a floor of 5.25%. As of the date of this report, the interest rate on the Crestmark Line of Credit is 5.75%. In addition to the interest rate, on the Closing Date and on each one-year anniversary date thereafter, the Company will pay Crestmark a Loan Fee of 0.50%, or $7,500, and a Monthly Maintenance Fee of 0.30% of the actual average monthly loan balance from the prior month will be paid to Crestmark. In Fiscal 2016, the interest rates ranged from 9.35% to 9.6% (with interest and the monthly maintenance fee considered). As of the date of this report, the interest rate in effect is 10.41% (with all fees; including the weighted annual fee, which is charged on the closing date anniversary and is $7,500 regardless of our balance on the line of credit). The WSJ prime rate was increased another .25% effective March 16, 2017, and we expect our rate to increase by this amount on April 1, 2017.

In addition to the Loan Fee paid to Crestmark on the Closing Date, the Company had to pay a Success Fee (i.e. early termination fee) to Imperium in the amount of $50,000 on the Closing Date, and a Broker’s Fee of 5%, or $75,000, to Landmark Pegasus Inc. Prior to the Closing, the Company paid $12,000 in due diligence fees to Crestmark. The Company also incurred $3,000 of its own legal costs related to the Crestmark Line of Credit. With the exception of the early term fee ($50,000) paid to Imperium (which was expensed fully in the year ended December 31, 2015), these expenses are all being amortized over the term of the Crestmark Line of Credit, or three years. The Company recognized $32,000 of this expense in Fiscal 2016 and $17,000 of this expense in Fiscal 2015.

The Company recognized $98,000 in interest expense related to the Crestmark Line of Credit in Fiscal 2016, of which $32,000 was debt issuance costs reclassified as interest expense, and $72,000 in interest expense in Fiscal 2015, of which $17,000 was debt issuance costs reclassified as interest expense.

Given the nature of the administration of the Crestmark Line of Credit, at December 31, 2016, the Company had $0 in accrued interest expense related to the Crestmark Line of Credit, and there is $0 in additional availability under the Crestmark Line of Credit.

As of December 31 2016, the balance on the Crestmark Line of Credit was $639,000, and as of December 31, 2015, the balance on the Crestmark Line of Credit was $777,000.

PRIOR DEBT INSTRUMENTS AFFECTING FISCAL 2015

FIRST NIAGARA: MORTGAGE CONSOLIDATION LOAN

The Company refinanced its mortgage consolidation loan with First Niagara in March 2015. Fiscal 2016 did not include any expense related to First Niagara loan. Fiscal 2015 did include $5,000 in interest expense.

DEBENTURE FINANCING/BRIDGE LOAN

The Company refinanced its Series A Debentures and associated bridge loan in March 2015. Fiscal 2016 did not include any expense related to the Series A Debentures. Fiscal 2015 did include $22,000 in interest expense.

Line of Credit with Imperium

The Company refinanced its line of credit with Imperium in June 2015. Fiscal 2016 did not include any expense related to the Imperium Line of Credit. Fiscal 2015 included $137,000 in debt issuance costs (of which $69,000 was accelerated costs due to the early termination of the line of credit), and $39,000 in interest expense.