Note 8 – Debt

Senior Secured Promissory Note

On April 14, 2014, the Company entered into a $5.0 million Senior Secured Promissory Note Purchase Agreement with MILFAM II L. P. (the "MILFAM Note" and the "MILFAM Note Agreement", respectively). The MILFAM Note bears interest at nine percent (9%) per annum, compounded semi-annually, and payable in arrears on a semi-annual basis. At the Company's option, the first two semi-annual interest payments were paid at eleven percent (11%) in kind in the form of additional promissory notes. The principal obligations under the MILFAM Note are due three (3) years from the effective date of the MILFAM Note. The MILFAM Note Agreement provided for the payment of a finance fee of 3.5% of the principal amount of the MILFAM Note at closing as well as providing a warrant exercisable to purchase up to 1.1 million shares of the Company's common stock at an exercise price per share of $0.01. The warrant would not be exercisable to the extent that doing so resulted in MILFAM and any related parties, in the aggregate, owning more than 19.9% of the Company's common stock. Further, until all of the obligations under the MILFAM Note are paid in full, MILFAM will have the right to participate in any future financing transactions consummated by the Company in an amount up to the greater of (1) the then-outstanding balance of obligations under the MILFAM Note and (2) $4.0 million. The MILFAM Note is guaranteed by the Company's subsidiaries and secured by a lien on all assets of the Company and its subsidiaries. Mr. Lloyd I. Miller, III, is the manager of MILFAM LLC, which is the general partner of MILFAM. Mr. Miller is a significant shareholder of the Company. The Company opted to pay the first interest payment at eleven percent (11%) in kind in the form of additional promissory notes, and paid the second interest payment in cash.

On September 16, 2014, 1.1 million warrants provided under the MILFAM Note Agreement were exercised in order to purchase 1.1 million unregistered shares of the Company's common stock at an exercise price of $0.01 per share, resulting in an aggregate purchase price of $11,000. The stock warrants were carried at a fair value as of the issuance date of approximately $1.3 million based on the Black-Scholes model using the following assumptions:

Expected life (in years)	3

Volatility	63.86	%

Risk Free interest rate	.82	%

Dividend yield (on common stock)	-

As of the issuance date, the relative value of the warrants was $1.0 million, which was the amount recorded as debt discount, with an offset to additional paid-in capital. The debt discount will be amortized over the life of the MILFAM Note, three years, and charged to interest expense using the effective interest rate calculation method.

On May 20, 2014, the Company entered into a $2.5 million Senior Secured Note Purchase Agreement with AB Opportunity Fund LLC and AB Value Partners, L.P. (the "AB Notes", the "AB Note Agreement", and the "AB Entities", respectively). The AB Notes are payable in full on the third anniversary from the effective date of the AB Notes. Interest will accrue at the rate of nine percent (9%), compounded semi-annually, and will be paid in arrears semi-annually, provided that the Company, at its option, elected to pay the first two semi-annual interest payments at a rate of eleven percent (11%) in kind in the form of additional promissory notes. As consideration for the AB Notes, the Company provided a fee of 3.5% of the principal amount of the AB Notes and warrants exercisable to purchase up to an aggregate, initially, of 550,000 shares of the common stock of the Company at an exercise price per share of $.01, provided that the AB Entities would not be permitted to exercise the warrants to the extent such exercise would result in any of the AB Entities and any related parties, in the aggregate, owning more than 19.9% of the Company's common stock. The warrants were exercisable by the AB Entities at any time prior to the third anniversary from the effective date of the AB Notes, in whole or in part, by surrendering the warrants and a form of exercise to the Company. The Company opted to pay the first interest payment at eleven percent (11%) in kind in the form of additional promissory notes, and intends to pay the second interest payment in cash.

On October 14, 2014, 550,000 warrants provided under the AB Note Purchase Agreement were exercised by the cashless exercise method, thus 2,895 shares were forfeited to pay for the warrants in lieu of cash. The Company's 550,000 stock warrants were carried at their fair value as of the issuance date of approximately $0.7 million based on the Black-Scholes model using the following assumptions:

Expected life (in years)	3

Volatility	63.86	%

Risk Free interest rate	.82	%

Dividend yield (on common stock)	-

As of the issuance date, the relative value of the warrants was $0.5 million, which was the amount recorded as debt discount, with an offset to additional paid-in capital. The debt discount will be amortized over the life of the AB Notes, three years, and charged to interest expense using the effective interest rate calculation method.

We incurred approximately $0.5 million of debt issuance costs in connection with the issuance of the three senior secured promissory notes issued during FY 2014 and are in compliance with all covenant requirements under the MILFAM Note Agreement and the AB Note Agreements.