Note

Long-term Borrowings

Long-term borrowings consisted of the following (in

’000’s

	December 31,
	2019			2018
Notes Payable due July, 2022	$	1,995		$	1,995
Accrued interest – long term		255			148
Less unamortized discount and debt issuance costs		(222	)		(305	)
		2,028			1838
Current portion of long-term borrowing		-			-
Non-current portion of long-term borrowing	$	2,028		$	1,838

February 2015

we entered into a multiple advance term loan agreement and related agreements with MHW SPV II, LLC (‘‘MHW’’), an entity affiliated with the Chairman of our Board of Directors, for a loan in the maximum amount of

million. We borrowed

$945,000

under the terms of this loan agreement on

February 3, 2015

and executed a promissory note to evidence this loan and the terms of repayment.

July 2017,

we amended and restated the terms of this multiple advance term loan agreement whereby we increased the maximum principal amount of loans to

$2.5

million for up to

sixty

days, and

million thereafter. The term of the loan was modified to be

five

years from the date of modification, thereby extending the term of the

$945,000

loan to

July 19, 2022.

As part of this modification, the interest rate on the

$945,000

loan remains at a fixed annual rate of

12%,

however it was changed so that

is paid in cash monthly in arrears, and

is payable in kind, to be evidenced by additional promissory notes having an aggregate principal amount equal to the accrued but unpaid interest. We can prepay the loan at any time, subject to a prepayment fee of

if the prepayment is made between

July 20, 2019

and

July 19, 2020.

In conjunction with entering into the loan agreement with MHW, the Company and MHW also entered into a warrant agreement granting MHW the right to purchase up to

1,115,827

shares of the Company’s common stock. As part of the

July 2017

modification, we also modified the warrant to change the exercise price of the shares and to extend the term of the warrant to

July 19, 2022.

The warrant is now exercisable for a period of

five

years from

July 19, 2017

at an exercise price of

$0.10

for the

first

390,539

shares,

$0.20

for the next

390,539

shares and

$0.30

for the final

334,749

shares. The exercise price and number of shares of common stock issuable on exercise of the warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. The fair value of the modified warrant was determined to be approximately

$167,000

and the incremental value of the warrant compared to the original warrant was approximately

$6,000.

This amount was added to the remaining unamortized value of the original warrant such that approximately

$93,000

will be amortized using the straight-line method (which approximates the effective interest rate method) over the term of the loan. Amortization expense of approximately

$19,000

was recorded during each of the years ended

December 31, 2019

and

2018

for this warrant.

July 19, 2017,

we also borrowed an additional

$650,000

from MHW Partners, an entity affiliated with MHW. This loan ranks parri-passu with the

$945,000

promissory notes held by MHW and is subject to the same loan agreement. Similar to the notes held by MHW, this note issued to MHW Partners bears interest at

12%

per annum payable in cash monthly in arrears at a rate of

per annum and payable in kind at a fixed rate of

per annum and has a maturity date of

July 19, 2022.

We can prepay the note issued to MHW Partners at any time, subject to a prepayment fee of

if the prepayment is made between

July 20, 2019

and

July 19, 2020.

The obligations under the loans to MHW and MHW Partners are secured by substantially all of the Company’s assets pursuant to the terms of a security agreement. At the time we entered into the revolving line of credit described below, MHW and MHW Partners executed a subordination agreement to evidence their agreement that their security interest is subordinated to the security interest of Texas Capital Bank, N.A.

In conjunction with entering into the loan with MHW Partners, we entered into a warrant granting MHW Partners the right to purchase up to

767,500

shares of our common stock. The warrant is exercisable for a period of

years from

July 19, 2017,

at an exercise price of

$0.10

for the

first

268,625

shares,

$0.20

for the next

268,625

shares and

$0.30

for the final

230,250

shares. The exercise price and number of shares of common stock issuable upon exercise of this warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transactions. The fair value of the warrant granted was approximately

$115,000.

Using the relative-fair value allocation method, the debt proceeds were allocated between the debt value and the fair value of the warrants, resulting in a recognition of a discount on the loan of approximately

$98,000

and a corresponding increase to additional paid-in capital. This discount will be amortized using the straight-line method (which approximates the effective interest rate method) over the term of the loan. Approximately

$20,000

was amortized during each of the years ended

December 31, 2019

and

2018.

Peter H. Woodward, the Chairman of our Board of Directors, is a principal of MHW Capital Management LLC, which is the investment manager of MHW and MHW Partners. MHW Capital Management LLC is entitled to a performance-related fee tied to any appreciation in the valuation of the common stock in excess of the applicable strike price under the warrants.

October 6, 2017,

we entered into an amendment to our multiple advance term loan agreement and the related security agreement with MHW and MHW Partners, to add new lenders to the loan and security agreements. Upon execution, Mr. Glen Ikeda and Mr. Andrew Berg became new lenders to the Company. In accordance with the terms of the Amendment, Mr. Ikeda then provided a loan in the amount of

$300,000

and Mr. Berg provided a loan in the amount of

$100,000

(collectively the “New Loans”).

The New Loans have a maturity date of

July 19, 2022.

The New Loans do

not

bear interest and we are permitted to make optional prepayments at any time without premium or penalty, provided that if we prepay the outstanding principal amount of a New Loan prior to the

second

anniversary of the date of the applicable note, then the total amount of such prepayment will

not

exceed

95%

of the total principal amount of the applicable note and any remaining principal amount under the note shall be fully and finally cancelled, extinguished, forgiven and terminated without further action of any party.

The New Loans include customary affirmative covenants for secured transactions of this type, including compliance with laws, maintenance of insurance, maintenance of assets, timely payments of taxes and notice of adverse events. The loan agreement and ancillary documents include customary negative covenants including limitations on liens on assets of the Company.

Concurrent with the New Loans, we entered into a warrant with Mr. Ikeda granting Mr. Ikeda the right to purchase up to

954,231

shares of our common stock. This warrant is exercisable until

July 19, 2022,

at an exercise price of

$0.10

for the

first

498,981

shares,

$0.20

for the next

273,981

shares and

$0.30

for the final

181,269

shares. The exercise price and number of shares of common stock issuable on exercise of this warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. Mr. Ikeda exercised the warrant in

December 2018.

Concurrent with the new loans, we entered into a warrant with Mr. Berg granting Mr. Berg the right to purchase up to

318,077

shares of our common stock. This warrant is exercisable until

July 19, 2022,

at an exercise price of

$0.10

for the

first

166,327

shares,

$0.20

for the next

91,327

shares and

$0.30

for the final

60,423

December 2018.

The fair value of the

two

warrants granted in connection with the New Loans was approximately

$367,000.

Using the relative fair-value allocation method, the debt proceeds were allocated between the debt value and the fair value of the warrants, resulting in a recognition of a discount on the new loans of approximately

$191,000,

with a corresponding increase to additional paid-in capital. This discount will be amortized to interest expense over the term of the loan using the straight-line method (which approximates the effective interest rate method). Approximately

$40,000

was amortized during each of the years ended

December 31, 2019

and

2018.

Future principal repayments on the notes payable as at

December 31, 2019

are as follows (in

’000’s

2020	$	-
2021		-
2022		1,995
Total	$	1,995