(

)

Term Loan

, Revolving Line of Credit and Warrants

April 27, 2017,

the Company entered into a

$1,500,000

loan agreement with Partners For Growth V, L.P. (“PFG”), which was funded by PFG on

April 28, 2017 (

the

“2017

Loan”). The

2017

Loan, which matures on

April 27, 2019,

provides for interest only payments during the term of the loan with principal and any accrued interest and fees due upon maturity. The

2017

Loan bears interest at a fixed aggregate per annum rate equal to

16%

per annum, of which

9.5%

per annum rate is payable monthly in cash and

6.5%

per annum rate is accrued monthly and due upon maturity. In addition, the Company agreed to pay PFG a cash fee of up to

$100,000

payable upon maturity (the “back-end fee”),

$76,000

of which was earned on

April 27, 2017,

and

$24,000

of which is earned at the rate of

$1,000

per month on the

first

day of each month if the loan principal (or any amount thereof) is outstanding during any day of the prior month.

Additionally, the

2017

Loan provides for the Company’s issuance of up to

250,000

common shares to PFG, of which

190,000

was eaned by PFG upon signing (

April 27, 2017)

and

60,000

of which is earned at the rate of

2,500

per month on the

first

day of each month if the loan principal (or any amount thereof) is outstanding during any day of the prior month. The

2017

Loan provided for certain financial covenants related to the revenue achievement and maintenance of tangible net worth. PFG can accelerate the maturity of the loan in case of a default and the Company can prepay the loan before maturity without interest prepayments or penalty. The Company has pledged all of its assets as collateral for the

2017

Loan, including all its accounts, inventory, equipment, deposit accounts, intellectual property and all other personal property. The

2017

Loan is subordinate to the Bridge Bank line of credit (see Note

Accounts Receivable Line of Credit).

The requirement to issue

60,000

shares of the Company’s common stock over the term of the loan is an embedded derivative (an embedded equity forward). The Company evaluated the embedded derivative in accordance with ASC

815

25.

The embedded derivative is

not

clearly and closely related to the debt host instrument and therefore is being separately measured at fair value, with subsequent changes in fair value being recognized in the consolidated statements of operations.

The proceeds received upon issuing the loan were allocated to: i) common stock, for the fair value of the

190,000

shares of common stock initially issued to the lender; ii) the fair value of the embedded derivative; and iii) the loan host instrument. Upon issuance of the loan, the Company recognized

$1,576,000

of principal payable to PFG, representing the stated principal balance of

$1,500,000

plus the initial back-end fee of

$76,000.

The initial carrying value of the loan was recognized net of debt discount aggregating approximately

$326,000,

which is comprised of the following:

Fees paid to the lender and third parties	$	44,000
Back-end fee		76,000
Estimated fair value of embedded equity forward		49,000
Fair value of 190,000 shares of common stock issued to lender		157,000
Aggregate discount amount	$	326,000

The bifurcated embedded derivative and the debt discount are presented net with the related loan balance in the consolidated balance sheets. The debt discount is being amortized to interest expense over the loan’s term using the effective interest method. During the fiscal year ended

March 31, 2018,

the Company amortized discounts of approximately

$127,000

to interest expense. As of

June 30, 2018,

the Company had issued to PFG

375,000

common shares under the loans.

PFG’s ability to call the debt on default (contingent put) and its ability to assess interest rate at a default rate (contingent interest) are embedded derivatives, which the Company evaluated. The fair value of these embedded features was determined to be immaterial and was

not

bifurcated from the debt host for accounting purposes.

Between

June 24, 2017

and

March 25, 2018,

the Company was

not

in compliance with the loan’s revenue and tangible net worth financial covenants and was subject to a default interest rate of

22%

per annum which it accrued and paid when due during this period.

March 26, 2018,

concurrent with the execution of the Securities Purchase Agreement for the Series E Shares (see Note

– Preferred Stock and Warrants - Series E Senior Convertible Voting Perpetual Preferred Stock), the Company and PFG entered into a modification agreement providing for the restructuring of certain terms associated with approximately

$1.7

million in indebtedness under the

2017

Loan. Subject to the sale of at least

$1.0

million in Series E Shares, PFG agreed to waive all current defaults and cease applying the applicable default interest rate, returning to the stated non-default rate of

16%,

and to lower the revenue and tangible net worth covenants for the remaining term of the loan. As consideration for the modifications, the Company reduced the exercise price of outstanding warrants previously granted to PFG pursuant to the

2014

Loan Agreement and Credit Line to purchase

260,000

shares of the Company’s common stock from

$1.42

$0.25

per share and extended the exercisability of the warrants by

one

year to

March 13, 2020.

The amendments to the

2017

Loan were recognized as a loan modification. The change in fair value of the warrants of

$43,700,

resulting from the reduced strike price and extension of term, was recognized as a discount to the

2017

Loan and is being amortized to interest expense over the remaining term of the

2017

Loan.

The Company anticipates it will need to seek additional funds through the issuance of new debt, equity securities or product line sales in order to repay the

2017

Loan (including accrued interest and back end fees) in full upon maturity or otherwise enter into a refinancing agreement with PFG. However, there can be

assurances that such financings, re-financing or product line sales will be available at all, or on terms acceptable to the Company.