7. Notes Payable

On March 24, 2004, the Company issued a note payable to a bank for $201,024 , bearing a current interest rate of 6.25 % per annum (the “Bank Loan”). Monthly principal and interest payments are $3,826 each with the final payment due on April 30, 2014. The note is secured by the personal guarantees of the Company’s founders, as well as a director. The guarantee by the director is secured by the pledge of the directors’ certificate of deposit in the amount of $ 200,000 . In addition, the note is secured by a senior secured interest on all business assets of the Company. The obligation is subject to certain covenants, which require that the Company maintain continuity of operations and which include limitations regarding the Company’s indebtedness. In addition, the bank is a party to an intercreditor agreement involving Authority Loan No. 1 and Authority Loan No. 2 (together, the “Authority Loans”), as discussed and defined below, which provides for cross notifications between the lenders. As of March 31, 2014, the principal amount outstanding under this bank loan was $6,354.

On July 17, 2009, the Company issued a note payable to the Ohio State Development Authority in the amount of $1,012,500, bearing interest at a rate of 6.00 % per annum (“Authority Loan No. 1”). Pursuant to the terms of the loan, the Company was required to pay only interest through September 30, 2010 and then monthly principal and interest payments of $ 23,779 each through September 1, 2015 . The note is secured by a senior secured interest on all business assets financed with loan proceeds, as well as a second secured interest in all business assets. Upon maturity, by acceleration or otherwise, the Company shall pay a loan participation fee of $101,250 , which is accounted for as a loan premium, accreted monthly, utilizing the interest method, over the term of the loan. Intellinetics and the Ohio State Development Authority entered into a Notice and Acknowledgement of Modification to Payment Schedule relating to Authority Loan No.1, deferring principal and interest payment until December 31, 2013. As of March 31, 2014, the principal amount outstanding under Authority Loan No. 1 was $681,276.

On June 3, 2011, the Company issued a note payable to the Ohio State Development Authority in the amount of $750,000 , bearing interest at a rate of 1 % per annum for the first 12 months, then interest at rate of 7 % per annum for the second 12 months (“Authority Loan No. 2”). The Company was not obligated to remit payments of principal until September 1, 2013. The monthly principal and interest payments, beginning on the third anniversary of the loan origination, are $14,850 and are payable on a monthly basis through July 13, 2017. The note is secured by a senior secured interest on all business assets financed with loan proceeds, as well as a second secured interest in all business assets. Upon maturity, by acceleration or otherwise, the Company shall pay a loan participation fee of $75,000 , which is accounted for as a loan premium, accreted monthly utilizing the interest method, over the term of the loan. The interest rate of 1% during the first 12 months of this loan was considered to be below market for that period. The Company further determined that over the life of the loan, the effective interest rate was 5.6 % per annum. Accordingly, during the first 12 months of the loan, the Company recorded interest expense at the 5.6 % rate per annum. The difference between the interest expense accrual at 5.6% and the stated rate of 1% over the first 12 months is credited to deferred interest. The deferred interest amount that is accumulated over the first 12 months of the loan term will be amortized as a reduction to interest expense over the remaining term of the loan. At March 31, 2014 and December 31, 2013 deferred interest of $81,328 and $ 83,942 , respectively, was reflected within long-term liabilities on the accompanying condensed consolidated balance sheets. Intellinetics and the Ohio State Development Authority entered into a Notice and Acknowledgement of Modification to Payment Schedule, deferring principal and interest payment until December 31, 2013. As of March 31, 2014, the principal amount outstanding under Authority Loan No. 2 was $718,389.

The Authority Loans were granted to the Company in connection with the State of Ohio’s economic development programs. The proceeds from these loans were used by the Company to support its efforts in developing software solutions for its customers.

These Authority Loans are subject to certain covenants and reporting requirements. The material covenants include:

	⋅	Providing quarterly financial information and management certifications;
	⋅	Maintaining our principal office in the state of Ohio;
	⋅	Maintaining insurance for risk of loss, public liability, and worker’s compensation;
	⋅	Delivering notice in the event of default, any pending or threatened action that would materially impair the company;
	⋅	Permitting the inspection of books, records, and premises;

	⋅	Not selling or disposing of substantially all of our assets or equity or merging or consolidating with another entity without consent; and
	⋅	Not pledging or encumbering our assets.

Additionally, Intellinetics is required to, within three years of the respective loan origination dates of each of the Authority Loans, have created and/or retained an aggregate of 25 full time jobs in the State of Ohio. Should Intellinetics not have attained these employment levels by the respective dates, then the interest rates on the Authority Loans shall increase to 10% per annum. The Authority Loans are subject to an intercreditor agreement involving the Bank Loan, which provides for cross notifications between the lenders in an event of a default. We have had past instances of non-compliance with certain of the loan covenants. We are currently in compliance with the loan covenants. There can be no assurance that we will not become non-compliant with one or more of these covenants in the future.

On August 7, 2012, the Company issued a $400,000 Promissory Note to a lender. The principal sum due to the lender was prorated based on the consideration actually funded by the lender, plus an approximate 10 % Original Issue Discount (“OID”) that was prorated based on the consideration actually funded by the lender as well as any other interest or fees, such that the Company was only required to repay the amount funded. The initial proceeds received on August 8, 2012 were $100,000, and the Company did not receive any further proceeds from the lender. On January 30, 2013, the Company paid off, in full, all principal plus fees in the total amount of $154,292. The termination of the option to exercise a beneficial conversion feature resulted in a derivative gain of $15,470 on January 30, 2013. The Company does not have any on-going relationship with the lender.

On November 12, 2013, the Company issued two convertible promissory notes in an aggregate amount of $160,000 to two accredited investors who are associated with each other. The Company received proceeds in the amount of $160,000. The notes provide for maturity on July 31, 2014 and provide for 10%interest until maturity. The note holders have a right, at their sole discretion, to convert the notes into equity under certain circumstances at $0.10 per share. If the notes are not paid off by the Company, with the consent of the investors, by the maturity date or converted in to equity at the election of the investors prior to the maturity date, the note will accrue interest in the amount of 15 % from the maturity date until the note is paid in full. Under the terms of the notes, the Company agreed to seek shareholder approval to increase the number of authorized shares by at least 10,000,000 shares on or before July 30, 2014. The Company used the proceeds for working capital and for general corporate purposes.

On December 27, 2013, the Company issued two convertible promissory notes in an aggregate amount of $160,000 to two accredited investors who are associated with each other. The Company received proceeds in the amount of $160,000. The notes provide for maturity on July 31, 2014 and provide for 10% interest until maturity. The note holders have a right, at their sole discretion, to convert the notes into equity under certain circumstances at $0.08 per share. If the notes are not paid off by the Company, with the consent of the investors, by the maturity date or converted in to equity at the election of the investors prior to the maturity date, the note will accrue interest in the amount of 15 % from the maturity date until the note is paid in full. Under the terms of the notes, the Company agreed to seek shareholder approval to increase the number of authorized shares by at least 10,000,000 shares on or before July 30, 2014. The Company used the proceeds for working capital and for general corporate purposes.

On February 4, 2014, the Company issued two convertible promissory notes in a maximum aggregate principal amount of $ 350,000 to two accredited investors who are associated with each other. By March 31, 2014, the Company received a portion of the proceeds from the issuance of the notes in the amount of $ 240,000, and the Company received the remaining $110,000 after March 31, 2014. The notes mature on September 30, 2014, and bear interest at an annual rate of interest of 10 % until maturity. Each note holder has a right, in their sole discretion, to convert the notes into shares of common stock, par value $ 0.001 per share, of the Company under certain circumstances at a conversion rate of $ 0.08 per share. If either note has not been fully repaid by the Company by the maturity date or converted into shares at the election of the note holders prior to the maturity date, then such note will accrue interest at the annual rate of 15 % from the maturity date until the date the convertible note is repaid in full. Under the terms of the convertible notes, the Company agreed to seek shareholder approval to increase the number of authorized shares of the Company by at least 20,000,000 shares on or before September 30, 2014. The Company intends to use the proceeds of the convertible notes for working capital and general corporate purposes.

The table below reflects all notes payable at March 31, 2014 and December 31, 2013, respectively, with the exception of related party notes disclosed in Note 8 - Notes Payable - Related Parties.

	March 31,		December 31,
	2014		2013
Bank Loan, due April 30, 2014	$	6,354	$	13,872
Authority Loan No. 1, due September 1, 2015		681,276		741,788
Authority Loan No. 2, due August 1, 2018		718,389		750,000
Note payable due July 31, 2014		160,000		160,000
Note payable due July 31, 2014		160,000		160,000
Note payable due September 30, 2014		120,000		-
Note payable due September 30, 2014		120,000		-
Total notes payable	$	1,966,019	$	1,825,660
Less current portion		(949,765)		(711,266)
Long-term portion of notes payable	$	1,016,254	$	1,114,394

Future minimum principal payments of these notes payable with the exception of the related party notes in Note 8 - Notes Payable - Related Parties, as described in this Note 7 are as follows:

For the Twelve-Month
Period Ended March 31,		Amount
2015	$	949,765
2016		571,632
2017		151,899
2018		162,880
2019		129,843
Total	$	1,966,019

As of March 31, 2014 and December 31, 2013, accrued interest for these notes payable with the exception of the related party notes in Note 8 - Notes Payable - Related Parties, was $160,184 and $155,199, respectively, and was reflected within accounts payable and accrued expenses on the condensed consolidated balance sheets. As of March 31, 2014 and December 31, 2013, accrued loan participation fees were $140,649 and $134,576, respectively, and reflected within accounts payable and accrued expenses on the condensed consolidated balance sheets. As of March 31, 2014 and December 31, 2013, deferred financing costs were $16,561 and $18,640, respectively, and were reflected within other assets on the condensed consolidated balance sheets.

For the three months ended March 31, 2014 and 2013, interest expense, including the amortization of deferred financing costs, accrued loan participation fees, original issue discounts, deferred interest and related fees and the embedded conversion feature was $42,139 and $56,156, respectively.