NOTE 5 — LINES OF CREDIT AND OTHER BORROWINGS

Lines of Credit

On May 24, 2012, the Company entered into two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”), as amended on August 6, 2012 (“Amendment No. 1”), which provide for borrowings against certain domestic accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the “Domestic Revolver”), and borrowings against certain export related accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the “Ex-Im Revolver”), for a combined aggregate commitment of borrowings up to $8.0 million. The lines of credit mature on May 1, 2014, at which date any remaining borrowings and accrued interest under the lines of credit become due and payable. As of December 31, 2012, the Company had outstanding borrowings totaling approximately $1.6 million, which included $0 under the Domestic Revolver and $1.6 million under the Ex-Im Revolver.

Lockbox arrangements under the revolving bank facilities provide that substantially all of the income generated is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of Comerica Bank. Cash is disbursed from Comerica Bank to the Company only after payment of the applicable debt service and principal. At December 31, 2012, there were no restricted cash amounts. The Company’s obligations are generally secured by substantially all of the Company’s assets now owned or hereinafter acquired.

The Credit Agreements require the Company to maintain compliance with certain financial and non-financial covenants, as defined therein. If a default occurs, Comerica Bank may declare the amounts outstanding under the Credit Agreements immediately due and payable. As of December 31, 2012, the Company was in compliance with these covenants.

The interest rates on the outstanding principal balance of the credit facilities bear interest at annual percentage rates equal to the daily adjusting LIBOR rate, plus spreads of 5.25% for the Domestic Revolver and 4.25% for the Ex-Im Revolver. The daily adjusting LIBOR rate is subject to a floor of 1.00% per annum. The Company is also required to pay an unused commitment fee of 0.25% based on a portion of the undrawn lines of credit, payable quarterly in arrears. During the year ended December 31, 2012, the Company incurred $232,000 of interest expense associated with the credit facilities, of which approximately $19,000 was payable at December 31, 2012. Included in interest expense during the year ended December 31, 2012 is $91,000 of amortization of deferred debt issuance costs and $43,000 of amortization of the discount on lines of credit.

Pursuant to the Credit Agreements, the Company paid both the first and second annual $120,000 commitment fees, each being one and one-half percent of the aggregate $8.0 million commitment, totaling $240,000. The commitment fees and the legal costs associated with acquiring the credit facilities were capitalized and are being amortized on a straight-line basis as interest expense over the term of the Credit Agreements.

As additional consideration for the lines of credit, the Company also issued warrants to Comerica Bank (the “Comerica Warrants”) to purchase up to 80,000 shares of the Company’s common stock at an exercise price of $2.83 per share. The Comerica Warrants vest in four equal quarterly tranches beginning on May 24, 2012 and are exercisable once vested. The Comerica Warrants may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrants into a number of shares, in whole or in part. In February 2013, Comerica Bank exercised 60,000 of the 80,000 warrants pursuant to the Notice of Exercise resulting in a net issuance of 30,515 shares of common stock. These remaining warrants to purchase 20,000 shares of common stock have an expiration date of May 24, 2017. The fair value of the Comerica Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.00 years; volatility of 99.55%; annual dividend per share of $0.00; and risk-free interest rate of 0.77%; and resulted in an estimated fair value of $135,000 which was recorded as equity and resulted in a discount to the credit facilities at issuance. The discount is being amortized on a straight-line basis to interest expense over the term of the Credit Agreements.

In connection with Amendment No. 1, the Company reduced the exercise price of the Comerica Warrants from $2.83 to $2.00 per share. The fair value of the re-priced Comerica Warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 4.80 years; volatility of 100.37%; annual dividend per share of $0.00; and risk-free interest rate of 0.65%. The modification to the Comerica Warrants resulted in an incremental expense of $7,000 which was added to the discount and is being amortized on a straight-line basis over the remaining term of the Credit Agreements.

Loan and Security Agreement

In May 2010, the Company entered into the Loan and Security Agreement with MidCap Financial, LLC (subsequently assigned to MidCap Funding III, LLC) and Silicon Valley Bank. In connection with the Loan and Security Agreement, the Company issued two secured promissory notes in an aggregate principal amount of $3 million, at 14.25%, secured by the Company’s assets, and warrants to purchase up to an aggregate of 101,694 shares of Common Stock at an exercise price of $1.77 per share, which was subsequently reduced to $0.84 per share, with an expiration date of May 26, 2015.

During February 2011, the Company repaid approximately $2.6 million in principal and MidCap Funding III, LLC and Silicon Valley Bank performed a cashless exercise of all of their warrants, which resulted in the combined issuance of 78,172 shares of unregistered stock.

During the years ended December 31, 2011 and 2010, the Company incurred $293,000 and $345,000, respectively, of interest expense, including amortization of debt issuance costs and discounts, associated with the Loan and Security Agreement.

Other Borrowings

The Company finances a portion of its annual insurance premiums which it pays in installments over nine months. As of December 31, 2012 and 2011, $379,000 at an annual interest rate of 3.0% and $433,000 at an annual interest rate of 2.5%, respectively, were outstanding under this arrangement. The Company incurred interest expense associated with the financed insurance premiums of approximately $5,000 during each of the years ended December 31, 2012, 2011, and 2010.