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. As of December 31, 2013, the Credit Agreements provided 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, 2013, the Company had outstanding borrowings totaling approximately $4.6 million, which included $1.8 million under the Domestic Revolver and $2.8 million under the Ex-Im Revolver.

As of December 31, 2013, the outstanding principal balances of the Credit Agreements bear interest at annual percentage rates equal to the daily prime rate, plus 2.00% for the Domestic Revolver and 1.50% for the Ex-Im Revolver. The daily prime rate is subject to a floor of the daily adjusting LIBOR rate plus 2.50% per annum, or if LIBOR is undeterminable, 2.50% 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 years ended December 31, 2013 and 2012, the Company incurred $599,000 and $232,000, respectively, of interest expense associated with the credit facilities, including $197,000 and $91,000, respectively, of amortization of deferred debt issuance costs and $179,000 and $43,000, respectively, of amortization of the discount on lines of credit. Interest expense payable was approximately $20,000 and $19,000 at December 31, 2013 and 2012, respectively, and was included in accrued liabilities in the accompanying consolidated financial statements.

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, 2013 and 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 monthly financial and non-financial covenants, as defined therein. Any noncompliance with these covenants may result in default interest rates and penalties, and Comerica Bank could declare the amounts outstanding immediately due and payable. The Company was either in compliance with these covenants at December 31, 2013, or had received a waiver in the event of non-compliance. On March 4, 2014, the Company received a waiver from Comerica Bank to waive noncompliance with certain financial and nonfinancial covenants as of January 31, 2014 and December 31, 2013. In connection with the waiver, the Company incurred a fee of $10,000 and Comerica Bank reduced the total aggregate available borrowings on the lines of credit to $5.0 million.

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 during the year ended December 31, 2012. During the year ended December 31, 2013, the Company incurred an additional $67,000 of commitment fees and legal costs associated with the various waivers and amendments. Commitment fees and legal costs associated with acquiring and maintaining the credit facilities are capitalized and are being amortized on a straight-line basis as interest expense over the term of the Credit Agreements.

On November 8, 2013, the Company issued a warrant to Comerica Bank (the “November 2013 Comerica Warrant”) in connection with Amendment No. 4 to the Credit Agreements to purchase up to 100,000 shares of the Company’s common stock at an exercise price per share of $2.00. The November 2013 Comerica Warrant includes an accelerated vesting clause that may be triggered by certain events described therein, but otherwise vests in four equal quarterly tranches commencing on December 31, 2013, and shares are exercisable once vested. The November 2013 Comerica Warrant may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrant shares into a number of shares, in whole or in part. These warrant shares will expire if unexercised on November 8, 2018. The fair value of the November 2013 Comerica Warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.00 years; volatility of 102.65%; annual dividend per share of $0.00; and risk-free interest rate of 1.42%; and resulted in an estimated fair value of $137,000 which was recorded as equity and resulted in a discount to the Credit Agreements that is being amortized on a straight-line basis to interest expense over the remaining term.

On September 6, 2013, the Company issued an additional warrant to Comerica Bank (the “September 2013 Comerica Warrant”) in connection with Amendment No. 3 to the Credit Agreements to purchase up to 100,000 shares of the Company’s common stock at an exercise price per share of $2.00. The September 2013 Comerica Warrant vests in four equal quarterly tranches commencing on December 31, 2013 and shares are exercisable once vested. The 2013 Comerica Warrant may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrant shares into a number of shares, in whole or in part. These warrant shares will expire if unexercised on September 6, 2018. The fair value of the September 2013 Comerica Warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.00 years; volatility of 105.32%; annual dividend per share of $0.00; and risk-free interest rate of 1.77%; and resulted in an estimated fair value of $143,000 which was recorded as equity and resulted in a discount to the Credit Agreements that is being amortized on a straight-line basis to interest expense over the remaining term.

During the year ended December 31, 2012, the Company issued a warrant to Comerica Bank (the “2012 Comerica Warrant”) to purchase up to 80,000 shares of the Company’s common stock at an exercise price of $2.83 per share, which was reduced to $2.00 per share in connection with Amendment No. 1 to the Credit Agreements, with an expiration date of May 24, 2017. During the three months ended March 31, 2013, Comerica Bank exercised all 80,000 of the 2012 Comerica Warrant shares on a cashless basis pursuant to the Notice of Exercise resulting in a net issuance of 40,465 shares of common stock. The amended warrant issuance has an estimated fair value of $142,000 which was recorded as equity and resulted in a discount to the Credit Agreements that is being amortized on a straight-line basis to interest expense over the remaining term.

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 year ended December 31, 2011, the Company incurred $293,000 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, 2013 and 2012, $197,000 at an annual interest rate of 2.9% and $379,000 at an annual interest rate of 3.0%, 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, 2013, 2012, and 2011.