NOTE 5 — LINES OF CREDIT AND OTHER BORROWINGS

Lines of Credit

The Company entered into two revolving credit facility agreements with Comerica Bank (the “Credit Agreements”) on May 24, 2012. The revolving lines of credit provided for borrowings against certain domestic accounts receivable and inventory (the “Domestic Revolver”) and certain export related accounts receivable and inventory (the “Ex-Im Revolver”).

On July 28, 2014, the Company repaid all amounts outstanding under the Credit Agreements, including principal, accrued interest, and fees which totaled, in the aggregate, approximately $2.9 million, and the Credit Agreements were terminated.

The Credit Agreements required the Company to maintain compliance with certain monthly financial and non-financial covenants, as defined therein. Any noncompliance with these covenants could have resulted in default interest rates and penalties, and Comerica Bank could have declared the amounts outstanding immediately due and payable. On March 4, 2014, the Company received a waiver of noncompliance with certain financial and nonfinancial covenants as of January 31, 2014 and December 31, 2013. In connection with this 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. The Company was not in compliance with a financial covenant as of February 28, 2014 and, as such, entered into a forbearance agreement (the “Forbearance Agreement”) with Comerica Bank on April 10, 2014.  The Company paid a fee of $10,000 in connection with the Forbearance Agreement and Comerica Bank reduced the total aggregate available borrowings to $4.0 million.

The Company was not in compliance with a financial covenant at March 31, 2014 and did not repay the lines of credit in full on the original maturity date of May 1, 2014. As a result, on May 5, 2014, the Company and Comerica Bank agreed to Amendment No. 1 to the Forbearance Agreement (“Amendment No. 1”) which extended the end of the forbearance period from May 1, 2014 to June 1, 2014. In connection with Amendment No. 1, the maturity date of the revolving lines of credit was extended to June 1, 2014 and the Company paid an administrative fee of $10,000. On June 3, 2014 the Company and Comerica Bank agreed to Amendment No. 2 to the Forbearance Agreement (“Amendment No. 2”) which extended the maturity date of the revolving lines of credit to August 1, 2014. In connection with Amendment No. 2, Comerica Bank increased the interest rates on the lines of credit by 0.50% and the Company paid an administrative fee of $15,000. The Company was not in compliance with certain financial covenants as of May 31, 2014 and, as a result, agreed to Amendment No. 3 to the Forbearance Agreement with Comerica Bank whereby the forbearance period was continued to August 1, 2014 and the Company paid an administrative fee of $10,000.  

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. 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.

The outstanding principal balances of the Credit Agreements, as amended June 3, 2014, bore interest at annual percentage rates equal to the daily prime rate, plus 2.50% for the Domestic Revolver and 2.00% for the Ex-Im Revolver. The daily prime rate was subject to a floor of the daily adjusting LIBOR rate plus 2.50% per annum, or if LIBOR was undeterminable, 2.50% per annum. The Company was 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. As of December 31, 2013, the outstanding principal balances of the Credit Agreements bore 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 was 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 was 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, 2014 and 2013, the Company incurred $457,000 and $599,000, respectively, of interest expense associated with the credit facilities, including $128,000 and $197,000, respectively, of amortization of deferred debt issuance costs and $200,000 and $179,000, respectively, of amortization of the discount on lines of credit. Interest expense payable was approximately $0 and $20,000 at December 31, 2014 and 2013, respectively, and was included in accrued liabilities in the accompanying consolidated financial statements.

Lockbox arrangements under the revolving bank facilities provided that substantially all of the income generated was deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of Comerica Bank. Cash was disbursed from Comerica Bank to the Company only after payment of the applicable debt service and principal. At December 31, 2014 and 2013, there were no restricted cash amounts. The Company’s obligations were generally secured by substantially all of the Company’s assets now owned or thereinafter acquired.

Pursuant to the Credit Agreements, the Company incurred $55,000 and $67,000 of commitment fees and legal costs associated with the various waivers and amendments during the years ended December 31, 2014 and 2013, respectively. Commitment fees and legal costs associated with acquiring and maintaining the credit facilities were capitalized and amortized on a straight-line basis as interest expense over the term of the Credit Agreements.

On November 8, 2013, in connection with Amendment No. 4 to the Credit Agreements, the Company issued a warrant to Comerica Bank (the “November 2013 Comerica Warrant”) to purchase up to 100,000 shares of Company 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 over a one year period commencing on December 31, 2013. The November 2013 Comerica Warrant may be exercised, in whole or in part, with a cash payment from Comerica Bank, or Comerica Bank may exercise the November 2013 Comerica Warrant on a cashless basis. 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 was amortized on a straight-line basis to interest expense. During the third quarter of 2014, Comerica Bank exercised all 100,000 of the November 2013 Comerica Warrant on a cashless basis resulting in a net issuance of 19,354 shares of Company common stock.

On September 6, 2013, in connection with Amendment No. 3 to the Credit Agreements, the Company issued an additional warrant to Comerica Bank (the “September 2013 Comerica Warrant”) to purchase up to 100,000 shares of Company common stock at an exercise price per share of $2.00. The September 2013 Comerica Warrant vests in four equal quarterly tranches over a one year period commencing on December 31, 2013. The 2013 Comerica Warrant may be exercised, in whole or in part, with a cash payment from Comerica Bank, or Comerica Bank may exercise the September 2013 Comerica Warrant on a cashless basis. 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 was amortized on a straight-line basis to interest expense. During the third quarter of 2014, Comerica Bank exercised all 100,000 of the September 2013 Comerica Warrant on a cashless basis resulting in a net issuance of 19,354 shares of Company common stock.

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 Company 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 first quarter of 2013, Comerica Bank exercised all 80,000 of the 2012 Comerica Warrants on a cashless basis resulting in a net issuance of 40,465 shares of Company 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.

Other Borrowings

The Company financed a portion of its annual insurance premiums which it paid in installments over nine months. As of December 31, 2014, $0 was outstanding under this arrangement. As of December 31, 2013, $197,000 at an annual interest rate of 2.9% was outstanding under this arrangement. The Company incurred interest expense associated with the financed insurance premiums of approximately $3,000 for the year ended December 31, 2014 and $5,000 during the years ended December 31, 2013 and 2012.