9. CONVERTIBLE NOTES AND LINE OF CREDIT

12 Months Ended

May 31, 2016

Convertible Notes And Line Of Credit

CONVERTIBLE NOTES AND LINE OF CREDIT

9. CONVERTIBLE NOTES AND LINE OF CREDIT:

    On April 10, 2015, the Company entered into a Convertible Note Purchase and Credit Facility Agreement (the “Purchase Agreement”) with QVT Fund LP and Quintessence Fund L.P. (the “Purchasers”) providing for (a) the Company’s sale to the Purchasers of $4,110,000 in aggregate principal amount of 9.0% Convertible Secured Notes due 2017 (the “Convertible Notes”) and (b) a secured revolving loan facility (the “Credit Facility”) in an aggregate principal amount of up to $2,000,000. On August 22, 2016 the Purchase Agreement was amended to extend the maturity date of the Convertible Notes to April 10, 2019, decrease the conversion price from $2.65 per share to $2.30 per share, decrease the forced conversion price from $7.50 per share to $6.51 per share, and allow for additional equity awards. Refer to Note 16, “SUBSEQUENT EVENTS”.

    The Convertible Notes bear interest at an annual rate of 9.0% and will mature on April 10, 2019 unless repurchased or converted prior to that date. Interest is payable quarterly on March 1, June 1, September 1 and December 1 of each year. Debt issuance costs of $356,000, which represent an effective interest rate of 4.3%, were offset against the loan balance and are amortized over the life of loan. During fiscal years ended May 31, 2016 and 2015, $177,000 and $31,000,  respectively, of amortization costs were recognized as interest expense.

    The conversion price for the Convertible Notes is $2.30 per share of the Company’s common stock and is subject to adjustment upon the occurrence of certain specified events (as adjusted, the “Conversion Price”). Holders may convert all or any part of the principal amount of their Convertible Notes in integrals of $10,000 at any time prior to the maturity date. Upon conversion, the Company will deliver shares of its common stock to the holder of Convertible Notes electing such conversion. The Company may not redeem the Convertible Notes prior to maturity.

    Advances under the Credit Facility must be supported by outstanding valid purchase orders at least equal to the amount of the requested drawdown plus the principal amount of all outstanding 5.0% Notes as defined under the Purchase Agreement. Advances will bear interest at an annual rate of 5.0%. Each advance under the Credit Facility and any accrued and unpaid interest thereon must be repaid within 90 days from the date on which such advance is made. Unless paid in full at maturity, amounts owing under the credit facility may be converted by the holder into Convertible Notes. Advances under the Credit Facility may be prepaid without any prepayment premium or penalty and may be reborrowed (unless converted into Convertible Notes).

    The Company’s obligations under the Purchase Agreement are secured by substantially all of the assets of the Company.

    During fiscal 2016, the Company borrowed $2,000,000 against the credit facility. During fiscal 2016, $900,000 of the borrowing was converted into Convertible Notes upon maturity. As of May 31, 2016 and 2015, the Company had a balance of $1,100,000 and zero against the Credit Facility, respectively. The balance available to borrow under the Credit Facility as of May 31, 2016 was zero. Upon maturity in July 2016, the $1,100,000 balance of the Credit Facility was converted into Convertible Notes. The May 31, 2016 balance was reclassified to Convertible Notes with the amendment of the Purchase Agreement. Refer to Note 16, “SUBSEQUENT EVENTS”.

    Convertible Notes, net of debt issuance costs (in thousands):

	May 31,			May 31,
	2016			2015
Principal	$	6,110		$	4,110
Unamortized debt issuance costs		(148	)		(319	)
	$	5,962		$	3,791