BORROWINGS

U.S. Bank term loan and revolving loan agreement

In October 2014, we entered into a syndicated senior secured credit facility (the “Facility”) with U.S. Bank National Association ("U.S. Bank" or the "Administrative Bank") and certain other banks in connection with the construction of our new corporate headquarters (the "Project"). The Facility is governed by a Loan Agreement dated as of October 24, 2014 which provides for an aggregate credit amount of $55.8 million, consisting of (i) a senior secured real estate loan of $45.8 million (the “Real Estate Loan”) to be used to finance a portion of the Project and (ii) a three-year $10.0 million senior secured revolving credit facility (the “Revolving Loan”) for working capital and capital expenditures, but not for the Project. We must satisfy a number of conditions at least 60 days prior to any funding under the Facility, including making cash contributions of approximately $37.4 million toward the Project, which we have done. In the future, we may be required to make additional cash contributions if necessary to maintain a loan to value ratio of 80% or less. The Real Estate Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our deposit accounts and related assets. We began borrowing under the facility in October 2015.

On or about January 1, 2017, upon completion of the Project, the Real Estate Loan is designed to convert into an approximately 6.75-year term loan due October 1, 2023 (the “Term Loan”). The conditions to conversion of the Real Estate Loan to the Term Loan include, among others, requirements that the Project must have been completed in accordance with the applicable plans, paid for in full, and generally free of liens; completion must have been certified by the project architect and the inspecting architect; certificates of occupancy must have been issued; we must have paid all amounts then due to the lending banks and must be in compliance with the covenants under the Loan Agreement; the Real Estate Loan must be brought “in balance” as defined in the Loan Agreement, which may require us to contribute additional cash to the Project; we must have paid the final amount of our cash contribution as required by the Loan Agreement; and if required by the Administrative Bank, an updated appraisal must show that the Project is in compliance with an 80% loan to value ratio requirement. If the conditions to conversion are not satisfied in early 2017, all amounts outstanding under the Facility will become immediately due and payable.

Amounts outstanding under the Real Estate Loan and the Term Loan will carry an interest rate based on one-month LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%. However, we have entered into interest rate swap agreements designed to fix our interest rate on the Real Estate Loan and the Term Loan at approximately 4.6% annually (see Derivative financial instruments in Note 2. Accounting Policies). Monthly payments of interest only will be due and payable on the Real Estate Loan prior to conversion. Following conversion, we are required to make monthly payments of principal estimated to be $1.1 million annually plus interest, with a balloon payment of all unpaid principal (estimated to be $38.0 million) and interest on October 1, 2023. Amounts outstanding under the Revolving Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%.

We are required to maintain compliance as of the end of each calendar quarter beginning with the quarter ending December 31, 2014 with the following financial covenants:


•	a fixed charge coverage ratio on a trailing 12-month basis of no less than 1.15 to 1.00;


•	a cash flow leverage ratio on a trailing 12-month basis not greater than 3.00 to 1.00 during the Construction Phase (as defined in the Loan Agreement);


•	a cash flow leverage ratio not greater than 2.50 to 1.00 following the Construction Phase; and


•	minimum liquidity of at least $50.0 million.

At September 30, 2015 we were in compliance with the financial covenants. In addition to the financial covenants described above, we are required to comply with a number of covenants relating to the Project and our business, including covenants limiting certain indebtedness. Notwithstanding, the Loan Agreement permits us to incur up to $20.0 million of additional senior-secured indebtedness for equipment financing, and other senior-secured indebtedness provided that the aggregate principal amount of such other senior-secured indebtedness does not exceed ten percent of our consolidated assets. The Loan Agreement includes customary events of default in addition to events of default relating specifically to the Project. The Real Estate Loan and the Revolving Loan are cross-defaulted and cross-collateralized. In the event of a default, the default rate of interest would be 2.00% above the otherwise applicable rate. Unless it terminates earlier or is extended with the consent of the Administrative Bank and all of the Banks, the Revolving Loan facility will terminate on October 24, 2017.

As of September 30, 2015 we had not borrowed any amounts under either the Real Estate Loan or the Revolving Loan.

Cryptobonds

In June 2015, as part of an initial demonstration of the digital securities trading system our majority-owned subsidiary Medici is working to develop, our Chief Executive Officer, Dr. Patrick M. Byrne purchased a $500,000 privately-placed digital “cryptobond” from us for $500,000 in cash. The terms of the bond include a fixed annual interest rate of 7.0%, and put and call rights that allow us to redeem the debt at 105.0% of the principal amount, and allow the holder to require us to repurchase the debt at 102.5% of the principal amount, in each case at any time after November 1, 2015. Because we intend to redeem this bond within the next year, this bond is included in Other current liabilities in the accompanying consolidated balance sheets. The initial terms of this cryptobond were changed to match the terms of the cryptobond we issued in July 2015 described below. The impact of this change was not significant. Dr. Byrne has waived his right to receive any prepayment premium to which he would otherwise have been entitled.

In July 2015, as an additional step in demonstrating the viability of the digital securities trading system Medici is developing, we issued additional privately-placed digital cryptobond debt to an unaffiliated purchaser for $5.0 million in cash and concurrently made a $5.0 million loan to the purchaser. The debt we issued to the unaffiliated purchaser has a 7.0% annual interest rate and is subject to put and call rights that allow us to redeem the debt at 105.0% of the principal amount, and allow the holder to require us to repurchase the debt at 102.5% of the principal amount, in each case at any time after November 1, 2015. The purchaser also has the right to require us to repurchase the debt prior to November 2, 2015 at 96.0% of the principal amount. The $5.0 million loan we made to the purchaser has a 3.0% annual interest rate, resulting in an effective net interest rate payable by us to the purchaser of the $5.0 million digital cryptobond debt of 4.0%. Both instruments have 5-year terms. The terms of our loan to the purchaser require repayment of the loan concurrently with the repayment of the digital cryptobond debt, whether at maturity or pursuant to the exercise of the put or call features. We issued the $5.0 million digital cryptobond debt for the purpose of further demonstrating the viability of the digital securities trading system Medici is developing, and made the offsetting loan to the purchaser in order to demonstrate the trading system without the complications of a normal financing and to reduce the borrowing cost. We have the right and intention to offset any amount owed between us and the purchaser. We intend to repay the digital cryptobond debt sometime after November 1, 2015, but prior to December 31, 2015, and will offset that repayment with our $5.0 million loan. At that time, we will amortize all of the unamortized debt issuance costs, and will incur the 5.0% cost associated with our right to put the debt to the holder. The cryptobond debt to our Chief Executive Officer and to the unaffiliated purchaser approximates fair value.

At September 30, 2015, the digital cryptobond and our loan back to the cryptobond purchaser are presented net in the accompanying consolidated balance sheets as follows (in thousands):



								Gross amounts not offset in the balance sheet
Description	Gross amounts of recognized assets		Gross amounts offset in the balance sheet			Net amounts of assets presented in the balance sheet		Financial instruments		Cash collateral received		Net amount
Cryptobonds	$	5,000	$	(5,000	)	$	—	$	—	$	—	$	—

U.S. Bank letters of credit

At September 30, 2015 and December 31, 2014, letters of credit totaling $505,000 and $580,000 respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets.

U.S. Bank commercial purchasing card agreement

We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2015, $1.0 million was outstanding and $4.0 million was available under the Purchasing Card. At December 31, 2014, $803,000 was outstanding and $4.2 million was available under the Purchasing Card.

Capital leases

During the nine months ended September 30, 2015, and the year ended December 31, 2014, we entered into capital lease arrangements of computer equipment for $362,000 and $325,000, respectively. These arrangements will expire in 2017. In order to obtain discounted pricing, we prepaid the entire $362,000 and $325,000 shortly after entering into the respective agreements. As such, we had no future payment obligations under capital leases at September 30, 2015 or December 31, 2014.

Fixed assets included assets under capital leases of $4.9 million and $4.7 million and accumulated depreciation related to assets under capital leases of $3.4 million and $2.8 million, respectively, at September 30, 2015 and December 31, 2014. Depreciation expense of assets recorded under capital leases was $218,000 and $188,000, for the three months ended September 30, 2015 and 2014, respectively and $632,000 and $518,000, for the nine months ended September 30, 2015 and 2014, respectively.