Loan Payable

12 Months Ended

Jan. 03, 2015

Debt Disclosure [Abstract]

Loan Payable

On September 29, 2014, the Company entered into a loan and security agreement (the “Loan Agreement”) with Hercules Technology II, L.P., as lender (“Lender”) and Hercules Technology Growth Capital, Inc., as agent. Lender will provide us with access to a term loan of up to $5 million. The first $2.5 million of the term loan was funded at closing, and is repayable in equal monthly installments of principal and interest (mortgage style) over 30 months, following an initial interest-only period of twelve months after closing.  The remaining $2.5 million of the term loan can be drawn down at our option at any time but no later than July 31, 2015. In connection with the loan, the Company paid a $50,000 facility charge to Lender and recorded as debt issuance cost.

The term loan bears interest at the rate per year equal to the greater of either (i) 9.35% plus the prime rate as reported in The Wall Street Journal minus 3.25%, or (ii) 9.35%. The Company may prepay all, but no less than all, of the outstanding loan balance, subject to prepayment charges of 3% during the first twelve months following closing, 2% during the next twelve months and 1% thereafter. On the earliest to occur of the (a) the loan maturity date, (b) the date the Company prepays the outstanding loan balance or (c) the date the outstanding loan balance becomes due and payable, the Company will pay Lender an end of term charge equal to 3.75% of all amounts drawn under the loan.

The Loan Agreement further provides that, subject to certain conditions, any regularly scheduled installment of principal due to Lender may be paid, in whole or in part at the option of the Company or Lender, by converting a portion of the principal of the term loan into shares of the Company’s common stock (the “Conversion Shares”) at a conversion price of $1.293, in lieu of payment in cash.  The aggregate principal amount to be paid in Conversion Shares shall not exceed $1,000,000.  Of this amount 50% shall convert at the Lender’s option and 50% shall convert at the Company’s option.

Pursuant to the Loan Agreement, the Company issued Lender a warrant (the “Warrant”) to purchase 419,020 shares of our common stock at an exercise price of $1.062 per share, subject to customary anti-dilution provisions.   The Warrant is exercisable and expires five years from the date of issuance.

In connection with the Loan Agreement, the Company granted first priority liens and security interest in substantially all of our assets, exclusive of intellectual property and 35% of the capital stock of any foreign subsidiary, as collateral for the obligations under the Loan Agreement.  The Loan Agreement also contains representations and warranties by the Company and Lender, indemnification provisions in favor of Lender and customary covenants, and events of default.  Upon the occurrence of an event of default, a default interest rate of an additional 4% will be applied to the outstanding loan balances, and Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Loan Agreement.  We are currently in compliance with all loan covenants.

Debt Issuance Costs and End of Term Charge

The Company incurred debt issuance costs of $102,866 in connection with this term loan.  The debt issuance costs are being amortized as interest expense using the effective interest method over the term of the loan.  Amortization of debt issuance costs was $11,505 for the year ended January 3, 2015 and the remaining unamortized debt issuance costs of $91,361 are included in other noncurrent assets.  In addition, the Company will pay an end of term charge of $93,750, which is 3.75% of the $2.5 million drawn under the loan.  The end of term charge is being accrued as additional interest expense using the effective interest rate method over the term of the loan.  The Company accrued $10,486 of this fee during the year ended January 3, 2015.

Warrant Issued to Lender

The Company determined the Warrant issued to Lender to be equity classified.  The Company estimated the fair value of this Warrant as of the issuance date using a Black-Scholes option pricing model with the following assumptions:

	September 29, 2014
Fair value of common stock	$	1.08
Volatility		72.40	%
Expected dividends		0.00	%
Contractual term	5.0 years
Risk-free rate		1.76	%

The Company utilized this fair value in its allocation of the loan proceeds between loan payable and the Warrant which was performed on a relative fair value basis.  The fair value of the Warrant to purchase 419,020 shares of our common stock was approximately $273,081.  Ultimately, the Company allocated $246,189 to the Warrant and recognized this amount in additional paid in capital.  Accordingly, this amount is recognized as a debt discount and is being amortized as interest expense using the effective interest method over the term of the loan.  Amortization of this debt discount was $27,535 for the year ended January 3, 2015.

Loan payable as of January 3, 2015 consists of the following:

Principal amount payable for following years ending December
2015	$	223,358
2016		867,247
2017		1,035,995
2018		373,400
Total principal payments		2,500,000
Accrued end of term charge		10,486
Total loan payable		2,510,486
Less unamortized debt discount		218,654
Less current portion		223,358
Loan payable – long term	$	2,068,474

The total interest expenses related the term loan, including cash interest payments, the amortizations of debt issuance costs and debt discount, and the accrual of end of term charge were approximately $112,000 for the year ended January 3, 2015.