Debt

As of March 31, 2016, the Company maintained the 2013 Loan and Security Agreement and the Term Loan provided by the Credit Agreement. The following table summarizes the Company's outstanding borrowings:



(in thousands)	March 31, 2016			December 31, 2015

2013 Loan and Security Agreement	$	2,645		$	3,278
Term Loan	4,474			5,000
Discount on Term Loan	(2,374		)	(2,785		)
Unamortized debt issuance costs related to Term Loan	(139		)	(163		)
Total debt	4,606			5,330
Short-term portion	(4,606		)	(5,330		)
Total long-term debt, net	$	—		$	—

There was no significant interest expense for the three month period ended March 31, 2015. The following table summarizes the components of interest expense for the three month period ended March 31, 2016:



(in thousands)	Three Months Ended
	March 31, 2016
Interest expense on Term Loan (interest at LIBOR, plus 14%)	$	180
Interest expense on 2013 Loan and Security Agreement	32
Accretion of termination fees (over term of Term Loan at rate of 8%)	46
Amortization of deferred financing costs	61
Accretion of debt discount associated with Warrant	306
Accretion of discount associated with additional warrant feature	105
Mark to market of the additional warrant feature	59
Total	$	789

2013 Loan and Security Agreement

As of March 31, 2016, the Company maintained the 2013 Loan and Security Agreement with Ares. Borrowings under the 2013 Loan and Security Agreement were to be used for working capital purposes and capital expenditures. The amount available for borrowing was less than the $7 million under this facility at any given time due to the manner in which the maximum available amount was calculated. The Company had an available borrowing base, subject to reserves established at Ares' discretion, of 85% of Eligible Receivables up to $7 million under this facility. As of March 31, 2016, the Company had $2.6 million borrowings outstanding under the 2013 Loan and Security Agreement with available borrowing capacity of $0.3 million.

Interest on revolving credit loans was calculated based on the greater of (i) the annualized prime rate plus 2.75%, (ii) the 90 day LIBOR rate plus 5.25%, and (iii) 6% per annum. The interest rate on the 2013 Loan and Security Agreement was 6% as of March 31, 2016. The Company was obligated to pay, on a monthly basis in arrears, an annual facility fee equal to 1% of the revolving credit limit. During the three month periods ended March 31, 2016 and 2015, the Company incurred facility fees of $0.03 million and $0.05 million, respectively. As of March 31, 2016, the remaining balance in deferred financing costs recorded in Other Assets on the condensed consolidated balance sheet was $0.3 million.

The 2013 Loan and Security Agreement contained various covenants, including financial covenants which required the Company to achieve a minimum adjusted EBITDA amount (earnings before interest expense, income taxes, depreciation, and amortization). On March 28, 2016, the Company obtained a Waiver and Sixth Amendment to the Loan and Security Agreement (the "Sixth Amendment") in which Ares modified the existing covenants and replaced them with minimum adjusted EBITDA covenants of negative $1.6 million for the three months ending March 31, 2016, negative $2.0 million for the six months ending June 30, 2016, negative $1.1 million for the nine months ending September 30, 2016, and $0.8 million for the twelve months ending December 31, 2016, and each twelve consecutive calendar month period ending on the last day of each fiscal quarter thereafter. In addition, the Company was required to obtain new equity contributions in an aggregate amount of not less than $4.0 million between November 10, 2015, and June 30, 2016, which condition was satisfied by its completion of the rights offering earlier this year and the private offering to the investor described above. The Company was in compliance with the covenants under the 2013 Loan and Security Agreement, as amended, as of March 31, 2016.

Subsequent to quarter end, the Company replaced the 2013 Loan and Security Agreement with a new revolving credit facility. For additional discussion regarding this new credit facility, see Note 14 to the condensed consolidated financial statements.

Credit Agreement

In order to fund the Acquisition, the Company entered into the Credit Agreement with SWK. The Credit Agreement provides the Company with a $5.0 million Term Loan. The proceeds of the Term Loan were used to pay certain fees and expenses related to the negotiation and consummation of the Purchase Agreement and the Acquisition described in Note 3 and general corporate purposes. The Company paid SWK an origination fee of $0.1 million. The Term Loan is due and payable on April 17, 2018. The Company is also required to make quarterly revenue-based payments in an amount equal to eight and one-half percent (8.5%) of yearly aggregate revenue up to and including $20 million, seven percent (7%) of yearly aggregate revenue greater than $20 million up to and including $30 million, and five percent (5%) of yearly aggregate revenue greater than $30 million. The revenue-based payment will be applied to fees and interest, and any excess to the principal of the Term Loan. Revenue-based payments commenced in February 2016, and the maximum principal portion of the aggregate revenue-based payment is capped at $600,000 per quarter. The Company made its first principal payment of $0.5 million, on February 16, 2016, in addition to $0.2 million of interest expense, for a total payment of $0.7 million.

The outstanding principal balance under the Credit Agreement bears interest at an adjustable rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (1.0%)) plus fourteen percent (14.0%) and is due and payable quarterly, in arrears, which commenced on August 14, 2015. Upon the earlier of (a) the maturity date on April 17, 2018, or (b) full repayment of the Term Loan, whether by acceleration or otherwise, the Company is required to pay an exit fee equal to eight percent (8%) of the aggregate principal amount of all term loans advanced under the Credit Agreement. The Company is recognizing the exit fee over the term of the Term Loan through an accretion accrual to interest expense using the effective interest method.

The Credit Agreement also contains certain financial covenants including minimum aggregate revenue, adjusted EBITDA, and consolidated unencumbered liquid assets requirements. On March 28, 2016, the Company obtained a Second Amendment to the Credit Agreement (the "Second Amendment") in which the lender modified the existing covenants and replaced them with minimum aggregate revenue covenants of $33.0 million for the twelve months ending March 31, 2016, $34.0 million for the twelve months ending June 30, 2016, $37.0 million for the twelve months ending September 30, 2016, $40.0 million for the twelve months ending December 31, 2016, and $45.0 million for the twelve months ending each fiscal quarter thereafter. The Second Amendment also modified the minimum adjusted EBITDA covenants for 2016 and replaced them with minimum adjusted EBITDA covenants of negative $1.6 million for the three months ending March 31, 2016, negative $2.0 million for the six months ending June 30, 2016, negative $1.1 million for the nine months ending September 30, 2016, $0.8 million for the twelve months ending December 31, 2016, $0.5 million for the twelve months ending March 31, 2017, $0.9 million for the twelve months ending June 30, 2017, and $2.5 million for the twelve months ending September 30, 2017, and each twelve consecutive calendar month period ending on the last day of each fiscal quarter thereafter. In addition, the Company was required to obtain new equity contributions in an aggregate amount of not less than $0.5 million between March 23, 2016 and June 30, 2016, which requirement the Company has satisfied through the private offering to the investor described above. The Second Amendment also required the Company to issue shares of its common stock, $0.04 par value, with a value of $100,000 to SWK, which the Company issued during the first quarter of 2016 and recorded in Selling, general and administrative expenses in the condensed consolidated statement of operations for the three month period ended March 31, 2016. The Company was in compliance with the covenants under the Credit Agreement, as amended, as of March 31, 2016. If the Company is unable to comply with financial covenants in the future and in the event that the Company was unable to modify the covenants, find new or additional lenders, or raise additional equity, it would be considered in default, which would then enable the lenders to accelerate the repayment of all amounts outstanding and exercise remedies with respect to collateral, which would have a material adverse impact on the Company's business.

The Credit Agreement contains a cross-default provision that can be triggered if the Company has more than $0.25 million in debt outstanding under the 2013 Loan and Security Agreement and the Company fails to make payments to Ares when due or if Ares is entitled to accelerate the maturity of debt in response to a default situation under the 2013 Loan and Security Agreement, which may include violation of any financial covenants.

As of March 31, 2016, as security for payment and other obligations under the 2013 Loan and Security Agreement, Ares held a security interest in all of the Company's, and its subsidiary guarantors', existing and after-acquired property, including receivables (which are subject to a lockbox account arrangement), inventory and equipment. Additionally, SWK holds a security interest for final and indefeasible payment. The security interest held by SWK is in substantially all of the Company's assets and the Company's subsidiaries.

In connection with the execution of the Credit Agreement, the Company issued SWK a warrant (the "Warrant") to purchase 8,152,174 shares of the Company’s common stock. The Warrant is exercisable after October 17, 2015, and up to and including April 17, 2022, at an exercise price of $0.46 per share. The Warrant is exercisable on a cashless basis. The exercise price of the Warrant is subject to customary adjustment provisions for stock splits, stock dividends, recapitalizations and the like. The Warrant grants the holder certain piggyback registration rights. The Warrant was considered equity classified, and as such, the Company allocated the proceeds from the Term Loan to the Warrant using the Relative Fair Value Method. The fair value of the Warrant of $2.7 million was recorded as debt discount, which is being recognized as interest expense over the term of the Credit Agreement using the effective interest method. The Company valued the Warrant using the Black-Scholes pricing model using volatility of 85.0%, a risk-free rate of 1.4%, dividend rate of zero and term of 7 years, which is consistent with the exercise period of the Warrant and is a Level 3 valuation technique.

Further, pursuant to the Credit Agreement, if the 2013 Loan and Security Agreement was not repaid in full and terminated, and all liens securing the 2013 Loan and Security Agreement were not released, on or prior to April 30, 2016, as amended per below, the Company agreed to issue an additional warrant to SWK to purchase common stock valued at $1.25 million, with an exercise price of the closing price on April 30, 2016, as amended per below. As discussed in Note 14 to the condensed consolidated financial statements, the Company met this requirement and was not required to issue the additional warrant. As of March 31, 2016, the Company considered whether the issuance of the additional warrant was a “credit sensitive payment”, as the issuance of the additional warrant was contingent upon the repayment of debt (the 2013 Loan and Security Agreement). However, as the repayment date specified in the Term Loan was prior to the maturity date of the 2013 Loan and Security Agreement and therefore this was an incentive feature, rather than a reflection of the Company’s creditworthiness, the Company did not think it was appropriate to consider this feature credit related. Therefore, the feature was not clearly and closely related to the debt host. The Company determined that the additional warrant feature did not contain an explicit limit on the number of warrants to be delivered for settlement. As the Company was required to deliver a number of additional warrants that would satisfy the fixed monetary amount of $1.25 million, the number of warrants (and underlying shares) to be delivered could not be determined. Therefore, the additional warrant feature was considered an embedded derivative.

As the issuance of the additional warrant was contingent, the evaluation of the likelihood of the occurrence of the contingency was considered in determining the fair value of the embedded derivative. As of March 31, 2016, the Company believed that the contingency (i.e. not repaying in full and terminating the 2013 Loan and Security Agreement by April 30, 2016) was probable as the Company did not believe that the 2013 Loan and Security Agreement would be paid in full and terminated by April 30, 2016, due to the fact that there was no executed agreement in place, and the Company was in the very early stages of identifying and evaluating potential lenders as of March 31, 2016. Accordingly, as of March 31, 2016, the fair value of the embedded derivative of $0.9 million was included in Other long-term liabilities on the condensed consolidated balance sheet with the loss associated with the change in the fair value of the derivative liability during the three months ended March 31, 2016, of $0.1 million recorded in Interest Expense. The Company valued the additional warrant using the Black-Scholes pricing model using volatility of 81.4%, a risk-free rate of 1.54%, dividend rate of zero, and term of 7 years, which was consistent with the exercise period of the additional warrant.

On February 25, 2016, the Company entered into a First Amendment to Credit Agreement (“First Amendment”) with SWK. The First Amendment modified the Credit Agreement to extend the date the Company had to issue the additional warrant to SWK from February 28, 2016, to April 30, 2016, if the 2013 Loan and Security Agreement was not repaid in full and terminated and all liens securing the 2013 Loan and Security Agreement were not released. The First Amendment also modified the exercise price of the warrant from one cent over the closing price on February 28, 2016, and replaced it with the closing price of the Company's stock on April 30, 2016. The First Amendment also required the Company to issue 454,545 shares of our common stock, $0.04 par value, with a value of $50,000 to SWK, which the Company issued during the first quarter of 2016 and recorded in Selling, general and administrative expenses in the condensed consolidated statement of operations for the three month period ended March 31, 2016.