Debt

As of June 30, 2016, the Company maintained the 2016 Credit and Security Agreement and the Term Loan provided by the Credit Agreement. The following table summarizes the Company's outstanding borrowings:



(in thousands)	June 30, 2016			December 31, 2015

2016 Credit and Security Agreement (2013 Loan and Security Agreement as of December 31, 2015)	$	3,277		$	3,278
Term Loan	4,046			5,000
Discount on Term Loan	(1,977		)	(2,785		)
Unamortized debt issuance costs related to Term Loan	(204		)	(163		)
Total debt	5,142			5,330
Short-term portion	(5,142		)	(5,330		)
Total long-term debt, net	$	—		$	—

The following table summarizes the components of interest expense for the three and six month periods ended June 30, 2016 and 2015:



(in thousands)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Interest expense on Term Loan (interest at LIBOR, plus 14%)	$	161	$	154	$	341	154
Interest expense on 2013 Loan and Security Agreement	16		4		49		4
Interest expense on 2016 Credit and Security Agreement	48		—		48		—
Accretion of termination fees (over term of Term Loan at rate of 8%)	45		27		91		27
Amortization of debt issuance costs	62		197		123		280
Write-off of debt issuance costs related to 2013 Loan and Security Agreement	282		—		282		—
Amortization of debt discount associated with the warrants	397		244		807		244
Mark to market of the Additional Warrant	—		—		59		—
Total	$	1,011	$	626	$	1,800	$	709

2016 Credit and Security Agreement

On April 29, 2016, the Company entered into the 2016 Credit and Security Agreement with SCM. The 2016 Credit and Security Agreement provides the Company with a revolving credit facility, the proceeds of which are to be used for general working capital purposes and capital expenditures. The 2016 Credit and Security Agreement replaced the 2013 Loan and Security Agreement, eliminating the requirement of the Company to issue the Additional Warrant for the purchase of common stock valued at $1.25 million to SWK, the holder of the Company’s Credit Agreement (see below for further information about the Additional Warrant). An early termination fee of $140,000, approximately $30,000 of legal fees, and approximately $107,000 of other ordinary course fees were accelerated due to the termination of the 2013 Loan and Security Agreement and were rolled into the opening outstanding borrowings under the 2016 Credit and Security Agreement with SCM and are reflected in transaction costs in the condensed consolidated statement of operations during the three month period ended June 30, 2016, and approximately $0.3 million of unamortized debt issuance costs related to the 2013 Loan and Security Agreement were written off and recorded in interest expense in the condensed consolidated statement of operations during the three month period ended June 30, 2016

Under the terms of the 2016 Credit and Security Agreement, SCM makes cash advances to the Company in an aggregate principal at any one time outstanding not to exceed $7 million, subject to certain loan balance limits based on the value of the Company’s eligible collateral (the “Revolving Loan Commitment Amount”). The 2016 Credit and Security Agreement has a term of three years, expiring on April 29, 2019. As of June 30, 2016, the Company had $3.3 million outstanding under the 2016 Credit and Security Agreement with available borrowing capacity of $0.3 million. As of August 9, 2016, the Company had $2.4 million outstanding, with estimated available borrowing capacity of $0.8 million.

Borrowings will bear interest at a fluctuating rate that when annualized is equal to the Prime Rate plus 5.5%, subject to increase in the event of a default. The Company paid SCM a $140,000 facility fee, and monthly, SCM will receive an unused line fee equal to one-half of one percent (0.5%) per annum of the difference derived by subtracting (i) the greater of (x) the average daily outstanding balance under the Revolving Facility during the preceding month and (y) the Minimum Balance, from (ii) the Revolving Loan Commitment Amount and also a collateral management fee equal to one-half of one percent (0.5%) per annum of the Revolving Loan Commitment Amount. As of June 30, 2016, the remaining balance in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheet was $0.3 million.

The 2016 Credit and Security Agreement contains customary representations and warranties and various affirmative and negative covenants including minimum aggregate revenue, EBITDA, and consolidated unencumbered liquid assets requirements. Minimum aggregate revenue must not be less than $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. Adjusted EBITDA must not be less than 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. In addition, consolidated unencumbered liquid assets must not be less than $0.75 million on the last day of any quarter. The Company was not in compliance with the covenants under the 2016 Credit and Security Agreement as of June 30, 2016, and has entered into a First Amendment to Credit and Security Agreement and Limited Waiver and Forbearance (“First Amendment”), which provides a waiver related to the measurement period ended June 30, 2016. If certain conditions set forth in the First Amendment are satisfied as of September 30, 2016, the waiver and an amendment to the 2016 Credit and Security Agreement providing for revised financial covenants will become permanent. If the Company is unable to fulfill the conditions in the First Amendment by September 30, 2016, or fails to comply with, or obtain further waivers to, the financial covenants in the First Amendment in the future, then the lenders would have the option 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 foregoing description of the First Amendment is only a summary and is qualified in its entirety by the full text of the First Amendment, which is attached as an exhibit to this Quarterly Report on Form 10-Q.

Borrowings under the Agreement are secured by a security interest in all existing and after-acquired property of the Company, including, but not limited to, its receivables (which are subject to a lockbox account arrangement), inventory and equipment.

Credit Agreement

In order to fund the Acquisition, the Company entered into the Credit Agreement with SWK on April 17, 2015, as amended on February 25, 2016, and March 28, 2016. 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. During the six month period ended June 30, 2016, the Company made principal payments to SWK of $1.0 million, in addition to $0.4 million of interest paid.

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 $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 $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 200 NNH, LLC, which is described further in Note 2 to the condensed consolidated financial statements. 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 as debt issuance costs as a direct deduction to short-term debt on the condensed consolidated balance sheet as of June 30, 2016. The Company was not in compliance with the covenants under the Credit Agreement, as amended, as of June 30, 2016, and has entered into a Third Amendment to Credit Agreement and Limited Waiver and Forbearance (“Third Amendment”), which provides a waiver related to the measurement period ended June 30, 2016. If certain conditions set forth in the Third Amendment are satisfied as of September 30, 2016, the waiver and an amendment to the Credit Agreement providing for revised financial covenants and an extended period of time to make required principal payments will become permanent. If the Company is unable to fulfill the conditions in the Third Amendment by September 30, 2016, or fails to comply with, or obtain further waivers to, the financial covenants in the Third Amendment in the future, then the lenders would have the option 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 foregoing description of the Third Amendment is only a summary and is qualified in its entirety by the full text of the Third Amendment, which is attached as an exhibit to this Quarterly Report on Form 10-Q.

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 2016 Credit and Security Agreement and the Company fails to make payments to SCM when due or if SCM is entitled to accelerate the maturity of debt in response to a default situation under the 2016 Credit and Security Agreement, which may include violation of any financial covenants.

As of June 30, 2016, as security for payment and other obligations under the 2016 Credit and Security Agreement, SCM 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 543,478 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 $6.90 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. 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 in the First Amendment to the Credit Agreement dated February 25, 2016, the Company agreed to issue an additional warrant (the “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. In accordance with the relevant accounting guidance, the Additional Warrant was determined to be an embedded derivative. The fair value of these warrants at the inception of the Credit Agreement of approximately $3.6 million was recorded as a debt discount, and is being amortized through interest expense over the term of the Credit Agreement using the effective interest method. The Company valued both warrants using the Black-Scholes pricing model, which utilizes Level 3 Inputs. For the Warrant, the Company utilized 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. For the Additional Warrant, the Company utilized volatility of 80.0%, a risk-free rate of 2.1%, dividend rate of zero, and term of 7 years, which is consistent with the exercise period of the Additional Warrant.

As noted above, on April 29, 2016, the Company entered into the 2016 Credit and Security Agreement with SCM, which eliminated the requirement of the Company to issue the Additional Warrant. Accordingly, during the three month period ended June 30, 2016, the Company recorded $0.9 million in other income in the condensed consolidated statement of operations related to the write-off of the derivative liability associated with the Additional Warrant.