Note 4.   Debt

 

In March 2013, the Company entered into a Loan and Security agreement for an initial $8 million term loan with an additional $2 million of borrowing capacity if certain conditions involving new partnerships are met.  The loan is collateralized by substantially all of the Company’s assets, including our intellectual property.

 

The loan provides for interest at a variable rate based on prime with a floor of 11% and matures in June 2016.  Our weighted average interest on outstanding borrowings was 11% for the year ended December 31, 2013.  The loan calls for interest only payments through December 2013 at which time principal and interest payments of approximately $300,000 begin through maturity.  The loan resulted in net proceeds of approximately $7,551,000 after origination and other cash fees and expenses related to the closing of the loan.  Principal payments due under this loan are approximately $2,940,000, $3,280,000 and $1,780,000 in 2014, 2015 and 2016, respectively.

 

In conjunction with the loan agreement, the Company issued to the lender a five-year common stock purchase warrant to purchase 648,809 shares of common stock at an exercise price of $1.0789 per share.  This warrant contains non-standard anti-dilution protection and, consequently, is being accounted for as a derivative instrument and is recorded at fair market value each period (see Note 3).  The allocation of proceeds to this warrant resulted in a debt discount which is being amortized as interest expense over the term of the debt using the effective interest method.

 

The Company also incurred expenses with various third parties in connection with the debt issuance, consisting of approximately $449,000 in cash, 350,650 shares of common stock valued at approximately $396,000, and a five-year common stock purchase warrant to purchase 648,798 shares at an exercise price of $1.07892 per share.  The warrant is classified as equity.  Fees related to the debt offering are recorded as deferred financing fees and are being amortized as interest expense over the term of the debt using the effective interest method.