Note 8. Debt

The table below summarizes the carrying amount and weighted average interest rate of the Company’s debt (in thousands, except percentages):


	September 30, 2015				December 31, 2014
			Weighted				Weighted
			Average				Average
	Carrying		Interest		Carrying		Interest
	Amount		Rate		Amount		Rate
Notes payable	$	10,196	—		$	12,771	—
Short-term borrowing		—	—			10,000	3.18	%
Total notes payable and short-term borrowing	$	10,196			$	22,771
Long-term debt, current and non-current:
Bank borrowings-Comerica Bank	$	23,800	2.95	%	$	17,500	3.16	%
Bank borrowings-Mitsubishi Bank		12,038	1.53	%		—	—
Acquisition-related debt		—	—			5,836	1.5	%
Total long-term debt, current and non-current		35,838				23,336
Unaccreted discount within current portion of long-term debt		(72)				—
Unaccreted discount within long-term debt, net of current portion		(198)				—
Total long-term debt, net of unaccreted discount	$	35,568			$	23,336

Reported as:
Current portion of long-term debt	$	24,563			$	2,445
Long-term debt, net of current portion		11,005				20,891
Total long-term debt, net of unaccreted discount	$	35,568			$	23,336

Notes payable

The Company regularly issues notes payable to its suppliers in China in exchange for accounts payable. These notes are supported by non-interest bearing bank acceptance drafts issued under the Company’s existing line of credit facility and are due three to six months after issuance. As a condition of the notes payable arrangements, the Company is required to keep a compensating balance at the issuing banks that is a percentage of the total notes payable balance until the amounts are settled.

In June 2015, the Company’s subsidiary in China renewed its short-term line of credit facility with a banking institution to an expiration date in June 2016. Under the renewed agreement, RMB 120.0 million ($18.9 million) can be used for short-term loans, which bears interest at varying rates, or up to approximately RMB 171.4 million ($26.9 million) can be used for bank acceptance drafts (with a 30% compensating balance requirement). In September 2015, the Company’s China subsidiary renewed its second short-term line of credit facility with a banking institution, under which RMB 133.0 million ($20.9 million) can be used for short-term loan or up to approximately RMB 190.0 million ($29.9 million) can be used for bank acceptance drafts (with a 30% compensating balance requirement). This line of credit facility expires in September 2016. As of September 30, 2015 and December 31, 2014, the non-interest bearing bank acceptance drafts issued in connection with the Company’s notes payable to its suppliers in China, under these line of credit facilities, had an outstanding balance of $10.2 million and $12.8 million, respectively.

As of September 30, 2015 and December 31, 2014, compensating balances relating to these bank acceptance drafts issued to suppliers and the Company’s subsidiaries totaled $3.1 million and $3.8 million, respectively. Compensating balances are classified as restricted cash and investments on the Company’s condensed consolidated balance sheets.

Short-term borrowing

In October 2014, the Company’s subsidiary in China entered into a short-term advance financing agreement, under one of its line of credit facilities, to borrow $5.0 million against export sales to its parent company. This financing agreement bore interest at 4.02% per annum. Interest and the principal were due and repaid in full in April 2015.

In November 2014, the Company’s subsidiary in China entered into a second short-term advance financing agreement, under one of its line of credit facilities, to borrow $5.0 million against export sales to its parent company. This financing agreement bore interest at 2.33% per annum and service fees at 1.00% per annum. Interest, service fees and the principal were due and repaid in full in May 2015.

On April 21, 2015, the Company’s China subsidiary executed a $5.0 million advance financing agreement with one of its line of credit facilities at an interest rate based on a six-month LIBOR plus 330 basis points, or approximately 3.71%. Both interest and principal were due on October 8, 2015. The Company repaid the loan in September 2015.

Acquisition-related

In connection with the acquisition of NeoPhotonics Semiconductor on March 29, 2013, the Company was obligated to pay 1,050 million Japanese Yen (“JPY”) in three equal installments on the first, second and third anniversaries of the closing date for the purchase of the real estate used by NeoPhotonics Semiconductor, of which 700 million JPY ($5.8 million) was outstanding as of December 31, 2014. The obligation bore interest at 1.5% per year, payable annually, and was secured by the acquired real estate property. This loan was repaid in full in February 2015.

As part of the purchase consideration to acquire the tunable laser products of EMCORE in January 2015 (See Note 5), the Company issued the EMCORE Note, as amended, of $15.5 million, which had a maturity of two years from the closing of the transaction and an interest rate of 5% per annum for the first year and 13% per annum for the second year. The interest was payable semi-annually in cash. In addition, the EMCORE Note was subject to prepayment under certain circumstances and was secured by certain of the assets to be sold pursuant to the asset purchase agreement with EMCORE. The EMCORE Note was subordinated to the Company’s existing bank debt in the U.S. The EMCORE Note, as amended, was repaid in full in April 2015.

Bank borrowings

The Company has a credit agreement with Comerica Bank as lead bank in the U.S. In January 2015, the Company executed an amendment to its credit agreement with Comerica Bank to refinance the then-outstanding Comerica term loan. Under the Credit Amendment, the $20.0 million revolving credit facility was replaced with a $25.0 million senior secured revolving credit line with a maturity date on November 2, 2016. In March 2015, the senior secured revolving credit line was further amended to increase the borrowing capacity from $25.0 million to $30.0 million. Borrowings under the amended revolving credit facility bear interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%. Base rate is based on the greater of (a) the effective prime rate, (b) the Federal Funds effective rate plus one percent, and (c) the daily adjusting LIBOR rate plus one percent. The Credit Amendment also modified the EBITDA and liquidity covenants and eliminated the need to maintain compensating balances (restricted cash). The credit agreement also restricts the Company’s ability to incur certain additional debt or to engage in specified transactions, restricts the payment of dividends and is secured by substantially all of the Company’s U.S. assets, other than intellectual property assets. The Company repaid the remaining Comerica term loan balance and borrowed $15.8 million under the amended revolving credit facility in March 2015. As of September 30, 2015, the outstanding balance under the revolving credit facility was $23.8 million, which was repaid in October 2015.

The components of the Comerica credit facilities are as follows:

—

A $30.0 million revolving credit facility under which there was $23.8 million outstanding at September 30, 2015 and no outstanding borrowing as of December 31, 2014, subject to covenant requirements. Amounts borrowed, if any, are due on or before November 2, 2016 and bear interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%. As of September 30, 2015 the rate on the LIBOR option was 2.95%.

—

Under the term loan facility, $17.5 million was outstanding at December 31, 2014 which was repaid in full in January 2015. Prior to the repayment, borrowings under the term loan bore interest at an interest rate option of a base rate as defined in the agreement plus 2.0% or LIBOR plus 3.0%.

The Company’s original credit agreement with Comerica Bank required the maintenance of specified financial covenants, including a debt to EBITDA ratio and liquidity ratios. The Company was not in compliance with the debt to EBITDA covenant at September 30, 2014, which noncompliance was effectively waived in the amendment described below. During 2014, the Company executed an amendment to the credit agreement that waived the testing of certain covenants for compliance, provided that the Company maintained compensating balances equal to outstanding amounts under the credit agreement in accounts for which the bank had sole access. The Company’s amended credit agreement with Comerica executed in January 2015 modified the financial covenants to replace the compensating balance requirement with the maintenance of a modified EBITDA and certain liquidity covenants. As of September 30, 2015, the Company was in compliance with the related covenants. As of September 30, 2015 and December 31, 2014, the amount of the Company’s cash and investments in its compensating balance accounts for the term loan facility with Comerica Bank was zero and $17.5 million, respectively, which was classified as current and non-current restricted cash and investments on the Company’s condensed consolidated balance sheet (see Note 6).

On February 25, 2015, the Company entered into certain loan agreements and related special agreements (collectively, the “Loan Arrangements”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Mitsubishi Bank”) that provided for (i) a term loan in the aggregate principal amount of 500 million JPY ($4.2 million) (the “Term Loan A”) and (ii) a term loan in the aggregate principal amount of one billion JPY ($8.4 million) (the “Term Loan B” and together with the Term Loan A, the “Mitsubishi Bank Loans”). The Mitsubishi Bank Loans are secured by a mortgage on certain real property and buildings owned by our Japanese subsidiary. The full amount of each of the Mitsubishi Bank Loans was drawn on the closing date of February 25, 2015. Interest on the Mitsubishi Bank Loans accrues and is paid monthly based upon the annual rate of the monthly Tokyo Interbank Offer Rate (TIBOR) plus 1.40%. The Term Loan A requires interest only payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal amount on the maturity date. The Term Loan B requires equal monthly payments of principal equal to 8,333,000 JPY until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8,373,000 JPY on the maturity date. Interest on the Term Loan B is accrued based upon monthly TIBOR plus 1.40% and is secured by real estate collateral. In conjunction with the execution of the Bank Loans, the Company paid a loan structuring fee, including consumption tax, of 40,500,000 JPY ($0.3 million).

The Mitsubishi Bank Loans contain customary representations and warranties and customary affirmative and negative covenants applicable to the Company’s Japanese subsidiary, including, among other things, restrictions on cessation in business, management, mergers or acquisitions. The Mitsubishi Bank Loans contain financial covenants relating to minimum net assets, maximum ordinary loss and a dividends covenant. The Mitsubishi Bank Loans also include customary events of default, including but not limited to the nonpayment of principal or interest, violations of covenants, restraint on business, dissolution, bankruptcy, attachment and misrepresentations. In February 2015, the Company used a portion of the proceeds of the Mitsubishi Bank Loans to repay the then-outstanding loan related to the acquisition of NeoPhotonics Semiconductor, which had an outstanding principal and interest amount of approximately 710 million JPY ($6.0 million) and the remainder will be used for general working capital. As of September 30, 2015, outstanding principal balance under the Mitsubishi Bank Loans was approximately 1.4 billion JPY (approximately $12.0 million) and the Company was in compliance with the related covenants.

At September 30, 2015, maturities of long-term debt were as follows (in thousands):


2015 (remaining three months)	$	24,009
2016		835
2017		835
2018		5,009
2019		835
Thereafter		4,315
	$	35,838