DEBT

6 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

NOTE 7 — DEBT

The following summarizes the debt activity of the Company during the six months ended June 30, 2012 (amounts in thousands):

	Total Debt			SVB Term Loan			SVB Line of Credit			BIA Note		Plexus Note		Subordinated Notes			Promissory Note
Debt obligation as of December 31, 2011	$	27,989		$	13,500		$	3,100		$	8,078	$	-	$	2,602		$	709
Issuance of Plexus Note, net of discount		5,436			-			-			-		5,436		-			-
Debt discount amortization		139			-			-			47		22		70			-
Increase in SVB Term Loan		14,500			14,500			-			-		-		-			-
Repayment on Line of Credit		(3,100	)		-			(3,100	)		-		-		-			-
Principal payments		(1,341	)		(1,000	)		-			-		-		(105	)		(236	)
Debt obligation as of June 30, 2012	$	43,623		$	27,000		$	-		$	8,125	$	5,458	$	2,567		$	473

Term Loan and Line of Credit

On June 6, 2011, immediately following the PacketExchange acquisition, the Company (the “Borrower”) entered into a joinder and first loan modification agreement with Silicon Valley Bank (“SVB”), which amended the loan agreement, dated September 30, 2010, by and among SVB and the Company.

On April 30, 2012, in connection with the nLayer acquisition, the Company and nLayer entered into a modification agreement with SVB, which increased the outstanding amount of the Term Loan by $7.5 million, while the amount of the Line of Credit remains unchanged.

On May 23, 2012, the Company refinanced the Term Loan through a syndication led by SVB, which amends the loan agreement dated April 30, 2012, as amended, by and among SVB and the Borrower, which increased the outstanding amount of the Term Loan by $7.0 million, while the amount of the Line of Credit remains unchanged.

The Term Loan matures on May 1, 2016. The Company will repay the Term Loan in sixteen (16) equal quarterly principal installments of $1.25 million, with each payment of principal being accompanied by a payment of accrued interest. The Term Loan bears interest at a floating rate per annum, calculated daily, equal to the prime rate plus 4.5% per annum, which may be reduced to 3.5% per annum if the Company’s consolidated senior leverage ratio is less than 2:1 and certain other criteria are met.

Any borrowing under the Line of Credit will mature on April 30, 2016, and will bear interest at a floating rate per annum, calculated daily, equal to the prime rate plus 3.5% per annum, which may be reduced to 2.5% per annum if the Company’s consolidated senior leverage ratio is less than 2:1 and certain other criteria are met.

Note Purchase Agreement for Second Lien Credit Facility

Concurrent with entering in to the modification agreement on June 6, 2011, the Company (the “Note Borrower”) entered into a note purchase agreement (the “Purchase Agreement”) with the BIA Digital Partners SBIC II LP (“BIA”).  The Purchase Agreement provided for a total commitment of $12.5 million, of which $7.5 million was immediately funded (the “Notes”).  The Notes were issued at a discount to face value of $0.4 million and the discount is being amortized into interest expense over the life of the Notes. The remaining $5.0 million of the committed financing was available to be called by the Note Borrower on or before August 11, 2011, subject to extension to December 31, 2011, at the sole option of BIA.  On September 19, 2011, BIA agreed to extend the commitment period and funded the Note Borrower an additional $1.0 million. The additional funding was issued at a discount to face value of $45,000, due to the warrants issued, and the discount is being amortized into interest expense over the life of the Notes. As of June 30, 2012, there was no additional availability with BIA.

On April 30, 2012, in connection with the nLayer acquisition, the Company entered into an Amended and Restated Note Purchase Agreement (the “Amended Note Purchase Agreement”) with BIA and Plexus Fund II, L.P. (“Plexus”) (together with BIA, the “Note Holders”). The Amended Note Purchase Agreement provides for an increase in the total financing commitment by $8.0 million, of which $6.0 million was immediately funded. The remaining $2.0 million of the committed financing may be called by the Company, subject to certain conditions, on or before December 31, 2012, which may be extended at the sole option of the Note Holders. The funding by Plexus was issued at a discount to face value of $0.6 million, due to the warrants issued, and the discount is being amortized into interest expense over the life of the Notes.

The Notes mature on June 6, 2016. The obligations evidenced by the Notes will bear interest at a rate of 13.5% per annum, of which (i) at least 11.5% per annum is payable, in cash, monthly in arrears on the last calendar day of each month (“Interest Payment Date”) in each year (“Cash Interest Portion”) and (ii) 2.0% per annum is, at the Company’s option, payable in cash or payable in-kind. If the Company achieves certain performance criteria, the obligations evidenced by the Notes will bear interest at a rate of 12.0% per annum, with a Cash Interest Portion of at least 11.0% per annum payable in arrears on each Interest Payment Date of each year.

 Warrants

On June 6, 2011, pursuant to the Purchase Agreement, the Company issued to BIA a warrant to purchase from the Company 634,648 shares of the Company’s common stock, at an exercise price equal to $1.144 per share (as adjusted from time to time as provided in the Purchase Agreement). Upon the additional $1.0 million funding, the Company issued to BIA an additional warrant to purchase from the Company 63,225 shares of the Company’s common stock, at an exercise price equal to $1.181 per share.

On April 30, 2012, pursuant to the Amended Note Purchase Agreement, the Company issued to Plexus a warrant to purchase from the Company 535,135 shares of the Company’s common stock at an exercise price equal to $2.208 per share (as adjusted from time to time as provided in the warrant). Upon a change of control (as defined in the Amended Note Purchase Agreement), the repayment of the Notes prior to the maturity date of the Notes, the occurrence of an event of default under the Notes or the maturity date of the Notes, the holder of the warrant shall have the option to require the Company to repurchase from the holder the warrant and any shares received upon exercise of the warrant and then held by the holder, which repurchase would be at a price equal to the greater of the closing price of the Company’s common stock on such date or a price determined by reference to the Company’s adjusted enterprise value on such date, in each case, with respect to any warrant, less the exercise price per share.

The Company evaluated the down round ratchet feature embedded in the warrants and after considering ASC 480, Distinguishing Liabilities from Equity which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity, and ASC 815,  Derivatives and Hedging, the Company concluded the warrants should be treated as a derivative and recorded a liability for the original fair value amount of $0.5 million during 2011.  At June 30, 2012, the warrant liability was marked to market which resulted in income of $0.1 million.  The balance of the warrant liability was $1.7 million as of June 30, 2012, which is included in other long-term liabilities.

Subordinated Notes

On February 8, 2010, the Company completed a units offering (“February 2010 Units”) in which it sold 500 units, consisting of debt and common stock at a purchase price of $10,000 per unit, resulting in $5.0 million of proceeds to the Company.  Each unit consisted of 2,970 shares of the Company’s common stock and $7,000 in principal amount of the Company’s subordinated promissory notes due February 8, 2012.  The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized into interest expense over the life of the Notes. Interest on the subordinated promissory notes accrues at 10% per annum.  Accrued but unpaid interest was $204,000 as of June 30, 2012.

The proceeds from the February 2010 Units were to be applied by the Company to finance a portion of the purchase price under an asset purchase agreement with a potential acquisition target. On April 30, 2010, the asset purchase agreement with the potential acquisition target expired without consummation of the acquisition.  On May 13, 2010, investors representing $1.5 million in aggregated principal amount of the Company’s subordinated promissory notes and $0.9 million of the Company’s common stock waived the right to receive their refund and elected to retain some or all of their subordinated promissory notes. In May 2011, $1.4 million of the February 2010 Units subordinated notes were amended to mature in four equal installments on March 31, June 30, September 30 and December 31, 2013. The remaining $0.1 million of the February 2010 Units subordinated notes were paid in February 2012. The $1.4 million of subordinate notes that mature on June 30, 2013 are included in short-term debt and the remaining notes of $1.2 million are included in long-term debt as of June 30, 2012.

On December 31, 2010, the Company completed a financing transaction in which it issued 212 units, valued at $10,000 per unit (“December 2013 Units”).  Each unit consisted of 5,000 shares of the Company’s common stock, and $5,000 in principal amount of the Company’s subordinated promissory notes due December 31, 2013.   The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized, into interest expense, over the life of the notes.  Interest on the subordinated promissory notes accrues at 10% per annum. In total, the Company issued 1,060,000 shares of the Company’s common stock and $1.1 million in principal amount of subordinated promissory notes.

On February 16, 2011, the Company and the holders of the December 2013 Units amended the offering solely to increase the aggregate principal amount available for issuance from $1.1 million to $1.6 million. On February 16, 2011, the Company also completed a financing transaction in which it issued 40 units, at a purchase price of $10,000 per unit, for gross proceeds of $0.4 million. Each unit was comprised of 5,000 shares of the Company’s common stock, and $5,000 in principal amount of subordinated promissory notes.  The subordinated promissory notes were issued at a discount to face value of $47,000 and the discount is being amortized into interest expense over the life of the Notes.

As of June 30, 2012, the subordinated notes payable had a balance of $2.6 million. The balance includes notes totaling $2.1 million due to a related party, Universal Telecommunications, Inc. H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, is also the head of Universal Telecommunications, Inc., his own private equity investment and advisory firm. Also, included in the balance is $0.1 million of the notes held by officers and directors of the Company.

Promissory Note

As part of the June 2011 acquisition of PacketExchange, the Company assumed a promissory note of approximately $0.7 million. As of June 30, 2012, the remaining balance due was $0.5 million.