Loan Payable

12 Months Ended

Jan. 02, 2016

Debt Disclosure [Abstract]

Loan Payable

Loan payable as of January 2, 2016 consists of the following:

Principal amount payable for following years ending December
2016	$       1,370,454
2017	1,991,688
2018	1,637,858
Total principal payments	5,000,000
Accrued end of term charge	68,082
Total loan payable	5,068,082
Less unamortized debt discount	194,169
Less current portion	1,528,578
Loan payable – long term	$      3,345,335

The total interest expenses related the term loan, including cash interest payments, the amortizations of debt issuance costs and debt discount, and the accrual of end of term charge were approximately $554,000 and $112,000 for the years ended January 2, 2016 and January 3, 2015, respectively.

On September 29, 2014, the Company entered into a loan and security agreement (the “Loan Agreement”) with Hercules Technology II, L.P., as lender (“Lender”) and Hercules Technology Growth Capital, Inc., as agent. Lender provided us with access to a term loan of up to $5 million. The first $2.5 million of the term loan was funded at closing. The first advance was to be repaid in equal monthly installments of principal and interest (mortgage style) through the loan’s maturity on April 1, 2018, following an initial interest-only period that was to conclude on October 31, 2015. In connection with the loan, the Company paid a $50,000 facility charge to Lender and recorded as debt issuance cost.

The term loan bears interest at the rate per year equal to the greater of either (i) 9.35% plus the prime rate as reported in The Wall Street Journal minus 3.25%, or (ii) 9.35%. The interest rate as of January 2, 2016 was 9.60%. The Company may prepay all, but no less than all, of the outstanding loan balance, subject to prepayment charges of 3% during the first twelve months following closing, 2% during the next twelve months and 1% thereafter. On the earliest to occur of the (a) the loan maturity date, (b) the date the Company prepays the outstanding loan balance or (c) the date the outstanding loan balance becomes due and payable, the Company will pay Lender an end of term charge equal to 3.75% of all amounts drawn under the loan.

The Loan Agreement further provides that, subject to certain conditions, any regularly scheduled installment of principal due to Lender may be paid, in whole or in part at the option of the Company or Lender, by converting a portion of the principal of the term loan into shares of the Company’s common stock (the “Conversion Shares”) at a conversion price of $1.293, in lieu of payment in cash. The aggregate principal amount to be paid in Conversion Shares shall not exceed $1,000,000. Of this amount 50% shall convert at the Lender’s option and 50% shall convert at the Company’s option.

Pursuant to the Loan Agreement, the Company issued Lender a warrant (the “Warrant”) to purchase 419,020 shares of our common stock at an exercise price of $1.062 per share, subject to customary anti-dilution provisions. The Warrant is exercisable and expires five years from the date of issuance.

In connection with the Loan Agreement, the Company granted first priority liens and security interest in substantially all of our assets, exclusive of intellectual property and 35% of the capital stock of any foreign subsidiary, as collateral for the obligations under the Loan Agreement. The Loan Agreement also contains representations and warranties by the Company and Lender, indemnification provisions in favor of Lender and customary covenants, and events of default. Upon the occurrence of an event of default, a default interest rate of an additional 4% will be applied to the outstanding loan balances, and Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Loan Agreement. We are currently in compliance with all loan covenants.

On June 17, 2015, the Company and Hercules Technology II, L.P entered into Amendment No. 1 (the “Amendment”) to the Loan Agreement. Pursuant to the Amendment, the parties agreed that the interest only period shall be extended to March 31, 2016. The maturity date remains unchanged at April 1, 2018 and any remaining principal balance of the loan and all unpaid interest shall be due on the maturity date. The Amendment became effective on June 18, 2015 upon the funding of the full amount of the $2.5 million second advance and payment of a nonrenewable facility fee of $15,000.

The second advance of $2.5 million is treated as if the Company entered into a separate loan. The facility fee of $15,000 is treated as debt issuance costs and are being amortized as interest expense using the effective interest method over the term of the loan. There is also additional $94,000 end of term charge the Company will pay, which is 3.75% of the $2.5 million drawn. The end of term charge is being accrued as additional interest expense using the effective interest rate method over the term of the loan.

The Company determined that the amended terms of the first advance of $2.5 million on September 29, 2014 were not substantially different from the original terms. The Company reflected the change prospectively as yield adjustments, based on the revised terms.

Debt Issuance Costs and End of Term Charge

The Company incurred debt issuance costs of approximately $103,000 and $15,000 for the first and second advance, respectively, in connection with this term loan. The debt issuance costs are being amortized as interest expense using the effective interest method over the term of the loan. Amortization of debt issuance costs were $41,000 and $12,000 for the years ended January 2, 2016 and January 3, 2015 and the remaining unamortized debt issuance costs of $65,000 are presented as a direct deduction from the carrying amount of the debt liability. In addition, the Company will pay an end of term charge of $188,000, which is 3.75% of the $5.0 million drawn under the loan. The end of term charge is being accrued as additional interest expense using the effective interest rate method over the term of the loan. The Company accrued $58,000 and $10,000 of this fee during the years ended January 2, 2016 and January 3, 2015, respectively.

Warrant Issued to Lender

The Company determined the Warrant issued to Lender during the year ended January 3, 2015 to be equity classified. The Company estimated the fair value of this Warrant as of the issuance date using a Black-Scholes option pricing model with the following assumptions:

	September 29, 2014
Fair value of common stock	$1.08
Volatility	72.40%
Expected dividends	0.00%
Contractual term	5.0 years
Risk-free rate	1.76%

The Company utilized this fair value in its allocation of the loan proceeds between loan payable and the Warrant which was performed on a relative fair value basis. The fair value of the Warrant to purchase 419,020 shares of our common stock was approximately $273,000. Ultimately, the Company allocated $246,000 to the Warrant and recognized this amount in additional paid in capital. Accordingly, this amount is recognized as a debt discount and is being amortized as interest expense using the effective interest method over the term of the loan. Amortizations of this debt discount were $90,000 and $28,000 for the years ended January 2, 2016 and January 3, 2015, respectively.