Note 10. Long-term debt

Long-term debt at the indicated dates consists of the following:

	June 30,			December 31,
	2015			2014
	(in thousands)

Senior debt, net of discount of $1,462 and $1,743	$	24,600		$	14,320
10% subordinated note payable to a related party	6,644			6,446
Capital leases, maturing through August 2017	3,211			4,008


	34,455			24,774
Less current portion	(3,257		)	(1,653		)


Long-term debt	$	31,198		$	23,121

Senior debt: In March 2014, the Company entered into a Loan and Security Agreement (“LSA”) with Hercules which was subsequently amended in August 2014, September 2014, December 2014 and June 2015. As amended, the LSA provides a total commitment of $25.0 million, available in four draws. Borrowings under the LSA are collateralized by substantially all of the Company’s assets, except the Company’s intellectual property and assets under capital lease. The first draw of $10.0 million, or Tranche 1, was issued during March 2014 and was used in its entirety to repay outstanding principal under a previous credit facility. The second draw of $5.0 million, or Tranche 2, was issued during September 2014. Tranche 3 in the amount of $5.0 million was issued in March 2015. In June 2015, the fourth and final draw of $5.0 million, or Tranche 4, was issued prior to meeting the Tranche 4 milestones. The Company met the Tranche 4 Milestones stated in the LSA prior to July 31, 2015.

Each draw is to be repaid in monthly installments, comprised of interest-only monthly payments until May 2016, when installments of interest and principal calculated over a thirty-month amortization period commence. A balloon payment of the entire principal balance outstanding on October 1, 2017 and all accrued but unpaid interest thereunder is due and payable on October 1, 2017. The interest rate is 9% per annum for Tranche 1 and Tranche 4 and 10.5% per annum for Tranche 2 and Tranche 3. An end of term charge of $1.1 million is payable at the earliest to occur of (1) October 1, 2017, (2) the date the Company prepays its outstanding Secured Obligations, as defined therein, or (3) the date the Secured Obligations become due and payable.

The LSA, as amended, also contains certain financial and nonfinancial covenants, including limitations on the Company’s ability to transfer assets, engage in a change of control, merge or acquire with or into another entity, incur additional indebtedness, repurchase or redeem stock or other equity interest other than pursuant to employee stock repurchase plans or other similar agreements, make investments and engage in transactions with affiliates. Upon an event of default, the lender may declare the unpaid principal amount of all outstanding loans and interest accrued under the loan and security agreement to be immediately due and payable, and exercise its security interests and other rights. As of December 31, 2014 and June 30, 2015, the Company was in compliance with the covenants under the LSA, as amended.

In connection with the LSA, the Company issued to Hercules 60,000 warrants in March 2014 and 110,000 warrants in September 2014 (“Series C Warrants”) to purchase shares of the Company’s Series C Redeemable Convertible Preferred Stock at the then current price of $5.00 per share. These warrants will become warrants for the purchase of 70,833 shares of common stock at a price of $12.00 per shares upon the closing of the Company’s IPO.

The fair value of the 60,000 Series C Warrants issued March 28, 2014 as part of the initial draw-down described above was $124,000 and the residual proceeds of $9,876,000 were allocated to the $10.0 million interest bearing note. The fair value of the 110,000 Series C Warrants issued September 25, 2014 as part of the second draw-down described above was $248,000 and the residual proceeds of $4,752,000 were allocated to the $5.0 million interest bearing note. The warrants were recorded as a liability with a related debt discount to be amortized as interest over the term of the LSA.

End of term charge amortization totaled $76,000 and $151,000 for the three and six months ended June 30, 2015, respectively. Debt discount amortization to interest expense for the senior debt totaled $65,000 and $129,000 for the three and six months ended June 30, 2015, respectively. At the end of the three and six months ended June 30, 2015, the warrant fair values were remeasured and the changes in fair value of approximately $87,000 and $119,000, respectively, have been recorded in other income (expense), net in the Company’s consolidated statements of operations. No change in fair value of these warrants was recorded in the three and six months ended June 30, 2014.

Credit Agreement: Previously, the Company had a credit agreement entered into on August 20, 2012 (the “Credit Agreement”) with a financial institution. The Credit Agreement provided for a four-year $10.0 million term loan, with an annual interest rate of 9.5% payable monthly. In addition, a $250,000 fee payable at maturity was being amortized using the effective interest method. The proceeds from the initial $10.0 million draw on the LSA were used to repay the outstanding $10.0 million Credit Agreement balance and $697,000 of interest expense related to the Credit Agreement in March 2014. The early prepayment of the Credit Agreement resulted in a $445,000 loss (due to recording the $98,000 prepayment penalty and writing off the $154,000 unamortized exit fee and the $193,000 of unamortized loan cost) reflected in interest expense for the six months ended June 30, 2014.

10% subordinated related party note: The Company has an amended and restated subordinated note (the “Note”) in the aggregate principal amount of $5.9 million that was issued by the Company to Essex Capital Corporation, or Essex. Interest accrues and adds to the principal balance until such time as the Company achieves positive EBITDA for three consecutive months. On July 19, 2014, the interest rate on the Note was reduced to 6% for the period from July 19, 2014 through July 31, 2015 pursuant to an amendment to the Note entered into as consideration for the $128,000 payment made by the Company to Essex as part of the Settlement and Release of Claims Agreement with Essex and a third party (see Note 16). The Company recorded this amendment as a loan modification. At each of December 31, 2014 and June 30, 2015, the aggregate principal amount of the Note was $5.9 million, and $511,000 and $709,000 in interest had been accrued through the year ended December 31, 2014 and through the six months ended June 30, 2015, respectively.

Capital lease obligations to related party: As described in Notes 7 and 16, during the years ended December 31, 2013 and 2014, the Company entered into agreements with a related party for the sale-leaseback of existing and newly acquired assets with a total capitalized cost of $5.5 million and $795,000, respectively, which are classified as capital leases. The approximate imputed interest rate on these leases is 14.5% and interest expense on these leases was $123,000 and $172,000 for the three months ended June 30, 2015 and June 30, 2014, respectively, and $261,000 and $338,000 for the six months ended June 30, 2015 and 2014, respectively.

Future principal payments of long-term debt, including capital leases, are as follows:

	June 30,
Period ending:	2015
	(in thousands)

2015	$	3,257
2016	17,357
2017	15,303


Future principal payments	$	35,917


Less unamortized debt discount	(1,462		)
Less current portion of long-term debt	(3,257		)


Total long-term debt	$	31,198