Note 8—Loan Payable

On February 6, 2017, the Company entered into a loan agreement (“Loan Agreement”) with a syndicate of investors (the “Lenders”) pursuant to which the Company borrowed $17.5 million (the “Loan Amount”). The loan matures on December 29, 2017. Interest accrued at a rate of 5% per annum until June 30, 2017 and then increased to a rate of 10% per annum. Other significant terms of the Loan Agreement include the following:

$15 million of the Loan Amount is be used to pay the Initial Civil Penalty provided for in the Consent Decree in accordance with the payment requirements set forth in the Consent Decree. The remainder of the Loan Amount is being used for general corporate purposes and working capital needs.

Upon funding the Loan Amount, the Lenders received warrants to purchase 252,161 shares of the Company’s Class B common stock with an aggregate exercise price equal to $7.5 million based on an exercise price of $34.70 per share. The exercise price was based on the weighted average trading price for the Class B common stock for the five trading days preceding the funding date. The warrants expire at the earlier of December 31, 2018 or a liquidation event (as defined). Warrants to purchase 147,682 shares of Class B common stock were exercised by the holders in the third quarter of Fiscal 2017 (see Note 9 - Equity).

From and after June 30, 2017, the Lenders are entitled to receive additional warrants on a monthly basis with an aggregate value equal to 7.5% (the rate was 10% for July 2017 and August 2017) of the then outstanding Loan Amount. The exercise price for such warrants is based on the weighted average trading price for the Class B common stock for the ten trading days preceding the warrant issue date. Under this provision, the Lenders received the following warrants:

a. On July 3, 2017, the Lenders received warrants to purchase 6,899 shares of the Company’s Class B common stock with an exercise price of $179.62 per share.

b. On August 1, 2017, the Lenders received warrants to purchase 6,911 shares of the Company’s Class B common stock with an exercise price of $179.26 per share.

c. On September 1, 2017, the Lenders received warrants to purchase 5,188 shares of the Company’s Class B common stock with an exercise price of $179.18.

d. On October 2, 2017, the Lenders received warrants to purchase 5,152 shares of the Company’s Class B common stock with an exercise price of $180.48.

To the extent the warrants are held by a Lender at the time of exercise, the exercise price will be paid by the reduction of the outstanding Loan Amount. As of July 31, 2017, the Loan Amount was reduced by $5,125,000 as the result of the exercise of 147,682 warrants received by the Lenders upon making the loan (see Note 9). There were no additional warrant exercises for the period from August 1, 2017 to the date of the filing of this report.

The Loan Agreement is secured by a first priority security interest in primarily all of the assets of the Company.

The fair value of the warrants at the date of grants was estimated using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rate	1.13	%
Dividend yield	0	%
Volatility	5% - 96.68	%
Expected term (in years)	1.92

Expected volatility is based on historical volatility of the Company’s common stock; the expected term until exercise represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company has not paid any dividends since its inception and does not anticipate paying any dividends for the foreseeable future, so the dividend yield is assumed to be zero.

The Company also incurred cash costs of $80,000 in connection with the loan.

The fair value of the warrants and the cash loan costs are amortized to interest expense over the term of the Loan Agreement. Amortization amounted to $2,286,000 for Fiscal 2017.

Interest expense incurred under the Loan Agreement totaled $402,000 for Fiscal 2017.

At July 31, 2017, loans payable were $11,274,000 which is net of unamortized debt discounts of $1,101,000.