DEBT

Long-term debt is comprised of the following (in thousands):

	At
	June 30, 2017			December 30, 2016
Term loan	$	16,163		$	16,163
Deferred financing fees		(1,131	)		(1,262	)
Discount on debt		(1,003	)		(1,157	)
Total debt		14,029			13,744
Less current portion of long-term debt		1,500			—
Total long-term debt	$	12,529		$	13,744

Credit Facility

– The Company has a credit facility, as amended in

February 2017 (

the “Credit Facility”), that consists of (a) term loan facilities in an aggregate maximum principal amount of

$40,000,000

comprised of (i) a

$15,000,000

Term Loan A Commitment, which was funded in full on

March 18, 2016, (

ii) a

$12,500,000

Term Loan B Commitment, which is available for draw

June 30, 2017

through

December 31, 2017,

and (iii) a

$12,500,000

Term Loan C Commitment, which is available for draw

December 31, 2017

through

June 30, 2018 (

collectively, the “Term Loans”); and (b) a Revolving Line Commitment in a maximum principal amount of

$5,000,000

(the “Revolving Loans” and collectively with the Term Loans, the “Loans”). Availability of the Term Loan B Commitment is subject to the Company achieving consolidated trailing

six

-month revenues of at least

$13,500,000,

and the availability of the Term Loan C Commitment is subject to the Company achieving consolidated trailing

six

-month revenues of at least

$20,000,000.

Based on the Company’s sequential quarterly revenue growth since the commercial release of its Algovita system into the United States market, and on its expectations of future and continued revenue growth, the Company believes that it should be able to achieve these consolidated trailing

six

-month revenue thresholds during the relevant periods, although there can be

assurances that the Company will be able to do so due to unforeseen obstacles that

may

negatively affect its business.

The Company has the right to draw on the Term Loan B and C Commitments within

days of achieving the applicable revenue threshold. The Revolving Line Commitment is subject to a borrowing base of

80%

of the aggregate amount of eligible accounts receivable of the Company, which advance rate and eligibility criteria

may

be modified from time to time based on periodic collateral examinations.

The Term Loans bear interest at a floating rate equal to the prime rate plus

4.15%,

with a floor of

7.65%.

June 30, 2017

the interest rate on borrowings under the term loan was

8.15%.

The Company pays monthly accrued interest only on the Term Loans through

December 2017 (

March 2018

if the Term Loan B Commitment is funded), and thereafter the Company will pay monthly accrued interest on the Term Loans plus equal payments of principal for

months (or

months if the Term Loan B Commitment is funded). At the maturity of the Term Loans, on

September 1, 2020,

all principal on the Term Loans then outstanding, plus an additional

7.75%

of the funded loan amounts (the “Final Payment”), will be due and payable. This Final Payment has been treated as an in substance discount and will be amortized using the straight-line method over the life of the loan. The Revolving Loans bear interest at a floating rate equal to the prime rate plus

3.45%,

with a floor of

6.95%.

The Company pays monthly accrued interest only on the Revolving Loans until maturity on

March 18, 2018,

at which time all principal on the Revolving Loans will be due and payable. There were

borrowings on the Revolving Loans as of

June 30, 2017.

March 18, 2016

the Company paid an arrangement fee of

$1,125,000

to Piper Jaffray Companies (“Piper Jaffray”), which equals

2.50%

of the aggregate principal amount of the Credit Facility, a commitment fee of

$200,000

for all of the Term Loan A, B, and C Commitments, and

one

-half of a

$25,000

commitment fee for the Revolving Loans, the remaining

one

-half of which was due and paid on the

one

year anniversary of the initial closing. In connection with the amendment dated

February 14, 2017,

the Company also paid an amendment fee of

$25,000

plus expenses of the lenders. The Term Loan B Commitment and the Term Loan C Commitment are subject to a non-use fee of

of the amount of such commitment if the commitment becomes available, but the Company declines to borrow the Term Loans thereunder. If any Term Loans are voluntarily prepaid prior to their scheduled maturity, the Company must pay, in addition to the Final Payment, a prepayment fee equal to

of the prepaid principal if paid in the

first

year after the initial closing,

of the prepaid principal if paid in the

second

year after the initial closing, and

of the prepaid principal if paid thereafter.

The Loans are secured by a

first

priority lien on substantially all of the assets of the Company, including, without limitation, all cash, deposit accounts, accounts receivable, equipment, inventory, contract rights, and the Company’s real property located in Blaine, Minnesota, but excluding all intellectual property of the Company (other than accounts receivable and proceeds of intellectual property). The Company’s intellectual property is subject to a negative pledge. The Company must maintain its primary operating and investment accounts with Silicon Valley Bank, which accounts are subject to customary control agreements.

The Credit Facility contains customary representations and warranties, reporting and other covenants for credit facilities of this kind including prohibitions on the payment of cash dividends on the Company’s capital stock and restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. If the lenders fund the Term Loan B Commitment, the Company will be subject to a quarterly financial covenant requiring the Company to achieve consolidated revenues of at least

75%

of Nuvectra’s forecasts that have been previously approved by the lenders. The events of default in the Credit Facility are customary for credit facilities of this kind, and include failure to pay interest or principal, breaches of affirmative and negative covenants, a material adverse change occurring, and cross defaults to other material agreements of the Company.

As a condition to the lenders’ funding the Loans under the Credit Facility, concurrently with the funding under the Term Loan A Commitment on

March 18, 2016, (

i) the Company issued to Oxford Finance LLC a warrant to purchase

56,533

shares of Nuvectra common stock at an exercise price of

$5.97

per share, which warrant is exercisable until

March 18, 2026,

and (ii) the Company issued to Silicon Valley Bank a warrant to purchase

56,533

shares of Nuvectra common stock at an exercise price of

$5.97

per share, which warrant is exercisable until

March 18, 2026.

The fair value of the warrants on the date of grant totaled approximately

$0.2

million and was recorded as a discount on long-term debt and as additional paid-in capital in the Consolidated Balance Sheet, as the warrants met the criteria under the relevant accounting standard for treatment as an equity instrument. The debt discount will be amortized over the term of the Term Loan A Commitment.

Upon the funding of each of the Term Loan B Commitment and the Term Loan C Commitment, as applicable, Oxford Finance LLC and Silicon Valley Bank will each be entitled to additional warrants for the purchase of Nuvectra common stock. The number of shares under each warrant will be equal to the amount of the Term Loan made by each lender multiplied by

4.50%

and divided by the then current trading price of Nuvectra common shares. The exercise price of the warrants will be equal to the trading price of Nuvectra common shares on the date of funding. The fair value of these future warrants as of

June 30, 2017

was approximately

$0.6

million and is recorded in other long-term liabilities in the Consolidated Balance Sheet. These warrants were classified as a derivative liability because the Company did

not

meet the criteria under the relevant accounting standard for treatment as equity instruments. As a result, the derivative liability warrants will be remeasured to its fair value at the end of each reporting period until it meets the requirements for equity treatment or is cancelled. See Note

“Fair Value Measurements” for additional information.

Deferred Financing Fees –

The change in deferred financing fees is as follows (in thousands):

At December 30, 2016	$	1,262
Additions during the period		42
Amortization during the period		(173	)

At June 30, 2017	$	1,131

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)

2015

03,

“Interest-Imputation of Interest (Subtopic

835

): Simplifying the Presentation of Debt Issuance Costs,” the Company has presented debt issuance costs as a direct deduction from Long-Term Debt in the Consolidated Balance Sheet.