Annual report pursuant to Section 13 and 15(d)

Note 16 - Term Loan and Warrants

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Note 16 - Term Loan and Warrants
12 Months Ended
Mar. 29, 2014
Disclosure Text Block [Abstract]  
Long-term Debt [Text Block]

16       Term Loan and Warrants


On March 13, 2014 the Company entered into a three year, $2.0 million term loan agreement with PFG under which the Company received $1.0 million on March 14, 2014. Pursuant to the agreement, the Company would have been able to borrow an additional $1.0 million following the Company’s achievement of certain performance milestones which includes achieving $7.5 million in net sales during the first half of fiscal 2015 and two consecutive quarters of net income greater than zero during fiscal 2015, however with the amendment discussed in Note 20, Subsequent Events, an additional $500,000 was borrowed and the amount potentially available for the Company to borrow if the performance criteria are met was reduced to $500,000. The PFG loan agreement provides for a fixed interest rate of 9.75% and requires monthly interest only payments during the first six months of the agreement followed by monthly principal and interest payments over the remaining thirty months. The Company may prepay the loan at any time prior to maturity by paying all future scheduled principal and interest payments. The PFG Loan is secured by all of the assets of the Company under a lien that is junior to the SVB position described in Note 15, and limits borrowing under the SVB credit line limit to $3.0 million. The Company paid a loan fee of $30,000 for the first draw and is required to pay a loan fee of $10,000 upon receipt of the second draw. The initial $30,000 loan fee is recorded within prepaid expenses and will be amortized to interest expense over the three-year term of the PFG loan.


The future payments under this loan, consisting of $1.0 million in principal and $175,000 in interest, were as follows as of March 29, 2014.


Fiscal year (Dollars in thousands)

 

Principal

   

Interest

   

Total

 

2015

  $ 200     $ 94     $ 294  

2016

    400       60       460  

2017

    400       21       421  

Total

  $ 1,000     $ 175     $ 1,175  

The loan agreement contains financial covenants associated with the Company achieving minimum quarterly net sales and maintaining a minimum monthly shareholders’ equity. In the event of default by the Company, all or any part of the Company’s obligation to PFG could become immediately due.


The loan agreement also provided for the issuance of warrants convertible into 300,000 shares of the Company’s common stock, of which 180,000 were exercisable upon receipt of the first draw, 80,000 became exercisable in connection with the June 16, 2014 amendment discussed in Note 20, Subsequent Events, and 40,000 would become exercisable if the remaining $500,000 is funded. Each warrant issued under the loan agreement has a term of five years and an exercise price of $1.42 which is equal to the average NASDAQ closing price of the Company’s common stock for the ten trading days prior to the first draw. The number of shares exercisable under the warrant agreements are subject to downward adjustment from 180,000 to 155,000, 80,000 to 67,500 and 40,000 to 27,500, respectively, if the Company achieves in fiscal 2015 net sales of at least $18.0 million and net income of at least $1.0 million.


If the warrants are not exercised before expiration on March 13, 2019, the warrants associated with the first draw would be settled for $150,000 in cash, the warrants associated with the June 16, 2014 amendment would be settled for $67,000 in cash and the warrants that would be issued if the additional $500,000 is funded would be settled for $33,000 in cash. The warrants could be settled for cash at an earlier date in the event of any acquisition or other change in control of the Company, future public issuance of Company securities or liquidation (or substantially similar event) of the Company. The Company currently has no plans for any of the aforementioned events, and as a result, the cash payment date is estimated to be the expiration date unless warrants are exercised before then. Due to the fixed payment amount on the expiration date, the warrant structure in substance is a debt arrangement (Warrant Debt) with a zero interest rate, a fixed maturity date and a feature that makes the debt convertible to common stock. The conversion feature is an embedded derivative and due to the adjustment feature based on sales is not considered indexed to the Company’s stock. Thus, for accounting purposes, the conversion feature is bifurcated and accounted for separately from the host debt instrument as a derivative liability measured at fair value which resulted in an initial carrying value of $128,000.


The proceeds from the first draw were allocated between the PFG Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair values on the date of issuance which resulted in initial carrying values of $822,000 and $178,000, respectively. The conversion feature was bifurcated from the Warrant Debt and recorded at fair value resulting in a remaining carrying value of $50,000 associated with the Warrant Debt. The resulting discounts of $178,000 on the PFG Debt and $100,000 on the Warrant Debt will be accreted to interest expense under the effective interest method over the three-year term of the PFG Debt and the five-year term of the Warrant Debt.