Quarterly report pursuant to Section 13 or 15(d)

3. Condensed Consolidated Balance Sheets

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3. Condensed Consolidated Balance Sheets
6 Months Ended
Sep. 30, 2013
Balance Sheet Related Disclosures [Abstract]  
3. Condensed Consolidated Balance Sheets

Inventories

 

Inventories consisted of the following (in thousands):

 

    September 30,     March 31,  
    2013     2013  
Raw materials   $ 591     $ 835  
Finished goods     234       327  
      825       1,162  
Less: inventory allowances     (76 )     (170 )
    $ 749     $ 992  

 

Notes Payable

 

Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc.

 

On May 1, 2010, the Company entered into a loan and security agreement and a supplement to the loan and security agreement with Venture Lending & Leasing V, Inc. (“VLL5”) to borrow up to an aggregate of $3,000,000 (collectively, the “VLL5 Agreements”). On May 3, 2010, the Company borrowed $2,000,000 on the first tranche and on November 17, 2010, the Company borrowed $1,000,000 on the second tranche.  The loan is secured by all assets of the Company excluding intellectual property under certain circumstances. Related to the first tranche, the Company made eight monthly interest-only payments of $16,660 through December 1, 2010. Thereafter, the Company made interest and principal payments of $75,000 per month through June 1, 2013. Related to the second tranche, the Company paid monthly interest only payments of $8,330 through May 1, 2012. Thereafter, the Company made interest and principal payments of $37,500 per month through November 1, 2013. The Company made a final balloon payment related to the first tranche of $132,000 prior to the June 1, 2013 deadline, and made a final balloon payment related to the second tranche of $66,000 on or prior to November 1, 2013. The effective interest rate on the first and second tranche is 13.3%. During the three months ended September 30, 2013 and 2012, the Company made interest payments of $7,000 and $50,000, respectively, and principal payments of $24,000 and $288,000, respectively. During the six months ended September 30, 2013 and 2012, the Company made interest payments of $27,000 and $109,000, respectively, and principal payments of $556,000 and $566,000, respectively.

 

In connection with the VLL5 Agreements, the Company issued two warrants to Venture Lending & Leasing V, LLC, a Delaware limited liability company (“LLC5”), which, in the aggregate, had a total put option cash value of $750,000 (the “VLL5 Warrants”). The $750,000 cash value of the VLL5 Warrants was recorded as a cash settlement liability and a corresponding amount of $750,000 was recorded as a discount on the note payable.  The discount is being accreted to non-cash interest expense over the term of the loan using the effective interest method.  During the three months ended September 30, 2013 and 2012, the Company recorded $24,000 and $63,000, respectively, of non-cash interest expense related to the loans. During the six months ended September 30, 2013 and 2012, the Company recorded $90,000 and $125,000, respectively, of non-cash interest expense related to the loans. The remaining balance of the loans amounted to $138,000 at September 30, 2013, which is included in the current portion of long-term debt, net of debt discount in the accompanying condensed consolidated balance sheet.

 

On June 29, 2011, the Company entered into a loan and security agreement and a supplement to the loan and security agreement with Venture Lending & Leasing VI, Inc. (“VLL6”) to borrow up to an aggregate of up to $2,500,000 (collectively, the “VLL6 Agreements”).  The VLL6 Agreements provided for a first tranche of $1,500,000 and, upon meeting certain financial milestones, a second tranche of $1,000,000. The loan is secured by the assets of the Company including intellectual property. On June 29, 2011, the Company borrowed $1,500,000 on the first tranche. On September 30, 2011, the Company met the financial milestones to borrow the second tranche. On November 10, 2011, the Company borrowed the second tranche.  The cash interest or “streaming” rate on the loan is 10%. In connection with the first tranche, for the first nine months, the Company made monthly interest-only payments set at $12,500 through March 1, 2012. The Company now makes principal and interest payments of $56,250 per month through September 1, 2014. Additionally, the Company will make a final balloon payment of $116,505 on September 29, 2014. In connection with the second tranche, for the first nine months, the Company made monthly interest-only payments set at $8,333 through August 31, 2012. The Company now makes principal and interest payments of $37,500 per month through February 1, 2015. Additionally, the Company will make a final balloon payment of $77,670 on February 1, 2015, resulting in an effective interest rate of 13%. During the three months ended September 30, 2013 and 2012, the Company made interest payments of $53,000 and $75,000, respectively and made principal payments of $228,000 and $148,000, respectively. During the six months ended September 30, 2013 and 2012, the Company made interest payments of $114,000 and $151,000, respectively and made principal payments of $449,000 and $266,000, respectively.

 

 

In connection with the VLL6 Agreements, the Company issued a warrant to Venture Lending & Leasing VI, LLC (individually referred to as “LLC6” and collectively referred to with LLC5 as “WTI”) for the purchase of 32,332 shares of its common stock at a purchase price per share equal to $11.592. Once the Company became eligible to draw the second tranche of the loan, the Company was required to issue a second warrant to LLC6 with coverage equal to $62,500 for the purchase of additional shares of the Company’s common stock at a strike price equal to the 10-day volume-weighted average price (“VWAP”) ending on the trading day prior to the date the Company satisfied the second tranche milestones. On September 30, 2011, the Company met the second tranche milestones and the Company issued the second warrant for the purchase of 5,586 shares of its common stock at a purchase price per share equal to $11.189. On November 10, 2011, the Company borrowed the second tranche and therefore the Company became obligated to issue a third warrant to LLC6 with coverage equal to $62,500 for the purchase of additional shares of its common stock at a strike price equal to the 10-day VWAP ending on the trading day prior to the borrowing date of the second tranche. In connection with borrowing the second tranche, the Company issued the third warrant for the purchase of 5,884 shares of its common stock at a purchase price per share equal to $10.623. The three warrants issued to LLC6 are hereinafter collectively referred to as the “VLL6 Warrants,” and had a total put option cash value, in the aggregate, of $1,250,000. The Company recorded the $1,250,000 cash value of the VLL6 Warrants as a cash settlement liability and a corresponding amount of $1,250,000 was recorded as a discount on the note payable. The discount is being accreted to non-cash interest expense over the term of the loan using the effective interest method. For the three months ended September 30, 2013 and 2012, the Company recorded $104,000 and $91,000 of non-cash interest related to the loan, respectively. For the six months ended September 30, 2013 and 2012, the Company recorded $204,000 and $178,000 of non-cash interest related to the loan, respectively. The remaining balance of the discount on the loan amounted to $474,000 at September 30, 2013. The remaining balance of the loan amounted to $1,367,000 at September 30, 2013, of which $821,000 is included in the current portion of long-term debt in the accompanying condensed consolidated balance sheet.

 

On October 30, 2012, the Company entered into respective letter agreements with VLL5 and VLL6 to amend the repayment terms of its outstanding debt obligations. Prior to the execution of these agreements, LLC5 and LLC6 held an aggregate of 79,517 warrants (adjusted for the reverse stock split effective April 1, 2013) to purchase common stock, which, in the aggregate, had a total put option cash value of $2,000,000 (the “Cash Settlement Liability”) and was included in long term liabilities on the Company’s condensed consolidated balance sheets.

 

On that same day, the Company also entered into a stock purchase agreement with WTI for the issuance to WTI of shares of its common stock having an aggregate grant date fair market value of $3,500,000, or approximately $5.67 per post-split share, in exchange for LLC5’s agreement to surrender the VLL5 Warrants, and LLC6’s agreement to surrender the VLL6 Warrants, and the surrender by WTI of the accompanying Cash Settlement Liability. Accordingly, on November 1, 2012, the Company issued an aggregate of 617,284 restricted shares of its post-split common stock (the “Shares”) to WTI, pursuant to the terms of the stock purchase agreement. The VLL5 Warrants and the VLL6 Warrants were surrendered on October 30, 2012.

 

If at any time between October 30, 2012 through either March 31, 2014 or July 31, 2015 (the “Settlement Dates”) WTI sells the Shares, then the proceeds from the sale of the Shares will be applied as follows (the “Grace Period”):

 

  (a) If and when the Shares are sold by WTI during the Grace Period, the fair value of the proceeds received will be retained by WTI as consideration for surrendering the Cash Settlement Liability, up to a maximum value of $2,000,000.
     
  (b) If and when the Shares are sold by WTI during the Grace Period, any additional proceeds received from the sale of the Shares in excess of $2,000,000 (approximately $3.22 per share) but up to $3,500,000 (approximately $5.67 per share) will be applied by WTI as a prepayment of a portion of the then outstanding debt based on the terms of the stock purchase agreement.
     
  (c) If and when the Shares are sold by WTI during the Grace Period, any additional proceeds received from the sale of the Shares in excess of $3,500,000 (approximately $5.67 per share) up to $4,500,000 (approximately $7.28 per share) shall be the sole possession and property of WTI, in accordance with the terms of the stock purchase agreement.
     
  (d) If and when the Shares are sold by WTI during the Grace Period for value in excess of $4,500,000 (approximately $6.72 per share), 50% of the amount of the proceeds in excess of the $4,500,000 will be the sole possession and property of WTI and 50% of the amount of the proceeds shall be applied as a prepayment of a portion of the then outstanding debt based on the terms of the stock purchase agreement.
     
  (e) If and when the Shares are sold by WTI during the Grace Period for value less than $2,000,000 (approximately $3.22 per share), the Company is required to make a cash payment to WTI until the total Cash Settlement Liability of $2,000,000 has been settled (“Cash Shortfall”).

 

If the Shares are not sold during the Grace Period, then the then fair value of the stock is to be determined at either of the Settlement Dates and the repayment of the Cash Settlement Liability, prepayment of outstanding, distribution of gains from the sale of the Shares, or calculation of the Cash Shortfall will consummate.

 

On October 30, 2012, upon the issuance of the Shares, the Company recorded a prepayment of $2,000,000 and $1,500,000 net against the Cash Settlement Liability and the outstanding notes payable, respectively, on that date.

 

 

At September 30, 2013 and June 30, 2013, the Shares had not yet been sold by WTI and the fair value of the Shares at September 30, 2013 and June 30, 2013 amounted to $1,691,000 and $1,592,000 (approximately $2.74 and $2.58 per share), respectively. Accordingly, in connection with the increase in fair market value of the Shares, the Company recorded a gain on the fair value in the amount of $99,000, which is included in the accompanying condensed consolidated statements of comprehensive loss for the three months ended September 30, 2013. The fair value of the Shares at March 31, 2013 amounted to $1,901,000 ($3.08 per share). Accordingly, in connection with the decrease in fair market value of the Shares from March 31, 2013 to September 30, 2013, the Company recorded a loss on the fair value in the amount of $210,000, which is included in the accompanying condensed consolidated statements of comprehensive loss for the six months ended September 30, 2013. The fair value of the Shares will continue to be marked to market with any gain or loss recorded in the statement of comprehensive loss until either the Shares are sold by the holder or the Settlement Dates, whichever is earlier. As of September 30, 2013, the net Cash Settlement Liability was $309,000, of which $116,000 is included in the current portion of the Cash Settlement Liability on the accompanying condensed consolidated balance sheet. As of September 30, 2013, the $1,691,000 fair value of the Shares has been recorded as a prepayment against the Cash Settlement Liability on the accompanying condensed consolidated balance sheet.