NOTE 4: COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases approximately 19 square feet of office and warehouse space located at 5929 Baker Road, Minnetonka, Minnesota. In July 2010, the Company entered into an amendment that extended the term of the lease through January 31, 2018. In consideration for this extension, the landlord provided the Company with a leasehold improvement allowance totaling $191 and a reduction in base rent per square foot. The leasehold allowance was recorded as an addition to deferred rent. The Company is recognizing the leasehold improvement allowance on a straight-line basis as a benefit to rent expense over the life of the lease, along with the existing deferred rent credit balance of $60 as of the date of the amendment. In addition, the amendment contains a rent escalation provision, which also is being recognized on a straight-line basis over the term of the lease. The Company had drawn upon the entire amount of leasehold improvement allowances as of December 31, 2010. The lease requires the Company to maintain a letter of credit which can, in the discretion of the landlord, be reduced or released. The amount of the letter of credit as of March 31, 2013 was $240. In addition, the Company leases office space of approximately 10 square feet to support its Canadian operations at a facility located at 4510 Rhodes Drive, Suite 800, Windsor, Ontario under a lease that, as amended, extends through June 30, 2014.

Rent expense under the operating leases was $88 and $95 for the three months ended March 31, 2013 and 2012, respectively.

Future minimum lease payments for operating leases are as follows:


At March 31, 2013	Lease Obligations

Nine months ending December 31, 2013	$ 194
2014	234
2015	206
2016	196
2017	196
Thereafter	17

Total future minimum obligations	$ 1,043

Litigation

The Company was not party to any material legal proceedings as of May 10, 2013, and there were no such proceedings pending during the period covered by this report.

Revolving Line-of-Credit

In March 2010, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the “Loan and Security Agreement”), which was most recently amended effective March 13, 2013. The Loan and Security Agreement provides the Company with a revolving line-of-credit at an annual interest rate of prime plus 1.5%, the availability of which is the lesser of (a) $1,500, or (b) the amount available under the Company’s borrowing base (75% of the Company’s eligible accounts receivable plus 50% of the Company’s eligible inventory) minus (1) the dollar equivalent amount of all outstanding letters of credit, (2) 10% of each outstanding foreign exchange contract, (3) any amounts used for cash management services, and (4) the outstanding principal balance of any advances. In connection with the July 2010 lease amendment for the Company’s corporate offices, Silicon Valley Bank issued a letter of credit which as of March 31, 2013 was in the amount of $240, which effectively reduced the capacity amount under the Loan and Security Agreement to $1,260, subject to the borrowing base availability and continued compliance with restrictive covenants. As of March 31, 2013, the amount available to the Company under the loan and security agreement was $157, after deducting the outstanding balance of $400.

The amendment which became effective March 31, 2013 adjusted the minimum tangible net worth requirement to $1,680 for the month ending March 31, 2013, and on the last day of each following month thereafter. It further established that, commencing with the quarter ended March 31, 2013, the minimum tangible net worth requirement increases (a) by 50% of the Company’s net income for such quarter and (b) by 50% of all gross proceeds received from the Company’s issuances of equity during such quarter and/or the principal amount of subordinated debt incurred by the Company during such quarter, but excluding up to $1,560 of gross proceeds from the Company’s March 2013 registered direct offering of equity securities. The Company must comply with this tangible net worth minimum in order to draw on such line of credit and also while there are outstanding credit extensions (other than the Company’s existing lease letter of credit). The maximum permitted amount of outstanding letters of credit is $240.

Under the Loan and Security Agreement, the Company is generally required to obtain the prior written consent of Silicon Valley Bank to, among other things, (a) dispose of assets, (b) change its business, (c) liquidate or dissolve, (d) change CEO or COO (replacements must be satisfactory to the lender), (e) enter into any transaction in which the Company’s shareholders who were not shareholders immediately prior to such transaction own more than 40% of the Company’s voting stock (subject to limited exceptions) after the transaction, (f) merge or consolidate with any other person, (g) acquire all or substantially all of the capital stock or property of another person, or (h) become liable for any indebtedness (other than permitted indebtedness). The line of credit, which is secured by all assets of the Company, matures on March 12, 2014.