LONG TERM DEBT AND NOTES PAYABLE TO BANK

6 Months Ended

Jun. 30, 2019

Long term debt and notes payable to bank

NOTE 3 – LONG-TERM DEBT AND NOTES PAYABLE TO BANK

Summary:

On March 31, 2017, the Company entered into an amendment to increase its existing line of credit with MidCap, subject to the satisfaction of certain borrowing base restrictions, which were subsequently satisfied, and extend the maturity date more fully described below.

On June 23, 2017, in connection with the purchase of equipment to be used in the operation of the Company's business, the Company issued notes totaling $129.0 thousand principal amount due to a related party. See Note 6 – Related Party Transactions.

On November 9, 2018, the Company entered into the BofA Loan Agreement with BofA and paid off all remaining amounts due to the Company's previous lender MidCap. On March 1, 2019, the Company amended the BofA Loan Agreement, which extended the commitment termination date to September 30, 2022 and released certain reserves previously required by BofA under the BofA Loan agreement, among other things. Also on March 1, 2019, the Company made a $500.0 thousand payment to a related party and extended the termination date of certain related party notes to December 31, 2022. See Note 6 – Related Party Transactions for discussion of loan arrangements with a related party.

During the second quarter of 2019, the Company was out of compliance with its financial covenant related to the FCCR set forth in the BofA Loan Agreement. On August 14, 2019, the Company entered into a second amendment to the BofA Loan Agreement, through which BofA waived the Company’s breach of the aforementioned covenant through July 31, 2019 and amended the financial covenants as more fully described below for future periods beginning August 1, 2019.

MidCap:

On February 29, 2016, the Company entered into the 2016 Loan, which, as initially entered into, provided a $6.0 million senior, secured asset-based line of credit with MidCap. The Company could borrow up to the sum of (a) 85% of the value of its eligible domestic accounts receivable; (b) the lesser of (i) $2.5 million and (ii) 75% of the net orderly liquidation value of eligible inventory; and (c) the lesser of (i) $500,000 and (ii) 40% of appraised net forced liquidation value of eligible fixed assets (the "Equipment Sublimit"). The Equipment Sublimit amortizes monthly on a straight line basis over sixty (60) months with no reduction to the overall line of credit availability. As described below, the 2016 Loan was amended on March 31, 2017 and June 4, 2018.

Proceeds from this loan were used to pay transaction expenses, pay off and close the remaining balance on the Wells Fargo revolving line of credit and fund working capital requirements.

The interest rate on the 2016 Loan was equal to the prime rate (5.25% as of November 9, 2018) plus 250 basis points (2.50%). In the Event of a Default (as defined in the 2016 Loan Agreement), the interest rate would increase by 300 basis points (3.00%). The 2016 Loan also had a monthly collateral-monitoring fee equal to 27.5 basis points (0.275%) of the average daily balance outstanding, an annual facility fee of 100 basis points (1.00%) and an unused line fee equal to an annual rate of 50 basis points (0.50%) of the average undrawn portion of the 2016 Loan.

The 2016 Loan had a maturity date of February 28, 2020 based on the amendment described below. The borrowings under the revolving credit agreement were classified as short-term obligations under GAAP as the agreement with MidCap contained a subjective acceleration clause and required the Company to maintain a lockbox arrangement with the lender.

Interest and monthly fees under the 2016 Loan were payable monthly in arrears.

The 2016 Loan Agreement contained a minimum line availability covenant equal to $350.0 thousand. This covenant may have been replaced by a FCCR covenant as set forth in the 2016 Loan Agreement once the Company achieved an FCCR of 1.0x on an annualized basis.

The Company granted MidCap a first priority security interest in all of the assets of ISA pursuant to the terms of a Security Agreement.

The Company was allowed to sell or refinance up to $3.0 million in fair market value of real property provided (i) the proceeds from such refinance or sale remained with the Company; and (ii) no event of default existed at the time of such refinance or sale.

On March 31, 2017, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap ("First Amendment"). The First Amendment increased the line of credit from $6.0 million to $8.0 million and extended the maturity date to February 28, 2020. As amended, the line of credit permitted the Company to borrow an amount under the 2016 Loan equal to the lesser of (A) $8.0 million; and (B)(i) 85% of the value of the Company’s eligible domestic accounts receivable, plus (ii) the lesser of (x) $2.5 million and (y) 75% of the net orderly liquidation value of eligible inventory, plus (iii) the lesser of (x) $400,000 and (y) 40% of appraised net forced liquidation value of eligible fixed assets, plus (iv) the lesser of (x) $1.75 million and (y) 45% of the appraised value of certain properties owned by the Company (subject to MidCap's receipt of any third-party or internal approvals it may require in its discretion), minus (v) any amount which MidCap may require from time to time, pursuant to terms of the agreement, in order to secure amounts owed to MidCap under the agreement.

The First Amendment contained a minimum line availability covenant equal to $350.0 thousand, the same as the original 2016 Loan. This covenant was replaced by a FCCR covenant once the Company achieved an FCCR of 1.1x on an annualized basis beginning July 1, 2018 with a result of an increase in availability of $350.0 thousand. The Company paid underwriting fees of $20.0 thousand at closing.

On April 26, 2017, certain borrowing base restrictions were satisfied with MidCap which resulted in an increase in availability of $1.75 million.

On June 4, 2018, the Company and each of its wholly-owned subsidiaries entered into an amendment to the 2016 Loan with MidCap (“Second Amendment”). The Second Amendment, among other things, increased the Company’s line of credit from $8.0 million to $10.0 million. The Company also entered into a Second Amended and Restated Revolving Note to evidence amounts borrowed from MidCap under the 2016 Loan. The Company paid fees of $15.0 thousand at closing.

On November 9, 2018, in connection with entry into the BofA Loan Agreement, the Company repaid in full the remaining balance of the Company's revolving line of credit with MidCap. The Company paid to MidCap $106.8 thousand in interest penalties as a result of such termination.

Bank of America:

On November 9, 2018, the Company and certain of its wholly-owned subsidiaries (collectively, the "Borrowers") entered into the BofA Loan Agreement that provides for (i) a revolving line of credit in the aggregate principal amount of $10.0 million (subject to a borrowing base), which includes a $1.0 million letter of credit subline (the “Revolving Loan”), and (ii) a term loan in the amount of $2.5 million (the “Term Loan” and together with the Revolving Loan, the “Loans”).

The interest rate on the Revolving Loan is equal to LIBOR plus 2.25% to 2.75%. The interest rate on the Term Loan is equal to LIBOR plus 2.75% to 3.25%. During a continuance of an Event of Default, the interest rate will increase by 2.0%. There was no interest expense impact from the pending discontinuation of the LIBOR index that is utilized in our borrowing facility with BofA. Although we do not expect any future material impacts from the LIBOR discontinuation, there can be no assurances that there will not be a material impact to the Company

Proceeds from the BofA Loan Agreement were used to satisfy the Company’s existing credit facility with Midcap. In addition, proceeds from the Revolving Loan were used to pay fees and transaction expenses associated with the Loans, to pay the Borrowers’ obligations to BofA, and for other corporate purposes of the Borrowers, including working capital.

The Revolving Loan is due and payable in full on the Commitment Termination Date (as defined below), and the Borrowers may prepay the Revolving Loan without premium or penalty. The Term Loan will be repaid by consecutive installments of $89.3 thousand on the first day of each quarter, commencing on January 1, 2019. On the Commitment Termination Date, all principal, interest, and other amounts with respect to the Term Loan will be due and payable in full.

The Borrowers agreed to pay BofA certain fees in connection with the BofA Loan Agreement, including, without limitation: (i) unused credit line fees, due on the first day of each month and on the Commitment Termination Date, (ii) letter of credit facility fees, payable in monthly arrears on the first day of each month, (iii) a closing fee in the amount of $50,000, due on the Closing Date, and (iv) an administrative fee of $10,000 on the Closing Date and on each anniversary date thereof. In addition, the Borrowers agreed to pay all reasonable fees, costs, and expenses, incurred by BofA in the enforcement of the BofA Loan Agreement and related documents during the continuance of an Event of Default and all legal, accounting, appraisal, consulting, and other fees incurred by BofA in connection with the Loans.

Borrowings under the BofA Loan Agreement are secured by all property of each Borrower. The Company’s obligations are also secured by mortgages upon real estate owned by certain wholly-owned subsidiaries of the Company.

The BofA Loan Agreement requires the Borrowers to comply with certain customary affirmative and negative covenants that, among other things, will restrict, subject to certain exceptions, the ability of the Borrowers to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, and pay dividends and other restricted payments. The BofA Loan Agreement also requires that the Borrowers maintain the FCCR set forth in the BofA Loan Agreement, calculated as of the last day of each month for the trailing twelve month period then ended.

The BofA Loan Agreement stated that it will terminate on the earlier of: (i) September 30, 2020, with an option to extend such date to September 30, 2023 upon certain conditions, (ii) the date on which the Borrowers terminate the Revolving Loan pursuant to the BofA Loan Agreement, or (iii) the date on which BofA terminates the Revolving Loan as a result of an Event of Default (as amended, the “Commitment Termination Date”). The Company has the right to terminate the BofA Loan Agreement at any time with 30 days prior written notice. Any notice of termination by the Borrowers will be irrevocable and the Borrowers will make full payment of all obligations on the Commitment Termination Date. The borrowings under the revolving credit agreement are classified as short-term obligations under GAAP as the agreement with BofA contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender.

On March 1, 2019, the Company entered into Amendment No. 1 to the Loan and Security Agreement and Consent (the “BofA First Amendment”) with BofA, which amended certain terms of the BofA Loan Agreement between the Company and BofA. The BofA First Amendment memorialized BofA’s consent to (i) the Company making a one-time prepayment of principal in an aggregate amount not to exceed $500.0 thousand to K&R, LLC and (ii) the Company amending certain terms of related party notes to K&R, LLC and 7100 Grade Lane, LLC (“Kletter Notes”). See Note 6 – Related Party Transactions. In addition, the BofA First Amendment amended the BofA Loan Agreement’s Commitment Termination Date to be September 30, 2022 and released certain reserves previously required by BofA under the BofA Loan Agreement, among other things.

The BofA Loan Agreement had availability of $2.3 million as of June 30, 2019.

During the second quarter of 2019, the Borrowers were out of compliance with their financial covenant related to the FCCR in the BofA Loan Agreement. On August 14, 2019 (the “Amendment No. 2 Effective Date”), the Borrowers, the Guarantors (as defined in the BofA Loan Agreement) signatory thereto and BofA entered into the Waiver and Amendment No. 2 to Loan and Security Agreement (the “BofA Second Amendment”) which waived the Borrower’s breach of the FCCR covenant through July 31, 2019 and amended certain provisions of the Loan Agreement.

The BofA Second Amendment added the following financial covenants of the Borrowers which apply during the period of time beginning on the Amendment No. 2 Effective Date and ending on the date that is the five months from the Amendment No. 2 Effective Date provided that no Event of Default, as defined in the BofA Loan Agreement, has occurred, and if an Event of Default has occurred, then ending on the date on which the Event of Default is waived by BofA (the "FCCR Conversion Date"):

Minimum EBITDA. The Borrowers shall maintain a consolidated EBITDA of not less than the following amounts opposite the respective periods set forth below:

Period	Minimum EBITDA
One month ending August 31, 2019	($100,000)
Two months ending September 30, 2019	$0
Three months ending October 31, 2019	$377,000
Four months ending November 30, 2019	$617,000
Five months ending December 31, 2019 and, if the FCCR Conversion Date has not occurred, the five months ending on the last day of each month thereafter	$782,000

Capital Expenditures. At any time before the FCCR Conversion Date, the Borrowers shall not make Capital Expenditures (as defined in the BofA Loan Agreement) in excess of $200.0 thousand in the aggregate.

The BofA Second Amendment also amended the FCCR covenant of the Borrowers to apply only after the FCCR Conversion Date as follows:

Fixed Charge Coverage Ratio. At all times after the FCCR Conversion Date, the Borrowers must maintain a FCCR of at least 1.0:1.0, determined as of the last day of each month, commencing on the last day of the first month after the FCCR Conversion Date, initially for the six month period then ending and thereafter building, by month, to a trailing twelve month basis.

Other Debt:

Amounts owed to K&R, LLC and 7100 Grade Lane LLC are more fully described in Note 6 – Related Party Transactions.

In June 2018, the Company executed a note for $68.9 thousand to purchase equipment to be used in the operation of the Company's business. The note is for a period of five years at an interest rate of 6.0% with a monthly payment of $1.3 thousand.

In March 2019, the Company executed a note for $88.0 thousand to purchase equipment to be used in the operation of the Company's business. The note is for a period of five years at an interest rate of 3.89% with a monthly payment of $1.6 thousand.

Debt as of June 30, 2019 and December 31, 2018 consisted of the following:

	June 30,			December 31,
	2019			2018
	(unaudited)
	(in thousands)
Revolving credit facility with Bank of America, see above description for additional details	$	5,236		$	3,646
Bank of America term loan	2,321			2,500
K&R, LLC related party notes (See Note 6 - Related Party Transactions)	120			652
7100 Grade Lane LLC related party note (See Note 6 - Related Party Transactions)	884			884
Equipment notes, see above description for additional details	141			63
Total debt	8,702			7,745
Debt issuance costs	(158		)	(175		)
Total debt and debt issuance costs	8,544			7,570
Less current portion of long-term debt and debt issuance costs	5,574			3,941
Total long-term debt and debt issuance costs	$	2,970		$	3,629

The annual contractual maturities of long-term debt for the next five twelve-month periods and thereafter ending June 30 are as follows:

	(in thousands)
2020	$	386
2021	388
2022	389
2023	7,524
2024	15
Total	$	8,702

The Company paid and capitalized loan fees in the amount of $22.2 thousand during the six month period ended June 30, 2019.