NOTE 5—FINANCING AGREEMENTS

On October 19, 2018, Torotel entered into three new business loan agreements (the “financing agreements”) with Cornerstone Bank (the “Bank”). The financing agreements provide for an asset-backed revolving line of credit, a guidance line of credit, and a real estate term loan. On October 19, 2019, Torotel renewed the asset-backed revolving line of credit. A summary of the notes issued under the financing agreements is provided below:


		2020		2019
5.00% asset-based revolving line of credit with a maturity date of October 19, 2020	$	-	$	975,000
6.25% guidance line of credit with a maturity date of October 19, 2019		-		54,000
5.35% mortgage note payable in monthly installments of $5,573, including interest, with final payment of $690,829 due October 19, 2023		773,000		795,000
5.50% equipment term loan note payable in monthly installments of $1,034, including interest, with final payment of $1,034 due on May 13, 2024		45,000		-
1.00% Paycheck Protection Program loan note payable in monthly installments of $111,712 starting after the six month payment deferment period on October 30, 2020, with a final payment of $111,712 due April 29, 2022. Interest will accrue during the deferment period.		1,985,000		-
Capital lease obligations (see Note 4)		-		98,000
Total long-term debt		2,803,000		1,922,000
Less current installments		795,000		1,121,000
Long-term debt, excluding current installments	$	2,008,000	$	801,000

The asset-based revolving line of credit is intended to be used for working capital purposes and has a capacity of $2,000,000. The asset-based revolving line of credit is renewable annually upon mutual agreement of Torotel and the Bank. The associated interest rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (5.00% as of April 30, 2020) or a floor of 5%. Monthly repayments of interest only are required under the asset-based revolving line of credit promissory note with the principal due at maturity. The borrowing base of the revolving line of credit is limited to 80% of eligible accounts receivable, plus 50% of eligible inventory, plus 80% of eligible equipment. This asset-based revolving line of credit is cross collateralized and cross defaulted with all other financing agreements of Torotel with the Bank. Pursuant to a Commercial Security Agreement dated October 19, 2018, between Torotel and the Bank (the “Commercial Security Agreement”), which was entered into in connection with the financing agreements, the asset-based revolving line of credit is secured by a first lien on all business assets of Torotel. Under the revolving line of credit, if the aggregate principal amount of the outstanding advances exceeds the applicable borrowing base, Torotel must pay the Bank an amount equal to the difference between the outstanding principal balance of the revolving line of credit and the borrowing base.

The real estate term loan is in the principal amount of $815,000 and has a 5-year term with a 20-year amortization period, with the balance at maturity on October 19, 2023. The associated interest rate is fixed at 5.35%. Monthly repayments of approximately $5,573, consisting of both interest and principal, are required. The final payment of approximately $690,829 is due on the maturity date. This real estate term loan is cross collateralized and cross defaulted with the other financing agreements. The real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas pursuant to the Commercial Security Agreement.

The equipment note was a guidance line of credit to be used for equipment purchases and had a capacity of $250,000. On May 13, 2019, Torotel converted the guidance line of credit relating to the equipment note into an equipment term loan. The equipment term loan is in the principal amount of $54,000 and contains a 5-year term with a 5-year amortization period, with the balance at maturity on May 13, 2024. The associated interest rate is fixed at 5.50%. Monthly repayments of approximately $1,034, consisting of both interest and principal, are required. This final payment of approximately $1,034 is due on the maturity date. This equipment term loan is cross collateralized and cross defaulted with the other financing agreements of Torotel and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel.

On April 15, 2020, Torotel entered into a promissory note with the Bank, which provides for a loan in the amount of $1,984,688 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Torotel Products intends to use the proceeds from the PPP Loan for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, neither the Company nor Torotel Products can completely assure at this time that such forgiveness of the PPP Loan will occur.

The financing agreements contain customary representations, warranties, and covenants of Torotel for the benefit of the Bank, as well as customary default provisions. Other than the borrowing base limitations under the asset-based revolving line of credit, none of the financing agreements requires Torotel to comply with any financial covenants. Prepayments are allowed without penalty under all of the financing agreements.

The amount of long-term debt maturities by year is as follows:


Year Ending April 30,	Amount
2021	$	795,000
2022		1,251,000
2023		38,000
2024		719,000
	$	2,803,000

Irrevocable Standby Letter of Credit

Under the terms of a lease amendment for its manufacturing facility located in Olathe, Kansas (see Note 7), Torotel provided the landlord an irrevocable standby letter of credit in the original amount of $300,000 as additional security. On January 1, 2020, the letter of credit was reduced from $300,000 to $225,000. The balance under the letter of credit will automatically reduce in accordance with the below schedule if not drawn upon:


Date of Reduction		Amount of Reduction		Balance of Letter of Credit
January 1, 2021	$	75,000	$	150,000
January 1, 2022		75,000		75,000
January 1, 2023		75,000		-