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Notes Payable, Related Party Notes Payable and Finance Lease Obligations | 9 Months Ended
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Sep. 30, 2019
Notes and Loans Payable [Abstract] |
NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS | Note 5. NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS Notes payable and finance lease obligations at September 30, 2019 and December 31, 2018 consisted of the following:
|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
|  | (unaudited) |  |  |  |
Revolving credit note payable to PNC Bank N.A. |  | $ | 13,446,000 |  |  | $ | 14,043,000 |
Term loans, PNC |  |  | 464,000 |  |  |  | 1,572,000 |
Finance lease obligations |  |  | 887,000 |  |  |  | 1,786,000 |
Loan Payable – financed asset |  |  | 455,000 |  |  |  | - |
Related party notes payable, net of debt discount |  |  | 5,798,000 |  |  |  | 4,835,000 |
Convertible notes payable-third parties, net of debt discount |  |  | 2,914,000 |  |  |  | 2,830,000 |
Subtotal |  |  | 23,964,000 |  |  |  | 25,066,000 |
Less: Current portion of notes and finance lease obligations |  |  | (21,880,000 | ) |  |  | (19,345,000 | )
Notes payable and finance lease obligations, net of current portion |  | $ | 2,084,000 |  |  | $ | 5,721,000 |
PNC Bank N.A. ("PNC") The Company has a Loan Facility with PNC that has been amended many times during its term. Substantially all of its assets are pledged as collateral under the Loan Facility. The Company is required to maintain a lockbox account with PNC, into which substantially all of its cash receipts are paid. The Loan Facility provides for a $15,000,000 revolving loan and a term loan (the "Term Loan"). The repayment terms of the Term Loan provide for monthly principal installments in the amount of $123,133, payable on the first business day of each month, with a final payment of any unpaid balance of principal and interest payable on the scheduled maturity date. The terms of the Loan Facility require, among other things, that the Company maintain a minimum EBITDA (as defined in the Loan Facility) for specified periods. In addition, the Company is limited in the amount of capital expenditures it can make. The Company is also limited to the amount of dividends it can pay as defined in the Loan Facility. The Loan Facility was amended most recently on May 30, 2018 (the "Sixteenth Amendment"), January 2, 2019 (the "Seventeenth Amendment") and February 8, 2019 (the "Eighteenth Amendment"). The Sixteenth Amendment waived Fixed Charge Coverage Ratio covenant violations for the periods ending September 30, 2017, December 31, 2017 and March 31, 2018. The Sixteenth Amendment imposes minimum EBITDA (as defined in the Loan Agreement) covenants of not less than (i) $75,000 for the three-month period ending March 31, 2018, (ii) $485,000 for the six-month period ending June 30, 2018, and (iii) $1,200,000 for the nine-month period ending September 30, 2018. The Company complied with these new covenants for the three-months ended March 31, 2018, the six-month period ended June 30, 2018 and the nine-month period ended September 30, 2018. In addition, the Company is prohibited from paying dividends to its stockholders and making capital expenditures above prescribed amounts. Under the terms of the Seventeenth Amendment, the revolving loan and the Term Loan bear interest at a rate equal to the sum of the Alternate Base Rate (as defined in the Loan Agreement) plus four percent (4%). In addition to the amounts available as revolving loans secured by inventory and receivables pursuant to the formula set forth in the Loan Agreement, PNC has agreed to permit the revolving advances to exceed the formula amount by $1,000,000 as of December 31, 2018, provided that the Company reduces the "Out-of-Formula Loan" by $25,000 per week commencing April 1, 2019, with the unpaid balance payable in full on December 31, 2019. The indebtedness under the revolving loan and the Term Loan are classified with the current portion of notes payable and financing lease obligations. Both the revolving loan, inclusive of the Out-of-Formula Loan, and the Term Loan mature on December 31, 2019. As a condition to the agreement to extend the maturity of the obligations due under the Loan Agreement (the "Obligations") to December 31, 2019, the Company is obligated to pay PNC an extension fee of (i) $250,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) June 30, 2019, (ii) $125,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of July 1, 2019, (iii) $125,000 on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of October 1, 2019 (iv) $500,000 on December 31, 2019, which amount is deemed earned in full if the Obligations have not been satisfied as of December 31, 2019. As of September 30, 2019, the Company has paid the extension fee of (i) $250,000 and has accrued (ii) $125,000 which is due and payable on the earlier of (a) the date the Obligations are indefeasibly paid in full or (b) December 31, 2019. As a further condition to PNC's agreement to extend the maturity of the Obligations, Michael and Robert Taglich purchased $2,000,000 principal amount of the Company's Senior Subordinated Convertible Notes and arranged a financing giving purchasers a right to receive a pro rata portion of the AMK Revenue Stream Payments (referred to in Note 6) resulting in gross proceeds of $800,000, including $275,000 from Michael and Robert Taglich. The Eighteenth Amendment requires the Company to maintain a minimum EBITDA of not less than (i) $1,500,000 for the twelve-month period ending December 31, 2018, (ii) $655,000 for the three-month period ending March 31, 2019, (iii) $1,860,000 for the six-month period ending June 30, 2019 and (iv) $3,110,000 for the nine-month period ending September 30, 2019. At September 30, 2019, June 30, 2019, March 31, 2019 and December 31, 2018 the Company was in compliance with the minimum EBITDA covenant. As of September 30, 2019, the Company's debt to PNC of $13,910,000 consisted of the revolving credit loan in the amount of $13,446,000 and the Term Loan in the amount of $464,000. The revolver balance was increased to include the Company's negative general ledger balances of its controlled disbursement cash accounts. As of December 31, 2018, the Company's debt to PNC of $15,615,000 consisted of the revolving credit note of $14,043,000 and the Term Loan of $1,572,000. Each day, the Company's cash collections are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing base formula. The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan Facility). PNC may use some elements of subjective business judgment in determining whether a material adverse change has occurred in the Company's condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of the Loan Facility. Interest expense related to these credit facilities amounted to approximately $391,000 and $288,000 for the three months ended September 30, 2019 and 2018, respectively, and $954,000 and $981,000 for the nine months ended September 30, 2019 and 2018, respectively. Finance Lease Obligations – Equipment The Company is committed under several financing leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at the termination of each lease. Financing lease obligations totaled $887,000 and $1,786,000 as of September 30, 2019 and December 31, 2018, respectively, with various interest rates ranging from approximately 4% to 9%. The aggregate future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:
For the twelve months ending |  | Amount |
December 31, 2019 (remainder of the year) |  | $ | 301,000 |
December 31, 2020 |  |  | 542,000 |
December 31, 2021 |  |  | 52,000 |
December 31, 2022 |  |  | 22,000 |
December 31, 2023 |  |  | — |
Thereafter |  |  | — |
Present value of finance lease obligations |  |  | 917,000 |
Less: imputed interest |  |  | (30,000 | )
Less: current portion |  |  | (783,000 | )
Total Long Term Portion |  | $ | 104,000 |
Related Party Notes Payable Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich. In addition, a third director of the Company is a vice president of Taglich Brothers, Inc. Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received cash and equity compensation for their services. On January 15, 2019, the Company issued its 7% senior subordinated convertible promissory notes due December 31, 2020, each in the principal amount of $1,000,000 (together, the "7% Notes"), to Michael Taglich and Robert Taglich, each for a purchase price of $1,000,000. The 7% Notes bear interest at the rate of 7% per annum, are convertible into shares of the Company's common stock at a conversion price of $0.93 per share, subject to the anti-dilution adjustments set forth in the 7% Notes, are subordinate to the Company's indebtedness under its credit facility with PNC Bank, National Association, and mature at December 31, 2020, or earlier upon an Event of Default. In connection with the 7% Notes, the Company paid Taglich Brothers, Inc. a fee of $80,000 (4% of the purchase price of the 7% Notes), paid in the form of a promissory note having terms substantially identical to the 7% Notes. On June 26, 2019, the Company was advanced $250,000 from each of Michael and Robert Taglich. The maturity date of these notes is June 30, 2020 which correspond with the maturity date of the Subordinated Notes due May 2019, ("The "2019 Notes"), that were extended to June 30, 2020. These notes bear interest at a rate of 12% per annum. In connection with these notes the Company issued 37,500 shares of stock to each of Michael and Robert Taglich. On October 21, 2019, the Company was advanced $1,000,000 from Michael Taglich. As of the date of this report, the terms of the advance have not been finalized. Private Placement of Subordinated Notes due May 31, 2019, together with Shares of Common Stock On March 29, 2018 and April 4, 2018, Michael Taglich and Robert Taglich advanced $1,000,000 and $100,000, respectively, to the Company for use as working capital. The Company subsequently issued its Subordinated Notes due May 31, 2019 (the "2019 Notes") to Michael Taglich and Robert Taglich, to evidence its obligation to repay the foregoing advances, together with shares of common stock. In May 2018, the Company issued $1,200,000 of Subordinated Notes due May 31, 2019, together with a total of 214,762 shares of common stock (the "Shares"), to Michael Taglich, Robert Taglich and another accredited investor. As part of the financing, the Company issued to Michael Taglich $1,000,000 principal amount of 2019 Notes and 178,571 shares of common stock for a purchase price of $1,000,000 and the Company issued to Robert Taglich $100,000 principal amount of 2019 Notes and 17,857 shares of common stock. The Company issued and sold a 2019 Note in the principal amount of $100,000, plus 18,334 shares of common stock, to the other accredited investor for a purchase price of $100,000. Seventy percent (70%) of the total purchase price for the 2019 Notes and Shares purchased by each investor has been allocated to the 2019 Notes with the remaining thirty percent (30%) allocated to the Shares purchased. The number of Shares purchased by Michael Taglich and Robert Taglich was calculated based upon $1.68, the closing price of the common stock on May 20, 2018, the trading day immediately preceding the date they purchased the 2019 Notes and shares of common stock. Interest on the 2019 Notes is payable on the outstanding principal amount thereof at the rate of one percent (1%) per month, payable monthly commencing June 30, 2018. Upon the occurrence and continuation of a failure to pay accrued interest, interest shall accrue and be payable on such amount at the rate of 1.25% per month; provided that upon the occurrence and continuation of a failure to timely pay the principal amount of the 2019 Note, interest shall accrue and be payable on such principal amount at the rate of 1.25% per month and shall no longer be payable on interest accrued but unpaid. The 2019 Notes are subordinate to the Company's obligations to PNC. Taglich Brothers, Inc. acted as placement agent for the offering and received a commission in the aggregate amount of 4% of the amount invested which was paid in kind. The gross proceeds of $1,200,000 was completed in the following closings:
Date |  | Gross Proceeds |  |  | Promissory Note |  |  | $ |  |  | Common Stock Price |  |  | Shares Issued |
3/29/2018 |  | $ | 1,000,000 |  |  | $ | 700,000 |  |  | $ | 300,000 |  |  |  | 1.68 |  |  |  | 178,571 |
4/4/2018 |  |  | 100,000 |  |  |  | 70,000 |  |  |  | 30,000 |  |  |  | 1.68 |  |  |  | 17,857 |
5/21/2018 |  |  | 100,000 |  |  |  | 70,000 |  |  |  | 30,000 |  |  |  | 1.64 |  |  |  | 18,334 |
Total |  | $ | 1,200,000 |  |  | $ | 840,000 |  |  | $ | 360,000 |  |  |  |  |  |  |  | 214,762 |
During the second quarter of 2019, the maturity date of the 2019 Notes was extended to June 30, 2020. The interest rate of the notes remains at 12% per annum. In connection with the extension, 180,000 shares of common stock were issued on a pro-rata basis to each of the note holders, including 150,000 shares to Michael Taglich and 15,000 shares to Robert Taglich at $1.01 per share or $182,000. The costs have been recorded as a debt discount, and are being accreted over the revised term. Related party advances and notes payable, net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled $5,798,000 and $4,835,000, as of September 30, 2019 and December 31, 2018, respectively. Interest incurred on these related party notes amounted to approximately $265,000 and $526,000 for the three months ended September 30, 2019 and 2018, respectively, and $1,393,000 and $1,324,000 for the nine months ended September 30, 2019 and 2018, respectively. These costs are included in interest and financing costs in the condensed consolidated statement of operations.

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- Definition The entire disclosure for debt and capital lease obligations can be reported. Information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. Also includes descriptions and amounts of capital leasing arrangements that consist of direct financing, sales type and leveraged leases. Disclosure may include the effect on the balance sheet and the income statement resulting from a change in lease classification for leases that at inception would have been classified differently had guidance been in effect at the inception of the original lease. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 840 -URI http://asc.fasb.org/topic&trid=2208923 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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