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Notes Payable, Related Party Notes Payable and Finance Lease Obligations | 9 Months Ended
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Sep. 30, 2020
Notes and Loans Payable [Abstract] |
NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS | Note 6. NOTES PAYABLE, RELATED PARTY NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS Notes payable and finance lease obligations at September 30, 2020 and December 31, 2019 consisted of the following:
|  | September 30, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
|  | (unaudited) |  |  |  |
Revolving credit note payable to Sterling National Bank (“SNB”) |  | $ | 15,883,000 |  |  | $ | 12,543,000 |
Term loan, SNB |  |  | 3,386,000 |  |  |  | 3,800,000 |
Finance lease obligations |  |  | 12,000 |  |  |  | 22,000 |
Loans Payable - financed assets |  |  | 220,000 |  |  |  | 385,000 |
Related party notes payable, net of debt discount |  |  | 6,018,000 |  |  |  | 6,862,000 |
Convertible notes payable-third parties, net of debt discount |  |  | 1,440,000 |  |  |  | 2,338,000 |
SBA loans |  |  | 2,414,000 |  |  |  | - |
Subtotal |  |  | 29,373,000 |  |  |  | 25,950,000 |
Less: Current portion of notes payable, related party notes payable and finance lease obligations |  |  | (22,234,000 | ) |  |  | (22,544,000 | )
Notes payable, related party notes payable and finance lease obligations, net of current portion |  | $ | 7,139,000 |  |  | $ | 3,406,000 |
Sterling National Bank (“SNB”) On December 31, 2019, the Company entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) expiring on December 30, 2022. The new loan facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). Proceeds from the SNB Facility repaid the Company’s outstanding loan facility (“PNC Facility”) with PNC Bank N.A. (“PNC”). The formula to determine the amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of the Company’s eligible receivables and eligible inventory (as defined in the SNB Facility). Each day, the Company’s cash collections are swept directly by SNB to reduce the SNB revolving loan balance and the Company then borrows according to a borrowing base formula. The Company’s receivables are payable directly into a lockbox controlled by SNB (subject to the terms of the SNB Facility). The repayment terms of the SNB term loan provide for monthly principal installments in the amount of $45,238, payable on the first business day of each month, beginning on February 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022. In addition, for so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year, beginning with the year ending December 31, 2020, the Company shall pay to SNB an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan. Such payment shall be made to SNB and applied to the outstanding principal balance of the term loan, on or prior to April 15 of the Fiscal Year immediately following such Fiscal Year. On November 6, 2020, the Company entered into the First Amendment to Loan and Security Agreement (“First Amendment”). The terms of the agreement increase the Term Loan to $5,685,000. The repayment terms of the term loan were amended to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022. Additionally, the date by which certain subordinated third-party notes need to be extended by was changed from September 30, 2020 to November 30, 2020. The Company has paid an amendment fee of $20,000. The Company may voluntarily prepay balances under the SNB Facility. Any prepayment of less than all of the outstanding principal of the SNB term loan is applied to the principal of the SNB term loan. The terms of the SNB Facility require that, among other things, the Company maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, the Company is limited in the amount of Capital Expenditures it can make. The SNB Loan Agreement required the Company by September 30, 2020, to either (i) extend the maturity date of certain subordinate convertible notes to a date more than six months after December 31, 2022 or alternatively (ii) convert these notes to common stock of the Company. As of September 30, 2020, the Company was not in compliance with all loan covenants. As a result, the full balance due under the term note was classified as a current liability in the condensed consolidated balance sheet as of September 30, 2020. In connection with the First Amendment, the bank waived all events of default identified as of and through September 30, 2020. The SNB Facility also restricts the amount of dividends the Company may pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the SNB Facility. The aggregate payments for the term note at September 30, 2020 are as follows:
For the twelve months ending |  | Amount |
December 31, 2020 (remainder of the year) |  | $ | 136,000 |
December 31, 2021 |  |  | 543,000 |
December 31, 2022 |  |  | 2,759,000 |
SNB Term Loans payable |  |  | 3,438,000 |
Less: debt issuance costs |  |  | (52,000 | )
Total SNB Term loan payable, net of debt issuance costs |  |  | 3,386,000 |
Less: Current portion of SNB term loan payable |  |  | 3,386,000 |
Total long-term portion of SNB term loan payable |  | $ | - |
Under the terms of the SNB Facility, both the SNB revolving line of credit and the SNB term loan will bear an interest rate equal to 30-day LIBOR (with a 1% floor) plus 2.5%. The average interest rate charged during the period ended September 30, 2020 was 3.5%. As of September 30, 2020, our debt to SNB in the amount of $19,269,000 consisted of the SNB revolving line of credit note in the amount of $15,883,000 and the SNB term loan in the amount of $3,386,000. As of December 31, 2019, our debt to SNB in the amount of $16,343,000 consisted of the SNB revolving line of credit note in the amount of $12,543,000 and the SNB term loan in the amount of $3,800,000. Interest expense related to the SNB Facility amounted to approximately $147,000 for the three months ended September 30, 2020, and $420,000 for the nine months ended September 30, 2020. PNC Bank N.A. (“PNC”) The Company previously maintained a financing facility with PNC. Under such facility, substantially all of the Company’s assets were pledged as collateral. The PNC Facility provided for a $15,000,000 revolving line of credit (“PNC revolving line of credit”) and a term loan (“PNC term loan”). Interest expense related to the PNC Facility amounted to approximately $391,000 for the three months ended September 30, 2019 and $954,000 for the nine months ended September 30, 2019. On December 31, 2019, both the PNC revolving line of credit and PNC term loan were paid in full and all assets that were previously pledged as collateral were released. Loans Payable – Financed Assets The Company financed the 2019 acquisition of manufacturing equipment with a third-party loan. The loan obligation totaled $170,000 and $385,000 as of September 30, 2020 and December 31, 2019, respectively and bears interest at 3% per annum. The Company has also borrowed to purchase a delivery vehicle in July 2020. The loan obligation totaled $50,000 and $0 as of September 30, 2020 and December 31, 2019, respectively. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026. Annual maturities of these loans are as follows:
For the twelve months ending |  | Amount |
December 31, 2020 (remainder of the year) |  | $ | 75,000 |
December 31, 2021 |  |  | 106,000 |
December 31, 2022 |  |  | 9,000 |
December 31, 2023 |  |  | 9,000 |
December 31, 2024 |  |  | 9,000 |
Thereafter |  |  | 12,000 |
Loans Payable - financed assets |  |  | 220,000 |
Less: Current portion |  |  | 179,000 |
Long-term portion |  | $ | 41,000 |
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 and are subordinate to the Company’s indebtedness under the SNB Facility. 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 similar to the 7% Notes. On June 26, 2019, the Company was advanced $250,000 from each of Michael and Robert Taglich. 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. The maturity date, of these notes, was June 30, 2020, but was extended to December 31, 2020. On October 21, 2019, the Company was advanced $1,000,000 from Michael Taglich. This advance was repaid on January 2, 2020. The interest rate on this advance was 12% per annum. 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 originally due May 31, 2019 to Michael Taglich and Robert Taglich, together with shares of common stock, in the financing described below, to evidence its obligation to repay the foregoing advances. In May 2018, the Company issued $1,200,000 of Subordinated Notes due May 31, 2019 (the “2019 Notes”), together with a total of 214,762 shares of common stock 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 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. This additional note was paid in full on January 2, 2020. 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 SNB. Taglich Brothers 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. 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. The shares were valued 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. In connection with the SNB Facility, Michael and Robert Taglich agreed to extend the maturity date of the 2019 Notes to December 31, 2020. Private Placements of 8% Subordinated Convertible Notes From November 23, 2016 through March 21, 2017, the Company received gross proceeds of $4,775,000, of which $1,950,000 were received from Robert and Michael Taglich, from the sale of an equal principal amount of its 8% Subordinated Convertible Notes (the “8% Notes”), together with warrants to purchase a total of 383,080 shares of its common stock, in private placement transactions with accredited investors (the “8% Note Offerings”). In connection with the offering of the 8% Notes, the Company issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc., placement agent for the 8% Note Offerings, in lieu of payment of cash compensation for sales commissions, together with warrants to purchase a total of 180,977 shares of common stock. Payment of the principal and accrued interest on the 8% Notes are junior and subordinate in right of payment to our indebtedness under the SNB Facility. Interest on the 8% Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in cash, or at the Company’s option, in additional 8% Notes, provided that if accrued interest payable on $1,269,000 principal amount of the 8% Notes issued in December 2016 is paid in additional 8% Notes, interest for that quarterly interest payment shall be calculated at the rate of 12% per annum. Upon the occurrence and continuation of an event of default, interest shall accrue at the rate of 12% per annum. Related party advances and notes payable, net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled $6,018,000 and $6,862,000, as of September 30, 2020 and December 31, 2019, respectively. Unamortized debt discounts related to these notes amounted to $38,000 and $226,000 as of September 30, 2020 and December 31, 2019, respectively. Interest incurred on these related party notes amounted to approximately $125,000 and $265,000 for the three months ended September 30, 2020 and 2019, respectively, and $378,000 and $740,000 for the nine months ended September 30, 2020 and 2019 respectively. Amortization of debt discount incurred on these related party notes amounted to approximately $38,000 and $76,000 for the three months ended September 30, 2020 and 2019, respectively and $189,000 and $227,000 for the nine months ended September 30, 2020 and 2019, respectively. The amortization of the debt discount is included in interest and financing costs in the Condensed Consolidated Statement of Operations. Per the terms of the SNB Facility, the maturity date of all related party notes has been extended to July 1, 2023 and are subordinated to the SNB Facility. There are no principal payments due on these notes until such time. Convertible Notes Payable – Third Parties 8% Notes payable to third parties totaled $1,440,000 and $2,338,000, as of September 30, 2020 and December 31, 2019, respectively. Interest incurred on the 8% Notes amounted to approximately $38,000 and $63,000 for the three months ended September 30, 2020 and 2019, respectively, and $118,000 and $319,000 for the nine months ended September 30, 2020 and 2019, respectively. Unamortized debt discounts related to these notes amounted to $0 and $7,000 as of September 30, 2020 and December 31, 2019, respectively. Amortization of debt discount on the 8% Notes amounted to approximately $0 and $3,000 for the three months ended September 30, 2020 and 2019, respectively, and $7,000 and $131,000 for the nine months ended September 30, 2020 and 2019, respectively. These costs are included in interest and financing costs in the Condensed Consolidated Statement of Operations. All convertible notes with third parties are due on December 31, 2020 and are subordinated to the SNB Facility. There are no principal payments due on these notes until such time. Per the terms of the SNB Facility, as amended, prior to November 30, 2020, the maturity date of each third party convertible note payable must be extended to a date that is more than six months after December, 30, 2022 or converted into common stock of the Company. On November 3, 2020 third party holders of $1,225,000 principal of the 8% Notes with accrued interest thereon of $210,282 converted their notes into 1,063,272 shares of common stock at a per share price of $1.35. SBA Loans In May 2020, AIM, NTW and Sterling entered into SBA Loans with SNB as the lender in an aggregate principal amount of $2,414,000 all of which remains outstanding. Each SBA Loan is evidenced by a Note. Subject to the terms of the Note, the SBA Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the SBA. At least 60% of the proceeds of each Loan must be used for payroll and payroll-related costs, in accordance with the applicable provisions of the federal statute authorizing the loan program administered by the SBA and the rules promulgated thereunder (the “Loan Program”). Each Note provides for customary events of default including, among other things, cross-defaults on any other loan with SNB. Each SBA Loan may be accelerated upon the occurrence of an event of default. The Company has elected to treat the SBA Loans as debt under FASB ASC 470. As such, the Company will derecognize the liability only when the loans are forgiven in whole or in part and the Company is legally released or repays the loans. The Company used the $2,414,000 of loans for allowed payroll and benefits expenses and expects the majority of the loans, if not all, will be forgiven. The Company has applied to the SNB for forgiveness and SNB has approved the application and submitted it to the SBA for final approval in accordance with the applicable provisions of the federal statute authorizing the Loan Program. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to SNB, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. No assurance can be given that the Company will obtain forgiveness of the loan in whole or in part. In addition, as a borrower that received over $2 million, the Company expects to be subject to an audit to review our eligibility under the Loan Program. The timing and scope of the audit remains unclear and as a result, the Company is not able to forecast when it can expect a decision on loan forgiveness. The Company does not expect the audit will impact its eligibility for forgiveness under the program. If the loans are not ultimately forgiven, the future minimum loan payments are as follows:
For the twelve months ending |  | Amount |
December 31, 2020 (remainder of the year) |  | $ | 133,000 |
December 31, 2021 |  |  | 1,607,000 |
December 31, 2022 |  |  | 674,000 |
Total SBA Loans |  |  | 2,414,000 |
Less: Current portion of SBA Loans |  |  | 1,337,000 |
Long-term portion of SBA Loans |  | $ | 1,077,000 |

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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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