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Notes Payable, Related Party Notes Payable and Finance Lease Obligations
 3 Months Ended
Mar. 31, 2022
Debt Disclosure [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, related party notes payable and finance lease obligations consist of the following:

 

   March 31,   December 31, 
   2022   2021 
   (unaudited)     
Revolving credit note payable to Webster Bank (F/K/A Sterling National Bank) (“Webster”)  $11,555,000   $12,456,000 
Term loan, Webster   3,999,000    4,192,000 
Finance lease obligations   251,000    263,000 
Loans Payable - financed assets   38,000    39,000 
Related party notes payable   6,412,000    6,412,000 
Subtotal   22,255,000    23,362,000 
Less: Current portion of notes payable, related party notes payable and finance lease obligations   (13,278,000)   (14,112,000)
Notes payable, related party notes payable and finance lease obligations, net of current portion  $8,977,000   $9,250,000 

 

Webster Bank (F/K/A Sterling National Bank) (“Webster”)

 

The Company has a loan facility (“Webster Facility”) with Webster Bank that expires on December 30, 2025. The Webster Facility, which was first entered into on December 31, 2019, was amended several times, and now provides for a $20,000,000 revolving loan (“Revolving Line of Credit”) and a $5,685,000 term loan (“Term Loan”).

 

As of March 31, 2022, there is currently $11,555,000 outstanding under the Revolving Line of Credit and $3,999,000 under the Term Loan. The below table shows the timing of payments due under the Term Loan:

 

For the period ending  Amount 
December 31, 2022 (remainder of the year)  $1,463,000 
December 31, 2023   812,000 
December 31, 2024   812,000 
December 31, 2025   912,000 
Webster Term Loan payable   3,999,000 
Less: debt issuance costs   (24,000)
Total Webster Term Loan payable, net of debt issuance costs   3,975,000 
Less: Current portion of Webster Term Loan payable   (812,000)
Total long-term portion of Webster Term Loan payable  $3,163,000 

 

As of December 31, 2021, our debt to Webster in the amount of $16,648,000 consisted of the Webster revolving line of credit note in the amount of $12,456,000 and the Webster term loan in the amount of $4,192,000.

 

Interest expense related to the Webster Facility amounted to approximately $155,000 and $181,000 for the three months ended March 31, 2022 and 2021, respectively.

 

The below summarizes historical amendments to the facility and various terms:

 

In 2020, the Company entered into the First Amendment to the Loan and Security Agreement which increased the Term Loan to $5,685,000 and required the Company to make monthly principal installments in the amount of $67,679 beginning on December 1, 2020. Other minor modifications were made and the Company paid an amendment fee of $20,000.

 

In June 2021, the Company entered into the Second Amendment to the Loan and Security Agreement, which clarified the definition and calculation of Excess Cash Flow, and to confirm the due date of required payment of the Excess Cash Flow payment. For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay to Webster 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 Webster and applied to the outstanding principal balance of the term loan, on or prior to the close of the fiscal year immediately following such fiscal year. The Company made Excess Cash Flow payments of $558,750 in 2021 (for the fiscal year ended December 31, 2020) and paid $854,000 in April 2022 (for fiscal year ended December 31, 2021). In connection with these changes, the Company paid an amendment fee of $10,000.

 

On December 7, 2021, the Company entered into the Third Amendment to the Loan and Security Agreement (“Third Amendment”). The purpose of the amendment was to provide a maturity date for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022. Such amendment also increased the Revolving Line of Credit to its current limit of $20,000,000 (up from the original $16,000,000) and also provided for a similar increase in the inventory sublimit to $14,000,000 (up from the original $11,000,000). The Third Amendment, also allows the Company, subject to certain limitations, to begin amortizing a portion of its subordinated debt. In connection with these changes, the Company paid an amendment fee of $75,000.

 

Under the terms of the Webster Facility, both the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii) a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal (or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum. The average interest rate charged during both of the three months ended March 31, 2022 and 2021 was 3.5%.

 

All amendment fees paid in connection with the Webster Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance Sheets and are amortized over the term of the loan.

 

In connection with the Webster Facility, the Company is required to maintain a defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter. The Webster Facility limits the amount of Capital Expenditures and dividends the Company can pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral under the Webster Facility.

 

As of March 31, 2022, the Company was in compliance with all loan covenants.

 

Finance Lease Obligations

 

The Company entered into a Finance lease in December of 2021 for the purchase of new manufacturing equipment. The obligation for the Finance lease as of December 31, 2021 is $262,000. The lease has an imputed interest rate of 4.2% per annum and is payable monthly with the final payment due on December 17, 2026.

 

As of March 31, 2022, the aggregate future minimum finance lease payments, including imputed interest are as follows:

 

For the period ending  Amount 
December 31, 2022 (remainder of the year)  $44,000 
December 31, 2023   58,000 
December 31, 2024   58,000 
December 31, 2025   58,000 
December 31, 2026   59,000 
Total future minimum finance lease payments   277,000 
Less: imputed interest   (26,000)
Less: Current portion   (49,000)
Long-term portion  $202,000 

 

Loan Payable – Financed Asset

 

The Company financed the purchase of a delivery vehicle in July 2020. The loan obligation totaled $37,000 and $39,000 as of March 31, 2022 and December 31, 2021, respectively. The loan bears no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.

 

The future minimum loan payments, are as follows:

 

For the period ending  Amount 
December 31, 2022 (remainder of the year)  $7,000 
December 31, 2023   9,000 
December 31, 2024   9,000 
December 31, 2025   9,000 
December 31. 2026   4,000 
Loans Payable - financed assets   38,000 
Less: Current portion   (9,000)
Long-term portion  $29,000 

Related Party Notes Payable

 

Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich.

 

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.

 

From 2016 through 2020, the Company entered into various subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich. These notes resulted in proceeds to the Company totaling $6,550,000. In connection with these notes, Michael and Robert were issued a total of 355,082 shares of common stock and Taglich Brothers Inc. was issued promissory notes totaling $554,000 for placement agency fees. At December 31, 2020, related party notes payable totaled $6,012,000 and accrued interest totaled $400,000.

 

On January 1, 2021, the related party subordinated notes due to Michael and Robert Taglich and Taglich Brothers, Inc., were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. Per the terms of the Webster Facility, these notes remain subordinate to the Webster Facility and are due on July 1, 2026. Approximately $2,732,000 of the related party subordinated notes can be converted at the option of the holder into Common Stock of the Company at $1.50 per share, while the remaining $2,080,000 of the related party subordinated notes can be converted at the option of the holder into common stock of the Company at $0.93 per share. There are no principal payments due on these notes. Under the terms of the Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations, to begin amortizing a portion of this subordinated debt. The note holders and the principal balance of the notes as amended on January 1, 2021 are shown below:

 

   Michael Taglich,   Robert Taglich,   Taglich Brothers,     
   Chairman   Director   Inc.   Total 
Convertible Subordinated Notes  $2,666,000   $1,905,000   $241,000   $4,812,000 
Subordinated Notes   1,250,000    350,000    
-
    1,600,000 
Total  $3,916,000   $2,255,000   $241,000   $6,412,000 

 

For the three months ended March 31, 2022 and 2021, no principal payments have been made on these notes and the principal balances remain unchanged from the table above. Interest expense for the three months ended March 31, 2022 and 2021 on all related party notes payable was $125,000 and $125,000, respectively.