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Debt | 9 Months Ended
--- | ---
Sep. 30, 2017
Debt Disclosure [Abstract] |
Debt | Debt Debt consisted of the following (in thousands):
| September 30, 2017 |  | December 31, 2016
Main Street Term Loan | $ | — |  |  | $ | 9,000 |
SRS Note | — |  |  | 1,785 |
Western Alliance Bank A/R Revolver | 1,000 |  |  | — |
Super G Loan | 1,096 |  |  | — |
Unamortized debt discounts | (308 | ) |  | (125 | )
Net carrying value | 1,788 |  |  | 10,660 |
Less: current maturities | (1,298 | ) |  | (10,660 | )
Long-term obligations, net of debt discount | $ | 490 |  |  | $ | — |
On July 31, 2017, the Company completed a recapitalization of its debt obligations as summarized in the table below and as described further below (the “Debt Recapitalization”). Therefore, as of July 31, 2017, there were no remaining obligations related to the Main Street Term Loan or SRS Note. The Company reduced debt and accrued interest obligations by $9,362,000 as of July 31, 2017 in the Debt Recapitalization and lowered outstanding shares of common stock by 404,587, as summarized in the following two tables.
|  | Former Debt Obligations as of July 31, 2017 * |  | Debt Obligations Extinguished on July 31, 2017 * |  | New Outstanding Debt Obligations as of July 31, 2017**
Main Street Term Loan: principal |  | $ | 9,000,000 |  |  | $ | (9,000,000 | ) |  | — |
SRS Note: principal |  | 1,784,692 |  |  | (1,784,692 | ) |  | — |
SRS Note: accrued interest |  | 777,568 |  |  | (777,568 | ) |  | — |
Western Alliance Bank: principal |  |  |  |  |  | $ | 1,100,000 |
Super G Capital: principal |  |  |  |  |  | 1,100,000 |
Total |  | $ | 11,562,260 |  |  | $ | (11,562,260 | ) |  | $ | 2,200,000 |
* The amounts presented herein represent the gross outstanding principal amounts and exclude approximately $89,000 of unamortized debt discounts.
** The amounts presented herein represent the gross outstanding principal amounts and exclude approximately $335,000 of unamortized debt discounts.
Outstanding Shares of Common Stock on July 31, 2017 prior to the Debt Recapitalization | 36,534,840 |
Shares of common stock purchased in connection with the Main Street Payoff | (7,711,517 | )
Shares of common stock issued in connection with the SRS Note Exchange | 7,306,930 |
Outstanding Shares of Common Stock on July 31, 2017 after the Debt Recapitalization | 36,130,253 |
The Company recorded a gain on debt extinguishment of approximately $9,045,000 (which was net of the write off of approximately $89,000 of unamortized debt discounts) during the three and nine months ended September 30, 2017 for the Debt Recapitalization. The Company recorded the net 404,587 shares purchased to treasury stock in the amount of $121,376, equal to the stock price of $0.30 per share as of July 31, 2017. Main Street Payoff Letter and Redemption Agreement As of June 30, 2017, the Company had outstanding borrowings of $9,000,000 with Main Street Capital Corporation (“Main Street”) under a senior secured term loan facility (the “Main Street Term Loan”). Borrowings under the Main Street Term Loan were to mature on October 17, 2018 unless sooner terminated as provided in the Main Street Loan Agreement. As of June 30, 2017, the Company was in default of certain covenants in the Main Street Term Loan. The interest rate on the Main Street Term Loan borrowings was 12% per annum and interest payments were due monthly. As of June 30, 2017, Main Street owned 7,711,517 shares, or 21%, of the Company’s outstanding common stock.
• | On July 31, 2017, the Company and Main Street entered into (i) a payoff letter (the “Main Street Payoff Letter”) that terminated the $9,000,000 Main Street Term Loan and (ii) a Redemption Agreement (“the Main Street Redemption Agreement”) whereby the Company purchased 7,711,517 shares of the Company’s common stock held by Main Street, in exchange for total cash payments from the Company of $2,550,000 (together the “Main Street Payoff”). On July 31, 2017, the Company funded the Main Street Payoff using $350,000 of the Company’s existing cash plus cash proceeds of $2,200,000 borrowed under loan agreements with Western Alliance Bank and Super G (each defined below).
SRS Note Exchange Agreement As of June 30, 2017, the Company had outstanding total obligations of $2,530,000 (consisting of $1,785,000 of principal and $745,000 of accrued interest) under a promissory note (the “SRS Note”) to Shareholder Representative Services LLC (“SRS”) the Company issued in connection with the 2012 acquisition of Affinity Videonet, Inc. (“Affinity”), which was amended in February 2015. The maturity date of the SRS Note was July 6, 2017 and the interest rate on the SRS Note was 15% per annum. Payment of all interest earned after March 1, 2015 was due on July 6, 2017, unless certain trailing Adjusted EBITDA targets were met as defined in the SRS Note. In June 2017, SRS granted the Company a waiver of the final installment for 60 days. The SRS Note was subordinate to borrowings under the Main Street Loan Agreement, and was only permitted to be repaid if permitted by the terms of the Main Street Loan Agreement.
• | On July 31, 2017, the Company and SRS entered into a Note Exchange Agreement (the “SRS Note Exchange Agreement’) to extinguish the $2,562,000 of obligations on the SRS Note (including accrued interest for July 2017 of $32,000) in exchange for 7,306,930 shares of the Company’s common stock (the “SRS Note Exchange”). Our President, Chief Executive Officer, and Director, Peter Holst, held a 27.3% interest in the SRS Note (or $699,528 as of July 31, 2017 including accrued interest) and received 1,806,087 shares of the Company’s common stock in connection with the SRS Note Exchange (representing an effective exchange price into common stock of $0.387 per share). The SRS Note Exchange was negotiated and approved on behalf of the Company by a special committee of the board of directors consisting exclusively of independent, disinterested directors.
Western Alliance Bank Business Financing Agreement On July 31, 2017, the Company and its subsidiary entered into a Business Financing Agreement with Western Alliance Bank, as lender (the “Western Alliance Bank Loan Agreement”). The Western Alliance Bank Loan Agreement provides the Company with up to a total of $1,500,000 of revolving loans (the “A/R Revolver”). The maximum amount available under the A/R Revolver is limited to the lesser of (x) $1,500,000 and (y) an amount equal to the borrowing base. The borrowing base includes 85% of the Company’s eligible accounts receivable plus a non-formula amount (which was $600,000 at closing, and which steps down to $400,000 on October 1, 2017, to $200,000 on January 1, 2018, and to $0 on April 1, 2018) (“the Non-Formula Amount”). On July 31, 2017, the Company received a loan in an amount equal to $1,100,000 under the Western Alliance Bank Loan Agreement, consisting of $500,000 based on 85% of eligible accounts receivable and $600,000 of Non-Formula Amount, the proceeds of which were used to fund the Main Street Payoff. During the three months ended September 30, 2017, the Company made a payment of $100,000 on the A/R Revolver. As of September 30, 2017, the total borrowings on the A/R Revolver were $1,000,000 and we had additional availability of $49,000. All loans under the A/R Revolver mature on July 31, 2019 (unless such loans are not supported by the borrowing base, in which case any loans exceeding the borrowing base must be immediately repaid). Given the step-down of the Non-Formula Amount as described above, the Company made a principal payment of $200,000 on October 1, 2017 and will be required to make mandatory prepayments of the loans on January 1, 2018 and April 1, 2018 in amounts equal to $200,000. The Western Alliance Bank Loan Agreement provides that all borrowings bear interest at the prime rate (4.25% as of September 30, 2017) plus 1.75% (or a total of 6.00% as of September 30, 2017) per year. The prime rate is subject to a floor of 4.00%. Interest payments on the outstanding borrowings are due monthly. The Company may receive new borrowings on the A/R Revolver if supported by the borrowing base and may prepay borrowings under the Western Alliance Bank Loan Agreement at any time without premium or penalty, subject to certain notice requirements. The obligations of the Company under the Western Alliance Bank Loan Agreement are secured by substantially all of the assets of the Company and its subsidiary, including accounts receivable, intellectual property, equipment and other personal property. The Western Alliance Bank Loan Agreement contains certain restrictions and covenants, which, among other things, subject to certain exceptions, restrict the Company’s ability to incur additional debt or make guarantees, sell assets, make investments or loans, make distributions or create liens or other encumbrances. The Western Alliance Bank Loan Agreement also requires that we comply with certain financial covenants, including maintaining a specified asset coverage ratio, minimum levels of adjusted EBITDA, maximum levels of capital expenditures, minimum revenues vs. plan, and minimum amounts of unrestricted cash held with Western Alliance Bank (equal to $200,000 plus the amount outstanding on the Non-Formula Amount). As of September 30, 2017, the Company was in compliance with all required covenants. The Western Alliance Bank Loan Agreement contains customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults and a change in control. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become immediately due and payable. Super G Loan Agreement and Warrant On July 31, 2017, the Company and its subsidiary entered into a Business Loan and Security Agreement with Super G Capital, LLC (“Super G”), as lender (the “Super G Loan Agreement”) and received a term loan from Super G in an amount equal to $1,100,000, the proceeds of which were used to fund the Main Street Payoff (the “Super G Loan”). Borrowings under the Super G Loan Agreement are to be repaid in installments (including interest) of $33,000 per month in the first 3 months following closing and approximately $68,600 per month in months four through twenty-four following closing, for total payments of $1,540,000. During the three months ended September 30, 2017, the Company made total principal and interest payments of $4,000 and $46,000, respectively, on the Super G Loan. The remaining principal balance as of September 30, 2017 is $1,096,000. Interest expense for the three months ended September 30, 2017 was $60,000. Interest payments for the fourth quarter of 2017, fiscal years 2018, and 2019 on the Super G Loan are expected to total $88,000, $246,000 and $46,000, respectively. The obligations of the Company under the Super G Loan Agreement are secured by a second lien on substantially all of the assets of the Company and its subsidiary, including accounts receivable, intellectual property, equipment and other personal property. The security interest granted and loans made under the Super G Loan Agreement are subordinated to the security interest and loans made under the Western Alliance Bank Loan Agreement pursuant to a subordination and intercreditor agreement. The Super G Loan Agreement contains certain restrictions and covenants similar to the Western Alliance Bank Loan Agreement, and requires the Company to comply with certain financial covenants, including maintaining unrestricted cash with Western Alliance and maintaining minimum levels of adjusted EBITDA. As of September 30, 2017, the Company was in compliance with all required covenants. The Super G Loan Agreement contains customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults and failure to own 100% of the Company’s subsidiary. Upon the occurrence of an event of default, subject to the terms of the above-mentioned subordination and intercreditor agreement, the outstanding obligations may be accelerated and become immediately due and payable. On July 31, 2017, the Company also issued a warrant that entitles Super G to purchase 550,000 shares of the Company’s common stock at an exercise price of $0.30 per share (the “Super G Warrant”). The Super G Warrant has a three year term and if the profit on such warrants is not equal to at least $165,000 over the term of the warrants, at the end of the three year term, the Company must pay an exit fee equal to the difference between $165,000 and the amount of profit recognized. As of September 30, 2017, no warrants have been exercised. The $165,000 fair value of this warrant has been recorded as a derivative liability and as a discount to the carrying amount of the debt as of September 30, 2017. The warrant liability is revalued on each balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded as other income or expense. During the three and nine months ended September 30, 2017, there was no change to the fair value of the warrant liability. The Company estimates the fair value of this liability using an option pricing model that is based on the individual characteristics of the warrant on the valuation date, which includes assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of the warrant liability is the Company’s stock price. Generally, increases (decreases) in the fair value of the underlying stock would result in a corresponding increase (decrease) in the fair value of the warrant liability. The total debt discount on the Western Alliance Bank A/R Revolver and Super G Loan was $335,000, comprised of $170,000 of debt issuance costs and $165,000 related to the warrants issued. This debt discount is being amortized to interest expense using the effective interest method over the term of the debt. During the three and nine months ended September 30, 2017, the Company amortized $28,000 of the debt discount to interest expense. The unamortized debt discount as of September 30, 2017 is $308,000. During the three and nine months ended September 30, 2017 total amortization of the debt discounts related to the Main Street Term Loan and SRS Note were $0 and $36,000, respectively, which is recorded in “Interest and Other Expense, Net” on our Condensed Consolidated Statements of Operations. Future minimum principal payments on debt as of September 30, 2017, are as follows (in thousands):
Year Ending December 31, | Western Alliance Bank | Super G | Total
Remaining 2017 | $ | 200 |  | $ | 64 |  | $ | 264 |
2018 | 400 |  | 570 |  | 970 |
Seven months ended July 31, 2019 | 400 |  | 462 |  | 862 |
| $ | 1,000 |  | $ | 1,096 |  | $ | 2,096 |

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- Definition The entire disclosure for 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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