|9 Months Ended|
Sep. 30, 2018
|Debt Disclosure [Abstract]|
Term Note and Line of Credit
On March 22, 2017, we entered into a two year asset-based revolving line of credit agreement (“ABL”) with SVB. The SVB credit facility provided for an ABL for an amount not to exceed the lesser of (a) $6.0 million or (b) 80% of eligible accounts receivable plus the lesser of 50% of the net collectible value of third party accounts receivable or three (3) times the average monthly collection amount of third party accounts receivable over the previous quarter. On August 20, 2018, the ABL was amended and the maximum borrowings available under the ABL was reduced from $6.0 million to $3.0 million; in addition, the amended ABL required us to enter into a binding and enforceable agreement with respect to a merger or other business combination transaction with an unrelated third party by August 31, 2018. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.50% (6.75% at September 30, 2018) and matures on March 22, 2019. Absent the covenant waivers, we would be required to make monthly interest payments at the default rate (10.75% at September 30, 2018). We also pay a fee of 0.25% per year on the average unused portion of the ABL. At September 30, 2018, we have borrowed approximately $2.8 million on the ABL.
We concurrently entered into a three year $6.0 million term loan agreement (“PFG Term Note”) with PFG. The PFG Term Note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per annum. Absent the covenant waivers, we would be required to make monthly interest payments at the default rate of 17.5% per annum. We may prepay the PFG Term Note in whole or part at any time without penalty.
Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA, revenue and liquidity covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants and negative covenants. The SVB and PFG loan covenants were modified on June 21, 2018 and June 30, 2018, respectively; however, the Company was in violation of the modified covenants at July 31, 2018, August 31, 2018 and September 30, 2018; additionally, the Company expects to be in violation of these covenants at October 31, 2018 and November 30, 2018. The July and August covenant violations were waived on August 20, 2018 by SVB and PFG, on the condition that the Company enter into a binding and enforceable agreement satisfactory to each lender by August 31, 2018 with respect to a merger or other business combination transaction between the Company and an unrelated third party satisfactory to each lender (the “Transaction Condition”). While the Company was in violation of the Transaction Condition as of August 31, it subsequently entered into a binding and enforceable agreement satisfactory to each lender on September 18, 2018 by entering into the Merger Agreement. The Company has received waivers from its lenders concerning the Transaction Condition for July and August, the September financial and reporting covenant violations and the anticipated October and November financial covenant violations, conditioned upon the Company raising $3,000,000 through the sale of its equity securities or issuance of subordinated debt (in the case of the agreement with SVB, to investors accepted to SVB) by November 30, 2018. During the three and nine months ended September 30, 2018, the Company incurred approximately $50,000 and $258,000, respectively, of debt modification costs that were expensed due to prior and expected future violations of the modified covenants.
Our obligations to SVB under the ABL facility are secured by a first priority security interest on substantially all of our assets, and our obligations under the PFG Term Note are secured by a second priority security interest subordinated to the SVB lien.
In connection with the PFG Term Note, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share (the “PFG Warrants”). On June 30, 2018, the PFG Warrants were amended to reduce the exercise price to $0.92 per share.
At September 30, 2018, the principal amount of the PFG Term Note of $6,000,000 is due in 2020. We have obtained waivers from our lender for violation of certain financial covenants and one reporting covenant at September 30, 2018. Nevertheless, based on the modified covenants for future months, the PFG Term Note is presented as a current liability.
On July 17, 2018, the Company entered into an agreement pursuant to which the Company issued a convertible promissory note to an institutional accredited investor in the initial principal amount of $2,625,000 (“Convertible Note”). The Company received consideration of $2,500,000, reflecting an original issue discount of $100,000, a beneficial conversion feature discount of approximately $328,000 and expenses payable by the Company of $25,000. The Convertible Note has an 18 month term and carries interest at 10% per annum. The note is convertible into shares of the Company’s common stock at a conversion price of $0.80 per share (“Conversion Price”) upon five trading days’ notice, subject to certain adjustments (standard dilution) and ownership limitations specified in the Convertible Note.
The investor may redeem any portion of the Convertible Note, at any time after six months from the issue date upon five trading days’ notice, subject to a maximum monthly redemption amount of $650,000, with the Company having the option to pay such redemptions in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions, including that the stock price is $1.00 per share or higher. The Company may prepay the outstanding balance of the Convertible Note, in part or in full, at a 10% premium to par value if prior to the one year anniversary of the date of issuance and at par if prepaid thereafter. At maturity, the Company may pay the outstanding balance in cash, the Company’s common stock at the Conversion Price, or by a combination thereof, subject to certain conditions. The note provides that in the event of default, the lender may, at its option, elect to increase the outstanding balance applying the default effect (defined as outstanding balance at date of default multiplied by 15% plus outstanding amount) by providing written notice to the Company. In addition, the interest rate increases to 22% upon default. These provisions were deemed embedded derivatives but at this time the value was de minimis.
The Convertible Note is the general unsecured obligation of the Company and is subordinated in right of payment to the ABL and PFG Term Note. The following is a summary of the Convertible Note balance at September 30, 2018 (in thousands):
Advance from NDX
In connection with signing the Merger Agreement described in Note 1, NDX agreed to loan us up to $2,300,000 (“Credit Agreement”). The first advance of $1,500,000 was extended on September 18, 2018, and the second advance of $800,000 is payable upon satisfaction of certain conditions, including the filing of a registration statement on Form S-4 related to the Merger Agreement. Interest accrues on the outstanding balance at 10.75% per annum, and the Credit Agreement matures upon the earlier of March 31, 2019 or the date on which the Merger Agreement is terminated in accordance with its terms (or 90 days thereafter in the case of certain causes for termination). Upon certain events of default, NDX may convert all, but not less than all, of the outstanding balance into shares of the Company’s common stock at a conversion price of $0.606 per share. At September 30, 2018, the principal balance of the Credit Agreement was $1,500,000.
The Credit Agreement is the general unsecured obligation of the Company and is subordinated in right of payment to the ABL and PFG Term Note, provided that amounts owed to NDX may be repaid ahead of the ABL and PFG Term Note upon certain types of termination of the Merger Agreement. There is an interest rate reset up to a maximum of 21% upon an event of default that is deemed to be an embedded derivative but at this time the value was de minimis.
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.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef