Note 4 - Debt

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Debt Disclosure [Text Block]

Note 4 - Debt

During  December 2017, we terminated a prior credit arrangement and entered in new financing agreements (as amended to date, the “PNC Agreements”) with PNC. The PNC Agreements, included a $6 million term loan and a $9 million revolving credit facility, with a termination date of  December 2021.

Available credit under the Revolving Credit facility was determined by eligible receivables and inventory at Yunhong CTI Ltd. (U.S.) and Flexo Universal (Mexico).

The PNC Agreements provided for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. Failure to comply with certain covenants caused us to pay a higher rate of interest (increased by 4% pursuant to the PNC Agreements).

As of  March 2019,  October 2019, January 2020, and April 2021 we entered into forbearance agreements with PNC due to various events of default which had occurred under the Loan Agreement and were continuing. We encountered subsequent compliance failures with covenants and we were out of compliance with the terms of our credit facility, as amended, as of  June 30, 2021. 

Pursuant to an April 2021 forbearance agreement, the Company agreed to pay PNC a Forbearance Fee of $1,000,000. Provided, however, that, so long as no event of default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by $1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates the Equity Investment (as defined in the agreement) by  June 30, 2021, the Forbearance Fee shall be reduced by $250,000, to $750,000, and (ii) if the Company causes all of the obligations under the Loan Agreement to be paid in full, in cash, on or before  September 30, 2021, the Forbearance Fee shall be reduced by an additional $500,000, to $250,000.  As the Company repaid all obligations under the Loan Agreement by September 30, 2021 and the Equity Investment was consummated by June 30, 2021, the forbearance fee was $250,000. For the three and nine months ended September 30, 2021, the Company recorded a forbearance expense of $250,000.

On September 30, 2021 (the “Closing Date”), the Company entered into a loan and security agreement (the “Agreement”) with Line Financial (the “Lender”), which provides for a senior secured financing consisting of a revolving credit facility (the “Revolving Credit Facility) in an aggregate principal amount of up to $6 million (the “Maximum Revolver Amount”) and term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $731,250 (“Term Loan Amount” and, together with the Revolving Credit Facility, the “Senior Facilities”). Proceeds of loans borrowed under the Senior Facilities were used to repay all amounts outstanding under the Company's PNC Agreements and for the Company’s working capital. The Senior Facilities are secured by substantially all assets of the Company.

Interest on the Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (3.25% as of September 30, 2021), plus 1.95% per annum, accruing daily and payable monthly. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The Term Loan Facility shall be repaid by the Company to Lender in 48 equal monthly installments of principal and interest, each in the amount of $15,234, commencing on November 1, 2021, and continuing on the first day of each month thereafter until the Term Loan Maturity Date (as defined in the Agreement). Also, the Company will pay the Lender collateral monitoring fees of 4.62% of the eligible accounts receivable, inventory, and equipment supporting the Revolving Credit Facility and the Term Loan. In addition, the Company paid the Lender a loan fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon the execution of the Agreement.

The Senior Facilities mature on September 30, 2023 and shall automatically be extended for successive periods of one year each, unless the Company or the Lender gives the other party written notice of termination not less than 90 days prior to the end of such term or renewal term, as applicable. If the Senior Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the anniversary of the Closing Date. The Company has the option to prepay the Term Loan Facility (together with all accrued but unpaid interest and a Term Loan Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not less than 60 days prior written notice to the Lender.

The Senior Facilities require that the Company shall, commencing December 31, 2021, maintain Tangible Net Worth of at least $4,000,000 or greater (“Minimum Tangible Net Worth”). Minimum Tangible Net Worth may be adjusted downward by the Lender, from time to time, in its sole and absolute discretion, based on the effect of non-cash charges and other factors on the calculation of Tangible Net Worth.

The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, and acquisitions, pay dividends and make other restricted payments, or make capital expenditures exceeding $1,000,000 in the aggregate in any fiscal year.

As of  January 1, 2019, the Company had a note payable to John H. Schwan, Director and former Chairman of the Board, for $1.6 million, including accrued interest. This loan accrues interest, is due on demand, and is subordinate to the Senior Facilities. During  January 2019, Mr. Schwan converted $600,000 of the note into approximately 181,000 shares of our common stock at the then market rate of $3.32 per share. As a result of the conversion, the loan balance decreased to $997,019 and Company and Mr. Schwan agreed to increase the interest rate to 6%.

As of  September 30, 2021, the Company had a note payable to Alex Chao for $166,667. This loan accrues interest at 3% and is subordinate to the Senior Facilities.  The subordination agreement signed September 30, 2021 changes the term of the maturity date from November 2023 to March 2024 and payment date starting April 2022.  

The loan and interest payable to Mr. Schwan amounted to $1,175,361 and $1,123,769 as of  September 30, 2021 and  December 31, 2020, respectively.

No payments were made to Mr. Schwan since 2019. Interest expense related to this loan amounted to $17,000 and $16,000 for the three months ended  September 30, 2021 and 2020, respectively, and $51,000 and $48,000 for the nine months ended  September 30, 2021 and 2020, respectively.

During 2020, Flexo replaced a $260,000 line of credit with three lines of credit totaling $260,000.  Flexo’s total debt instruments as of  September 30, 2021 amounted to $3,000,000.