Note 8 – Debt

As of September 30, 2019, the Company is in compliance with the financial covenants included in its outstanding indebtedness.

Senior Debt

The Company currently has a loan and security agreement with Middlesex Savings Bank (“Middlesex”) for general corporate purposes, as well as a $4.0 million line of credit note and an annual $1.0 million equipment line of credit agreement with a one year draw period in which the outstanding balance will be converted into a five year term note on the one year anniversary.

The loan and security agreement, the line of credit note and the equipment line of credit are secured by (i) a security interest in substantially all of the Company’s personal property and (ii) sixty-five percent (65%) of Dynasil’s equity interests in its U.K. subsidiary, Hilger Crystals, Ltd. Under the Note, the borrowing base is determined monthly based on eligible billed and unbilled accounts receivable and eligible inventory.

On July 31, 2018, the Company converted the outstanding balance on the original equipment line of credit with Middlesex of approximately $750,000 into a five year term note with an interest rate of 5.66%. Additionally, on August 9, 2018, the Company’s equipment line of credit was renewed for $750,000 through April 30, 2019. As part of the renewal process and due to the additional credit being extended to the Company, the Middlesex loan and security agreement was amended on August 9, 2018 to change the maximum debt leverage ratio covenant to 2.5x from 3.0x.

On April 30, 2019, the Company converted the outstanding balance on the equipment line of credit with Middlesex of approximately $484,000 into a five year term note with an interest rate of 5.17%, which will be repaid in equal monthly installments from May 2019 through April 2024. Additionally, on May 1, 2019, the Company’s equipment line of credit was renewed for $750,000 through April 30, 2020, at which time the outstanding balance will be converted into a five year term note. Additionally, a modification was made to the borrowing base under the revolving line of credit note to increase the percentage of eligible accounts receivable available for borrowing from 80% to 85% and to eliminate unbilled receivables as a category in obtaining advances under the revolving line of credit.

On August 5, 2019, the Company entered into a Loan Modification Agreement with Middlesex to modify the loan and security agreement, by and between the Company and Middlesex, to allow for the exclusion of certain transaction-related expenses from the calculation of EBITDA.

On December 23, 2019, the Company and Middlesex entered in an agreement to extend the terms of the existing term loan and line of credit from May 2020 to April 2022, at which time all outstanding principal and unpaid interest will be due and payable. The new agreement includes a modification of the terms of the line of credit’s interest rate to add, at the Company’s election, the option of the LIBOR Benchmark Rate, plus two and one-half of one (2.50%) percent per annum, in addition to the existing rate of the Lender’s Prime Rate, but in no event less than three and one-quarter of one (3.25%) percent. Additionally, the $750,000 availability under the existing equipment line of credit has been extended through December 2020.

As of September 30, 2019, approximately $0.9 million was due under the revolving line of credit with Middlesex and the total availability was $3.1 million. As of September 30, 2019, no amount was outstanding under the equipment line of credit with Middlesex.

Subordinated Debt

The Company and Massachusetts Capital Resource Company (“MCRC”) entered into a Note Purchase Agreement (the “Agreement”) in July of 2012 in which the Company issued and sold to MCRC a $3.0 million subordinated note (the “Original MCRC Note”) for a purchase price of $3.0 million. The Original MCRC Note provided for interest at the rate of ten percent (10%) per annum, with interest to be payable monthly on the last day of each calendar month and principal payments of $130,000 beginning on September 30, 2015, and on the last day of each calendar month thereafter through and including July 31, 2017.

This Original MCRC Note was amended in 2015 to adjust the interest rate to six percent (6%) in connection with a prepayment of $2.0 million.

On January 3, 2018, the Company amended the Agreement with MCRC to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2018. Such amendment also increased the interest rate of the Original MCRC Note from six percent (6%) to seven percent (7%) per annum.

On November 27, 2018, the Company amended the Agreement with MCRC to reinstate the interest only payment requirements of the Original MCRC Note and defer principal repayment requirements to November 30, 2019. Such amendment also extended the maturity date from July 31, 2019 to November 30, 2021.

On May 7, 2019, the Company received a waiver from MCRC to terms of the Agreement to allow and permit the Company’s proposed transaction to delist its Common Stock from the Nasdaq Stock Market, including the 1-for-8,000 reverse stock split on its outstanding shares of Common Stock (the “Reverse Split”), the payment of cash to stockholders subsequent to the Reverse Split who hold only a fractional interest, and the subsequent forward stock split of 8,000-for-1 to restore the remaining shareholders to their original share ownership as of immediately prior to the Reverse Split (for additional information, see Note 10, “Stockholders Equity”).

In connection with the events described above, on August 6, 2019, the Company entered into a Note Purchase Agreement with MCRC in which the Company borrowed an additional $2,000,000 in cash and replaced the Original MCRC Note which had an outstanding principal amount of $865,216, for an aggregate principal amount of $2,865,216 which will be due July 31, 2026 and bears eight (8%) percent interest per annum (the “Consolidated Note”). Until August 31, 2022 the Consolidated Note will require interest only payments, followed by principal and interest payments for the remaining four years of the Consolidated Note. Until August 31, 2021, the Company is subject to early-payback penalties. As a result of this amendment to the Agreement, the debt balance as of September 30, 2019 with MCRC was classified as long-term.

Under the terms of the Agreement and a Subordination Agreement dated August 6, 2019, MCRC and any successor holder of the Subordinated Note have agreed that the payment of the principal and interest on the Subordinated Note is subordinated in right of payment, to the prior payment in full of all indebtedness of the Company for money borrowed from banks or other institutional lenders at any time outstanding.

The Agreement contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Agreement contains financial covenants by the Company (as further defined in the Agreement) that (i) impose a Consolidated Maximum Leverage Ratio (consolidated total funded debt to consolidated EBITDA) equal to or less than 4.0 to 1.0 for each rolling four quarter period ending on or after September 30, 2019, and (ii) require a Debt Service Coverage Ratio of at least 1.10 to 1.0 for the prior 12 month period (EBITDA excluding non-cash and/or non-recurring expenditures, effective for the subsequent three fiscal quarters to give effect to the trailing twelve month testing periods for this covenant, minus unfinanced capital expenditures, minus dividends and distributions, minus cash taxes paid for ongoing operations, divided by scheduled interest and principal payments made on all debt) of not less than 1.10 to 1.00 for each rolling four quarter period ending on or after September 30, 2019. Non-recurring expenditures include without limitation, up to $750,000 of certain expenditures incurred in the de-listing of certain of the Company’s stock from NASDAQ and the deregistration of the Company’s common stock for the fiscal quarters ending June 30, 2019, September 30, 2019 and December 31, 2019 only.

The Agreement also provides for events of default customary for agreements of this type, including, but not limited to, non-payment, breach of covenants, insolvency and defaults on other debt. Upon an event of default, MCRC may elect to declare all obligations (including principal, interest and all others amounts payable) immediately due and payable, which will occur automatically if the Company becomes insolvent.

Other Debt

The Company’s RMD and Optometrics subsidiaries entered into equipment financing notes payable in connection with the purchase of certain equipment. Optometrics entered into equipment financing notes payable with two government agencies for up to $0.5 million bearing interest at 5% to 5.25% which were repayable in monthly installments over a five year period. RMD entered into equipment financing notes payable with a private equipment funding source bearing interest at 8.7% to 14.59% which were repayable in monthly installments through July 2019. All three of these notes were fully paid during the year ended September 30, 2019.

In November 2016, Xcede entered into an additional Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement (collectively the “Note Agreement”) with Cook Biotech, Inc. (CBI), in which CBI committed to fund the pre-clinical testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trials for, the Xcede Patch. Under the terms of the Note Agreement, in exchange for the services performed by CBI, Xcede has committed to a multiple draw credit facility in the aggregate amount not to exceed $1.5 million, with three draws of principal available, each in the amount of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement, all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark and service mark registrations and applications. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025. The note was recorded at fair value at issuance net of unamortized discount based on an imputed interest rate of 5.4%. On July 20, 2018, Xcede received a notice of termination from CBI, which included CBI’s assertion that the foregoing study results trigger an immediate repayment of the $500,000 promissory note owed by Xcede to CBI under the Note Agreement and cancelled the remaining availability under the Note Agreement. While Xcede vigorously contests this assertion, at this time it is unclear how this matter will be resolved between Xcede and CBI. The Company carries the promissory note in short-term debt. During the twelve months ended September 30, 2018, upon termination of the CBI agreements, research and development expense of $35,000 was recorded to accrete the note to face value. As of September 30, 2019, Xcede had $0.5 million of outstanding indebtedness owed to CBI. See Note 3 – Xcede Technologies, Inc. Joint Venture.

Debt at September 30, 2019 and 2018 is summarized as follows:


	2019		2018
Term note payable to Middlesex Savings Bank. The note payable to Middlesex is due in monthly installments of $37,000 for principal and interest through February 2021. The interest rate is 4.52% and the note is secured by an interest in substantially all of the Company's personal property and sixty-five percent of the Company's equity interests in its UK subsidiary, Hilger Crystals, Ltd.	$	614,000	$	1,024,000

Equipment term note payable to Middlesex Savings Bank. The note payable to Middlesex is due in monthly installments of $14,000 for principal and interest through July 2023. The interest rate is 5.66% and the note is secured by an interest in substantially all of the Company's personal property and sixty-five percent of the Company's equity interests in its UK subsidiary, Hilger Crystals, Ltd.		596,000		742,000

Equipment term note payable to Middlesex Savings Bank. The note payable to Middlesex is due in monthly installments of $9,000 for principal and interest through April 2024. The interest rate is 5.17% and the note is secured by an interest in substantially all of the Company's personal property and sixty-five percent of the Company's equity interests in its UK subsidiary, Hilger Crystals, Ltd.		448,000		—

Note payable to Town of Ayer Industrial Development Finance Authority (Ayer) for an equipment line of credit made with Dynasil subsidiary Optometrics. The note payable to Ayer was due in monthly installments totaling $17,000 per year and was amortized over ten years with a balloon payment at five years from the date of the note. The interest rate was 5.00%. The note was secured by an interest in the equipment purchased with the line.		—		122,000

Note payable to Massachusetts Development Finance Agency (MDFA) for promissory note made with Dynasil subsidiary Optometrics. The note payable to MDFA was due in monthly installments of $6,000 for principal and interest through March, 2019. The interest rate was 5.25%. The note was secured by an interest in substantially all of Optometric's personal property.		—		36,000

Subordinated note payable to Massachusetts Capital Resource Company in monthly installments of $5,000 through November 2019 for interest only, followed by monthly payments of $39,000 of interest and principal through November 2021. The interest rate was fixed at 7.00%. Subordinated note was refinanced and combined with consolidated subordinated note payable to Massachusetts Capital Resource Company.		—		865,000

Consolidated subordinated note payable to Massachusetts Capital Resource Company in monthly installments of $19,000 through July 2022 for interest only, followed by monthly payments of $70,000 of interest and principal through July 2026. The interest rate is fixed at 8.00%.		2,865,000		—

Note payable to Leaf Capital Funding, LLC (Leaf) for equipment financing with Dynasil subsidiary RMD. The note payable to Leaf was due in monthly installments of $1,000 for principal and interest through July 2019. The interest rate was 8.70%. The note was secured by an interest in the financed equipment.		—		14,000

Xcede Note agreement with Cook Biotech Inc. to fund pre-clinical testing for Xcede. Credit draw not to exceed $1.5 million, in three draws of $500,000 upon satisfaction of conditions in Note Agreement. Upon termination of the CBI note the remaining $1.0 million is no longer available. Note bears interest at a rate of 2% and is secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License Agreement. The note was recorded at inception at fair value net of unamortized discount based on an imputed interest rate of 5.4%. During the year ended September 30, 2018, R&D expense of $35,000 was recorded to accrete the note to face value.		528,000		518,000

Total Debt	$	5,051,000	$	3,321,000
Less current portion		(1,189,000)		(1,246,000)
Long term portion		3,862,000		2,075,000

The aggregate maturities of debt based on the payment terms of the agreement are as follows:


For the years ending on September 30:
2020	$	1,189,000
2021		430,000
2022		361,000
2023		886,000
2024		758,000
Thereafter		1,427,000
	$	5,051,000

There was no unamortized debt issuance costs for the years ended September 30, 2019 and 2018. There was no amortization expense for the years ended September 30, 2019 and 2018.