Debt

12 Months Ended

Sep. 30, 2018

Note 8 – Debt

As of September 30, 2018, the Company is in compliance with the financial covenants included in its outstanding indebtedness.

Senior Debt

On May 1, 2014, the Company entered into a loan and security agreement (the “Bank Loan Agreement”) and line of credit note (the “Note”) with Middlesex Savings Bank, pursuant to which it agreed to provide up to $4.0 million, subject to the availability restrictions described below, under a revolving line of credit loan to the Company for general corporate purposes. The original Bank Loan Agreement provided that the loan expired in May of 2017.

The Bank Loan Agreement provides for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy, change of management, as defined, and the occurrence of a material adverse change, as defined.

The Bank Loan Agreement also contains other terms, conditions and provisions that are customary for commercial lending transactions of this sort. The Bank Loan Agreement requires Dynasil, at the close of each fiscal quarter, to maintain a Debt Service Coverage ratio, as defined, of at least 1.20 to 1.00 on a trailing four quarter basis.

On February 1, 2016, the Company entered into a $2.0 million Term Note with Middlesex Savings Bank (“Term Note”). The Company converted $2.0 million of outstanding advances under the Company’s Middlesex Bank Line of Credit Note to a new five-year term note bearing interest at the fixed annual rate of 4.5%. As of September 30, 2018, the outstanding principal balance of the Term Note is $1.0 million.

The Bank Loan Agreement, the Note and the Term Note 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. The interest rate under the Note is equal to the Prime Rate, but in no event less than 3.25%. As of September 30, 2018, there were no outstanding borrowings and the total availability under the Company’s line of credit was $4.0 million.

On May 16, 2017, the Company and Middlesex Savings Bank entered in an agreement to extend the Company’s existing line of credit through May 2020. Additionally, on May 16, 2017, the Company and Middlesex Savings Bank entered into 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 existing loan agreement was also amended on December 2, 2016 to permit the Company to invest up to $1.2 million in its Xcede Technologies subsidiary during the period from the quarter ended December 31, 2016 through the quarter ending September 30, 2018.

On July 31, 2018, the Company converted the outstanding balance on the equipment line of credit with Middlesex Savings Bank (“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, at which time the outstanding balance will be converted into a five year term note. 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 both March 31, 2018 and June 30, 2018, the Company was in compliance with all but one of the financial covenants contained in the loan agreement with Middlesex that requires the Company to maintain certain ratios of earnings before interest, taxes, depreciation and amortization to fixed charges and to total debt and senior debt. On August 9, 2018, Middlesex issued a waiver for these events in the periods ended March 31, 2018 and June 30, 2018, as this circumstance arose due to the timing of equipment purchases as the Company invests for the future. The Company is in compliance with this covenant at September 30, 2018.

Subordinated Debt

On July 31, 2012, the Company entered into a Note Purchase Agreement (the “Agreement”) with Massachusetts Capital Resource Company (“MCRC”). Pursuant to the terms of the Agreement, the Company issued and sold to MCRC a $3.0 million subordinated note (the “Subordinated Note”) for a purchase price of $3.0 million.

The Subordinated Note was scheduled to mature on July 31, 2017, unless accelerated pursuant to an event of default. The Subordinated 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.

Effective October 1, 2015, in connection with a prepayment of $2.0 million of the Subordinated Note, MCRC agreed to adjust the interest rate to 6% per annum and to amend the principal repayment terms such that beginning on September 30, 2016, the Company would redeem monthly, without premium, $43,478 in principal amount of Subordinated Note together with all accrued and unpaid interest then due on the amount redeemed through and including July 31, 2018.

On December 15, 2016, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2017. Such amendment also extended the maturity date from July 31, 2018 to July 31, 2019.

On January 3, 2018, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company 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 note from six percent (6%) to seven percent (7%) per annum.

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

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. The notes bear interest at 5% to 5.25% and are repayable in monthly installments over a five year period. RMD entered into equipment financing notes payable with a private equipment funding source. The notes bear interest at 8.7% to 14.59% and are repayable in monthly installments through July 2019.

Since its inception in October of 2013, the Company’s Xcede joint venture raised $2.9 million through the issuance of convertible notes to external investors, including certain officers and directors of the Company, which bear interest at 5%, due on demand after June 30, 2017. In November 2016, the notes and accrued interest were converted into 5,394,120 shares of preferred stock of Xcede at a 20% discount to the price per share of the investments the Company has committed to make in Xcede, in accordance with the provisions of the notes. See Note 3 – Xcede Technologies, Inc. Joint Venture.

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. As of September 30, 2018, Xcede had $0.5 million of outstanding indebtedness owed to CBI. 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. Upon termination of the CBI agreements, research and development expense of $35,000 was recorded to accrete the note to face value. See Note 3 – Xcede Technologies, Inc. Joint Venture.

Debt at September 30, 2018 and 2017 is summarized as follows:

	2018			2017
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.	$	1,024,000		$	1,415,000

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.		742,000			-

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 is due in monthly installments totaling $17,000 per year and will be amortized over ten years with a balloon payment at five years from the date of the note. The interest rate is 5.00%. The note is secured by an interest in the equipment purchased with the line.		122,000			141,000

Note payable to Massachusetts Development Finance Agency (MDFA) for promissory note made with Dynasil subsidiary Optometrics. The note payable to MDFA is due in monthly installments of $6,000 for principal and interest through March, 2019. The interest rate is 5.25%. The note is secured by an interest in substantially all of Optometric's personal property.		36,000			107,000

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 is fixed at 7.00%.		865,000			870,000

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 $7,000 for principal and interest through February 2018. The interest rate was 14.59%. The note was secured by an interest in the financed equipment.		-			32,000

Note payable to Leaf Capital Funding, LLC (Leaf) for equipment financing with Dynasil subsidiary RMD. The note payable to Leaf is due in monthly installments of $1,000 for principal and interest through July 2019. The interest rate is 8.70%. The note is secured by an interest in the financed equipment.		14,000			29,000

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.		518,000			458,000

Total Debt	$	3,321,000		$	3,052,000
Less current portion		(1,246,000	)		(2,007,000	)
Long term portion	$	2,075,000		$	1,045,000

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

For the years ending on September 30:
2019	$	1,246,000
2020		932,000
2021		769,000
2022		233,000
2023		141,000
Thereafter		-
	$	3,321,000

Unamortized debt issuance costs of $64,000 are net of accumulated amortization of $64,000 at September 30, 2018 and 2017. There was no amortization expense for the year ended September 30, 2018. Amortization expense for the year ended September 30, 2017 was $3,000 and is included in interest expense.