Note F - Debt

6 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Debt Disclosure [Text Block]

F. Debt

On May 24, 2021, we entered into a new credit facility with Wells Fargo Bank, N.A (“Wells Fargo”) to extend the maturity for our working line of credit from November 1, 2022, to May 24, 2024. This credit facility provides total lending capacity of up to $20.0 million and allows us to use the credit facility for working capital as well as potential acquisitions. On August 18, 2021, we entered into an amendment of our credit facility with Wells Fargo. The amended credit facility added a $10.0 million term loan to the existing $20.0 million credit facility and permitted us to use the $10.0 million term loan as part of the $17.5 million purchase consideration for the acquisition of our manufacturing and warehouse property in Carlsbad, California. The amended credit agreement also increased the allowed capital expenditures from $10.0 million to $15.0 million for fiscal 2022 (exclusive of the amount paid for the acquisition of the new Carlsbad property noted above). In addition, the revised credit notes now reflect a change in the interest rate reference from LIBOR to Secured Overnight Financing Rate (SOFR). The Credit Agreement was amended and a new Revolving Line of Credit Note, and Security Agreement were entered into. A Term Note and real property security documents were added to secure the Term Note by the Carlsbad property.

Subsequently we entered into a Second and Third Amendment that changed certain limits on our use of the line of credit. In the second quarter of fiscal 2024 we failed to meet three continuing requirements for our line of credit and were not in compliance at the end of our second quarter. As of February 13, 2024, we entered into a Fourth Amendment to our credit facility with Wells Fargo. The Fourth Amendment waived all prior instances of non-compliance, decreased our total borrowing capacity on the line of credit to $12.5 million, increased the interest rate on borrowings under the line of credit to 2.25% from 1.29% above the daily simple SOFR rate, modified our continuing compliance requirements, and reduced the uses we can fund with the line of credit.

Under the terms of the Credit Agreement, as amended by the Fourth Amendment, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.50 to 1.0 at any time; (ii) limits our losses to a decreasing amount over the next three quarters, with net income after taxes of not less than $1.00 by September 30, 2024; (iii) a rolling 4-quarter fixed charge coverage ratio not less than 1.25 to 1.0 as of December 31, 2024 and each quarter thereafter. The Fourth Amendment includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with such limitation set at $6.5 million, requires us to suspend share repurchase and dividend activity, and includes an availability reserve of 10% that will be in place until we return to profitability. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by us from time to time. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date which remains at May 23, 2025. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures. There is an unused commitment fee of 0.25% required as part of the line of credit, and an origination fee of 1% we paid upon execution of the Fourth Amendment.

The Term Note used as part of the purchase consideration of our powder processing and warehouse property in Carlsbad, California referenced above, was for the original principal amount of $10.0 million, and is a seven-year term note with payments fully amortized based on a twenty-five year assumed term. Installment payments under this loan commenced October 1, 2021, and continue through August 1, 2028, with a final installment consisting of all remaining amounts due to be paid in full on September 1, 2028. Amounts outstanding on this note during the term of the agreement bear interest equal to 1.8% above the SOFR rolling 30-day average. In connection with this term loan, we entered into an interest rate swap with Wells Fargo that effectively fixes our interest rate on our term loan at 2.4% for the first three years of the term of the note.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have credit approval with Wells Fargo Bank, which allows us to hedge foreign currency exposures up to 30 months in the future. We also have credit approval with Bank of America which allows us to hedge foreign currency exposures up to 24 months in the future.

As of December 31, 2023, we had $9.4 million outstanding under the Term Note used in August 2021 for the purchase of our Carlsbad, California powder processing and warehouse property.

On December 31, 2023, we were not in compliance with the financial covenants related to net income requirements as noted in item (iii) above and the fixed charge coverage ratio as noted in item (iv) above. On  February 13, 2024, we entered into a fourth amendment to our credit facility with Wells Fargo. The fourth amendment modifies the financial covenant requirements such that item (iii) noted above has been eliminated through the end of fiscal 2024 and replaced with maximum loss requirements of $3.2 million for the third quarter of fiscal 2024 and $2.0 million for the fourth quarter of fiscal 2024 and a requirement to maintain net income after taxes not less than $1.00 on a quarterly basis beginning with the first quarter of fiscal 2025. The amendment also eliminates the fixed charge coverage ratio requirements described in item (iv) above through the quarter ending September 30, 2024 and resuming with the quarter ending December 31, 2024. The amended credit agreement also decreased the allowed capital expenditures from $7.5 million to $6.5 million for fiscal 2024 and beyond and requires us to suspend share repurchase and dividend activity. All other financial covenants remain unmodified. The amended credit agreement also modifies our borrowing capacity to a monthly asset-based borrowing base calculation with a maximum borrowing capacity of $12.5 million, which includes an availability reserve of 10% that will be in place until we return to profitability. The amendment also modifies our interest rate to be equal to 2.25% above the daily simple SOFR rate and includes a 0.25% unused commitment fee payable quarterly in arrears along with an up-front amendment fee of 1.0% of the maximum borrowing base.

As of December 31, 2023, we had zero outstanding on our credit facility with Wells Fargo Bank.