Note 5 - Notes Payable and Line of Credit

3 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Debt Disclosure [Text Block]

Note

5

– Notes Payable and Line of Credit

Notes Payable

The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”) with its primary financial lender. Revolving credit and term loans created under the Credit and Term Loan Agreement are collateralized by inventory, accounts receivable, equipment and fixtures, general intangibles and a mortgage on certain property. Among other financial covenants, the Credit and Term Loan Agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges) of

not

less than

1.25

to

1.0

and a leverage ratio (total funded debt to EBITDA) of

not

more than

2.50

to

1.0.

Both financial covenants are determined quarterly.

At

December 31, 2017,

we were in compliance with our financial covenants.

At

December 31, 2017,

the Company has

two

term loans outstanding under the Credit and Term Loan Agreement. The

first

outstanding term loan has an outstanding balance of

$0.7

million at

December 31, 2017

and is due on

November 30, 2021,

with monthly principal payments of

$15,334

plus accrued interest. The interest rate is the prevailing

30

-day LIBOR rate plus

1.4%

(

2.78%

at

December 31, 2017)

and is reset monthly.

The

second

outstanding term loan has an outstanding balance of $

2.4

million at

December 31, 2017

and is due

October 14, 2019,

with monthly principal and interest payments of

$118,809.

The interest rate on the term loan is a fixed interest rate of

4.40%.

On

December

6,

2017,

the Company extinguished

one

of its previous term loans by paying the outstanding balance of

$2.7

million plus a prepayment penalty of

$25,000.

Line of Credit

The Company has a

$7.0

million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement. On

March 31, 2017,

the Company executed the Eighth Amendment under the Credit and Term Loan Agreement. This amendment extended the Line of Credit maturity to

March 30, 2018,

while other terms of the Line of Credit remained essentially the same. At

December 31, 2017,

the Company had

no

balance outstanding under the Line of Credit. The Line of Credit requires quarterly interest payments based on the prevailing

30

-day LIBOR rate plus

2.75%

(

4.31%

at

December 31, 2017),

and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on

March 30, 2018.

Future borrowings under the Line of Credit are limited to the lesser of

$7.0

million or the net balance of

80%

of qualified accounts receivable plus

50%

of qualified inventory. Under these limitations, the Company’s total available Line of Credit borrowing base was

$7.0

million at

December 31, 2017.

Fair Value of Debt

FASB ASC

820,

Fair Value Measurements and Disclosures,

defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value.  The

three

levels of the fair value hierarchy are as follows:

● Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

● Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.

● Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.

The Company has determined the carrying value of its

variable-rate term loan approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.

The Company has determined the fair value of its fixed-rate term loan utilizing

the Level

2

hierarchy as the fair value can be estimated from broker quotes corroborated by other market data. These broker quotes are based on observable market interest rates at which loans with similar terms and maturities could currently be executed. The Company then estimated the fair value of the fixed-rate term loans using cash flows discounted at the current market interest rate obtained. The fair value of the Company’s

second

outstanding fixed rate loan was

$2.5

million as of

December 31, 2017.