Line of Credit and Debt

3 Months Ended

Mar. 31, 2018

Debt Disclosure [Abstract]

Line of Credit and Debt

	March 31, 2018			December 31, 2017
Loan and Security Agreement with Cherokee Financial, LLC: 5 year note at an annual interest rate of 8% plus a 1% annual oversight fee, interest only and oversight fee paid quarterly with first payment being made on May 15, 2015, annual principal reduction payment of $75,000 due each year beginning on February 15, 2016, with a final balloon payment being due on February 15, 2020. Loan is collateralized by a first security interest in building, land and property.	$	975,000		$	1,050,000
Crestmark Line of Credit: 3 year line of credit maturing on June 22, 2020 with interest payable at a variable rate based on WSJ Prime plus 2% with a floor or 5.25%; loan fee of 0.5% annually & monthly maintenance fee of 0.3% on actual loan balance from prior month. Early termination fee of 2% if terminated in year 2 or after (and prior to natural expiration). Loan is collateralized by first security interest in receivables and inventory and the all-in interest rate as of the date of this report is 12.43%.		492,000			446,000
Crestmark Equipment Term Loan: 38 month equipment loan related to the purchase of manufacturing equipment, at an interest rate of WSJ Prime Rate plus 3%; or 7.75% as of the date of this report.		28,000			31,000
Loan Agreement with Cherokee Financial LLC: 1 year note at an annual interest rate of 12% paid quarterly in arrears with first interest payment being due on May 15, 2018 and a balloon payment being due on February 15, 2019.		150,000			0
		1,645,000			1,527,000
Less debt discount & issuance costs (Cherokee Financial, LLC Loan)		(196,000	)		(203,000	)
Total debt, net		1,449,000			1,324,000
Current portion		729,000			533,000
Long-term portion, net of current portion	$	720,000		$	791,000

LOAN AND SECURITY AGREEMENT WITH CHEROKEE FINANCIAL, LLC (“CHEROKEE”)

On March 26, 2015, the Company entered into a LSA with Cherokee Financial, LLC (the “Cherokee LSA”). The debt with Cherokee is collateralized by a first security interest in real estate and machinery and equipment. Under the Cherokee LSA, the Company was provided the sum of $1,200,000 in the form of a 5-year Note at an annual interest rate of 8%. The Company is making interest only payments quarterly on the Cherokee LSA, with the first interest payment paid on May 15, 2015. The Company is also required to make an annual principal reduction payment of $75,000 on each anniversary of the date of the closing; with the first principal reduction payment being made on February 15, 2016 and the most recent principal reduction payment being made on February 15, 2018 with the proceeds received from a new term loan with Cherokee Financial, LLC (See “Term Loan with Cherokee” within this Note). A final balloon payment is due on March 26, 2020. In addition to the 8% interest, the Company pays Cherokee a 1% annual fee for oversight and administration of the loan. This oversight fee is paid in cash and is paid contemporaneously with the quarterly interest payments. The Company can pay off the Cherokee loan at any time with no penalty; except that a 1% administration fee would be required to be paid to Cherokee to close out all participations.

The Company received net proceeds of $80,000 after $1,015,000 of debt payments, and $105,000 in other expenses and fees. With the adoption of ASU No. 2015-03 in the First Quarter of Fiscal 2016, these transaction costs (with the exception of the interest expense) are being deducted from the balance on the Cherokee LSA and are being amortized over the term of the debt.

The Company recognized $44,000 in interest expense related to the Cherokee LSA in the First Quarter 2018 (of which $24,000 is debt issuance cost amortization recorded as interest expense), and $39,000 in interest expense in the First Quarter 2017 (of which $23,000 is debt issuance cost amortization recorded as interest expense). The Company had $12,000 in accrued interest expense at March 31, 2018 related to the Cherokee LSA.

As of March 31, 2018, the balance on the Cherokee LSA is $975,000; however the discounted balance is $779,000. As of December 31, 2017, the balance on the Cherokee LSA is $1,050,000; however the discounted balance is $847,000.

LINE OF CREDIT WITH CRESTMARK BANK (“CRESTMARK”)

On June 29, 2015 (the “Closing Date”), the Company entered into a Loan and Security Agreement (“LSA”) with Crestmark related to a revolving line of credit (the “Crestmark LOC”). The Crestmark LOC is used for working capital and general corporate purposes and expires on June 22, 2020.

The Crestmark LOC provides the Company with a revolving line of credit up to $1,500,000 (“Maximum Amount”) with a minimum loan balance requirement of $500,000. At March 31, 2018, the Company did not meet this minimum loan balance requirement as our balance was $492,000. Under the LSA, Crestmark has the right to calculate (and is calculating) interest on the minimum balance requirement rather than the actual balance on the Crestmark LOC. The Crestmark LOC is secured by a first security interest in the Company’s inventory, and receivables and security interest in all other assets of the Company (in accordance with permitted prior encumbrances).

The Maximum Amount is subject to an Advance Formula comprised of: 1) 90% of Eligible Accounts Receivables (excluding, receivables remaining unpaid for more than 90 days from the date of invoice and sales made to entities outside of the United States), and 2) up to 40% of eligible inventory plus up to 10% of Eligible Generic Packaging Components not to exceed the lesser of $350,000 (“Inventory Sub-Cap Limit”), or 100% of the Eligible Accounts Receivable.

So long as any obligations are due to Crestmark, the Company must comply with a minimum Tangible Net Worth (“TNW”) Covenant of at least $650,000. Additionally, if a quarterly net income is reported, the TNW covenant will increase by 50% of the reported net income. If a quarterly net loss is reported, the TNW covenant will remain the same as the prior quarter’s covenant amount. TNW is defined as: Total Assets less Total Liabilities less the sum of (i) the aggregate amount of non-trade accounts receivables, including accounts receivables from affiliated or related persons, (ii) prepaid expenses, (iii) deposits, (iv) net lease hold improvements, (v) goodwill and (vi) any other asset that would be treated as an intangible asset under GAAP; plus Subordinated Debt. Subordinated Debt means any and all indebtedness presently or in the future incurred by the Company to any creditor of the Company entering into a written subordination agreement with Crestmark. The Company was not in compliance with this covenant at December 31, 2017 however, the Company received a waiver from Crestmark for the December 31, 2017 TNW requirement. As consideration for the granting of the waiver, Crestmark increased the interest rate on the Crestmark LOC from current Prime Rate plus 2% to the Prime Rate plus 3%. The increase in interest rate was effective as of May 1, 2018. The Company was also not in compliance with the TNW covenant at March 31, 2018; as of the date of this report, the Company is in the process of obtaining another waiver from Crestmark. Due to internal requirements within Crestmark, the waiver could not be obtained prior to the date of this report. . There was no additional consideration to Crestmark for the issuance of this waiver for the year ended December 31, 2017; rather the increase in interest rate will remain in place until such time that the Company is back in compliance with the TNW covenant.

If the Company terminates the LSA prior to June 22, 2020, an early exit fee of 2% of the Maximum Amount (plus any additional amounts owed to Crestmark at the time of termination) would be due.

In the event of a default of the LSA, which includes but is not limited to, failure of the Company to make any payment when due and non-compliance with the TNW covenant (that is not waived by Crestmark), Crestmark is permitted to charge an Extra Rate. The Extra Rate is the Company’s then current interest rate plus 12.75% per annum. As of the date of this report, Crestmark has not elected to charge the Extra Rate even though the Company is not in compliance with the TNW covenant as of March 31, 2018 as the Company expects to receive a waiver from Crestmark.

Interest on the Crestmark LOC is at a variable rate based on the Prime Rate plus 2% with a floor of 5.25%. As of March 31, 2018, the interest only rate on the Crestmark LOC was 6.75%. As of March 31, 2018, with all fees considered (the interest rate + an Annual Loan Fee of $7,500 + a monthly maintenance fee of 0.30% of the actual average monthly balance from the prior month), the interest rate on the Crestmark LOC was 11.43%. With the change in the interest rate from Prime plus 2% to Prime plus 3% (as a result of Crestmark’s waiver of the Company’s non-compliance with the TNW covenant), as of the date of this report, the interest only rate is 7.75% and the rate with all fees is 12.43%.

The Company recognized $21,000 in interest expense related to the Crestmark LOC in the First Quarter 2018, of which $8,000 was debt issuance costs related to interest expense. The Company recognized $26,000 in interest expense related to the Crestmark LOC in the First Quarter 2017, of which $8,000 was debt issuance costs related to interest expense.

Given the nature of the administration of the Crestmark LOC, at March 31, 2018, the Company had $0 in accrued interest expense related to the Crestmark Line of Credit, and there is $0 in additional availability under the Crestmark LOC.

As of March 31, 2018, the balance on the Crestmark LOC was $492,000, and as of December 31, 2017, the balance on the Crestmark LOC was $446,000. 

EQUIPMENT LOAN WITH CRESTMARK

On May 1, 2017, the Company entered into term loan with Crestmark in the amount of $38,000 related to the purchase of manufacturing equipment. The equipment loan is collateralized by a first security interest in a specific piece of manufacturing equipment. The Company executed an amendment to its LSA and Promissory Note with Crestmark. The amendments addressed the inclusion of the term loan into the LSA and an extension of the Crestmark LOC. No terms of the Crestmark LOC were changed in the amendment. The interest rate on the term loan is the WSJ Prime Rate plus 3%; or 7.75% as of the date of this report. The balance on the equipment loan was $28,000 as of March 31, 2018, and $31,000 as of December 31, 2017. The Company incurred less than $1,000 in interest expense related to the Equipment Loan in First Quarter 2018 and $0 in interest expense in the First Quarter 2017 (as the Equipment Loan was not yet in place). Given the Company has not yet received the waiver for the TNW compliance at March 31, 2018, the Company is in default under the Equipment Loan with Crestmark as of the date of this report. This results in the Equipment Loan being due and payable if called by Crestmark.

TERM LOAN WITH CHEROKEE

On March 2, 2018, the Company entered into a one-year Loan Agreement made as of February 15, 2018 (the “Closing Date”) with Cherokee under which Cherokee provided the Company with $150,000 (the “Cherokee Term Loan”). The proceeds from the Cherokee Term Loan were used by the Company to pay a $75,000 principal reduction payment to Cherokee and $1,000 in legal fees incurred by Cherokee. Net proceeds (to be used for working capital and general business purposes) were $74,000.

The annual interest rate for the Cherokee Term Loan is 12% to be paid quarterly in arrears with the first interest payment being due on May 15, 2018. The Cherokee Term Loan is required to be paid in full on February 15, 2019 unless paid off earlier (with no penalty) at the Company’s sole discretion. In connection with the Cherokee Term Loan, the Company issued 150,000 restricted shares of common stock to Cherokee on March 8, 2018.

In the event of default, this includes, but is not limited to, the Company’s inability to make any payments due under the Cherokee Term Loan, Cherokee has the right to increase the interest rate on the Cherokee Term Loan to 18% and the Company would be required to issue and additional 150,000 restricted shares of common stock to Cherokee.

The Company recognized $5,000 in interest expense related to the Cherokee Term Loan in the First Quarter 2018, of which $3,000 was debt issuance costs related to interest expense, and $0 in interest expense in the First Quarter 2017 (as the Cherokee Term Loan was not yet in place). The balance on the Cherokee Term Loan was $150,000 at March 31, 2018 and $0 at December 31, 2017 (as the Cherokee Term Loan was not yet in place).