Line of Credit and Debt

9 Months Ended

Sep. 30, 2021

Line of Credit and Debt

Note E - Line of Credit and Debt

Note E – Line of Credit and Debt

The Company’s Line of Credit and Debt consisted of the following as of September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
Loan and Security Agreement with Cherokee Financial, LLC: 5 year note executed on February 15, 2015, at a fixed 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 was extended for one year (until February 15, 2021) on February 15, 2020 under the same terms and conditions as original loan. Loan was further extended in February 2021 to February 15, 2022.A penalty of $100,000 was added to the loan principal and the annual interest rate was increased to 10% on February 15, 2021 in connection with the extension. Loan is collateralized by a first security interest in building, land and property.	$	1,000,000	$	900,000
Crestmark Line of Credit: Line of credit maturing on June 22, 2022 with interest payable at a variable rate based on WSJ Prime plus 3% 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 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 11.79%.		446,000		277,000
2019 Term Loan with Cherokee Financial, LLC: 1 year note at an annual fixed interest rate of 18% paid quarterly in arrears with first interest payment being made on May 15, 2019 and a balloon payment being due on February 15, 2020. Loan was extended in February 2020, until February 15, 2021, under the same terms and conditions. A penalty of $20,000 was added to the loan principal on February 15, 2020 in connection with the extension of the loan. Loan was further extended in February 2021 to February 15, 2022. Another penalty of $20,000 was added to the loan principal on February 15, 2021 in connection with the additional extension of the loan.		240,000		220,000
April 2020 PPP Loan with Crestmark: 2 year SBA loan at 1% interest with first payment due October 2020. Entire Loan principal and all interest were forgiven on August 3, 2021.		0		332,000
November 2020 Shareholder Note: with Chaim Davis; no terms, note was paid on February 24, 2021 with proceeds from Lincoln Park financing.		0		25,000
November 2020 Shareholder Note: Term loan at 7% interest (Prime + 3.75%), with an initial term of 6 months which was extended for another 6 months on May 4, 2021 to November 4, 2021. Interest only payments are being made on the loan. Loan was extended on November 3, 2021 to November 4, 2022 with no changes to any terms of the note.		50,000		50,000
Total Debt	$	1,736,000	$	1,804,000
Current portion	$	1,736,000	$	684,000
Long-term portion, net of current portion	$	0	$	1,120,000

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

On March 26, 2015, the Company entered into a LSA with Cherokee (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 a fixed annual interest rate of 8%; paid quarterly in arrears. In addition to the 8% interest, the Company is required to pay 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 received net proceeds of $80,000 after $1,015,000 of debt payments, and $105,000 in other expenses and fees which, were deducted from the balance on the Cherokee LSA and amortized over the initial term of the debt (in accordance with ASU No. 2015-03). The Company was required to make annual principal reduction payments 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 last principal reduction payment being made on February 15, 2019; partially with proceeds received from a term loan with Cherokee (See 2019 Term Loan with Cherokee within this Note E).

In February 2020, the Company extended the due date of the Cherokee LSA (with a balance of $900,000) to February 15, 2021. No terms of the facility were changed in February 2020. In connection with this extension, the Company was required to issue 2% of the $900,000 principal, or $18,000, in 257,143 restricted shares of the Company’s common stock to Cherokee on behalf of their investors.

On February 24, 2021, the Company completed a transaction related to another one-year Extension Agreement dated February 14, 2021 (the “Second Extension”) with Cherokee under which Cherokee extended the due date of the Cherokee LSA to February 15, 2022.

Under the terms of the Second Extension, the Cherokee LSA was increased to $1,000,000 to include a $100,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee on February 15, 2021. Under the Second Extension, the annual interest rate on the Cherokee LSA was increased to a fixed rate of 10% (the prior fixed rate was 8%) plus a 1% annual oversight fee (that remained unchanged). Interest and the oversight fee are being paid quarterly with the first payment being made on May 15, 2021.

Under the terms of the Second Extension Agreement, if the Company doesn’t pay off the principal on or before February 15, 2022, there will be an 8% delinquent fee charged. This delinquent fee will only apply to whatever the principal balance is on February 15, 2022. If the Company pays any portion (or all) of the principal back, the 8% fee will not be due on the prepaid amounts. The Company can prepay all of part of the facility back prior to February 15, 2022 with no penalty.

Cantone Research, Inc. earned a 3% fee on the extended principal of $900,000 (or $27,000) for their services related to securing the Second Extension with Cherokee investors. This 3% service fee will be “rebated” when/if the Company prepays any, or a portion, of the loan. As an example, if the Company makes a principal reduction payment of $100,000, only $97,000 in cash will need to be remitted to Cherokee to have the $100,000 taken off the principal balance. The fee paid to Cantone Research, Inc. was recorded as a bank fee and is included in general and administrative expenses. No common stock was issued in connection with the extensions. The Company also paid Cherokee’s legal fees in the amount of $1,000.

In the event of default, this includes, but is not limited to; the Company’s inability to make any payments due under the Cherokee LSA (as amended) Cherokee has the right to increase the interest rate on the financing to 18%. The Company will continue to make interest payments and administrative fees quarterly on the Cherokee LSA. 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 recognized $73,000 in interest expense related to the Cherokee LSA in the nine months ended September 30, 2021 and, $72,000 in interest expense in the nine months ended September 30, 2020 (of which $16,000 was debt issuance cost amortization recorded as interest expense). The Company recognized $25,000 in interest expense related to the Cherokee LSA in the three months ended September 30, 2021 and, $20,000 in interest expense in the three months ended September 30, 2020.

In lieu of cash, the Company paid the quarterly interest payment of $25,000 due August 15, 2021 in 625,000 shares of restricted common stock valued at $0.04 per share issued on August 18, 2021. The Company paid the administrative fee in the amount of $2,500 (also due on August 15, 2021) in cash. (See Part II; Item 2 for more information).

The Company had $17,000 in accrued interest expense at September 30, 2021 and, $12,000 in accrued interest expense at September 30, 2020 related to the Cherokee LSA.

As of September 30, 2021, the balance on the Cherokee LSA was $1,000,000 including the $100,000 penalty that was added onto the principal in February 2021. As of December 31, 2020, the balance on the Cherokee LSA was $900,000.

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. Upon completion of the initial 5 year term, the Crestmark LOC automatically renews for additional one (1) year terms unless notice of termination from the Company is received by Crestmark not less than sixty (60) days prior to the end of the renewal term. The Company did not provide Crestmark with a notice of non-renewal and therefore, the Crestmark LOC automatically renewed on June 22, 2021 for another one year term, or until June 22, 2022.

Originally, availability under the Crestmark LOC was based on certain inventory components (under a specific formula previously defined in prior periodic reports) and receivables. The maximum available under the Crestmark LOC was $1,500,000. However on June 25, 2018, the facility was amended to decrease the amounts available under the inventory component until availability under the inventory component was zero; making the Crestmark LOC a receivables-based only line of credit as of July 1, 2020. The facility was further amended on June 22, 2020 to decrease the maximum availability (“Maximum Amount”) under the Crestmark LOC to $1,000,000.

The Crestmark LOC has a minimum loan balance requirement of $500,000. At September 30, 2021, the Company did not meet the minimum loan balance requirement as our balance was $446,000. Under the LSA, Crestmark has the right to calculate interest on the minimum balance requirement rather than the actual balance on the Crestmark LOC (and they are exercising that right). 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).

As part of the amendment on June 22, 2020, the minimum Tangible Net Worth (“TNW”) covenant (previously defined in other periodic reports) was removed effective with the quarter ended June 30, 2020. With the exception of the quarter ended June 30, 2019, the Company did not historically comply with the TNW covenant and Crestmark previously provided a number of waivers (for which the Company was charged $5,000 each).

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, Crestmark is permitted to charge an Extra Rate. The Extra Rate is the Company’s then current interest rate plus 12.75% per annum.

Interest on the Crestmark LOC is at a variable rate based on the Prime Rate plus 3% with a floor of 5.25%. As of September 30, 2021 and as of the date of this report, the interest only rate on the Crestmark LOC is 6.25%. As of the date of this report, 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 is 11.79%.

The Company recognized $38,000 in interest expense related to the Crestmark LOC in the nine months ended September 30, 2021 and $29,000 in interest expense related to the Crestmark LOC in the nine months ended September 30, 2020. The Company recognized $13,000 in interest expense in the three months ended September 30, 2021 and $10,000 in interest expense in the three months ended September 30, 2020. Given the nature of the administration of the Crestmark LOC, at September 30, 2021, the Company had $0 in accrued interest expense related to the Crestmark LOC, and there is $0 in additional availability under the Crestmark LOC.

At September 30 2021, the balance on the Crestmark LOC was $446,000 and as of December 31, 2020, the balance on the Crestmark LOC was $277,000.

2019 TERM LOAN WITH CHEROKEE

On February 25, 2019, the Company entered into an agreement dated (and effective) February 13, 2019 with Cherokee under which Cherokee provided the Company with a loan in the amount of $200,000 (the “2019 Cherokee Term Loan”). Gross proceeds of the 2019 Cherokee Term Loan were $200,000; $150,000 of which was used to satisfy the 2018 Cherokee Term Loan, $48,000 (which was used to pay a portion of the $75,000 principal reduction payment; with the remaining $27,000 being paid with cash on hand) and $2,000 which was used to pay Cherokee’s legal fees in connection with the financing. The annual interest rate under the 2019 Cherokee Term Loan is 18% (fixed) paid quarterly in arrears with the first interest payment being made on May 15, 2019.

On February 24, 2020, the Company completed a transaction related to a one-year Extension Agreement dated February 14, 2020 (the “Extension Agreement”) with Cherokee under which Cherokee extended the due date of the 2019 Term Loan to February 15, 2021. No terms of the facility were changed under the Extension Agreement. For consideration of the Extension Agreement, the Company issued 1.5% of the $200,000 principal, or $3,000, in 42,857 restricted shares of the Company’s common stock to Cherokee. The Company also incurred a penalty in the amount of $20,000 which was added to the principal balance of the Cherokee Term Loan.

A final balloon payment was due on February 15, 2021; however the Company further extended the 2019 Cherokee Term Loan on February 24, 2021 to February 15, 2022. Under the terms of the extension, the 2019 Cherokee Term Loan was increased to $240,000 to include a $20,000 penalty that was due as a result of the Company being unable to pay back the principal balance to Cherokee on February 15, 2021. The annual interest rate under the 2019 Cherokee Term Loan remains fixed at 18% paid quarterly in arrears with the first interest payment being due on May 15, 2021. If the Company doesn’t pay off the principal on or before February 15, 2022, there will be an 8% delinquent fee charged. This delinquent fee will only apply to whatever the principal balance is on February 15, 2022. If the Company pays any portion (or all) of the principal back, the 8% fee will not be due on the prepaid amounts. The Company can prepay all of part of the facility back prior to February 15, 2022 with no penalty.

In the event of default, this includes, but is not limited to, the Company’s inability to make any payments due under the Agreement; Cherokee has the right to increase the interest rate on the financing to 20%.

The Company recognized $32,000 in interest expense related to the 2019 Cherokee Term Loan in the nine months ended September 30, 2021 and $30,000 in interest expense related to the 2019 Cherokee Term Loan in the nine months ended September 30, 2020 (of which $1,000 was debt issuance cost amortization recorded as interest expense). The Company recognized $11,000 in interest expense related to the 2019 Cherokee Term Loan in the three months ended September 30, 2021 and $10,000 in interest expense related to the 2019 Cherokee Term Loan in the three months ended September 30, 2020. The Company had $7,000 in accrued interest expense at September 30, 2021 and $6,000 in accrued interest expense at September 30, 2020.

In lieu of cash, the Company paid the quarterly interest payment of $11,000 due August 15, 2021 in 270,000 shares of restricted common stock valued at $0.04 per share issued on August 18, 2021. (See Part II; Item 2 for more information).

The balance on the 2019 Cherokee Term Loan was $240,000 at September 30, 2021 and $220,000 at December 31, 2020.

SBA PAYCHECK PROTECTION LOAN (PPP LOAN)

On April 22, 2020, we entered into a Promissory Note (“PPP Note”) for $332,000 with Crestmark Bank, pursuant to the U.S. Small Business Administration Paycheck Protection Program under Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by Congress and signed into law on March 27, 2020. The PPP Note was unsecured, with an interest rate of 1.00% per annum, with principal and interest payments deferred for the first six months, and would mature in two years. On June 15, 2021, the Company applied for forgiveness of the PPP loan in the amount of $332,000 under PPP guidelines. Our forgiveness application was reviewed by the SBA and on August 3, 2021, the Small Business Administration remitted payment to Crestmark Bank for the balance of the PPP Loan principal and all interest due on the PPP Loan.

The balance on the PPP Loan was $0 at September 30, 2021 and $332,000 at December 31, 2020.

NOVEMBER 2020 TERM LOAN

On November 4, 2020, the Company entered into a loan agreement with an individual shareholder in the amount of $50,000. There were no expenses related to the term loan and the interest rate is 7% (Prime + 3.75%). The first interest only payment was paid on February 4, 2021 and the final interest payment and 50,000 principal was due on May 4, 2021. On May 4, 2021, the Company extended this loan for another 6 months, or until November 4, 2021. The interest rate and all other terms of the note remained unchanged under the Extension. All interest payments due to the shareholder have been paid as required with the next interest payment being due on November 4, 2021 along with the principal of $50,000; however, on November 4, 2021, the November 2020 Term Loan was extended for another 12 months, or until November 4, 2022 under the same terms and conditions. See Note I – Subsequent Events.

The company recognized $2,000 of interest expense related to the term loan in the nine months ended September 30, 2021 and $0 in interest expense in the nine months ended September 30, 2020 (as the loan was not in place until November 4, 2020). The Company had less than $1,000 in accrued interest expense related to this loan as of September 30, 2021.

The company recognized and accrued $1,000 of interest expense related to the term loan in the three months ended September 30, 2021 and $0 in interest expense in the three months ended September 30, 2020 (as the loan was not in place until November 4, 2020). The balance on the November 2020 Term Loan was $50,000 at September 30, 2021 and at December 31, 2020.

OTHER DEBT INFORMATION

In addition to the debt indicated previously, previous debt facilities (paid in full via refinance or conversion into equity) had financial impact on the nine months ended September 30, 2020. More specifically:

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 was 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 was the WSJ Prime Rate plus 3% throughout the term of the loan.

The Company did not incur any interest expense in the nine months ended September 30, 2021 as the Equipment Loan was satisfied in full in the quarter ended September 30, 2020 and minimal interest expense in the nine months ended September 30, 2020.

The Company did not incur any interest expense in the three months ended September 30, 2021 as the Equipment Loan was satisfied in full in the quarter ended September 30, 2020 and minimal interest expense in the three months ended September 30, 2020. The balance on the Equipment Loan was $0 at both September 30, 2021 and at December 31, 2020.

NOVEMBER 2020 LOAN WITH CHAIM DAVIS

On November 6, 2020, the Company entered into a loan agreement with our (now former) Chairman of the Board Chaim Davis, under which Davis provided the Company the sum of $25,000 (the “November 2020 Loan”). There were no expenses or interest related to the November 2020 loan. The Company incurred $0 in interest expense in the three and nine months ended September 30, 2021 and $0 in the three and nine months ended September 30, 2020 (as the facility was not in place until November 2020). The balance on the November 2020 Term Loan was $0 at September 30, 2021 (as the facility was paid in full on February 24, 2021 with proceeds from the Lincoln Park equity line) and $25,000at December 31, 2020.