Line of Credit and Debt

3 Months Ended

Mar. 31, 2022

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 March 31, 2022 and December 31, 2021:

	March 31, 2022		December 31, 2021
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 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 with $100,000 added to the loan principal as a penalty and the annual interest rate increased to 10%. Loan is collateralized by a first security interest in building, land and machinery & equipment. See Note I – Subsequent Events	$	1,000,000	$	1,000,000
Crestmark Line of Credit: Line of credit maturing on June 22, 2023 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, inventory and all other assets. The all-in interest rate as of the date of this report is 12.58%.		93,000		178,000
2019 Term Loan with Cherokee Financial, LLC: Note at an annual fixed interest rate of 18% paid quarterly in arrears and a balloon payment due on February 15, 2020. Loan was extended in February 2020, until February 15, 2021 with a penalty of $20,000 added to the loan principal. Loan was further extended in February 2021 to February 15, 2022 with another penalty of $20,000 added to the loan principal. See Note I – Subsequent Events		240,000		240,000
November 2020 Shareholder Note: Term loan at 7% interest (Prime + 3.75%) with the first interest only payment being made on February 4, 2021 and the final interest and $50,000 principal due on November 4, 2022.		50,000		50,000
December 2021 Shareholder Notes: Two term loans with two non-affiliated shareholders at 7% interest until principal and interest are both due in full, or until June 15, 2022. The first interest payments were due on March 15, 2022 and payment of final interest and principal are due June 15, 2022, or earlier as we receive further ERC refunds		75,000		75,000
Total Debt	$	1,458,000	$	1,543,000
Current portion	$	1,458,000	$	1,543,000

LOAN AND SECURITY AGREEMENT ("LSA")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 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 due quarterly.

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%. A final balloon payment was due on February 15, 2022. Under the terms of the Second Extension Agreement, if the Company doesn’t pay off the principal on or before February 15, 2022, Cherokee may impose an 8% delinquent fee. This delinquent fee applies to the principal balance due on February 15, 2022. Although the facility was not paid off on February 15, 2022, Cherokee has not imposed this delinquent fee or increased the interest rate.

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. The Company also paid Cherokee’s legal fees in the amount of $1,000.

On August 18, 2021, we issued 625,000 restricted shares of common stock to Cherokee in lieu of paying the $25,000 August 2021 interest payment in cash. The closing price of the Company’s common shares on the date of the payment in lieu of cash was $0.04.

The Company recognized $25,000 in interest expense related to the Cherokee LSA in the First Quarter 2022 and $23,000 in interest expense related to the Cherokee LSA in the First Quarter 2021.

The Company had $8,000 in accrued interest expense at March 31, 2022 related to the Cherokee LSA.

As of March 31, 2022 and December 31, 2021, the balance on the Cherokee LSA was $1,000,000. See Note I – Subsequent Events for more information on the status of the Cherokee LSA.

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 current maturity date of the Crestmark LOC is June 22, 2023.

Although secured by inventory and other assets, the Crestmark LOC is a receivables-based only line of credit and the maximum availability (“Maximum Amount”) under the Crestmark LOC is $1,000,000. The Crestmark LOC has a minimum loan balance requirement of $500,000. At March 31, 2022, the Company did not meet the minimum loan balance requirement as our balance was $93,000. 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, receivables and security interest in all other assets of the Company (in accordance with permitted prior encumbrances).

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 March 31, 2022 and as of the date of this report, the interest only rate on the Crestmark LOC is 6.50%. 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 12.58%.

The Company incurred $10,000 in interest expense in the First Quarter 2022 and $12,000 in interest expense in the First Quarter 2021 related to the Crestmark LOC. Given the nature of the administration of the Crestmark LOC, at March 31, 2022, the Company had $0 in accrued interest expense related to the Crestmark LOC, and there is $0 in additional availability under the Crestmark LOC.

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 annual interest rate under the 2019 Cherokee Term Loan is 18% (fixed) paid quarterly in arrears.

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 Cherokee Term Loan to February 15, 2021. No terms of the facility were changed under the Extension Agreement. The 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 this additional 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.

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%. A final balloon payment was due on February 15, 2022. If the Company didn’t pay off the principal on or before February 15, 2022, Cherokee could impose an 8% delinquent fee. This delinquent fee applies to the principal balance due on February 15, 2022. Although the facility was not paid off on February 15, 2022, Cherokee has not imposed this delinquent fee or increased the interest rate.

The Company recognized $11,000 in interest expense in the First Quarter 2022 and $10,000 in interest expense in the First Quarter 2021 related to the 2019 Cherokee Term Loan. The Company had $4,000 in interest expense accrued at March 31, 2022. The balance on the 2019 Cherokee Term Loan is $240,000 at March 31, 2022 and December 31, 2021. See Note I – Subsequent Events for more information on the status of the 2019 Cherokee Term Loan.

NOVEMBER 2020 TERM LOAN

On November 4, 2020, the Company entered into a loan agreement with an unaffiliated, 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.

On November 4, 2021, the Company entered into a twelve-month Extension Agreement (the “Extension”) with the shareholder. Under the Extension, the principal is now due on November 4, 2022. The interest rate and all other terms of the note remain unchanged under the Extension. All interest payments due to the shareholder have been paid as required with the next interest payment being due on May 4, 2022.

The Company recognized $1,000 in interest expense related to the November 2020 term loan in the First Quarter 2022 and the First Quarter 2021. The Company had less than $1,000 of interest expense accrued related to the November 2020 Term Loan in the First Quarter 2022. The balance on the November 2020 Term Loan was $50,000 at March 31, 2022 and at December 31, 2021.

DECEMBER 2021 SHAREHOLDER LOANS

On December 14, 2021, the Company entered into Loan Agreements with two non-affiliated investors resulting in gross (and net) proceeds of $75,000 as there were no costs associated with the loans. The loans bear interest of 7% per annum until principal and interest are both due in full, or until June 15, 2022. The first interest payments were due on March 15, 2022 and payment of final interest and principal are due June 15, 2022, or earlier as we receive further ERC refunds.

The Company incurred $1,000 in interest expense related to these loans in the First Quarter 2022 and $0 in interest expense in the First Quarter 2021 (as the facilities were not in place until December 2021). The Company had less than $1,000 in accrued interest expense at March 31, 2022. The balance on these loans was $75,000 at March 31, 2022 and at December 31, 2021.

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 First Quarter 2021. More specifically:

SBA PAYCHECK PROTECTION LOAN (PPP LOAN)

On April 22, 2020, the Company 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 Company recognized $1,000 in interest expense related to the PPP Loan in the First Quarter 2021. The Company had $3,000 in accrued interest expense at March 31, 2021.