Line of Credit and Debt

9 Months Ended

Sep. 30, 2022

Line of Credit and Debt

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, 2022 and December 31, 2021:

	September 30, 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 and oversight fee paid quarterly with principal due on February 15, 2020. Loan was extended for one year (until February 15, 2021) under the same terms and conditions as the original loan. The 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 was further extended in June 2022 (until February 15, 2023). Loan is collateralized by a first security interest in building, land and machinery & equipment.	$	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. Loan was collateralized by first security interest in receivables, inventory and all other assets.  Line of credit was paid off on September 29, 2022 with the proceeds of a loan with an unaffiliated third party.		0		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 and, extended again in February 2021 to February 15, 2022 with another penalty of $20,000 added to the loan principal. Loan was extended in June 2022 (until February 15, 2023).		240,000		240,000
November 2020 Shareholder Note: Term loan at 7% interest 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 Note: Term loan with one non-affiliated shareholder at 7% interest until the loan is paid in full. Loan was amended to address additional amounts (totaling $240,000) provided under the loan.		265,000		75,000
September 2022 Loan & Promissory Note: Term loan with an unaffiliated third party at a fixed rate of 1% per month, compounded monthly. Loan is collateralized by first security interest in receivables, inventory and all other assets. Principal and accrued interest due on March 28, 2023.		40,000		0
Total Debt	$	1,595,000	$	1,543,000
Current portion	$	1,595,000	$	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”) in the amount of $1,200,000. The Cherokee LSA reached maturity on February 15, 2020 with a balance of $900,000 (after 4 principal reduction payments of $75,000 each were made over the course of the initial term). In February 2020, the Cherokee LSA was extended for one year, or until February 15, 2021. No terms of the facility were changed under the February 2020 extension.

In February 2021, the Cherokee LSA was further extended for another year, or until February 15, 2022 (the “February 2021 Extension”). Under the February 2021 Extension, the principal of 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. The annual interest rate on the Cherokee LSA was also 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 were still due quarterly.

Cantone Research, Inc. earned a 3% fee on the extended principal of $900,000 (or $27,000) for their services related to securing the February 2021 Extension with Cherokee investors. The fee paid to Cantone Research, Inc. was recorded as a bank fee and is included in general and administrative expenses in the nine months ended September 30, 2021. 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.

Under the terms of the February 2021 Extension, if the Company didn’t pay off the principal on or before February 15, 2022, Cherokee could charge an 8% delinquent fee on the principal balance ($1,000,000) on February 15, 2022. The Company was not able to pay off the facility on February 15, 2022; however, on June 14, 2022 Cherokee agreed that they would defer the principal amounts due under the Cherokee LSA until February 15, 2023 and that any applicable penalties would also be deferred as long as the Company remained current on the quarterly interest payments. Furthermore, any penalties will also be waived if the principal amounts are paid on or prior to February 15, 2023.

The debt with Cherokee is collateralized by a first security interest in real estate and machinery and equipment.

In the event of default, including 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%. As of the date of this report, the Company is current in its interest and administrative fee payments and the Company will continue to make interest and administrative fee payment quarterly on the Cherokee LSA until its maturity in February 2023. 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 $75,000 in interest expense related to the Cherokee LSA in the nine months ended September 30, 2022 and $73,000 in interest expense related to the Cherokee LSA in the nine months ended September 30, 2021. The Company recognized $25,000 in interest expense related to the Cherokee LSA in the three months ended September 30, 2022and $25,000 in interest expense related to the Cherokee LSA in the three months ended September 30, 2021.

The Company had $8,000 in accrued interest expense at September 30, 2022 related to the Cherokee LSA.

As of September 30, 2022 and December 31, 2021, the balance of the Cherokee LSA was $1,000,000.

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 was used for working capital and general corporate purposes. Upon completion of the initial 5 year term, the Crestmark LOC automatically renewed for additional one (1) year terms unless notice of termination from the Company was received by Crestmark not less than sixty (60) days prior to the end of the renewal term. On September 29, 2022, the Company made a payment to Crestmark in the amount of $34,000 which paid off the balance on the Crestmark LOC.

The Crestmark LOC was 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). Although secured by the assets previously indicated, the Crestmark LOC was a receivables-based only line of credit and the maximum availability (“Maximum Amount”) under the Crestmark LOC was $1,000,000. The Crestmark LOC had a minimum loan balance requirement of $500,000. Throughout the three and nine months ended September 30, 2022 (and until the Company paid off the Crestmark LOC on September 29, 2022), the Company did not meet the minimum loan balance requirement. Under the LSA, Crestmark had the right to calculate interest on the minimum balance requirement rather than the actual balance on the Crestmark LOC (and they were exercising that right).

Interest on the Crestmark LOC was at a variable rate based on the Prime Rate plus 3% with a floor of 5.25%. As of September 29, 2022 (the payoff date), the interest only rate on the Crestmark LOC was 9.25%. As of September 29, 2022 (the payoff date), 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 16.38%.

The Company incurred $35,000 in interest expense in the nine months ended September 30, 2022 and $38,000 in interest expense related to the Crestmark LOC in the nine months ended September 30, 2021. The Company incurred $13,000 in interest expense in the three months ended September 30, 2022 and $13,000 in interest expense in the three months ended September 30, 2021. The Crestmark LOC was paid off on September 29, 2022 so, the Company had $0 in accrued interest expense related to the Crestmark LOC at September 30, 2022.

At September 30 2022, the balance on the Crestmark LOC was $0 and as of December 31, 2021, the balance on the Crestmark LOC was $178,000.

2019 TERM LOAN WITH CHEROKEE

 In February 2019, the Company entered into an agreement with Cherokee under which Cherokee provided the Company with a loan in the amount of $200,000 (the “2019 Cherokee Term Loan”). The annual interest rate under the 2019 Cherokee Term Loan is 18% (fixed) paid quarterly in arrears.

 In February 2020, the 2019 Cherokee Term Loan was extended for one year, or until February 15, 2021. No terms of the facility were changed under the February 2020 extension. For consideration of this extension, 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 2019 Cherokee Term Loan; bringing the principal to $220,000.

 In February 2021, the 2019 Cherokee Term Loan was further extended 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. In addition, if the Company didn’t pay off the principal on or before February 15, 2022, Cherokee may charge an 8% delinquent fee on the principal balance ($240,000) on February 15, 2022. The Company was not able to pay off the facility on February 15, 2022; however, on June 14, 2022 Cherokee agreed that they would defer the principal amounts due under the 2019 Cherokee Term Loan until February 15, 2023 and that any applicable penalties would also be deferred as long as the Company remained current on the quarterly interest payments. Furthermore, any penalties will also be waived if the principal amounts are paid on or prior to February 15, 2023.

 In the event of default, this includes, but is not limited to, the Company’s inability to make any payments due under the 2019 Cherokee Term Loan; Cherokee has the right to increase the interest rate on the 2019 Cherokee Term Loan to 20%.

 The Company recognized $32,000 in interest expense related to the 2019 Cherokee Term Loan in both the nine months ended September 30, 2022 and the nine months ended September 30, 2021. The Company recognized $11,000 in interest expense related to the 2019 Cherokee Term Loan in both the three months ended September 30, 2022 and the three months ended September 30, 2021. The Company had $4,000 in accrued interest expense at September 30, 2022.

 The balance on the 2019 Cherokee Term Loan was $240,000 at September 30, 2022 and at December 31, 2021.

NOVEMBER 2020 TERM LOAN

On November 4, 2020, the Company entered into a loan agreement with an individual shareholder in the principal amount of $50,000. There were no expenses related to the term loan and the interest rate is 7%. The first interest only payment was paid on February 4, 2021 and the final interest payment and 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 this extension.

On November 4, 2021, the November 2020 Term Loan was extended again. Under this extension, the principal was due on November 4, 2022. The last interest payment made to the shareholder was in November 2021 and was for the period of August 5, 2021 through November 4, 2021. The shareholder agreed to defer the quarterly interest payments due on the extended facility. The facility was further extended on November 4, 2022, under the same terms and conditions, for another 6 months. Therefore, interest accruing on the November 2020 Term Loan from November 5, 2021 until May 4, 2023 would be paid upon maturity of the loan along with the principal. Provided no further funds are loaned under the facility and no payments are made on the loan, including a complete payoff, the interest due on May 4, 2023 would be $5,000. At September 30, 2022, the interest due on this loan is $3,000.

The Company recognized $3,000 of interest expense related to the November 2020 Term Loan in the nine months ended September 30, 2022 and $2,000 of interest expense in the nine months ended September 30, 2021. The Company recognized $1,000 of interest expense related to the November 2020 Term Loan in both the three months ended September 30, 2022 and in the three months ended September 30, 2021.

The Company had $3,000 in accrued interest expense related to this loan as of September 30, 2022.

The balance on the November 2020 Term Loan was $50,000 at September 30, 2022 and at December 31, 2021.

DECEMBER 2021 SHAREHOLDER LOAN

On December 14, 2021, the Company entered into Loan Agreements with two non-affiliated shareholders resulting in gross (and net) proceeds of $75,000 as there were no costs associated with the loans. Interest on the loans is 7% per annum until principal and interest were 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 was due June 15, 2022.

One of the loans (in the amount of $25,000) was paid in full on June 13, 2022 along with the final interest payment due.

On April 6, 2022, we amended the loan with the other non-affiliated shareholder. This amendment (No.1; hereinafter referred to in this paragraph as “Amendment No. 1”) increased the principal due to the shareholder by $25,000; bringing their total principal to $75,000. No other terms of the loan were changed under Amendment No. 1.

On April 14, 2022, the loan was amended again (under Amendment No. 2; hereinafter referred to in this paragraph as “Amendment No. 2”) increasing the principal again by $50,000; bringing their total principal to $125,000. No other terms of the loan were changed under Amendment No. 2.

On May 11, 2022, the loan was amended again (under Amendment No. 3; hereinafter referred to in this paragraph as “Amendment No. 3”) increasing the principal again by $75,000; bringing their total principal to $200,000. The loan was further amended to include a specific payment schedule based on receipt of anticipated ERC refunds.

On June 13, 2022, the Company made a principal reduction payment to this shareholder in the amount of $25,000 from proceeds from the ERC refund received on June 2, 2022; bringing the principal amount owed on the loan to $175,000. See Note I – Subsequent Events for more information on this loan.

On July 13, 2022, the loan was amended again (under Amendment No. 4; hereinafter referred to in this paragraph as “Amendment No. 4”) increasing the principal by $25,000; bringing their total principal to $200,000 again. The loan agreement was also amended to revise the maturity date from June 15, 2022 to no specific maturity date.

On September 13, 2022, the loan was amended again (under Amendment No. 5; hereinafter referred to in this paragraph as “Amendment No. 5”) increasing the principal by $25,000; bringing their total principal to $225,000 again.

On September 28, 2022, the shareholder provided the Company with additional funds, $40,000, under this shareholder loan with the understanding that the amount would be paid back once the September 2022 Loan funds were received and there would be no interest charged on this additional amount. This increased the amount due to the shareholder under the facility to $265,000. The Company did pay this additional amount in full on October 4, 2022 as indicated under Note I – Subsequent Events.

The Company incurred $8,000 in interest expense related to these loans in the nine months ended September 30, 2022 and $0 in interest expense in the nine months ended September 30, 2021 (as the facilities were not in place until December 2021). The Company incurred $3,000 in interest expense related to these loans in the three months ended September 30, 2022 and $0 in interest expense in the three months ended September 30, 2021 (as the facilities were not in place until December 2021).

The Company had $1,000 in accrued interest expense at September 30, 2022. The balance on these loans was $265,000 at September 30, 2022 and $75,000 at December 31, 2021. See Note I – Subsequent Event for more information regarding the balance of the loan.

SEPTEMBER 2022 LOAN & PROMISSORY NOTE

On September 28, 2022, the Company entered into a Loan and Promissory with an unaffiliated third party (the “September 2022 Loan”) at a fixed rate of 1% per month, compounded monthly and received gross/net proceeds of $40,000. The Company utilized $34,000 of the loan proceeds to pay off its Crestmark Line of Credit (See Note E – Line of Credit and Debt). The September 2022 Loan is collateralized by a first security interest in the Company’s receivables, inventory and all other assets. Principal and accrued interest is due on March 28, 2023.

OTHER DEBT INFORMATION

In addition to the current debt indicated previously, previous debt facilities had financial impact on the three and/or nine months ended September 30, 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 (“SBA”) 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 maturity 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 SBA remitted payment to Crestmark Bank for the balance of the PPP Loan principal and all interest due on the PPP Loan.

The Company recognized $2,000 in interest expense in the nine months ended September 30, 2021 and $1,000 in interest expense in the three months ended September 30, 2021.