Annual report pursuant to Section 13 and 15(d)

Bank Term Note and Line of Credit

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Bank Term Note and Line of Credit
12 Months Ended
Dec. 31, 2017
Debt Disclosure [Abstract]  
Bank Term Note and Line of Credit
Bank Term Note and Line of Credit

At December 31, 2016, we had a term note with Silicon Valley Bank (“SVB”) that required monthly principal payments of approximately $167,000 and interest at the Wall Street Journal prime rate plus 2%, with a floor of 5.25% (5.75% at December 31, 2016) (“SVB Term Note”). An additional deferred interest payment of $180,000 was due at payoff. At December 31, 2016, the principal balance of the SVB Term Note was $4,666,667.

On March 22, 2017, we refinanced our debt with SVB, by repaying the SVB Term Note, which was scheduled to mature in April 2019, and entered into a new two year asset-based revolving line of credit agreement. The new SVB credit facility provides for an asset-based line of credit (“ABL”) for an amount not to exceed the lesser of (a) $6.0 million or (b) an amount equal to 80% of eligible accounts receivable plus the lesser of 50% of the net collectible value of third party accounts receivable or three times the average monthly collection amount of third party accounts receivable over the previous quarter. The ABL requires monthly interest payments at the Wall Street Journal prime rate plus 1.5% (6.0% at December 31, 2017) and matures on March 22, 2019. We paid to SVB a $30,000 commitment fee at closing and will pay a fee of 0.25% per year on the average unused portion of the ABL. At December 31, 2017, the ABL had a principal balance of $4,136,907, which is the maximum amount allowed based on eligible accounts receivable.

We concurrently entered into a new three year $6.0 million term loan agreement (“PFG Term Note”) with Partners for Growth IV, L.P. (“PFG”). The PFG Term Note is an interest only loan with the full principal and any outstanding interest due at maturity on March 22, 2020. Interest is payable monthly at a rate of 11.5% per annum, with the possibility of reducing to 11.0% in 2018 based on achieving certain financial milestones set forth by PFG. We may prepay the PFG Term Note in whole or part at any time without penalty. We paid PFG a commitment fee of $120,000 at closing. At December 31, 2017, the PFG Term Note had a principal balance of $6,000,000.

Both loan agreements require us to comply with certain financial covenants, including minimum adjusted EBITDA, revenue and liquidity covenants, and restrict us from, among other things, paying cash dividends, incurring debt and entering into certain transactions without the prior consent of the lenders. Repayment of amounts borrowed under the new loan agreements may be accelerated if an event of default occurs, which includes, among other things, a violation of such financial covenants and negative covenants. As of December 31, 2017, January 31, 2018, February 28, 2018 and March 31, 2018, we were in violation of certain financial covenants. We are in discussion with PFG and SVB to amend the terms of the loan agreement which would, among other modifications, cure the default and reset the financial covenants.

Our obligations to SVB under the ABL facility are secured by a first priority security interest on substantially all of our assets, and our obligations under the PFG Term Note are secured by a second priority security interest subordinated to the SVB lien.
In connection with the PFG Term Note, we issued seven year warrants to the lenders to purchase an aggregate of 443,262 shares of our common stock at an exercise price of $2.82 per share, valued at $1,004,000. This amount has been recorded as a derivative warrant liability (see Note 14). The number of warrants may be reduced by 20% subject to us achieving certain financial milestones set forth by PFG.

The following is a summary of long-term debt as of December 31 (in thousands):

 
 
2017
 
2016
SVB Term Note, repaid in 2017
 
$

 
$
4,667

PFG Term Note
 
6,000

 

Less unamortized debt issuance costs
 

 
13

Term note, net
 
6,000

 
4,654

Less current maturities
 
$
6,000

 
$
2,000

Long-term portion
 
$

 
$
2,654



At December 31, 2017, the principal amount of the PFG Term Note of $6,000,000 was due in 2020; however, due to the financial covenant violations, the debt is now considered due on demand and has been reclassified as a current liability. As a result of these violations, we also recorded additional interest expense of approximately $220,000 to fully amortize debt issuance costs on the PFG Term Note and the ABL, as well as approximately $796,000 of interest expense to accrete the remaining discount on debt.