Debt | 9 Months Ended |
Dec. 27, 2013 |
Debt | ' |
Note 5. Debt |
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Total outstanding debt of the Company as of December 27, 2013 and March 31, 2013 consisted of the following (in thousands): |
| | 27-Dec-13 | | | 31-Mar-13 | |
Bank term loan | | $ | 417 | | | $ | 667 | |
Bank line of credit | | | 1,128 | | | | -- | |
MEDC/MSF loans | | | 654 | | | | 930 | |
Partners for Growth (PFG) loan, net of debt discount | | | 1,642 | | | | 2,036 | |
Capital leases | | | 45 | | | | -- | |
Total | | $ | 3,886 | | | $ | 3,633 | |
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Bank Debt |
On January 31, 2012, the Company entered into a loan and security agreement (and such other documents which constitute the SVB Loan Agreement) with Silicon Valley Bank (SVB). Subsequent to the initial SVB Loan Agreement, there have been four amendments that have modified the covenants, allowed for the acquisition of substantially all of the operating assets of Silonex, Inc. (Silonex), allowed for the grant to Partners for Growth III, L.P. (PFG) of a subordinated security interest in the Company’s collateral and extended the maturity date of the line of credit to March 31, 2014. The terms of the SVB Loan Agreement, as amended, provide for a $5.0 million line of credit with a $3.0 million Export-Import (EX-IM) sublimit at an interest rate that ranges from prime plus 50 basis points on up to prime plus 400 basis points depending on a liquidity ratio and adjusted three month rolling EBITDA as defined in the SVB Loan Agreement. The SVB Loan Agreement, as amended, contains a covenant for a minimum rolling three month adjusted EBITDA, measured monthly, and a minimum liquidity ratio of 2.25 to 1.00. The current adjusted EBITDA covenant allows for a negative adjusted EBITDA of $750,000 for each month during the period from January to June 2013, negative adjusted EBITDA of $300,000 for each month during the period July through October 2013, adjusted EBITDA of $1 for each month during the period November 2013 through February 2014, and adjusted EBITDA of $100,000 thereafter, subject to reset based on mutual agreement once a fiscal year 2015 budget is submitted to the lenders. The amount that can be drawn on the line of credit is subject to a formula based on our outstanding receivables and inventory. In addition, the SVB Loan Agreement, as amended, provided for a $1.0 million term loan with principal payable over three years in equal monthly installments and interest at a rate ranging from prime plus 100 basis points to prime plus 450 basis points dependent on the Company’s liquidity ratio and adjusted three month rolling EBITDA as defined in the SVB Loan Agreement. Under the SVB Loan Agreement, the Company may prepay all, but not less than all, of the term loan by paying a prepayment premium equal to (i) 1.00% of the amount outstanding if prepayment occurs before the first anniversary of the term loan; (ii) 0.50% of the amount outstanding if prepayment occurs after the first, but before the second anniversary of the term loan; and (iii) 0.25% of the amount outstanding if prepayment occurs after the second anniversary of the term loan. In addition, if the term loan becomes due and payable because of the occurrence and continuance of an Event of Default (as defined in the SVB Loan Agreement), API will be required to pay a termination fee equal to 1.00% of the amount outstanding. The interest rates on the SVB term loan and line of credit as of December 27, 2013 were 6.0% and 5.5%, respectively. The Company had $1,128,000 outstanding on the SVB line of credit with approximately $2.3 million in additional borrowing capacity as of December 27, 2013 prior to liquidity covenant restrictions. The EX-IM line of credit with SVB is guaranteed by the Company and its subsidiaries and all borrowings under the SVB Loan Agreement are secured by a first priority security interest granted to SVB over substantially all of the Company’s respective assets. |
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As of December 27, 2013, the Company was not in compliance with the adjusted EBITDA covenant of $1 for the three months ended December 27, 2013. This constitutes an event of default under the terms of our credit facility agreement which gave SVB the ability to proceed against the collateral provided under the provisions of the SVB Loan Agreement. In addition and as described in greater detail below, unless the Company reaches an agreement with SVB to extend the term of the SVB line of credit, the outstanding balances under the SVB line of credit will become due and payable on March 31, 2014. |
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On February 10, 2014, the Company and SVB entered into a forbearance agreement under which SVB agreed not to proceed against the collateral through February 28, 2014 and raised the interest rate on the line of credit and existing term debt to 7.25% and 7.75% effective February 1, 2014. This waiver did not amend or alter in any respect the terms and conditions of the agreement or any of the other loan documents, or constitute a waiver or release by SVB of any right, remedy or event of default under the agreement or any of the other loan documents, except to the extent expressly set forth in the forbearance agreement and the SVB loan agreement. The Company believes the forbearance agreement will allow time for the parties to agree upon new covenants and to negotiate an extension of the term of the SVB line of credit. There can be no assurance that the Company will be successful in negotiating new covenants and, because the forbearance agreement does not waive the current event of default, the failure to negotiate new covenants will adversely affect the Company’s business, financial position and results of operations and prevent the Company from making additional borrowings under the SVB line of credit. Given that the Company has not agreed with SVB on either the renewal of the line of credit or new covenants, the outstanding principal with SVB has been fully classified as a current liability. |
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As noted above, the outstanding balances under the SVB line of credit will become due and payable on March 31, 2014. There can be no assurance that the Company will be successful in negotiating an extension of the term of the SVB line of credit. If the term of the SVB line of credit is not extended beyond March 31, 2014, the Company may not have adequate resources available to pay off the outstanding balances thereunder, which as of January 31, 2014 totaled $2,240,000. In addition to constituting an event of default under the terms of the SVB Loan Agreement, the failure to pay off all outstanding balances under the SVB line of credit when due will also constitute an event of default under the PFG Loan Agreement (as defined below), which in turn will entitle PFG to proceed against the collateral provided under the provisions of the PFG Loan Agreement, subject to any rights that SVB may have in that same collateral. |
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API anticipates that additional financing will be necessary to fund both the repayment of its existing indebtedness and the future growth of the business and is pursuing both strategic alternatives and financing options at this time. There can be no assurance that additional financing will be available or the terms on which it might be available. If adequate financing is not available, or is not available on favorable terms, the Company’s business, financial position and results of operations will be adversely affected. |
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The SVB term loan expires in March 2015 and the line of credit expires on March 31, 2014 since on January 22, 2014, the parties mutually agreed to extend the line of credit expiration date. |
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Total interest payments made to the Company’s bank lenders during the nine months ended December 27, 2013 and December 28, 2012 were $57,000 and $43,000, respectively. Total interest payments made to the Company’s bank lenders during the three months ended December 27, 2013 and December 28, 2012 were $21,000 and $13,000, respectively |
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MEDC/MSF Loans |
The Michigan Economic Development Corporation (MEDC) entered into two unsecured loan agreements with the Company’s subsidiary Picometrix: one in fiscal 2005 (MEDC Loan 1) and one in fiscal 2006 (MEDC Loan 2) for a total initial principal amount of $2.2 million. Both loans have been modified as to the interest rate and principal repayment terms in prior years. MEDC Loan 2 was assigned to the Michigan Strategic Fund (MSF) on October 28, 2009 although the MEDC continues to provide administrative services for MSF in regards to the loan. Effective November 6, 2013 , the Company and the MEDC agreed to defer principal payments on their two loans until maturity of the debts in the third quarter of fiscal 2015 in exchange for an increase in the annual interest from 4% to 5% and a 15% default rate of interest. As of the end of the quarter, both loans have an interest rate of 5% and the maturity dates on MEDC Loan 1 and on MEDC Loan 2 are December 1, 2014 and November 1, 2014, respectively. Prior to the amendment, the Company was making a monthly payment of $22,533 and $25,758 for principal and interest on MEDC Loan 1 and MEDC Loan 2 through their respective maturity dates. Given the amendment, the Company pays approximately $2,728 per month in interest with the principal due at maturity. |
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Interest payments made to the MEDC/MSF were $25,000 and $38,000 during the nine months ended December 27, 2013 and December 28, 2012, respectively. Interest payments made to the MEDC/MSF were $8,000 and $10,000 during the three months ended December 27, 2013 and December 28, 2012, respectively. |
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Partners for Growth Secured Debt |
On February 8, 2013, the Company entered into a secured debt agreement with PFG that is subordinated to SVB’s senior secured position (the PFG Loan Agreement). In conjunction with this transaction, on February 8, 2013 API executed a second amendment to the SVB loan to allow PFG a subordinated position and to adjust the previous covenant levels. On February 14, 2013, pursuant to the terms of the PFG Loan Agreement, the Company received $2.5 million in cash and was obligated to make monthly principal and interest payments beginning in March 2013 for 42 months at an interest rate of 11.75%. Consistent with a second amendment to the SVB Loan Agreement, the PFG Loan Agreement provided for a minimum rolling three month adjusted EBITDA covenant, measured monthly, on a go forward basis and a minimum liquidity ratio of 2.25 to 1.00. The new adjusted EBITDA covenant begins at a negative adjusted EBITDA of $750,000 for each month during the period February to June 2013, negative adjusted EBITDA of $300,000 for each month during the period July through October 2013, adjusted EBITDA of $1 for each month during the period November 2013 through February 2014, and adjusted EBITDA of $100,000 thereafter, subject to reset based on mutual agreement once a fiscal year 2015 budget is submitted to the lenders. |
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As of December 27, 2013, the Company was not in compliance with the adjusted EBITDA covenant of $1 for the three months ended December 27, 2013. This constitutes an event of default under the terms of the PFG Loan Agreement which gave PFG the ability to proceed against the collateral provided under the provisions of the PFG Loan Agreement, subject to any rights that SVB may have in that same collateral. On February 10, 2014, the Company and PFG entered into a forbearance agreement under which PFG agreed not to proceed against the collateral through February 28, 2014. This waiver did not amend or alter in any respect the terms and conditions of the agreement or any of the other loan documents, or constitute a waiver or release by PFG of any right, remedy or event of default under the agreement or any of the other loan documents, except to the extent expressly set forth in the forbearance agreement and the PFG Loan Agreement. The Company believes the forbearance agreement will allow time for the parties to agree upon new covenants. |
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API anticipates that additional financing will be necessary to fund both the repayment of its existing indebtedness and the future growth of the business and is pursuing both strategic alternatives and financing options at this time. There can be no assurance that additional financing will be available or the terms on which it might be available. If adequate financing is not available, or is not available on favorable terms, the Company’s business, financial position and results of operations will be adversely affected. |
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As part of the consideration for the loan, the Company granted PFG and certain of its affiliates warrants to purchase up to 1,195,000 shares of Class A Common Stock with 995,000 of the shares issuable at $0.50 per share, and the remaining 200,000 shares issuable at a $1.00 strike price. In the event that the Company achieves at least $32,600,000 in sales and $412,000 in EBITDA during the fiscal year ending March 31, 2014, the warrant agreements (the PFG Warrant Agreements) provide that an aggregate of 100,000 of the $0.50 warrants and an aggregate of 100,000 of the $1.00 warrants will be cancelled. The PFG Warrant Agreements also include a net exercise provision pursuant to which the warrant holders would receive the number of shares equal to (i) the product of (A) the number of warrants exercised multiplied by (B) the difference between (1) the fair market value of a share of Class A Common Stock (with fair value generally being equal to the highest closing price of our Class A Common Stock during the 45 consecutive trading days prior to the date of exercise) and (2) the strike price of the warrant, (ii) divided by the fair market value of a share of Class A Common Stock. In addition, in the event the Company is acquired, liquidates, conducts a public offering, or the warrants expire, each warrant holder will have the right to “put” its warrants to the Company in exchange for a per share cash payment that varies with the number of shares issuable under each warrant, but in the aggregate will not exceed $250,000. The Company determined the fair value of the warrant as of the issuance date to be $434,000. Pursuant to the accounting literature, a debt discount and a warrant liability were established as of the issuance date with the debt discount amortized over the life of the loan on an effective interest method. As of December 27, 2013 and March 31, 2013, there was $262,000 and $405,000 respectively, in remaining unamortized debt discount offset against the PFG long term debt principal. See Note 6 to the Condensed Consolidated Financial Statements for additional information on the PFG warrants. |
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Interest payments made to PFG during the three and nine month periods ended December 27, 2013 were $60,000 and $198,000, respectively. No interest payments were made to PFG during the three and nine month periods ended December 28, 2012. |