• Filing Date: 2018-11-13
  • Form Type: 10-Q
  • Description: Quarterly report
v3.10.0.1
DEBT
9 Months Ended
Sep. 30, 2018
Debt  
DEBT

Lines of Credit

 

Global and AOC Key Solutions have revolving lines of credit with Wells Fargo Bank, National Association (“WFB”) (the “Global Wells Agreements” and “AOC Wells Agreement”). The current terms of the Global Wells Agreements and AOC Wells Agreement run through December 31, 2018, with automatic renewal terms of 12 months and may be terminated by either party upon written notice at least 60, but no more than 120, days prior to the last day of the current term. WFB may also terminate either of these agreements at any time and for any reason upon 30 days’ written notice or without notice upon the occurrence of an Event of Default (as such term is defined in the agreement) after the expiration of any grace or cure period. As part of the lines of credit agreements, Global and AOC Key Solutions must maintain certain financial covenants. Global and AOC Key Solutions met all financial covenant requirements for the nine months ended September 30, 2018.

 

WFB has agreed to advance to Global, 90% of all eligible accounts with a maximum facility amount of $5,000,000. Interest is payable under the Global Wells Agreements at a monthly rate equal to the Three-Month LIBOR in effect from time to time plus 3% plus the Margin. The Margin is 3%. Payment of the revolving lines of credit is secured by the accounts receivable of Global. The principal balance at September 30, 2018 and December 31, 2017 was $1,510,234 and $2,057,259, respectively. As part of the lines of credit agreements, Global must maintain certain financial covenants. Global met all financial covenant requirements for the nine months ended September 30, 2018.

 

Pursuant to the AOC Wells Agreement, AOC Key Solutions agreed to sell and assign to WFB all of its Accounts (as such term is defined in Article 9 of the Uniform Commercial Code), constituting accounts arising out of sales of Goods (as such term is defined in Article 9 of the Uniform Commercial Code) or rendition of services that WFB deems to be eligible for borrowing under the AOC Wells Agreement. WFB agreed to advance to AOC Key Solutions, 90% of all eligible accounts with a maximum facility amount of $3,000,000. Interest is payable under the AOC Wells Agreement at a monthly rate equal to the Daily One Month LIBOR in effect from time to time plus 5% (the “Contract Rate”). The AOC Wells Agreement also provides for a deficit interest rate equal to the then applicable interest rate plus 50% of the Contract Rate and a default interest rate equal to the then applicable interest rate or deficit interest rate, plus 50% of the Contract Rate. The principal balance at September 30, 2018 and December 31, 2017 was $581,368 and $1,606,327, respectively. As part of the line of credit agreement, AOC Key Solutions must maintain certain financial covenants. AOC Key Solutions met all financial covenant requirements for the nine months ended September 30, 2018.

 

Short-Term and Long-Term Debt

 

Avon Road Note

 

On March 16, 2016, Novume entered into a Subordinated Note and Warrant Purchase Agreement (the “Avon Road Note Purchase Agreement”) pursuant to which Novume agreed to issue up to $1,000,000 in subordinated debt (the "Avon Road Note") and warrants to purchase up to 242,493 shares of Novume’s common stock (“Avon Road Subordinated Note Warrants”). The exercise price for the Avon Road Subordinated Note Warrants is equal to $1.031 per share of common stock. Subordinated notes with a face amount of $500,000 and Avon Road Subordinated Note Warrants to purchase 121,247 shares of Novume’s common stock have been issued pursuant to the Avon Road Note Purchase Agreement to Avon Road Partners, L.P. (“Avon Road”), an affiliate of Robert Berman, Novume’s CEO and a member of Novume’s Board of Directors. The Avon Road Subordinated Note Warrants had an expiration date of March 16, 2019 and qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The fair value of the Avon Road Subordinated Note Warrants was determined to be $58,520 and was recorded as a debt discount and additional paid-in capital in the 2016 consolidated financial statements. The debt discount is being amortized as interest expense on a straight-line basis through the maturity date of the note payable.

 

The Avon Road Note accrues simple interest on the unpaid principal at a rate equal to the lower of (a) 9% per annum, or (b) the highest rate permitted by applicable law. Interest is payable monthly, and the note was to mature on March 16, 2019. On October 23, 2018, the maturity date of this note was extended to March 16, 2020.

 

Firestorm Notes

 

Pursuant to the terms of the Novume acquisition of the membership interests in the Firestorm Entities, the Company issued $1,000,000 in the aggregate in the form of four unsecured, subordinated promissory notes issued by Novume with interest payable over five years after the Firestorm Closing Date. The principal amount of the note payable to Lancer is $500,000. The principal amount of the note payable to each of Mr. Rhulen, Mr. Satterfield and Ms. Loughlin is $166,667. The Firestorm Principal Notes are payable at an interest rate of 2% and the Lancer Note is payable at an interest rate of 7%. The notes mature on January 25, 2022. The Firestorm Principal Notes were recorded at fair value to reflect the difference in the interest rates. As of September 30, 2018 and December 31, 2017, the balance of these notes payable was $938,272 and $924,383, net of unamortized interest of $61,728 and $75,617, respectively.

 

April 2018 Promissory Note

 

On April 3, 2018, Novume and Brekford entered into a transaction pursuant to which an institutional investor (the “Lender”) loaned $2,000,000 to Novume and Brekford (the “April 2018 Promissory Note”). The loan was originally due and payable on May 1, 2019 and bears interest at 15% per annum, with a minimum of 15% interest payable if the loan is repaid prior to May 1, 2019. On October 24, 2018, Novume and Brekford entered into a note amendment with the Lender by which the maturity date of the note was extended to May 1, 2020. In consideration for the agreement of the Lender to extend the maturity date, the Company agreed to pay the Lender $62,500. The amendment further provides for payment of interest through May 1, 2019 if the principal is repaid before May 1, 2019 and for the payment of interest through May 1, 2020 if the principal is repaid after May 1, 2019 and before May 1, 2020. The loan is secured by a security interest in all of the assets of Brekford. In addition, Novume agreed to issue 35,000 shares of common stock to the Lender, which shares contain piggy-back registration rights. If the shares are not so registered on the next selling shareholder registration statement, Novume shall be obligated to issue an additional 15,000 shares to the Lender. Upon any sale of Brekford or its assets, the Lender will be entitled to receive 7% of any proceeds received by Novume or Brekford in excess of $5 million (the “Lender’s Participation”). In addition, commencing January 1, 2020, the Lender shall be paid 7% of Brekford’s earnings before interest, taxes, depreciation and amortization, less any capital expenditures, which amount would be credited for any payments that might ultimately be paid to the Lender as its Lender’s Participation, if any. At April 3, 2018, the fair value of shares issued was $126,000 and designated as financing cost and the amortized financing cost for the three and nine months ended September 30, 2018 was determined to be $29,076 and $58,152, respectively. The April 2018 Promissory note has an effective interest rate of 22.5%.

 

The principal amounts due for long-term notes payable are shown below:

 

2018   $ 975  
2019     4,388  
2020     2,504,665  
2021     4,959  
2022     1,005,273  
Thereafter     11,564  
Total     3,531,824  
         
Less unamortized interest     (61,728 )
Less unamortized financing costs     (75,560 )
      3,394,536  
Current portion of long-term debt     (4,241 )
Long-term debt   $ 3,390,295