Quarterly report pursuant to Section 13 or 15(d)

Note 4 - Debt

v3.20.1
Note 4 - Debt
3 Months Ended
Mar. 29, 2020
Notes to Financial Statements  
Debt Disclosure [Text Block]
4
.
Deb
t
 
(a) Revolving credit and long-term debt facilities 
 
   
March 29,
2020
   
December 29,
2019
 
Revolving credit facility
  $
33,340
    $
34,701
 
                 
Term loans:
 
 
 
 
 
 
 
 
Term loan A facility
  $
38,438
    $
38,750
 
Less deferred debt issue costs
   
(2,140
)
   
(2,286
)
Less unamortized discount on debt
   
(1,371
)
   
(1,464
)
Total term loans
  $
34,927
    $
35,000
 
Less current portion
   
(1,562
)
   
(1,250
)
Long term portion
  $
33,365
    $
33,750
 
 
 
The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”) which governs the Company’s revolving credit facility (“PNC Facility”). The PNC Facility has a term ending on
November 8, 2023.
Advances made under the PNC Facility bear interest at the U.S. base rate plus a grid ranging from
0.50%
to
1.00%
or
1,
2
or
3
-month fully-absorbed PNC LIBOR plus a grid ranging from
1.50%
to
2.00%.
The base commercial lending rate should approximate U.S. prime rate.  
 
The Company also borrows money under a Financing Agreement (the “Financing Agreement”), by and among the Company and certain of its subsidiaries, the lenders party to the Financing Agreement from time to time (collectively, the “Lenders”), and TCW Asset Management Company, LLC, as collateral agent for the Lenders (“TCW”). The Financing Agreement governs a term loan A facility (the “Term A Loan Facility” and together with the PNC Facility, the “Credit Facilities” and previously governed a term loan B facility (the “Term Loan B Facility”) until it was paid in full on
July 3, 2019.
The Term Loan A Facility matures on
November 8, 2023 (
the “Maturity Date”). The Term Loan A Facility bears interest LIBOR plus an applicable margin of
8.75%
through
June 30, 2020,
and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from
7.25%
to
8.75%.
Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i)
3.00%
in the event that such payment occurs before
November 8, 2019, (
ii)
2.00%
in the event that such payment occurs after
November 8, 2019
and on or before
November 8, 2020,
and (iii)
1.00%
in the event that such payment occurs after
November 8, 2020
and on or before
November 8, 2021.
No
such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after
November 8, 2021.
 
As at
March 29, 2020,
the funds available to borrow under the PNC Facility after deducting the current borrowing base conditions were
$31,185
(
December 29, 2019 -
$21,644
). The maximum amount of funds that could be available under the PNC Facility is
$65,000.
However, availability under the PNC Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, and certain conditions as determined by PNC. The Company is required to use a “lock-box” arrangement for the PNC Facility, whereby remittances from customers are swept daily to reduce the borrowings under this facility.
 
At
March 29, 2020,
$33,340
(
December 29, 2019 -
$34,701
) was outstanding under the PNC Facility and is classified as a current liability based on the requirement to hold a “lock-box” under the terms of the PNC Facility.
 
At
March 29, 2020,
$38,438
(
December 29, 2019 -
$38,750
) was outstanding under the TCW Term Loan A Facility. The TCW Facilities are reported on the consolidated balance sheet net of deferred financing fees of
$2,140
(
December 29, 2019 -
$2,286
) and a discount on debt of
$1,371
(
December 29, 2019 -
$1,464
) related to the outstanding warrants described below.
 
The Credit Facilities are joint and several obligations of the Company and its subsidiaries that are borrowers under the Credit Facilities and are jointly and severally guaranteed by other subsidiaries of the Company. Repayment under the PNC Facility and Term A Loan Facility are collateralized by the assets of the Company and each of its subsidiaries.
 
(b) Covenants
 
The Credit Facilities contain certain financial and non-financial covenants, including restrictions on dividend payments. The financial covenants require the Company to maintain a fixed charge coverage ratio and a total leverage ratio quarterly during the term of the Credit Facilities.
 
The Company was in compliance with the covenants included in the Credit Facilities as at
March 29, 2020. 
The Company’s continued financial covenant compliance will depend on key variables, including the Company’s cash flow from earnings before interest, income taxes and depreciation as well as debt levels.  For context, assuming
no
change to debt balances, a reduction of approximately
19%
and
25%
of earnings before interest, income taxes, depreciation and amortization over the next
six
month period, could jeopardize covenant compliance at the end of our
second
and
third
quarters
2020,
respectively, which test our ratios against
twelve
-month trailing results.  The Company attempts to address risks of covenant compliance by taking measures to reduce its inventory, revolving credit facility and term debt balances as necessary.
 
Market conditions, including the implications of the COVID-
19
pandemic,
may
negatively impact our ability to secure and source alternative methods of financing. We do
not
currently foresee a material impact in the short term based on our working capital needs, however if a number of our customers reduce or temporarily cease payments to us, this would present a risk and negatively impact our cash flow and ability to meet our working capital obligations to operate our business, which could require us to secure alternative methods of financing.
 
The Company continues to monitor operations and results closely and manage debt levels relative to our operational results to ensure compliance with its lenders covenants.
 
(c
)
Warrant liability
 
On
November 8, 2018,
504,735
warrants were issued to TCW in connection with the Financing Agreement and are outstanding as at
March 29, 2020.
As a result of the anti-dilution provisions contained in the warrants that were triggered in connection with the Rights Offering and the Registered Direct Offering in
June 2019,
the warrants were exercisable to purchase an additional
7,214
shares of common stock (or a total of
511,949
) at
March 29, 2020.
These warrants are exercisable on a cashless basis, or for an exercise price of
$0.01.
The Company initially recorded the value of the warrants as a warrant liability with a corresponding discount on the long-term debt in the amount of
$1,898.
The fair value has been assessed at
$2.37
per unit or
$1,213
as at
March 29, 2020 (
$3.38
per unit or
$1,730
December 29, 2019).
The fair value of the warrant obligation is presented as a warrant liability on the consolidated balance sheet with changes to the fair value recorded each reporting period as either a gain or a loss in the consolidated statement of operations and comprehensive income.