Bank Credit Line and Long-Term Debt

9 Months Ended

Dec. 31, 2012

4.	Bank Credit Line and Long-Term Debt

At December 31, 2012 and March 31, 2012, the Company’s bank credit line and long-term debt consisted of the following:

	December 31, 2012			March 31, 2012
Secured line of credit	$	—		$	243,923
Factoring facility		246,059			—
Notes payable		200,000			100,000
Notes payable – related parties		3,142,245			3,117,245
Notes payable – equipment		9,902			12,379
Unamortized debt discount		(164,309	)		(270,246	)
Total secured notes payable and bank debt		3,433,897			3,203,301
Less: Current portion of long-term debt		(370,283	)		(244,667	)
Long-term debt, net of current portion	$	3,063,614		$	2,958,634

A/R Line of Credit and Term Loan

Effective as of October 27, 2010, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”) providing for a senior credit facility (the “Credit Facility”) comprised of an asset-based accounts receivable line of credit (the “A/R Line of Credit”) and a term loan (The “Term Loan”). The Loan Agreement amended and restated a previous loan agreement with SVB in its entirety. As of February 8, 2011, May 9, 2011, June 7, 2011, July 7, 2011, September 12, 2011, November 1, 2011, March 15, 2012 and June 28, 2012, the Company entered into certain amendments to the Loan Agreement.

The Term Loan, which was fully repaid in March 2012, accrued interest at the fixed annual rate of 7.00% prior thereto.

The A/R Line of Credit accrued interest by applying a variable finance charge and a collateral handling fee to the A/R Line of Credit balance. For the quarters ended June 30, 2011, September 30, 2011, December 31, 2011, March 31, 2012 and June 30, 2012 the effective rates were 10.31%, 10.82%, 10.82%, 10.82%, and 10.82%, respectively.

Pursuant to the June 28, 2012 amendment, the maturity date of the Loan Agreement was extended to September 26, 2012. On August 17, 2012, the A/R Line of Credit was paid in full and the Loan Agreement was terminated

Factoring Facility

On July 13, 2012, the Company and Porter Capital Corporation (“PCC”) entered into a certain Recourse Receivables Purchase & Security Agreement pursuant to which PCC has agreed to purchase from the Company certain of its accounts receivable from time to time (the “Factoring Agreement”). The Factoring Agreement provides, among other things, that (i) the line of credit will be $1,000,000 measured as the unpaid face amount of all purchased receivables at any given time; (ii) the initial term of the facility will be one year with automatic one-year renewals unless the Company elects in advance not to renew; (iii) the advance rate under the facility will be 85% of the face amount of purchased receivables (the “Advance Amount”), with the remaining 15% being held in reserve until the purchased receivable is paid in full, (iv) interest will accrue on the Advance Amount until the purchased receivable is paid in full at an annual rate equal to (a) the greater of prime rate or 5%, plus (b) 1.75%; (v) additional service fees will accrue on the full face amount of each purchased receivable until such purchased receivable is paid in full at a rate of 0.90% for each 30 days, or 0.03% per day; and (v) the Company will owe a minimum term fee in an amount, if any, by which the sum of the interest paid plus the service fee paid plus the origination/renewal fee paid during the initial or any renewal term is less than $36,000. The obligations owed under the Factoring Agreement are secured by a perfected first priority security interest in all of the assets of the Company. In connection with entering into this factoring facility, the Company paid an origination fee of $7,500 when it first accessed the facility, which occurred on August 17, 2012. The Company will also be required to pay a renewal fee of $7,500 each year that it renews the facility. At December 31, 2012, the amount advanced under the facility was $246,059 and the amount held in reserve until each purchased receivable is paid was $43,573. The combined amount of $289,632 is included in accounts receivable, trade on the Company's Balance Sheet. At December 31, 2012, the amount available for advance under the facility was $347,655.

Notes Payable

In August 2011, the Company completed a private placement in which investors received in the aggregate $125,000 in one-year notes (the “One-Year Notes”) and three-year warrants to purchase a total of 58,138 shares of the Company’s common stock at an exercise price of $0.43 per share (the “Three Year Warrants”). Included in the One-Year Notes is $25,000 held by a related party. The One-Year Notes accrue interest at a rate of 12% per annum payable monthly in arrears. No principal payments are required to be made on the Notes until the maturity date, which was August 1, 2012. The One-Year Notes are secured by a second lien on all of the assets of the Company which is junior only to the first lien that secures the Company’s factoring facility with PCC. The Three Year Warrants were valued at $7,111, which represents the original issue discount to the One-Year- Notes.

In June 2012, the Company and the holders of the One-Year Notes and the Three-Year Warrants agreed to certain amendments to the One-Year Notes and the Three-Year Warrants. Specifically, the One-Year Notes were amended to (i) extend the maturity date of the notes out to August 1, 2013 and (ii) add a right to convert the notes into shares of the Company’s common stock at a conversion price of $0.43 per share, with such conversion price being subject to reduction in the event of certain dilutive equity issuances by the Company. The Three-Year Warrants were amended to (i) double the number of shares of the Company’s common stock into which the warrants are exercisable, (ii) extend the expiration date of the warrants to August 1, 2017 and (iii) add a provision that the exercise price of the warrants will be subject to reduction in the event of certain dilutive equity issuances by the Company. The unamortized discount on the One-Year-Notes was $4,076 at December 31, 2012.

In August 2012, the Company completed two closings of a private placement in which investors received in the aggregate $125,000 of 12% Senior Subordinated Convertible Notes due August 1, 2014 (the “Two-Year Notes”) and five-year warrants to purchase a total of 58,137 shares of the Company’s common stock at an exercise price of $0.43 per share, with such exercise price being subject to reduction in the event of certain dilutive equity issuances by the Company (the “Five Year Warrants”). Included in the Two-Year Notes is $25,000 held by a related party. Holders of the Two Year Notes have the right to convert the notes into shares of the Company’s common stock at a conversion price of $0.43 per share, with such conversion price being subject to reduction in the event of certain dilutive equity issuances by the Company. The Two-Year Notes accrue interest at a rate of 12% per annum payable monthly in arrears. No principal payments are required to be made on the Two-Year Notes until the maturity date, which is August 1, 2014. The Two-Year Notes are secured by a second lien on all of the assets of the Company, which is junior to the first lien that secures the Company’s factoring facility with PCC, pari passu with the One-Year Notes and senior to all other Company debt, including the affiliate debt. The Five Year Warrants were valued at $4,912, which represents the original issue discount to the Two-Year Notes. The unamortized discount on the Two-Year-Notes was $4,214 at December 31, 2012.

Notes Payable – Related Parties

Through a series of negotiated agreements, the Company has executed and delivered, and is currently indebted under, (i) a promissory note (the “Nicholson Refinance Note”) payable to John L. Nicholson, an outside director of the Company and (ii) a promissory note (the “Ramey Refinance Note”) payable to Charles E. Ramey, the Chairman and CEO of the Company. The original proceeds from the Nicholson Refinance Note and the Ramey Refinance Note (collectively, the “Refinance Notes”) were used to refinance certain debt of the Company and for other corporate purposes.

The terms of the Refinance Notes are as follows:

Refinance Notes
Nicholson		Ramey		Total
$	2,295,000	$	797,245	$	3,092,245

The maturity date on the Refinance Notes is January 1, 2014. Interest on the Refinance Notes is payable monthly and no principal payments are required until maturity. The annual interest rate for the Nicholson Refinance Note is 12% but reduces to 10% if the principal balance drops below $1,905,000. The annual interest rate for the Ramey Refinance Note is 10%. As of December 31, 2012, the Company had $525,737 in accrued but unpaid interest on the Refinance Notes. On July 11, 2012, the Company and the holders of the Refinance Notes entered into a letter agreement pursuant to which such holders agreed to (i) waive the default under their notes that has occurred and will continue to occur as a result of the Company’s failure to remain current on the interest owed on these notes and (ii) agreed not to take any action against the Company for such defaults. These agreements expire on June 30, 2013.

The Refinance Notes are secured by a Security Agreement, dated August 13, 2008, by and between the Company and Messrs. Nicholson and Ramey, pursuant to which the Company granted Messrs. Nicholson and Ramey a security interest in all its personal property, whether now owned or hereafter acquired, including but not limited to, all accounts receivable, copyrights, trademarks, licenses, equipment and all proceeds as from such collateral. Pursuant to the subordination agreements with PCC and the holders of the One-Year Notes and the Two-Year Notes, this security interest will be junior to PCC’s security interest under the Factoring Agreement as long as that agreement is in place and junior to the security interest of the holders of the One-Year Notes and the Two-Year Notes until those notes are paid in full.

The $25,000 of One-Year Notes held by a related party is reported on the balance sheet at December 31, 2012 net of unamortized debt discount of $812 in current portion of long term debt – related party and at March 31, 2012 net of unamortized debt discount of $0 in notes payable – related parties.

The $25,000 of the Two-Year Notes held by a related party is reported on the balance sheet at December 31, 2012 net of unamortized debt discount of $843 in notes payable – related parties.

Note Payable – Equipment

In December 2010, the Company entered into a capital lease agreement with CIT Technology Financing Services, Inc. to lease new telephone equipment for $16,505. The lease has a $1 purchase option at the end of 60 equal monthly installments of $379. As of December 31, 2012, the outstanding balance on this capital lease was $9,902.

Payment Table

Future minimum payments under our loan agreements and notes payable at December 31, 2012 were as follows:

Fiscal Year Ended March 31,	Amount
2013	$	246,884
2014		3,220,546
2015		128,301
2016		2,475
2017		—
	$	3,598,206

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

US DATAWORKS INC 10-Q