9. Debt and Redeemable Preferred Stock

Debt and redeemable preferred stock consisted of the following (in thousands):


	June 30, 2014				December 31, 2013
	Short-Term		Long-Term		Short-Term		Long-Term
$2.5 million redeemable preferred stock, Series A⁽¹⁾	$	—	$	3,188	$	—	$	2,949
$0.5 million redeemable preferred stock, Series B⁽²⁾		—		563		—		514
$0.5 million redeemable preferred stock, Series C⁽³⁾		—		544		—		509
$15.0 million revolving credit facility⁽⁴⁾		10,831		—		11,774		—
$20.0 million credit agreement⁽⁵⁾		19,822		—		1,200		18,774
$2.1 million promissory note⁽⁶⁾		1,306		562		—		—
$0.4 million promissory note⁽⁷⁾		204		149		—		—
	$	32,163	$	5,006	$	12,974	$	22,746

(1)

$2.5 million of redeemable preferred stock (25,000 shares of Series A preferred stock at $100 per share) is subject to mandatory redemption on the date which is 181 days following the date at which our Term Facility is repaid in full. The redemption price is equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in our then-outstanding indebtedness. The preferred stock is not convertible into common stock and accrues cumulative dividends at a rate of 16% per year. The dividends are payable in additional shares of Series A preferred stock.

(2)

$0.5 million of redeemable preferred stock (5,000 shares of Series B preferred stock at $100 per share) is subject to mandatory redemption on the date which is 181 days following the date at which our $2.5 million redeemable preferred stock, Series A, is repaid in full. The redemption price is equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in our then-outstanding indebtedness. The preferred stock is not convertible into common stock and accrues cumulative dividends at a rate of 20% for the first year and 25% per year thereafter. The dividends are payable in additional shares of Series B preferred stock.

(3)

$0.5 million of redeemable preferred stock (5,000 shares of Series C preferred stock at $100 per share) is subject to mandatory redemption on the date which is 181 days following the date at which our $2.5 million redeemable preferred stock, Series A, is repaid in full. The redemption price is equal to the purchase price, plus all accrued and unpaid dividends to the date of redemption, subject to compliance with any restrictions in our then-outstanding indebtedness. The preferred stock is not convertible into common stock and accrues cumulative dividends at a rate of 14% per year. The dividends are payable in additional shares of Series C preferred stock.

(4)

$15.0 million revolving credit facility which expires on December 31, 2014, as amended on March 31, 2014 (see Note 2). Borrowings under this Revolving Facility bear interest at a rate determined by the lending institution, with a minimum rate of 1.5%. The interest rate at June 30, 2014 and 2013 was 7.75% and 4.75% respectively. Additionally, the lender assesses a “Lenders fee” of 0.375% on the unused portion of the Revolving Facility. The Company is jointly and severally liable for the obligations owing under the Revolving Facility and any future subsidiaries of the Company shall be required to guarantee the payment and performance of the obligations of the Company under the Revolving Facility. The Revolving Facility is secured, subject to certain permitted liens, on a first priority basis by a security interest in substantially all of the Company’s tangible and intangible assets.

(5)

$20.0 million credit agreement which matures on June 30, 2015, as amended on March 31, 2014 (see Note 2). Loans under this Term Facility bear interest, at the Borrowers’ option, at a rate equal to the adjusted LIBOR rate or an alternate base rate, in each case, subject to a floor and a spread. As of June 30, 2014 and 2013, the cash interest rate was 12%. In addition to the cash interest rate, all loans bear an additional paid-in-kind (PIK) interest at a rate of 4% per annum (unless the Borrower’s total leverage ratio is less than 3:50:1:00, in which case such interest shall accrue at a rate of 2%). The Company is jointly and severally liable for the obligations under the Term Facility and any future subsidiaries of the Company will be required to guarantee the payment and performance of the obligations of the Company under the Term Facility. The Term Facility is secured, subject to certain permitted liens, on a second priority basis by a security interest in substantially all of the Company’s tangible and intangible assets.

(6)

$2.1 million promissory note issued to Stephen Cope, our former CEO, provides for bi-weekly installment payments of $40,614.44 until the note is paid in full. Interest accrues on the note at the rate of 9% per annum and interest on all past due amounts at the rate of 18% per annum. All interest shall accrue and be paid at maturity. Notwithstanding the foregoing, upon the earlier of (i) April 7, 2016 or (ii) the later to occur of (x) the date the Company determines that it would have had, after paying the note in full, liquidity of at least $5 million on each of two consecutive months’ end and (y) the date the Company has contracted backlog for drilling rigs and related equipment (1) of at least $75 million or (2) of $60 million (excluding the electrical segment’s contracted backlog), then the entire amount of such note shall become due and payable. In addition, a mandatory prepayment on the note in the amount of $250,000 shall be due on the date, after March 31, 2014, when the Company has received deposits of at least $5.0 million for contracted backlog for drilling related equipment. This note is prepayable at any time without payment of any premium or fee.

(7)

$0.4 million promissory note issued to Stephen Cope, our former CEO, provides for bi-weekly installment payments of $7,849.40 until the note is paid in full. Notwithstanding the foregoing, on April 8, 2016, all unpaid principal shall be due and payable. The note does not accrue interest and is prepayable at any time without payment of any premium or fee.

Compliance with Debt Covenants

As of June 30, 2014, we were not in compliance with the minimum fixed charge coverage ratio (“FCCR”) covenant in our Revolving Facility and Term Facility. The Company incurred a non-cash expense of $2.3 million related to the Settlement Agreement entered into with our former CEO in April 2014. As a result of this expense, we did not generate sufficient EBITDA to meet our FCCR covenant for the six months ended June 30, 2014 reporting period and therefore are in default of our debt facilities. This resulted in an event of default under such facilities, which, if not cured or waived, would give the lenders under such facilities the right to declare the debt immediately due and payable. In the event of an acceleration of amounts due under our debt facilities as a result of this default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interest in the collateral securing such indebtedness, which would have a material adverse effect on our business, prospects and financial condition.

We are currently in discussions with the lenders under these facilities to amend the agreements to address these covenants. The Company believes it will be able to negotiate with the lenders to amend the Revolving Facility and the Term Facility. However, if the Company is unable to negotiate amendments, there can be no assurance that the Company would be able to find other lenders to refinance these agreements.

- 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

Integrated Drilling Equipment Holdings Corp 10-Q