2. Company Financing

On December 14, 2012, the Company, Integrated Drilling Equipment, LLC and Integrated Drilling Equipment Company Holdings, LLC (collectively with the Company, the “Borrowers”) entered into a term loan and security agreement with Elm Park Credit Opportunities Fund, L.P. and Elm Park Credit Opportunities Fund (Canada), L.P., as lenders, and Elm Park Capital Management, LLC, as administrative agent (the “Term Loan Agreement”). The Term Loan Agreement provides for a $20.0 million senior secured second-lien term loan facility (as amended, the “Term Facility”). On the same date, the Borrowers also entered into an amended and restated revolving credit and security agreement with PNC Bank, National Association, as administrative agent and the initial lender (the “Revolving Credit Agreement”). The Revolving Credit Agreement currently provides for a $15 million committed asset-based revolving credit facility, with a sublimit for letters of credit (as amended, the “Revolving Facility” and, together with the Term Facility, the “Credit Facilities”).

On March 31, 2014, the Borrowers entered into the Third Amendment to the Term Facility and the Third Amendment to the Revolving Facility to, among other things, (1) amend the maturity date of the Term Facility from September 30, 2014 to June 30, 2015 and the maturity date of the Revolving Facility from March 31, 2014 to December 31, 2014; (2) add a covenant regarding the fixed charge coverage ratio in the Credit Facilities; (3) amend (a) the minimum EBITDA financial covenant and (b) the capital expenditures financial covenant in the Credit Facilities; (4) amend the term loan repayment schedule in the Term Facility; (5) amend the PIK interest provision in the Term Facility to increase such interest from 2% to 4% (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%); and (6) amend the calculation of the amount of revolving advances lenders are required to make under the Revolving Facility.

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.

As of June 30, 2014, the Company had cash and cash equivalents of approximately $3.5 million. The Company believes its existing cash and cash equivalents, $1.4 million available from its revolving facility, expected revenues from its contractual backlog of $23.0 million, and future orders will enable it to meet its material liquidity needs for the next twelve months from the balance sheet date provided that we are successful in extending or refinancing our current debt maturities and/or are able to obtain additional working capital through credit arrangements, debt, or additional equity. There can be no assurance that we will be able to extend our debt maturity dates and/or whether additional financing sources will be available.

The Company’s ability to obtain additional external debt financing will be limited by the amount and terms of its existing borrowing arrangements and the fact that substantially all of its assets have been pledged as collateral for these existing arrangements. In addition, a failure to comply with the covenants under its existing debt instruments could result in an event of default. Furthermore, there are cross-default provisions in certain of the Company’s existing debt instruments such that an event of default under one agreement or instrument could result in an event of default under another. If an event of default resulted in the acceleration of all of its payment obligations under its debt instruments as of June 30, 2014, it would be required to pay its lenders an aggregate of $30.7 million. In the event of an acceleration of amounts due under its debt instruments as a result of an event of default, the Company may not have sufficient funds or may be unable to arrange for additional financing to repay its indebtedness or to make any accelerated payments, and the lenders could seek to enforce their security interests in the collateral securing such indebtedness. The Company’s failure to obtain additional external financing to fund its cash requirements would further cause noncompliance with its existing debt covenants which would have a material adverse effect on its business, operations and financial condition and raises substantial doubt about the Company’s ability to continue as a going concern.

Integrated Drilling Equipment Holdings Corp 10-Q