Regarding the $4M LOC...
...First, it is important to remember that it is NOT actually $4M... ...SCRC is permitted to draw down a maximum of 85% of Main Ave's A/R balance, and this is only UP TO $4M.
To put it in perspective, the 9/30/14 A/R balance was $3.2M. The most recent SEP approved orders number was $5.5M. Therefore, a rough ballpark estimate is that A/R constitutes approx 58% of monthly approved orders. This means that based on the most recently available 9/30/14 A/R balance, SCRC would have only been permitted to draw down $2.7M.
Now, fast-forward to present day. We know that JAN-2015 approved orders came in at $3.4M. So if the collection rate remains consistent with what it was just 4 months ago, then the current A/R balance should be approx $2.0M. And so the maximum that SCRC would be permitted to have outstanding on this line of credit is now only $1.7M (85% of the $2.0M A/R balance).
Why is this significant? Because we know that SCRC already PR'd that it spent a portion of the LOC on paying down some higher-interest rate debt.
We have no idea what else SCRC has used the LOC for, not to mention how much of it was drawn down. If it has not drawn down any further amounts then we have no issue. In addition, if SCRC did draw down additional funds, so long as the cumulative amounts drawn is less than $1.7M, then we are fine.
HOWEVER, if SCRC were hypothetically to have drawn down $2.5M because back then it would have been permitted to draw down $2.7M (85% of the $3.2M A/R, remember?), but now because JAN numbers plummeted down to $3.4M -- thereby reducing A/R to $2.0M, and reducing the 85% of A/R limit to only $1.7M... ...well, you see the dilemma here, folks?
This $2.5M that was drawn down a couple months ago when the limit was $2.7M is now considered to be over-drawn and in violation of the terms of the LOC because the limit now has decreased to only $1.7M.
So what this means is that, in the above HYPOTHETICAL scenario, SCRC needs to find a way to paydown $800k immediately to get the outstanding balance down from $2.5M to $1.7M.
If SCRC is unable to regain compliance within the timeframe specified in the terms of the LOC, then the financier will have many options available to it to force collection via either garnishment of SCRC revenues/receivables as well as seizures and liquidation of other SCRC assets.
This is similar to what got SCRC in trouble with Ironridge last year. SCRC needs to make 100% certain that it is able to live up to the terms that it has agreed to and not welch on its word again -- otherwise, shareholders will be subject to Ironridge deja vu all over again...
AI
