ASTRO MED INC /NEW/

The COVID-19 pandemic has also had an adverse impact on the sales of our Product Identification hardware products due to travel restrictions, because, in most, cases customers prefer in-person demonstrations of these printers at their production sites prior to placing orders with us and those visits have been severely limited. Additionally, the widespread cancellation of trade shows, which traditionally provided an effective forum for customers to consider our products, has also had an adverse impact. A greater reliance on remote video demonstrations, sample deliveries and digital marketing has proven effective in obtaining sales, but at a lower level than traditional methods. We expect that, while our customers’ acceptance of remote methods in their buying processes may have changed permanently, the degree to which that will prove to be the case once the current COVID-19 crisis has abated is unknown. Despite favorable market reception to our recently refreshed and expanded product lines, we expect that the level of hardware sales will remain lower until it is possible for our direct sales force and distributors to travel to visit customers and attend and present products at trade shows. The same dynamic has also affected our Test and Measurement product lines.

Shortly after the COVID-19 crisis began, we experienced a somewhat greater demand for ink, toner, media and parts supplies that are used in our digital label printers. In addition to the strong demand from our food & beverage customers, we have also seen increased demand coming from customers selling products that have experienced higher demand as a result of the COVID-19 crisis, such as, certain medical, janitorial and sanitation related products. We do not know how long this trend will continue. However, although we have had to occasionally extend our lead times because of some temporary labor shortages, we have been able to adjust production and satisfy our customer demands successfully, and being a reliable supplier is one of the characteristics on which we compete.

Since the COVID-19 pandemic began to impact us in early March, we have closely monitored the government and health authority recommendations applicable to us and have made modifications to our operations including requiring most non-production related team members to work remotely. While some inefficiencies related to remote work have occurred, overall effectiveness and productivity has been satisfactorily maintained. At the same time we have maintained sufficient capacity and employment levels in our manufacturing facilities located in West Warwick, Rhode Island, as well as in our manufacturing facilities in Canada and Germany to satisfy customer demand and related contractual commitments, despite a higher than normal level of absenteeism due to the ancillary impacts of the pandemic. We believe that as a result of a variety of heightened cleaning and sanitization standards, as well as several new health and safety protocols, procedures and workplace modifications implemented to safeguard our team members, the incidence of COVID-19 disease among our employees has thus far been limited. We know of only one case of COVID-19 among our teammates, and that individual returned to work, after completing the required quarantine period. Though the government mandated COVID-19 restrictions have begun to lessen in Rhode Island where our main production and office is located , if the COVID-19 crisis were to worsen it could have further material adverse impacts on our ability to maintain workforce levels, productivity and output. As a result, we are maintaining current precautions for the near-term.

Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also funded a portion of our capital expenditures and contractual contingent consideration obligations. We have funded acquisitions by borrowing under bank term loan facilities. However, as the result of the decline in demand for our products, especially with respect to the 737 MAX specifically and in the aerospace market more generally as the result of the COVID-19 pandemic, it is likely that we will have to rely more heavily on external financing sources to meet our operating and capital needs until market conditions allow for our earnings and cash flow generation capabilities to improve or we are able to reduce costs sufficiently to generate more earnings and cash flow.

Conditions have deteriorated in the credit markets generally and in the bank financing market specifically, and the availability of credit has been reduced as a result of lending institutions taking a more conservative posture in response to the risks introduced by the COVID-19 pandemic. Because of the deterioration of our financial condition due to the decline in 737 MAX-related revenue and COVID-19 impacts, our first quarter operating results caused us to violate a financial covenant in our Credit Agreement with Bank of America. Specifically, under the terms of our current Credit Agreement we are obligated to maintain, as of the end of each fiscal quarter, a minimum EBITDA (as defined in the agreement) of $9.5 million on a trailing twelve-months basis and a maximum consolidated leverage ratio of 3.0 to 1.0. Our actual EBITDA was below the required level for the period ended May 2, 2020. However, on June 22, 2020, we entered into a letter agreement with Bank of America, N.A. (the “Letter Agreement”), wherein Bank of America agreed to waive compliance with both of those financial covenants for the measurement period ended May 2, 2020. The Letter Agreement requires us to have, as of June 30, 2020, consolidated EBITDA of not less than $9.5 million on a trailing twelve-months basis, and to report our compliance with such covenant on or before August 15, 2020. The Letter Agreement provides that such covenant will not be tested until August 15, 2020 and we do not expect to be in compliance with the covenants at the time, hence constituting an immediate event of default under the Credit Agreement. However, we and Bank of America are actively negotiating the terms of an amendment to restructure the Credit Agreement that would provide for mutually acceptable revised financial and operational covenants and other mutually acceptable revised terms and we both fully expect that amendment to be executed prior to August 15, 2020. The effect of the Letter Agreement therefore is to give both parties sufficient time to complete the relevant documentation and also enable us to execute the amendment by that deadline.

Our credit agreement with Bank of America requires us, among other things, to satisfy certain financial ratios and conditions on an ongoing basis. Specifically, we are required to maintain minimum EBITDA (as defined in the credit agreement) of $9.5 million on a trailing twelve-months basis and our consolidated leverage ratio is not permitted to exceed 3.0 to 1.0, in each case as of the end of each fiscal quarter. Our actual EBITDA dropped below the required level for such period ended May 2, 2020, primarily as a result of the declines in our revenue attributable to the reduced demand for aircraft cockpit printers for the Boeing 737 MAX aircraft and the reduced demand for aircraft driven by the global reduction in air travel caused by the COVID-19 outbreak. While we entered into a Letter Agreement with Bank of America on June 22, 2020 that, among other things, waived our noncompliance with the financial covenants in the credit agreement noted above for the measurement period ending May 2, 2020, the Letter Agreement requires us to have, as of June 30, 2020, a consolidated EBITDA of not less than $9.5 million on a trailing twelve month basis, and to report our compliance with such additional covenant on or before August 15, 2020. While we and Bank of America have agreed in the Letter Agreement that this additional covenant will not be tested until August 15, 2020, we do not expect to comply with this additional covenant when it is tested. If an event of default occurs with respect to our obligations under the credit agreement, Bank of America is entitled to declare all of our outstanding borrowings under the credit agreement immediately due and payable. In addition, the loan agreement governing our PPP Loan includes a cross-default provision whereby a default under other debt facilities could result in a default and acceleration of our repayment obligations under the PPP Loan. While we are actively negotiating an amendment to restructure the terms of our credit agreement with Bank of America, there can be no assurance that we will be able to successfully complete such amendment or secure alternative financing on acceptable terms or at all. If we are unable to renegotiate the terms of our credit agreement or secure alternative financing and Bank of America declares our outstanding borrowings immediately due and payable, we would be unable to satisfy that demand. If that occurred it would have a material adverse impact on us.

On June 22, 2020, we entered into a Letter Agreement with Bank of America, N.A. relating to the testing of certain financial covenants included in the credit agreement dated as of February 28, 2017 between us, our wholly owned Danish subsidiaries, ANI ApS and TrojanLabel ApS and Bank of America, as amended to date. Pursuant to that agreement, Bank of America has agreed to waive the testing of the financial covenants set forth in the credit agreement related to our consolidated leverage ratio and consolidated EBITDA (as defined in the credit agreement) for the measurement period ending May 2, 2020. The Letter Agreement requires us to have, as of June 30, 2020, a consolidated EBITDA of not less than $9.5 million on a trailing twelve-months basis, and to report our compliance with such requirement on or before August 15, 2020. The Letter Agreement provides that such covenant will not be tested until August 15, 2020. Under the terms of the Letter Agreement we are not permitted to request any additional borrowings under the revolving line of credit under the credit agreement through August 15, 2020, and we will not be permitted to request any such additional borrowings thereafter unless we are in compliance with the credit agreement. The Letter Agreement also prohibits us from making any dividend or stock repurchase payments or other restricted payments through August 15, 2020, and we will be permitted to make restricted payments thereafter only in compliance with the credit agreement.