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Bank Financing | 12 Months Ended
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Mar. 31, 2020
Debt Disclosure [Abstract] |
Bank Financing | NOTE 7 – BANK FINANCING Revolving Credit Facility PNC Bank On June 22, 2017, the Company renewed the existing revolving credit facility (the “Revolving Credit Facility”) with PNC Bank, National Association (“PNC”) for an additional three years which was terminated on June 16, 2020. The outstanding loan balance could not exceed $15.0 million during peak selling season between August 1 and December 31 and was reduced to a maximum of $7.5 million between January 1 and July 31. At March 31, 2020 there was no amount due on the Revolving Credit Facility. Usage under the Revolving Credit Facility could not exceed the sum of the following (the “Borrowing Base”):
| ● | Up to 70% of the Company’s eligible domestic and Canadian accounts receivable aged less than 90 days past due as defined plus
| ● | Up to the lesser of (a) 60% of the cost of eligible inventory or (b) 85% of net orderly liquidation value percentage of eligible inventory (annual inventory appraisals required); minus
| ● | Applicable reserves including a dilution reserve equal to 100% of the Company’s co-op promotion expense and return accrual reserves.
| ● | Dilution reserve not to exceed availability generated from eligible accounts receivable.
The Revolving Credit Facility included the following sub-limits:
| ● | Letters of Credit to be issued limited to $3.0 million.
| ● | Inventory availability limited to $5.0 million.
| ● | $0.5 million eligible in-transit inventory sublimit within the $5.0 million total inventory.
| ● | Mandatory pay-down to $1.0 million (excluding letters of credit) for any 30 consecutive days between February 1 and April 30.
The Revolving Credit Facility had to comply with the following quarterly financial covenants to avoid default:
| ● | Fixed charge coverage ratio test as defined.
| ● | Capital expenditures limited to approximately $0.4 million per year.
As of September 30, 2019 the Company defaulted on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and expenses associated with the damaged goods discussed above. In November 2019, the Company entered into a Forbearance Agreement with PNC Bank National Association (“PNC”) whereby PNC delayed taking action it would have been be entitled to under a default through March 31, 2020. The Forbearance Agreement required, among other matters, the Company to comply with certain conditions and covenants including the following:
| ● | PNC implemented a $1,000,000 loan availability block.
| ● | PNC required EBITDA hurdles of greater than or equal to $400,000 for the third quarter ending December 31, 2019, of $0 for the six months ending March 31, 2020 and $(83,000) for the twelve months ending March 31, 2020.
| ● | PNC charged a loan pricing increase of .5% until March 31, 2020 which continued until termination of Revolving Credit Facility.
The Company remained in default of the forbearance agreement up until termination of the Revolving Credit Facility on June 16, 2020 at which time the Company entered into the Intercreditor Revolving Credit Facility with Crestmark and Iron Horse. Prior to the Forbearance Agreement interest on the Revolving Line of Credit was accrued at .75% per annum over PNC’s announced prime rate with an option for the Company to elect the 1, 2 or 3 month fully absorbed PNC LIBOR Rate plus 2.75% per annum with a default rate of 2% over the applicable rate. Upon execution of the Forbearance Agreement there was a pricing rate increase of .5% on the .75% per annum rate and the PNC LIBOR Rate plus 2.75%. There was an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which was calculated on the basis of a 360 day year for the actual number of days elapsed and will be payable quarterly in arrears. During the twelve months ended March 31, 2020 and 2019 the Company incurred interest expense of approximately $0.1 million and $0.2 million, respectively, on amounts borrowed against the Revolving Credit Facility. During the twelve months ended March 31, 2020 and 2019, the Company incurred an unused facility fee of approximately $46,000 and $30,000, respectively on the unused portion of the Revolving Credit Facility. The Revolving Line of Credit was secured by first priority security interests in all of the named borrowers’ tangible and intangible assets as well as first priority security interests of 100% of member or ownership interests of any of its domestic existing or newly formed subsidiaries and first priority lien on up to 65% of the borrowers’ foreign subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility was also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $803,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and were amortized over the term of the agreement. During the fiscal years ended March 31, 2020 and 2019 the Company incurred amortization expense of approximately $13,000 associated with the amortization of deferred financing costs from the Revolving Credit Facility. Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit On June 16, 2020, the Company executed an Intercreditor Revolving Credit Facility on eligible accounts receivable and inventory. The Company signed a two-year Loan and Security Agreement for a $10.0 million financing facility with Crestmark on eligible accounts receivable. The outstanding loan balance cannot exceed $10.0 million during peak selling season between July 1 and December 31and is reduced to a maximum of $5.0 million between January 1 and July 31. Under the Crestmark Bank Intercreditor Revolving Credit Line:
| ● | Advance rate shall not exceed 70% of Eligible Accounts Receivable aged less than 90 days from invoice date.
| ● | Crestmark shall maintain a base dilution reserve of 1% for each 1% of dilution over 15%.
| ● | Crestmark will implement an availability block of 20% of amounts due on Iron Horse Intercreditor Revolving Line of Credit.
| ● | Mandatory pay-down of the loan to zero in January and February each year.
| ● | All financial covenants are waived throughout the agreement.
The Crestmark Intercreditor Revolving Credit Facility is secured by a perfected security interest in all assets including a first security interest in Accounts Receivable and Inventory. Notwithstanding the foregoing, Crestmark shall subordinate its first security interest in inventory to Iron Horse as agreed between all parties. The Crestmark Intercreditor Revolving Credit Facility bears interest at the Wall Street Journal Prime Rate plus 5.50% with a floor of 8.75%. Interest and Maintenance Fees shall be calculated on the higher of the actual average monthly loan balance from the prior month or a minimum average loan balance of $2,000,000. The Crestmark Intercreditor Revolving Credit Facility expires on June 15, 2022. In addition, the Company also executed a two-year Loan and Security Agreement with Iron Horse for up to $2,500,000 in inventory financing. Under the Iron Horse Intercreditor Revolving Credit Line:
| ● | Advance rate shall not exceed the lower of (a) 70% of the inventory cost or (b) 85% of Net Orderly Liquidation Value (NOLV) as determined by an independent third-party appraiser engaged by Iron Horse.
| ● | The Company must maintain a fixed charge coverage ratio test of 1:1 times measured on a rolling 12-month basis, defined as EBITDA less non-financed capital expenditures, cash dividends and distributions paid and cash taxes paid divided by the sum of interest and principal on all indebtedness. This financial covenant has been waived for the first six months of the Intercreditor Revolving Credit Line.
The Iron Horse Intercreditor Revolving Credit Facility is secured by a perfected security interest in the Company’s inventory. The Iron Horse Intercreditor Revolving Credit Facility bears interest at 1.292% per month or 15.51% annually. Interest shall be calculated on the higher of the actual average monthly loan balance from the prior month or a minimum average loan balance of $1,000,000. The Iron Horse Intercreditor Revolving Credit Facility expires on June 15, 2022. Term Note Payable In connection with the PNC Revolving Line of Credit, the agreement also included a two-year term note (“Term Note”) in the amount of $1.0 million. The Term Note bore interest at 1.75% per annum over PNC’s announced prime rate or 1, 2, or 3 month PNC LIBOR Rate plus 3.75%. The Term Note was payable in quarterly installments of $125,000 plus accrued interest with the first installment paid on August 1, 2017. At March 31, 2020 and 2019, the outstanding balance on the Term Note was approximately $0.0 million and $0.1 million, respectively. During the years ended March 31, 2020 and 2019 the Company incurred interest expense of approximately $0 and $22,000, respectively. Installment Notes Payable On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance a new ERP System project over a term of 60 months at a cost of approximately $0.4 million. Upon approval by Company management, Dimension released progress payments directly to the project vendor as specific project milestones were met. Progress payments were made to the vendor over a period of approximately nine months and the Company was charged financing costs only on the amounts released to the vendor. At the end of each quarter, progress payments made to the vendor were converted to installment notes. As of March 31, 2020 the Company executed two installment notes totaling approximately $0.3 million for payments issued to the project vendor. The installment notes have 60 month terms with interest rates of 7.58% and 9.25%, respectively. The installment notes are payable in monthly installments of $5,785 which include principal and interest. As of March 31, 2020 there was an outstanding balance on the installment notes of approximately $0.3 million. For the year ended March 31, 2020 the Company incurred interest expense of approximately $23,000. In April 2020 the Company executed a third installment note in the amount of approximately $0.1 million for the remaining amounts payable to the project vendor. The third installment has 60 month payment terms and bears interest at 8.55%. Initial monthly payments of $1,674 commenced on April 1, 2020. Subordinated Debt/Note Payable to Related Party The subordination agreement was previously amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision was also made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum commencing September 30, 2017 and ending on the debt maturity date of June 30, 2019. Payments of $123,000 were only permitted upon receipt of the Company’s quarterly compliance certificate; the Company having met the mandatory pay-down of the Revolving Credit Facility to $1,000,000 and average excess availability for the prior 30 days (after subtraction of third party trade payables 30 days or more past due) of no less than $1,000,000 after giving effect to the payment. As part of the Conditions to Installment Payment of the subordinated debt, payments not made under this note that could be made as a result of the foregoing prohibition, including payments after the scheduled maturity date, were not be deemed an Event of Default and could made as soon as the Company was able to demonstrate that it met the liquidity requirements defined above. Quarterly installment payments of $123,000 due on the last day of each fiscal quarter have not been made since September 2017 due to the Company not meeting these requirements. A payment of $25,000 was made in August 2019 with approximately $12,500 paying down the principal and approximately $12,500 paying interest due. On June 1, 2020 the remaining amount due on the subordinated debt of approximately $803,000 was converted to a note payable which bears interest at 6%. As part of the agreement to convert the subordinated debt to a note payable it was agreed that interest expense would be accrued on the unpaid principal retroactively from the date that scheduled payments had been missed resulting in an incremental charge to interest expense of approximately $72,000 for the Fiscal 2020. During the fiscal years ended March 31, 2020 and 2019 interest expense was approximately $74,000 and $21,000, respectively on the related party subordinated debt. In connection with the Intercreditor Revolving Credit Facility the Company was required to subordinate the note payable (“subordinated note payable”) to Starlight Marketing Development, Ltd. Both Crestmark and Iron Horse agreements allow for the repayment of the subordinated note payable provided any amounts borrowed against these credit facilities are paid in full, the Company maintains a 1 : 1 debt coverage ratio and exhibits sufficient cash liquidity to support on-going operations. There is no set schedule with regards to repayment of the note and as such the subordinated note payable has been classified a non-current liability for the year ended March 31, 2020 on the consolidated balance sheets. As of March 31, 2019 the remaining amount due on the subordinated debt was approximately $815,000 and was classified as a current liability on the consolidated balance sheets.

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- 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 Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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