Bank Financing

6 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Bank Financing

NOTE 6 – BANK FINANCING

Revolving Credit Facility

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 expiring on July 15, 2020. The outstanding loan balance cannot exceed $15.0 million during peak selling season between August 1 and December 31 (with the ability of the Company to request an additional $5.0 million of availability during peak selling season if required) and is reduced to a maximum of $7.5 million between January 1 and July 31. At September 30, 2018 and March 31, 2018, the outstanding balance was approximately $6,878,000 and $0, respectively, on the Revolving Credit Facility. Usage under the Revolving Credit Facility shall not exceed the sum of the following (the “Borrowing Base”):

● Up to 85% of the company’s eligible domestic and Canadian accounts receivable and up to 90% of eligible foreign credit insured accounts aged less than 60 days past due (not to exceed 90 days from invoice date, cross aged on the basis of 50% or more past due with certain specific accounts qualifying for up to 120 days from invoice date not to exceed 30 days from the due date; 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 advertising and return accrual reserves. Dilution reserve not to exceed availability generated from eligible accounts receivable.

The Revolving Credit Facility includes the following sub-limits:

● Letters of Credit to be issued limited to $3,000,000.

● Inventory availability limited to $5,000,000.

● $500,000 eligible in-transit inventory sublimit within the $5,000,000 total inventory.

● Mandatory pay-down to $1,000,000 (excluding letters of credit) for any 30 consecutive days between February 1 and April 30.

The Revolving Credit Facility must comply with the following quarterly financial covenants to avoid default:

● Fixed charge coverage ratio test of 1.1:1 times measured on a rolling four quarter 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.

● Capital expenditures limited to $300,000 per year.

On August 2, 2018, PNC issued a third amendment and waiver (“third amendment”) to the Revolving Credit Facility, the Security Agreement in effect for fiscal 2019 amending the agreements as follows:

● For purposes of calculating the fixed charge coverage ratio only, a $550,000 one-time credit for bad debt expense relating to the Toys R Us bankruptcy is allowed to be taken as of March 31, 2018.

● The capital expenditures limit is increased to $375,000 for fiscal 2019 and for each fiscal year thereafter.

The third amendment waived existing violations of the fixed charge coverage ratio of 1.1:1 and capital expenditures in excess of the $300,000 limitation per fiscal year. The Company incurred an amendment fee of $10,000 upon execution of the agreement.

Interest on the Revolving Line of Credit is 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. There is an unused facility fee equal to .375% per annum on the unused portion of the Revolving Credit Facility which will be 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 three months ended September 30, 2018 and 2017 the Company incurred interest expense of approximately $50,000 and $74,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the six month periods ended September 30, 2018 and 2017, the Company incurred interest expense of approximately $55,000 and $74,000 respectively on amounts borrowed against the Revolving Credit Facility. During the three month periods ended September 30, 2018 and 2017, the Company incurred an unused facility fee of approximately $8,000 and $7,000, respectively on the unused portion of the Revolving Credit Facility. During the six month periods ended September 30, 2018 and 2017, the Company incurred an unused facility fee of approximately $15,000 and $14,000 respectively on the unused portion of the Revolving Credit Facility.

The Revolving Line of Credit is 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’ domestic subsidiary’s existing or subsequently formed or acquired foreign subsidiaries. The Revolving Credit Facility is also secured by a related-party debt subordination agreement with Starlight Marketing Development, Ltd. in the amount of approximately $815,000. Costs associated with renewal of the Revolving Credit Facility of approximately $40,000 were deferred and are being amortized over the term of the agreement. During the three months ended September 30, 2018 and 2017 the Company incurred amortization expense of approximately $4,000 and $3,000, respectively, associated with the amortization of deferred financing costs from the original Revolving Credit Facility. During the six month periods ended September 30, 2018 and 2017, the Company incurred amortization expense of approximately $7,000 and $25,000, respectively.

Term Note Payable

In connection with the amendments above and in addition to the maximum availability limits on the Revolving Line of Credit, the agreement also includes a two-year term note (“Term Note”) in the amount of $1,000,000 the proceeds of which were used to pay down a portion of the subordinated related party debt of approximately $1,924,000 in June 2017. The term note bears 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 is payable in quarterly installments of $125,000 plus accrued interest. The outstanding balance on the Term Note was $375,000 and $625,000 as of September 30, 2018 and March 31, 2018, respectively. During the three months ended September 30, 2018 and 2017 the Company incurred interest expense of approximately $11,000 and $7,000, respectively. During the six months ended September 30, 2018 and 2017 the Company incurred interest expense of approximately $20,000 and $7,000 respectively.

The subordination agreement has been amended reducing the amount of related party subordinated debt to the remaining amount due of approximately $815,000. Provision has also been made to allow repayment of the remaining $815,000 in quarterly installments of $123,000 including interest accrued at 6% per annum that commenced on September 30, 2017. Payments of $123,000 are 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 cannot be made as a result of the foregoing prohibition shall not be deemed an Event of Default and can be made as soon as the Company is able to demonstrate that it meets the liquidity requirements defined above. The installment payments of $123,000 due on December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 were not made due to the Toys R Us prior year bankruptcy’s unfavorable effect on cash flow. During the three months ended September 30, 2018 and 2017 the Company incurred interest expense of approximately $7,000 and $14,000, respectively on the related party subordinated debt. During the six months ended September 30, 2018 and 2017 the Company incurred interest expense of approximately $16,000 and $14,000, respectively on the related party subordinated debt.