Bank Financing

9 Months Ended

Dec. 31, 2019

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 for an additional three years expiring on July 15, 2020. The outstanding loan balance cannot exceed $15,000,000 during peak selling season between August 1 and December 31 (with the ability of the Company to request an additional $5,000,000 of availability during peak selling season if required) and is reduced to a maximum of $7,500,000 between January 1 and July 31. At December 31, 2019 and March 31, 2019, the outstanding balance was approximately $0 and $0, respectively, on the Revolving Credit Facility. As of December 31, 2019, there was approximately $15,000,000 available to borrow on the Revolving Credit Facility, assuming compliance with the limits and covenants as discussed below. 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 $375,000 per year.

As of December 31, 2019 the Company remained in default on the Revolving Credit Facility due to non-compliance with the fixed charge coverage ratio in part due to the loss of margin and related expenses associated with the damaged goods received by one major customer in August, 2019. In November 2019, the Company entered into a Forbearance Agreement with PNC whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 and would continue forbearance actions provided the Company continued to meet compliance with certain conditions (See Note 2 – LIQUIDITY).

As of December 31, 2019 the Company did not meet the required conditions of the Forbearance Agreement and is unlikely to meet the remaining hurdles of the Forbearance Agreement for the fiscal year ending March 31, 2020. As of December 31, 2019 the Revolving Credit Facility has no outstanding balance and there have been no further actions by PNC to exercise any of their options afforded to them as per the terms of the Revolving Credit Facility.

Prior 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% (See Note 2 – LIQUIDITY). 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 December 31, 2019 and 2018 the Company incurred interest expense of approximately $86,000 and $100,000, respectively, on amounts borrowed against the Revolving Credit Facility. During the nine months ended December 31, 2019 and 2018, the Company incurred interest expense of approximately $119,000 and $155,000, respectively on amounts borrowed against the Revolving Credit Facility. During the three months ended December 31, 2019 and 2018, the Company incurred an unused facility fee of approximately $10,000 and $8,000, respectively on the unused portion of the Revolving Credit Facility. During the nine months ended December 31, 2019 and 2018, the Company incurred an unused facility fee of approximately $30,000 and $23,000, 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’ foreign 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 $803,000. 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 December 31, 2019 and 2018, the Company incurred amortization expense of approximately $3,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility. During the nine months ended December 31, 2019 and 2018 the Company incurred amortization expense of approximately $10,000 associated with the amortization of deferred financing costs from the original Revolving Credit Facility.

Subordinated Related Party Debt

The subordination agreement was 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 commencing September 30, 2017 and ending on the debt maturity date of June 30, 2019. There are no provisions to continue accruing interest on the outstanding principal amount due as of June 30, 2019. 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, including payments after the scheduled maturity date, 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. 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 $123,000 which includes principal and interest, was not made during the three months ended December 31, 2019. 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. During the three months ended December 31, 2019 and 2018, the Company incurred interest expense of approximately $0 and $7,000 respectively on the related party subordinated debt. During the nine months ended December 31, 2019 and 2018, the Company incurred interest expense of approximately $0 and $20,000, respectively on the related party subordinated debt. As of December 31, 2019 and March 31, 2019, the remaining amount due on the subordinated related party debt was approximately $803,000 and $815,000, respectively.

Bank Term Note

The Company repaid the final $125,000 installment of a term loan with PNC which originated in fiscal year 2018.