Liquidity

9 Months Ended

Dec. 31, 2019

Liquidity

Liquidity

NOTE 2 – LIQUIDITY

In August 2019, we received notification from a major customer that several containers of goods from multiple vessels purchased direct import by the customer had arrived severely water damaged. Upon inspection of the damaged goods by insurance surveyors it was their opinion that the source of the damage was due to moisture in the pallets provided by the factory which caused significant condensation and consequently water damage to the merchandise. Actual damage to the goods occurred while the goods were in transit. We have filed insurance claims on our cargo insurance policy which does provide for recovery of the sales value plus additional expenses associated with the damaged goods. For the three months ended December 31, 2019, the customer charged us back a total of approximately $48,000 for damaged goods consisting of sales value of approximately $46,000 which was recorded as a reduction in net sales and approximately $2,000 in survey fees which were expensed as a component of general and administrative expenses on the accompanying condensed consolidated statements of operations. For the nine months ended December 31, 2019, the customer charged us back a total of approximately $1,691,000 for damaged goods consisting of sales value of approximately $1,580,000 which was recorded as a reduction in net sales, approximately $109,000 in freight charges which were expensed as a component of sales and marketing expenses and approximately $2,000 in survey fees which were expensed as a component of general and administrative expenses on the accompanying condensed consolidated statements of operations. For the three and nine months ended December 31, 2019 we have incurred additional related expenses of approximately $127,000 and $346,000, respectively that were included as a component of general and administrative expenses on the accompanying condensed consolidated statements of operations. We continue to gather the relevant information required to complete the insurance claims, however due to the significant extent of the damage more time will be required by the underwriter to determine the final claim settlement. As such, we have recorded a refund due to the customer of approximately $510,000 which reflects approximately $1,691,000 of chargebacks by the customer less approximately $1,181,000 the customer has deducted on payment remittances to the Company as of December 31, 2019. We recognized an insurance claim receivable of approximately $1,286,000 (the approximate cost of the damaged goods returned that will be destroyed) on the accompanying condensed consolidated balance sheet at December 31, 2019. The timing of the collection of this insurance claim receivable remains uncertain at this time.

As of December 31, 2019 the Company was 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 expenses associated with the damaged goods discussed above as well as a loss from operations. In November 2019, the Company entered into a Forbearance Agreement with PNC Bank, National Association (“PNC”) whereby PNC “forbears” taking action it would be entitled to under a default through March 31, 2020 at which time we would renegotiate renewal of the Revolving Credit Facility or obtain alternative financing.

● PNC implemented a $1,000,000 loan availability block.

● PNC required an EBITDA hurdle greater than or equal to $400,000 for the third quarter ending December 31, 2019 and requires EBITDA of $0 for the six months ending March 31, 2020 and $(83,000) for the twelve months ending March 31, 2020.

● PNC implemented loan pricing increase of .5% until March 31, 2020 which will continue until the Company achieves compliance with the original fixed charge coverage ratio test of 1.1:1.

As of December 31, 2019 the Company did not meet the required EBITDA hurdle of greater than or equal to $400,000 for the third quarter ended December 31, 2019 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.

For the nine months ended December 31, 2019, the Company incurred a net loss of approximately $1,003,000 compared to net income of approximately $1,473,000 for the nine months ended December 31, 2018. The Company expects cash flows from operations as well as other financing resources to be adequate to satisfy working capital requirements for at least the next twelve months from the date the accompanying condensed consolidated financial statements are issued. The Company plans to supplement cash flows from operations from several activities and resources including the following:

● Reduce operating expenses.

● Continue to negotiate renewal of the existing Revolving Credit Facility with PNC Bank prior to its expiration on July 15, 2020.

● Continuing discussions for alternative financing arrangements with several financial institutions.

● Utilize “dynamic discount” programs offered by several of the Company’s major customers which allow for accelerated payment of invoices in exchange for an early pay discount.

There can be no assurances that any of the above actions can be accomplished or that financing will be available on acceptable terms. If the Company is unable to obtain financing or continues to experience sustained losses from operations this would have a material adverse effect on its ability to meet its financial obligations when due.