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FINANCING
12 Months Ended
Mar. 31, 2022
Debt Disclosure [Abstract]  
FINANCING

NOTE 6 – FINANCING

 

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 which replaced the Company’s previous revolving credit facility with PNC Bank which was terminated on June 16, 2020. The Company signed a two-year Loan and Security Agreement for a $10.0 million financing facility under the Crestmark Facility on eligible accounts receivable. The outstanding loan balance cannot exceed $10.0 million during peak selling season between July 1 and December 31 and is reduced to a maximum of $5.0 million between January 1 and July 31 with the ability to exceed when required. Costs associated with closing of the Intercreditor Revolving Credit Facility of approximately $74,000 were deferred and were amortized over one year. During the fiscal years ended March 31, 2022 and 2021 the Company incurred amortization expense of approximately $45,000 and $62,000, respectively associated with the amortization of deferred financing costs from the Intercreditor Revolving Credit Facility.

 

Under the Crestmark Facility:

 

  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 Credit (“IHC”) Intercreditor Revolving Credit Facility. See below.

 

The Crestmark 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 IHC as agreed between all parties. The Crestmark 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 $2.0 million. For the fiscal years ended March 31, 2022 and 2021 the Company recorded interest expense under the Crestmark Facility of approximately $0.3 million and $0.4 million, respectively. The Crestmark Facility is under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. As of March 31, 2022 and 2021 the Company had no outstanding balance on the Crestmark Facility. In addition, the Company executed a two-year Loan and Security Agreement with Iron Horse Credit (“IHC Facility”) for up to $2.5 million in inventory financing.

 

Under the IHC Facility:

 

  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 IHC.
  The Company must maintain a fixed charge coverage ratio test of 1:1 times measured on a rolling 12-month basis, defined as earnings before interest, taxes, depreciation and amortization (“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 was waived for the first six months of the IHC Facility. As of March 31, 2022, the Company was in compliance with this covenant.

 

The IHC Facility is secured by a perfected security interest in the Company’s inventory. The IHC 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. Interest expense under the IHC Facility for the fiscal years ended March 31, 2022and 2021 was approximately $0.2 million and $0.1 million, respectively. The IHC Facility was to expire on June 11, 2022, however, absent any termination notice given to IHC by the Company, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. As of March 31, 2022 and 2021, there was an outstanding balance of approximately $2.5 million and $0.1 million, respectively. As of March 31, 2022 there was approximately $2.0 million of available borrowings under these facilities.

 

 

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022 and 2021

 

Note Payable Payroll Protection Plan

 

On May 5, 2020, the Company received loan proceeds from Crestmark in the amount of approximately $444,000 under the Paycheck Protection Program (the “PPP”). The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which provided for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgivable to the extent the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness may be reduced if the borrower terminates employees or reduces salaries during the eligible period. The unforgiven portion of the PPP loan was payable over two years at an interest rate of 1%, with a deferral of payments until a forgiveness application was accepted and reviewed by the Small Business Administration (“SBA”), and the SBA provided Crestmark with the loan forgiveness amount. In June 2021, the Company received notification from the SBA that the loan had been forgiven in its entirety and we were notified by Crestmark that the debt was discharged. For the fiscal year ended March 31, 2022, a gain of approximately $448,000 (including principal and interest) from the forgiveness of the loan was included in other income and expenses in the accompanying consolidated statements of income.

 

Installment Notes Payable

 

On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an ERP System project over a term of 60 months at a cost of approximately $365,000. As of March 31, 2021, the Company executed three installment notes totaling approximately $0.4 million for payments issued to the project vendor. The installment notes have 60-month terms with interest rates of 7.58%, 8.55% and 9.25%, respectively. The installment notes are payable in monthly installments of $7,459 which include principal and interest. For the fiscal years ended March 31, 2022 and 2021 there was an outstanding balance on the installment notes of approximately $0.2 million and $0.3 million, respectively. For the fiscal years March 31, 2022 and 2021 the Company incurred interest expense of approximately $21,000 and $26,000, respectively.

 

Subordinated Debt/Note Payable to Related Party

 

In conjunction with the Crestmark Facility and IHC Facility there is a subordination agreement on related party debt due to Starlight Marketing Development, Ltd. On June 1, 2020, the remaining amount due on the subordinated debt of approximately $0.8 million was converted to a note payable (“Subordinated 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 at the same 6% interest rate on the unpaid principal retroactively from the date that previously scheduled payments had been missed. During the fiscal years ended March 31, 2022 and 2021 interest expense was approximately $20,000 and $47,000, respectively, on the Subordinated Note Payable and the related party subordinated debt.

 

Both the Crestmark Facility and IHC Facility 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. As of March 31, 2022, the Company met repayment requirements of the Intercreditor Revolving Credit Facility and has made cumulative principal payments totaling approximately $0.4 million. During the next twelve months the Company intends on making additional payments and pay off of the remaining balance outstanding provided the Company meets all repayment requirements of the financing facility in place.

 

As of March 31, 2022 and 2021 the remaining amount due on the Subordinated Note Payable was approximately $0.3 million and $0.5 million, respectively. The remaining amount due on the Subordinated Note Payable was classified as a current liability as of March 31, 2022 and 2021 on the consolidated balance sheets.