FINANCING

3 Months Ended

Jun. 30, 2022

Debt Disclosure [Abstract]

FINANCING

NOTE 7 – FINANCING

Intercreditor Revolving Credit Facility Crestmark Bank and Iron Horse Credit:

On June 16, 2020, the Company entered into a two-year Credit and Security Agreement for a $2.5 million financing facility, with IronHorse Credit LLC (the “IHC Facility”) on eligible accounts receivable and inventory. Also, on June 16, 2020, the Company entered into a two-year Loan and Security Agreement for a $10.0 million financing facility with Crestmark, a division of MetaBanK, National Association (the “Crestmark Facility”) on eligible accounts receivable.

Under the terms of the Crestmark Facility, 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 IHC and Crestmark facilities of approximately $74,000 were deferred and were amortized over one year. During the three months ended June 30, 2022 and 2021 the Company incurred amortization expense of approximately $8,000 and $17,000, respectively associated with the amortization of deferred financing costs from the IHC and Crestmark facilities.

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 three months ended June 30, 2022 and 2021 the Company recorded interest expense under the Crestmark Facility of approximately $53,000 and $45,000, 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 June 30, 2022 and March 31, 2022, the Company had no outstanding balance on the Crestmark Facility.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022 and 2021

(Unaudited)

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. The Company was not in compliance with this covenant as of May 31, 2022; however, a waiver from default was obtained from IHC for this month.  As of June 30, 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 three months ended June 30, 2022 and 2021 was approximately $98,000 and $39,000, respectively. The IHC Facility was to expire on June 11, 2022. However, absent a termination notice given to IHC by the Company, the IHC Facility 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 both June 30, 2022 and March 31, 2022, there was an outstanding balance $2,500,000.

Simultaneously with the Company’s entry into the IHC Facility and the Crestmark Facility, the Company entered into an Intercreditor Agreement with IronHorse and Crestmark which sets forth the respective rights of each of IronHorse and Crestmark as secured parties.

As of this filing there was approximately $3,000,000 of available borrowings under the Crestmark and IHC facilities.

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, 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 three months ended June 30, 2022 and 2021, a gain of approximately $0 and $448,000 (including principal and interest), respectively from the forgiveness of the loan was included in other income and expenses in the accompanying condensed consolidated statements of operations.

Installment Notes Payable

On June 18, 2019, the Company entered into a financing arrangement with Dimension Funding, LLC (“Dimension”) to finance an entire ERP System project over a term of 60 months at a cost of approximately $365,000. The Company executed three installment notes totaling approximately $365,000 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. As of June 30, 2022 and March 31, 2022 there was an outstanding balance on the installment notes of approximately $195,000 and $213,000, respectively. For the three months ended June 30, 2022 and 2021 the Company incurred interest expense of approximately $4,000 and $6,000, respectively.

Subordinated Debt/Note Payable

In conjunction with the Crestmark Facility and IHC Facility, the parties entered into a subordination agreement on debt due to Starlight Marketing Development, Ltd. of approximately $803,000. On June 1, 2020 the remaining amount due on the subordinated debt of approximately $803,000 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 three months ended June 30, 2022 and 2021 interest expense was approximately $3,000 and $9,000, respectively on the subordinated note payable.

In connection with the Intercreditor Agreement, the Company was required to subordinate the note payable. 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 June 30, 2022 the Company met repayment requirements of the Intercreditor Revolving Credit Facility has made cumulative principal payments totaling $450,000. During the next twelve months the Company intends on making additional payments and pay off the remaining balance outstanding provided the Company meets all repayment requirements of the Crestmark Facility and IHC Facility agreements.

THE SINGING MACHINE COMPANY, INC AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

June 30, 2022 and 2021 

(Unaudited)

As of both June 30, 2022 and March 31, 2022, the remaining amount due on the note payable was approximately $353,000. The remaining amount due on the subordinated note payable was classified as a current liability as of June 30, 2022 and March 31, 2022 on the condensed consolidated balance sheets.