The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2017
AND 2016
Note 1: Background
and Basis of Presentation
The accompanying consolidated financial
statements include the accounts of Live Ventures Incorporated, a Nevada corporation, and its subsidiaries (collectively the “Company”).
The Company has three operating segments for fiscal years 2017 and 2016 – Manufacturing, Retail Online and Services. Under
the Live Ventures brand the Company seeks opportunities to acquire profitable and well-managed companies. The Company believes
that with the proper positioning and its investment capital, these companies can become more profitable.
Note 2: Summary
of Significant Accounting Policies
Principles of Consolidation
The accompanying
consolidated financial statements for fiscal years 2017 and 2016 include the accounts of Live Ventures Incorporated and its wholly-owned
subsidiaries. O
n July 6, 2015, The Company acquired 80% of Marquis Industries, Inc. and subsidiaries (“Marquis”).
Effective November 30, 2015, the Company acquired the remaining 20% of Marquis. On November 3, 2016, the Company acquired 100%
of Vintage Stock, Inc., a Missouri corporation (“Vintage Stock”), through its newly formed, wholly-owned subsidiary,
Vintage Stock Affiliated Holdings LLC (“VSAH”). All intercompany transactions and balances have been eliminated in
consolidation.
All data for common stock, options and
warrants have been adjusted to reflect the 1-for-6 reverse stock split (which took effect on December 5, 2016) for all periods
presented. In addition, all common stock prices, and per share data for all periods presented have been adjusted to reflect the
1-for-6 reverse stock split.
Non-Controlling Interest
On July 6, 2015, the Company, through Marquis
Affiliated Holdings, LLC, a wholly owned subsidiary of the Company, acquired 80% interest in Marquis. The transaction was accounted
for under the acquisition method of accounting, with the purchase price allocated based on the fair value of the individual assets
acquired and liabilities assumed.
The Company follows Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “
Consolidation,
”
which governs the accounting for and reporting of non-controlling interests (“NCI’s”) in partially owned consolidated
subsidiaries and the loss control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI’s
be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership
interest that leave control intact be treated as an equity transaction rather than as step acquisitions or dilution gains or losses,
and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in
a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the
NCI is separately designated in the accompanying consolidated statements of income. Losses attributable to the NCI in a subsidiary
may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those
interests. The NCI shall continue to attribute its share of losses, if applicable, even if that attribution results in a deficit
NCI balance. The NCI was acquired by the Company on November 30, 2015. At September 30, 2016, there was no NCI.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumption
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Significant estimates made in connection
with the accompanying consolidated financial statements include the estimate of dilution and fees associated with billings, the
estimated reserve for doubtful current and long-term trade and other receivables, the estimated reserve for excess and obsolete
inventory, estimated fair value and forfeiture rates for stock-based compensation, fair values in connection with the analysis
of goodwill, other intangibles and long-lived assets for impairment, current portion of notes payable, valuation allowance against
deferred tax assets and estimated useful lives for intangible assets and property and equipment.
Financial Instruments
Financial instruments consist primarily
of cash equivalents, trade and other receivables, advances to affiliates and obligations under accounts payable, accrued expenses
and notes payable. The carrying amounts of cash equivalents, trade receivables and other receivables, accounts payable, accrued
expenses and short-term notes payable approximate fair value because of the short maturity of these instruments.
The
fair value of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to
the Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts
of long-term debt at September 30, 2017 and 2016 approximate fair value.
Cash and Cash Equivalents
Cash and Cash equivalents consist of highly
liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents approximates
carrying value.
Trade Receivables
The Company grants trade credit to customers
under credit terms that it believes are customary in the industry it operates and does not require collateral to support customer
trade receivables. Some of the Company’s trade receivables are factored primarily through two factors. Factored trade receivables
are sold without recourse for substantially all of the balance receivable for credit approved accounts. The factor purchases the
trade receivable(s) for the gross amount of the respective invoice(s), less factoring commissions, trade and cash discounts. The
factor charges the Company a factoring commission for each trade account, which is between 0.75-1.00% of the gross amount of the
invoice(s) factored on the date of the purchase, plus interest calculated at 3.25%-6% per annum. The minimum annual commission
due the factor is $75,000 per contract year.
Allowance for Doubtful Accounts
The Company maintains an allowance for
doubtful accounts, which includes allowances for accounts and factored trade receivables, customer refunds, dilution and fees from
LEC billing aggregators and other uncollectible accounts. The allowance for doubtful accounts is based upon historical bad debt
experience and periodic evaluations of the aging and collectability of the trade receivables. This allowance is maintained at a
level which the Company believes is sufficient to cover potential credit losses and trade receivables are only written off to bad
debt expense as uncollectible after all reasonable collection efforts have been made. The Company has also purchased accounts receivable
credit insurance to cover non-factored trade and other receivables which helps reduce potential losses due to doubtful accounts.
At September 30, 2017 and 2016, the allowance for doubtful accounts was $1,161,223 and $1,161,434, respectively.
Inventories
Manufacturing Segment
Inventories are valued at the lower of
the inventory’s cost (first in, first out basis) or market of the inventory. Management compares the cost of inventory with
its net realizable value and an allowance is made to write down inventory to net realizable value, if lower. Management also reviews
inventory to determine if excess or obsolete inventory is present and a reserve is made to reduce the carrying value for inventory
for such excess and or obsolete inventory. At September 30, 2017 and September 30, 2016, the reserve for obsolete inventory was
$91,940.
Retail and Online Segment
Merchandise Inventories are valued at the
lower of cost or market using the average cost method which approximates first in first out or FIFO. Under the average cost method,
as new product is received from vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged
over the cumulative units in inventory available for sale. Pre-owned products traded in by customers are recorded as merchandise
inventory for the amount of cash consideration or store credit less any premiums given to the customer. Management reviews the
merchandise inventory to make required adjustments to reflect potential obsolescence or the lower of cost or market. In valuing
merchandise inventory, management considers quantities on hand, recent sales, potential price protections, returns to vendors and
other factors. Management’s ability to assess these factors is dependent upon forecasting customer demand and to provide
a well-balanced merchandise assortment. Merchandise Inventory valuation is adjusted based on anticipated physical inventory losses
or shrinkage and actual losses resulting from periodic physical inventory counts. Merchandise inventory reserves as of September
30, 2017 and September 30, 2016 were $1,256,629 and $1,013,870, respectively.
Property and Equipment
Property and Equipment are stated at cost
less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost
and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of building and improvements
are three to forty years, transportation equipment is five to ten years, machinery and equipment are five to ten years, furnishings
and fixtures are three to five years and office and computer equipment are three to five years. Depreciation expense was $4,161,684
and $2,898,132 for the years ended September 30, 2017, and 2016, respectively.
We periodically review our property and
equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation
or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with
respect to our stores and those stores projected undiscounted cash flows. An impairment loss would be recognized for the amount
by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted
cash flows.
Goodwill
The Company accounts for
purchased goodwill and intangible assets in accordance with ASC 350,
Intangibles—Goodwill and Other
. Under ASC
350, purchased goodwill are not amortized; rather, they are tested for impairment on at least an annual basis. Goodwill represents
the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired.
We test goodwill annually
on July 1 of each fiscal year or more frequently if events arise or circumstances change that indicate that goodwill may be impaired.
The Company assesses whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative
assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines
it is not more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects
not to perform a qualitative assessment, a quantitative assessment is performed using a two-step approach required by ASC 350 to
determine whether a goodwill impairment exists.
The first
step of the quantitative test is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting
unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If
the carrying amount exceeds the fair value, then the second step is required to be completed, which involves allocating the fair
value of the reporting unit to each asset and liability using the guidance in ASC 805 (“
Business Combinations, Accounting
for Identifiable Intangible Assets in a Business Combination
”), with the excess being applied
to goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. The determination of
the fair value of our reporting units is based, among other things, on estimates of future operating performance of the reporting
unit being valued. We are required to complete an impairment test for goodwill and record any resulting impairment losses at least
annually. Changes in market conditions, among other factors, may have an impact on these estimates and require interim impairment
assessments.
When performing the two-step
quantitative impairment test, the Company's methodology includes the use of an income approach which discounts future net cash
flows to their present value at a rate that reflects the Company's cost of capital, otherwise known as the discounted cash flow
method ("DCF"). These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting
these future cash flows include the continued market acceptance of the products and services offered by the businesses, the development
of new products and services by the businesses and the underlying cost of development, the future cost structure of the businesses,
and future technological changes. The Company also incorporates market multiples for comparable companies in determining the fair
value of our reporting units. Any such impairment would be recognized in full in the reporting period in which it has been identified.
Intangible Assets
The Company’s intangible assets
consist of customer relationship intangibles, leases, trade names, licenses for the use of internet domain names, Universal Resource
Locators, or URL’s, software, and marketing and technology related intangibles.
Upon acquisition,
critical estimates are made in valuing acquired intangible assets, which include but are not limited to: future expected cash
flows from customer contracts, determining favorable leases relative to market, customer lists, and estimating cash flows from
projects when completed; tradename and market position, as well as assumptions about the period of time that customer relationships
will continue; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable and, as a result, actual results may differ from the assumptions used in
determining the fair values.
All intangible assets are capitalized at their original cost and amortized over their estimated
useful lives as follows: domain name and marketing – 3 to 20 years; leases – the remaining life of the lease contract
– 1 – 10 years, software – 3 to 5 years, customer relationships – 7 to 15 years. Intangible amortization
expense is $863,864 and $266,179 for the years ended September 30, 2017, and 2016, respectively.
Revenue Recognition
Manufacturing Segment
The Manufacturing Segment derives revenue
primarily from the sale of carpet products; including shipping and handling amounts, which are recognized when the following criteria
are met: there is persuasive evidence that a sales agreement exists, delivery has occurred, or services have been rendered, the
price to the buyer is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred
until the customer takes title to the goods and assumes the risks and rewards of ownership, which is generally on the date of
shipment. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based
primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are
recorded net of taxes collected from customers.
Retail Online Segment
The Retail Online Segment derives product
revenue primarily from direct sales. Product revenue is recognized when the following revenue recognition criteria are met: there
is persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectability
is reasonably assured. Currently, all direct product revenue is recorded on a gross basis, as the Company is the primary obligor.
Revenues are recorded net of taxes collected from customers.
At the time revenue is recognized, the
Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends
or conditions that exist at the time revenue is recognized.
Services Segment
The Services Segment recognizes revenue
from directory subscription services as billed for and accepted by the customer. Directory services revenue is billed and recognized
monthly for directory services subscribed. The Company has utilized outside billing companies to perform direct ACH withdrawals.
For billings via ACH withdrawals, revenue is recognized when such billings are accepted by the customer. Customer refunds are recorded
as an offset to gross Services Segment revenue.
Revenue for billings to certain customers
that are billed directly by the Company and not through outside billing companies is recognized based on estimated future collections
which are reasonably assured. The Company continuously reviews this estimate for reasonableness based on its collection experience.
Shipping and Handling
The Company classifies shipping and handling
charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Customer Liabilities
The Company establishes a liability upon
the issuance of merchandise credits and the sale of gift cards. Breakage income related to gift cards which are no longer reportable
under state escheatment laws of $47,603 for the for the period of November 3, 2016 through September 30, 2017 is recorded in other
income in our consolidated financial statements. No amounts were recorded for breakage for any period prior to November 3, 2016.
Advertising Expense
Advertising expense is charged to operations
as incurred. Advertising expense totaled $746,041 and $1,247,383 for the years ended September 30, 2017 and 2016, respectively.
Fair Value Measurements
ASC Topic 820, “Fair Value Measurements
and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. Level 2
– to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Income Taxes
The Company accounts for
income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and
liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial
reporting bases of the Company's assets and liabilities. Deferred income tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than
not that the asset will not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities
in the provision for income taxes in its Consolidated Statements of Income.
Significant management
judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company
uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether it is more likely than
not (greater than 50% chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial
statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid
upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact
the financial statements of the Company in future periods.
Lease Accounting
We lease retail stores, warehouse facilities
and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates
through 2024 with various renewal options for additional periods. The agreements, which have been classified as operating leases,
generally provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance
costs. Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis
over the lease term and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease
incentives received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line
basis as a reduction to rent expense over the lease term. We record the unamortized portion of tenant improvement allowances as
a part of deferred rent. We do not have leases with capital improvement funding. Percentage rentals are based on sales performance
in excess of specified minimums at various stores and are accounted for in the period in which the amount of percentage rent can
be accurately estimated.
Stock-Based Compensation
The Company from time to time grants restricted
stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the
grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line
basis over the vesting period.
Earnings Per Share
Earnings per share is calculated in accordance
with ASC 260, “
Earnings Per share
”. Under ASC 260 basic earnings per share is computed using the weighted average
number of common shares outstanding during the period except that it does not include unvested restricted stock subject to cancellation.
Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares
outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants,
options, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares, options and warrants
is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected
on an if-converted basis.
Segment Reporting
ASC Topic 280, “
Segment Reporting
,”
requires use of the “management approach” model for segment reporting. The management approach model is based on the
way a Company’s management organizes segments within the Company for making operating decisions and assessing performance.
The Company determined it has three reportable segments (See Note 19).
Concentration of Credit Risk
The Company maintains cash balances at
several banks in several states including, Missouri, Kansas, Oklahoma, Arkansas, Illinois, Texas, Colorado, New Mexico, Utah, Idaho,
Nevada, Georgia, California and New York within the United States. Accounts are insured by the Federal Deposit Insurance Corporation
up to $250,000 per institution as of September 30, 2017. At times, balances may exceed federally insured limits.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued
Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
ASU 2014-09, which supersedes nearly all
existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is
effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition
methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option
to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. In August
2015, the FASB issued ASU No. 2015-04,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.
The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities
should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods
within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31,
2016, including interim reporting periods within that reporting period.
In March 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08,
Revenue
from Contracts with Customers
. The standard addresses the implementation guidance on principal versus agent considerations
in the new revenue recognition standard. The ASU clarifies how an entity should identify the unit of accounting (i.e. the specified
good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
Subsequently,
the FASB has issued the following standards related to ASU 2014-09 and ASU No. 2016-08: ASU No. 2016-10,
Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”); ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”);
ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU
2016-20”); and, ASU
2017-05—
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
(“ASU 2017-05). The Company must adopt ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05
with ASU 2014-09 (collectively, the “new revenue standards”). The Company is in the early stages of assessing the provisions
of the new standard. We are continuing to evaluate the impact of the transition methods on our financial statements.
In September, 2014, the FASB issued ASU No. 2014-15,
Presentation
of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern
. The standard requires an entity’s management to determine whether substantial doubt exists
regarding the entity’s ability to continue as a going concern. The amendments denote how and when companies are obligated
to disclose going concern uncertainties, which are required to be evaluated every interim and annual period. If management determines
that substantial doubt exists, particular disclosures are required. The extent of these disclosures are dependent upon management’s
evaluation of mitigation of the going concern uncertainty. ASU 2014-15 applies prospectively to annual periods ending after December
15, 2016 and to interim and annual periods thereafter. The Company has adopted this guidance during its 2017 fiscal year and it
did not have a significant impact on its consolidated results of operations, financial condition and cash flows.
In July 2015, the FASB
issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This standard changes the measurement
principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is
defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal
and transportation. This standard is effective for interim and annual reporting periods beginning after December 15, 2016, with
early adoption permitted. We have not adopted this standard and are currently evaluating the impact that this standard will have
on our consolidated financial statements.
ASU 2016-02,
Leases
(Topic 842)
. The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing
a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact
that this standard will have on our consolidated financial statements.
ASU 2016-04,
Recognition
of Breakage for Certain Prepaid Stored-Value Products
. The standard specifies how prepaid stored-value product liabilities
should be derecognized, thereby eliminating the current and potential future diversity in practice. The ASU is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently
evaluating the impact that this standard will have on our consolidated financial statements.
ASU 2016-09,
Compensation-
Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting,
introduces targeted amendments intended
to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies
(including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income
statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they
occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether
the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming
from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise.
Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if
required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain
and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash
flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold
to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies
that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing
activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis,
to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures
when they occur. The ASU is effective for public business entities for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted in any interim or annual period for which the financial statements
have not been issued or made available to be issued. Certain detailed transition provisions apply if an entity elects to early
adopt. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
ASU 2016-15,
Statement of Cash Flows (Topic 230): Restricted Cash
(a consensus of the FASB Emerging Issues Task Force).
ASU
2016-15 clarifies whether the following items should be categorized as operating, investing or financing in the statement of cash
flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration,
(iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies,
(vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts
and payments with aspects of more than one class of cash flows. ASU 2016-15 takes effect in 2018 for public companies. If an entity
elects early adoption, it must adopt all of the amendments in the same period.
We are currently
evaluating the impact that this standard will have on our consolidated financial statements.
ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. Under the
current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While
an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs,
outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not
required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set
with their own inputs and processes. The amendments in this Update provide a screen to determine when a set is not a business.
The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated
in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number
of transactions that need to be further evaluated by public business entities applying the amendments in this Update to annual
periods beginning after December 15, 2017, including interim periods within those periods.
ASU 2017-04,
Intangibles-
Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment
, eliminates step 2 from the goodwill impairment
test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. An entity may still perform the optional qualitative assessment for a reporting unit to determine if it
is more likely than not that goodwill is impaired. A public business entity that is an SEC filer should prospectively adopt the
ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have adopted this
standard effective with our goodwill impairment test date of July 1, 2017.
ASU 2017-09,
Compensation-
Stock Compensation (Topic 718): Scope of Modification Accounting
, clarifies such that an entity must apply modification accounting
to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair
value of the modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates
that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not
required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award
are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of
the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim
periods within those years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the
impact that this standard will have on our consolidated financial statements.
In July, 2017, the FASB issued ASU No. 2017-11, Earnings Per
Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivative and Hedging (Topic 815). The standard is intended
to simplify the accounting for certain financial instruments with down round features. This ASU changes the classification analysis
of particular equity-linked financial instruments (e.g. warrants, embedded conversion features) allowing the down round feature
to be disregarded when determining whether the instrument is to be indexed to an entity’s own stock. Because of this, the
inclusion of a down round feature by itself exempts an instrument from having to be remeasured at fair value each earnings period.
The standard requires that entities recognize the effect of the down round feature on EPS when it is triggered (i.e., when the
exercise price is adjusted downward due to the down round feature) equivalent to the change in the fair value of the instrument
instantly before and after the strike price is modified. An adjustment to diluted EPS calculation may be required. The standard
does not change the accounting for liability-classified instruments that occurred due to a different feature or term other than
a down round feature. Additionally, entities must disclose the presence of down round features in financial instruments they issue,
when the down round feature triggers a strike price adjustment, and the amount of the adjustment necessary. ASU 2017-11 is effective
for all fiscal years beginning after December 15, 2018. The Company has decided to early adopt ASU 2017-11 and it did not have
a significant impact on its consolidated results of operations, financial condition and cash flows.
Note 3: Comprehensive Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For our Company, for
years ended September 30, 2017 and 2016, net income does not differ from comprehensive income.
Note 4: Reclassifications and Restatements
Our previously issued consolidated financial
statements for year ended September 30, 2016 have been reclassified and restated.
Classification of Marquis line of credit
with both a subjective acceleration clause and lock box arrangement was not properly classified as a current liability according
to ASC 470. The Company determined that $222,590 of long-term debt should have been classified as a current liability in the consolidated
balance sheet.
Characterization of deposits (advance payments)
on the purchase of Marquis carpet manufacturing equipment and the related cash flow presentation (operating vs. investing) in the
statement of cash flows was an error and not presented correctly. The Company determined that cash from operations was understated
and cash used in investing were understated by $1,816,855 in the consolidated statement of cash flows.
Deferred income tax liabilities related
to the Marquis Industries, Inc (“Marquis”) acquisition were not reflected in the final purchase accounting. The Company
also had unrecorded deferred tax assets relating to non-qualified stock options and restricted stock from fiscal years 2013-2016,
which would have been fully reserved until the valuation allowance was released in 2016 as a result of the purchase of Marquis.
In addition, the pre-tax net income on the tax provision did not agree to the audited consolidated financial statements included
in the Form 10-K primarily attributable to the adjustments made to the bargain purchase gain. As a result of these errors, the
Company determined that the bargain purchase gain was overstated, and deferred tax benefit was understated by $3,074,623 in the
consolidated statement of operations. In addition, the components of deferred taxes that were misstated are within Note 17 –
Income Taxes.
Management has evaluated the impact of
the above referenced errors. The impact on our previously issued Form 10-Q’s for quarters ended December 31, 2016, March
31, 2017 and June 30, 2017 are as follows, in error and will be amended to reflect the following changes:
|
|
Fiscal Quarter Ended December 31, 2016
|
|
|
Fiscal Quarter Ended March 31, 2017
|
|
|
Fiscal Quarter Ended June 30, 2017
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Change
|
|
|
(Restated)
|
|
|
Reported
|
|
|
Change
|
|
|
(Restated)
|
|
|
Reported
|
|
|
Change
|
|
|
(Restated)
|
|
Current portion of long- term debt
|
|
$
|
6,226,454
|
|
|
$
|
14,278,689
|
|
|
$
|
20,505,143
|
|
|
$
|
5,832,567
|
|
|
$
|
15,378,332
|
|
|
$
|
21,210,899
|
|
|
$
|
5,847,194
|
|
|
$
|
17,375,442
|
|
|
$
|
23,222,636
|
|
Long-term debt, net of current portion
|
|
|
67,287,070
|
|
|
|
(14,278,689
|
)
|
|
|
53,008,381
|
|
|
|
69,019,133
|
|
|
|
(15,378,332
|
)
|
|
|
53,640,801
|
|
|
|
70,104,445
|
|
|
|
(17,375,442
|
)
|
|
|
52,729,003
|
|
Total liabilities
|
|
|
91,328,118
|
|
|
|
|
|
|
|
91,328,118
|
|
|
|
90,550,517
|
|
|
|
|
|
|
|
90,550,517
|
|
|
|
93,105,215
|
|
|
|
|
|
|
|
93,105,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in capital
|
|
|
56,705,679
|
|
|
|
6,249,254
|
|
|
|
62,954,933
|
|
|
|
56,773,754
|
|
|
|
6,249,254
|
|
|
|
63,023,008
|
|
|
|
56,841,245
|
|
|
|
6,249,254
|
|
|
|
63,090,499
|
|
Accumulated deficit
|
|
|
(27,408,969
|
)
|
|
|
(6,238,516
|
)
|
|
|
(33,647,485
|
)
|
|
|
(25,568,783
|
)
|
|
|
(6,238,516
|
)
|
|
|
(31,807,299
|
)
|
|
|
(23,441,219
|
)
|
|
|
(6,238,516
|
)
|
|
|
(29,679,735
|
)
|
Series E convertible preferred stock
|
|
|
10,866
|
|
|
|
(10,738
|
)
|
|
|
128
|
|
|
|
10,866
|
|
|
|
(10,738
|
)
|
|
|
128
|
|
|
|
10,866
|
|
|
|
(10,738
|
)
|
|
|
128
|
|
Total shareholders' equity
|
|
|
29,009,849
|
|
|
|
–
|
|
|
|
29,009,849
|
|
|
|
30,918,112
|
|
|
|
–
|
|
|
|
30,918,112
|
|
|
|
32,616,801
|
|
|
|
–
|
|
|
|
32,616,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current liabilities
|
|
|
1,990,407
|
|
|
|
(1,816,855
|
)
|
|
|
173,552
|
|
|
|
2,520,099
|
|
|
|
(1,816,855
|
)
|
|
|
703,244
|
|
|
|
2,104,859
|
|
|
|
(1,816,855
|
)
|
|
|
288,004
|
|
Net cash provided by operations
|
|
|
4,994,685
|
|
|
|
(1,816,855
|
)
|
|
|
3,177,830
|
|
|
|
5,209,543
|
|
|
|
(1,816,855
|
)
|
|
|
3,392,688
|
|
|
|
8,830,128
|
|
|
|
(1,816,855
|
)
|
|
|
7,013,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,869,153
|
)
|
|
|
1,816,855
|
|
|
|
(3,052,298
|
)
|
|
|
(7,100,362
|
)
|
|
|
1,816,855
|
|
|
|
(5,283,507
|
)
|
|
|
(7,753,755
|
)
|
|
|
1,816,855
|
|
|
|
(5,936,900
|
)
|
Net cash used in investing activities
|
|
|
(62,180,053
|
)
|
|
|
1,816,855
|
|
|
|
(60,363,198
|
)
|
|
|
(54,507,921
|
)
|
|
|
1,816,855
|
|
|
|
(52,691,066
|
)
|
|
|
(55,150,965
|
)
|
|
|
1,816,855
|
|
|
|
(53,334,110
|
)
|
Conversion features on convertible notes
and related warrants issued in 2012, 2013 and 2014 required bifurcation and derivative liability accounting due to the down round
protection features included within the agreements in accordance with ASC 815. On December 22, 2014, the Company executed an amendment
to remove the down round provisions for the convertible notes and warrants. As a result of these errors, the Company determined
that accumulated deficit and additional paid-in capital were understated by $6,238,516 in the stockholders’ equity section
of the consolidated balance sheet and consolidated statement of changes in stockholder’s equity.
We reclassified $10,738 from Series E
Preferred Stock to additional paid in capital.
The following table presents the impact of the corrections
on the Company's previously issued consolidated financial statements as of and for the year ended September 30, 2016:
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Change
|
|
|
Restated
|
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,789,290
|
|
|
$
|
222,590
|
|
|
$
|
2,011,880
|
|
Long-term debt, net of current portion
|
|
|
13,682,872
|
|
|
|
(222,590
|
)
|
|
|
13,460,282
|
|
Total liabilities
|
|
|
29,271,588
|
|
|
|
–
|
|
|
|
29,271,588
|
|
Paid in capital
|
|
|
53,319,217
|
|
|
|
6,249,254
|
|
|
|
59,568,471
|
|
Accumulated deficit
|
|
|
(28,837,063
|
)
|
|
|
(6,238,516
|
)
|
|
|
(35,075,579
|
)
|
Series E convertible preferred stock
|
|
|
10,866
|
|
|
|
(10,738
|
)
|
|
|
128
|
|
Total stockholders' equity
|
|
|
24,195,812
|
|
|
|
–
|
|
|
|
24,195,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bargain purchase gain on acquisition
|
|
$
|
4,573,968
|
|
|
$
|
(3,074,623
|
)
|
|
$
|
1,499,345
|
|
Total other income (expense), net
|
|
|
3,142,581
|
|
|
|
(3,074,623
|
)
|
|
|
67,958
|
|
Income before provision for income taxes
|
|
|
5,460,830
|
|
|
|
(3,074,623
|
)
|
|
|
2,386,207
|
|
Benefit for income taxes
|
|
|
(12,493,221
|
)
|
|
|
(3,074,623
|
)
|
|
|
(15,567,844
|
)
|
Net income attributed to Live Ventures Incorporated
|
|
|
17,829,857
|
|
|
|
–
|
|
|
|
17,829,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cashflows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on bargain purchase of acquisition
|
|
$
|
(4,573,968
|
)
|
|
$
|
3,074,623
|
|
|
|
(1,499,345
|
)
|
Change in deferred income taxes
|
|
|
(12,524,582
|
)
|
|
|
(3,074,623
|
)
|
|
|
(15,599,205
|
)
|
Change in prepaid expenses and other current assets
|
|
|
(3,423,650
|
)
|
|
|
1,816,855
|
|
|
|
(1,606,795
|
)
|
Net cash provided by operations
|
|
|
6,061,778
|
|
|
|
1,816,855
|
|
|
|
7,878,633
|
|
Purchases of property and equipment
|
|
|
(1,376,685
|
)
|
|
|
(1,816,855
|
)
|
|
|
(3,193,540
|
)
|
Net cash used by investing activities
|
|
|
(722,828
|
)
|
|
|
(1,816,855
|
)
|
|
|
(2,539,683
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
(1,956,923
|
)
|
|
|
–
|
|
|
|
(1,956,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Changes in Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in capital - at September 30, 2015
|
|
$
|
52,965,036
|
|
|
$
|
6,249,254
|
|
|
$
|
59,214,290
|
|
Paid in capital - at September 30, 2016
|
|
|
53,319,217
|
|
|
|
6,249,254
|
|
|
|
59,568,471
|
|
Accumulated deficit - at September 30, 2015
|
|
|
(46,665,003
|
)
|
|
|
(6,238,516
|
)
|
|
|
(52,903,519
|
)
|
Accumulated deficit - at September 30, 2016
|
|
|
(28,837,063
|
)
|
|
|
(6,238,516
|
)
|
|
|
(35,075,579
|
)
|
Series E convertible preferred stock - at September 30, 2015
|
|
|
10,866
|
|
|
|
(10,738
|
)
|
|
|
128
|
|
Series E convertible preferred stock - at September 30, 2016
|
|
|
10,866
|
|
|
|
(10,738
|
)
|
|
|
128
|
|
Note 5: Acquisitions
Acquisition of Marquis Industries, Inc.
On July 6 and July 7, 2015,
the Company entered into a series of agreements in connection with its indirect purchase of Marquis Industries, Inc., a Georgia
corporation, and its subsidiaries (“Marquis”). The Marquis acquisition has been accounted for under the acquisition
method and, accordingly, is included in the consolidated financial statements from the effective date of acquisition. Initially
the Company acquired 80% of Marquis indirectly through a wholly-owned subsidiary, Marquis Affiliated Holdings LLC, a Delaware limited
liability company. Effective November 30, 2015, the Company acquired the remaining 20% interest in Marquis for $2,000,000.
The purchase price was
paid through a combination of debt financing that was provided by (i) Bank of America through a Term and Revolving Loan in the
aggregate amount of (a) approximately $7.8 million for the term component and (b) approximately $15 million for the revolving component
and (ii) a mezzanine loan in the amount of up to $7.0 million provide by Isaac Capital Fund – see note 15.
A summary of the restated
and final purchase price allocation at fair value is presented below. The Company finalized its estimates just prior to filing
it’s form 10-K for fiscal year ended September 30, 2016 after it was able to determine that it had obtained all necessary
information that existed as of the acquisition date related to these matters during fiscal 2016.
|
|
(Restated)
Total
|
|
|
Cash and cash equivalents
|
|
$
|
496,944
|
|
|
Accounts receivable
|
|
|
7,262,188
|
|
|
Inventory
|
|
|
11,717,113
|
|
|
Prepaid and other current assets
|
|
|
1,518,430
|
|
|
Property and equipment
|
|
|
16,392,695
|
|
|
Intangible - customer relationships
|
|
|
439,039
|
|
|
Bargain purchase gain (1)
|
|
|
(1,499,345
|
)
|
|
Deferred taxes (1)
|
|
|
(3,074,623
|
)
|
|
Accounts payable
|
|
|
(4,139,830
|
)
|
|
Accrued expenses
|
|
|
(433,989
|
)
|
|
Non-controlling interest (2)
|
|
|
(2,000,000
|
)
|
|
|
|
$
|
26,678,622
|
|
(3)
|
______________
|
(2)
|
– non-controlling interest was valued at the price paid by the Company when it subsequently
purchased the remaining 20% of Marquis.
|
|
(3)
|
- includes $4,800,000 of cash, $6,495,825 from a mezzanine loan from Isaac Capital fund, and $15,382,797
from Bank of America Term and Revolver Loan.
|
Marquis’ results
of operations were included in the Company’s financial statements.
The estimated fair value of the Customer
Relationships related to Marquis was determined using the income approach, which discounts expected future cash flows to present
value. The Company estimated the fair value of this intangible asset using the residual method and a present value discount rate
of 18%. Customer relationships relate to the Company’s ability to sell existing and future versions of products. The Company
is amortizing the Customer relationships intangible asset on a straight-line basis over an estimated life of 15 years.
After determining and recording the fair
value associated with the assets and liabilities acquired, the Company recorded a restated gain on the acquisition of $1,499,345
included in ―Gain on acquisition in the Consolidated Statement of Operations for the year ended September 30, 2016.
Due to the measurement period extending
into the fourth quarter of fiscal 2016, the following would have been recorded in the Company’s consolidated statement of
operations for year ending September 30, 2015. Instead, according to ASU 2015-16 they were recorded at the end of the measurement
period in the fourth quarter of fiscal 2016 when management completed its analysis of fair value as it relates to the Marquis
acquisition.
|
|
(Restated)
|
|
Depreciation expense
|
|
$
|
227,654
|
|
Amortization expense
|
|
|
6,117
|
|
Cost of revenue
|
|
|
1,080,051
|
|
Bargain purchase gain on acquisition
|
|
|
1,499,345
|
|
Acquisition of Vintage Stock Inc.
On November 3, 2016 (the “Closing
Date”), the Company, through its newly formed, wholly-owned subsidiary, VSAH, entered into a series of agreements in connection
with its purchase of Vintage Stock. Vintage Stock is a retailer that sells, buys and trades new and used movies, books, collectibles,
games, comics, music and other retail products.
Total consideration
paid of $57,653,698 was paid through a combination of $8,000,000 of capital provided by the Company and debt financing provided
by (i) Texas Capital Bank Revolver Loan in the aggregate amount of approximately $12,000,000, mezzanine financing from the Capitala
Term Loan of approximately $30 million, and the Company issued $10,000,000 in subordinated acquisition notes payable to
the sellers of Vintage Stock, as more fully described in Note 9.
The following table below summarizes our
final purchase price allocation of the consideration paid to the respective fair values of the assets acquired and liabilities
assumed in the Vintage Stock acquisition as of the closing date. The Company finalized its estimates after it was able to determine
that it had obtained all necessary information that existed as of the acquisition date related to these matters.
Cash and cash equivalents
|
|
$
|
272,590
|
|
Trade and other receivables
|
|
|
177,338
|
|
Inventory
|
|
|
18,711,192
|
|
Prepaid expenses and other current assets
|
|
|
814,201
|
|
Property and equipment
|
|
|
4,859,676
|
|
Intangible - leases
|
|
|
1,033,412
|
|
Intangible - trade names
|
|
|
1,200,000
|
|
Intangible - customer list
|
|
|
50,000
|
|
Intangible - customer relationship
|
|
|
1,000,000
|
|
Goodwill
|
|
|
36,946,735
|
|
Notes payable
|
|
|
(542,074
|
)
|
Accounts payable
|
|
|
(5,165,612
|
)
|
Accrued expenses
|
|
|
(1,703,760
|
)
|
|
|
$
|
57,653,698
|
|
In connection with the purchase of Vintage
Stock, we incurred bank fees of $15,000, appraisal fees of $20,497, legal fees of $192,339 and consulting fees of $119,774 –
for a total of $347,610; all of which was recorded as general and administrative expense during the year ended September 30, 2017.
Goodwill of $36,946,735 is the excess of total consideration less identifiable assets at fair value less debt assumed at fair
value and is tax deductible. Goodwill is attributable to Vintage Stock’s management, assembled workforce, operating model,
the number of stores, locations and competitive presence in each of its respective markets.
The operating results of Vintage Stock
have been included in our consolidated financial statements beginning on November 3, 2016 and are reported in our Retail and Online
segment.
The estimated fair value of the customer
relationship intangible related to Vintage Stock was determined using the income approach, which discounts expected future cash
flows to present value. The Company estimated the fair value of this intangible asset using the residual method and a present value
discount rate of 17% or $1,000,000. Customer relationships relate to the Company’s ability to sell existing and future products.
The Company is amortizing the Customer relationships intangible asset on a straight-line basis over an estimated life of 5 years.
The estimated fair value of the trade names
intangible that Vintage Stock uses – “Vintage Stock”, “EntertainMart” and “Movie Trading Company”
was determined using a royalty income approach, which estimates an assumed royalty income stream and then discounts that expected
future revenue or cash flow stream to present value. The Company estimated the fair value of this intangible asset using the residual
method and a present value discount rate of 17% or $1,200,000. Trade names relate to the Company’s awareness by consumers
in the market place. The Company is amortizing the trade names intangible asset on a straight-line basis over an estimated life
of 7 years.
The estimated fair value of the customer
list intangible asset was determined using the cost approach, which estimates the cost to acquire each email address in the list.
The Company estimated the fair value of this intangible asset to be $0.19 per acquired email address, less a discount 40% attributable
to domain and trade names or a net cost per email address of $0.11 or approximately $50,000. The Company is amortizing the customer
list intangible asset on a straight-line basis over an estimated life of 3 years.
The unaudited pro forma information below
presents statement of income data for the years ended September 30, 2017 and 2016, as if the acquisition of Vintage Stock took
place on October 1, 2015.
|
|
|
Year Ended
September 30,
2017
|
|
|
Year Ended
September 30,
2016
|
|
Net revenue
|
|
$
|
76,133,061
|
|
|
$
|
65,493,122
|
|
Gross profit
|
|
|
43,735,263
|
|
|
|
37,482,534
|
|
Operating income
|
|
|
11,167,940
|
|
|
|
11,674,745
|
|
Net income
|
|
|
5,517,942
|
|
|
|
3,285,387
|
|
Earnings per basic common share
|
|
$
|
2.50
|
|
|
$
|
1.17
|
|
Note 6: Balance Sheet Detail Information
Balance Sheet information is as follows:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Trade receivables, current, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, current
|
|
$
|
11,383,576
|
|
|
$
|
8,419,626
|
|
Less: Reserve for doubtful accounts
|
|
|
(746,651
|
)
|
|
|
(816,862
|
)
|
|
|
$
|
10,636,925
|
|
|
$
|
7,602,764
|
|
Trade receivables, long term, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, long term
|
|
$
|
344,572
|
|
|
$
|
344,572
|
|
Less: Reserve for doubtful accounts
|
|
|
(344,572
|
)
|
|
|
(344,572
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total trade receivables, net:
|
|
|
|
|
|
|
|
|
Gross trade receivables
|
|
$
|
11,728,148
|
|
|
$
|
8,764,198
|
|
Less: Reserve for doubtful accounts
|
|
|
(1,091,223
|
)
|
|
|
(1,161,434
|
)
|
|
|
$
|
10,636,925
|
|
|
$
|
7,602,764
|
|
Components of reserve for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for dilution and fees on amounts due from billing aggregators
|
|
$
|
1,063,617
|
|
|
$
|
1,063,617
|
|
Reserve for customer refunds
|
|
|
1,042
|
|
|
|
1,230
|
|
Reserve for trade receivables
|
|
|
26,564
|
|
|
|
96,587
|
|
|
|
$
|
1,091,223
|
|
|
$
|
1,161,434
|
|
Inventory
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
7,709,969
|
|
|
$
|
6,664,286
|
|
Work in progress
|
|
|
987,689
|
|
|
|
773,238
|
|
Finished goods
|
|
|
3,922,362
|
|
|
|
4,721,371
|
|
Merchandise
|
|
|
23,230,350
|
|
|
|
–
|
|
|
|
|
35,850,370
|
|
|
|
12,158,895
|
|
Less: Inventory reserves
|
|
|
(1,348,569
|
)
|
|
|
(1,105,810
|
)
|
|
|
$
|
34,501,801
|
|
|
$
|
11,053,085
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Building and improvements
|
|
$
|
8,090,797
|
|
|
$
|
6,780,959
|
|
Transportation equipment
|
|
|
104,853
|
|
|
|
77,419
|
|
Machinery and equipment
|
|
|
17,402,064
|
|
|
|
10,211,565
|
|
Furnishings and fixtures
|
|
|
4,360,820
|
|
|
|
192,701
|
|
Office, computer equipment and other
|
|
|
224,822
|
|
|
|
216,793
|
|
|
|
|
30,183,356
|
|
|
|
17,479,437
|
|
Less: Accumulated depreciation
|
|
|
(7,365,496
|
)
|
|
|
(3,464,936
|
)
|
|
|
$
|
22,817,860
|
|
|
$
|
14,014,501
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Domain name and marketing related intangibles
|
|
$
|
18,957
|
|
|
$
|
18,957
|
|
Lease intangibles
|
|
|
1,033,412
|
|
|
|
–
|
|
Customer relationship intangibles
|
|
|
2,689,039
|
|
|
|
439,039
|
|
Purchased software
|
|
|
1,595,977
|
|
|
|
1,500,000
|
|
|
|
|
5,337,385
|
|
|
|
1,957,996
|
|
Less: Accumulated amortization
|
|
|
(1,132,071
|
)
|
|
|
(268,206
|
)
|
|
|
$
|
4,205,314
|
|
|
$
|
1,689,790
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and bonuses
|
|
$
|
2,602,695
|
|
|
$
|
922,299
|
|
Accrued software costs
|
|
|
–
|
|
|
|
584,500
|
|
Accrued fee due Kingston Diversified Holdings LLC
|
|
|
–
|
|
|
|
2,800,000
|
|
Accrued sales and property taxes
|
|
|
824,206
|
|
|
|
270,183
|
|
Deferred rent
|
|
|
502,617
|
|
|
|
4,092
|
|
Accrued gift card liability
|
|
|
1,479,622
|
|
|
|
–
|
|
Accrued interest payable
|
|
|
464,184
|
|
|
|
–
|
|
Accrued bank overdraft
|
|
|
1,367,539
|
|
|
|
–
|
|
Customer deposits
|
|
|
182,052
|
|
|
|
169,965
|
|
Accrued expenses - other
|
|
|
1,563,819
|
|
|
|
1,645,733
|
|
|
|
$
|
8,986,734
|
|
|
$
|
6,396,772
|
|
Note 7: Intangibles
The Company’s intangible assets
consist of customer relationship intangibles, trade names, licenses for the use of internet domain names, Universal Resource Locators,
or URL’s, software, and marketing and technology related intangibles. All such assets are capitalized at their original
cost and amortized over their estimated useful lives as follows: domain name and marketing – 3 to 20 years; software –
3 to 5 years, customer relationships – 7 to 15 years. When certain events or changes in operating conditions occur, an impairment
assessment is performed and lives of intangible assets with determined lives may be adjusted. Intangible amortization expense
is $863,864 and $266,179 for the years ended September 30, 2017 and 2016, respectively.
The following summarizes estimated future
amortization expense related to intangible assets that have net balances as of September 30, 2017:
2018
|
|
$
|
762,865
|
|
2019
|
|
|
762,866
|
|
2020
|
|
|
310,515
|
|
2021
|
|
|
240,554
|
|
2022
|
|
|
240,554
|
|
Thereafter
|
|
|
235,844
|
|
|
|
$
|
2,553,198
|
|
Note 8: Goodwill
Goodwill is not amortized, but is evaluated
for impairment on July 1 annually or when indicators of a potential impairment are present. The annual evaluation for impairment
of goodwill is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and
operating plans. We believe such assumptions are also comparable to those that would be used by other marketplace participants.
Note 9: Long-Term
Debt
Bank of America Revolver Loan
On July 6, 2015, Marquis entered into a
$15 million revolving credit agreement with Bank of America Corporation (“BofA Revolver”). The BofA Revolver is a five-year,
asset-based facility that is secured by substantially all of Marquis assets. Availability under the Bank of America Revolver is
subject to a monthly borrowing base calculation.
Payment obligations under the BofA Revolver
include monthly payments of interest and all outstanding principal and accrued interest thereon due in July 2020, which is when
the BofA Revolver loan agreement terminates. The BofA Revolver is recorded as a currently liability due to a lockbox requirement,
and a subjective acceleration clause as part of the agreement. The outstanding balance as of September 30, 2016, has been reclassified
as a currently liability.
Borrowing availability under the BofA Revolver
is limited to a borrowing base which allows Marquis to borrow up to 85% of eligible accounts receivable, plus the lesser of 1)
$7,500,000; 2) 65% of the value of eligible inventory; or 3) 85% of the appraisal value of the eligible inventory. For purposes
of clarity and definition of the advance rate for inventory – it shall be 55.3% for raw materials, 0% for work-in-process
and 70% for finished goods subject to eligibility, special reserves and advance limit. Letters of credit reduce the amount available
to borrow under the BofA Revolver by an amount equal to the face value of the letters of credit.
As of February 22, 2017, Marquis’s
ability to make prepayments against Marquis subordinated debt including the related party loan with Isaac Capital Group and pay
cash dividends is generally permitted if 1) excess availability under the BofA Revolver is more than $4 million, and has been for
each of the 90 days preceding the requested distribution and 2) excess availability under the BofA Revolver is more than $4 million,
and the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months is 2:1 or greater. Restrictions
apply to our ability to make additional prepayments against Marquis subordinated debt and pay cash dividends if the fixed charge
coverage ratio, as calculated on a pro-forma basis for the prior 12 months is less than 2:1 and excess availability under the BofA
Revolver is less than $4 million at the time of payment or distribution. There is no restriction on dividends that can be taken
by the Company so long as Marquis maintains $4 million of current availability at the time of the dividend or distribution. This
translates to having no restriction on Net Income so long as the Company retains sufficient assets to establish $4 million of current
availability and continues to meet the required fixed charge coverage ratio of 2:1 as stated above.
The BofA Revolver places certain restrictions
and covenants on Marquis, including a limitation on asset sales, additional liens, investment, loans, guarantees, acquisitions,
incurrence of additional indebtedness for Marquis to maintain a fixed charge coverage ratio of at least 1.05 to 1, tested as of
the last day of each month for the twelve consecutive months ending on such day.
The Bank of America Revolver Loan bears
interest at a variable rate based on a base rate plus a margin. The current base rate is the greater of (a) Bank of America prime
rate, (b) the current federal funds rate plus 0.50%, or (c) 30-day LIBOR plus 1.00% plus the margin, which varies, depending on
the fixed coverage ratio table below. Levels I – IV determine the interest rate to be charged Marquis which is based on
the fixed charge coverage ratio achieved.
Level
|
Fixed
Charge Coverage Ratio
|
Base Rate
Revolver
|
LIBOR
Revolver
|
Base Rate
Term
|
LIBOR Term
Loans
|
I
|
>2.00 to 1.00
|
0.50%
|
1.50%
|
0.75%
|
1.75%
|
II
|
<2.00 to 1.00 but
>1.50 to 1.00
|
0.75%
|
1.75%
|
1.00%
|
2.00%
|
III
|
<1.50 to 1.00 but
>1.20 to 1.00
|
1.00%
|
2.00%
|
1.25%
|
2.25%
|
IV
|
<1.2 to 1.00
|
1.25%
|
2.25%
|
1.50%
|
2.50%
|
On October 20, 2016, it was agreed that
Level IV interest rates would be applicable until October 20, 2017, and then the Level would be adjusted up or down on a quarterly
basis going forward based upon the above fixed coverage ratio achieved by Marquis.
The BofA Revolver provides for customary
events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply
with covenants, change in control of Marquis, a material representation or warranty made by us or the borrowers proving to be false
in any material respect, certain bankruptcy, insolvency or receivership events affecting Marquis or its subsidiaries, defaults
relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of Marquis or certain of
its subsidiaries. During the period of October 1, 2016 through September 30, 2017, Marquis cumulatively borrowed $89,923,216 and
repaid $85,294,991 under the BofA Revolver. Our maximum borrowings outstanding during the same period were $7,770,651. Our weighted
average interest rate on those outstanding borrowings for the period of October 1, 2016 through September 30, 2017 was 3.5667%.
As of September 30, 2017, total additional availability under the BofA Revolver was $9,691,672; with $4,850,815 outstanding, and
outstanding standby letters of credit of $72,715.
Real Estate Transaction
On June 14, 2016, Marquis entered into
a transaction with Store Capital Acquisitions, LLC. The transaction included a sale-leaseback of land owned by Marquis and a loan
secured by the improvements on such land. The total aggregate proceeds received from the sale of the land and the loan was $10,000,000,
which consisted of $644,479 from the sale of the land and a note payable of $9,355,521. In connection with the transaction, Marquis
entered into a lease with a 15-year term commencing on the closing of the transaction, which provides Marquis an option to extend
the lease upon the expiration of its term. The initial annual lease rate is $59,614. The proceeds from this transaction were used
to pay down the Bank of America Revolver and Term loans, and related party loan, as well as purchasing a building from the previous
owners of Marquis that was not purchased in the July 2015 transaction. The note payable bears interest at 9.25% per annum, with
principal and interest due monthly. The note payable matures June 13, 2056. For the first five years of the note payable, there
is a pre-payment penalty of 5%, which declines by 1% for each year the loan remains un-paid. At the end of 5 years, there is no
pre-payment penalty. In connection with the note payable, Marquis incurred $457,757 in transaction costs that are being recognized
as a debt issuance cost that is being amortized and recorded as interest expense over the term of the note payable.
Kingston Diversified Holdings LLC Agreement
($2 Million Line of Credit)
On December 21, 2016, the Company and Kingston
Diversified Holdings LLC (“Kingston”) entered into an agreement modifying its agreement between the parties. This agreement,
effective September 15, 2016, memorializes an October 2015 interim agreement to extend the maturity date by twelve months for 55,888
shares of to be issued and certificated Series B Convertible Preferred shares with a value on September 15, 2016 of $2,800,000
as a compromise between the parties in respect of certain of their respective rights and duties under the agreement. The agreement
also decreases the maximum principal amount of the Notes from $10,000,000 in principal amount to $2,000,000 in principal amount,
and eliminates any and all actual, contingent, or other obligations of the Company to issue to the Purchaser any shares of the
Company’s common stock, or to grant any rights, warrants, options, or other derivatives that are exercisable or convertible
into shares of the Company’s common stock.
Kingston acknowledges that from the effective
date through and including December 31, 2021, it shall not sell, transfer, assign, hypothecate, pledge, margin, hedge, trade, or
otherwise obtain or attempt to obtain any economic value from any of the shares or any shares into which they may be converted
or from which they may be exchanged. As a result of this agreement, the Company recorded $2,800,000 as an outstanding accrued liability
as of September 30, 2016. On December 29, 2016 the Company issued 55,888 shares of Series B Convertible Preferred shares in settlement
of the outstanding accrued liability due Kingston of $2,800,000. As of September 30, 2017, and September 30, 2016, the Company
had no borrowings on the Kingston line of credit.
Equipment Loans
On June 20, 2016 and August 5, 2016, Marquis
entered into a transaction which provided for a master agreement and separate loan schedules (“the Equipment Loans”)
with Banc of America Leasing & Capital, LLC which provided: Note #1 is $5 million, secured by equipment. The Equipment Loan
#1 is due September 23, 2021, payable in 59 monthly payments of $84,273 beginning September 23, 2016, with a final payment in the
sum of $584,273, interest at 3.8905% per annum. Note #2 is $2,209,807, secured by equipment. The Equipment Loan #2 is due January
30, 2022, payable in 59 monthly payments of $34,768 beginning January 30, 2017, with a final payment in the sum of $476,729, interest
at 4.63% per annum. Note #3 is $3,679,514, secured by equipment. The Equipment Loan #3 is due December 30, 2023, payable in 84
monthly payments of $51,658 beginning January 30, 2017, with a final payment due December 30, 2023, interest rate at 4.7985% per
annum. Note #4 is $1,095,113, secured by equipment. The Equipment Loan#4 is due December 30, 2023, payable in 81 monthly payments
of $15,901 beginning April 30, 2017, with final payment due December 30, 2023, interest at 4.8907% per annum.
Texas Capital Bank Revolver Loan
On November 3, 2016, Vintage Stock entered
into a $20 million credit agreement with Texas Capital Bank (“TCB Revolver”). The TCB Revolver is a five-year, asset-based
facility that is secured by substantially all of Vintage Stock’s assets. Availability under the TCB Revolver is subject to
a monthly borrowing base calculation.
Payment obligations under the TCB Revolver
include monthly payments of interest and all outstanding principal and accrued interest thereon due in November 2020, which is
when the TCB Revolver loan agreement terminates. The TCB Revolver has been classified as a currently liability due to a lockbox
requirement and a subjective acceleration clause as part of the agreement.
Borrowing availability under the TCB Revolver
is limited to a borrowing base which allows Vintage Stock to borrow up to 95% of the appraisal value of the inventory, plus 85%
of eligible receivables, net of certain reserves. The borrowing base provides for borrowing up to 95% of the appraisal value for
the period of November 4, 2016 through December 31, 2016, then 90% of the appraisal value during the fiscal months of January through
September and 92.5% of the appraisal value during the fiscal months of October through December. Letters of credit reduce the amount
available to borrow under the TCB Revolver by an amount equal to the face value of the letters of credit.
Vintage Stock’s ability to make prepayments
against Vintage Stock subordinated debt including the Capitala Term Loan and pay cash dividends is generally permitted if 1) excess
availability under the TCB Revolver is more than $2 million, and is projected to be within 12 months after such payment and 2)
excess availability under the TCB Revolver is more than $2 million, and the fixed charge coverage ratio, as calculated on a pro-forma
basis for the prior 12 months is 1.2:1.0 or greater. Restrictions apply to our ability to make additional prepayments against Vintage
Stock subordinated debt including the Capitala Term Loan and pay cash dividends if the fixed charge coverage ratio, as calculated
on a pro-forma basis for the prior 12 months is less than 1.2:1.0 and excess availability under the TCB Revolver is less than $2
million at the time of payment or distribution. There is no restriction on dividends that can be taken by the Company so long as
Vintage Stock maintains $2 million of current availability at the time of the dividend or distribution. This translates to having
no restriction on Net Income so long as the Company retains sufficient assets to establish $2 million of current availability and
continues to meet the required fixed charge coverage ratio of 1.2:1 as stated above.
The TCB Revolver places certain restrictions
on Vintage Stock, including a limitation on asset sales, a limitation of 25 new leases in any fiscal year, additional liens, investment,
loans, guarantees, acquisitions and incurrence of additional indebtedness.
The per annum interest rate under the TCB
Revolver is variable and is equal to the one-month LIBOR rate for deposits in United States Dollars that appears on Thomson Reuters
British Bankers Association LIBOR Rates Page (or the successor thereto) as of 11:00 a.m., London, England time, on the applicable
determination date plus a margin of 2.75%.
The TCB Revolver provides for customary
events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply
with covenants, change in control of Vintage Stock, a material representation or warranty made by us or the borrowers proving to
be false in any material respect, certain bankruptcy, insolvency or receivership events affecting Vintage Stock, defaults relating
to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of Vintage Stock. During the period
of November 3, 2016 through September 30, 2017, Vintage Stock cumulatively borrowed $77,385,123 and repaid $64,864,686 under the
TCB Revolver. Our maximum borrowings outstanding during the period of November 3, 2016 through September 30, 2017 were $14,460,716.
Our weighted average interest rate on those outstanding borrowings for the period of November 3, 2016 through September 30, 2017
was 3.60264%. As of September 30, 2017, total additional availability under the TCB Revolver was $3,250,393, with $12,520,437 outstanding;
and outstanding standby letters of credit of $0. In connection with the TCB Revolver, Vintage Stock incurred $25,000 in transaction
cost that is being recognized as debt issuance cost that is being amortized and recorded as interest expense over the term of the
TCB Revolver.
Capitala Term Loan
On November 3, 2016, the Company, through
VSAH, entered into a series of agreements in connection with its purchase of Vintage Stock. As a part of those agreements, VSAH
and Vintage Stock (the “Term Loan Borrowers”) obtained $29,871,650 of mezzanine financing from the Lenders as defined
in the term loan agreement (the “Term Loan Lenders”), and Capitala Private Credit Fund V, L.P., in its capacity as
lead arranger. Wilmington Trust, National Association, acts as administrative and collateral agent on behalf of the Term Loan Lenders
(the “Term Loan Administrative Agent”).
The Term loans under the term loan agreement
(collectively the “Capitala Term Loan”) bear interest at the LIBO rate (as described below) or base rate, plus an applicable
margin in each case. In their loan notice to the Term Loan Administrative Agent, the Term Loan Borrowers selected the LIBO rate
for the initial term loans made under the term loan agreement on the Closing Date.
The interest rate for LIBO rate loans under
the term loan agreement is equal to the sum of (a) the greater of (i) a rate per annum equal to (A) the offered rate for deposits
in United States Dollars for the applicable interest period and for the amount of the applicable loan that is a LIBOR loan that
appears on Bloomberg ICE LIBOR Screen (or any successor thereto) that displays an average ICE Benchmark Administration Limited
Interest Settlement Rate for deposits in United States Dollars (for delivery on the first day of such interest period) with a term
equivalent to such interest period, determined as of approximately 11:00 a.m. (London time) two business days prior to the
first day of such interest period, divided by (B) the sum of one minus the daily average during such interest period of the aggregate
maximum reserve requirement (expressed as a decimal) then imposed under Regulation D of the Federal Reserve Board for “Eurocurrency
Liabilities” (as defined therein), and (ii) 0.50% per annum,
plus
(b) the sum of (i) 12.50% per annum
in cash pay
plus
(ii) 3.00% per annum payable in kind by compounding such interest to the principal amount of
the obligations under the Term Loan Agreement on each interest payment date.
The interest rate for base rate loans under
the term loan agreement is equal to the sum of (a) the highest of (with a minimum of 1.50%) (i) the federal funds rate plus 0.50%,
(ii) the prime rate, and (iii) the LIBO rate plus 1.00%,
plus
(b) the sum of (i) 11.50% per annum payable in cash
plus
(ii)
3.00% per annum payable in kind by compounding such interest to the principal amount of the obligations under the Term Loan Agreement
on each interest payment date.
The Term Loans place certain restrictions
and covenants on Vintage Stock, including a limitation on asset sales, additional liens, investment, loans, guarantees, acquisitions
and incurrence of additional indebtedness for Vintage Stock. Vintage Stock is required to maintain a fixed charge coverage ratio
of 1.3 for year ended September 30, 2017, 1.4 for year ended September 30, 2018 and 1.5 for all years thereafter. For years ended
September 30, 2017 and thereafter, Vintage Stock is required to incur no more than $1.2 million in annual capital expenditures
subject to certain cumulative quarter and year to date covenants. Vintage Stock is required to maintain a total leverage ratio
of 3.25 for year ended September 30, 2017, 2.5 for year ended September 30, 2018 and 2.0 for all years thereafter. In addition,
for quarter ended December 31, 2017, the total leverage ratio cannot exceed 3.0 and for quarters ended March 31, 2018 and June
30, 2018, the total leverage ratio cannot exceed 2.75.
The Term Loans provide for customary events
of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with
covenants, change in control of Vintage Stock, a material representation or warranty made by us or the borrowers proving to be
false in any material respect, certain bankruptcy, insolvency or receivership events affecting Marquis or its subsidiaries, defaults
relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of Vintage Stock or certain
of its subsidiaries.
The payment obligations under the term
loan agreement include (i) monthly payments of interest and (ii) principal installment payments in an amount equal to $725,000
due on March 31, June 30, September 30, and December 31 of each year, with the first such payment due on December 31, 2016. The
outstanding principal amounts of the term loans and all accrued interest thereon under the Term Loan Agreement are due and payable
in November 2021.
The Term Loan Borrowers may prepay the
term loans under the term loan agreement from time to time, subject to the payment (with certain exceptions described below) of
a prepayment premium of: (i) an amount equal to 2.0% of the principal amount of the term loan prepaid if prepaid during the period
of time from and after the Closing Date up to the first anniversary of the Closing Date; (ii) 1.0% of the principal amount of the
term loan prepaid if prepaid during the period of time from and after the first anniversary of the Closing Date up to the second
anniversary of the Closing Date; and (iii) zero if prepaid from and after the second anniversary of the Closing Date.
The Term Loan Borrowers may make the following
prepayments of the term loans under term loan agreement without being required to pay any prepayment premium:
|
(i)
|
an amount not to exceed $3 million of the term loans;
|
|
(ii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed $1.45
million, but only if that additional amount is paid prior to the first anniversary of the Closing Date; and
|
|
(iii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed the
difference between $2.9 million and any amount prepaid in respect of item (ii), but only if that additional amount is paid from
and after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date.
|
There are also various mandatory prepayment
triggers under the term loan agreement, including in respect of excess cash flow, dispositions, equity and debt issuances, extraordinary
receipts, equity contributions, change in control, and failure to obtain required landlord consents. Our weighted average interest
rate on our Capitala Term Loan outstanding borrowings for the period of November 3, 2016 through September 30, 2017 was 16.43056%.
In connection with the Capitala Term Loan, Vintage Stock incurred $1,088,000 in transaction cost was being recognized as debt
issuance cost and is being amortized as interest expense over the term of the Capitala Term Loan.
Sellers Subordinated Acquisition Note
In connection with the purchase of Vintage
Stock, on November 3, 2016, VSAH and Vintage Stock entered into a seller financed mezzanine loan in the amount of $10 million with
the previous owners of Vintage Stock. The Sellers Subordinated Acquisition Note bears interest at 8% per annum, with interest payable
monthly in arrears. The Sellers Subordinated Acquisition Note matures five years and six months from November 3, 2016.
Loan Covenant Compliance
We were in compliance with all covenants
under our existing revolving and other loan agreements as of September 30, 2017, due to waivers granted by both Texas Capital
Bank for the TCB Revolver and Capitala for the Capitala Term Loan. We are not in compliance as of December 31, 2017, with the
Capitala Term Loan total leverage ratio and do not anticipate that we will regain compliance with this covenant until sometime
in fiscal year ended September 30, 2019, based upon our current operating forecast. We are seeking alternatives to resolve the
out-of-compliance condition, including negotiating with Capitala and seeking alternative credit sources. The resolution of the
out-of-compliance condition has not occurred as of the date of issuance of these financial statements. The Capitala Term Loan
has been classified as a short-term obligation at September 30, 2017, as a result of this default.
Notes Payable as of September 30, 2017
and 2016 consisted of the following:
|
|
|
|
|
AS RESTATED
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Bank of America Revolver Loan - variable interest rate based upon a base rate plus a margin, interest payable monthly, maturity date July 2020, secured by substantially all Marquis assets
|
|
$
|
4,850,815
|
|
|
$
|
222,590
|
|
Texas Capital Bank Revolver Loan - variable interest rate based upon the one-month LIBOR ate plus a margin, interest payable monthly, maturity date November 2020, secured by substantially all Vintage Stock assets
|
|
|
12,520,437
|
|
|
|
–
|
|
Note Payable Capitala Term Loan - variable interest rate based upon a base rate plus a margin, 3% per annum interest payable in kind, with the balance of interest payable monthly in cash, principal due quarterly in the amount of $725,000, maturity date November 2021, note subordinate to Texas Capital Bank Revolver Loan, secured by Vintage Stock Assets
|
|
|
28,310,505
|
|
|
|
–
|
|
Note Payable to the Sellers of Vintage Stock, interest at 8% per annum, with interest payable monthly, maturity date May 2022, note subordinate to both Texas Capital Bank Revolver and Capitala Term Loan, secured by Vintage Stock Assets
|
|
|
10,000,000
|
|
|
|
–
|
|
Note #1 Payable to Banc of America Leasing & Capital
LLC - interest at 3.8905% per annum,with interest and principal payable monthly in the amount of $84,273 for 59 months,
beginning September 23, 2016, with a final payment due in the amount of $584,273, maturity date September
2021, secured by equipment
|
|
|
4,097,764
|
|
|
|
4,931,937
|
|
Note #2 Payable to Banc of America Leasing & Capital
LLC - interest at 4.63% per annum, with interest and principal payable monthly in the amount of $34,768 for 59
months, beginning January 30, 2017, with a final payment due in the amount of
$476,729, maturity date January 2022, secured by equipment
|
|
|
1,969,954
|
|
|
|
–
|
|
Note #3 Payable to Banc of America Leasing & Capital
LLC - interest at 4.7985% per annum with interest and principal payable monthly in the amount of $51,658 for 84 months,
beginning January 30, 2017, secured by equipment.
|
|
|
3,341,642
|
|
|
|
–
|
|
Note #4 Payable to Banc of America Leasing & Capital
LLC - interest at 4.8907% per annum, with interest and principal payable monthly in the amount of $15,901 for 81 months,
beginning April 30, 2017, secured by equipment.
|
|
|
1,025,782
|
|
|
|
–
|
|
Note Payable to Store Capital Acquisitions, LLC, - interest at 9.25% per annum, with interest and principal payable monthly in the amount of $73,970 for 480 months, beginning July 1, 2016, maturity date of June 2056, secured by Marquis land and buildings
|
|
|
9,328,208
|
|
|
|
9,351,796
|
|
Note Payable to Cathay Bank, variable interest rate, Prime Rate plus 2.50%, with interest payable monthly, maturity date December 2017, secured by substantially all Modern Everyday assets
|
|
|
174,757
|
|
|
|
198,569
|
|
Note Payable to Cathay Bank, variable interest rate, Prime Rate plus 1.50%, with interest payable monthly, maturity date December 2017, secured by substantially all Modern Everyday assets
|
|
|
249,766
|
|
|
|
249,766
|
|
Note payable to individual, interest at 11% per annum,payable on a 90 day written notice, unsecured
|
|
|
206,529
|
|
|
|
206,529
|
|
Note payable to individual, interest at 10% per annum, payable on a 90 day written notice, unsecured
|
|
|
500,000
|
|
|
|
500,000
|
|
Note payable to individual, interest at 8.25% per annum, payable on a 120 day written demand notice, unsecured
|
|
|
225,000
|
|
|
|
225,000
|
|
Total notes payable
|
|
|
76,801,159
|
|
|
|
15,886,187
|
|
Less unamortized debt issuance costs
|
|
|
(1,353,352
|
)
|
|
|
(414,025
|
)
|
Net amount
|
|
|
75,447,807
|
|
|
|
15,472,162
|
|
Less current portion
|
|
|
(48,877,536
|
)
|
|
|
(2,011,880
|
)
|
Long-term portion
|
|
$
|
26,570,271
|
|
|
$
|
13,460,282
|
|
Future maturities of debt at September
30, 2017 are as follows excluding note payable, related party:
Years ending September 30,
|
|
|
|
2018
|
|
$
|
48,877,536
|
|
2019
|
|
|
1,922,560
|
|
2020
|
|
|
2,009,230
|
|
2021
|
|
|
2,093,635
|
|
2022
|
|
|
1,745,247
|
|
Thereafter
|
|
|
20,152,951
|
|
Total
|
|
$
|
76,801,159
|
|
Note 10: Note Payable,
Related Party
In connection with the purchase of Marquis
Industries, Inc., the Company entered into a mezzanine loan in the amount of up to $7,000,000 with Isaac Capital Fund, a private
lender whose managing member is Jon Isaac, the Chief Executive Officer of the Company.
The Isaac Capital Fund mezzanine loan bears
interest at a rate of 12.5% per annum with payment obligations of interest each month and all principal due in January 2021. As
of September 30, 2017, and 2016, there was $2,000,000 outstanding on this mezzanine loan.
Note 11: Stockholders’
Equity
Convertible Series B Preferred Shares
On December 27, 2016 the Company established
a new series of preferred stock, Series B Convertible Preferred Stock. The shares, as a series, have waived their participation
rights with respect to dividends paid to the holders of our common stock, if any. These shares, as a series, are entitled to dividends
in an amount equal to $1.00 (in the aggregate for all then-issued and outstanding shares of Series B Convertible Preferred Stock).
The series does not have any redemption rights. The series does not provide for any specific allocation of seats on the Board of
Directors. At any time and from time to time, the shares of Series B Convertible Preferred Stock are convertible into shares of
Common Stock at a ratio of one series B preferred share into five shares of common stock, subject to equitable adjustment in the
event of forward stock splits and reverse stock splits.
The holders of shares of the Series B Convertible
Stock have agreed not to sell transfer, assign, hypothecate, pledge, margin, hedge, trade, or otherwise obtain or attempt to obtain
any economic value from any of such shares or any shares into which they may be converted (e.g., common stock) or for which they
may be exchanged. This “lockup” agreement expires on December 31, 2021. Our Warrant Agreements with ICG have been amended
to provide that the shares underlying those warrants are exercisable into shares of Series B Convertible Preferred Stock, which
warrant shares are also subject to the same “lockup” agreement as the currently outstanding shares of Series B Convertible
Preferred Stock.
During the year ended September 30, 2017,
the Company issued:
55,888 shares of Series B Convertible Preferred
Stock were issued to Kingston Diversified Holdings LLC on December 29, 2016 to settle and pay for an outstanding accrued liability
in the amount of $2,800,000. The 55,888 shares of Series B Convertible Preferred Stock issued is convertible at an exchange ratio
of (five) shares of common stock for each share of Series B Convertible Preferred Stock, or 279,440 shares of common stock.
158,356 shares of Series B Convertible
Preferred Stock were issued to Isaac Capital Group (“ICG”) on December 27, 2016 in exchange for 791,758 shares of our
common stock at an exchange ratio of (five) shares of common stock for each share of Series B Convertible Preferred Stock.
Series E Convertible Preferred Stock
As of September 30, 2017, there were 127,840
shares of series E convertible preferred stock issued and outstanding. The shares accrue dividends at the rate of 5% per annum
on the liquidation preference per share, payable quarterly from legally available funds. The shares carry a cash liquidation preference
of $0.30 per share, plus any accrued but unpaid dividends. If such funds are not available, dividends shall continue to accumulate
until they can be paid from legally available funds. Holders of the preferred shares are entitled, after two years from issuance,
to convert them into shares of our common stock on a one-to-one basis together with payment of $85.50 per converted share. On November
18, 2017, the Company repurchased 50,000 shares of series E convertible preferred stock for an aggregate purchase price of $4,000.
During the years ended September 30, 2017
and 2016, the Company accrued dividends of $1,917 and $1,917, respectively, payable to holders of Series E preferred stock. At
year end September 30, 2017, and 2016, respectively, unpaid dividends were $959 and $959.
Common Stock
On November 22, 2016, the Company’s
board of directors authorized a one-for-six reverse stock split and a contemporaneous one-for-six (1:6) reduction in the number
of authorized shares of common stock, par value $0.001 per share from 60,000,000 to 10,000,000 shares, to take effect for stockholders
of record as of December 5, 2016. No fractional shares will be issued.
All share, option and warrant related information
presented in these financial statements and accompanying footnotes have been retroactively adjusted to reflect the decreased number
of shares resulting in this action.
During the year ended September 30, 2017,
the Company issued:
58,333 of common stock were issued to Novalk
Apps S.A.S. on December 28, 2016 to settle and pay for an outstanding accrued liability in the amount of $584,500. The value was
based on the market value of the Company’s common stock on the date of issuance.
2,284 of common stock were issued to various
holders of fractional shares of the Company’s common stock pursuant to the 1:6 stock split effective for stockholders of
record on December 5, 2016. All fractional shares of the Company’s common stock were eliminated.
During the year ended September 30, 2016,
the Company issued:
2,158 shares of common stock for services
rendered valued at $20,000. The value was based on the market value of the Company’s common stock on the date of issuance.
Treasury Stock
For year ended September 30, 2017, the
Company purchased 66,185 shares of its common stock on the open market (treasury shares) for $699,557. For year ended September
30, 2016, the Company purchased 30,122 shares of its common stock on the open market (treasury shares) for $300,027. The Company
accounted for the purchase of these treasury shares using the cost method. At September 30, 2017, and 2016, the Company held 96,307
and 30,122 shares of its common stock as treasury shares at a cost of $999,584 and $300,027, respectively.
2014 Omnibus Equity Incentive Plan
On January 7, 2014, our Board of Directors
adopted the 2014 Omnibus Equity Incentive Plan (the “2014 Plan”), which authorizes issuance of distribution equivalent
rights, incentive stock options, non-qualified stock options, performance stock, performance units, restricted ordinary shares,
restricted stock units, stock appreciation rights, tandem stock appreciation rights and unrestricted ordinary shares to our directors,
officer, employees, consultants and advisors. The Company has reserved up to 300,000 shares of common stock for issuance under
the 2014 Plan. The Company’s stockholders approved the 2014 Plan on July 11, 2014.
Note 12: Warrants
The Company issued several notes in prior
periods and converted them resulting in the issuance of warrants. The following table summarizes information about the Company’s
warrants at September 30, 2017:
|
|
Number of
units - Series B
Convertible
preferred
warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
0.91
|
|
|
$
|
4,862,230
|
|
Exercisable at September 30, 2017
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
0.91
|
|
|
$
|
4,862,230
|
|
As of September 30, 2016, the Company had
590,146 common stock warrants outstanding with weighted average exercise price, weighted average remaining contractual term and
intrinsic value of $4.14, 1.73 years and $4,307,493, respectively. On December 27, 2016, ICG and the Company agreed to amend and
exchange the common stock warrants for warrants to purchase shares of Series B Convertible Preferred Stock, and the number of warrants
held adjusted by an exchange ratio of 5:1 shares of common stock for shares of Series B Convertible Preferred Stock. ICG, the holder
of the warrants outstanding, is not permitted to sell, transfer, assign, hypothecate, pledge, margin, hedge, trade or otherwise
obtain or attempt to obtain any economic value from the shares of Series B Convertible Preferred Stock should the warrants be exercised
prior to December 31, 2021.
Warrants for 10,914 series B convertible
preferred shares expired on September 10, 2017. On January 16, 2018, the Company agreed to extend the expiration date on all warrants
outstanding if not exercised prior to expiration date by an additional 2 years, including the September 10, 2017 expired warrants.
See note 19 of these consolidated financial statements.
The exercise price for the series B convertible preferred stock
warrants outstanding and exercisable at September 30, 2017 is as follows:
Series B Convertible Preferred
|
|
Outstanding
|
|
|
Exercisable
|
|
Number of Warrants
|
|
|
Exercise
Price
|
|
|
Number of Warrants
|
|
|
Exercise
Price
|
|
|
54,396
|
|
|
$
|
16.60
|
|
|
|
54,396
|
|
|
$
|
16.60
|
|
|
17,857
|
|
|
|
16.80
|
|
|
|
17,857
|
|
|
|
16.80
|
|
|
12,383
|
|
|
|
24.30
|
|
|
|
12,383
|
|
|
|
24.30
|
|
|
33,393
|
|
|
|
28.50
|
|
|
|
33,393
|
|
|
|
28.50
|
|
|
118,029
|
|
|
|
|
|
|
|
118,029
|
|
|
|
|
|
Note 13: Stock-Based
Compensation
From time to time, the Company grants stock
options and restricted stock awards to directors, officers and employees. These awards are valued at the grant date by determining
the fair value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line basis
over the requisite service period.
Stock Options
The following table summarizes stock option activity for the
years ended September 30, 2017 and 2016:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
Outstanding at September 30, 2016
|
|
|
175,000
|
|
|
$
|
11.22
|
|
|
|
3.75
|
|
|
$
|
346,500
|
|
Granted
|
|
|
36,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
211,668
|
|
|
$
|
13.19
|
|
|
|
3.47
|
|
|
$
|
454,417
|
|
Exercisable at September 30, 2017
|
|
|
175,000
|
|
|
$
|
11.22
|
|
|
|
2.75
|
|
|
$
|
428,750
|
|
The Company recognized compensation expense
of $203,690 and $256,145 during the years ended September 30, 2017 and 2016, respectively, related to stock option awards granted
to certain employees and officers based on the grant date fair value of the awards, net of estimated forfeitures.
At September 30, 2017 the Company had $361,627
of unrecognized compensation expense (net of estimated forfeitures) associated with stock option awards which the Company expects
will be recognized through December of 2021.
The exercise price for stock options outstanding
and exercisable at September 30, 2017 is as follows:
Outstanding
|
|
|
Exercisable
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
31,250
|
|
|
$
|
5.00
|
|
|
|
31,250
|
|
|
$
|
5.00
|
|
|
25,000
|
|
|
|
7.50
|
|
|
|
25,000
|
|
|
|
7.50
|
|
|
31,250
|
|
|
|
10.00
|
|
|
|
31,250
|
|
|
|
10.00
|
|
|
4,167
|
|
|
|
10.86
|
|
|
|
|
|
|
|
|
|
|
4,167
|
|
|
|
10.86
|
|
|
|
|
|
|
|
|
|
|
4,167
|
|
|
|
10.86
|
|
|
|
|
|
|
|
|
|
|
4,167
|
|
|
|
10.86
|
|
|
|
|
|
|
|
|
|
|
6,250
|
|
|
|
12.50
|
|
|
|
6,250
|
|
|
|
12.50
|
|
|
6,250
|
|
|
|
15.00
|
|
|
|
6,250
|
|
|
|
15.00
|
|
|
75,000
|
|
|
|
15.18
|
|
|
|
75,000
|
|
|
|
15.18
|
|
|
4,000
|
|
|
|
23.41
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
27.60
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
31.74
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
36.50
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
41.98
|
|
|
|
|
|
|
|
|
|
|
211,668
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
The following table summarizes information
about the Company’s non-vested shares as of September 30, 2017:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
Non-vested Shares
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at September 30, 2016
|
|
|
6,250
|
|
|
$
|
14.22
|
|
Granted
|
|
|
36,668
|
|
|
$
|
17.70
|
|
Vested
|
|
|
(6,250
|
)
|
|
$
|
14.22
|
|
Non-vested at September 30, 2017
|
|
|
36,668
|
|
|
$
|
17.70
|
|
For stock options granted during 2017 where
the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $8.41,
and the weighted-average exercise price of such options was $10.86. For stock options granted during 2017 where the exercise price
was above the stock price at the date of the grant, the weighted-average fair value of such options was $21.07, and the weighted-average
exercise price for such options was $23.41. No options were granted during 2016, where the exercise price was less than the common
stock price at the date of grant or where the exercise price was greater than the common stock price at the date of grant.
The assumptions used in calculating the
fair value of stock options granted use the Black-Scholes option pricing model for options granted in 2017 are as follows:
Risk-free interest rate
|
|
1.25%
|
Expected life of the options
|
|
5.0 to 10 years
|
Expected volatility
|
|
107%
|
Expected dividend yield
|
|
0%
|
Note 14: Earnings
Per Share
Net earnings per share is calculated using
the weighted average number of shares of common stock outstanding during the applicable period. Basic weighted average common shares
outstanding do not include shares of restricted stock that have not yet vested, although such shares are included as outstanding
shares in the Company’s Consolidated Balance Sheet. Diluted net earnings per share is computed using the weighted average
number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential common shares
consist of the additional common shares issuable in respect of restricted share awards, stock options and convertible preferred
stock. Preferred stock dividends are subtracted from net earnings to determine the amount available to common stockholders.
The following table presents the computation
of basic and diluted net earnings per share:
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed to Live Ventures Incorporated
|
|
$
|
6,501,780
|
|
|
$
|
17,829,857
|
|
Less: preferred stock dividends
|
|
|
(1,917
|
)
|
|
|
(1,917
|
)
|
Net income applicable to common stock
|
|
$
|
6,499,863
|
|
|
$
|
17,827,940
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
2,210,104
|
|
|
|
2,815,072
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.94
|
|
|
$
|
6.33
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
6,499,863
|
|
|
$
|
17,827,940
|
|
Add: preferred stock dividends
|
|
|
1,917
|
|
|
|
1,917
|
|
Net income applicable for diluted earnings per share
|
|
$
|
6,501,780
|
|
|
$
|
17,829,857
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
2,210,104
|
|
|
|
2,815,072
|
|
Add: Options
|
|
|
48,407
|
|
|
|
21,166
|
|
Add: Common Stock Warrants
|
|
|
–
|
|
|
|
339,620
|
|
Add: Series B Preferred Stock
|
|
|
1,071,200
|
|
|
|
–
|
|
Add: Series B Preferred Stock Warrants
|
|
|
590,145
|
|
|
|
–
|
|
Add: Series E Preferred Stock
|
|
|
127,840
|
|
|
|
127,840
|
|
Assumed weighted average common shares outstanding
|
|
|
4,047,696
|
|
|
|
3,303,698
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.61
|
|
|
$
|
5.40
|
|
Potentially dilutive securities were excluded
from the calculation of diluted net income per share for years ended September 30, 2017 and September 30, 2016. The weighted average
number of dilutive securities excluded were 80,105 and 87,500, respectively for each fiscal year, because the effects were anti-dilutive
based on the application of the treasury stock method.
Note 15: Related
Party Transactions
From fiscal year 2012 to 2014, the Company
issued a note to Isaac Capital Group ("ICG"), a related party, in the principal amount of $2,000,000. As of September
30, 2015, the note has been converted to common stock and 590,146 common stock warrants. On December 27, 2016, ICG and the Company
agreed to amend and exchange the common stock warrants for 118,029 series B preferred stock warrants. Warrants for 10,914 series
B convertible preferred shares expired on September 10, 2017. On January 16, 2017, the Company agreed to extend the expiration
date on all ICG warrants outstanding if not exercised prior to expiration date by an additional 2 years, including the September
10, 2017 expired warrants.
In connection with the purchase of Marquis
Industries, Inc., the Company entered into a mezzanine loan in the amount of up to $7,000,000 with Isaac Capital Fund, a private
lender whose managing member is Jon Isaac, the Chief Executive Officer of the Company.
The Isaac Capital Fund mezzanine loan bears
interest at a rate of 12.5% per annum with payment obligations of interest each month and all principal due in January 2021. As
of September 30, 2017, and 2016, respectively, there was $2,000,000 outstanding on this mezzanine loan. During the years ended
September 30, 2017 and 2016, the Company recognized total interest expense of $253,472 and $583,233, respectively, associated with
the Isaac Capital Fund notes.
Customer Connexx LLC, a wholly-owned subsidiary
of Appliance Recycling Centers of America, Inc. (“ARCA”), rents approximately 9,879 square feet of office space from
the Company at its Las Vegas office which totals 11,100 square feet. ARCA paid the Company $164,516 in rent and other common area
reimbursed expenses for year ended September 30, 2017. Tony Isaac, a member of the Board of Directors of the Company and Virland
Johnson, Chief Financial Officer of the Company are Chief Executive Officer and Board of Directors member and Chief Financial Officer
of ARCA, respectively.
On December 30, 2017, ApplianceSmart Holdings
LLC (the “Purchaser”), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Agreement”)
with ARCA and ApplianceSmart, Inc. (“ApplianceSmart”), a subsidiary of ARCA. ApplianceSmart is a 17-store chain specializing
in new and out-of-the-box appliances with annualized revenues of approximately $65 million. Pursuant to the Agreement, the Purchaser
purchased from ARCA all of the issued and outstanding shares of capital stock (the “Stock”) of ApplianceSmart in exchange
for $6,500,000 (the “Purchase Price”). The shares of Stock were delivered into escrow and will be released to the Purchaser
upon Purchaser’s receipt of third-party financing in an amount sufficient to fund the Purchase Price, and the subsequent
delivery of such funds to certain third-party lenders of ARCA and ApplianceSmart, all of which the parties expect to occur prior
to March 31, 2018.
In connection with the acquisition of Vintage
Stock on November 3, 2016, Rodney Spriggs, President of Vintage Stock holds a 41.134752% interest in the $10,000,000 Seller Subordinated
Acquisition Note payable by VSAH. The terms of payment are interest only, payable monthly on the 1
st
of each month,
until maturity 5 years and 6 months from the date of the note – November 3, 2016. Interest paid to Mr. Spriggs in year ended
September 30, 2017 was $275,147. Interest unpaid and accrued as of September 30, 2017 is $27,423.
Also see Note 9, 10, 11 and 19.
Note 16: Commitments
and Contingencies
Litigation
The Company is party to certain legal proceedings
from time to time incidental to the conduct of its business. These proceedings could result in fines, penalties, compensatory or
treble dames or non-monetary relief. The nature of legal proceedings is such that the Company cannot assure the outcome of any
particular matter, and an unfavorable ruling or development could have a materially adverse effect on our consolidated financial
position, results of operations and cash flows in the period which a ruling or settlement occurs. However, based on information
available to the Company’s management to date and other than as noted below, the Company’s management does not expect
that the outcome of any matter pending against us is likely to have a materially adverse effect on the Company’s consolidated
financial position as of September 30, 2017, results of operations, cash flows or liquidity of the Company.
Operating Leases and Service Contracts
The Company leases its office space, certain
equipment and a building (from a related party) under long-term operating leases expiring through fiscal year 2017. Rent expense
under these leases was $8,329,186 and $518,877 for the years ended September 30, 2017 and 2016, respectively. The Company has also
entered into several non-cancelable service contracts. Rent expense may include certain common area charges.
As of September 30, 2017, future minimum
annual payments under operating lease agreements for fiscal years ending September 30 are as follows:
2018
|
|
$
|
5,573,252
|
|
2019
|
|
|
4,317,198
|
|
2020
|
|
|
3,455,330
|
|
2021
|
|
|
2,697,575
|
|
2022
|
|
|
1,050,357
|
|
Thereafter
|
|
|
1,572,864
|
|
|
|
$
|
18,666,576
|
|
Note 17: Income
Taxes
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Income tax expense for the years ended
September 30, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
(Restated)
|
|
Current expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
313,405
|
|
|
$
|
103,704
|
|
State
|
|
|
243,841
|
|
|
|
52,745
|
|
|
|
|
557,246
|
|
|
|
156,449
|
|
Deferred expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,397,732
|
|
|
|
(15,114,529
|
)
|
State
|
|
|
126,841
|
|
|
|
(609,764
|
)
|
|
|
|
3,524,573
|
|
|
|
(15,724,293
|
)
|
Total income tax expense
|
|
$
|
4,081,819
|
|
|
$
|
(15,567,844
|
)
|
A reconciliation of the differences between
the effective and statutory income tax rates for years ended September 30:
|
|
2017
|
|
|
2016
(Restated)
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rates
|
|
$
|
3,598,424
|
|
|
|
34%
|
|
|
$
|
1,830,150
|
|
|
|
77%
|
|
State income taxes
|
|
|
299,216
|
|
|
|
3%
|
|
|
|
161,484
|
|
|
|
7%
|
|
Permanent differences
|
|
|
71,908
|
|
|
|
1%
|
|
|
|
(1,798,450
|
)
|
|
|
-75%
|
|
Net operating loss adjustment
|
|
|
–
|
|
|
|
|
|
|
|
(1,194,004
|
)
|
|
|
-50%
|
|
Property & equipment adjustment
|
|
|
–
|
|
|
|
|
|
|
|
742,854
|
|
|
|
31%
|
|
Equity compensation adjustment
|
|
|
–
|
|
|
|
|
|
|
|
(2,872,210
|
)
|
|
|
-120%
|
|
Valuation allowance against net deferred tax assets
|
|
|
–
|
|
|
|
|
|
|
|
(12,284,278
|
)
|
|
|
-515%
|
|
Other
|
|
|
112,271
|
|
|
|
1%
|
|
|
|
(153,390
|
)
|
|
|
-6%
|
|
Effective rate
|
|
$
|
4,081,819
|
|
|
|
39%
|
|
|
$
|
(15,567,844
|
)
|
|
|
-652%
|
|
At September 30, deferred income tax assets
and liabilities were comprised of:
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
(Restated)
|
|
Deferred income tax asset, current:
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$
|
401,866
|
|
|
$
|
406,733
|
|
Accrued expenses
|
|
|
31,183
|
|
|
|
241,536
|
|
Inventory
|
|
|
772,657
|
|
|
|
414,575
|
|
Accrued compensation
|
|
|
–
|
|
|
|
–
|
|
Total deferred income tax asset, current
|
|
|
1,205,706
|
|
|
|
1,062,844
|
|
Less: valuation allowance
|
|
|
–
|
|
|
|
–
|
|
Deferred income tax asset, current, net
|
|
|
1,205,706
|
|
|
|
1,062,844
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax asset (liability), long-term:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
7,804,948
|
|
|
|
9,915,371
|
|
Tax credits
|
|
|
377,776
|
|
|
|
–
|
|
Other
|
|
|
3,743
|
|
|
|
–
|
|
Stock compensation
|
|
|
2,982,009
|
|
|
|
–
|
|
Intangibles
|
|
|
13,126
|
|
|
|
794,455
|
|
Property & equipment
|
|
|
(3,387,298
|
)
|
|
|
751,912
|
|
Total deferred income tax asset, long-term
|
|
|
7,794,304
|
|
|
|
11,461,738
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
–
|
|
|
|
–
|
|
Deferred income tax asset, net
|
|
|
7,794,304
|
|
|
|
11,461,738
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax asset
|
|
$
|
9,000,010
|
|
|
$
|
12,524,582
|
|
We reduced our valuation allowance by $12,284,278
(as restated) based on the profitable operations of our acquired Marquis subsidiary that can be offset against our net operation
loss carryforwards, this release in valuation allowance occurred during the period ending September 30, 2016.
The Company annually conducts an analysis
of its tax positions and has concluded that it has no uncertain tax positions as of September 30, 2017. The Company’s policy
is to record uncertain tax positions as a component of income tax expense.
The Company has net operating loss carry-forwards
of approximately $22.7 million as of September 30, 2017 and tax credit carry-forwards of $0.4 million respectively. The net operating
loss amounts are subject to IRS code section 382 limitations and expire in 2027. The 2014 through 2016 tax years are open to examination
by the various federal and state jurisdictions.
The Company restated the prior year deferred
income taxes related to the Marquis acquisition. Certain deferred tax items were not recorded by the Company. The Company has adjusted
the deferred taxes associated with property and equipment and stock compensation.
|
|
September 30, 2016
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
As restated
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statuary rate
|
|
$
|
1,830,150
|
|
|
$
|
–
|
|
|
$
|
1,830,150
|
|
State taxes, net of federal benefit
|
|
|
161,484
|
|
|
|
–
|
|
|
|
161,484
|
|
Permanent difference
|
|
|
(852,646
|
)
|
|
|
(945,804
|
)
|
|
|
(1,798,450
|
)
|
Net operating loss adjustment
|
|
|
(1,083,866
|
)
|
|
|
(110,138
|
)
|
|
|
(1,194,004
|
)
|
Property and equipment adjustment
|
|
|
–
|
|
|
|
742,854
|
|
|
|
742,854
|
|
Equity compensation adjustment
|
|
|
–
|
|
|
|
(2,872,210
|
)
|
|
|
(2,872,210
|
)
|
Valuation allowance
|
|
|
(12,284,278
|
)
|
|
|
–
|
|
|
|
(12,284,278
|
)
|
Other
|
|
|
(264,065
|
)
|
|
|
110,675
|
|
|
|
(153,390
|
)
|
|
|
$
|
(12,493,221
|
)
|
|
$
|
(3,074,623
|
)
|
|
$
|
(15,567,844
|
)
|
Note 18: Segment
Reporting
The Company operates in three segments
which are characterized as: (1) Manufacturing, (2) Retail Online and (3) Services. The Manufacturing Segment consists of Marquis
Industries, Inc., the Retail Online segment consists of Vintage Stock, Inc., Livedeal.com and Modern Everyday, Inc., and the Services
segment consists of the Local Exchange Carrier billings business and Velocity Local.
The following tables summarize segment information for the
years ended September 30, 2017 and 2016:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Net
|
|
|
Net
|
|
|
|
Revenue
|
|
|
Revenue
|
|
Revenue
|
|
|
|
|
|
|
Used Movies, Music, Games and Other
|
|
$
|
40,752,981
|
|
|
$
|
–
|
|
New Movies, Music, Games and Other
|
|
|
29,522,356
|
|
|
|
–
|
|
Rentals, Concessions and Other
|
|
|
1,116,308
|
|
|
|
–
|
|
Kitchen and Home Products
|
|
|
128,904
|
|
|
|
5,438,007
|
|
Carpets
|
|
|
57,510,294
|
|
|
|
56,572,212
|
|
Hard Surface Products
|
|
|
16,211,404
|
|
|
|
11,254,131
|
|
Synthetic Turf Products
|
|
|
5,964,633
|
|
|
|
4,683,014
|
|
Directory Services
|
|
|
854,052
|
|
|
|
1,006,883
|
|
Total Revenue
|
|
$
|
152,060,932
|
|
|
$
|
78,954,247
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
Revenues
|
|
|
|
|
|
Retail and Online
|
|
$
|
71,520,549
|
|
|
$
|
5,438,007
|
|
Manufacturing
|
|
|
79,686,331
|
|
|
|
72,509,357
|
|
Services
|
|
|
854,052
|
|
|
|
1,006,883
|
|
|
|
$
|
152,060,932
|
|
|
$
|
78,954,247
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
41,101,989
|
|
|
$
|
1,238,317
|
|
Manufacturing
|
|
|
20,653,006
|
|
|
|
17,771,735
|
|
Services
|
|
|
811,640
|
|
|
|
964,818
|
|
|
|
$
|
62,566,635
|
|
|
$
|
19,974,870
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
8,875,855
|
|
|
$
|
(5,172,406
|
)
|
Manufacturing
|
|
|
8,414,684
|
|
|
|
6,529,469
|
|
Services
|
|
|
808,838
|
|
|
|
961,186
|
|
|
|
$
|
18,099,377
|
|
|
$
|
2,318,249
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
2,074,574
|
|
|
$
|
284,593
|
|
Manufacturing
|
|
|
2,950,974
|
|
|
|
2,840,718
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
5,025,548
|
|
|
$
|
3,125,311
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
5,879,447
|
|
|
$
|
2,947,294
|
|
Manufacturing
|
|
|
1,717,538
|
|
|
|
1,073,253
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
7,596,985
|
|
|
$
|
4,020,547
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before provision for income taxes
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
3,096,109
|
|
|
$
|
2,947,294
|
|
Manufacturing
|
|
|
6,678,652
|
|
|
|
1,073,253
|
|
Services
|
|
|
808,838
|
|
|
|
–
|
|
|
|
$
|
10,583,599
|
|
|
$
|
4,020,547
|
|
Note 19: Subsequent
Events
On December 30, 2017, ApplianceSmart Holdings
LLC (the “Purchaser”), a wholly owned subsidiary of the Company, entered into a Stock Purchase Agreement (the “Agreement”)
with ARCA and ApplianceSmart, Inc. (“ApplianceSmart”), a subsidiary of ARCA. ApplianceSmart is a 17-store chain
specializing in new and out-of-the-box appliances with annualized revenues of approximately $65 million. Pursuant to the Agreement,
the Purchaser purchased from ARCA all of the issued and outstanding shares of capital stock (the “Stock”) of ApplianceSmart
in exchange for $6,500,000 (the “Purchase Price”). The shares of Stock were delivered into escrow and will be released
to the Purchaser upon Purchaser’s receipt of third-party financing in an amount sufficient to fund the Purchase Price, and
the subsequent delivery of such funds to certain third-party lenders of ARCA and ApplianceSmart, all of which the parties expect
to occur prior to March 31, 2018.
Warrants for 10,914 series B convertible
preferred shares expired on September 10, 2017. On January 16, 2018, the Company agreed to extend the expiration date on all warrants
outstanding if not exercised prior to expiration date by an additional 2 years, including the September 10, 2017 expired warrants.
We were in compliance with all covenants
under our existing revolving and other loan agreements as of September 30, 2017 due to waivers granted by both Texas Capital Bank
for the TCB Revolver and Capitala for the Capitala Term Loan. We are not in compliance as of December 31, 2017 with the Capitala
Term Loan total leverage ratio and do not anticipate that we will regain compliance with this covenant until sometime in fiscal
year ended September 30, 2019 based upon our current operating forecast. We are seeking alternatives to resolving the out of compliance
condition including negotiating with Capitala and seeking alternative credit sources. The resolution of the out of compliance condition
has not occurred and is not certain as of the date of issuance of these financial statements. As such, the entire Capitala Term
Loan has been classified as a short-term obligation.