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.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2019 AND 2018
(dollars in thousands, except per share)
Note 1: Background and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Live Ventures Incorporated, a Nevada corporation, and its subsidiaries (collectively, the “Company”). Commencing in fiscal year 2015, the Company began a strategic shift in its business plan away from providing online marketing solutions for small and medium sized business to acquiring profitable companies in various industries that have demonstrated a strong history of earnings power. The Company continues to actively develop, revise and evaluate its products, services and its marketing strategies in its businesses. The Company has three operating segments: Manufacturing, Retail and Online and Services. With Marquis Industries, Inc. (“Marquis”), the Company is engaged in the manufacture and sale of carpet and the sale of vinyl and wood floorcoverings. With Vintage Stock, Inc. (“Vintage Stock”), the Company is engaged in the retail sale of new and used movies, music, collectibles, comics, books, games, game systems and components. With ApplianceSmart, Inc. (“ApplianceSmart”), the Company is engaged in the sale of new major appliances through a chain of company-owned retail stores.
Note 2: Summary of Significant Accounting Policies
Revision of Previously Issued Financial Statements for Correction of Immaterial Errors
During the year ended September 30, 2019, the Company identified an error related to Vintage Stock Trade receivables and Inventory since 2017. During 2017, the Company completed the purchase price allocation associated with the acquisition of Vintage Stock. The Company overstated Trade receivables by $545. Additionally, during 2017, the Company overstated its inventory balance by $144 due to an error in the calculation of its inventory reserve. The effect of correcting these errors for the year ended September 30, 2017, was to decrease Trade receivables by $545, decrease Inventory by $144, and increase Accumulated deficit by $689.
The Company assessed the materiality of these errors on our prior annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108 and concluded that the errors were not material to our consolidated financial statements for the year ended September 30, 2017 through 2018. However, to correctly present trade receivables and inventory, management revised its previously issued financial statements for the year ended September 30, 2018. Certain amounts in prior periods as previously reported have been reclassified to conform to the current period presentation.
Principles of Consolidation
The accompanying consolidated financial statements represent the consolidated financial position, results of operations and cash flows for Live Ventures and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
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 assumptions 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 warranty reserve, 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, lease terminations, and estimated useful lives for intangible assets and property and equipment.
F-7
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 are available (Level 2 inputs). The carrying amounts of long-term debt at September 30, 2019 and 2018 approximate fair value.
Restricted Cash
Restricted cash represents funds on account at a bank used to secure a letter of credit in favor of Whirlpool Corporation in the face amount of $750. This account and letter of credit was closed as of September 30, 2019. Restricted cash is included in cash and cash equivalents on the Consolidated Balance Sheets.
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 and restricted cash 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 $112 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 local exchange carrier 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, 2019 and 2018, the allowance for doubtful accounts was $936 and $856, respectively.
Inventories
Manufacturing Segment
Inventories are valued at the lower of the inventory’s cost (first in, first out basis or “FIFO”) or net realizable value 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, 2019 and September 30, 2018, the reserve for obsolete inventory was $92.
F-8
Retail and Online Segment
Merchandise Inventories are valued at the lower of cost or net realizable value using the average cost method which approximates 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 net realizable value. 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 providing 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, 2019 and September 30, 2018 were $590 and $1,254, 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 3 to 40 years, transportation equipment is 5 to 10 years, machinery and equipment are 5 to 10 years, furnishings and fixtures are 3 to 5 years and office and computer equipment are 3 to 5 years. Depreciation expense was $4,104 and $4,648 for the years ended September 30, 2019 and 2018, 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.
F-9
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.
There was no goodwill impairment for the years ended September 30, 2019 or 2018.
Intangible Assets
The Company’s intangible assets consist of customer relationship intangibles, favorable 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, 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; software – 3 to 5 years, customer relationships – 7 to 15 years, favorable leases – over the life of the lease, customer lists – to 20 years, trade names – to 20 years. Intangible amortization expense is $1,569 and $1,401 for the years ended September 30, 2019 and 2018, respectively.
Revenue Recognition
General
The Company accounts for its sales revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). Topic 606 provides a five-step revenue recognition model that is applied to the Company’s customer contracts. Under this model we (i) identify the contract with the customer, (ii) identify our performance obligations in the contract, (iii) determine the transaction price for the contract, (iv) allocate the transaction price to our performance obligations and (v) recognize revenue when or as we satisfy our performance obligations.
Revenue is recognized upon transfer of control of the promised goods or the performance of the services to customers in an amount that reflects the consideration expected to be receive in exchange for those goods or services. The Company enters into contracts that may include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations.
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 requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales transaction price is fixed or determinable, (iii) title, ownership and risk of loss have been transferred to the customer, (iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied. 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. All direct costs are either paid and or accrued for in the period in which the sale is recorded.
F-10
Retail and Online Segment
The Retail and Online Segment derives revenue primarily from direct sales of entertainment and appliance products and services, including shipping and handling amounts, which are recognized when the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales transaction price is fixed or determinable, (iii) title or use rights, ownership and risk of loss have been transferred to the customer, (iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied. 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. All direct costs are either paid and or accrued for in the period in which the sale is recorded.
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.
Spare Parts
For spare part sales, we transfer control and recognize a sale when we ship the product to our customer or when the customer receives product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. We do not have any additional performance obligations other than spare part sales that are material in the context of the contract. The amount of consideration we receive and revenue we recognize varies due to sales incentives and returns we offer to our customers. When we give our customers the right to return eligible products, we reduce revenue for our estimate of the expected returns which is primarily based on an analysis of historical experience.
Warranties
Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the consumer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company offers certain limited warranties that are assurance type warranties and extended service arrangements that are service type warranties. Assurance type warranties are not accounted for as separate performance obligations under the revenue model. If a service type warranty is sold with a product or separately, revenue is recognized over the life of the warranty. The Company evaluates warranty offerings in comparison to industry standards and market expectations to determine appropriate warranty classification. Industry standards and market expectations are determined by jurisdictional laws, competitor offerings and customer expectations. Market expectations and industry standards can vary based on product type and geography. The Company primarily offers assurance type warranties.
We sell certain extended service arrangements separately from the sale of products. During 2018 and part of 2019, we acted as a sales agent under some of these arrangements whereby the Company receives a fee that is recognized as revenue upon the sale of the extended service arrangement. During 2019, the Company became the principal for certain extended service arrangements. Revenue related to these arrangements is recognized ratably over the contract term. The warranty reserve of $292 is included in accrued liabilities on the consolidated balance sheet at September 30, 2019.
F-11
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 recognizes the portion of the dollar value of prepaid stored-value products that ultimately is unredeemed (“breakage”) in accordance with ASU 2016-04 Liabilities- Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.
Because the Company expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product, the Company utilized the Redemption Pattern methodology. Under this, the Company shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur.
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 $369 and $158 for the years ended September 30, 3019 and 2018, respectively, is recorded in other income in our consolidated financial statements.
Advertising Expense
Advertising expense is charged to operations as incurred. Advertising expense totaled $1,676 and $494 for the years ended September 30, 2019 and 2018, 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.
F-12
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 2029 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 include “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. We record a liability for lease termination costs at the date we cease using a property. The liability is calculated based on the lease payments due for the remainder of the lease plus applicable early termination fees, if any.
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 15).
Concentration of Credit Risk
The Company maintains cash balances in bank accounts in each state the Company has business operations. Accounts are insured by the Federal Deposit Insurance Corporation up to $250 per institution as of September 30, 2019. At times, balances may exceed federally insured limits.
Recently Issued Accounting Pronouncements
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU No. 2016-13 is effective for smaller reporting companies for fiscal years beginning after December
F-13
15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact of adopting this new accounting standard on our Consolidated Financial Statements and related disclosures.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize assets and liabilities for all leases with lease terms greater than 12 months, including leases classified as operating leases. The standard also modifies the definition of a lease and the criteria for classifying leases as operating, finance or sales-type leases and requires certain additional disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The new standard, as amended in July 2018, may be applied either on a modified retrospective basis or prospectively as of the adoption date without restating prior periods, with certain practical expedients available. The Company adopted the new standard prospectively as of October 1, 2019 and elected certain practical expedients permitted under the new standard’s transition guidance. This allows the Company to carry forward the historical lease classification and to not reassess the lease term for leases in existence as of the adoption date and to carry forward our historical accounting treatment for land easements on agreements existing on the adoption date. The Company also made policy elections for certain classes of underlying assets to not separate lease and non-lease components in a contract as permitted under the new standard.
The Company currently leases retail stores, warehouse facilities and office space under operating leases. Upon adoption of the new standard, we will recognize right-of-use assets and liabilities related to substantially all operating leases where we are the lessee. While our work is not finalized, we expect that the aggregate increase in our operating lease assets and liabilities will be approximately 20% of total assets as of October 1, 2019.
Based on our transition method, practical expedients and policy elections, our leases existing as of the adoption date will continue to be reported in our Consolidated Statements of Operations in accordance with current accounting standards throughout their remaining terms unless the leases are modified. However, all leases entered into or modified after the adoption date will be accounted for in accordance with the new standard. The classification of those leases as operating, finance or sales type may be impacted by the new standard and affect our future operating results and the classification of our cash flows.
Note 3: Acquisition
Acquisition of ApplianceSmart Inc.
On December 30, 2017 (the “ApplianceSmart Closing Date”), the Company, through its newly formed, wholly owned subsidiary, ApplianceSmart Affiliated Holdings LLC (“ASH”), entered into a series of agreements in connection with its purchase of ApplianceSmart. ApplianceSmart is a retailer engaged in the sale of new major appliances through a chain of company-owned retail stores.
Total consideration was $6,500, with no liabilities assumed by ASH. On December 30, 2017, ASH agreed to pay the $6,500 no later than March 31, 2018. Effective April 1, 2018, ASH issued an interest-bearing promissory note to the Seller, with interest at 5% per annum, with a three-year term in the original amount of $3,919 for the balance of the purchase price. Interest is payable monthly in arrears. Ten percent of the outstanding principal amount is due to be repaid annually on a quarterly basis, with any remainder due and payable on maturity, April 1, 2021. This promissory note is guaranteed by ApplianceSmart. The remaining $2,581 was paid in cash by ASH to the Seller. ASH may reborrow funds, and pay interest on such re-borrowings, from the Seller up to the Original Principal amount. On December 31, 2017, ASH offset certain liabilities and was provided certain assets from the Seller in the net amount of $1,607, against the amount due to the Seller. ASH and Seller agreed to the offset as if it were payment in cash against the purchase price. At September 30, 2019 and 2018, the net amount owing to the Seller was $2,826 and $3,822, respectively, and is included in long term debt, related parties. See Note 7.
F-14
Net liabilities assumed by ASH on December 31, 2017:
Accounts payable
|
|
$
|
1,374
|
|
Accrued expenses
|
|
|
1,080
|
|
Capital leases
|
|
|
30
|
|
Credit card receivables
|
|
|
(255
|
)
|
Cash
|
|
|
(622
|
)
|
Total net liabilities assumed by ASH
|
|
$
|
1,607
|
|
The table below summarizes our final purchase price allocation of the consideration paid to the respective fair values of the assets acquired in the ApplianceSmart acquisition as of the ApplianceSmart Closing Date. The Company finalized its estimates after it determined that it had obtained all necessary information that existed as of the ApplianceSmart Acquisition Date related to these matters.
Trade receivables
|
|
$
|
1,806
|
|
Inventory
|
|
|
7,444
|
|
Prepaid expenses
|
|
|
69
|
|
Refundable deposits
|
|
|
1,004
|
|
Intangible asset - trade names
|
|
|
2,015
|
|
Intangible asset - customer list
|
|
|
5
|
|
Intangible asset - leases
|
|
|
1,206
|
|
Restricted cash
|
|
|
750
|
|
Property and equipment
|
|
|
1,095
|
|
Deferred income tax
|
|
|
(1,600
|
)
|
Bargain gain on acquisition
|
|
|
(7,294
|
)
|
|
|
$
|
6,500
|
|
The operating results of ApplianceSmart are included in our Retail and Online Segment.
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 $0.10 per acquired active contact email or approximately $5. The Company was amortizing the customer list intangible asset on a straight-line basis over an estimated life of 20 years. At September 30, 2019, the Company recorded as an impairment charge in the Consolidated Statements of Income (Loss) for the balance of $4 related to the customer list intangible as of that date due to the pending bankruptcy filing which occurred in December 2019.
The estimated fair value of the trade names intangible that ApplianceSmart uses – “ApplianceSmart” 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 of 0.5% and a present value discount rate of 18.6%, or $2,015. Trade name relates to the Company’s brand awareness by consumers in the marketplace. The Company is amortizing the trade name intangible asset on a straight-line basis over an estimated life of 20 years. At September 30, 2019, the Company recorded as an impairment charge in the Consolidated Statements of Income (Loss) for the balance of $1,839 related to the trade names intangible as of that date during to the pending bankruptcy filing which occurred in December 2019.
The estimated fair value of the lease assets that ApplianceSmart leases was determined comparing the existing leases assumed to current market rates within a three-mile radius of existing stores. These market rates were then compared to existing ApplianceSmart contracted lease rates over the remaining lease terms. If the lease contract began within six months of acquisition date or the square footage price difference was within 10% of the contracted lease rate, or the overall discounted cash flow effect of the difference was less than $150, the lease was excluded for intangible valuation purposes. The remaining leases that were included were then compared to market rates, with the differences discounted using a discount rate of 7.50% to determine the discounted present value of the lease intangibles. The Company is amortizing the lease intangibles on a straight-line basis over the remaining life of each lease ranging between two and ten years. During the year ended September 30, 2019, ApplianceSmart closed certain
F-15
retail locations resulting in an impairment charge in the Consolidated Statements of Income (Loss) of $760 related to lease intangibles.
The unaudited pro forma information below presents statement of income data for the year ended September 30, 2018 compared to the actual results, adjusted for the bargain purchase gain associated with the transaction.
|
|
Year Ended September 30, 2018
|
|
|
|
Proforma
|
|
|
Actual
|
|
Net revenue
|
|
$
|
209,637
|
|
|
$
|
199,633
|
|
Gross profit
|
|
|
76,849
|
|
|
|
74,198
|
|
Operating income
|
|
|
8,791
|
|
|
|
10,800
|
|
Net income (loss)
|
|
|
(62
|
)
|
|
|
1,741
|
|
Income (loss) per basic common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.89
|
|
Note 4: Balance Sheet Detail Information
Balance Sheet information is as follows:
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Trade receivables, current, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, current
|
|
$
|
12,641
|
|
|
$
|
13,805
|
|
Less: Reserve for doubtful accounts
|
|
|
(740
|
)
|
|
|
(511
|
)
|
|
|
$
|
11,901
|
|
|
$
|
13,294
|
|
Trade receivables , long term, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, long term
|
|
$
|
196
|
|
|
$
|
345
|
|
Less: Reserve for doubtful accounts
|
|
|
(196
|
)
|
|
|
(345
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total trade receivables, net:
|
|
|
|
|
|
|
|
|
Gross trade receivables
|
|
$
|
12,837
|
|
|
$
|
14,150
|
|
Less: Reserve for doubtful accounts
|
|
|
(936
|
)
|
|
|
(856
|
)
|
|
|
$
|
11,901
|
|
|
$
|
13,294
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Inventory, net
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
7,431
|
|
|
$
|
9,713
|
|
Work in progress
|
|
|
2,141
|
|
|
|
1,141
|
|
Finished goods
|
|
|
6,785
|
|
|
|
5,414
|
|
Merchandise
|
|
|
22,883
|
|
|
|
31,461
|
|
|
|
|
39,240
|
|
|
|
47,729
|
|
Less: Inventory reserves
|
|
|
(682
|
)
|
|
|
(1,346
|
)
|
|
|
$
|
38,558
|
|
|
$
|
46,383
|
|
F-16
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Building and improvements
|
|
$
|
10,827
|
|
|
$
|
10,955
|
|
Transportation equipment
|
|
|
82
|
|
|
|
82
|
|
Machinery and equipment
|
|
|
20,035
|
|
|
|
23,295
|
|
Furnishings and fixtures
|
|
|
2,741
|
|
|
|
2,640
|
|
Office, computer equipment and other
|
|
|
2,544
|
|
|
|
2,530
|
|
|
|
|
36,229
|
|
|
|
39,502
|
|
Less: Accumulated depreciation
|
|
|
(13,633
|
)
|
|
|
(11,511
|
)
|
|
|
$
|
22,596
|
|
|
$
|
27,991
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Domain name and marketing related
intangibles
|
|
$
|
90
|
|
|
$
|
59
|
|
Lease intangibles
|
|
|
1,033
|
|
|
|
2,239
|
|
Customer relationship intangibles
|
|
|
2,689
|
|
|
|
4,709
|
|
Purchased software
|
|
|
808
|
|
|
|
2,191
|
|
|
|
|
4,620
|
|
|
|
9,198
|
|
Less: Accumulated amortization
|
|
|
(2,421
|
)
|
|
|
(2,532
|
)
|
|
|
$
|
2,199
|
|
|
$
|
6,666
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and bonuses
|
|
$
|
3,316
|
|
|
$
|
2,384
|
|
Accrued sales and use taxes
|
|
|
1,176
|
|
|
|
1,007
|
|
Accrued property taxes
|
|
|
191
|
|
|
|
362
|
|
Accrued rent
|
|
|
604
|
|
|
|
507
|
|
Deferred revenue
|
|
|
—
|
|
|
|
354
|
|
Accrued gift card and escheatment liability
|
|
|
1,461
|
|
|
|
1,594
|
|
Accrued interest payable
|
|
|
181
|
|
|
|
196
|
|
Accrued accounts payable and bank
overdrafts
|
|
|
591
|
|
|
|
943
|
|
Accrued professional fees
|
|
|
4,660
|
|
|
|
471
|
|
Customer deposits
|
|
|
240
|
|
|
|
508
|
|
Accrued expenses - other
|
|
|
564
|
|
|
|
245
|
|
|
|
$
|
12,984
|
|
|
$
|
8,571
|
|
F-17
Note 5: Intangibles
The Company’s intangible assets consist of customer relationship intangibles, trade names, favorable leases, 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, favorable leases – over the life of the lease, outstanding lists – 20 years, trade names – 20 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 $1,569 and $1,401 for the years ended September 30, 2019 and 2018, respectively.
Impairment charges of $3,222 for the year ended September 30, 2019, were related to the write down of intangibles associated with the ApplianceSmart customer list and trade names due to the bankruptcy filing in December 2019, the write down of lease intangibles related to the ApplianceSmart retail locations closed during the period and the write down of software that is no longer in use. There were no impairment charges for the year ended September 30, 2018.
The following summarizes estimated future amortization expense related to intangible assets that have net balances:
As of September 30,
|
|
|
|
|
2020
|
|
$
|
890
|
|
2021
|
|
|
612
|
|
2022
|
|
|
285
|
|
2023
|
|
|
201
|
|
2024
|
|
|
44
|
|
Thereafter
|
|
|
167
|
|
|
|
$
|
2,199
|
|
Note 6: Long-Term Debt
Bank of America Revolver Loan
On July 6, 2015, Marquis entered into a $15,000 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 BofA 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.
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 (i) $7,500; (ii) 65% of the value of eligible inventory; or (iii) 85% of the appraisal value of the eligible inventory. For purposes of clarity, the advance rate for inventory is 53.5% 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 December 24, 2018, Distributions by Holdings to holders of its Equity Interests so long as the following conditions are satisfied with respect to each such Distribution: (a) no Default or Event of Default has occurred or would result from such Distribution, (b) Lender has received the financial statements required under Section 10.1.2 (a)(ii), (c) Lender has received evidence that after giving effect to consummation of such Distribution, Borrowers shall maintain a Fixed Charge Coverage Ratio of at least 1.1 to 1.0 on a pro forma basis, measured as of the most recently ended month for which Obligors have delivered the financial statements required under Section 10.1.2(a) or (b), as the case may be, for the twelve month period then ended, (d) Availability on each day during the 60 day period immediately preceding such Distribution calculated on a pro forma basis assuming such Distribution
F-18
occurred on the first day of such period (including any Loans made hereunder to finance such Distribution) shall be greater than or equal to $4,000, and (e) Availability, on the date of such Distribution, immediately after giving pro forma effect to the consummation of such Distribution (including any Loans made hereunder to finance such Distribution) shall be greater than or equal to $4,000.
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 BofA Revolver Loan bears interest at a variable rate based on a base rate plus a margin. The current base rate is the greater of (i) Bank of America prime rate, (ii) the current federal funds rate plus 0.50%, or (iii) 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. The Level IV interest rate is adjusted up or down on a quarterly basis going forward based upon the above fixed coverage ratio achieved by Marquis.
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
|
|
<1.2x
|
|
|
1.25
|
%
|
|
|
2.25
|
%
|
|
|
1.50
|
%
|
|
|
2.50
|
%
|
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.
The following tables summarize the BofA Revolver for the years ended and as of September 30, 2019 and 2018:
|
|
During the year ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cumulative borrowing during the period
|
|
$
|
87,771
|
|
|
$
|
94,697
|
|
Cumulative repayment during the period
|
|
|
95,358
|
|
|
|
91,947
|
|
Maximum borrowed during the period
|
|
|
8,071
|
|
|
|
8,531
|
|
Weighted average interest for the period
|
|
|
4.20
|
%
|
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Total availability
|
|
$
|
14,914
|
|
|
$
|
9,692
|
|
Total outstanding
|
|
|
13
|
|
|
|
4,852
|
|
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, which consisted of $644 from the sale of the land and a note payable of $9,356. 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 $60. The proceeds from this transaction were used to pay down the BofA 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 9.3% per annum, with principal and interest due monthly. The note payable matures June 13, 2056. For the first five
F-19
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 five years, there is no pre-payment penalty. In connection with the note payable, Marquis incurred $458 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 ($2,000 Line of Credit)
On December 21, 2016, the Company and Kingston Diversified Holdings LLC (“Kingston”) entered into an agreement (the “December 21 Agreement”) modifying its then existing agreement between the parties to extend the maturity date of notes issued by Kingston to the Company (the “Kingston Notes”) by twelve months for 55,888 shares of the Company’s Series B Convertible Preferred Stock with a value on September 15, 2016 of $2,800, as a compromise between the parties in respect of certain of their respective rights and duties under the agreement. The December 21 Agreement also decreases the maximum principal amount of the Kingston Notes from $10,000 in principal amount to $2,000 in principal amount, and eliminates any and all actual, contingent, or other obligations of the Company to issue to Kingston 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 of Series B Preferred Stock or any shares into which they may be converted or from which they may be exchanged. As of September 30, 2019, and September 30, 2018, 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 $5,000, secured by equipment. The Equipment Loan #1 is due September 23, 2021, payable in 59 monthly payments of $84 beginning September 23, 2016, with a final payment in the sum of $584, bearing interest at 3.9% per annum.
Note #2 is $2,210, secured by equipment. The Equipment Loan #2 is due January 30, 2022, payable in 59 monthly payments of $35 beginning January 30, 2017, with a final payment in the sum of $477, bearing interest at 4.6% per annum. As of September 30, 2019, this loan was paid in full.
Note #3 is $3,680, secured by equipment. The Equipment Loan #3 is due December 30, 2023, payable in 84 monthly payments of $52 beginning January 30, 2017, bearing interest rate at 4.8% per annum.
Note #4 is $1,095, secured by equipment. The Equipment Loan #4 is due December 30, 2023, payable in 81 monthly payments of $16 beginning April 30, 2017, bearing interest at 4.9% per annum.
Note #5 is $3,932, secured by equipment. The Equipment Loan #5 is due December 28, 2024, payable in 84 monthly payments of $55 beginning January 28, 2018, bearing interest at 4.7% per annum.
Note #6 is $913, secured by equipment. The Equipment Loan #6 is due July 29, 2024, payable in 60 monthly payments of $55 beginning August 28, 2019, bearing interest at 4.7% per annum
Texas Capital Bank Revolver Loan
On November 3, 2016, Vintage Stock entered into a $12,000 credit agreement (as amended on January 23, 2017, amended on September 20, 2017, June 7, 2018 and September 24, 2019) 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. The TCB Revolver matures November 3, 2020.
F-20
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 non-current liability due to the removal of the subjective acceleration clause as part of the credit agreement amendment on June 7, 2018.
Borrowing availability under the TCB Revolver is limited to a borrowing base which allows Vintage Stock to borrow up to 90% of the appraisal value of the inventory, plus 85% of eligible receivables, net of certain reserves. The borrowing base provides for borrowing up to 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 Comvest Term Loan and pay cash dividends is generally permitted if (i) excess availability under the TCB Revolver is more than $2,000, and is projected to be within 12 months after such payment and (ii) excess availability under the TCB Revolver is more than $2,000, 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 Comvest 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 $2,000 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 $2,000 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 $2,000 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 2.25%, effective June 7, 2018.
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. The following tables summarize the TCB Revolver for the years ended and as of September 30, 2019 and September 30, 2018:
|
|
During the year ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cumulative borrowing during the period
|
|
$
|
74,356
|
|
|
$
|
76,191
|
|
Cumulative repayment during the period
|
|
|
75,648
|
|
|
|
76,819
|
|
Maximum borrowed during the period
|
|
|
11,932
|
|
|
|
16,078
|
|
Weighted average interest for the period
|
|
|
4.55
|
%
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Total availability
|
|
$
|
1,410
|
|
|
$
|
108
|
|
Total outstanding
|
|
|
10,590
|
|
|
|
11,892
|
|
In connection with the TCB Revolver, Vintage incurred $25 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.
F-21
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 $29,872 of mezzanine financing from the lenders (the “Term Loan Lenders”) as defined in the term loan agreement (the “Term Loan Agreement”) between the Term Loan Borrowers 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”) bore 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 were 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) 0.5% per annum, plus (b) the sum of (i) 12.5% per annum in cash pay plus (ii) 3.0% 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 was equal to the sum of (a) the highest of (with a minimum of 1.5%) (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) the LIBO rate plus 1.0%, plus (b) the sum of (i) 11.5% per annum payable in cash plus (ii) 3.0% 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 placed 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 was required to maintain a fixed charge coverage ratio of 1.3 for year ended September 30, 2018, 1.4 for year ended September 30, 2019 and 1.5 for all years thereafter. For years ended September 30, 2017 and thereafter, Vintage Stock was 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 was required to maintain a total leverage ratio of 3.25 for year ended September 30, 2018, 2.5 for year ended September 30, 2019 and 2.0 for all years thereafter. In addition, for quarter ended December 31, 2017, the total leverage ratio could not exceed 3.0 and for quarters ended March 31, 2018 and June 30, 2018, the total leverage ratio could not exceed 2.75.
The Capitala Term Loans provided 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 included (i) monthly payments of interest and (ii) principal installment payments in an amount equal to $725 due on March 31, June 30, September 30, and December 31 of each year, with the first such payment was due on December 31, 2016. The outstanding principal amounts of the term loans and all accrued interest thereon under the Term Loan Agreement were due and payable in November 2021.
F-22
The Term Loan Borrowers could 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 $3,000 of the term loans;
|
|
(ii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed $1,450, 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 $2.900 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 were 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 October 1, 2017 through June 7, 2018 was 16.94%. In connection with the Capitala Term Loan, Vintage Stock incurred $1,088 in transaction cost that was being recognized as debt issuance cost that was being amortized and recorded as interest expense over the term of the Capitala Term Loan. On June 7, 2018, the Capitala Term Loan was paid in full, and the Company recorded as additional interest expense $742 of unamortized debt issuance cost related to 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 $10,000 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 originally had a maturity date of May 3, 2021. On June 7, 2018, in connection with the Comvest Term Loan refinance of the Capitala Term Loan, the Sellers Subordinated Acquisition Note was amended and restated to have a maturity date of September 23, 2023.
Comvest Term Loan
On June 7, 2018 (amended September 9, 2019), Vintage Stock Affiliated Holdings LLC (“Holdings”) and Vintage Stock, Inc. (the “Borrower”), entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) by and among Borrower, Holdings, the lenders party thereto and Comvest Capital IV, L.P. (“Comvest”), as agent. The Credit Agreement provides for a $24,000 secured term loan (the “Term Loan”). The proceeds of the Term Loan, together with a cash equity contribution of approximately $4,000 from the Company to the Borrower, will be used by the Borrower (i) to refinance and terminate the Borrower’s credit facility (the “Prior Credit Facility”) with Capitala Private Credit Fund and certain of its affiliates, as lenders, and Wilmington Trust National Association (the “Term Loan Administrative Agent”), as agent, (ii) to pay transaction costs, and (iii) for the Borrower’s working capital and other general corporate purposes. In connection with the closing of the refinancing transaction with Comvest, all defaults under the Prior Credit Facility were extinguished.
The Term Loan bears interest at the base or LIBOR rates (as described below) plus an applicable margin in each case. The applicable margin ranges from 8.0% to 9.5% per annum (subject to a LIBOR floor of 1.0%) and is determined based on the Borrower’s senior leverage ratio pricing grid.
F-23
The base rate under the Comvest Credit Agreement is equal to the greatest of (i) the per annum rate of interest which is identified as the “Prime Rate” and normally published in the Money Rates section of The Wall Street Journal (or, if such rate ceases to be so published, as quoted from such other generally available and recognizable source as Agent may select), (ii) the sum of the Federal Funds Rate plus one half percent (0.5%), (iii) the most recently used LIBO Rate and (iv) two percent (2.0%) per annum.
LIBOR rate is defined as the greater of (a) a rate per annum equal to the London interbank offered rate for deposits in Dollars for a period of one month and for the outstanding principal amount of the Term Loan as published in the “Money Rates” section of The Wall Street Journal (or another national publication selected by Agent if such rate is not so published), two Business Days prior to the first day of such one month period and (b) one percent (1.0%) per annum.
The Term Loan matures on May 26, 2023 and is subject to amortization of 12.5% (decreasing to 10% upon the Borrower’s senior leverage ratio being less than 1.5 times the Borrower’s EBITDA (as defined in the Credit Agreement)) of principal per annum payable in equal quarterly installments due on March 31, June 30, September 30, and December 31 of each year, with the first such payment due on June 30, 2018; plus, to the extent the Borrower generates excess cash flow (as defined in the Credit Agreement), a percent of such excess cash flow (ranging from 50% to 100%), all in accordance with the terms of the Credit Agreement.
Under the Credit Agreement, any and all mandatory prepayments arising from any voluntary act of the Borrower are subject to a prepayment premium, ranging from 5.0% of the principal amount prepaid plus a make-whole amount to 1.0%, depending on when the mandatory prepayment is made. There is no prepayment premium after June 7, 2021.
The Term Loan is secured by a pledge of substantially all of the assets of the Borrower and a pledge of the capital stock of the Borrower. In addition, the Company is guaranteeing (the “Sponsor Guaranty”) that portion of the Term Loan that results in the Borrower’s senior leverage ratio being greater than 2.0:1.0, and only for so long as such ratio exceeds 2.0:1.0. The Sponsor Guaranty terminates on the date that the Borrower’s senior leverage ratio is less than 2.0:1.0 for two consecutive fiscal quarters.
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 minimum of $12,000 of EBITDA on a trailing twelve months basis as measured quarterly starting June 30, 2018 through December 31, 2018. Beginning quarter ending March 31, 2019 and thereafter, Vintage Stock is required to maintain a minimum of $11,500 of EBITDA on a trailing twelve months basis. So long as the Senior leverage ratio is greater than 2.0 to 1.0, Vintage Stock is required to spend no more than $1,000 on capital expenditures in fiscal year 2018, $1,500 in fiscal year 2019, $2,000 in fiscal year 2020, $1,750 in fiscal year 2021, and $1,500 in fiscal years 2022 and thereafter. At all times that the senior leverage ratio is greater than or equal to 1.50:1.00, Vintage Stock cannot have the same store sales percentage to be less than or equal to a negative 5.5 percent as of the last day of any fiscal quarter. Vintage Stock may only open three new retail locations within a twelve-month period so long as the senior leverage ratio is 2.00:1.00 or more. If the senior leverage ratio is less than 2.00:1.00, Vintage Stock may only open no more than five new retail locations within a twelve-month period.
F-24
Vintage Stock is required to maintain a declining maximum senior leverage ratio on a trailing twelve-month basis as follows:
June 30, 2018
|
|
2.85 : 1.00
|
September 30, 2018
|
|
2.85 : 1.00
|
December 31, 2018
|
|
2.65 : 1.00
|
March 31, 2019
|
|
2.60 : 1.00
|
June 30, 2019
|
|
2.40 : 1.00
|
September 30, 2019
|
|
2.40 : 1.00
|
December 31, 2019
|
|
2.40 : 1.00
|
March 31, 2020
|
|
2.20 : 1.00
|
June 30, 2020
|
|
2.15 : 1.00
|
September 30, 2020
|
|
2.05 : 1.00
|
December 31, 2020
|
|
1.85 : 1.00
|
March 31, 2021
|
|
1.60 : 1.00
|
June 30, 2021 and thereafter
|
|
1.55 : 1.00
|
Vintage Stock is required to maintain on a trailing twelve-month basis a minimum fixed charge ratio of no less than the following:
June 30, 2018
|
|
1.30 : 1.00
|
September 30, 2018
|
|
1.30 : 1.00
|
December 31, 2018
|
|
1.30 : 1.00
|
March 31, 2019
|
|
1.10 : 1.00
|
June 30, 2019
|
|
1.30 : 1.00
|
September 30, 2019
|
|
1.30 : 1.00
|
December 31, 2019
|
|
1.30 : 1.00
|
March 31, 2020 and thereafter
|
|
1.40 : 1.00
|
Vintage Stock may cure both payment and financial covenant defaults through infusion of equity cures as determined by the Credit Agreement. EBITDA, senior leverage ratio, same store sales decline percentage and fixed charge ratio are terms defined within the Credit Agreement.
In connection with the Comvest Term Loan, Vintage Stock incurred $1,318 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 Comvest Term Loan.
Crossroads Revolver
On March 15, 2019, ApplianceSmart, Inc. (the “Borrower”), entered into a Loan and Security Agreement (the “Cross Roads Revolver”) with Crossroads Financing, LLC (“Crossroads”), providing for a $4,000 revolving credit facility, subject to a borrowing base limitation (the “ABL Facility”). The borrowing base for the ABL Facility at any time equals the lower of (i) up to 75% of inventory cost or (ii) up to 85% of net orderly liquidation value, in each case as further described in the Loan Agreement. The proceeds of the ABL Facility will be used by the Borrower to repay a portion of the outstanding loan owed by ApplianceSmart Holdings LLC, Borrower’s parent (“Parent”), to JanOne Inc. (formerly Appliance Recycling Centers of America, Inc.), to pay transaction costs, and for working capital and other general corporate purposes.
Advances under the Crossroads Revolver bear interest at an interest rate equal to the greater of (i) the three-month London Interbank Offered Rate plus 2.19% or (ii) 5.0%. In addition to paying interest on the outstanding principal under the ABL Facility, the Borrower is required to pay Lender a servicing fee equal to 1.0% per month of the amount of the Borrower’s outstanding obligations under the Crossroads Revolver that accrue interest, an annual loan fee of $80, an early termination fee described below, and other fees described in the Crossroads Revolver.
F-25
Unless terminated early in accordance with its terms, the Crossroads Revolver terminates on March 15, 2021 (the “Maturity Date”). If the Crossroads Revolver is terminated by the Borrower prior to the Maturity Date, Borrower is required to pay Crossroads (i) a fee in an amount equal to $120 if the Crossroads Revolver is terminated prior to March 15, 2020 and (b) if the Crossroads Revolver is terminated on or after March 15, 2020, a fee in an amount equal to $80.
Advances under the Crossroads Revolver are guaranteed by Parent and ApplianceSmart Contracting, Inc., a wholly owned subsidiary of Parent. In addition, certain executive officers of the Borrower have agreed to provide validity guarantees. Advances under the Crossroads Revolver are secured by a pledge of substantially all of the assets of the Borrower. The Company is not a guarantor under the Crossroads Revolver.
The Crossroads Revolver contains representations and warranties, events of default, affirmative and negative covenants and indemnities customary for loans of this nature. As of September 30, 2019, the Crossroads Revolver had a balance outstanding of $1,981. In connection with the Crossroads Revolver, ApplianceSmart incurred $118 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 Crossroads Revolver.
Loan Covenant Compliance
We were in compliance as of September 30, 2019 with all covenants under our existing revolving and other loan agreements, with the exception of covenants related to the Crossroads Revolver.
Notes Payable as of September 30, 2019 and 2018 consisted of the following:
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Bank of America Revolver Loan
|
|
$
|
13
|
|
|
$
|
7,600
|
|
Texas Capital Bank Revolver Loan
|
|
|
10,590
|
|
|
|
11,892
|
|
Crossroads Financial Revolver Loan
|
|
|
1,981
|
|
|
|
—
|
|
Note Payable Comvest Term Loan
|
|
|
15,412
|
|
|
|
22,500
|
|
Note Payable to the Sellers of Vintage Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Note #1 Payable to Banc of America Leasing & Capital LLC
|
|
|
2,057
|
|
|
|
3,231
|
|
Note #2 Payable to Banc of America Leasing & Capital LLC
|
|
|
—
|
|
|
|
1,637
|
|
Note #3 Payable to Banc of America Leasing & Capital LLC
|
|
|
2,379
|
|
|
|
2,872
|
|
Note #4 Payable to Banc of America Leasing & Capital LLC
|
|
|
731
|
|
|
|
882
|
|
Note #5 Payable to Banc of America Leasing & Capital LLC
|
|
|
3,065
|
|
|
|
3,569
|
|
Note #6 Payable to Banc of America Leasing & Capital LLC
|
|
|
891
|
|
|
|
—
|
|
Note Payable to Store Capital Acquisitions, LLC
|
|
|
9,274
|
|
|
|
9,302
|
|
Note payable to individual, interest at 11% per annum, payable on a 90 day
written notice, unsecured
|
|
|
207
|
|
|
|
207
|
|
Note payable to individual, interest at 10% per annum, payable on a 90 day
written notice, unsecured
|
|
|
500
|
|
|
|
500
|
|
Note payable to individual, interest at 8.5% per annum, payable on a 120 day
written demand notice, unsecured
|
|
|
—
|
|
|
|
225
|
|
Total notes payable
|
|
|
57,100
|
|
|
|
74,417
|
|
Less unamortized debt issuance costs
|
|
|
(1,384
|
)
|
|
|
(1,654
|
)
|
Net amount
|
|
|
55,716
|
|
|
|
72,763
|
|
Less current portion
|
|
|
(7,897
|
)
|
|
|
(13,958
|
)
|
Long-term portion
|
|
$
|
47,819
|
|
|
$
|
58,805
|
|
F-26
Future maturities of long-term debt at September 30, 2019 are as follows excluding related party debt:
Years ending September 30,
|
|
|
|
|
2020
|
|
$
|
7,897
|
|
2021
|
|
|
5,665
|
|
2022
|
|
|
4,507
|
|
2023
|
|
|
28,584
|
|
2024
|
|
|
1,198
|
|
Thereafter
|
|
|
9,249
|
|
Total
|
|
$
|
57,100
|
|
Note 7: Notes payable, related parties
JanOne Inc. Note
On December 30, 2017, ASH entered into a Stock Purchase Agreement (the “Agreement”) with Appliance Recycling Centers of America, Inc. (now JanOne Inc.) (the “Seller”) and ApplianceSmart, Inc. (“ApplianceSmart”), a subsidiary of the Seller. Pursuant to the Agreement, ASH purchased (the “Transaction”) from the Seller all of the issued and outstanding shares of capital stock of ApplianceSmart in exchange for $6,500 (the “Purchase Price”). ASH was required to deliver the Purchase Price, and a portion of the Purchase Price was delivered, to the Seller prior to March 31, 2018. Between March 31, 2018 and April 24, 2018, ASH and the Seller negotiated in good faith the method of payment of the remaining outstanding balance of the Purchase Price.
On April 25, 2018, ASH delivered to the Seller that certain Promissory Note (the “ApplianceSmart Note”) in the original principal amount of $3,919, (the “Original Principal Amount”), as such amount may be adjusted per the terms of the ApplianceSmart Note. The ApplianceSmart Note is effective as of April 1, 2018 and matures on April 1, 2021 (the “Maturity Date”). The ApplianceSmart Note bears interest at 5% per annum with interest payable monthly in arrears. Ten percent of the outstanding principal amount will be repaid annually on a quarterly basis, with the accrued and unpaid principal due on the Maturity Date. ApplianceSmart has agreed to guaranty repayment of the ApplianceSmart Note. The remaining $2,581 of the Purchase Price was paid in cash by ASH to the Seller. ASH may reborrow funds, and pay interest on such re-borrowings, from the Seller up to the Original Principal Amount. As of September 30, 2019, there was $2,826 outstanding on the ApplianceSmart Note.
On December 26, 2018, ASH and the Seller amended and restated the ApplianceSmart Note to, among other things, grant the Seller a security interest in the assets of ASH and ApplianceSmart in accordance with the terms of separate security agreements entered into between ASH and ApplianceSmart, respectively, and the Seller.
Isaac Capital Fund Note
In connection with the acquisition of Marquis by the Company, the Company entered into a mezzanine loan in the amount of up to $7,000 with Isaac Capital Fund (“ICF”), a private lender whose managing member is Jon Isaac, our President and Chief Executive Officer. The ICF mezzanine loan bears interest at 12.5% per annum with payment obligations of interest each month and all principal due in January 2021. As of September 30, 2019, and September 30, 2018, there was $2,000 outstanding on this mezzanine loan.
Long-term debt, related parties as of September 30, 2019 and September 30, 2018 consisted of the following:
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
JanOne Inc
|
|
$
|
2,826
|
|
|
$
|
3,822
|
|
Isaac Capital Fund
|
|
|
2,000
|
|
|
|
2,000
|
|
Total notes payable - related parties
|
|
|
4,826
|
|
|
|
5,822
|
|
Less current portion
|
|
|
—
|
|
|
|
(392
|
)
|
Long-term portion
|
|
$
|
4,826
|
|
|
$
|
5,430
|
|
F-27
Future maturities of notes payable, related parties at September 30, 2019 are as follows:
Years ending September 30,
|
|
|
|
|
2020
|
|
$
|
—
|
|
2021
|
|
|
4,826
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
2024
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
4,826
|
|
Note 8: Stockholders’ Equity
Convertible Series B Preferred Shares
The Series B Convertible Preferred Stock shareholders are entitled to dividends as declared by the board of directors in an amount equal to $1.00 per share (in the aggregate for all then-issued and outstanding shares of Series B Convertible Preferred Stock). The series does not have any redemption rights or Stock basis, except as otherwise required by the Nevada Revised Statutes. 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 share of Series B Preferred Stock 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, 2019 and 2018, the Company did not issue any Series B preferred shares.
Series E Convertible Preferred Stock
As of September 30, 2019, there were 77,840 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 to convert them into shares of our common stock on a 1:0.005 basis together with payment of $85.50 per converted share.
During the years ended September 30, 2019 and 2018, the Company accrued dividends of $1 and $1, respectively. As of September 30, 2019 and 2018, accrued dividends were $1 and $1, respectively, payable to holders of Series E preferred stock.
Common Stock
During the year ended September 30, 2019 and 2018, the Company did not issue any common stock.
F-28
Treasury Stock
For year ended September 30, 2019 and 2018, the Company purchased 119,238 and 46,632 shares of its common stock on the open market (treasury shares), respectively, for $888 and $550, respectively. At September 30, 2019, and 2018, the Company held 262,177 and 142,939 shares of its common stock as treasury shares at a cost of $2,438 and $1,550, 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 9: Warrants
The Company issued several notes in prior periods and converted them resulting in the issuance of Series B Convertible Preferred Stock warrants. The following table summarizes information about the Company’s warrants at September 30, 2019 and September 30, 2018, respectively:
|
|
Number of
units -
Series B
Convertible
preferred
warrants
|
|
|
Weighted
Average
Exercise
Price`
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Intrinsic
Value
|
|
Outstanding and Exercisable at September 30, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
1.35
|
|
|
$
|
—
|
|
Outstanding and Exercisable at September 30, 2019
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
0.53
|
|
|
$
|
—
|
|
As discussed in Note 8. Stockholders’ Equity, the warrants may be exchanged for shares of common stock at a ratio of one share of Series B Preferred Stock into five common shares. The following table provides information assuming the warrants are exercised and exchanged for common shares:
|
|
Number of
Common
Shares to be
Issued
|
|
|
Weighted
Average
Exercise
Price Per
Common
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Intrinsic
Value
|
|
Outstanding and Exercisable at September 30, 2018
|
|
|
590,147
|
|
|
$
|
4.16
|
|
|
|
1.35
|
|
|
$
|
2,856
|
|
Outstanding and Exercisable at September 30, 2019
|
|
|
590,147
|
|
|
$
|
4.16
|
|
|
|
0.53
|
|
|
$
|
2,602
|
|
Warrants for 10,914, 12,383, 54,396 and 17,857 shares of Series B Convertible Preferred Stock were set to expire on September 10, 2017, December 11, 2017, March 27, 2018 and March 28, 2018, respectively. On January 16, 2018 and December 3, 2019, the Company and ICG amended the original terms of the warrants so that the warrants automatically extend for additional two-year periods if the warrants are not exercised by their expiration date, as the expiration date may be extended from time to time. Warrants outstanding and exercisable as of September 30, 2019 and September 30, 2018 reflect the time extended warrants in addition to 22,479 warrants for shares of Series B Convertible Preferred Stock with an original expiration date of December 3, 2019. The Company recognized compensation expense of $128 and $270 during the years ended September 30, 2019 and 2018, respectively, related to warrant awards granted to certain employees and officers based on the grant date fair value of the awards, net of estimated forfeitures. No forfeitures are estimated.
F-29
The exercise price for the Series B convertible preferred stock warrants outstanding and exercisable at September 30, 2019 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 10: 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, 2019 and 2018:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
211,668
|
|
|
$
|
13.19
|
|
|
|
3.47
|
|
|
$
|
454,117
|
|
Granted
|
|
|
20,000
|
|
|
|
32.24
|
|
|
|
9.02
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
231,668
|
|
|
$
|
14.84
|
|
|
|
3.04
|
|
|
$
|
162,500
|
|
Exercisable at September 30, 2018
|
|
|
175,000
|
|
|
$
|
11.89
|
|
|
|
2.08
|
|
|
$
|
162,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
231,668
|
|
|
$
|
14.84
|
|
|
|
3.04
|
|
|
$
|
162,500
|
|
Forfeited
|
|
|
(31,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
200,418
|
|
|
$
|
16.05
|
|
|
|
2.40
|
|
|
$
|
26,750
|
|
Exercisable at September 30, 2019
|
|
|
168,084
|
|
|
$
|
13.92
|
|
|
|
1.44
|
|
|
$
|
26,750
|
|
The Company recognized compensation expense of $142 and $227 during the years ended September 30, 2019 and 2018, 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. No forfeitures are estimated.
At September 30, 2019 the Company had $145, of unrecognized compensation expense (net of estimated forfeitures) associated with stock option awards which the Company expects will be recognized through December of 2021.
F-30
The exercise price for stock options outstanding and exercisable at September 30, 2019 is as follows:
Outstanding
|
|
|
Exercisable
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
25,000
|
|
|
|
7.50
|
|
|
|
25,000
|
|
|
|
7.50
|
|
|
31,250
|
|
|
|
10.00
|
|
|
|
31,250
|
|
|
|
10.00
|
|
|
16,668
|
|
|
|
10.86
|
|
|
|
8,334
|
|
|
|
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
|
|
|
8,000
|
|
|
|
23.41
|
|
|
|
8,000
|
|
|
|
23.41
|
|
|
8,000
|
|
|
|
27.60
|
|
|
|
8,000
|
|
|
|
27.60
|
|
|
8,000
|
|
|
|
31.74
|
|
|
|
—
|
|
|
|
—
|
|
|
8,000
|
|
|
|
36.50
|
|
|
|
—
|
|
|
|
—
|
|
|
8,000
|
|
|
|
41.98
|
|
|
|
—
|
|
|
|
—
|
|
|
200,418
|
|
|
|
|
|
|
|
168,084
|
|
|
|
|
|
The following table summarizes information about the Company’s non-vested shares as of September 30, 2019:
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
Non-vested Shares
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at September 30, 2018
|
|
|
48,501
|
|
|
$
|
25.53
|
|
Vested
|
|
|
(12,167
|
)
|
|
$
|
21.87
|
|
Non-vested at September 30, 2019
|
|
|
36,334
|
|
|
$
|
26.76
|
|
No stock options were granted during the year ended September 30, 2019. For stock options granted during September 30, 2018 where the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $10.14, and the weighted-average exercise price of such options was $32.24.
The assumptions used in calculating the fair value of stock options granted use the Black-Scholes option pricing model for options granted during September 30, 2018 are as follows:
Risk-free interest rate
|
|
1.25%
|
|
Expected life of the options
|
|
5 and 10 years
|
|
Expected volatility
|
|
107%
|
|
Expected dividend yield
|
|
0%
|
|
Note 11: Income (Loss) Per Share
Net income (loss) 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 income (loss) 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.
F-31
The following table presents the computation of basic and diluted net income (loss) per share:
|
|
Years Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,012
|
)
|
|
$
|
5,923
|
|
Less: preferred stock dividends
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net income (loss) applicable to common stock
|
|
$
|
(4,013
|
)
|
|
$
|
5,922
|
|
Weighted average common shares outstanding
|
|
|
1,901,315
|
|
|
|
1,965,595
|
|
Basic income (loss) per share
|
|
$
|
(2.11
|
)
|
|
$
|
3.01
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
$
|
(4,013
|
)
|
|
$
|
5,922
|
|
Add: preferred stock dividends
|
|
|
1
|
|
|
|
1
|
|
Net income (loss) applicable for diluted earnings per share
|
|
$
|
(4,012
|
)
|
|
$
|
5,923
|
|
Weighted average common shares outstanding
|
|
|
1,901,315
|
|
|
|
1,965,595
|
|
Add: Options
|
|
|
—
|
|
|
|
38,179
|
|
Add: Series B Preferred Stock
|
|
|
—
|
|
|
|
1,071,200
|
|
Add: Series B Preferred Stock Warrants
|
|
|
—
|
|
|
|
590,145
|
|
Add: Series E Preferred Stock
|
|
|
—
|
|
|
|
77,840
|
|
Assumed weighted average common shares
outstanding
|
|
|
1,901,315
|
|
|
|
3,742,959
|
|
Diluted income (loss) per share
|
|
$
|
(2.11
|
)
|
|
$
|
1.58
|
|
Potentially dilutive securities of 1,939,603 and 38,179 and were excluded from the calculation of diluted net income per share for years ended September 30, 2019 and September 30, 2018 because the effects were anti-dilutive based on the application of the treasury stock method.
Note 12: Related Party Transactions
In connection with its purchase of Marquis, Marquis entered into a mezzanine loan in the amount of up to $7,000 with ICF. The ICF 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, 2019, and September 30, 2018, respectively, there was $2,000 outstanding on this mezzanine loan. During the years ended September 30, 2019 and 2018, we recognized total interest expense of $253, associated with the ICF notes.
Customer Connexx LLC, a wholly owned subsidiary of JanOne Inc. (formerly Appliance Recycling Centers of America, Inc.), rents approximately 9,879 square feet of office space from the Company at its Las Vegas office which totals 11,100 square feet. JanOne Inc. paid the Company $176 and $173 in rent and other common area reimbursed expenses for the year ended September 30, 2019 and 2018, respectively. 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 JanOne Inc., respectively.
Warrants for 10,914, 12,383, 54,396 and 17,857 shares of Series B Convertible Preferred Stock were set to expire on September 10, 2017, December 11, 2017, March 27, 2018 and March 28, 2018, respectively. On January 16, 2018 and December 3, 2019, the Company and ICG amended the original terms of the warrants so that the warrants automatically extend for additional two-year periods if the warrants are not exercised by their expiration date, as the expiration date may be extended from time to time. Warrants outstanding and exercisable as of September 30, 2019 and September 30, 2018 reflect the time extended warrants in addition to 22,479 warrants for shares of Series B Convertible Preferred Stock with an original expiration date of December 3, 2019.
F-32
As previously announced by the Company, on December 30, 2017, ASH entered into the Agreement with the Seller and ApplianceSmart, a subsidiary of the Seller. Pursuant to the Agreement, ASH purchased from the Seller all of the issued and outstanding shares of capital stock of ApplianceSmart in exchange for the Purchase Price. ASH was required to deliver the Purchase Price, and a portion of the Purchase Price was delivered, to the Seller prior to March 31, 2018. Between March 31, 2018 and April 24, 2018, ASH and the Seller negotiated in good faith the method of payment of the remaining outstanding balance of the Purchase Price.
On April 25, 2018, ASH delivered to the Seller the ApplianceSmart Note in the Original Principal Amount, as such amount may be adjusted per the terms of the ApplianceSmart Note. The ApplianceSmart Note is effective as of April 1, 2018 and matures on the Maturity Date. The ApplianceSmart Note bears interest at 5% per annum with interest payable monthly in arrears. Ten percent of the outstanding principal amount will be repaid annually on a quarterly basis, with the accrued and unpaid principal due on the Maturity Date. ApplianceSmart has agreed to guaranty repayment of the ApplianceSmart Note. The remaining $2,581 of the Purchase Price was paid in cash by ASH to the Seller. ASH may reborrow funds, and pay interest on such re-borrowings, from the Seller up to the Original Principal Amount. As of September 30, 2019, there was $2,826 outstanding on the ApplianceSmart Note.
On December 26, 2018, ASH and the Seller amended and restated the ApplianceSmart Note to, among other things, grant the Seller a security interest in the assets of ASH and ApplianceSmart in accordance with the terms of separate security agreements entered into between ASH and ApplianceSmart, respectively, and the Seller.
In connection with the acquisition of Vintage Stock on November 3, 2016, Rodney Spriggs, President of Vintage Stock, holds a 41% interest in the $10,000 Seller Subordinated Acquisition Note payable by VSAH. The terms of payment are interest only, payable monthly on the 1st of each month, until maturity. On June 7, 2018, in connection with the Comvest Term Loan refinance of the Capitala Term Loan, the Sellers Subordinated Acquisition Note was amended and restated to have a maturity date of September 23, 2023. Interest paid to Mr. Spriggs in years ended September 30, 2019 and September 30, 2018 was $334 and $334, respectively. Interest unpaid and accrued as of September 30, 2019 and September 30, 2018 is $27 and $27, respectively.
Also see Note 3, 6, 7, 8 and 9.
Note 13: Commitments and Contingencies
Litigation
SEC Notice
On February 21, 2018, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) and a letter from the SEC stating that it is conducting an investigation. The subpoena requests documents and information concerning, among other things, the restatement of the Company’s financial statements for the quarterly periods ended December 31, 2016, March 31, 2017, and June 30, 2017, the acquisition of Marquis Industries, Inc., Vintage Stock, Inc., and ApplianceSmart, Inc., and the change in auditors. The letter from the SEC states that “this inquiry does not mean that the SEC has concluded that the Company or any of its officers and directors has broken the law or that the SEC has a negative opinion of any person, entity, or security.” The Company is cooperating with the SEC in its investigation.
F-33
On October 1, 2018, the Company received a letter from the SEC requesting information regarding a potential violation of Section 13(a) of the Securities Exchange Act of 1934, based upon the timing of the Company’s Form 8-K filed on February 14, 2018. The Company provided a response to the SEC on October 26, 2018. The Company is cooperating with the SEC in its inquiry.
Live Ventures and ApplianceSmart Related Litigation
On April 26, 2019, New Leaf Serv. Contracts, LLC (“New Leaf”) filed suit again ApplianceSmart and the Company in the District Court of Dallas County, Texas (the “Dallas Court”) alleging, among other things, breach of contract. Plaintiff seeks damages of approximately $215, plus interest and attorneys’ fees. This matter was subsequently abated to allow the parties to arbitrate this dispute. The Company has asserted certain counterclaims against New Leaf. This matter has been stayed as a result of the Chapter 11 Case (as defined below).
ApplianceSmart Bankruptcy and Other ApplianceSmart Litigation Matters
On December 12, 2019, Crossroads Center LLC served a lawsuit against ApplianceSmart in the District Court for the State of Minnesota, County of Olmsted, alleging, among other things, breach of contract and seeking damages in excess of $64. This matter has been stayed as a result of the Chapter 11 Case.
On December 9, 2019, ApplianceSmart filed a voluntary petition (the “Chapter 11 Case”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The bankruptcy affects Live Ventures’ indirect subsidiary ApplianceSmart only and does not affect any other subsidiary of Live Ventures, or Live Ventures itself. ApplianceSmart expects to continue to operate its business in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In addition, the Company reserves its right to file a motion seeking authority to use cash collateral of the lenders under ApplianceSmart’s reserve-based revolving credit facility. The case is being administrated under the caption In re: ApplianceSmart, Inc. (case number 19-13887). Court filings and other information related to the Chapter 11 Case are available at the PACER Case Locator website for those registered to do so or at the Courthouse located at One Bowling Green, Manhattan, New York 10004.
On November 22, 2019, Haier US Appliance Solutions, Inc. d/b/a GE Appliances filed suit against ApplianceSmart in the District Court for the State of Minnesota, County of Hennepin (the “Hennepin Court”) alleging, among other things, breach of contract and seeking damages in excess of $250. This matter has been stayed as a result of the Chapter 11 Case.
On November 1, 2019, OIRE Minnesota, L.L.C. filed suit against ApplianceSmart in the Hennepin Court alleging, among other things, breach of contract and seeking damages in excess of $60. This matter has been stayed as a result of the Chapter 11 Case.
On October 16, 2019, VanMile, LLC filed a lawsuit against ApplianceSmart in the Magistrate Court of Gwinnett County, State of Georgia alleging unpaid invoices and seeking damages therefor. Plaintiff is seeking damages of $15. This matter has been stayed as a result of the Chapter 11 Case.
On September 12, 2019, Fisher & Paykel Appliances, Inc. initiated an arbitration against ApplianceSmart in San Diego alleging breach of contract and seeking damages in excess of $100. This matter has been stayed as a result of the Chapter 11 Case.
On July 22, 2019, Trustee Main/270, LLC (the “Reynoldsburg Landlord”) filed a lawsuit against ApplianceSmart and JanOne Inc. (formerly known as Appliance Recycling Centers of America, Inc.) (“JanOne”) in the Franklin County Common Pleas Court in Columbus, Ohio, alleging, with respect to ApplianceSmart, default under a lease agreement and, with respect to JanOne, guaranty of lease. The complaint sought damages of $1,530 attorney fees, and other charges. On or about September 27, 2019, the parties entered into a second lease modification agreement and ratification of agreement (the “Second Lease Modification Agreement”) whereby the Reynoldsburg Landlord restored ApplianceSmart’s access to the property. Pursuant to the terms of the Second Lease Modification Agreement, in exchange for such restored access, ApplianceSmart paid the Reynoldsburg Landlord $141 in partial satisfaction of past due rent and costs and the Reynoldsburg Landlord agreed to dismiss the lawsuit with prejudice. In addition, the Reynoldsburg Landlord agreed to reduced minimum annual rent for the remainder of the
F-34
term and waived the rent due for October 2019, December 2019, and January 2020. In addition, JanOne ratified its guaranty under the lease.
On August 29, 2019, Martin Drive, LLC filed suit against ApplianceSmart in the Hennepin Court, alleging, among other things, breach of contract and failure to pay rent under the terms of a lease agreement. The plaintiff was awarded a default judgment in the aggregate amount of $265. This matter has been stayed as a result of the Chapter 11 Case.
On August 27, 2019, CH Robinson Worldwide, Inc. served a lawsuit against ApplianceSmart in the District Court for the State of Minnesota, County of Carver, alleging, among other things, breach of contract and seeking damages in excess of $140. This matter has been stayed as a result of the Chapter 11 Case.
On August 15, 2019, 280 Business Center, LLC filed suit against ApplianceSmart in the District Court for the State of Minnesota, County of Ramsey for eviction from the premises. This matter was settled in September 2019 for $130.
On June 19, 2019, Graceland Retail 2017 LLC filed suit against ApplianceSmart in the Court of Common Pleas in Franklin County, Ohio, alleging, among other things, breach of contract and failure to pay rent under the terms of a lease agreement. The plaintiff was seeking damages of approximately $940. This matter has been stayed as a result of the Chapter 11 Case.
On May 29, 2019, Hopkins Mainstreet II, LLC (“Hopkins Mainstreet”) filed suit against ApplianceSmart, Inc. in the Hennepin Court alleging, among other things, breach of contract and failure to pay rent. The Hennepin Court subsequently entered a default judgment in favor of Hopkins Mainstreet in the amount of $225, plus attorneys’ fees in the amount of $3, and costs and disbursements in the amount of $1. This matter has been stayed as a result of the Chapter 11 Case.
On or about December 28, 2018, Berger Transfer & Storage, Inc. filed suit against ApplianceSmart in the District Court for the State of Minnesota, County of Ramsey for breach of contract. This matter was settled in April 2019 for $31.
Generally
We are involved in various claims and lawsuits arising in the normal course of business. The ultimate results of claims and litigation cannot be predicted with certainty. We currently believe that the ultimate outcome of such lawsuits and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Operating Leases and Service Contracts
The Company leases its office, retail and warehouse space under long-term operating leases expiring through fiscal year 2029. Rent expense under these leases was $13,059 and $13,542 for the years ended September 30, 2019 and 2018, respectively. The Company has also entered into several non-cancelable service contracts. Rent expense may include certain common area charges.
As of September 30, 2019, future minimum annual payments under operating lease agreements for fiscal years ending September 30 are as follows:
2020
|
|
$
|
8,331
|
|
2021
|
|
|
6,886
|
|
2022
|
|
|
4,402
|
|
2023
|
|
|
2,415
|
|
2024
|
|
|
1,470
|
|
Thereafter
|
|
|
1,836
|
|
|
|
$
|
25,340
|
|
F-35
Additionally, during fiscal 2019, as a result of our decision to close certain ApplianceSmart retail locations, we recorded a liability for the estimated remaining lease payments and early termination charges, as applicable, of $724. The lease charges were recorded to general and administration expenses in the consolidated statements of income (loss) with a corresponding accrued liability in the consolidated balance sheet as of September 30, 2019.
Warranties
During 2019, the Company became the principal for certain extended warranties, as a result, warranty reserves are included in accrued liabilities in our consolidated balance sheet. The following table summarizes the warranty reserve activity for the year ended September 30, 2019:
Beginning balance, October 31, 2018
|
|
$
|
—
|
|
Warranties issued/accrued
|
|
|
378
|
|
Warranty settlements
|
|
|
(86
|
)
|
Ending balance, September 30, 2019
|
|
$
|
292
|
|
Note 14: 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, 2019 and 2018 is as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Current expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
State
|
|
|
237
|
|
|
|
244
|
|
|
|
|
237
|
|
|
|
227
|
|
Deferred expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,024
|
)
|
|
|
3,471
|
|
State
|
|
|
(1,226
|
)
|
|
|
368
|
|
Change in valuation allowance
|
|
|
388
|
|
|
|
341
|
|
|
|
|
(1,862
|
)
|
|
|
4,180
|
|
Total income tax expense
|
|
$
|
(1,625
|
)
|
|
$
|
4,407
|
|
A reconciliation of the differences between the effective and statutory income tax rates for years ended September 30, 2019 and 2018:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Federal statutory rates
|
|
|
21.0
|
%
|
|
|
24.3
|
%
|
State income taxes, net of federal benefit
|
|
|
11.3
|
%
|
|
|
3.3
|
%
|
Permanent differences
|
|
|
(0.9
|
)%
|
|
|
0.7
|
%
|
Impact of federal rate change from Tax Act
|
|
|
—
|
|
|
|
29.4
|
%
|
Bargain gain - purchase accounting
|
|
|
—
|
|
|
|
(14.1
|
)%
|
Property & equipment adjustment
|
|
|
(0.5
|
)%
|
|
|
(2.6
|
)%
|
Federal carryforward attributes trued up
|
|
|
4.8
|
%
|
|
|
(1.7
|
)%
|
Change in valuation allowance
|
|
|
(6.9
|
)%
|
|
|
3.3
|
%
|
Other
|
|
|
—
|
|
|
|
0.1
|
%
|
Effective rate
|
|
|
28.8
|
%
|
|
|
42.7
|
%
|
F-36
At September 30, 2019 and 2018, deferred income tax assets and liabilities were comprised of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$
|
352
|
|
|
$
|
229
|
|
Accrued expenses
|
|
|
223
|
|
|
|
22
|
|
Inventory
|
|
|
466
|
|
|
|
(8
|
)
|
Accrued compensation
|
|
|
87
|
|
|
|
34
|
|
Net operating loss
|
|
|
5,205
|
|
|
|
6,051
|
|
Disallowed interest carryforward
|
|
|
1,049
|
|
|
|
—
|
|
Tax credits
|
|
|
27
|
|
|
|
259
|
|
Stock compensation
|
|
|
2,232
|
|
|
|
2,252
|
|
Intangibles
|
|
|
(1,142
|
)
|
|
|
(1,387
|
)
|
Property & equipment
|
|
|
(2,906
|
)
|
|
|
(3,890
|
)
|
Other
|
|
|
5
|
|
|
|
—
|
|
Less: Valuation allowance
|
|
|
(729
|
)
|
|
|
(341
|
)
|
Total deferred income tax asset
|
|
$
|
4,869
|
|
|
$
|
3,221
|
|
The Company has federal and state net operating loss carryforwards of approximately $21,300 and $11,300 respectively as of September 30, 2019. The federal net operating loss amounts are subject to IRS code section 382 limitations and expire in 2030. State net operating loss amounts begin to expire in 2019. Due to the Tax Act, the federal AMT tax credit carryforward is fully refundable in 2021 if not utilized before then. The 2015 through 2018 tax years are open to examination by the various federal and state jurisdictions.
The Company evaluates all available evidence to determine if a valuation allowance is needed to reduce its deferred tax assets. Management has concluded that it is more likely than not that a portion of its existing tax benefits will not be realized. Accordingly, the Company has recorded a valuation allowance of $729 at September 30, 2019 to reduce its deferred tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The legislation significantly revises the U.S. corporate income tax system by, among other things, lowering corporate income tax rates from 35% to 21%, introducing new limitations on interest expense, subjecting foreign earnings in excess of an allowable return to U.S. taxation, adopting a territorial tax regime and imposing a one-time transitional tax on deemed repatriated earnings of foreign subsidiaries. As a result of the enactment of the Tax Act, the Company’s deferred tax assets and liabilities were revalued at the lower federal income tax rate.
The Company annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of September 30, 2019. The Company’s policy is to record uncertain tax positions as a component of income tax expense.
Note 15: Segment Reporting
The Company operates in three segments which are characterized as: (1) Manufacturing, (2) Retail and Online, and (3) Services. The Manufacturing Segment consists of Marquis Industries, the Retail and Online segment consists of Vintage Stock and ApplianceSmart, and the Services segment consists of the directory services business.
F-37
The following tables summarize segment information for the years ended September 30, 2019 and 2018:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of Total
|
|
|
|
Net
Revenue
|
|
|
Total
Revenue
|
|
|
Net
Revenue
|
|
|
Total
Revenue
|
|
Retail and Online Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used Movies, Music, Games and Other
|
|
$
|
42,298
|
|
|
|
21.9
|
%
|
|
$
|
43,014
|
|
|
|
21.5
|
%
|
New Movies, Music, Games and Other
|
|
|
33,695
|
|
|
|
17.4
|
%
|
|
|
32,980
|
|
|
|
16.5
|
%
|
Rentals, Concessions and Other
|
|
|
968
|
|
|
|
0.5
|
%
|
|
|
1,189
|
|
|
|
0.6
|
%
|
Retail Appliance
|
|
|
23,740
|
|
|
|
12.3
|
%
|
|
|
32,943
|
|
|
|
16.5
|
%
|
Manufacturing Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carpets
|
|
|
60,747
|
|
|
|
31.4
|
%
|
|
|
58,451
|
|
|
|
29.3
|
%
|
Hard Surface Products
|
|
|
29,146
|
|
|
|
15.1
|
%
|
|
|
24,229
|
|
|
|
12.1
|
%
|
Synthetic Turf Products
|
|
|
2,058
|
|
|
|
1.1
|
%
|
|
|
6,082
|
|
|
|
3.0
|
%
|
Services Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directory Services
|
|
|
636
|
|
|
|
0.3
|
%
|
|
|
745
|
|
|
|
0.4
|
%
|
Total Revenue
|
|
$
|
193,288
|
|
|
|
100.0
|
%
|
|
$
|
199,633
|
|
|
|
100.0
|
%
|
|
|
Year Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
100,701
|
|
|
$
|
110,125
|
|
Manufacturing
|
|
|
91,951
|
|
|
|
88,763
|
|
Services
|
|
|
636
|
|
|
|
745
|
|
|
|
$
|
193,288
|
|
|
$
|
199,633
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
45,154
|
|
|
$
|
51,040
|
|
Manufacturing
|
|
|
25,122
|
|
|
|
22,450
|
|
Services
|
|
|
597
|
|
|
|
708
|
|
|
|
$
|
70,873
|
|
|
$
|
74,198
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
(9,074
|
)
|
|
$
|
1,338
|
|
Manufacturing
|
|
|
11,735
|
|
|
|
8,756
|
|
Services
|
|
|
595
|
|
|
|
706
|
|
|
|
$
|
3,256
|
|
|
$
|
10,800
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
3,090
|
|
|
$
|
2,880
|
|
Manufacturing
|
|
|
2,583
|
|
|
|
3,168
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
5,673
|
|
|
$
|
6,048
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
4,634
|
|
|
$
|
6,739
|
|
Manufacturing
|
|
|
1,681
|
|
|
|
1,904
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
6,315
|
|
|
$
|
8,643
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
(17,259
|
)
|
|
$
|
2,781
|
|
Manufacturing
|
|
|
11,026
|
|
|
|
6,843
|
|
Services
|
|
|
596
|
|
|
|
706
|
|
|
|
$
|
(5,637
|
)
|
|
$
|
10,330
|
|
F-38
Note 16: Subsequent Events
Chapter 11 Filing of ApplianceSmart, Inc.
On December 9, 2019, ApplianceSmart filed a voluntary petition (the “Chapter 11 Case”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The bankruptcy affects Live Ventures’ indirect subsidiary ApplianceSmart only and does not affect any other subsidiary of Live Ventures, or Live Ventures itself. As part of the Chapter 11 process, ApplianceSmart expects to work with its lenders and creditors to restructure and or settle secured and unsecured indebtedness.
ApplianceSmart expects to continue to operate its business in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In addition, the Company reserves its right to file a motion seeking authority to use cash collateral of the lenders under the reserve-based revolving credit facility.
The case is being administrated under the caption In re: ApplianceSmart, Inc. (case number 19-13887). Court filings and other information related to the Chapter 11 Case are available at the PACER Case Locator website for those registered to do so or at the Courthouse located at One Bowling Green, Manhattan, New York 10004.
Lonesome Oak Acquisition
On November 1, 2019, Marquis entered into a purchase agreement, as amended (as amended, the “LOTC Purchase Agreement”), to acquire the outstanding capital stock of Lonesome Oak Trading Co., Inc. (“Lonesome Oak”). Pursuant to the LOTC Purchase Agreement, Marquis will acquire from the sole shareholder of Lonesome Oak (the “LOTC Shareholder”) all of the issued and outstanding shares of capital stock of Lonesome Oak. The transaction value under the Purchase Agreement is approximately $14,000. In addition, following the closing of the transaction, Lonesome Oak will be leasing back from the LOTC Shareholder certain properties owned by affiliates of the LOTC Shareholder that will be used in Lonesome Oak’s operations. Marquis will hold back $1,200 of the purchase price (the “Holdback Amount”) to satisfy claims for indemnity arising out of breaches of certain representations, warranties, and covenants, and certain other enumerated items, if any. In connection with the closing of the transaction, the LOTC Shareholder will enter into an employment agreement with a five-year term and will serve as Lonesome Oak’s Executive Vice President pursuant to the terms thereof. The parties expect that the transaction will close within the Company’s second fiscal quarter, subject to customary closing conditions. The LOTC Purchase Agreement contains customary representations, warranties, and covenants. Subject to certain exceptions, the LOTC Shareholder has agreed to indemnify Marquis for breaches of certain representations, warranties, and covenants, and certain other enumerated items, if any. Indemnification by the LOTC Shareholder for breaches of certain representations and warranties is generally limited to the Holdback Amount. The LOTC Purchase Agreement contains a three-year non-competition covenant and non-solicitation covenant that apply to the LOTC Shareholder. The transaction closed on January 31, 2020.
F-39