The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31,
2018 AND 2017
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
(our new name for the previously named Marketplace Platform segment) 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 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.
The unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim
financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial
statements. In the opinion of the Company’s management, this interim information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results of operations
for three months ended December 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending
September 30, 2019. This financial information should be read in conjunction with the consolidated financial statements and related
notes thereto as of September 30, 2018 and for the fiscal year then ended included in the Company’s Annual Report on Form
10-K for the fiscal year ended September 30, 2018, as amended, filed with the U.S. Securities and Exchange Commission (the “SEC”)
on December 27, 2018 (the “2018 10-K”).
Note 2: Summary
of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated
financial statements represent the consolidated financial position, results of operations and cash flows of Live Ventures Incorporated
and its wholly-owned subsidiaries. On July 6, 2015, the Company acquired 80% of Marquis Industries, Inc. and subsidiaries (“Marquis”).
Effective November 30, 2015, the Company acquired the remaining 20% of Marquis. On November 3, 2016, the Company acquired 100%
of Vintage Stock, Inc., a Missouri corporation (“Vintage Stock”), through its newly formed, wholly-owned subsidiary,
Vintage Stock Affiliated Holdings LLC (“VSAH”). Effective December 30, 2017, the Company acquired 100% of ApplianceSmart
through its newly formed, wholly-owned subsidiary, ApplianceSmart Holdings LLC (“ASH”). All intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with GAAP 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 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, sales return allowance, the estimated reserve for excess and obsolete
inventory, estimated fair value and forfeiture rates for stock-based compensation, fair values in connection with the analysis
of goodwill, other intangibles and long-lived assets for impairment, current portion of long-term debt, valuation allowance against
deferred tax assets and estimated useful lives for intangible assets and property and equipment.
Financial Instruments
Financial instruments consist primarily
of cash equivalents, trade and other receivables, advances to affiliates and obligations under accounts payable, accrued expenses
and notes payable. The carrying amounts of cash equivalents, trade receivables and other receivables, accounts payable, accrued
expenses and short-term notes payable approximate fair value because of the short maturity of these instruments. The fair value
of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to the Company’s
existing debt arrangements, unless quoted market prices were available (Level 2 inputs). The carrying amounts of long-term debt
at December 31, 2018 and September 30, 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 $750,000.
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 receivables 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 $112,500 per contract year. Total commissions paid to factors were $62,049 and $68,759 for three months ended
December 31, 2018 and 2017, respectively.
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 December 31, 2018 and September 30, 2018, the allowance for doubtful accounts was $922,284 and $855,709,
respectively.
Inventories
Manufacturing Segment
Inventories are valued at the lower of
the inventory’s cost (first in, first out basis (“FIFO”)) or market of the inventory. Management compares the
cost of inventory with its net realizable value and an allowance is made to write down inventory to net realizable value, if lower.
Management also reviews inventory to determine if excess or obsolete inventory is present and a reserve is made to reduce the carrying
value for inventory for such excess and or obsolete inventory. At December 31, 2018 and September 30, 2018, the reserve for obsolete
inventory was $91,940.
Retail and Online Segment
Merchandise inventories are valued at the
lower of cost or market using the average cost method which approximates FIFO. Under the average cost method, as new product is
received from vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged over the
cumulative units in inventory available for sale. Pre-owned products traded in by customers are recorded as merchandise inventory
for the amount of cash consideration or store credit less any premiums given to the customer. Management reviews the merchandise
inventory to make required adjustments to reflect potential obsolescence or the lower of cost or market. In valuing merchandise
inventory, management considers quantities on hand, recent sales, potential price protections, returns to vendors and other factors.
Management’s ability to assess these factors is dependent upon forecasting customer demand and to provide a well-balanced
merchandise assortment. Merchandise inventory valuation is adjusted based on anticipated physical inventory losses or shrinkage
and actual losses resulting from periodic physical inventory counts. Merchandise inventory reserves as of December 31, 2018 and
September 30, 2018 were $1,128,906 and $1,110,729, respectively.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost
and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of building and improvements
are three to forty years, transportation equipment is five to ten years, machinery and equipment are five to ten years, furnishings
and fixtures are three to five years and office and computer equipment are three to five years. Depreciation expense was $1,127,872
and $1,159,587 for the three months ended December 31, 2018 and 2017, 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
is 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 the business acquired.
We test goodwill annually on July 1 of
each fiscal year or more frequently if events arise or circumstances change that indicate that goodwill may be impaired. The Company
assesses whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative assessment
involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting
unit is less than its’ carrying amount, including goodwill. If based on this qualitative assessment the Company determines
it is not more likely than not that the fair value of a reporting unit is less than its’ carrying amount or if the Company
elects not to perform a qualitative assessment, a quantitative assessment is performed using a two-step approach required by ASC
350 to determine whether a goodwill impairment exists.
The first step of the quantitative test
is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting unit. If the fair value exceeds
the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying amount exceeds the
fair value, then the second step is required to be completed, which involves allocating the fair value of the reporting unit to
each asset and liability using the guidance in ASC 805 (“
Business Combinations, Accounting for Identifiable Intangible
Assets in a Business Combination
”), with the excess being applied to goodwill. An impairment loss occurs if the amount
of the recorded goodwill exceeds the implied goodwill. The determination of the fair value of our reporting units is based, among
other things, on estimates of future operating performance of the reporting unit being valued. We are required to complete an impairment
test for goodwill and record any resulting impairment losses at least annually. Changes in market conditions, among other factors,
may have an impact on these estimates and require interim impairment assessments.
When performing the two-step quantitative
impairment test, the Company's methodology includes the use of an income approach which discounts future net cash flows to their
present value at a rate that reflects the Company’s cost of capital, otherwise known as the discounted cash flow method (“DCF”).
These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash
flows include the continued market acceptance of the products and services offered by the businesses, the development of new products
and services by the businesses and the underlying cost of development, the future cost structure of the businesses, and future
technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of
our reporting units. Any such impairment would be recognized in full in the reporting period in which it has been identified.
Intangible Assets
The Company’s intangible assets consist
of customer relationship intangibles, 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 $353,897 and $236,318 for the three months ended
December 31, 2018 and 2017, respectively.
Revenue Recognition
Manufacturing Segment
The Manufacturing Segment derives revenue
primarily from the sale of carpet products, including shipping and handling amounts, which are recognized when the following 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.
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.
Shipping and Handling
The Company classifies shipping and handling
charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Customer Liabilities
The Company establishes a liability upon
the issuance of merchandise credits and the sale of gift cards. Breakage income related to gift cards which are no longer reportable
under state escheatment laws for the three months ended December 31, 2018 and 2017, was $14,844 and of $13,305, respectively. Breakage
income is recorded in other income in our consolidated financial statements. The gift card liability at December 31, 2018 and September
30, 2018 is $1,668,503 and $1,593,688, respectively, and is recorded in accrued liabilities in our consolidated financial statements.
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 require recognition of deferred tax assets and liabilities for expected
future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's
assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance
is provided on deferred taxes if it is determined that it is more likely than not that the asset will not be realized. The Company
recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its Consolidated
Statements of Income.
Significant management judgment is required
to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company uses a two-step process
to evaluate tax positions. The first step requires an entity to determine whether it is more likely than not (greater than 50%
chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial statements the
benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid upon resolution
of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements
of the Company in future periods.
Lease Accounting
We lease retail stores, warehouse facilities
and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates
through 2024 with various renewal options for additional periods. The agreements, which have been classified as operating leases,
generally provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance
costs. Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis
over the lease term and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease
incentives received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line
basis as a reduction to rent expense over the lease term. The Company records the unamortized portion of tenant improvement allowances
as a part of deferred rent. We do not have leases with capital improvement funding. Percentage rentals are based on sales performance
in excess of specified minimums at various stores and are accounted for in the period in which the amount of percentage rent can
be accurately estimated.
Stock-Based Compensation
The Company from time to time grants restricted
stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the
grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line
basis over the vesting period.
Earnings Per Share
Earnings per share is calculated in accordance
with ASC 260 (“
Earnings Per share
”). Under ASC 260 basic earnings per share is computed using the weighted average
number of common shares outstanding during the period except that it does not include unvested restricted stock subject to cancellation.
Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares
outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants,
options, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares, options and warrants
is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected
on an if-converted basis.
Segment Reporting
ASC Topic 280, “
Segment Reporting
,”
requires use of the “management approach” model for segment reporting. The management approach model is based on the
way a Company’s management organizes segments within the Company for making operating decisions and assessing performance.
The Company determined it has three reportable segments (See Note 17).
Concentration of Credit Risk
The Company maintains cash balances at
several banks in multiple states including, Arkansas, California, Colorado, Georgia, Idaho, Illinois, Kansas, Missouri, Minnesota,
Nevada, New Mexico, New York, Ohio, Oklahoma, Texas, and Utah. Accounts are insured by the Federal Deposit Insurance Corporation
up to $250,000 per institution as of December 31, 2018. At times, balances may exceed federally insured limits.
Recently Issued Accounting Pronouncements
ASU 2016-02,
Leases (Topic 842)
.
The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to
use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
Note 3: Comprehensive
Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For our Company, for
the three months ended December 31, 2018 and 2017, net income does not differ from comprehensive income.
Note 4: Balance
Sheet Detail Information
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Trade receivables, current, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, current
|
|
$
|
11,513,055
|
|
|
$
|
14,350,559
|
|
Less: Reserve for doubtful accounts
|
|
|
(577,712
|
)
|
|
|
(511,137
|
)
|
|
|
$
|
10,935,343
|
|
|
$
|
13,839,422
|
|
Trade receivables , long term, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, long term
|
|
$
|
344,572
|
|
|
$
|
344,572
|
|
Less: Reserve for doubtful accounts
|
|
|
(344,572
|
)
|
|
|
(344,572
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total trade receivables, net:
|
|
|
|
|
|
|
|
|
Gross trade receivables
|
|
$
|
11,857,627
|
|
|
$
|
14,695,131
|
|
Less: Reserve for doubtful accounts
|
|
|
(922,284
|
)
|
|
|
(855,709
|
)
|
|
|
$
|
10,935,343
|
|
|
$
|
13,839,422
|
|
Inventory, net
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
8,042,924
|
|
|
$
|
9,712,839
|
|
Work in progress
|
|
|
1,554,306
|
|
|
|
1,141,486
|
|
Finished goods
|
|
|
5,761,173
|
|
|
|
5,414,072
|
|
Merchandise
|
|
|
28,378,693
|
|
|
|
31,461,311
|
|
|
|
|
43,737,096
|
|
|
|
47,729,708
|
|
Less: Inventory reserves
|
|
|
(1,220,846
|
)
|
|
|
(1,202,669
|
)
|
|
|
$
|
42,516,250
|
|
|
$
|
46,527,039
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Building and improvements
|
|
$
|
11,119,160
|
|
|
$
|
10,954,843
|
|
Transportation equipment
|
|
|
82,266
|
|
|
|
82,266
|
|
Machinery and equipment
|
|
|
19,263,117
|
|
|
|
23,295,315
|
|
Furnishings and fixtures
|
|
|
2,693,025
|
|
|
|
2,639,616
|
|
Office, computer equipment and other
|
|
|
2,559,621
|
|
|
|
2,530,410
|
|
|
|
|
35,717,189
|
|
|
|
39,502,450
|
|
Less: Accumulated depreciation
|
|
|
(11,228,227
|
)
|
|
|
(11,511,390
|
)
|
|
|
$
|
24,488,962
|
|
|
$
|
27,991,060
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Domain name and marketing related intangibles
|
|
$
|
59,313
|
|
|
$
|
59,313
|
|
Lease intangibles
|
|
|
2,239,008
|
|
|
|
2,239,008
|
|
Customer relationship intangibles
|
|
|
4,709,241
|
|
|
|
4,709,241
|
|
Purchased software
|
|
|
2,237,162
|
|
|
|
2,190,937
|
|
|
|
|
9,244,724
|
|
|
|
9,198,499
|
|
Less: Accumulated amortization
|
|
|
(2,886,549
|
)
|
|
|
(2,532,652
|
)
|
|
|
$
|
6,358,175
|
|
|
$
|
6,665,847
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and bonuses
|
|
$
|
1,994,912
|
|
|
$
|
2,384,041
|
|
Accrued sales and use taxes
|
|
|
1,443,559
|
|
|
|
1,007,284
|
|
Accrued property taxes
|
|
|
11,955
|
|
|
|
362,388
|
|
Accrued rent
|
|
|
450,563
|
|
|
|
506,989
|
|
Deferred revenue
|
|
|
365,778
|
|
|
|
354,227
|
|
Accrued gift card and escheatment liability
|
|
|
1,668,503
|
|
|
|
1,593,688
|
|
Accrued interest payable
|
|
|
194,391
|
|
|
|
195,907
|
|
Accrued accounts payable and bank overdrafts
|
|
|
1,248,793
|
|
|
|
942,600
|
|
Accrued professional fees
|
|
|
70,000
|
|
|
|
470,726
|
|
Customer deposits
|
|
|
152,883
|
|
|
|
508,252
|
|
Accrued expenses - other
|
|
|
1,864,273
|
|
|
|
244,803
|
|
|
|
$
|
9,465,610
|
|
|
$
|
8,570,905
|
|
Note 5: Acquisitions
Acquisition of Vintage Stock Inc.
On November 3, 2016 (the “Vintage
Stock Closing Date”), the Company, through its wholly-owned subsidiary, VSAH, entered into a series of agreements in connection
with its purchase of Vintage Stock. Vintage Stock sells, buys and trades new and used movies, books, collectibles, games, comics,
music and other retail products.
Total consideration paid of $57,653,698
was paid through a combination of $8,000,000 of capital provided by the Company and debt financing provided by (i) Texas Capital
Bank Revolver Loan in the aggregate amount of approximately $12,000,000, (ii) mezzanine financing from the Capitala Term Loan of
approximately $30 million, and (iii) the Company issued $10,000,000 in subordinated acquisition notes payable to the sellers of
Vintage Stock, as more fully described in Note 8.
The following table below summarizes our
final purchase price allocation of the consideration paid to the respective fair values of the assets acquired and liabilities
assumed in the Vintage Stock acquisition as of the Vintage Stock Closing Date. The Company finalized its estimates after it was
able to determine that it had obtained all necessary information that existed as of the acquisition date related to these matters.
Cash and cash equivalents
|
|
$
|
272,590
|
|
Trade and other receivables
|
|
|
177,338
|
|
Inventory
|
|
|
18,711,192
|
|
Prepaid expenses and other current assets
|
|
|
814,201
|
|
Property and equipment
|
|
|
4,859,676
|
|
Intangible - leases
|
|
|
1,033,412
|
|
Intangible - trade names
|
|
|
1,200,000
|
|
Intangible - customer list
|
|
|
50,000
|
|
Intangible - customer relationship
|
|
|
1,000,000
|
|
Goodwill
|
|
|
36,946,735
|
|
Notes payable
|
|
|
(542,074
|
)
|
Accounts payable
|
|
|
(5,165,612
|
)
|
Accrued expenses
|
|
|
(1,703,760
|
)
|
|
|
$
|
57,653,698
|
|
In connection with the purchase of Vintage
Stock, we incurred bank fees of $15,000, appraisal fees of $20,497, legal fees of $192,339 and consulting fees of $119,774 –
for a total of $347,610; all of which was recorded as general and administrative expense during the year ended September 30, 2017.
Goodwill of $36,946,735 is the excess of total consideration less identifiable assets at fair value less debt assumed at fair value
and is tax deductible. Goodwill is attributable to Vintage Stock’s management, assembled workforce, operating model, the
number of stores, locations and competitive presence in each of its respective markets.
The operating results of Vintage Stock
have been included in our consolidated financial statements beginning on November 3, 2016 and are reported in our Retail and Online
segment.
The estimated fair value of the customer
relationship intangible related to Vintage Stock was determined using the income approach, which discounts expected future cash
flows to present value. The Company estimated the fair value of this intangible asset using the residual method and a present value
discount rate of 17%, totaling $1,000,000. Customer relationships relate to the Company’s ability to sell existing and future
products. The Company is amortizing the Customer relationships intangible asset on a straight-line basis over an estimated life
of 5 years.
The estimated fair value of the trade names
intangible that Vintage Stock owns – “Vintage Stock”, “EntertainMart” and “Movie Trading Company”
was determined using a royalty income approach, which estimates an assumed royalty income stream and then discounts that expected
future revenue or cash flow stream to present value. The Company estimated the fair value of this intangible asset using the residual
method and a present value discount rate of 17%, totaling $1,200,000. Trade names relate to the Company’s brand awareness
by consumers in the market place. The Company is amortizing the trade names intangible asset on a straight-line basis over an estimated
life of 7 years.
The estimated fair value of the customer
list intangible asset was determined using the cost approach, which estimates the cost to acquire each email address in the list.
The Company estimated the fair value of this intangible asset to be $0.19 per acquired email address, less a discount 40% attributable
to domain and trade names or a net cost per email address of $0.11 or approximately $50,000. The Company is amortizing the customer
list intangible asset on a straight-line basis over an estimated life of 3 years.
Acquisition of ApplianceSmart Inc.
On December 30, 2017 (the “ApplianceSmart
Closing Date”), the Company, through its 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 $6,500,000, with
no liabilities assumed by ASH. On December 30, 2017, ASH agreed to pay the $6,500,000 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 $3,919,494 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 $2,580,506 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 $1,607,369, 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. 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 addition, ASH and the Seller modified the terms of when interest and principal
would be due. Outstanding principal and accrued and un-paid interest at 5% per annum is now all due and payable on April 1, 2021.
At December 31, 2018 and September 30, 2018, the net amount owing to the Seller was $3,821,507 and is included in long term debt,
related parties. See Note 9.
Net liabilities assumed by ASH on December
31, 2017:
Accounts payable
|
|
$
|
1,374,647
|
|
Accrued expenses
|
|
|
1,080,255
|
|
Capital leases
|
|
|
29,631
|
|
Credit card receivables
|
|
|
(255,301
|
)
|
Cash
|
|
|
(621,863
|
)
|
Total net liabilities assumed by ASH
|
|
$
|
1,607,369
|
|
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 Closing Date related to these matters.
Trade receivables
|
|
$
|
1,805,545
|
|
Inventory
|
|
|
7,444,282
|
|
Prepaid expenses
|
|
|
69,347
|
|
Refundable deposits
|
|
|
1,003,841
|
|
Intangible asset - trade names
|
|
|
2,015,000
|
|
Intangible asset - customer list
|
|
|
5,202
|
|
Intangible asset - leases
|
|
|
1,205,596
|
|
Restricted cash
|
|
|
750,000
|
|
Property and equipment
|
|
|
1,094,503
|
|
Deferred income tax
|
|
|
(1,599,560
|
)
|
Bargain gain on acquisition
|
|
|
(7,293,756
|
)
|
|
|
$
|
6,500,000
|
|
The operating results of ApplianceSmart
are included in our audited consolidated financial statements beginning on December 31, 2017 and are reported 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 $5,202.
The Company is amortizing the customer list intangible asset on a straight-line basis over an estimated life of 20 years.
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 $2,015,000. Trade name relates to the Company’s brand awareness by consumers in the market place. The Company
is amortizing the trade name intangible asset on a straight-line basis over an estimated life of 20 years.
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 $150,000, 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.
The unaudited pro forma information below
presents statement of income data for the three months ended December 31, 2017, as if the acquisition of ApplianceSmart took place
on October 1, 2017. Actual unaudited consolidated results of ApplianceSmart are also shown. ApplianceSmart was acquired on December
30, 2017 with only one day of consolidated results for the quarter ended December 31, 2017.
|
|
Proforma
|
|
|
Actual
|
|
|
|
Three Months
|
|
|
Unaudited
|
|
|
|
Ended
|
|
|
Results - One Day
|
|
|
|
December 31, 2017
|
|
|
December 31, 2017
|
|
Net revenue
|
|
$
|
11,320,975
|
|
|
$
|
68,674
|
|
Gross profit
|
|
|
1,112,073
|
|
|
|
19,200
|
|
Operating income
|
|
|
(2,504,976
|
)
|
|
|
19,655
|
|
Net income (loss)
|
|
|
(2,089,772
|
)
|
|
|
19,655
|
|
Earnings (loss) per basic common share
|
|
$
|
(1.06
|
)
|
|
$
|
0.01
|
|
Note 6: Intangibles
The Company’s intangible assets consist
of customer relationship intangibles, trade names, licenses for the use of internet domain names, 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 $353,897 and $236,318 for the three months ended
December 31, 2018 and 2017, respectively.
The following table summarizes estimated
future amortization expense related to intangible assets that have net balances as of December 31, 2018:
2019
|
|
$
|
1,267,294
|
|
2020
|
|
|
1,106,076
|
|
2021
|
|
|
1,016,466
|
|
2022
|
|
|
757,985
|
|
2023
|
|
|
454,755
|
|
Thereafter
|
|
|
1,755,599
|
|
|
|
$
|
6,358,175
|
|
Note 7: Goodwill
Goodwill is not amortized, but rather is
evaluated for impairment on July 1 annually or when indicators of a potential impairment are present. The annual evaluation for
impairment of goodwill is based on valuation models that incorporate assumptions and internal projections of expected future cash
flows and operating plans. We believe such assumptions are also comparable to those that would be used by other marketplace participants.
Note 8: Long
Term Debt
Bank of America Revolver Loan
On July 6, 2015, Marquis entered into a
$15 million revolving credit agreement with Bank of America Corporation (“BofA Revolver”). The BofA Revolver is
a five-year, asset-based facility that is secured by substantially all of Marquis’ assets. Availability under the 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)
$7,500,000; (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 55.3% for raw materials, 0% for work-in-process and 70% for finished goods subject
to eligibility, special reserves and advance limit. Letters of credit reduce the amount available to borrow under the BofA Revolver
by an amount equal to the face value of the letters of credit.
As of December 24, 2018, Marquis’s
ability to make prepayments against Marquis subordinated debt, including the related party loan with Isaac Capital Group, LLC
(“ICG”) and pay cash dividends is generally permitted if (i) excess availability under the BofA Revolver is
more than $4 million, and has been for each of the 60 days preceding the requested distribution and (ii) excess availability under
the BofA Revolver is more than $4 million, and the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior
12 months is 1.1:1 or greater. Restrictions apply to our ability to make additional prepayments against Marquis subordinated debt
and pay cash dividends if the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months is less
than 1.1:1 and excess availability under the BofA Revolver is less than $4 million at the time of payment or distribution. There
is no restriction on dividends that can be taken by the Company so long as Marquis maintains $4 million of current availability
at the time of the dividend or distribution. This translates to having no restriction on Net Income so long as the Company retains
sufficient assets to establish $4 million of current availability and continues to meet the required fixed charge coverage ratio
of 1.1:1 as stated above.
The BofA Revolver places certain restrictions
and covenants on Marquis, including a limitation on asset sales, additional liens, investment, loans, guarantees, acquisitions,
incurrence of additional indebtedness for Marquis to maintain a fixed charge coverage ratio of at least 1.05 to 1, tested as of
the last day of each month for the twelve consecutive months ending on such day.
As of December 24, 2018, 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.
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. On September 30, 2018, total additional availability under the BofA Revolver was $7,326,680, with $7,600,605
outstanding, and outstanding standby letters of credit of $72,715. During the period of October 1, 2018 through December 31, 2018,
Marquis cumulatively borrowed $22,723,210 and repaid $28,013,283 under the BofA Revolver. Maximum borrowing under the BofA Revolver
is $15,000,000. Our maximum borrowings outstanding during the same period was $8,070,635. Our weighted average interest rate on
those outstanding borrowings for the period of October 1, 2018 through December 31, 2018 was 4.27%. As of December 31, 2018, total
additional availability under the BofA Revolver was $12,616,753; with $2,310,532 outstanding, and outstanding standby letters of
credit of $72,715.
Real Estate Transaction
On June 14, 2016, Marquis entered into
a transaction with Store Capital Acquisitions, LLC. The transaction included a sale-leaseback of land owned by Marquis and a loan
secured by the improvements on such land. The total aggregate proceeds received from the sale of the land and the loan was $10,000,000,
which consisted of $644,479 from the sale of the land and a note payable of $9,355,521. In connection with the transaction, Marquis
entered into a lease with a 15-year term commencing on the closing of the transaction, which provides Marquis an option to extend
the lease upon the expiration of its term. The initial annual lease rate is $59,614. The proceeds from this transaction were used
to pay down the 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 9.25% per annum, with principal
and interest due monthly. The note payable matures June 13, 2056. For the first five years of the note payable, there is a pre-payment
penalty of 5%, which declines by 1% for each year the loan remains un-paid. At the end of five years, there is no pre-payment penalty.
In connection with the note payable, Marquis incurred $457,757 in transaction costs that are being recognized as a debt issuance
cost that is being amortized and recorded as interest expense over the term of the note payable.
Kingston Diversified Holdings LLC Agreement
($2 Million Line of Credit)
On December 21, 2016, the Company and Kingston
Diversified Holdings LLC (“Kingston”) entered into an agreement (the “December 21 Agreement”) modifying
its then existing agreement between the parties. The December 21 Agreement, effective September 15, 2016, memorializes an October
2015 interim agreement 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 $2,800,000, 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 $10,000,000 in principal amount
to $2,000,000 in principal amount, and eliminates any and all actual, contingent, or other obligations of the Company to issue
to 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 a result of the December 21 Agreement, the Company recorded
$2,800,000 as an outstanding accrued liability as of September 30, 2016. As of September 30, 2018, and September 30, 2017, the
Company had no borrowings on the Kingston line of credit. On December 29, 2016, the Company issued 55,888 shares of Series B Convertible
Preferred Stock in settlement of the outstanding accrued liability due Kingston of $2,800,000.
Equipment Loans
On June 20, 2016 and August 5, 2016, Marquis
entered into a transaction which provided for a master agreement and separate loan schedules (the “Equipment Loans”)
with Banc of America Leasing & Capital, LLC which provided:
Note #1 is $5 million,
secured by equipment. The Equipment Loan #1 is due September 23, 2021, payable in 59 monthly payments of $84,273 beginning September
23, 2016, with a final payment in the sum of $584,273, bearing interest at 3.8905% per annum.
Note #2 is $2,209,807,
secured by equipment. The Equipment Loan #2 is due January 30, 2022, payable in 59 monthly payments of $34,768 beginning January
30, 2017, with a final payment in the sum of $476,729, bearing interest at 4.63% per annum. This Note #2 was paid in full with
the sale of the Synthetic Turf line within the quarter ended December 31, 2018.
Note #3 is $3,679,514,
secured by equipment. The Equipment Loan #3 is due December 30, 2023, payable in 84 monthly payments of $51,658 beginning January
30, 2017, with a final payment due December 30, 2023, bearing interest rate at 4.7985% per annum.
Note #4 is $1,095,113,
secured by equipment. The Equipment Loan #4 is due December 30, 2023, payable in 81 monthly payments of $15,901 beginning April
30, 2017, with final payment due December 30, 2023, bearing interest at 4.8907% per annum.
Note #5 is $3,931,591,
secured by equipment. The Equipment Loan #5 is due December 28, 2024, payable in 84 monthly payments of $54,944 beginning January
28, 2018, with the final payment due December 28, 2024, bearing interest at 4.66% per annum.
Texas Capital Bank Revolver Loan
On November 3, 2016, Vintage Stock entered
into a $20 million credit agreement (as amended on January 23, 2017 and as further amended on September 20, 2017) 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. On June 7,
2018, the credit agreement was amended reducing the maximum revolving facility to $12 million. The TCB Revolver matures November
3, 2020.
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 95% of the appraisal value of the inventory, plus 85%
of eligible receivables, net of certain reserves. The borrowing base provides for borrowing up to 95% of the appraisal value for
the period of November 4, 2016 through December 31, 2016, then 90% of the appraisal value during the fiscal months of January through
September and 92.5% of the appraisal value during the fiscal months of October through December. Letters of credit reduce the amount
available to borrow under the TCB Revolver by an amount equal to the face value of the letters of credit.
Vintage Stock’s ability to make prepayments
against Vintage Stock subordinated debt including the Comvest Term Loan and pay cash dividends is generally permitted if (i) excess
availability under the TCB Revolver is more than $2 million, and is projected to be within 12 months after such payment and (ii)
excess availability under the TCB Revolver is more than $2 million, and the fixed charge coverage ratio, as calculated on a pro-forma
basis for the prior 12 months is 1.2:1.0 or greater. Restrictions apply to our ability to make additional prepayments against Vintage
Stock subordinated debt including the 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
million at the time of payment or distribution. There is no restriction on dividends that can be taken by the Company so long as
Vintage Stock maintains $2 million of current availability at the time of the dividend or distribution. This translates to having
no restriction on Net Income so long as the Company retains sufficient assets to establish $2 million of current availability and
continues to meet the required fixed charge coverage ratio of 1.2:1 as stated above.
The TCB Revolver places certain restrictions
on Vintage Stock, including a limitation on asset sales, a limitation of 25 new leases in any fiscal year, additional liens, investment,
loans, guarantees, acquisitions and incurrence of additional indebtedness.
The per annum interest rate under the TCB
Revolver is variable and is equal to the one-month LIBOR rate for deposits in United States Dollars that appears on Thomson Reuters
British Bankers Association LIBOR Rates Page (or the successor thereto) as of 11:00 a.m., London, England time, on the applicable
determination date plus a margin of 2.25%, 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. During the period
of October 1, 2017 through December 31, 2018, Vintage Stock cumulatively borrowed $57,546,998 and repaid $59,150,804 under the
TCB Revolver. Our maximum borrowings outstanding during the period of October 1, 2017 through December 31, 2018 was $16,077,915.
Our weighted average interest rate on those outstanding borrowings for the period of October 1, 2017 through December 31, 2018
was 4.502899%. As of December 31, 2018, total additional availability under the TCB Revolver was $1,083,369, with $9,836,123 outstanding;
and outstanding standby letters of credit of $0. In connection with the TCB Revolver, Vintage incurred $25,000 in transaction cost
that is being recognized as debt issuance cost that is being amortized and recorded as interest expense over the term of the TCB
Revolver.
Capitala Term Loan
On November 3, 2016, the Company, through
VSAH, entered into a series of agreements in connection with its purchase of Vintage Stock. As a part of those agreements, VSAH
and Vintage Stock (the “Term Loan Borrowers”) obtained $29,871,650 of mezzanine financing from the lenders (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) 0.50% per annum,
plus
(b) the sum of (i) 12.50% per annum
in cash pay
plus
(ii) 3.00% per annum payable in kind by compounding such interest to the principal amount of
the obligations under the Term Loan Agreement on each interest payment date.
The interest rate for base rate loans under
the term loan agreement was equal to the sum of (a) the highest of (with a minimum of 1.50%) (i) the federal funds rate plus 0.50%,
(ii) the prime rate, and (iii) the LIBO rate plus 1.00%,
plus
(b) the sum of (i) 11.50% per annum payable in cash
plus
(ii)
3.00% per annum payable in kind by compounding such interest to the principal amount of the obligations under the Term Loan Agreement
on each interest payment date.
The Term Loans 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, 2017, 1.4 for year ended September 30, 2018 and 1.5 for all years thereafter. For years ended
September 30, 2017 and thereafter, Vintage Stock 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, 2017, 2.5 for year ended September 30, 2018 and 2.0 for all years thereafter. In addition,
for quarter ended December 31, 2017, the total leverage ratio 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 $725,000
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.
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 million of the term loans;
|
|
(ii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed $1.45 million, but only if that additional amount is paid prior to the first anniversary of the Closing Date; and
|
|
(iii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed the difference between $2.9 million and any amount prepaid in respect of item (ii), but only if that additional amount is paid from and after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date.
|
There 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 $1,088,000 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 $742,000 of un-amortized 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 million with
the previous owners of Vintage Stock. The Sellers Subordinated Acquisition Note bears interest at 8% per annum, with interest payable
monthly in arrears. The Sellers Subordinated Acquisition Note originally had a maturity date of five years and six months from
November 3, 2016. 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, 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 $24,000,000 secured term loan (the “Term
Loan”). The proceeds of the Term Loan, together with a cash equity contribution of approximately $4.0 million 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 8.00% to 9.50% per
annum (subject to a LIBOR floor of 1.00%) and is determined based on the Borrower’s senior leverage ratio pricing grid. The
applicable margin during the first six months following the June 7, 2018 closing is 9.50%.
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 (0.50%), (iii) the most recently used LIBO Rate and (iv) two percent (2.00%) 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 (1.00%) 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 1.50 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 5.00% of
the principal amount prepaid plus a make-whole amount to 1.00%, 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 2.30:1.00, and only for so long as such ratio exceeds 2.30:1.00. The Sponsor Guaranty terminates on the
date that the Borrower’s senior leverage ratio is less than 2.30:1.00 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 $12,000,000 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 $12,500,000 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
$1,000,000 on capital expenditures in fiscal year 2018, $1,500,000 in fiscal year 2019, $2,000,000 in fiscal year 2020, $1,750,000
in fiscal year 2021, and $1,500,000 in fiscal years 2022 and thereafter. Vintage Stock is required to maintain a declining maximum
senior leverage ratio on a trailing twelve month basis beginning June 30, 2018 of 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 2.10:1.00, December 31, 2019 1.90:1.00,
March 31, 2020 1.80:1.00, June 30, 2020 1.75:1.00 and September 30, 2020 and each fiscal quarter thereafter 1.50:1.00. Vintage
Stock is required to maintain on a trailing twelve-month basis a minimum fixed charge ratio of no less than 1.30:1.00 for quarters
ending June 30, 2018, September 30, 2018 and December 31, 2018. For quarter ending March 31, 2019 1.10:1.00. For quarters ending
June 30, 2019, September 30, 2019 and December 31, 2019 1.30:1.00. For quarter ending March 31, 2020 and each fiscal quarter thereafter
1.40:1.00. 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 four new retail
locations within a twelve-month period. 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 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 $1,318,069 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.
Loan Covenant Compliance
We are in compliance as of December 31,
2018 and September 30, 2018 with all covenants under our existing revolving and other loan agreements.
Long-term debt as of December 31, 2018
and September 30, 2018 consisted of the following:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Bank of America Revolver Loan - variable interest rate based upon a base rate plus a margin, interest payable monthly, maturity date July 2020, secured by substantially all Marquis assets
|
|
$
|
2,310,533
|
|
|
$
|
7,600,605
|
|
Texas Capital Bank Revolver Loan - variable interest rate based upon the one-month LIBOR rate plus a margin, interest payable monthly, maturity date November 2020, secured by substantially all Vintage Stock assets and common stock
|
|
|
9,836,123
|
|
|
|
11,892,595
|
|
Note Payable Comvest Term Loan - variable interest rate based upon LIBOR rate plus a margin, interest payable monthly in cash, principal due quarterly March 31, June 30, September 30, December 31, subject to a variable amortization of principal, maturity date May 26, 2023 note subordinate to Texas Capital Bank Revolver Loan, secured by Vintage Stock Assets
|
|
|
21,750,000
|
|
|
|
22,500,000
|
|
Note Payable to the Sellers of Vintage Stock, interest at 8% per annum, with interest payable monthly, amended maturity date of September 6, 2023, note subordinate to both Texas Capital Bank Revolver and Capitala Term Loan, secured by Vintage Stock Assets
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
Note #1 Payable to Banc of America Leasing & Capital LLC - interest at 3.8905% per annum, with interest and principal payable monthly in the amount of $84,273 for 59 months, beginning September 23, 2016, with a final payment due in the amount of $584,273, maturity date September 2021, secured by equipment
|
|
|
2,648,246
|
|
|
|
3,230,555
|
|
Note #2 Payable to Banc of America Leasing & Capital LLC - interest at 4.63% per annum, with interest and principal payable monthly in the amount of $34,768 for 59 months, beginning January 30, 2017, with a final payment due in the amount of $476,729, maturity date January 2022, secured by equipment
|
|
|
–
|
|
|
|
1,636,940
|
|
Note #3 Payable to Banc of America Leasing & Capital LLC - interest at 4.7985% per annum with interest and principal payable monthly in the amount of $51,658 for 84 months, beginning January 30, 2017, secured by equipment.
|
|
|
2,750,844
|
|
|
|
2,871,849
|
|
Note #4 Payable to Banc of America Leasing & Capital LLC - interest at 4.8907% per annum, with interest and principal payable monthly in the amount of $15,901 for 81 months, beginning April 30, 2017, secured by equipment.
|
|
|
844,866
|
|
|
|
881,937
|
|
Note #5 Payable to Banc of America Leasing & Capital LLC - interest at 4.67% per annum, with interest and principal payable monthly in the amount of $54,943 for 84 months, beginning January 28, 2018, secured by equipment.
|
|
|
3,445,197
|
|
|
|
3,568,925
|
|
Note Payable to Store Capital Acquisitions, LLC, - interest at 9.25% per annum, with interest and principal payable monthly in the amount of $73,970 for 480 months, beginning July 1, 2016, maturity date of June 2056, secured by Marquis land and buildings
|
|
|
9,295,499
|
|
|
|
9,302,346
|
|
Note payable to individual, interest at 11% per annum, payable on a 90 day written notice, unsecured
|
|
|
206,529
|
|
|
|
206,529
|
|
Note payable to individual, interest at 10% per annum, payable on a 90 day written notice, unsecured
|
|
|
500,000
|
|
|
|
500,000
|
|
Note payable to individual, interest at 8.5% per annum, payable on a 120 day written demand notice, unsecured
|
|
|
225,000
|
|
|
|
225,000
|
|
Total notes payable
|
|
|
63,812,837
|
|
|
|
74,417,281
|
|
Less unamortized debt issuance costs
|
|
|
(1,556,160
|
)
|
|
|
(1,653,458
|
)
|
Net amount
|
|
|
62,256,677
|
|
|
|
72,763,823
|
|
Less current portion
|
|
|
(8,356,925
|
)
|
|
|
(13,958,355
|
)
|
Long-term portion
|
|
$
|
53,899,752
|
|
|
$
|
58,805,468
|
|
Future maturities of long-term debt at December 31, 2018 are
as follows which does not include related party debt separately stated:
2019
|
|
$
|
8,356,925
|
|
2020
|
|
|
15,046,786
|
|
2021
|
|
|
5,073,987
|
|
2022
|
|
|
4,376,961
|
|
2023
|
|
|
21,195,650
|
|
Thereafter
|
|
|
9,762,528
|
|
Total
|
|
$
|
63,812,837
|
|
Note 9: Notes
Payable, Related Parties
Appliance Recycling Centers of America,
Inc. Note
On December 30, 2017, ASH entered into
a Stock Purchase Agreement (the “Agreement”) with Appliance Recycling Centers of America, 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 $6,500,000 (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 $3,919,494 (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 accruing from April 1, 2018, payable at maturity, April 1, 2021, in arrears. ApplianceSmart
has agreed to guaranty repayment of the ApplianceSmart Note. The remaining $2,580,506 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 December 31, 2018 and September 30, 2018, there was $3,821,507 outstanding on the ApplianceSmart Note, respectively.
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 addition, ASH and the Seller modified the terms of when interest and principal would be due. Outstanding principal
and accrued and un-paid interest at 5% per annum is now all due and payable on April 1, 2021.
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 $7,000,000 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 December 31, 2018,
and September 30, 2018, there was $2,000,000 outstanding on this mezzanine loan.
Notes payable, related parties as of December
31, 2018 and September 30, 2018 consisted of the following:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Note Payable and revolving line of credit to the Sellers of ApplianceSmart, Inc., interest rate is 5% per annum, with interest payable monthly, maturity date April 1, 2021, accrued interest and principal all due at maturity. ApplianceSmart may reborrow funds up to the Original Principal amount during the term of the note.
|
|
$
|
3,821,507
|
|
|
$
|
3,821,507
|
|
|
|
|
|
|
|
|
|
|
Note Payable to Isaac Capital Fund, interest rate is 12.5% per annum, with interest payable monthly, maturity date January 2021.
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Total notes payable - related parties
|
|
|
5,821,507
|
|
|
|
5,821,507
|
|
Less unamortized debt issuance costs
|
|
|
–
|
|
|
|
–
|
|
Net amount
|
|
|
5,821,507
|
|
|
|
5,821,507
|
|
Less current portion
|
|
|
–
|
|
|
|
(391,949
|
)
|
Long-term portion
|
|
$
|
5,821,507
|
|
|
$
|
5,429,558
|
|
Future maturities of notes payable, related parties at December
31, 2018 are as follows:
2019
|
|
$
|
–
|
|
2020
|
|
|
–
|
|
2021
|
|
|
5,821,507
|
|
2022
|
|
|
–
|
|
2023
|
|
|
–
|
|
Thereafter
|
|
|
–
|
|
Total
|
|
$
|
5,821,507
|
|
Note 10: Stockholders’
Equity
Series B Convertible Preferred Stock
On December 27, 2016, the Company established
a new series of preferred stock, Series B Convertible Preferred Stock. The shares, as a series, are entitled to dividends as declared
by the board of directors in an amount equal to $1.00 (in the aggregate for all then-issued and outstanding shares of Series B
Convertible Preferred Stock). The series does not have any redemption rights 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.
On December 31, 2018, and September 30,
2018, there were 1,000,000 authorized and 214,244 shares issued and outstanding of Series B Convertible Preferred Stock, with a
par value of $0.001 per share.
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 three months ended December
31, 2018 and 2017, respectively, the Company did not issue any shares of Series B Convertible Preferred Stock.
Series E Convertible Preferred Stock
As of December 31, 2018, and September
30, 2018, there were 200,000 shares authorized, 127,840 shares issued and 77,840 shares outstanding of Series a Preferred Stock,
with a par value of $0.001 per share. The shares accrue dividends at the rate of 5% per annum on the liquidation preference per
share, payable quarterly from legally available funds. The shares carry a cash liquidation preference of $0.30 per share, plus
any accrued but unpaid dividends. If such funds are not available, dividends shall continue to accumulate until they can be paid
from legally available funds. Holders of the preferred shares are entitled, after two years from issuance, to convert them into
shares of our common stock on a one-to-one basis together with payment of $85.50 per converted share. On November 18, 2017, the
Company repurchased 50,000 shares of Series E Convertible Preferred Stock for an aggregate purchase price of $4,000.
During the three months ended December
31, 2018 and December 31, 2017, the Company accrued dividends of $292 and $292, respectively, payable to holders of Series E preferred
stock. As of December 31, 2018, and September 30, 2018, unpaid dividends were $292 and $292, respectively.
Common Stock
On December 31, 2018, and September 30,
2018, there was 10,000,000 shares authorized, 2,088,186 shares outstanding, and 1,942,428 and 1,945,247 shares issued, respectively,
of Common Stock, with a par value of $0.001 per share.
During the three months ended December
31, 2018 and 2017, respectively, the Company did not issue any shares of common stock.
Treasury Stock
For the three months ended December 31,
2018 and 2017, the Company purchased 2,819 and 19,743 shares of its common stock on the open market (treasury shares for $19,079
and $249,392, respectively).
The Company accounted for the purchase
of these treasury shares using the cost method. At December 31, 2018, the Company held 145,758 shares of its common stock as treasury
shares at a cost of $1,569,090. At September 30, 2018, the Company held 142,939 shares of its common stock as treasury shares at
a cost of $1,550,011.
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 11: Warrants
The Company issued several notes in prior
periods and converted them, resulting in the issuance of warrants. The following table summarizes information about the Company’s
warrants at December 31, 2018 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 at September 30, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
1.35
|
|
|
$
|
2,855,734
|
|
Exercisable at September 30, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
1.35
|
|
|
$
|
2,855,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
1.10
|
|
|
$
|
1,510,201
|
|
Exercisable at December 31, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
1.10
|
|
|
$
|
1,510,201
|
|
On December 27, 2016, ICG and the Company
agreed to amend and exchange the common stock warrants for warrants to purchase shares of Series B Convertible Preferred Stock,
and the number of warrants held adjusted by an exchange ratio of 5:1 shares of common stock for shares of Series B Convertible
Preferred Stock. ICG, the holder of the warrants outstanding, is not permitted to sell, transfer, assign, hypothecate, pledge,
margin, hedge, trade or otherwise obtain or attempt to obtain any economic value from the shares of Series B Convertible Preferred
Stock should the warrants be exercised prior to December 31, 2021.
As of December 31, 2018, the Company had
118,029 common stock warrants outstanding with a weighted average exercise price, weighted average remaining contractual term and
intrinsic value of $20.80, 1.10 years and $1,510,201, respectively. As of September 30, 2018, the Company had 118,029 common stock
warrants outstanding with weighted average exercise price, weighted average remaining contractual term and intrinsic value of $20.80,
1.35 years and $2,855,734, 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, the Company memorialized an agreement reached prior to any of the warrants
expiring, to extend the expiration date for two years, just prior to expiration for all warrants listed. Warrants outstanding and
exercisable as of September 30, 2018 and September 30, 2017 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 did not recognize
any compensation expense during the three months ended December 31, 2018 and 2017, 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.
The exercise price for the Series B Convertible Preferred Stock
warrants outstanding and exercisable at December 31, 2018 and September 30, 2018, are as follows:
Series B Convertible Preferred
|
|
Outstanding
|
|
|
Exercisable
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
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 12: 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
twelve months ended September 30, 2018 and the three months ended December 31, 2018:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
Outstanding at September 30, 2017
|
|
|
211,668
|
|
|
$
|
13.19
|
|
|
|
3.47
|
|
|
$
|
454,417
|
|
Granted
|
|
|
20,000
|
|
|
|
32.24
|
|
|
|
9.02
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
231,668
|
|
|
$
|
14.84
|
|
|
|
3.04
|
|
|
$
|
162,500
|
|
Exercisable at September 30, 2018
|
|
|
190,639
|
|
|
$
|
11.89
|
|
|
|
2.08
|
|
|
$
|
162,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
231,668
|
|
|
$
|
14.84
|
|
|
|
3.04
|
|
|
$
|
162,500
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
231,668
|
|
|
$
|
14.84
|
|
|
|
2.79
|
|
|
$
|
53,750
|
|
Exercisable at December 31, 2018
|
|
|
195,996
|
|
|
$
|
12.05
|
|
|
|
1.99
|
|
|
$
|
53,750
|
|
The Company recognized compensation expense
of $46,599 and $79,356 during the three months ended December 31, 2018 and 2017, respectively, related to stock option awards granted
to certain employees and officers based on the grant date fair value of the awards, net of estimated forfeitures.
At December 31, 2018, the Company has $240,206
of unrecognized compensation expense (net of estimated forfeitures) associated with stock option awards which the company expects
to recognize as compensation expense through October of 2022.
The exercise price for stock options outstanding
and exercisable outstanding at December 31, 2018 is as follows:
Outstanding
|
|
Exercisable
|
|
Number of
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Options
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
31,250
|
|
$
|
5.00
|
|
|
|
31,250
|
|
|
$
|
5.00
|
|
25,000
|
|
|
7.50
|
|
|
|
25,000
|
|
|
|
7.50
|
|
31,250
|
|
|
10.00
|
|
|
|
31,250
|
|
|
|
10.00
|
|
4,167
|
|
|
10.86
|
|
|
|
4,167
|
|
|
|
10.86
|
|
4,167
|
|
|
10.86
|
|
|
|
4,167
|
|
|
|
10.86
|
|
4,167
|
|
|
10.86
|
|
|
|
662
|
|
|
|
10.86
|
|
4,167
|
|
|
10.86
|
|
|
|
–
|
|
|
|
–
|
|
6,250
|
|
|
12.50
|
|
|
|
6,250
|
|
|
|
12.50
|
|
6,250
|
|
|
15.00
|
|
|
|
6,250
|
|
|
|
15.00
|
|
75,000
|
|
|
15.18
|
|
|
|
75,000
|
|
|
|
15.18
|
|
8,000
|
|
|
23.41
|
|
|
|
8,000
|
|
|
|
23.41
|
|
8,000
|
|
|
27.60
|
|
|
|
4,000
|
|
|
|
27.60
|
|
8,000
|
|
|
31.74
|
|
|
|
–
|
|
|
|
–
|
|
8,000
|
|
|
36.50
|
|
|
|
–
|
|
|
|
–
|
|
8,000
|
|
|
41.98
|
|
|
|
–
|
|
|
|
–
|
|
231,668
|
|
|
|
|
|
|
195,996
|
|
|
|
|
|
The following table summarizes information
about the Company’s non-vested shares outstanding as of December 31, 2018 and September 30, 2018:
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
Non-vested Shares
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at September 30, 2017
|
|
|
36,668
|
|
|
$
|
17.70
|
|
Granted
|
|
|
20,000
|
|
|
$
|
10.14
|
|
Vested
|
|
|
(15,639
|
)
|
|
$
|
15.72
|
|
Non-vested at September 30, 2018
|
|
|
41,029
|
|
|
$
|
12.88
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2018
|
|
|
41,029
|
|
|
$
|
12.88
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
Vested
|
|
|
(5,357
|
)
|
|
$
|
10.08
|
|
Non-vested at December 31, 2018
|
|
|
35,672
|
|
|
$
|
15.72
|
|
Options were granted during fiscal 2018,
where the exercise price was less than the common stock price at the date of grant or where the exercise price was greater than
the common stock price at the date of grant. There have been no options granted in fiscal 2019 to date. The assumptions used in
calculating the fair value of stock options granted in fiscal 2018 use the Black-Scholes option pricing model for options granted
were 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 13: Earnings
Per Share
Net earnings per share is calculated using
the weighted average number of shares of common stock outstanding during the applicable period. Basic weighted average shares of
common stock outstanding do not include shares of restricted stock that have not yet vested, although such shares are included
as outstanding shares in the Company’s Consolidated Balance Sheet. Diluted net earnings per share is computed using the weighted
average number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential shares
of common stock consist of the additional shares of common stock issuable in respect of restricted share awards, stock options
and convertible preferred stock. Preferred stock dividends are subtracted from net earnings to determine the amount available to
common stockholders.
The following table presents the computation of basic and diluted
net earnings per share:
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,530,509
|
|
|
$
|
1,877,555
|
|
Less: preferred stock dividends
|
|
|
(292
|
)
|
|
|
(292
|
)
|
Net income applicable to common stock
|
|
$
|
1,530,217
|
|
|
$
|
1,877,263
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
1,945,247
|
|
|
|
1,975,380
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.79
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
1,530,217
|
|
|
$
|
1,877,263
|
|
Add: preferred stock dividends
|
|
|
292
|
|
|
|
292
|
|
Net income applicable for diluted earnings per share
|
|
$
|
1,530,509
|
|
|
$
|
1,877,555
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
1,945,247
|
|
|
|
1,975,380
|
|
Add: Options
|
|
|
11,576
|
|
|
|
34,476
|
|
Add: Series B Preferred Stock
|
|
|
1,071,200
|
|
|
|
1,071,200
|
|
Add: Series B Preferred Stock Warrants
|
|
|
590,145
|
|
|
|
590,145
|
|
Add: Series E Preferred Stock
|
|
|
77,840
|
|
|
|
77,840
|
|
Assumed weighted average common shares outstanding
|
|
|
3,696,008
|
|
|
|
3,749,041
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.41
|
|
|
$
|
0.50
|
|
There are 200,418 and 121,250 common stock
options that are anti-dilutive that are not included in the three months ended December 31, 2018 and 2017, diluted earnings per
share computations, respectively.
Note 14: Related
Party Transactions
In connection with its purchase of Marquis,
Marquis entered into a mezzanine loan in the amount of up to $7,000,000 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 December 31, 2018,
and September 30, 2018, respectively, there was $2,000,000 outstanding on this mezzanine loan. During the three months ended December
31, 2018 and 2017, the Company recognized total interest expense of $63,888, associated with the ICF notes.
Customer Connexx LLC, a wholly-owned subsidiary
of Appliance Recycling Centers of America, Inc. (“ARCA”), rents approximately 9,879 square feet of office space from
the Company at its Las Vegas office which totals 11,100 square feet. ARCA paid the Company $44,565 and $45,388 in rent and other
reimbursed expenses for the three months ended December 31, 2018 and 2017, 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 ARCA, 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, the Company memorialized an agreement reached prior to any of the warrants
expiring, to extend the expiration date for two years, just prior to expiration for all warrants listed. Warrants outstanding and
exercisable as of December 31, 2018 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.
On December 30, 2017, ASH, a wholly owned
subsidiary of the Company, entered into a Stock Purchase Agreement (the “Agreement”) with ARCA and ApplianceSmart,
a subsidiary of ARCA. Pursuant to the Agreement, the Purchaser purchased from ARCA all of the issued and outstanding shares
of capital stock (the “Stock”) of ApplianceSmart in exchange for $6,500,000 (the “Purchase Price”). Effective
April 1, 2018, ASH issued an interest-bearing promissory note, with interest at 5% per annum, with a three-year term in the original
amount of $3,919,494 for the balance of the purchase price.
Under a transition service agreement between
ARCA and ApplianceSmart, ARCA would provide healthcare benefits to ApplianceSmart employees from January 1, 2018 thru December
31, 2018 for a monthly fee of $22,500. ApplianceSmart paid ARCA transition services fees of $0 for the three months ended December
31, 2018. Transition service fees expensed by ApplianceSmart were $67,500 for the three months ended December 31, 2018. The transaction
service fees liability at December 31, 2018 and September 30, 2018 are $90,000 and $22,500, respectively.
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. At December 31, 2018 and September 30, 2018, respectively, there was $3,821,507 outstanding on this ApplianceSmart
Note.
In connection with the acquisition of Vintage
Stock on November 3, 2016, Rodney Spriggs, President of Vintage Stock, holds a 41.134752% interest in the $10,000,000 Seller Subordinated
Acquisition Note payable by VSAH. The terms of payment are interest only, payable monthly on the 1
st
of each month,
until maturity 5 years and 6 months from the date of the note – November 3, 2016. Interest paid to Mr. Spriggs for the three
months ended December 31, 2018 and 2017, was $83,184 and $83,184, respectively. Interest unpaid and accrued as of December 31,
2018 and September 30, 2018 is $28,337 and $27,423, respectively.
Also see Note 5, 8, 9, 10 and 11.
Note 15: Commitments
and Contingencies
Litigation
The Company is involved in various claims
and lawsuits arising in the normal course of business. These proceedings could result in fines, penalties, compensatory or treble
dames or non-monetary relief. The nature of legal proceedings is such that the Company cannot assure the outcome of any particular
matter, and an unfavorable ruling or development could have a materially adverse effect on our consolidated financial position,
results of operations and cash flows in the period which a ruling or settlement occurs. However, based on information available
to the Company’s management to date, the Company’s management does not expect that the outcome of any matter pending
against us is likely to have a materially adverse effect on the Company’s consolidated financial position as of December
31, 2018, results of operations, cash flows or liquidity of the Company.
Note 16: Income
Taxes
The
income tax rate for the three months ended December 31, 2018 and December 31, 2017 were 27.3% and 64.6%, respectively. The effective
income tax rate differs from the U.S. federal statuary rate primarily due to state taxes and certain non-deductible expenses. As
of December 31, 2018, and December 31, 2017 the Company had no uncertain tax positions. The Company is subject to taxation and
files income tax returns in the U.S., and various state jurisdictions. The Company is subject to audit for U.S. purposes for the
current and prior three years; and for state purposes the current and prior four years.
During
the first quarter, ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in the
federal statutory rate from 34% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively
effective as of January 1, 2018, which requires the Company to use a blended rate for the annual period. As a result, the blended
federal statutory rate for the year is 24.53%. In addition, we recognized a tax expense in our tax provision for the period related
to adjusting our deferred tax balance to reflect the new corporate tax rate. As a result, income tax expense reported for the three
months was adjusted to reflect the effects of the change in tax law and resulted in an increase in income tax expense of approximately
$2.3 million for the three-month period ended December 31, 2017.
Note 17: 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, ApplianceSmart, Modern Everyday and LiveDeal.com, and the
Services segment consists of the directory services business.
The following tables summarize segment information for the three
months ended December 31, 2018 and 2017:
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
30,645,015
|
|
|
$
|
21,293,471
|
|
Manufacturing
|
|
|
22,382,285
|
|
|
|
18,878,535
|
|
Services
|
|
|
168,640
|
|
|
|
196,058
|
|
|
|
$
|
53,195,940
|
|
|
$
|
40,368,064
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
13,576,283
|
|
|
$
|
11,455,802
|
|
Manufacturing
|
|
|
5,601,658
|
|
|
|
4,752,568
|
|
Services
|
|
|
159,137
|
|
|
|
187,520
|
|
|
|
$
|
19,337,078
|
|
|
$
|
16,395,890
|
|
Operating income
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
(238,652
|
)
|
|
$
|
2,231,476
|
|
Manufacturing
|
|
|
2,170,477
|
|
|
|
1,502,254
|
|
Services
|
|
|
158,667
|
|
|
|
187,058
|
|
|
|
$
|
2,090,492
|
|
|
$
|
3,920,788
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
788,251
|
|
|
$
|
677,461
|
|
Manufacturing
|
|
|
693,518
|
|
|
|
718,444
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,481,769
|
|
|
$
|
1,395,905
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
1,175,791
|
|
|
$
|
2,022,407
|
|
Manufacturing
|
|
|
476,942
|
|
|
|
445,905
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,652,733
|
|
|
$
|
2,468,312
|
|
Net income before provision for income taxes
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
(1,272,417
|
)
|
|
$
|
4,052,595
|
|
Manufacturing
|
|
|
3,211,620
|
|
|
|
1,063,393
|
|
Services
|
|
|
158,667
|
|
|
|
187,058
|
|
|
|
$
|
2,097,870
|
|
|
$
|
5,303,046
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Total assets
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
85,297,114
|
|
|
$
|
88,799,584
|
|
Manufacturing
|
|
|
46,424,885
|
|
|
|
52,915,109
|
|
Services
|
|
|
87,292
|
|
|
|
57,703
|
|
|
|
$
|
131,809,291
|
|
|
$
|
141,772,396
|
|
Intangible assets and goodwill
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
42,968,314
|
|
|
$
|
43,268,668
|
|
Manufacturing
|
|
|
336,596
|
|
|
|
343,914
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
43,304,910
|
|
|
$
|
43,612,582
|
|
Note 18: Subsequent
Events
None.