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 SIX MONTHS ENDED MARCH 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 and six months ended March 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year
ending September 30, 2018. This financial information should be read in conjunction with the consolidated financial statements
and related notes thereto as of September 30, 2017 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, 2017, as amended, filed with the U.S. Securities and Exchange Commission (the
“SEC”) on January 18, 2018 (the “2017 10-K”).
On November 22, 2016, the Company’s
board of directors authorized a one-for-six (1:6) reverse stock split and a contemporaneous one-for-six (1:6) reduction in the
number of authorized shares of common stock from 60,000,000 to 10,000,000 shares, to take effect for stockholders of record as
of December 5, 2016. No fractional shares were issued. All share, option and warrant related information presented in these financial
statements and accompanying footnotes has been retroactively adjusted to reflect the decreased number of shares resulting this
reverse stock split.
Note 2: Summary
of Significant Accounting Policies
Principles of Consolidation
The 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 March 31, 2018 and September 30, 2017 approximate fair value.
Cash and Restricted Cash
Cash and cash equivalents consist of highly
liquid investments with a maturity of three months or less at the time of purchase. Restricted cash consists of balances on deposit
pledged as collateral. Fair value of cash equivalents and restricted cash approximates carrying value.
Trade Receivables
The Company grants trade credit to customers
under credit terms that it believes are customary in the industry it operates and does not require collateral to support customer
trade receivables. Some of the Company’s trade receivables are factored primarily through two factors. Factored trade receivables
are sold without recourse for substantially all of the balance receivable for credit approved accounts. The factor purchases the
trade receivable(s) for the gross amount of the respective invoice(s), less factoring commissions, trade and cash discounts. The
factor charges the Company a factoring commission for each trade account, which is between 0.75-1.00% of the gross amount of the
invoice(s) factored on the date of the purchase, plus interest calculated at 3.25%-6% per annum. The minimum annual commission
due the factor is $112,500 per contract year. The total amount of trade receivables factored was $18,420,998 and $16,854,493 for
the six months ended March 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 March 31, 2018 and September 30, 2017, the allowance for doubtful accounts was $1,101,130 and $1,091,223,
respectively.
Inventories
Manufacturing Segment
Inventories are valued at the lower of
the inventory’s cost (first in, first out basis (“FIFO”)) or market. 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 March 31, 2018 and September 30, 2017, 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 March 31, 2018 and September
30, 2017 were $1,292,982 and $1,256,629, 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 $1,067,608
and $833,377 for the three months ended March 31, 2018 and 2017, respectively. Depreciation expense was $2,227,194 and $1,703,891
for the six months ended March 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, 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. Intangible amortization expense is $236,318 and $98,084 for the three months
ended March 31, 2018 and 2017, respectively. Intangible amortization expense is $475,970 and $159,581 for the six months ended
March 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 criteria
are met: there is persuasive evidence that a sales agreement exists, delivery has occurred, or services have been rendered, the
price to the buyer is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred
until the customer takes title to the goods and assumes the risks and rewards of ownership, which is generally on the date of shipment.
At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on
historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net
of taxes collected from customers.
Retail and Online Segment
The Retail and Online Segment derives product
revenue primarily from direct sales. Product revenue is recognized when the following revenue recognition criteria are met: there
is persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectability
is reasonably assured. Currently, all direct product revenue is recorded on a gross basis, as the Company is the primary obligor.
Revenues are recorded net of taxes collected from customers.
At the time revenue is recognized, the
Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends
or conditions that exist at the time revenue is recognized.
Services Segment
The Services Segment recognizes revenue
from directory subscription services as billed for and accepted by the customer. Directory services revenue is billed and recognized
monthly for directory services subscribed. The Company has utilized outside billing companies to perform direct ACH withdrawals.
For billings via ACH withdrawals, revenue is recognized when such billings are accepted by the customer. Customer refunds are recorded
as an offset to gross Services Segment revenue.
Revenue for billings to certain customers
that are billed directly by the Company and not through outside billing companies is recognized based on estimated future collections
which are reasonably assured. The Company continuously reviews this estimate for reasonableness based on its collection experience.
Shipping and Handling
The Company classifies shipping and handling
charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Customer Liabilities
The Company establishes a liability upon
the issuance of merchandise credits and the sale of gift cards. Breakage income related to gift cards which are no longer reportable
under state escheatment laws for the three months ended March 31, 2018 and 2017, is $66,531 and $45,000, respectively. For the
six months ended March 31, 2018, breakage income of $93,143, and the period of November 3, 2016 through March 31, 2017, breakage
income of $73,092 is recorded in other income in our consolidated financial statements. No amounts were recorded for breakage for
any period prior to November 3, 2016.
Fair Value Measurements
ASC
Topic 820 (“
Fair Value Measurements and Disclosures
”)
requires
disclosure of the fair value of financial instruments held by the Company. ASC topic 825, “Financial Instruments,”
defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The three levels of valuation hierarchy are defined as follows: Level 1 - inputs to the valuation
methodology are quoted prices for identical assets or liabilities in active markets. Level 2 – to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation
methodology are unobservable and significant to the fair value measurement.
Income Taxes
The Company accounts for income taxes using
the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for
expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases
of the Company's assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than not that the asset will
not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities in the provision for income
taxes in its Consolidated Statements of Income.
Significant management judgment is required
to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company uses a two-step process
to evaluate tax positions. The first step requires an entity to determine whether it is more likely than not (greater than 50%
chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial statements the
benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid upon resolution
of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements
of the Company in future periods.
Lease Accounting
The Company leases retail stores, warehouse
facilities and office space. These assets and properties are generally leased under noncancelable agreements that expire at various
dates through 2024 with various renewal options for additional periods. The agreements, which have been classified as operating
leases, generally provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance
costs. Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis
over the lease term and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease
incentives received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line
basis as a reduction to rent expense over the lease term. We record the unamortized portion of tenant improvement allowances as
a part of deferred rent. We do not have leases with capital improvement funding. Percentage rentals are based on sales performance
in excess of specified minimums at various stores and are accounted for in the period in which the amount of percentage rent can
be accurately estimated.
Stock-Based Compensation
The Company from time to time grants restricted
stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the
grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line
basis over the vesting period.
Earnings Per Share
Earnings
per share is calculated in accordance with ASC 260 (“
Earnings Per share
”)
.
Under ASC 260 basic earnings per share is computed using the weighted average number of common shares outstanding during the period
except that it does not include unvested restricted stock subject to cancellation. Diluted earnings per share is computed using
the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential
common shares consist of the incremental common shares issuable upon the exercise of warrants, options, restricted shares and convertible
preferred stock. The dilutive effect of outstanding restricted shares, options and warrants is reflected in diluted earnings per
share by application of the treasury stock method. Convertible preferred stock is reflected on an if-converted basis.
Segment Reporting
ASC Topic 280, “
Segment Reporting
,”
requires use of the “management approach” model for segment reporting. The management approach model is based on the
way a Company’s management organizes segments within the Company for making operating decisions and assessing performance.
The Company determined it has three reportable segments (See Note 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, Nevada,
New Mexico, New York, Oklahoma, Texas, and Utah. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000
per institution as of March 31, 2018. At times, balances may exceed federally insured limits.
Reclassifications
Certain amounts in the prior year consolidated
financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect
on the previously reported net income or stockholders’ equity.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting
Standards Boad (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts
with Customers
ASU 2014-09, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle
of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects
the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process
to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process
than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and
interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application
of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective
approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional
footnote disclosures). Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-04,
Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date.
The amendment in this ASU defers the effective date of ASU No.
2014-09 for all entities for one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods
beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted
only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting
period.
In March 2016, the FASB issued ASU No.
2016-08,
Revenue from Contracts with Customers
. The standard addresses the implementation guidance on principal versus agent
considerations in the new revenue recognition standard. The ASU clarifies how an entity should identify the unit of accounting
(i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to
certain types of arrangements.
Subsequently, the FASB has issued the following
standards related to ASU 2014-09 and ASU No. 2016-08: ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing
(“ASU 2016-10”); ASU No. 2016-12,
Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”); ASU No. 2016-20,
Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU 2016-20”); and, ASU 2017-05—
Other
Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition
Guidance and Accounting for Partial Sales of Nonfinancial Assets
(“ASU 2017-05”). The Company must adopt ASU 2016-10,
ASU 2016-12, ASU 2016-20 and ASU 2017-05 with ASU 2014-09 (collectively, the “new revenue standards”). The Company
is in the early stages of assessing the provisions of the new standard. We are continuing to evaluate the impact of the transition
methods on our financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This standard changes the measurement principle for inventory
from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
This standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.
We have adopted this standard.
ASU 2016-02,
Leases (Topic 842)
.
The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to
use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that this
standard will have on our consolidated financial statements.
ASU 2016-04,
Recognition of Breakage
for Certain Prepaid Stored-Value Products
. The standard specifies how prepaid stored-value product liabilities should be derecognized,
thereby eliminating the current and potential future diversity in practice. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact
that this standard will have on our consolidated financial statements.
ASU 2016-09,
Compensation- Stock Compensation
(Topic 718) Improvements to Employee Share-Based Payment Accounting,
introduces targeted amendments intended to simplify the
accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits
of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax
effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity
also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces
taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits
would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses
that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment
to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.”
The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the
statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification
up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when
directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional
accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards
that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur. The ASU is effective
for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
Early adoption is permitted in any interim or annual period for which the financial statements have not been issued or made available
to be issued. Certain detailed transition provisions apply if an entity elects to early adopt. We have adopted this standard.
ASU 2016-15,
Statement of Cash Flows
(Topic 230): Restricted Cash
(a consensus of the FASB Emerging Issues Task Force). ASU 2016-15 clarifies whether the following
items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment
costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement
of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees,
(vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class
of cash flows. ASU 2016-15 takes effect in 2018 for public companies. If an entity elects early adoption, it must adopt all of
the amendments in the same period. We are currently evaluating the impact that this standard will have on our consolidated financial
statements.
ASU 2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
. Under the current implementation guidance in Topic 805, there are three elements
of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to
as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs
and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to
produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this Update
provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of
the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets,
the set is not a business. This screen reduces the number of transactions that need to be further evaluated by public business
entities applying the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods
within those periods. We have adopted this standard at the end of our fiscal 2017 year and it did not have a significant impact
on our consolidated results of operations, financial condition and cash flows.
ASU 2017-04,
Intangibles- Goodwill and
Other (Topic 350) Simplifying the Test for Goodwill Impairment
, eliminates step 2 from the goodwill impairment test. As amended,
the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An
entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value. An entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely
than not that goodwill is impaired. A public business entity that is an SEC filer should prospectively adopt the ASU for its annual
or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim
or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have adopted this standard effective with
our goodwill impairment test date of July 1, 2017.
ASU 2017-09,
Compensation- Stock Compensation
(Topic 718): Scope of Modification Accounting
, clarifies such that an entity must apply modification accounting to changes
in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the
modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates that
if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required
to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same
as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified
award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before
the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods
within those years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact
that this standard will have on our consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivative and Hedging (Topic 815). The
standard is intended to simplify the accounting for certain financial instruments with down round features. This ASU changes the
classification analysis of particular equity-linked financial instruments (e.g. warrants, embedded conversion features) allowing
the down round feature to be disregarded when determining whether the instrument is to be indexed to an entity’s own stock.
Because of this, the inclusion of a down round feature by itself exempts an instrument from having to be remeasured at fair value
each earnings period. The standard requires that entities recognize the effect of the down round feature on EPS when it is triggered
(i.e., when the exercise price is adjusted downward due to the down round feature) equivalent to the change in the fair value of
the instrument instantly before and after the strike price is modified. An adjustment to diluted EPS calculation may be required.
The standard does not change the accounting for liability-classified instruments that occurred due to a different feature or term
other than a down round feature. Additionally, entities must disclose the presence of down round features in financial instruments
they issue, when the down round feature triggers a strike price adjustment, and the amount of the adjustment necessary. ASU 2017-11
is effective for all fiscal years beginning after December 15, 2018. The Company has decided to early adopt ASU 2017-11 and it
did not have a significant impact on its consolidated results of operations, financial condition and cash flows.
Note 3: Comprehensive
Income
Comprehensive income is the sum of net
income and other items that must bypass the income statement because they have not been realized, including items like an unrealized
holding gain or loss from available for sale securities and foreign currency translation gains or losses. For our Company, for
three and six months ended March 31, 2018 and 2017, net income does not differ from comprehensive income.
Note 4: Balance
Sheet Detail Information
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Trade receivables, current, net:
|
|
|
|
|
|
|
|
|
Accounts receivable, current
|
|
$
|
11,749,344
|
|
|
$
|
11,383,576
|
|
Less: Reserve for doubtful accounts
|
|
|
(756,558
|
)
|
|
|
(746,651
|
)
|
|
|
$
|
10,992,786
|
|
|
$
|
10,636,925
|
|
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
|
|
$
|
12,093,916
|
|
|
$
|
11,728,148
|
|
Less: Reserve for doubtful accounts
|
|
|
(1,101,130
|
)
|
|
|
(1,091,223
|
)
|
|
|
$
|
10,992,786
|
|
|
$
|
10,636,925
|
|
Components of reserve for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for dilution and fees on amounts due from billing aggregators
|
|
$
|
1,063,617
|
|
|
$
|
1,063,617
|
|
Reserve for customer refunds
|
|
|
873
|
|
|
|
978
|
|
Reserve for trade receivables
|
|
|
36,640
|
|
|
|
26,628
|
|
|
|
$
|
1,101,130
|
|
|
$
|
1,091,223
|
|
Inventory
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
9,271,283
|
|
|
$
|
7,709,969
|
|
Work in progress
|
|
|
1,096,509
|
|
|
|
987,689
|
|
Finished goods
|
|
|
5,428,000
|
|
|
|
3,922,362
|
|
Merchandise
|
|
|
30,649,002
|
|
|
|
23,230,350
|
|
|
|
|
46,444,794
|
|
|
|
35,850,370
|
|
Less: Inventory reserves
|
|
|
(1,384,922
|
)
|
|
|
(1,348,569
|
)
|
|
|
$
|
45,059,872
|
|
|
$
|
34,501,801
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Building and improvements
|
|
$
|
11,981,655
|
|
|
$
|
8,090,797
|
|
Transportation equipment
|
|
|
82,266
|
|
|
|
104,853
|
|
Machinery and equipment
|
|
|
23,432,503
|
|
|
|
17,402,064
|
|
Furnishings and fixtures
|
|
|
2,547,268
|
|
|
|
4,360,820
|
|
Office, computer equipment and other
|
|
|
2,288,717
|
|
|
|
224,822
|
|
|
|
|
40,332,409
|
|
|
|
30,183,356
|
|
Less: Accumulated depreciation
|
|
|
(12,730,856
|
)
|
|
|
(7,365,496
|
)
|
|
|
$
|
27,601,553
|
|
|
$
|
22,817,860
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Domain name and marketing related intangibles
|
|
$
|
18,957
|
|
|
$
|
18,957
|
|
Lease intangibles
|
|
|
1,033,412
|
|
|
|
1,033,412
|
|
Customer relationship intangibles
|
|
|
2,689,039
|
|
|
|
2,689,039
|
|
Purchased software
|
|
|
2,045,167
|
|
|
|
1,595,977
|
|
|
|
|
5,786,575
|
|
|
|
5,337,385
|
|
Less: Accumulated amortization
|
|
|
(1,658,475
|
)
|
|
|
(1,132,071
|
)
|
|
|
$
|
4,128,100
|
|
|
$
|
4,205,314
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and bonuses
|
|
$
|
1,858,887
|
|
|
$
|
2,602,695
|
|
Due to seller of ApplianceSmart, Inc.
|
|
|
2,549,955
|
|
|
|
–
|
|
Accrued sales and property taxes
|
|
|
1,232,211
|
|
|
|
824,206
|
|
Deferred rent
|
|
|
397,632
|
|
|
|
502,617
|
|
Deferred revenue
|
|
|
552,442
|
|
|
|
|
|
Accrued gift card liability
|
|
|
1,575,711
|
|
|
|
1,479,622
|
|
Accrued interest payable
|
|
|
534,357
|
|
|
|
464,184
|
|
Accrued bank overdraft
|
|
|
2,260,108
|
|
|
|
1,367,539
|
|
Customer deposits
|
|
|
231,073
|
|
|
|
182,052
|
|
Accrued expenses - other
|
|
|
3,202,976
|
|
|
|
1,563,819
|
|
|
|
$
|
14,395,352
|
|
|
$
|
8,986,734
|
|
Note 5: Acquisitions
Acquisition of Vintage Stock Inc.
On November 3, 2016 (the “Vintage
Stock Closing Date”), the Company, through its newly formed, wholly-owned subsidiary, VSAH, entered into a series of agreements
in connection with its purchase of Vintage Stock. Vintage Stock is a retailer that sells, buys and trades new and pre-owned movies,
video games and music products, as well as ancillary products such as books, comics, toys and collectibles.
Total consideration paid of $57,653,698
was paid through a combination of (i) $8,000,000 of capital provided by the Company, (ii)debt financing provided by the TCB Revolver
(as defined below) in the aggregate amount of approximately $12,000,000, and mezzanine financing from the Capitala Term Loan (as
defined below) of approximately $30 million, and (iii) $10,000,000 of Company-issued subordinated acquisition notes payable to
the sellers of Vintage Stock, all as more fully described in Note 8.
The 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 determined that it
had obtained all necessary information that existed as of the Vintage Stock 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, totaling
$347,610, all of which was recorded as general and administrative expense during the year ended September 30, 2017. Goodwill of
$36,946,735 is the excess of total consideration less identifiable assets at fair value less debt assumed at fair value and is
tax deductible. Goodwill is attributable to Vintage Stock’s management, assembled workforce, operating model, the number
of stores, locations and competitive presence in each of its respective markets.
The operating results of Vintage Stock
have been included in our consolidated financial statements beginning on November 3, 2016 and are reported in our Retail and Online
segment.
The estimated fair value of the customer
relationship intangible related to Vintage Stock was determined using the income approach, which discounts expected future cash
flows to present value. The Company estimated the fair value of this intangible asset using the residual method and a present value
discount rate of 17% or $1,000,000. Customer relationships relate to the Company’s ability to sell existing and future products.
The Company is amortizing the Customer relationships intangible asset on a straight-line basis over an estimated life of 5 years.
The estimated fair value of the trade names
intangible that Vintage Stock uses – “Vintage Stock”, “EntertainMart” and “Movie Trading Company”
was determined using a royalty income approach, which estimates an assumed royalty income stream and then discounts that expected
future revenue or cash flow stream to present value. The Company estimated the fair value of this intangible asset using the residual
method and a present value discount rate of 17%, or $1,200,000. Trade names relate to the Company’s awareness by consumers
in the market place. The Company is amortizing the trade names intangible asset on a straight-line basis over an estimated life
of 7 years.
The estimated fair value of the customer
list intangible asset was determined using the cost approach, which estimates the cost to acquire each email address in the list.
The Company estimated the fair value of this intangible asset to be $0.19 per acquired email address, less a discount 40% attributable
to domain and trade names or a net cost per email address of $0.11 or approximately $50,000. The Company is amortizing the customer
list intangible asset on a straight-line basis over an estimated life of 3 years.
Acquisition of ApplianceSmart Inc.
On December 30, 2017 (the “ApplianceSmart
Closing Date”), the Company, through its newly formed, wholly-owned subsidiary, 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 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 reborrowings, 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 $1,901,796, against the amount due Seller. ASH and Seller agreed to the offset as
if it were payment in cash against the purchase price. At March 31, 2018, the net amount owing to Seller was $2,549,955 and is
included in Accrued Expenses.
Net liabilities assumed by ASH on December
31, 2017:
Accounts payable
|
|
$
|
1,374,647
|
|
Accrued expenses
|
|
|
1,374,682
|
|
Capital leases
|
|
|
29,631
|
|
Credit card receivables
|
|
|
(255,301
|
)
|
Cash
|
|
|
(621,863
|
)
|
Total net liabilities assumed by ASH
|
|
$
|
1,901,796
|
|
The following table below summarizes our
preliminary purchase price allocation of the consideration to be paid to the respective fair values of the assets acquired and
liabilities assumed in the Appliancesmart acquisition as of the ApplianceSmart Closing Date.
Trade receivables
|
|
$
|
250,000
|
|
Inventory
|
|
|
7,953,064
|
|
Prepaid expenses
|
|
|
69,347
|
|
Refundable deposits
|
|
|
204,841
|
|
Restricted cash
|
|
|
1,285,747
|
|
Property and equipment
|
|
|
510,487
|
|
Bargain gain on acquisition
|
|
|
(3,773,486
|
)
|
|
|
$
|
6,500,000
|
|
The preliminary purchase price allocation
is subject to change. We will complete this analysis to determine the fair value of accounts receivable, inventory, prepaid expenses,
property and equipment, intangibles, deposits, restricted cash and other assets and liabilities on the acquisition date. Once this
analysis is complete, we will adjust, if necessary, the provisional amounts assigned to accounts receivable, inventory, prepaid
expenses, property and equipment, intangibles, deposits, restricted cash and other assets and liabilities in the accounting period
in which the analysis is completed.
The operating results of Appliancesmart
are included in our unaudited condensed consolidated financial statements beginning on December 31, 2017 and are reported in our
Retail and Online Segment.
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. 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 $236,318 and $98,084 for the three
months ended March 31, 2018 and 2017, respectively. Intangible amortization expense is $475,970 and $159,581 for the six months
ended March 31, 2018 and 2017, respectively.
The following table summarizes estimated
future amortization expense related to intangible assets that have net balances as of March 31, 2018:
2018
|
|
$
|
1,084,661
|
|
2019
|
|
|
1,077,717
|
|
2020
|
|
|
812,959
|
|
2021
|
|
|
532,434
|
|
2022
|
|
|
307,839
|
|
Thereafter
|
|
|
312,490
|
|
|
|
$
|
4,128,100
|
|
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 February 22, 2017, 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 90 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 2:1 or greater.
Restrictions apply to our ability to make additional prepayments against Marquis subordinated debt and pay cash dividends if the
fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months is less than 2:1 and excess availability
under the BofA Revolver is less than $4 million at the time of payment or distribution. There is no restriction on dividends that
can be taken by the Company so long as Marquis maintains $4 million of current availability at the time of the dividend or distribution.
This translates to having no restriction on Net Income so long as the Company retains sufficient assets to establish $4 million
of current availability and continues to meet the required fixed charge coverage ratio of 2:1 as stated above.
The BofA Revolver places certain restrictions
and covenants on Marquis, including a limitation on asset sales, additional liens, investment, loans, guarantees, acquisitions,
incurrence of additional indebtedness for Marquis to maintain a fixed charge coverage ratio of at least 1.05 to 1, tested as of
the last day of each month for the twelve consecutive months ending on such day.
The BofA Revolver Loan bears interest at
a variable rate based on a base rate plus a margin. The current base rate is the greater of (i) Bank of America prime rate, (ii)
the current federal funds rate plus 0.50%, or (iii) 30-day LIBOR plus 1.00% plus the margin, which varies, depending on the fixed
coverage ratio table below. Levels I – IV determine the interest rate to be charged Marquis which is based on the fixed charge
coverage ratio achieved.
Level
|
Fixed Charge Coverage Ratio
|
Base Rate Revolver
|
LIBOR Revolver
|
Base Rate Term
|
LIBOR Term Loans
|
I
|
>2.00 to 1.00
|
0.50%
|
1.50%
|
0.75%
|
1.75%
|
II
|
<2.00 to 1.00 but >1.50 to 1.00
|
0.75%
|
1.75%
|
1.00%
|
2.00%
|
III
|
<1.50 to 1.00 but >1.20 to 1.00
|
1.00%
|
2.00%
|
1.25%
|
2.25%
|
IV
|
<1.2 to 1.00
|
1.25%
|
2.25%
|
1.50%
|
2.50%
|
On October 20, 2016, Marquis and Bank of
America agreed that Level IV interest rates would be applicable until October 20, 2017, and the Level would subsequently be adjusted
up or down on a quarterly basis going forward based upon the above fixed coverage ratio achieved by Marquis.
The BofA Revolver provides for customary
events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply
with covenants, change in control of Marquis, a material representation or warranty made by us or the borrowers proving to be false
in any material respect, certain bankruptcy, insolvency or receivership events affecting Marquis or its subsidiaries, defaults
relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of Marquis or certain of
its subsidiaries. During the period of October 1, 2017 through March 31, 2018, Marquis cumulatively borrowed $44,010,811 and repaid
$43,732,689 under the BofA Revolver. Our maximum borrowings outstanding during the same period were $6,335,222. Our weighted average
interest rate on those outstanding borrowings for the period of October 1, 2017 through March 31, 2018 was 3.71%. As of March 31,
2018, total additional availability under the BofA Revolver was $9,798,348; with $5,128,937 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 15 Agreement,
the Company recorded $2,800,000 as an outstanding accrued liability as of September 30, 2016. As of March 31, 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.
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 $54,943 beginning January
28, 2018, with the final payment due December 28, 2024, bearing interest at 4.67% 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.
Payment obligations under the TCB Revolver
include monthly payments of interest and all outstanding principal and accrued interest thereon due in November 2020, which is
when the TCB Revolver loan agreement terminates. The TCB Revolver has been classified as a currently liability due to a lockbox
requirement and a subjective acceleration clause as part of the agreement.
Borrowing availability under the TCB Revolver
is limited to a borrowing base which allows Vintage Stock to borrow up to 95% of the appraisal value of the inventory, plus 85%
of eligible receivables, net of certain reserves. The borrowing base provides for borrowing up to 95% of the appraisal value for
the period of November 4, 2016 through December 31, 2016, then 90% of the appraisal value during the fiscal months of January through
September and 92.5% of the appraisal value during the fiscal months of October through December. Letters of credit reduce the amount
available to borrow under the TCB Revolver by an amount equal to the face value of the letters of credit.
Vintage Stock’s ability to make prepayments
against Vintage Stock subordinated debt including the Capitala Term Loan and pay cash dividends is generally permitted if (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 Capitala Term Loan and pay cash dividends if the fixed charge coverage ratio, as calculated
on a pro-forma basis for the prior 12 months is less than 1.2:1.0 and excess availability under the TCB Revolver is less than $2
million at the time of payment or distribution. There is no restriction on dividends that can be taken by the Company so long as
Vintage Stock maintains $2 million of current availability at the time of the dividend or distribution. This translates to having
no restriction on Net Income so long as the Company retains sufficient assets to establish $2 million of current availability and
continues to meet the required fixed charge coverage ratio of 1.2:1 as stated above.
The TCB Revolver places certain restrictions
on Vintage Stock, including a limitation on asset sales, a limitation of 25 new leases in any fiscal year, additional liens, investment,
loans, guarantees, acquisitions and incurrence of additional indebtedness.
The per annum interest rate under the TCB
Revolver is variable and is equal to the one-month LIBOR rate for deposits in United States Dollars that appears on Thomson Reuters
British Bankers Association LIBOR Rates Page (or the successor thereto) as of 11:00 a.m., London, England time, on the applicable
determination date plus a margin of 2.75%.
The TCB Revolver provides for customary
events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply
with covenants, change in control of Vintage Stock, a material representation or warranty made by us or the borrowers proving to
be false in any material respect, certain bankruptcy, insolvency or receivership events affecting Vintage Stock, defaults relating
to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of Vintage Stock. During the period
of October 1, 2017 through March 31, 2018, Vintage Stock cumulatively borrowed $38,625,006 and repaid $39,678,798 under the TCB
Revolver. Our maximum borrowings outstanding during the period of October 1, 2017 through March 31, 2018 was $16,077,915. Our weighted
average interest rate on those outstanding borrowings for the period of October 1, 2017 through March 31, 2018 was 4.1128%. As
of March 31, 2018, total additional availability under the TCB Revolver was $3,876,322, with $11,466,645 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”) bear interest at the LIBO rate (as described below) or base rate, plus an
applicable margin in each case. In their loan notice to the Term Loan Administrative Agent, the Term Loan Borrowers selected the
LIBO rate for the initial term loans made under the term loan agreement on the Closing Date.
The interest rate for LIBO rate loans under
the term loan agreement is equal to the sum of (a) the greater of (i) a rate per annum equal to (A) the offered rate for deposits
in United States Dollars for the applicable interest period and for the amount of the applicable loan that is a LIBOR loan that
appears on Bloomberg ICE LIBOR Screen (or any successor thereto) that displays an average ICE Benchmark Administration Limited
Interest Settlement Rate for deposits in United States Dollars (for delivery on the first day of such interest period) with a term
equivalent to such interest period, determined as of approximately 11:00 a.m. (London time) two business days prior to the
first day of such interest period, divided by (B) the sum of one minus the daily average during such interest period of the aggregate
maximum reserve requirement (expressed as a decimal) then imposed under Regulation D of the Federal Reserve Board for “Eurocurrency
Liabilities” (as defined therein), and (ii) 0.50% per annum,
plus
(b) the sum of (i) 12.50% per annum
in cash pay
plus
(ii) 3.00% per annum payable in kind by compounding such interest to the principal amount of
the obligations under the Term Loan Agreement on each interest payment date.
The interest rate for base rate loans under
the term loan agreement is equal to the sum of (a) the highest of (with a minimum of 1.50%) (i) the federal funds rate plus 0.50%,
(ii) the prime rate, and (iii) the LIBO rate plus 1.00%,
plus
(b) the sum of (i) 11.50% per annum payable in cash
plus
(ii)
3.00% per annum payable in kind by compounding such interest to the principal amount of the obligations under the Term Loan Agreement
on each interest payment date.
The Term Loans place certain restrictions
and covenants on Vintage Stock, including a limitation on asset sales, additional liens, investment, loans, guarantees, acquisitions
and incurrence of additional indebtedness for Vintage Stock. Vintage Stock is required to maintain a fixed charge coverage ratio
of 1.3 for year ended September 30, 2017, 1.4 for year ended September 30, 2018 and 1.5 for all years thereafter. For years ended
September 30, 2017 and thereafter, Vintage Stock is required to incur no more than $1.2 million in annual capital expenditures
subject to certain cumulative quarter and year to date covenants. Vintage Stock is required to maintain a total leverage ratio
of 3.25 for year ended September 30, 2017, 2.5 for year ended September 30, 2018 and 2.0 for all years thereafter. In addition,
for quarter ended December 31, 2017, the total leverage ratio cannot exceed 3.0 and for quarters ended March 31, 2018 and June
30, 2018, the total leverage ratio cannot exceed 2.75.
The Capitala Term Loans provide for customary
events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply
with covenants, change in control of Vintage Stock, a material representation or warranty made by us or the borrowers proving to
be false in any material respect, certain bankruptcy, insolvency or receivership events affecting Marquis or its subsidiaries,
defaults relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of Vintage Stock
or certain of its subsidiaries.
The payment obligations under the Term
Loan Agreement include (i) monthly payments of interest and (ii) principal installment payments in an amount equal to $725,000
due on March 31, June 30, September 30, and December 31 of each year, with the first such payment due on December 31, 2016. The
outstanding principal amounts of the term loans and all accrued interest thereon under the Term Loan Agreement are due and payable
in November 2021.
The Term Loan Borrowers may prepay the
term loans under the term loan agreement from time to time, subject to the payment (with certain exceptions described below) of
a prepayment premium of: (i) an amount equal to 2.0% of the principal amount of the term loan prepaid if prepaid during the period
of time from and after the Closing Date up to the first anniversary of the Closing Date; (ii) 1.0% of the principal amount of the
term loan prepaid if prepaid during the period of time from and after the first anniversary of the Closing Date up to the second
anniversary of the Closing Date; and (iii) zero if prepaid from and after the second anniversary of the Closing Date.
The Term Loan Borrowers may make the following
prepayments of the term loans under term loan agreement without being required to pay any prepayment premium:
|
(i)
|
an amount not to exceed $3 million of the term loans;
|
|
(ii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed $1.45 million, but only if that additional amount is paid prior to the first anniversary of the Closing Date; and
|
|
(iii)
|
in addition to any amount prepaid in respect of item (i), an additional amount not to exceed the difference between $2.9 million and any amount prepaid in respect of item (ii), but only if that additional amount is paid from and after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date.
|
There are also various mandatory prepayment
triggers under the Term Loan Agreement, including in respect of excess cash flow, dispositions, equity and debt issuances, extraordinary
receipts, equity contributions, change in control, and failure to obtain required landlord consents. Our weighted average interest
rate on our Capitala Term Loan outstanding borrowings for the period of October 1, 2017 through March 31, 2018 was 16.94%. In connection
with the Capitala Term Loan, Vintage Stock incurred $1,088,000 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 Capitala Term Loan.
Sellers Subordinated Acquisition Note
In connection with the purchase of Vintage
Stock, on November 3, 2016, VSAH and Vintage Stock entered into a seller financed mezzanine loan in the amount of $10 million with
the previous owners of Vintage Stock. The Sellers Subordinated Acquisition Note bears interest at 8% per annum, with interest payable
monthly in arrears. The Sellers Subordinated Acquisition Note matures five years and six months from November 3, 2016.
Loan Covenant Compliance
We were in compliance with all covenants
under our existing revolving and other loan agreements as of September 30, 2017 due to waivers granted by both Texas Capital Bank
for the TCB Revolver and Capitala for the Capitala Term Loan. We are not in compliance as of March 31, 2018 with the Capitala Term
Loan total leverage ratio and, based on our current operating forecast, do not anticipate that we will regain compliance with this
covenant until sometime in fiscal year ended September 30, 2019. We are seeking alternatives to resolve the out of compliance condition,
including negotiating with Capitala and seeking alternative credit sources. There is no guarantee that we will be able to resolve
the out of compliance condition or that we will be able to obtain credit from alternative sources. Resolution of the out of compliance
condition has not occurred as of May 15, 2018, the date of issuance of these financial statements. As a result of this default,
the Capitala Term Loan has been classified as a short-term obligation at March 31, 2018 and December 31, 2017.
Long-term debt as of March 31, 2018 and
September 30, 2017 consisted of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
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
|
|
$
|
5,128,936
|
|
|
$
|
4,850,815
|
|
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
|
|
|
11,466,648
|
|
|
|
12,520,437
|
|
Note Payable Capitala Term Loan - variable interest rate based upon a base rate plus a margin, 3% per annum interest payable in kind, with the balance of interest payable monthly in cash, principal due quarterly in the amount of $725,000, maturity date November 2021, note subordinate to Texas Capital Bank Revolver Loan, secured by Vintage Stock Assets
|
|
|
25,924,457
|
|
|
|
28,310,505
|
|
Note Payable to the Sellers of Vintage Stock, interest at 8% per annum, with interest payable monthly, maturity date May 2022, note subordinate to both Texas Capital Bank Revolver and Capitala Term Loan, secured by Vintage Stock Assets
|
|
|
10,000,000
|
|
|
|
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.
|
|
|
3,668,368
|
|
|
|
4,097,764
|
|
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.
|
|
|
1,805,370
|
|
|
|
1,969,954
|
|
Note #3 Payable to Banc of America Leasing & Capital LLC - interest at 4.7985% per annum with interest and principal payable monthly in the amount of $51,658 for 84 months, beginning January 30, 2017, secured by equipment.
|
|
|
3,109,559
|
|
|
|
3,341,642
|
|
Note #4 Payable to Banc of America Leasing & Capital LLC - interest at 4.8907% per annum, with interest and principal payable monthly in the amount of $15,901 for 81 months, beginning April 30, 2017, secured by equipment.
|
|
|
954,736
|
|
|
|
1,025,782
|
|
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.
|
|
|
3,812,105
|
|
|
|
–
|
|
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
|
|
|
9,315,576
|
|
|
|
9,328,208
|
|
Note Payable to Cathay Bank, variable interest rate, Prime Rate plus 2.50%, with interest payable monthly, maturity date December 2017, secured by substantially all Modern Everyday assets
|
|
|
–
|
|
|
|
174,757
|
|
Note Payable to Cathay Bank, variable interest rate, Prime Rate plus 1.50%, with interest payable monthly, maturity date December 2017, secured by substantially all Modern Everyday assets
|
|
|
–
|
|
|
|
249,766
|
|
Note payable to individual, interest at 11% per annum, payable on a 90 day written notice, unsecured
|
|
|
206,529
|
|
|
|
206,529
|
|
Note payable to individual, interest at 10% per annum, payable on a 90 day written notice, unsecured
|
|
|
500,000
|
|
|
|
500,000
|
|
Note payable to individual, interest at 8.25% per annum, payable on a 120 day written demand notice, unsecured
|
|
|
225,000
|
|
|
|
225,000
|
|
Total notes payable
|
|
|
76,117,284
|
|
|
|
76,801,159
|
|
Less unamortized debt issuance costs
|
|
|
(1,236,328
|
)
|
|
|
(1,353,352
|
)
|
Net amount
|
|
|
74,880,956
|
|
|
|
75,447,807
|
|
Less current portion
|
|
|
(45,824,329
|
)
|
|
|
(48,877,536
|
)
|
Long-term portion
|
|
$
|
29,056,627
|
|
|
$
|
26,570,271
|
|
Future maturities of debt at March 31,
2018 are as follows which does not include related party debt separately stated:
Years ending March 31,
|
|
|
|
|
2018
|
|
$
|
45,824,329
|
|
2019
|
|
|
2,480,917
|
|
2020
|
|
|
2,594,120
|
|
2021
|
|
|
2,970,772
|
|
2022
|
|
|
11,393,814
|
|
Thereafter
|
|
|
10,853,332
|
|
Total
|
|
$
|
76,117,284
|
|
Note 9: Note
Payable, Related Party
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 March 31, 2018,
and September 30, 2017, there was $2,000,000 outstanding on this mezzanine loan.
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.
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 six months ended March 31, 2018,
the Company did not issue any shares of Series B Convertible Preferred Stock.
During the six months ended March 31, 2017,
the Company issued:
55,888 shares of Series B Convertible Preferred
Stock to Kingston Diversified Holdings LLC on December 29, 2016 to settle and pay for an outstanding accrued liability in the amount
of $2,800,000. The 55,888 shares of Series B Convertible Preferred Stock issued are convertible at an exchange ratio of (five)
shares of common stock for each share of Series B Convertible Preferred Stock, or 279,440 shares of common stock.
158,356 shares of Series B Convertible
Preferred Stock were issued to ICG on December 27, 2016 in exchange for 791,758 shares of our common stock at an exchange ratio
of five shares of common stock for each share of Series B Convertible Preferred Stock.
Series E Convertible Preferred Stock
As
of March 31, 2018
, there were 127,840 shares of Series E
Convertible Preferred Stock and 77,840 shares outstanding. The shares accrue dividends at the rate of 5% per annum on the liquidation
preference per share, payable quarterly from legally available funds. The shares carry a cash liquidation preference of $0.30 per
share, plus any accrued but unpaid dividends. If such funds are not available, dividends shall continue to accumulate until they
can be paid from legally available funds. Holders of the preferred shares are entitled, after two years from issuance, to convert
them into shares of our common stock on a one-to-one basis together with payment of $85.50 per converted share. On November 18,
2017, the Company repurchased 50,000 shares of Series E Convertible Preferred Stock for an aggregate purchase price of $4,000.
Series E Convertible Preferred Stock
Dividends
During the six months ended March 31, 2018
and March 31, 2017, the Company accrued dividends of $584 and $959, respectively, payable to holders of Series E preferred stock.
As of March 31, 2018 and September 30, 2017, unpaid dividends were $584 and $959, respectively.
Common Stock
On November 22, 2016, the Company’s
board of directors authorized a one-for-six (1:6) reverse stock split and a contemporaneous one-for-six (1:6) reduction in the
number of authorized shares of common stock from 60,000,000 to 10,000,000 shares, to take effect for stockholders of record as
of December 5, 2016. No fractional shares were issued. All share, option and warrant related information presented in these financial
statements and footnotes has been retroactively adjusted to reflect the decreased number of shares resulting in this action.
During the six months ended March 31, 2018,
the Company did not issue any shares of common stock.
During the six months ended March 31, 2017,
the Company issued:
58,333 shares of common stock to Novalk
Apps S.A.S. on December 28, 2016 to settle and pay for an outstanding accrued liability in the amount of $584,500. The value was
based on the market value of the Company’s common stock on the date of issuance.
2,284 shares of common stock to various
holders of fractional shares of the Company’s common stock pursuant to the 1:6 stock split effective for stockholders of
record on December 5, 2016. All fractional shares of the Company’s common stock were eliminated.
Treasury Stock
For the year ended September 30, 2017,
the Company purchased a total of 96,307 shares of its common stock in the open market (treasury shares) over a two-year period,
for $999,584. For the six months ended March 31, 2018, the Company purchased 29,743 additional shares of its common stock in the
open market (treasury shares) for $377,447. The Company accounted for the purchase of these treasury shares using the cost method.
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 March 31, 2018:
|
|
Number of
units -
Series B
Convertible
preferred
warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Intrinsic
Value
|
|
Outstanding at March 31, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
0.63
|
|
|
$
|
4,720,595
|
|
Exercisable at March 31, 2018
|
|
|
118,029
|
|
|
$
|
20.80
|
|
|
|
0.63
|
|
|
$
|
4,720,595
|
|
As of September 30, 2016, the Company
had 590,146 common stock warrants outstanding with weighted average exercise price, weighted average remaining contractual term
and intrinsic value of $4.14, 1.73 years and $4,307,493, respectively. On December 27, 2016, ICG and the Company agreed to amend
and exchange the common stock warrants for warrants to purchase shares of Series B Convertible Preferred Stock, and the number
of warrants held adjusted by an exchange ratio of 5:1 shares of common stock for shares of Series B Convertible Preferred Stock.
ICG, the holder of the warrants outstanding, is not permitted to sell, transfer, assign, hypothecate, pledge, margin, hedge, trade
or otherwise obtain or attempt to obtain any economic value from the shares of Series B Convertible Preferred Stock should the
warrants be exercised prior to December 31, 2021.
Warrants for 10,914, 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 March 31, 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 exercise price for the Series B Convertible Preferred Stock
warrants outstanding and exercisable at March 31, 2018 is 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
six months ended March 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
|
|
|
|
10.00
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
231,668
|
|
|
$
|
14.84
|
|
|
|
3.54
|
|
|
$
|
429,417
|
|
Exercisable at March 31, 2018
|
|
|
187,167
|
|
|
$
|
11.75
|
|
|
|
2.58
|
|
|
$
|
429,417
|
|
The Company recognized compensation expense
of $60,829 and $68,084 during the three months ended March 31, 2018 and 2017, respectively. The Company recognized compensation
expense of $140,185 and $69,520 during the six months ended March 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 March 31, 2018, the Company has $385,179
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 March 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
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
15.18
|
|
|
8,000
|
|
|
|
27.60
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
31.74
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
36.50
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
41.98
|
|
|
|
|
|
|
|
|
|
|
231,668
|
|
|
|
|
|
|
|
187,167
|
|
|
|
|
|
The following table summarizes information
about the Company’s non-vested shares outstanding as of March 31, 2018:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
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
|
|
|
(12,167
|
)
|
|
$
|
13.32
|
|
Non-vested at March 31, 2018
|
|
|
44,501
|
|
|
$
|
13.54
|
|
Options
were granted during fiscal 2017 and 2016, where the exercise price was less than the common stock price at the date of
grant
or where the exercise price was greater than the common stock price at the date of grant. There have been no options granted in
fiscal 2018 to date. The assumptions used in calculating the fair value of stock options granted use the Black-Scholes option pricing
model for options granted were as follows:
Risk-free interest rate
|
|
1.25%
|
Expected life of the options
|
|
5.0 to 10.0 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 March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,923,273
|
|
|
$
|
1,840,666
|
|
|
$
|
3,800,828
|
|
|
$
|
3,269,239
|
|
Less: preferred stock dividends
|
|
|
(292
|
)
|
|
|
(480
|
)
|
|
|
(584
|
)
|
|
|
(959
|
)
|
Net income applicable to common stock
|
|
$
|
1,922,981
|
|
|
$
|
1,840,186
|
|
|
$
|
3,800,244
|
|
|
$
|
3,268,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
1,970,136
|
|
|
|
2,058,064
|
|
|
|
1,972,758
|
|
|
|
2,029,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.98
|
|
|
$
|
0.89
|
|
|
$
|
1.93
|
|
|
$
|
1.61
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
1,922,981
|
|
|
$
|
1,840,186
|
|
|
$
|
3,800,244
|
|
|
$
|
3,268,280
|
|
Add: preferred stock dividends
|
|
|
292
|
|
|
|
480
|
|
|
|
292
|
|
|
|
959
|
|
Net income applicable for diluted earnings per share
|
|
$
|
1,923,273
|
|
|
$
|
1,840,666
|
|
|
$
|
3,800,536
|
|
|
$
|
3,269,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
2,027,564
|
|
|
|
2,058,064
|
|
|
|
1,972,758
|
|
|
|
2,029,023
|
|
Add: Options
|
|
|
44,923
|
|
|
|
69,979
|
|
|
|
44,171
|
|
|
|
56,458
|
|
Add: Common Stock Warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Add: Series B Preferred Stock
|
|
|
1,071,200
|
|
|
|
1,071,200
|
|
|
|
1,071,200
|
|
|
|
1,071,200
|
|
Add: Series B Preferred Stock Warrants
|
|
|
590,145
|
|
|
|
590,145
|
|
|
|
590,145
|
|
|
|
590,145
|
|
Add: Series E Preferred Stock
|
|
|
77,840
|
|
|
|
127,840
|
|
|
|
77,840
|
|
|
|
127,840
|
|
Assumed weighted average common shares outstanding
|
|
|
3,811,672
|
|
|
|
3,917,228
|
|
|
|
3,756,114
|
|
|
|
3,874,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.50
|
|
|
$
|
0.47
|
|
|
$
|
1.01
|
|
|
$
|
0.84
|
|
There are 121,250 and 20,000 common stock
options that are anti-dilutive that are not included in the three months ended March 31, 2018 and 2017, diluted earnings per share
computations, respectively. There are 121,250 and 50,625 common stock options that are anti-dilutive that are not included in the
six months ended March 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 March 31, 2018, and September
30, 2017, respectively, there was $2,000,000 outstanding on this mezzanine loan. During the three months ended March 31, 2018 and
2017, the Company recognized total interest expense of $62,500, associated with the ICF notes. During the six months ended March
31, 2018 and 2017, we recognized total interest expense of $126,389, 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 $29,929 in rent and other common area
reimbursed expenses for the three months ended March 31, 2018. ARCA paid the Company $75,317 in rent and other common area reimbursed
expenses for the six months ended March 31, 2018. 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 March 31, 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.
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.
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 March 31, 2018 and 2017, was $83,184 and $24,681, respectively. Interest paid to Mr. Spriggs for the six months ended
March 31, 2018 and 2017, was $165,454 and $106,951, respectively. Interest unpaid and accrued as of March 31, 2018 and September
30, 2017 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 March 31, 2018, results of operations, cash flows or liquidity of the Company.
Note 16: Income
Taxes
The income tax rate for the six months
ended March 31, 2018 and March 31, 2017 were 50.1% and 42.1%, respectively. The effective income tax rate differs from the U.S.
federal statuary rate primarily due to state taxes, extraordinary gains, and certain non-deductible expenses. As of March 31, 2018,
and March 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. The Company has net operating loss carry-forwards of approximately
$27.2 million for U.S. income tax purposes, these net operating loss carryforwards are subject to IRC Section 382 limitations and
can be carried forward indefinitely.
During the first quarter, 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 six 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 six-month period
ended March 31, 2018.
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
and six months ended March 31, 2018 and 2017:
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
31,183,512
|
|
|
$
|
19,975,533
|
|
|
$
|
52,476,983
|
|
|
$
|
34,752,256
|
|
Manufacturing
|
|
|
20,808,622
|
|
|
|
18,343,692
|
|
|
|
39,687,157
|
|
|
|
35,531,226
|
|
Services
|
|
|
187,794
|
|
|
|
217,200
|
|
|
|
383,852
|
|
|
|
441,607
|
|
|
|
$
|
52,179,928
|
|
|
$
|
38,536,425
|
|
|
$
|
92,547,992
|
|
|
$
|
70,725,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
14,536,885
|
|
|
$
|
11,084,654
|
|
|
$
|
25,992,687
|
|
|
$
|
19,152,262
|
|
Manufacturing
|
|
|
4,936,246
|
|
|
|
5,186,082
|
|
|
|
9,688,814
|
|
|
|
9,549,375
|
|
Services
|
|
|
177,570
|
|
|
|
204,634
|
|
|
|
365,090
|
|
|
|
418,965
|
|
|
|
$
|
19,650,701
|
|
|
$
|
16,475,370
|
|
|
$
|
36,046,591
|
|
|
$
|
29,120,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
2,391,848
|
|
|
$
|
2,535,159
|
|
|
$
|
4,623,324
|
|
|
$
|
4,279,126
|
|
Manufacturing
|
|
|
1,504,823
|
|
|
|
2,531,388
|
|
|
|
3,007,077
|
|
|
|
4,252,648
|
|
Services
|
|
|
177,292
|
|
|
|
204,310
|
|
|
|
364,350
|
|
|
|
418,151
|
|
|
|
$
|
4,073,963
|
|
|
$
|
5,270,857
|
|
|
$
|
7,994,751
|
|
|
$
|
8,949,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
440,503
|
|
|
$
|
326,675
|
|
|
$
|
1,117,964
|
|
|
$
|
555,106
|
|
Manufacturing
|
|
|
866,756
|
|
|
|
761,523
|
|
|
|
1,585,200
|
|
|
|
1,468,139
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,307,259
|
|
|
$
|
1,088,198
|
|
|
$
|
2,703,164
|
|
|
$
|
2,023,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
1,349,291
|
|
|
$
|
1,603,120
|
|
|
$
|
3,371,698
|
|
|
$
|
2,682,426
|
|
Manufacturing
|
|
|
472,429
|
|
|
|
431,933
|
|
|
|
918,334
|
|
|
|
802,103
|
|
Services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,821,720
|
|
|
$
|
2,035,053
|
|
|
$
|
4,290,032
|
|
|
$
|
3,484,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
$
|
1,161,581
|
|
|
$
|
1,193,591
|
|
|
$
|
5,214,176
|
|
|
$
|
2,016,338
|
|
Manufacturing
|
|
|
1,019,656
|
|
|
|
1,981,175
|
|
|
|
2,083,049
|
|
|
|
3,216,069
|
|
Services
|
|
|
177,292
|
|
|
|
204,310
|
|
|
|
364,350
|
|
|
|
418,151
|
|
|
|
$
|
2,358,529
|
|
|
$
|
3,379,076
|
|
|
$
|
7,661,575
|
|
|
$
|
5,650,558
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
|
|
|
|
|
|
|
|
$
|
86,373,999
|
|
|
$
|
81,703,371
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
50,860,338
|
|
|
|
46,783,429
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
90,586
|
|
|
|
107,795
|
|
|
|
|
|
|
|
|
|
|
|
$
|
137,324,923
|
|
|
$
|
128,594,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail and Online
|
|
|
|
|
|
|
|
|
|
$
|
40,716,285
|
|
|
$
|
40,778,865
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
358,550
|
|
|
|
373,184
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,074,835
|
|
|
$
|
41,152,049
|
|
Note 18: Subsequent
Events
ApplianceSmart, Inc. Financing
As previously announced by Live Ventures
Incorporated (the “Company”), on December 30, 2017, ApplianceSmart Holdings LLC, a wholly-owned subsidiary of the Company
(the “Purchaser”), 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, the Purchaser 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”). The Purchaser 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, the Purchaser and the Seller negotiated in good faith the method of payment of the remaining
outstanding balance of the Purchase Price. On April 25, 2018, the Purchaser delivered to the Seller that certain Promissory Note
(the “ApplianceSmart Note”) in the original principal amount of $3,919,494.46 (the “Original Principal Amount”),
as such amount may be adjusted per the terms of the ApplianceSmart Note. The ApplianceSmart Note is effective as of April 1, 2018
and matures on April 1, 2021 (the “Maturity Date”). The ApplianceSmart Note bears interest at 5% per annum with interest
payable monthly in arrears. Ten percent of the outstanding principal amount will be repaid annually on a quarterly basis, with
the accrued and unpaid principal due on the Maturity Date. ApplianceSmart has agreed to guaranty repayment of the ApplianceSmart
Note. The remaining $2,580,505.54 of the Purchase Price was paid in cash by the Purchaser to the Seller. The Purchaser may reborrow
funds, and pay interest on such reborrowings, from the Seller up to the Original Principal Amount.