ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the year ended September 30, 2021, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Part II, Item 8 of this Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (this “Form 10-K”).
Stated in thousands of US dollars, except per share amounts.
Note about Forward-Looking Statements
This Form 10-K includes statements that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “intends,” “plans,” “expects,” or “anticipates,” and do not reflect historical facts.
Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to: (i) statements that are based on current projections and expectations about the markets in which we operate, (ii) statements about current projections and expectations of general economic conditions, (iii) statements about specific industry projections and expectations of economic activity, (iv) statements relating to our future operations, prospects, results, and performance, (v) statements about the Chapter 11 Case, (vi) statements that the cash on hand and additional cash generated from operations together with potential sources of cash through issuance of debt or equity will provide the Company with sufficient liquidity for the next 12 months, and (vii) statements that the outcome of pending legal proceedings will not have a material adverse effect on business, financial position and results of operations, cash flow or liquidity.
Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. This Form 10-K identifies those factors and risks that could affect our results, our future performance, and our capital requirements under Item 1A “Risk Factors”. There are also other factors that we are currently unable to identify or quantify, but that may exist in the future, that could similarly affect us.
In addition, any or all of the factors identified in this Form 10-K may generally affect our business, results of operations, and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained on our website, www.liveventures.com, or any other websites referenced in this Annual Report, are not part of this Annual Report.
Our Company
Live Ventures Incorporated is a holding company of diversified businesses, which, together with our subsidiaries, we refer to as the “Company”, “Live Ventures”, “we”, “us” or “our”. We acquire and operate companies in various industries that have historically demonstrated a strong history of earnings power. We currently have three segments to our business: Retail, Flooring Manufacturing, Steel Manufacturing, and Corporate & Other.
Under the Live Ventures brand, we seek opportunities to acquire profitable and well-managed companies. We work closely with consultants who help us identify target companies that fit within the criteria we have established for opportunities that will provide synergies with our businesses.
Our principal offices are located at 325 E. Warm Springs Road, Suite 102, Las Vegas, Nevada 89119, our telephone number is (702) 939-0231, and our corporate website (which does not form part of this report Form 10-K) is located at www.liveventures.com. Our common stock trades on the Nasdaq Capital Market under the symbol “LIVE”.
Retail Segment
Our Retail Segment is composed of Vintage Stock and ApplianceSmart.
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Vintage Stock
Vintage Stock Holdings LLC, Vintage Stock, V-Stock, Movie Trading Company and EntertainMart (collectively, “Vintage Stock”) is an award-winning specialty entertainment retailer that offers a large selection of entertainment products, including new and pre-owned movies, video games and music products, as well as ancillary products, such as books, comics, toys and collectibles, in a single location. With its integrated buy-sell-trade business model, Vintage Stock buys, sells and trades new and pre-owned movies, music, video games, electronics and collectibles through 63 retail locations strategically positioned across Arkansas, Colorado, Idaho, Illinois, Kansas, Missouri, Nebraska, New Mexico, Oklahoma, Texas, and Utah.
ApplianceSmart
At September 30, 2021, ApplianceSmart Affiliated Holdings LLC and ApplianceSmart, Inc. (collectively “ApplianceSmart”) operated one store in Ohio. ApplianceSmart is a household appliance retailer with two product categories: one consisting of typical and commonly available, innovative appliances, and the other consisting of affordable value-priced, niche offerings such as close-outs, factory overruns, discontinued models, and special-buy appliances, including open box merchandise and others.
On December 9, 2019, ApplianceSmart filed a voluntary petition (the “Chapter 11 Case”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The bankruptcy affects Live Ventures’ indirect subsidiary ApplianceSmart only and does not affect any other subsidiary of Live Ventures, or Live Ventures itself. ApplianceSmart expects to continue to operate its business in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In addition, ApplianceSmart reserves its right to file a motion seeking authority to use cash collateral of the lenders under the reserve-based revolving credit facility. The case is being administrated under the caption In re: ApplianceSmart, Inc. (case number 19-13887). Court filings and other information related to the Chapter 11 Case are available at the PACER Case Locator website for those registered to do so or at the Courthouse located at One Bowling Green, Manhattan, New York 10004.
On October 13, 2021, a hearing was held to consider approval of the Disclosure Statement filed by ApplianceSmart in conjunction with its bankruptcy proceedings. The Disclosure Statement was approved by the court, subject to minor amendment, and a directive issued that an order for a final confirmation hearing be drafted and scheduled in the foreseeable future.
Flooring Manufacturing Segment
Our Flooring Manufacturing segment is comprised of Marquis.
Marquis Affiliated Holdings LLC and wholly-owned subsidiaries (“Marquis”). Marquis is a leading carpet manufacturer and distributor of carpet and hard-surface flooring products. Over the last decade, Marquis has been an innovator and leader in the value-oriented polyester carpet sector, which is currently the market’s fastest-growing fiber category. Marquis focuses on the residential, niche commercial, and hospitality end-markets and serves thousands of customers.
Since commencing operations in 1995, Marquis has built a strong reputation for outstanding value, styling, and customer service. Its innovation has yielded products and technologies that differentiate its brands in the flooring marketplace. Marquis’s state-of-the-art operations enable high quality products, unique customization, and exceptionally short lead-times. Furthermore, the Company has recently invested in additional capacity to grow several attractive lines of business, including printed carpet and yarn extrusion.
Steel Manufacturing Segment
Our Steel Manufacturing segment is comprised of Precision Industries, Inc. (otherwise known in the industry as “Precision Marshall”).
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Precision Marshall is the North American leader in providing and manufacturing pre-finished de-carb free tool and die steel. For nearly 75 years, Precision Marshall has served steel distributors through quick and accurate service. Precision Marshall has led the industry with exemplary availability and value-added processing that saves distributors time and processing costs.
Founded in 1948, Precision Marshall “The Deluxe Company” has built a reputation of high integrity, speed of service and doing things the “Deluxe Way”. The term Deluxe refers to all aspects of the product and customer service to be head and shoulders above the rest. From order entry to packaging and delivery, Precision Marshall makes it easy to do business and backs all products and service with a guarantee.
Precision Marshall provides four key products to over 500 steel distributors in four product categories: Deluxe Alloy Plate, Deluxe Tool Steel Plate, Precision Ground Flat Stock, and Drill Rod. With over 5,000 distinct size grade combinations in stock every day, Precision Marshall arms tool steel distributors with deep inventory availability and same day shipment to their place of business or often ships direct to their customer saving time and handling.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of these statements requires us to make judgments and estimates. Some accounting policies have a significant and material impact on amounts reported in these financial statements. Estimates and assumptions are based on management's experience and other information available prior to the issuance of our financial statements. Our actual realized results may differ materially from management’s initial estimates as reported. Our critical and significant accounting policies include Trade and Other Receivables, Inventories, Goodwill, Revenue Recognition, Fair Value Measurements, Stock Based Compensation, Income Taxes, Segment Reporting and Concentrations of Credit Risk.
Results of Operations
The following table sets forth certain statement of income items and as a percentage of revenue, for the periods indicated:
Year Ended Year Ended
% of Total % of Total
Revenue Revenue
Statement of Income Data:
Gain on lease settlement, net — — 307 0.2 %
Gain on Payroll Protection Program loan forgiveness 6,150 2.3 % — —
Gain on disposal of fixed assets — — — —
Gain on bankruptcy settlement 1,765 0.6 % — —
Bargain purchase gain — — 1,507 0.8 %
Impairment charges — — (525 ) (0.3 )%
Net loss attributable to non-controlling interest 180 0.1 % 268 0.1 %
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The following table sets forth revenues by segment:
Year Ended Year Ended
Net % of Total Net % of Total
Revenue Revenue Revenue Total Revenue
Revenue
Retail
The following table sets forth gross profit and gross profit as a percentage of total revenue by segment:
Year Ended Year Ended
Gross Gross Profit% Gross Gross Profit%
Profit of TotalRevenue Profit of TotalRevenue
Gross Profit
Retail
Revenue
Revenue increased by approximately $81.3 million to approximately $273 million for the year ended September 30, 2021 as compared to the year ended September 30, 2020 of approximately $191.7 million.
Retail: The increase in revenue of approximately $18.1 million for Movies, Music, Games and Other was primarily due to new video game and movie releases as compared to the prior year, and the reopening of Vintage Stock retail locations that were closed temporarily during 2020 due to COVID-19. Appliance revenue decreased by approximately $2.9 million due to the closure of certain retail locations that were incurring continual decreases in sales resulting from increased competition.
Floor Manufacturing: Flooring Manufacturing revenue increased by approximate $20.6 million as a result of the availability of new product lines due to the 2020 acquisition of Lonesome Oak.
Steel Manufacturing: Steel Manufacturing revenue was approximately $49.3 million for the year ended September 30, 2021. Revenue for the year ended September 30, 2020 was approximately $8.0 million, and represents revenue for the period of July 14, 2020, the date of acquisition of Precision Marshall, through September 30, 2020.
Cost of Revenue
Cost of revenue increased by approximately $57.1 million, or 49.1% for the year ended September 30, 2021 as compared to the year ended September 30, 2020. While the increase is, in part, due to the factors described above, cost of revenue also increased due to the steel manufacturing segment constituting a full year's activity, as well as the influence of an inflationary environment on all segments.
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General and Administrative Expense
General and Administrative expense increased by approximately $8.7 million or 19.9%, for the year ended September 30, 2021 as compared to the year ended September 30, 2020, primarily due to the reopening of Vintage Stock retail locations following temporary closure of these locations due to COVID-19 during the year ended September 30, 2020, a full year's general and administrative expenses for Precision Marshall, which was acquired during the year ended September 30, 2020, as well as increases in Corporate & Other expenses of payroll-related costs, professional fees, and general and administrative expenses for SW Financial.
Selling and Marketing Expense
Selling and marketing expense increased by approximately $93,000 for the year ended September 30, 2021 as compared to the year ended September 30, 2020 primarily due to increased marketing efforts during the period.
Interest Expense, net
Interest expense, net decreased by approximately $49,000 or 0.9%, for the year ended September 30, 2021 as compared to the year ended September 30, 2020.
Gain on Lease Settlement, net
During the year ended September 30, 2020, the Company recorded a net gain on lease settlement of approximately $307,000 which consisted of impairment charges of approximately $614,000 related to the decision to close additional ApplianceSmart retail locations resulting in a decrease to the associated right of use asset related to these leases, offset by a gain on lease settlement of approximately $921,000 resulting from the extinguishment of the lease liability associated with the closed retail locations. There were no such transactions during the year ended September 30, 2021.
Bargain Purchase Gain
The bargain purchase gain of approximately $1.5 million for year ended September 30, 2020 was related to the acquisition of Precision Marshall. There were no similar bargain purchase gains for the year ended September 30, 2021.
Gain on Payroll Protection Program
During the year ended September 30, 2021, the Company recorded a gain of approximately $6.2 million due to the forgiveness of PPP Loans. There were no similar transactions during the year ended September 30, 2020.
Gain on Bankruptcy Settlement
During the year ended September 30, 2021, the Company recorded a gain of approximately $1.8 million due to the discharge of certain payables from bankruptcy proceedings. There were no similar transactions during the year ended September 30, 2020.
Impairment Charges
Impairment charges of $525,000 for the year ended September 30, 2020 were related to the disposal of fixed assets that were no longer in use. There were no impairment charges recorded for the year ended September 30, 2021.
Provision (Benefit) for Income Taxes
For the year ended September 30, 2021, the Company recorded an income tax provision of approximately $8.7 million, compared to a tax provision of approximately $5.0 million for the year ended September 30, 2020. The year over year increase is primarily due to an increase in net income during the year ended September 30, 2021. The tax provision
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for the year ended September 30, 2020 was impacted by state income taxes, net of federal benefit and non-deductible items related to the acquisition of Precision Marshall.
Results of Operations by Segment
Flooring Steel Corporate & Flooring Steel Corporate &
Retail Segment
Segment results for Retail include Vintage Stock and ApplianceSmart. Revenue for the year ended September 30, 2021 increased by approximately $15.3 million, or 20.8%, as compared to the prior year, primarily due to new video game and movie releases as compared to the prior year. Cost of revenue for the year ended September 30, 2021 increased approximately $8.0 million or 24.4%, as compared to the prior year period, primarily due to increased revenue. Operating income for the year ended September 30, 2021 was approximately $16.3 million, as compared to approximately $8.7 million during the prior year period primarily due to an increase in gross profit of approximately $7.3 million.
Flooring Manufacturing Segment
Segment results for Flooring Manufacturing includes Marquis. Revenue for the year ended September 30, 2021 increased by approximately $20.6 million, or 18.8%, as compared to the prior year period, due to increased sales of carpets and hard surface products related to development of new products. Cost of revenue for the year ended September 30, 2021 increased proportionately with revenue, as compared to the prior year period. Operating income for the year ended September 30, 2021 increased by approximately $4.1 million, or 25.6%, as compared to the prior year period.
Steel Manufacturing Segment
Segment results for Steel Manufacturing includes Precision Marshall. We completed the acquisition of Precision Marshall in July 2020. Revenue was approximately $49.3 million, and cost of revenue was approximately $37.3 million for the year ended September 30, 2021, as compared to approximately $8.0 million and $6.8 million for the year ended September 30, 2020. Operating income was approximately $5.9 million and approximately $172,000, for the years ended September 30, 2021 and 2020, respectively. The results of operations for the year ended September 30, 2020 represent the period from July 14, 2020 to September 30, 2020.
Corporate and Other Segment
Segment results for Corporate and Other includes our directory services business and our investment in SW Financial. Revenues and operating income for our directory services business continue to decline due to decreasing renewals. We expect revenue and operating income from this segment to continue to decrease in the future. We are no longer accepting new customers in our directory services business. We anticipate revenues from our investment SW Financial to trend upward in the future.
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Liquidity and Capital Resources
Overview
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under our asset-based revolver lines of credit will provide sufficient liquidity to fund our operations, pay our scheduled loan payments, ability to repurchase shares under our share buyback program, and pay dividends on our shares of Series E Preferred Stock as declared by the Board of Directors, for at least the next 12 months.
We have the following three asset-based revolver lines of credit: (i) Texas Capital Bank Revolver Loan (“TCB Revolver”) utilized by Vintage Stock, (ii) Bank of America Revolver Loan (“BofA Revolver”) utilized by Marquis, and (iii) Encina Revolver Loan (“Encina Revolver”) utilized by Precision Marshall. Additionally, we have an unsecured revolving line of credit with Isaac Capital Group (“ICG Revolver”), a related party, which is utilized by the Company.
As of September 30, 2021, we had total cash on hand of approximately $4.7 million as well as approximately $31.1 million of available borrowing under our revolving credit facilities. As we continue to pursue acquisitions and other strategic transactions to expand and grow our business, we regularly monitor capital market conditions and may raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Cash Flows from Operating Activities
The Company’s cash and cash equivalents at September 30, 2021 were approximately $4.7 million compared to approximately $9.0 million at September 30, 2020, a decrease of approximately $4.3 million. Net cash provided by operations was approximately $28.5 million for the year ended September 30, 2021 as compared to net cash provided by operations of approximately $28.8 million for the same period in 2020 primarily due to the results of operations discussed above.
Our primary sources of cash inflows are from customer receipts from sales on account, factored accounts receivable proceeds, receipts for securities sales commissions, and net remittances from directory services customers processed in the form of ACH billings. Our most significant cash outflows include payments for raw materials and general operating expenses, including payroll costs and general and administrative expenses that typically occur within close proximity of expense recognition.
Cash Flows from Investing Activities
Our cash flows used in investing activities of approximately $17.4 million for the year ended September 30, 2021 consisted of purchases of property and equipment and our investment in SW Financial. Our cash flows used in investing activities of approximately $8.8 million for the year ended September 30, 2020 consisted primarily of purchases of approximately $4.9 million associated with the acquisition of Precision Marshall and Lonesome Oak, and property and equipment of approximately $3.9 million.
Cash Flows from Financing Activities
Our cash flows used in financing activities of approximately $15.4 million for the year ended September 30, 2021 primarily consisted of payment on notes payable and related party notes payable of approximately $16.8 million, $737,000 in net payments under revolver loans, and purchase of treasury stock of approximately $421,000, partially offset by the issuance of notes payable of approximately $2.3 million, and proceeds of approximately $323,000 from stock options exercised.
Our cash flows used in financing activities of approximately $13.7 million for the year ended September 30, 2020 primarily consisted of approximately $12.7 million for payments of notes payable, approximately $6.0 million in net
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payments under revolver loans, and approximately $1.7 million for the purchase of treasury stock, offset by proceeds of $6.8 million from proceeds received from the issuance of notes payable.
Currently, the Company is not issuing common shares for liquidity purposes. We prefer to use asset-based lending arrangements and mezzanine financing together with Company provided capital to finance acquisitions and have done so historically. Occasionally as our Company history has demonstrated we will issue stock and derivative instruments linked to stock for services and/or debt settlement.
Working Capital
We had working capital of approximately $33.8 million as of September 30, 2021 as compared to approximately $38.6 million as of September 30, 2020. Changes in working capital were primarily attributable to the investment in Salomon Whitney and purchases of property and equipment.
Future Sources of Cash; New Products and Services
We may require additional debt financing or capital to finance new acquisitions, refinance existing indebtedness or other strategic investments in our business. Other sources of financing may include stock issuances and additional loans; or other forms of financing. Any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders.
Contractual Obligations
The following table summarizes our contractual obligations consisting of operating lease agreements and debt obligations and the effect such obligations are expected to have on our future liquidity and cash flows:
Payments due by Period
Less ThanOne Year One to ThreeYears Three to FiveYears More ThanFive Years Total
Off-Balance Sheet Arrangements
At September 30, 2021, we had no off-balance sheet arrangements, commitments or guarantees that require additional disclosure or measurement.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
As of September 30, 2021, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required. We believe we are not subject in any material way to other forms of market risk, such as foreign currency exchange risk or foreign customer purchases or commodity price risk.
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ITEM 8. Financial Statement and Supplementary Data
LIVE VENTURES INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page
Reports of Independent Registered Public Accounting Firm
Report of Frazier & Deeter, LLC F-1
Report of WSRP, LLC F-3
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2021 and 2020 F-4
Notes to Consolidated Financial Statements F-9
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
of Live Ventures Incorporated
Las Vegas, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Live Ventures Incorporated (the "Company") as of September 30, 2021, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021, and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
As described in Note 4 to the consolidated financial statements, during the current year, the Company acquired an interest in Salomon Whitney LLC, a New York limited liability company doing business as SW Financial (“SW Financial”) for a total consideration of approximately $7.0 million. The Company determined it had acquired a variable interest in SW Financial and that the Company was the primary beneficiary of the variable interest entity. The Company also determined SW Financial met the definition of a business in accordance with US GAAP and therefore applied acquisition accounting of a business combination for its acquisition of the variable interest in SW Financial. As part of its purchase price allocation, the Company determined that approximately $3.6 million should be allocated to a customer relationship intangible asset (“customer relationship”).
We identified the Company’s valuation of the customer relationship as a critical audit matter because of the significant estimates and assumptions management used in the estimate of the preliminary acquisition date fair value, including forecasts of future revenues and expenses and the selection of the discount rates. Auditing management’s forecasts of future revenues and expenses as well as the selection of the discount rates involved a high degree of auditor judgment
F-1
and increased audit effort, including the use of our valuation specialists, as changes in these assumptions could have a significant impact on the preliminary acquisition date fair value of the acquired customer relationship.
Our audit procedures related to the Company’s estimate of the preliminary acquisition date fair value of the customer relationship included the following, among others:
We read the purchase and sale agreement to understand and evaluate the terms of the transaction to determine that the acquisition met the requirements of a business combination, and our analysis of the initial allocation of the purchase price accounting as well as the determination of the balance sheet classification of each component of the transaction.
We obtained the Company’s third-party expert valuation report to gain an understanding of the process and key assumptions for estimating the fair value of intangible assets and other acquired assets and liabilities.
We utilized our valuation specialists to evaluate the adequacy and appropriateness of the methodologies and assumptions, including weighted-average cost of capital and the discount rate, used by the Company’s third-party valuation expert in developing the estimated fair value of the customer relationship.
We assessed the reasonableness of management’s cash flow forecasts based on limited historical results and limited growth based on expected inflation.
We performed independent calculations to test the reasonableness and mathematical accuracy of the fair values concluded on by the Company.
We evaluated the qualifications of the Company’s third-party valuation expert based on credentials, reputation and experience.
We assessed the appropriateness of the disclosures in the consolidated financial statements.
/s/ Frazier & Deeter, LLC
We have served as the Company’s auditor since 2021.
Atlanta, Georgia
December 28, 2021
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Live Ventures Incorporated
Las Vegas, Nevada
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Live Ventures Incorporated (the “Company”) as of September 30, 2020 and the related consolidated statements of income (loss), changes in stockholders’ equity, and cash flows for the year ended September 30, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020, and the results of its operations and its cash flows for the year ended September 20, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ WSRP, LLC
We have served as the Company’s auditor from 2018 to 2021.
Salt Lake City, Utah
January 13, 2021
F-3
LIVE VENTURES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Assets
Prepaid expenses and other current assets 1,640 1,778
Debtor in possession assets 180 520
Right of use asset - operating leases 30,466 29,545
Deposits and other assets 682 223
Deferred taxes — 1,021
Liabilities and Stockholders' Equity
Liabilities:
Current portion of notes payable related parties 2,000 1,297
Current portion of lease obligations - operating leases 7,202 7,176
Long-term debt, net of current portion 37,559 63,390
Lease obligation long term - operating leases 29,343 28,101
Notes payable related parties, net of current portion 2,000 4,000
Deferred tax liability 2,796 —
Other non-current obligations — 734
Commitments and contingencies
Stockholders' equity:
Equity attributable to Live stockholders 75,528 43,940
Non-controlling interest (448 ) (268 )
Total liabilities and stockholders' equity $ 211,738 $ 197,259
The accompanying notes are an integral part of these consolidated financial statements.
F-4
LIVE VENTURES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share)
Years Ended September 30,
Operating expenses:
Other (expense) income:
Gain on lease settlement, net — 307
Gain on Payroll Protection Program loan forgiveness 6,150 —
Gain on bankruptcy settlement 1,765 —
Bargain purchase gain — 1,507
Impairment charges — (525 )
Total other (expense) income, net 3,889 (4,806 )
Net loss attributable to non-controlling interest 180 268
Net income attributable to Live stockholders $ 31,197 $ 10,927
Income per share:
Weighted average common shares outstanding:
Dividends declared - Series B convertible preferred stock $ — $ —
Dividends declared - Series E convertible preferred stock $ — $ 1
Dividends declared - Common stock $ — $ —
The accompanying notes are an integral part of these consolidated financial statements.
F-5
LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Series E preferred stock dividends — — — — — — — — — (1 ) — (1 )
Stock based compensation — — — — — — 86 — — — — 86
Fair value of warrant extension adjustment — — — — — — 462 — — — — 462
Purchase of common treasury stock — — — — (236,908 ) — — (1,660 ) — — — (1,660 )
Stock based compensation — — — — — — 489 — — — — 489
Stock options exercised — — — — 28,668 — 323 — — — — 323
Warrants exercised 101,546 — — — — — — — — — — —
Purchase of common treasury stock — — — — (35,435 ) — — (421 ) — — — (421 )
The accompanying notes are an integral part of these consolidated financial statements.
F-6
LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended September 30,
Operating activities:
Depreciation and amortization 6,791 5,862
Gain on lease settlement, net — (307 )
Gain on disposal of property and equipment 337 —
Gain on bargain purchase of acquisition — (1,507 )
Impairment charges — 525
Amortization of debt issuance costs 659 471
Gain on Payroll Protection Program loan forgiveness (6,150 ) —
Gain on bankruptcy settlement (1,765 )
Stock based compensation expense 489 86
Warrant extension fair value adjustment — 462
Amortization of right of use assets (215 ) 1,461
Change in reserve for uncollectible accounts 658 421
Change in reserve for obsolete inventory 1,239 (139 )
Changes in assets and liabilities:
Prepaid expenses and other current assets 141 —
Change in deferred income taxes 3,818 4,069
Deposits and other assets (457 ) 128
Net cash provided by operating activities 29,188 28,791
Investing activities:
Purchase of intangible assets (587 ) (4 )
Purchases of property and equipment (10,834 ) (3,882 )
Salomon Whitney acquisition (6,000 ) —
Lonesome Oak acquisition — (550 )
Precision Marshall acquisition — (4,340 )
Net cash used in investing activities (17,421 ) (8,776 )
Financing activities:
Net borrowings (payments) under revolver loans (1,355 ) (5,974 )
Purchase of Series E preferred treasury stock — (3 )
Stock options exercised 323 —
Proceeds from issuance of notes payable 2,259 4,768
Purchase of common treasury stock (421 ) (1,660 )
Proceeds from (payments of) related party notes payable (5,800 ) 2,000
Payments on financing leases (117 ) —
Debtor in possession cash 60 (134 )
Net cash used in financing activities (16,087 ) (13,712 )
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended September 30,
Supplemental cash flow disclosures:
Income taxes refunded, net $ — $ 30
Income taxes paid, net $ 1,537 $ —
Noncash financing and investing activities:
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
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 businesses 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: Retail, Flooring Manufacturing, Steel Manufacturing, and Corporate and Other. Included in the Retail segment: (i) Vintage Stock, Inc. (“Vintage Stock”), the Company is engaged in the retail sale of new and used movies, music, collectibles, comics, books, games, game systems and components and (ii) ApplianceSmart, Inc. (“ApplianceSmart”), the Company is engaged in the sale of new major appliances through a retail store. Included in the Flooring Manufacturing segment is Marquis Industries, Inc. (“Marquis”), which is engaged in the manufacture and sale of carpet and the sale of vinyl and wood floorcoverings. Included in the Steel Manufacturing Segment is Precision Industries, Inc. (“Precision Marshall”), which is engaged in the manufacture and sale of alloy and steel plates, ground flat stock and drill rods.
Coronavirus
In March 2020, there was a global outbreak of COVID-19 (Coronavirus) that has resulted in changes in global supply of certain products. The pandemic has created significant uncertainties and is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, the Company’s supply chain partners, its employees and customers, customer sentiment in general, and traffic within shopping centers, and, where applicable, malls, containing its stores. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state, and local authorities to avoid large gatherings of people or self-quarantine are continuing to increase, which has already affected, and may continue to affect, traffic to the stores. As of March 31, 2020, Vintage Stock had closed all of its retail locations in response to the crisis. Beginning May 1, 2020, Vintage Stock began to reopen certain locations in compliance with government regulations. Additionally, as of June 30, 2020, all Vintage Stock retail locations were reopened, while maintaining compliance with government mandates. The Company is unable to predict if additional periods of store closures will be needed or mandated. During March and April 2020, Marquis conducted rolling layoffs for certain employees; however, during May 2020, most employees returned to their respective locations. Continued impacts of the pandemic materially adversely affect the near-term and long-term revenues, earnings, liquidity, and cash flows, and may require significant actions in response, including but not limited to, employee furloughs, reduced store hours, store closings, expense reductions or discounting of pricing of products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on the business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that the Company is not aware of currently.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries over which the Company exercises control and a variable interest entity. See Note 4, Variable Interest Entity for further information. The Company records a non-controlling interest within stockholders’ equity for the portion of the entity’s equity attributed to the consolidated entities that are not wholly owned. All intercompany accounts and transactions
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have been eliminated in consolidation. Certain prior period amounts may have been reclassified for consistency with the current period presentation. These reclassifications have no material effect on the reported financial results
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made in connection with the accompanying consolidated financial statements include the estimated reserve for doubtful current and long-term trade and other receivables, the estimated reserve for excess and obsolete inventory, estimated warranty reserve, estimated fair value and forfeiture rates for stock-based compensation, fair values in connection with the analysis of goodwill, other intangibles and long-lived assets for impairment, valuation allowance against deferred tax assets, lease terminations, 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, leases, accounts payable, accrued expenses and short-term notes payable approximate fair value because of the short maturity of these instruments. The fair value of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements, unless quoted market prices are available (Level 2 inputs). The carrying amounts of long-term debt at September 30, 2021 and 2020 approximate fair value.
Cash and Cash Equivalents
Cash and Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents 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 industries in which 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 receivables balances 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 approximately $100,000 per contract year.
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The following table details the Company's trade receivables as of September 30, 2021 (000's):
Trade receivables, current, net:
Less: Reserve for doubtful accounts (61 ) (76 )
Trade receivables, long term, net:
Accounts receivable, long term $ — $ 196
Less: Reserve for doubtful accounts — (196 )
$ — $ —
Total trade receivables, net:
Less: Reserve for doubtful accounts (61 ) (272 )
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 some non-factored trade and other receivables which helps reduce potential losses due to doubtful accounts. At September 30, 2021 and 2020, the allowance for doubtful accounts was approximately $61,000 and $272,000, respectively.
Inventories
Inventories are valued at the lower of the inventory’s cost (first in, first out basis or “FIFO”) or net realizable value of the inventory. Management compares the cost of inventory with its net realizable value and an allowance is made to write down inventory to net realizable value, if lower. Management also reviews inventory to determine if excess or obsolete inventory is present and a reserve is made to reduce the carrying value for inventory for such excess and or obsolete inventory. At September 30, 2021 and September 30, 2020, the inventory reserves were approximately $1.9 million and $3.1 million, respectively.
The following table details the Company's inventories as of September 30, 2021 (000's):
Inventory, net
Less: Inventory reserves (1,793 ) (3,135 )
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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 40 years, transportation equipment is five to 10 years, machinery and equipment are five to 10 years, furnishings and fixtures are three to five years, and office and computer equipment are three to five years.
The Company periodically reviews its 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. The Company assesses recoverability based on several factors, including its intention with respect to its 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 goodwill and intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Under ASC 350, goodwill is not amortized; rather, it is tested for impairment on at least an annual basis. Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired.
The Company tests 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 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, as required by ASC 350, to determine whether a goodwill impairment exists.
The quantitative test is used 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. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. The determination of the fair value of the Company's reporting units is based, among other things, on estimates of the future operating performance of the reporting unit being valued. A goodwill impairment test is required to be completed, at minimum, once annually, and any resulting impairment loss recorded upon completion of the assessment. Changes in market conditions, among other factors, may have an impact on these estimates and require interim impairment assessments.
When performing the two-step quantitative impairment test, the Company's methodology includes the use of an income approach which discounts future net cash flows to their present value at a rate that reflects the Company's cost of capital, otherwise known as the discounted cash flow method (“DCF”). These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash flows include the continued market acceptance of the products and services offered by the businesses, the development of new products and services by the businesses and the underlying cost of development, the future cost structure of the businesses, and future technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of our reporting units. Any such impairment would be recognized in full in the reporting period in which it has been identified.
Intangible Assets
The Company’s intangible assets consist of customer relationship intangibles, favorable leases, trade names, licenses for the use of internet domain names, Universal Resource Locators, or URL’s, software, and marketing and technology
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related intangibles. Upon acquisition, 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 – three to 20 years; software – three to 5 years, customer relationships – seven to 15 years, favorable leases – over the life of the lease, customer lists – to 20 years, trade names – to 20 years. Intangible amortization expense was approximately $522,000 and $605,000 for the years ended September 30, 2021 and 2020, respectively.
Revenue Recognition
General
The Company accounts for its sales revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). Topic 606 provides a five-step revenue recognition model that is applied to the Company’s customer contracts. Under this model we (i) identify the contract with the customer, (ii) identify our performance obligations in the contract, (iii) determine the transaction price for the contract, (iv) allocate the transaction price to our performance obligations and (v) recognize revenue when or as we satisfy our performance obligations.
Revenue is recognized upon transfer of control of the promised goods or the performance of the services to customers in an amount that reflects the consideration expected to be receive in exchange for those goods or services. The Company enters into contracts that may include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations.
Retail Segment
The Retail Segment derives revenue primarily from direct sales of entertainment and appliance products and services, including shipping and handling amounts, which are recognized when the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales transaction price is fixed or determinable, (iii) title or use rights, ownership and risk of loss have been transferred to the customer, (iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of sales taxes collected from customers. All direct costs are either paid and or accrued for in the period in which the sale is recorded.
Flooring and Steel Manufacturing Segments
The Flooring Manufacturing Segment derives revenue primarily from the sale of carpet and hard surface flooring products, including shipping and handling amounts. The Steel Manufacturing Segments derives revenue primarily from the sale of steel plates, ground flat stock and drill rods, including shipping and handling amounts. Revenue is recognized when the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales transaction price is fixed or determinable, (iii) title, ownership and risk of loss have been transferred to the customer, (iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of taxes collected from customers. All direct costs are either paid and or accrued for in the period in which the sale is recorded.
Spare Parts
For spare parts sales, the Company transfers control and recognizes a sale when it ships the product to the customer or when the customer receives product based upon agreed shipping terms. Each unit sold is considered an independent,
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unbundled performance obligation. The Company has no additional performance obligations other than spare parts sales that are material in the context of the contract. The amount of consideration received and revenue recognized varies due to sales incentives and returns offered to customers. When customers retain the right to return eligible products, the Company reduces revenue for the estimate of the expected returns, which is primarily based on an analysis of historical experience.
Warranties
Warranties are classified as either assurance or service type warranties. A warranty is considered an assurance type warranty if it provides the consumer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company offers certain limited warranties that are assurance type warranties and extended service arrangements that are service type warranties. Assurance type warranties are not accounted for as separate performance obligations under the revenue model. If a service type warranty is sold with a product or separately, revenue is recognized over the life of the warranty. The Company evaluates warranty offerings in comparison to industry standards and market expectations to determine appropriate warranty classification. Industry standards and market expectations are determined by jurisdictional laws, competitor offerings and customer expectations. Market expectations and industry standards can vary based on product type and geography. The Company primarily offers assurance type warranties.
A warranty reserve of approximately $105,000 and $206,000 is included in accrued liabilities on the consolidated balance sheet at September 30, 2021 and 2020, respectively.
Shipping and Handling
The Company classifies shipping and handling charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Customer Liabilities
The Company recognizes the portion of the dollar value of prepaid stored-value products that ultimately is unredeemed (“breakage”) in accordance with ASU 2016-04 Liabilities- Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.
Because the Company expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product, the Company utilized the Redemption Pattern methodology. Under this methodology, the Company shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur.
The Company establishes a liability upon the issuance of merchandise credits and the sale of gift cards. Breakage income related to gift cards which are no longer reportable under state escheatment laws of approximately $10,000 and $75,000 for the years ended September 30, 2021 and 2020, respectively, is recorded in other income in our consolidated financial statements.
Advertising Expense
Advertising expense is charged to operations as incurred. Advertising expense totaled approximately $350,000 and $305,000 for the years ended September 30, 2021 and 2020, respectively.
Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows: Level 1 - inputs to the valuation
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methodology are quoted prices for identical assets or liabilities in active markets. Level 2 – inputs 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.
The fair value of inventory acquired as part of a business combination is based on a third-part valuation utilizing the comparable sales method which is based on Level 2 and Level 3 inputs. The comparative sales method utilizes the actual or expected selling prices of finished goods to customers in the ordinary course of business as the base amount that must be adjusted for factors that are generally relevant in determining the Fair Value of the inventory including:
the time that would be required to dispose of this inventory;
the expenses that would be expected to be incurred in the disposition; and
a profit commensurate with the amount of investment in the assets and the degree of risk.
The fair value of property, plant and equipment, and goodwill acquired as part of a business combination is based on a third-party valuation utilizing the indirect method of cost approach which is based on Level 2 and Level 3 inputs. In the indirect method of Cost Approach, the Reproduction Cost New for each asset or group of assets is determined by indexing the original capitalized cost basis. The cost basis generally includes the base cost of the asset and certain contributory costs, such as sales tax, freight and handling charges, installation, general contractor’s costs, and engineering and design costs. The index factors used in this analysis are based on the asset type and manufacture date. Index factors were derived from various published sources including Marshall Valuation Service and the Bureau of Labor Statistics.
The fair value of debt assumed as part of a business combination is discounted utilizing implied interest rates, as applicable, which is based on Level 1 and Level 2 inputs.
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 2040 with various renewal options for additional periods. The agreements, substantially all of which have been classified as operating leases, generally provide for minimum and, in some cases percentage rent and require it to pay all insurance, taxes and other maintenance costs.
For contracts entered into on or after October 1, 2019, the Company assesses at contract inception whether the contract is, or contains, a lease. Generally, it determines that a lease exists when (i) the contract involves the use of a distinct
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identified asset, (ii) obtains the right to substantially all economic benefits from use of the asset and (iii) it has the right to direct the use of the asset.
At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs, such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of the Company’s incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities as of October 1, 2019 were based on the original lease terms.
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the noncancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs, such as utilities and common area maintenance. The Company has elected an accounting policy, as permitted by ASC 842, not to account for such payments separately from the related lease payments. The Company’s policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of the Company’s real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes and the Company’s proportionate share of actual property taxes, insurance and utilities. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. The lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments
The Company adopted Accounting Standard Update (“ASU”) No. 2016-02 - Leases (Topic 842), as amended, or Accounting Standard Codification (“ASC 842”), as of October 1, 2019. The primary impact of ASC 842 on the Company’s consolidated financial statements is the recognition of right-of-use assets and related liabilities on its consolidated balance sheet for operating leases where the Company is the lessee. The Company elected to apply the requirements of the new standard on October 1, 2019 and has not restated its consolidated financial statements for prior periods. Their adoption of ASC 842 did not have a material impact on the results of the operations or on the cash flows for the period presented.
The Company elected certain practical expedients under its transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. They also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the lease liability and the calculation of straight-line expense over the lease term for operating leases. As a result of the Company’s transition elections, there was no change in its recognition of expense for leases that commenced prior to October 1, 2019.
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.
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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 operating segments (See Note 19).
Concentration of Credit Risk
The Company maintains cash balances in bank accounts in each state the Company has business operations. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution as of September 30, 2021. At times, balances may exceed federally insured limits.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses instead of incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU No. 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of adopting this new accounting standard on its Consolidated Financial Statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is part of the FASB’s overall simplification initiative and seeks to simplify the accounting for income taxes by updating certain guidance and removing certain exceptions. The updated guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of adopting this new accounting standard on its Consolidated Financial Statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. The Company is currently assessing the impact of adopting this new accounting standard on its Consolidated Financial Statements and related disclosures.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for the Company’s fiscal years beginning after December 15, 2021. The Company is currently
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assessing the impact of adopting this new accounting standard on its Consolidated Financial Statements and related disclosures.
Note 3: Leases
The weighted average remaining lease term is 8.43 years. The Company’s weighted average discount rate is 6.5%. Total cash payments for the year ended September 30, 2021 were approximately $9.7 million. During July 2020, the Company entered into a lease agreement for office space in Nevada with an initial lease term through November 30, 2025.
The following table details the Company's right of use assets and lease liabilities as of September 30, 2021 and 2020, respectively (in 000's):
Right of use asset - operating leases $ 30,466 $ 29,545
Operating lease liabilities:
Total present value of future lease payments as of September 30, 2021:
Twelve months ended September 30,
Less implied interest (7,495 )
Present value of payments $ 36,545
During the year ended September 30, 2020, the Company recorded a net gain on lease settlement of approximately $307,000, which consisted of impairment charges of approximately $614,000 related to the decision to close additional ApplianceSmart retail locations resulting in a decrease to the associated right of use asset related to these leases, offset by a gain on lease settlement of approximately $921,000 resulting from the extinguishment of the lease liability associated with the closed retail locations. There were no such transactions during the year ended September 30, 2021.
Note 4: Variable Interest Entity
On June 14, 2021 (the “Execution Date”), the Company agreed to acquire 100% of the outstanding membership interests in Salomon Whitney LLC, a New York limited liability company d/b/a SW Financial (“SW Financial”), for approximately $7.0 million. SW Financial is a broker-dealer that is registered with the U.S. Securities and Exchange Commission (“SEC”), as SEC #8-67688, and with the Financial Industry Regulatory Authority, Inc. (“FINRA”), having Central Registration Depository #145012.
On the Execution Date, SW Affiliated Holdings LLC, a Nevada limited liability company and a wholly-owned subsidiary of the Company (the “Purchaser”), entered into a definitive Membership Interest Purchase Agreement (the “Purchase Agreement”) with Angia Holdings LLC, a New York limited liability company (the “Seller”), and SW Financial. Pursuant to the Purchase Agreement, the Purchaser agreed to acquire from the Seller all of the outstanding membership interests (the “Units”) in SW Financial on the following terms:
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The closing (the “Closing”) of the acquisition of the Remaining Units by the Purchaser is subject to customary conditions, including, approval by FINRA. On the Execution Date, the Purchaser and the Seller entered into an amended and restated operating agreement (the “Operating Agreement”) of SW Financial that governs the management of SW Financial from and after the Effective Date.
On the Execution Date, the two principals of the Seller entered into employment agreements with SW Financial. Each employment agreement provides that each principal shall be entitled to, among other things, an annual base salary, a cash bonus equal to a specified percentage of SW Financials’ annual adjusted earnings before interest, income taxes, depreciation, and amortization for a specified period, and severance benefits if an employee is terminated without cause, contingent upon the relevant principal agreeing to a general release of claims in favor of SW Financial following termination of employment in certain circumstances. Each employment agreement also contains confidentiality, non-competition, non-solicitation, and non-disparagement provisions.
Due to the proximity of the execution date of the acquisition agreement to the of the filing of the Company's Q3 10-Q, the Company was unable to complete its VIE considerations for the transaction, and, thus, treated the acquisition as an equity investee in that filing. However, upon full consideration of the facts and circumstances of the acquisition, the Company determined that SW Financial should be accounted for as a VIE because the equity holder lacks the power to direct the activities that most significantly impact SW Financial's economic performance. This conclusion is based upon SW Financial’s amended and restated operating agreement for which the Company has representation for three of five board members, which conveys to the Company all significant operating decisions and responsibilities. In addition, the purchase price is fixed at $7.0 million and if FINRA does not approve, the Company has the ability to reapply for approval as well as sell the company. In the event of a sale, the Company is entitled to all proceeds and therefore bares the risk and reward of the SW Financial. As such, the Company determined that it is the primary beneficiary of SW Financial as it has both the power to direct the activities that most significantly impact SW Financial’s economic performance and the obligation to absorb profits and/or losses of SW Financial that could potentially be significant to SW Financial.
SW Financial meet’s the definition of a business as per FASB Topic ASC 810, Consolidation (Topic 810) ("ASC 810"), and therefore the Company applied the guidance in ASC 810 for initial consolidation of a VIE that is a business when consolidating SW Financial’s financial statements for the year ended September 30, 2021.
Under the purchase price allocation, the Company recognized goodwill of approximately $3.7 million, which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of June 14, 2021 as calculated by a third-part appraisal firm. The table below outlines the purchase price allocation of the purchase for SW Financial to the acquired identifiable assets, liabilities assumed and goodwill:
Total purchase price $ 7,000
Accounts payable 12
Accrued liabilities 1,031
Total liabilities assumed 1,043
Total consideration 8,043
Accounts receivable 756
Intangible assets 3,570
Total assets acquired 4,326
Total goodwill $ 3,717
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Goodwill arising from the acquisition is expected to be fully deductible for tax purposes.
The assets acquired and liabilities assumed were classified within the fair value hierarchy table below in accordance with our fair value measurements policy (see Note 2).
Level 1 Level 3 Total
Accounts receivable, net $ 756 $ — $ 756
Accounts payable 12 — 12
Note 5: Acquisitions
The Company seeks opportunities to acquire profitable and well-managed companies. During fiscal year ended September 30, 2021, the Company agreed to acquire 100% of the outstanding membership interests in SW Financial. See Note 4 regarding the consolidation of SW Financial. During the fiscal year ended September 30, 2020, the Company acquired Lonesome Oak and Precision Marshall.
Precision Industries, Inc.
On July 14, 2020 (the “Closing Date”), the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Precision Industries, Inc., a Pennsylvania corporation (otherwise known in the industry as “Precision Marshall”), President Merger Sub Inc., a Pennsylvania corporation and a wholly-owned subsidiary of Live Ventures (“Merger Sub”), and D. Jackson Milhollan, as shareholders’ representative, pursuant to which the Company acquired Precision Marshall by the consummation of a merger (the “Merger”) of its Merger Sub with and into Precision Marshall, with Precision Marshall surviving the Merger.
Pursuant to the Merger Agreement, and subject to the terms and conditions contained therein, at the closing of the Merger, Live Ventures paid Precision Marshall’s shareholders aggregate consideration of approximately $31.5 million in cash (the “Merger Consideration”), subject to (i) certain adjustments with respect to Precision Marshall’s cash, expenses incurred in connection with the Merger, debt, and net working capital balances at the closing of the Merger, (ii) the withholding of a portion of the Merger Consideration in connection with the Precision shareholders’ indemnification obligations under the Merger Agreement, and (iii) the withholding of a portion of the Merger Consideration as an expense account for the shareholders’ representative. At the effective time of the Merger (the “Effective Time”), shares of Precision Marshall’s outstanding common stock (the “Precision Common Stock”) were converted into the right to receive a portion of the Merger Consideration in accordance with the terms of the Merger Agreement.
The Merger Agreement contains customary representations, warranties, covenants, and agreements of the Company, Merger Sub, and Precision Marshall, including indemnification rights in favor of the Company that are customary for a transaction of this nature and magnitude.
In connection with the Merger, the Company formed Precision Affiliated Holdings LLC, a Delaware limited liability company (“Precision Holdings”), as its wholly-owned subsidiary for the purpose of its holding 100% of the issued and outstanding shares of capital stock of Precision Marshall. Pursuant to the terms of a Contribution Agreement (the “Contribution Agreement”) and in connection with the Merger and the financing of the acquisition of Precision, the Company caused the capital stock of Precision Marshall to be vested in Precision Holdings.
Under the purchase price allocation, the Company recognized a bargain purchase gain of approximately $1.5 million which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of July 14, 2020 as calculated by a third-part appraisal firm. The table below outlines the purchase price allocation of the purchase for Precision Marshall to the acquired identifiable assets, liabilities assumed and bargain purchase gain:
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Total purchase price $ 5,500
Less fair value of the holdback option (2,500 )
Net purchase price 3,000
Accounts payable 3,116
Accrued liabilities 583
Lease liabilities 8,109
Total liabilities assumed 34,830
Total consideration 37,830
Accounts receivable, net 2,814
Property, plant and equipment, net 6,048
Right of use assets 4,873
Other assets 438
Total assets acquired 39,337
Total bargain purchase gain $ (1,507 )
The Company expects to collect the accounts receivable balance. However, for any uncollectible accounts receivable the Company will reduce the amount of the holdback in an amount equal to the uncollectable accounts receivable.
The bargain purchase gain arising from the acquisition is nondeductible for tax purposes.
Revenues and expenses for the period of July 14, 2020 through September 30, 2020, and the year ended September 30, 2021, are detailed in Note 19. The assets acquired and liabilities assumed were classified within the fair value hierarchy table below in accordance with our fair value measurements policy (see Note 2).
Level 1 Level 2 and 3 Total
Property, plant and equipment, net — 6,048 6,048
Lonesome Oak Acquisition
On November 1, 2019, Marquis entered into a purchase agreement, as amended on January 31, 2020 (as amended, the “LOTC Purchase Agreement”), to acquire all of the outstanding capital stock of Lonesome Oak Trading Co., Inc. (“Lonesome Oak”). Pursuant to the LOTC Purchase Agreement, and on January 31, 2020, Marquis acquired from the sole stockholder of Lonesome Oak (the “LOTC Stockholder”) all of the issued and outstanding shares of capital stock of Lonesome Oak for $2.0 million and the assumption of approximately $12.5 million of debt. In connection with the closing of the acquisition, Lonesome Oak entered into a lease agreement with the LOTC Stockholder regarding certain properties that are used in Lonesome Oak’s operations and that are owned by affiliates of the LOTC Stockholder. Marquis held back approximately $1.5 million of the purchase price (the “Holdback Amount”) to satisfy claims for indemnity arising out of breaches of certain representations, warranties, and covenants, and certain other enumerated items, if any. In connection with the closing of the transaction, the LOTC Stockholder entered into an employment agreement with a five-year term and serves as an Executive Vice President of Lonesome Oak pursuant to the terms thereof. Subject to certain exceptions, the LOTC Stockholder agreed to indemnify Marquis for breaches of certain representations, warranties, and covenants, and certain other enumerated items, if any. Indemnification by the LOTC Stockholder for breaches of certain representations and warranties is generally limited to the Holdback Amount. The LOTC Stockholder is subject to a three-year non-competition and non-solicitation provisions. On March 2, 2020,
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Lonesome Oak merged with and into Marquis, with Marquis surviving the merger and Lonesome Oak ceasing to exist as a separate entity. Because Lonesome Oak ceased to exist as a separate entity, the Company does not have the ability to breakout the revenues or expenses incurred since the acquisition date.
Under the purchase price allocation, the Company recognized goodwill of $807,000 which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of January 31, 2020 as calculated by a third-party appraisal firm. The table below outlines the purchase price allocation of the purchase for Lonesome Oak to the acquired identifiable assets, liabilities assumed and goodwill:
Total purchase price $ 2,000
Less fair value of the holdback option (1,450 )
Net purchase price 550
Accounts payable 7,188
Accrued liabilities 1,514
Total liabilities assumed 22,581
Total consideration 23,131
Accounts receivable, net 4,838
Property, plant and equipment, net 3,485
Other assets 135
Total assets acquired 22,324
Total goodwill $ 807
The Company expects to collect the accounts receivable balance. However, any uncollectible accounts receivable, the Company will reduce the amount of the holdback in an amount equal to the uncollectable accounts receivable. As of September 30, 2020, the holdback had been reduced to approximately $1.3 million due to unrecorded liabilities at the time of the acquisition. During July 2021, the holdback balance of approximately $1.3 million was written off due to inventory obsolescence. During December 2020, the note was paid in full.
Goodwill arising from the acquisition is expected to be fully deductible for tax purposes.
The assets acquired and liabilities assumed were classified within the fair value hierarchy table below in accordance with our fair value measurements policy (see Note 2).
Level 1 Level 2 and 3 Total
Property, plant and equipment, net — 3,485 3,485
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Note 6: Property and Equipment
The following table details the Company's property and equipment as of September 30, 2021 and 2020, respectively (000's):
Property and equipment, net:
Transportation equipment 450 480
Office, computer equipment and other 2,792 3,445
During the year ended September 30, 2020, impairment charges of $525,000 were taken related to the disposal of fixed assets no longer in use. No such transactions occurred during the year ended September 30, 2021. Depreciation expense was approximately $6.3 million and $5.1 million for the years ended September 30, 2021 and 2020, respectively.
Note 7: Intangibles
The Company’s intangible assets consist of customer relationship intangibles, trade names, licenses for the use of internet domain names, Universal Resource Locators, or URL’s, software, and marketing and technology related intangibles.
The following table details the Company's intangible assets as of September 30, 2021 and 2020, respectively (in 000's):
Intangible assets, net:
Domain name and marketing related intangibles $ 260 $ 90
Customer relationship intangibles 6,089 2,689
Less: Accumulated amortization (2,239 ) (1,837 )
There were no impairment charges for the years ended September 30, 2021 or 2020, respectively.
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The following table summarizes estimated future amortization expense related to intangible assets that have net balances (in 000's):
As of September 30,
Note 8: Goodwill
The following table details the Company's goodwill as of September 30, 2021 (000's):
Retail Flooring Manufacturing Steel Manufacturing Corporate Total
Impairment — — — — —
Impairment — — — — —
The Company accounts for purchased goodwill and intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (see Note 2). Goodwill recognized during the year ended September 30, 2021 was approximately $3.7 million, and was due to the consolidation of SW Financial as a VIE (see Note 4). Goodwill recognized during the year ended September 30, 2020 was approximately $807,000, and was due to the acquisition of LOTC (see Note 5). There was no goodwill impairment for the years ended September 30, 2021 or 2020, respectively. The Company expects that Goodwill arising from these transactions will be fully deductible for tax purposes.
Note 9: Accrued Liabilities
The following table details the Company's accrued liabilities as of September 30, 2021 and 2020, respectively (in 000's):
Accrued liabilities:
Accrued payroll and bonuses $ 4,765 $ 4,178
Accrued rent 14 —
Accrued gift card and escheatment liability 1,593 1,534
Accrued interest payable 372 280
Accrued accounts payable and bank overdrafts 503 3,818
ApplianceSmart accrued liabilities of approximately $2.6 million and approximately $3.0 million are included in debtor in possession liabilities on the Consolidated Balance Sheets at September 30, 2021 and 2020, respectively.
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Note 10: Long-Term Debt
Notes Payable as of September 30, 2021 and 2020 consisted of the following:
Texas Capital Bank Revolver Loan 8,794 7,115
Crossroads Financial Revolver Loan — 883
Encina Business Credit Term Loan 1,319 1,663
Note Payable Comvest Term Loan — 5,554
Note Payable to the Sellers of Vintage Stock 4,200 10,000
Note #1 Payable to Banc of America Leasing & Capital LLC — 1,229
Note #3 Payable to Banc of America Leasing & Capital LLC 1,320 1,862
Note #4 Payable to Banc of America Leasing & Capital LLC 406 572
Note #5 Payable to Banc of America Leasing & Capital LLC 1,985 2,538
Note #6 Payable to Banc of America Leasing & Capital LLC 618 758
Note #7 Payable to Banc of America Leasing & Capital LLC 4,121 4,681
Note #8 Payable to Banc of America Leasing & Capital LLC 2,943 3,091
Note payable to the Sellers of Precision Marshall 2,500 2,500
Note Payable to Store Capital Acquisitions, LLC 9,209 9,243
Payroll Protection Program — 6,151
Note payable RSSI/(VSSS) 130 —
Notes payable JCM Holdings 1,833 —
Less unamortized debt issuance costs (576 ) (1,767 )
Future maturities of long-term debt at September 30, 2021 are as follows excluding related party debt:
Years ending September 30,
Bank of America Revolver Loan
On January 31, 2020, Marquis entered into an amended revolving credit agreement with Bank of America Corporation (“BofA Revolver”). The BofA Revolver, as amended, is a $25.0 million 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. Marquis’ ability to borrow under the BofA Revolver is subject to the satisfaction of certain conditions,
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including meeting all loan covenants under the credit agreement with BofA. The BofA Revolver is recorded as a current liability due to a lockbox requirement, and a subjective acceleration clause as part of the agreement.
The BofA Revolver bears interest at a variable rate based on a base rate plus a margin. The current base rate is the greatest 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 – V determine the interest rate to be charged Marquis and is based on the fixed charge coverage ratio achieved. The 30-day LIBOR rate has been extended by regulators for use through June 30, 2023. The Level V interest rate is adjusted up or down on a quarterly basis going forward based upon the above fixed coverage ratio achieved by Marquis. 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 advance rate in certain circumstances for inventory is 39.1% or 53.5% for raw materials, 0% for work-in-process, and 54.2% or 70% for finished goods subject to eligibility, special reserves and advance limit of the lessor of $12.5 million or 65% of the value of eligible inventory. 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.
Level Fixed Charge Coverage Ratio Base RateRevolver LIBORRevolver
The following tables summarize the BofA Revolver for the years ended and as of September 30, 2021 and 2020, respectively (in 000's):
During the year ended September 30,
Maximum borrowed during the period — 11,347
Weighted average interest for the period 0.00 % 3.14 %
As of September 30,
Total outstanding — —
Loan with Encina Business Credit, LLC
On the Closing Date, Precision Holdings, a wholly-owned subsidiary of Live Ventures and the holder of 100% of the issued and outstanding shares of capital stock of Precision Marshall and Merger Sub entered into a Loan and Security Agreement (the “Loan Agreement”) by and among Precision Marshall and Merger Sub, as Borrowers, Precision Holdings, as a Loan Party Obligor, the lenders from time-to-time party thereto, and Encina Business Credit, LLC, as Agent (the “Agent”). The Loan Agreement provides for a secured term loan (the “Encina Term Loan”) of approximately $1.7 million, and secured revolving loans (the “Encina Revolver Loans”, and together with the Term Loan, the “Encina Loans”) in a principal amount not to exceed the lesser of (i) $23.5 million and (ii) a borrowing base equal to the sum of (a) 85% of eligible accounts receivable of the Borrowers, plus (b) 85% of eligible inventory of the two Borrowers, subject to an eligible inventory sublimit that begins at $14.0 million and declines to $12.0 million during the term of the Loan Agreement, minus (c) customary reserves. The Encina Loans will be used (1) in connection with the consummation and financing of the Merger, (2) to repay in full certain indebtedness of Precision Marshall,
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(3) to pay the fees, costs, and expenses incurred in connection with the Loan Agreement and the Merger Agreement, (4) for Borrowers’ working capital purposes, and (5) for other lawful business purposes.
The Revolving Loans bear interest at an interest rate equal to the one-month London interbank offered rate (“LIBOR”) plus the applicable margin. The one-month LIBOR rate has been extended by regulators for use through June 30, 2023.The applicable margin ranges from 4.50% to 5.50% per annum (subject to a LIBOR floor of 1.00%) and is determined based on a pricing grid based on the Borrowers’ inventory-to-accounts receivable availability ratio and average Revolving Loan excess availability. The Term Loan bears interest at an interest rate equal to LIBOR plus 6.50%.
The outstanding principal amounts of the Encina Loans and all accrued and unpaid interest are due and payable on July 14, 2023 (the “Scheduled Maturity Date”). The Encina Term Loan requires monthly payments of principal in the amount of approximately $29,000 plus accrued and unpaid interest. The Encina Revolver Loans require monthly payments of accrued and unpaid interest.
The Encina Loans are secured by a lien on substantially all of the assets of Precision Holdings, the Borrowers, and any future subsidiaries of the Borrowers, and are guaranteed by Precision Holdings and future subsidiaries of the Borrowers.
The following tables summarize the Encina Revolver Loans as of and for the year ended September 30, 2021 (in 000's):
During the year ended September 30,
Cumulative borrowing during the period $ 47,008 $ 22,008
Cumulative repayment during the period 49,159 7,203
Maximum borrowed during the period 1,400 14,920
Weighted average interest for the period 6.50 % 6.50 %
As of September 30,
Texas Capital Bank Revolver Loan
On September 30, 2020, Vintage Stock entered into an amended $12.0 million credit agreement with Texas Capital Bank (“TCB Revolver”). The TCB Revolver is a five-year, asset-based facility that is secured by substantially all of Vintage Stock’s assets. Availability under the TCB Revolver is subject to a monthly borrowing base calculation. The TCB Revolver matures November 3, 2023.
Borrowing availability under the TCB Revolver is limited to a borrowing base that allows Vintage Stock to borrow up to 90% of the appraisal value of the inventory, plus 85% of eligible receivables, net of certain reserves. The borrowing base provides for borrowing up to 90% of the appraisal value during the fiscal months of January through September and 92.5% of the appraisal value during the fiscal months of October through December. Letters of credit reduce the amount available to borrow under the TCB Revolver by an amount equal to the face value of the letters of credit.
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.
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The following tables summarize the TCB Revolver for the years ended and as of September 30, 2021 and September 30, 2020 (in 000's):
During the year ended September 30,
Cumulative borrowing during the period $ 90,650 $ 66,362
Cumulative repayment during the period 88,971 69,837
Maximum borrowed during the period 8,930 11,799
Weighted average interest for the period 2.43 % 3.29 %
As of September 30,
Crossroads Revolver
On March 15, 2019, ApplianceSmart, Inc. (the “Borrower”), entered into a Loan and Security Agreement (the “Crossroads Revolver”) with Crossroads Financing, LLC (“Crossroads”), providing for a $4.0 million revolving credit facility, subject to a borrowing base limitation (the “ABL Facility”). The borrowing base for the ABL Facility at any time equals the lower of (i) up to 75% of inventory cost or (ii) up to 85% of net orderly liquidation value, in each case as further described in the Loan Agreement. The Crossroads Revolver matured on March 15, 2021.
Advances under the Crossroads Revolver bore interest at an interest rate equal to the greater of (i) the three-month London Interbank Offered Rate plus 2.19% or (ii) 5.0%. In addition to paying interest on the outstanding principal under the ABL Facility, the Borrower was required to pay Lender a servicing fee equal to 1.0% per month of the amount of the Borrower’s outstanding obligations under the Crossroads Revolver that accrue interest, an annual loan fee of $80 and other fees described in the Crossroads Revolver.
Advances under the Crossroads Revolver were secured by a pledge of substantially all of the assets of the Borrower. On March 3, 2020, the Company executed a guaranty agreement to Crossroads to induce Crossroads to continue to extend financial accommodations and consent to use of cash collateral to ApplianceSmart. The amount of the guaranty was $1.2 million. The guaranty terminates at such time as ApplianceSmart has paid in full all amounts owed by it to Crossroads. The Company expects the guaranty to continue in effect until August 2021. In addition, certain executive officers of the Borrower have agreed to provide validity guarantees.