ITEM 1A.Risk Factors
The following are certain risks that could affect our business and our results of operations. The risks identified below are not all encompassing but should be considered in establishing an opinion of our future operations.
RISKS RELATING TO OUR COMPANY GENERALLY
Our results of operations could fluctuate due to factors outside of our control.
Our operating results have historically fluctuated significantly, and we could continue to experience fluctuations or revert to declining operating results due to factors that may or may not be within our control. Such factors include the following:
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fluctuating demand for our products and services;
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changes in economic conditions and the amount of consumers’ discretionary spending;
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changes in technologies favored by consumers;
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customer refunds or cancellations;
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our ability to continue to bill our customers through existing means;
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market acceptance of new or enhanced versions of our services or products;
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new product offerings or price competition (or pricing changes) by us or our competitors;
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with respect to our retail segment, the opening of new stores by competitors in our markets;
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with respect to our manufacturing segment, changes in import tariffs;
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the amount and timing of expenditures for the acquisition of new businesses and the expansion of our operations, including the hiring of new employees, capital expenditures, and related costs (including wage cost increases due to historically low unemployment);
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recent steep increases at the consumer-level (CPI), including rising prices for gasoline, may dampen consumer spending at our retail establishments;
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the COVID-19 pandemic and resulting adverse economic conditions has had and may continue to have a negative impact on our business, financial condition and results of operations;
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technical difficulties or failures affecting our systems in general; and
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the fixed nature of a significant amount of our operating expenses.
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Our obligations under our consolidated indebtedness are significant.
As of September 30, 2022, we had approximately $86.3 million of total consolidated indebtedness outstanding consisting of (in 000's):
Fifth-Third Bank Revolver, variable interest rate, matures January 2027 23,573
Fifth-Third Bank Term Loan, variable interest rate, matures January 2027 3,167
Fifth-Third Bank Term Loan, variable interest rate, matures January 2027 3,857
Note payable to individual, 7.0% interest rate, five-year notes, unsecured 198
Notes payable JCM Holdings, 6.0% interest rate, matures January 2030 1,656
Total notes payable 82,265
Isaac Capital Group, LLC, 12.5% interest rate, matures May 2025 2,000
Spriggs Investments, LLC, 10% interest rate, matures July 2023 2,000
Total notes payable to related parties 4,000
Total indebtedness $ 86,265
These financial obligations may have significant negative consequences for us, including:
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limiting our ability to satisfy our obligations;
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increasing our vulnerability to general adverse economic and industry conditions;
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limiting our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate;
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placing us at a competitive disadvantage compared to competitors that have less debt;
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increasing our vulnerability to, and limiting our ability to react to, changing market conditions, changes in our industry and economic downturns;
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limiting our ability to obtain additional financing to fund working capital requirements, capital expenditures, debt service, acquisitions, general corporate or other obligations;
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subjecting us to a number of restrictive covenants that, among other things, limit our ability to pay dividends and distributions, make acquisitions and dispositions, borrow additional funds and make capital expenditures and other investments;
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restricting our and our wholly-owned subsidiaries ability to make dividend payments and other payments;
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limiting our ability to use operating cash flow in other areas of our business because we must dedicate a significant portion of these funds to make principal and/or interest payments on our outstanding debt;
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exposing us to interest rate risk due to the variable interest rate on borrowings under certain of our credit facilities; and
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causing our failure to comply with the financial and restrictive covenants contained in our current or future indebtedness, which could cause a default under such indebtedness and which, if not cured or waived, could have a material adverse effect on us.
Because of our floating rate credit facilities, we may be adversely affected by interest rate changes.
Our financial position may be affected by fluctuations in interest rates, as our floating rate credit facilities are subject to floating interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. Due to our current borrowings against our floating rate credit facilities, or if we were to increase our floating rate credit borrowings, a significant increase in interest rates generally could have an adverse effect on our financial condition and results of operations. As of the year ended September 30, 2022, the amount of floating rate credit borrowings is approximately $51.0 million.
If we do not effectively manage our growth and business, our management, administrative, operational, and financial infrastructure and results of operations may be materially and adversely affected.
We have expanded our Company over the past few years through the acquisition of different businesses in different industries. We intend to acquire additional businesses (possibly in different sectors) in the future. Significant expansion of our present operations will be required to capitalize on potential growth in market opportunities, will require us to add additional management personnel, and will require us to continue to upgrade our financial and management systems and controls and information technology infrastructure. Any further expansion will also place a significant strain on our existing management, operational, and financial resources. Additionally, due to changing conditions in financial markets, financing may be more difficult to obtain at rates and terms that are acceptable to the Company.
Although we currently have no material long-term need for capital expenditures at our existing operating subsidiaries, we will likely be required to make increased capital expenditures to fund our anticipated growth of operations, infrastructure, and personnel. In the future, we may need to seek additional capital through the issuance of debt (including convertible debt) or equity, depending upon the results of our operations, market conditions, or unforeseen needs or opportunities. Our future liquidity and capital requirements will depend on numerous factors, including:
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the pace of expansion of our operations;
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our response to competitive pressures; and
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future acquisitions of complementary products, technologies or businesses.
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The sale of equity or convertible debt securities could result in additional dilution to existing stockholders. There is no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all.
If we identify a material weakness in our internal control over financial reporting, fail to remediate a material weaknesses, or fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
The effectiveness of any controls or procedures is subject to certain inherent limitations, and as a result, there can be no assurance that our controls and procedures will prevent or detect misstatements. Even an effective system of internal control over financial reporting will provide only reasonable, not absolute, assurance with respect to financial statement preparation. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
If we fail to remediate a material weakness, or are otherwise unable to maintain effective internal control over financial reporting, management could be required to expend significant resources and we could fail to meet our public reporting requirements on a timely basis, and be subject to fines, penalties, investigations or judgements, all of which could negatively affect investor confidence and adversely impact our stock price.
Our failure to comply withvarious applicable federal and state employment and labor laws and regulations could have a material, adverse impact on our business.
Various federal and state employment and labor laws and regulations govern our relationships with our employees. These laws and regulations relate to matters, such as employment discrimination, wage and hour laws, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules, healthcare laws and regulations (including with respect to the COVID-19 pandemic), and anti-discrimination and anti-harassment laws. Complying with these laws and regulations subjects us to substantial expense and non-compliance could expose us to significant liabilities. We could suffer losses from these and similar cases, and the amount of such losses or costs could be significant. In addition, several states and localities in which we operate (as well as the federal government) have from time-to-time enacted minimum wage increases, changes to eligibility for overtime pay, changes to paid sick leave, changes to mandatory vacation accruals, and changes to other similar requirements. These changes have increased our labor costs and may have a further negative impact on our labor costs in the future.
A significant number of our employees are paid at rates related to the applicable minimum wage. Federal, state and local proposals that increase minimum wage requirements or mandate other employee matters will likely, to the extent implemented, materially increase our labor and other costs. Several states in which we operate have approved minimum wage increases that are above the federal minimum. As more jurisdictions implement minimum wage increases, our labor costs will continue to increase. Our ability to respond to minimum wage increases by increases in our prices depends on the willingness of our customers to pay higher prices and our perceived value relative to our competitors. Our distributors and suppliers could also be affected by higher minimum wages, benefit standards, and compliance costs, which would result in higher costs for goods and services that they supply to us.
We may not be able to protect our intellectual property rights adequately.
Our success depends both on our internally developed technology and licensed third-party technology. We rely on a variety of trademarks, service marks, and designs to promote our brand names and identity. We also rely on a combination of contractual provisions, confidentiality procedures, and trademark, copyright, trade secrecy, unfair competition, and other intellectual property laws to protect the proprietary aspects of our products and services. The commercially reasonable steps we take to protect our intellectual property rights may not be adequate to protect our intellectual property and may not prevent our competitors from gaining access to our intellectual property and proprietary information. In addition, we cannot provide assurance that courts will always uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to obtain and protect our proprietary technology.
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Third parties, including our partners, contractors, or employees may infringe or misappropriate our copyrights, trademarks, service marks, trade dress, and other proprietary rights. Any such infringement or misappropriation could have a material adverse effect on our business operations and prospects, financial condition, liquidity, cash flow, profitability, and results of operations generally. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights, which may result in the dilution of the brand identity of our services and the pricing of our services.
We may decide to initiate litigation in order to enforce our intellectual property rights or to determine the validity and scope of our proprietary rights. Any such litigation could result in substantial expense and may not adequately protect our intellectual property rights. In addition, we may be exposed to future litigation by third parties based on claims that our products or services infringe or misappropriate their intellectual property rights. Any such claim or litigation against us, whether or not successful, could result in substantial costs and harm our reputation. In addition, such claims or litigation could force us to do one or more of the following:
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cease selling or using any of our products and services that incorporate the subject intellectual property, which would adversely affect our revenue;
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attempt to obtain a license from the holder of the intellectual property right alleged to have been infringed or misappropriated, which license may not be available on reasonable terms, if at all; and
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attempt to redesign or, in the case of trademark claims, rename our products or services to avoid infringing or misappropriating the intellectual property rights of third parties, which may be costly and time-consuming.
Even if we were to prevail, such claims or litigation could be time-consuming and expensive to prosecute or defend and could result in the diversion of our management’s time and attention. These expenses and diversion of managerial resources could have a material adverse effect on our business operations and prospects, financial condition, cash flow, profitability, and results of operations generally.
We may be subject to intellectual property claims that create uncertainty about ownership or use of technology essential to our business and divert our managerial and other resources.
Our success depends, in part, on our ability to operate without infringing the intellectual property rights of others. Third parties may, in the future, claim our current or future services, products, trademarks, technologies, business methods or processes infringe their intellectual property rights, or challenge the validity of our intellectual property rights. We may be subject to patent infringement claims or other intellectual property infringement claims that would be costly to defend and could limit our ability to use certain critical technologies or business methods. We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions.
The defense and prosecution, if necessary, of intellectual property suits, interference proceedings, and related legal and administrative proceedings can become very costly and may divert our technical and management personnel from their normal responsibilities. We may not prevail in any of these suits or proceedings. An adverse determination of any litigation or defense proceedings could require us to pay substantial compensatory and exemplary damages, could restrain us from using critical technologies, business methods or processes, and could result in us losing, or not gaining, valuable intellectual property rights.
Furthermore, due to the voluminous amount of discovery frequently conducted in connection with intellectual property litigation, some of our confidential information could be disclosed to competitors during this type of litigation. In addition, public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation could be perceived negatively by investors, and thus have an adverse effect on the trading price of our common stock.
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Data breaches involving customer or employee data stored by us could adversely affect our reputation and revenues.
We store confidential information with respect to our customers and employees. A compromise of our data security systems or those of businesses with which we interact could result in information related to our customers or employees being obtained by unauthorized persons. Any such breach of our systems could lead to fraudulent activity resulting in claims and lawsuits against us or other operational problems or interruptions in connection with such breaches. Any breach or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others with whom we interact will protect confidential information, there is a risk the confidentiality of data held or accessed by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition, cash flows and liquidity and possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Also, the interpretation and enforcement of data protection laws in the United States are uncertain and, in certain circumstances, contradictory. These laws may be interpreted and enforced in a manner that is inconsistent with our policies and practices. If we are subject to data security breaches or government-imposed fines, we may have a loss in sales or be forced to pay damages or other amounts, which could adversely affect profitability, or be subject to substantial costs related to compliance.
Tax matters, including the changes in corporate tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
We are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives.
We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our tax filings. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.
We also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other changes in the application or interpretation of the Tax Cuts and Jobs Act, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
We are involved in an ongoing SEC investigation, which could divert management’s focus, result in substantial investigation expenses and have an adverse impact on our reputation, financial condition, results of operations and cash flows.
On February 21, 2018, the Company received a subpoena from the SEC and a letter from the SEC stating that it is conducting an investigation. On October 1, 2018, the Company received a letter from the SEC requesting information regarding a potential violation of Section 13(a) of the Securities Exchange Act of 1934, based upon the timing of the Company’s Form 8-K filed on February 14, 2018. On August 12, 2020, three of the Company’s corporate executive officers (together, the “Executives”) each received a “Wells Notice” from the Staff of the SEC relating to the Company’s SEC investigation. On October 7, 2020, the Company received a “Wells Notice” from the Staff of the SEC relating to the Company’s previously-disclosed SEC investigation. On August 2, 2021, the SEC Complaint was filed and, on August 13, 2021, the Sieggreen Class Action was filed.On October 1, 2021, the Company filed a motion to dismiss the SEC Complaint. The SEC filed its response opposing the motions on November 1, 2021. The defendants filed their reply responses to the SEC’s opposition on November 15, 2021. On September 7, 2022, the court denied the motions to dismiss.
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RISKS RELATED TO OUR BUSINESS STRATEGY
We may not be able to identify, acquire or establish control of, or effectively integrate previously acquired businesses, which could materially adversely affect our growth.
As part of our business strategy, we intend to pursue a wide array of potential strategic transactions, including acquisitions of new businesses, as well as strategic investments and joint ventures. Although we regularly evaluate such opportunities, we may not be able to identify suitable acquisition candidates or investment opportunities successfully, obtain sufficient financing on acceptable terms or at all to fund such strategic transactions, complete any such acquisitions and integrate the acquired businesses with our existing businesses, or manage profitable acquired businesses or strategic investments.
The acquisition of a company or business is accompanied by a number of risks, including:
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failure of due diligence during the acquisition process;
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adverse short-term effects on reported operating results;
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the potential loss of key partners or key personnel in connection with, or as the result of, a transaction;
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the impairment of relationships with clients of the acquired business, or our own customers, partners or employees, as a result of any integration of operations or the expansion of our offerings;
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the recording of goodwill and intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges;
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the diversion of management’s time and resources;
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the risk of entering into markets or producing products where we have limited or no experience, including the integration or removal of the acquired or disposed products with or from our existing products; and
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the inability properly to implement or remediate internal controls, procedures and policies appropriate for a public company at businesses that prior to our acquisition were not subject to federal securities laws and may have lacked appropriate controls, procedures and policies.
The acquisition of new businesses is costly and such acquisitions may not enhance our financial condition.
Our growth strategy is to acquire companies and identify and acquire assets and technologies from companies in various industries that have a demonstrated history of strong earnings potential. The process to undertake a potential acquisition is time-consuming and costly. We expend significant resources to undertake business, financial, and legal due diligence on our potential acquisition target and there is no guarantee that we would acquire a target company after we complete due diligence.
Our acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities or convertible debt securities, significant write-downs of goodwill, and other intangible assets and exposure to undisclosed or potential liabilities of the acquired companies. To the extent that the goodwill arising from the acquisitions carried on the financial statements does not pass the annual goodwill impairment test, excess goodwill will be charged to, and reduce, future earnings.
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Because we do not intend to use our own employees or members of management to run the daily operations at our acquired companies, business operations might be interrupted if employees at the acquired businesses were to resign, or be terminated.
As part of our acquisition strategy, we do not use our own employees or members of our management team to operate the acquired companies. Key members of management at these acquired companies have been in place for several years and have established relationships with their customers. Competition for executive-level personnel is strong and we can make no assurance that we will be able to retain these key members of management for any period of time. Although we have entered into employment agreements with certain of these key members of management and provided incentives to stay with the business after it has been acquired, if such key persons were to resign, we might face impairment of relationships with remaining employees or customers, which might cause long-term customers to terminate their relationships with the acquired companies, which may, in turn, materially adversely affect our business, financial condition, and results of operations.
RISKS RELATED TO OUR RETAIL SEGMENT
Economic conditions in the U.S. could adversely affect demand for the products we sell.
Sales of products by Vintage Stock are driven, in part, by discretionary spending by consumers. Consumers are typically more likely to make discretionary purchases, including purchasing movies, games, music, and other discretionary products when there are favorable economic conditions. Consumer spending may be affected by many economic factors outside of our control, such as a decline in consumer confidence in current and future economic conditions, levels of employment, consumer debt levels, and inflation. These and other economic factors could negatively impact our business, results of operations and financial condition.
The video game industry is cyclical and affected by the introduction of next-generation consoles, two of which were released in Fall 2020. The introduction of these new consoles could negatively impact the demand for existing products or Vintage Stock’s pre-owned business model.
The video game industry is cyclical in nature because of the introduction and maturation of new technology: Two new consoles were introduced in November 2020; following the introduction of the new video game consoles, sales of these consoles and related software and accessories generally increase due to initial demand, while sales of older platforms and related products generally decrease as customers migrate to the new platforms. There is a shortage of new consoles and there is no guaranty that Vintage Stock will receive any of these new consoles to sell to its customers, or, if it does receive any of these new consoles to sell, that Vintage Stock will receive enough inventory to meet customer demand. If the new video game consoles are not successful, or the developers of video games do not make games to play on these new consoles, or there are no games that the public finds interesting to play, Vintage Stock’s sales of new video game products could decline. In addition, some of the new consoles are “backwards compatible,” meaning that games on the prior generation consoles may also be played on these new consoles. As a result, our customers may not be incentivized to sell to us or trade in their older games, resulting in less used product that we would like to obtain, which reduction could negatively impact Vintage Stock’s pre-owned business and, in turn, could have a negative impact on our business, results of operations, financial condition, cash flow, and liquidity.
Technological advances in the delivery and types of video, video games and PC entertainment software, as well as changes in consumer behavior related to these new technologies, could lower Vintage Stock’s sales.
While it is currently possible to download video, video game content, and music to the current generation of video and gaming systems, downloading is somewhat constrained by bandwidth capacity and video game and movie file sizes. However, broadband speeds are increasing and downloading technology is becoming more prevalent and continues to evolve rapidly. The current game consoles from Sony, Microsoft, and Nintendo have facilitated download technology. If these consoles and other advances in technology continue to expand our customers’ ability to access and download the current format of video, music and games and incremental content from their games and videos through these and other sources, our customers may no longer choose to purchase videos, DVDs, video games and music in our stores or they may reduce their purchases in favor of other forms of video, digital, and game delivery. As a result, our sales and earnings could decline.
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Vintage Stock may not compete effectively as browser, mobile and social video viewing and gaming becomes more popular.
Listening to music, gaming, and viewing video and digital content continues to evolve rapidly. The popularity of browser, mobile and social viewing and gaming have increased greatly, and this popularity is expected to continue to grow. Browser, mobile and social video viewing, listening to music and gaming are accessed through hardware other than the game consoles and traditional hand-held video and game devices we currently sell. If there is continued growth in popularity of browser, mobile and social viewing and gaming, our financial position, results of operations, cash flows and liquidity could be impacted negatively.
Sales of video games containing graphic violence may decrease as a result of actual violent events or other reasons, and Vintage Stock’s, and our, financial results may be adversely affected as a result.
Many popular video games contain material with graphic violence. These games receive an “M” or “T” rating from the Entertainment Software Ratings Board. As actual violent events occur and are publicized, or for other reasons, public acceptance of graphic violence in video games may decline. Consumer advocacy groups may increase their efforts to oppose sales of graphically-violent video games and may seek legislation prohibiting their sales. As a result, our sales of those games may decrease, which could negatively impact our results of operations.
As a seller of certain consumer products, Vintage Stock is subject to various federal, state, and local laws, regulations, and statutes related to product safety and consumer protection.
While Vintage Stock takes steps to comply with these laws, there can be no assurance that they will be in compliance, and failure to comply with these laws could result in penalties that could have a negative impact on their respective businesses, financial condition, and results of operations, cash flows and liquidity. Each of them may also be subject to involuntary or voluntary product recalls or product liability lawsuits. Direct costs or reputational damage associated with product recalls or product liability lawsuits, individually or in the aggregate, could have a negative impact on future revenues and results of operations, cash flows and liquidity.
International events could delay or prevent the delivery of products to our suppliers.
Some of Vintage Stock’s suppliers rely on foreign sources to manufacture a portion of the products or raw materials that we purchase from them. As a result, any event causing a disruption of imports, including natural disasters or the imposition of import restrictions or trade restrictions in the form of tariffs or quotas, could increase the cost and reduce the supply of products available to Vintage Stock, which could lower their sales and profitability and, indirectly, ours.
If we are unable to renew or enter into new leases on favorable terms, our revenue growth may decline.
All of Vintage Stock’s retail stores are located in leased premises. If the cost of leasing existing stores increases, neither entity can be certain that either will be able to maintain their respective existing store locations as leases expire. In addition, neither entity may be able to enter into new leases on favorable terms or at all, or may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner. Their revenues and earnings may decline if they fail to maintain existing store locations, enter into new leases, locate alternative sites, or find additional sites for new store expansion.
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An adverse trend in sales during the winter and holiday selling season could impact our financial results.
Our retail business, like that of many retailers, is seasonal, with a major portion of Vintage Stock’s sales realized around various holidays and other days, including Black Friday, President’s Day, tax refund season, Memorial Day, July 4th, and Labor Day. Any adverse trend in sales during these times could negatively impact their results of operations and, indirectly, ours.
Results of operations may fluctuate from quarter to quarter.
Vintage Stock’s results of operations may fluctuate from quarter to quarter depending upon several factors, some of which are beyond our control. These factors include, but are not limited to:
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the timing and allocations of new product releases;
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the timing of new store openings or closings;
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shifts in the timing or content or certain promotions or service offerings;
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the effect of changes in tax rates in the jurisdictions in which we are operating;
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acquisition costs and the integration of companies we acquire or invest in; and
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the costs associated with the exit of unprofitable markets or stores.
These and other factors could affect their respective businesses, financial condition and results of operations, cash flows and liquidity, and this makes the prediction of our financial results on a quarterly basis difficult. Also, it is possible that our quarterly financial results may be below the expectations of public market analysts.
Failure to manage our new store openings effectively could lower our sales and profitability.
Our growth strategy depends in part upon Vintage Stock opening new stores and operating them profitably. Their ability to open new stores and operate them profitability depends upon a number of factors, some of which may be beyond our control. These factors include the ability to:
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identify new store locations, negotiate suitable leases and build out the stores in a timely and cost-efficient manner;
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hire and train skilled associates;
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integrate new stores into existing operations; and
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increase sales at new store locations.
If we fail to manage new store openings in a timely and cost-efficient manner, our growth or profits may decrease.
If our management information systems fail to perform or are inadequate, our ability to manage our business could be disrupted.
We rely on computerized inventory and management systems to coordinate and manage the activities in our stores and distribution centers. We use inventory replenishment systems to track sales and inventory. Our ability to rapidly process incoming shipments of new products and deliver them to all of our stores enables us to meet peak demand and replenish our stores to keep them in stock at optimum levels and to move inventory efficiently. If our inventory or management information systems fail to perform these functions adequately, our business could be adversely affected. In addition, if operations in any of our distribution centers were to shut down or be disrupted for a prolonged period of time or if these centers were unable to accommodate the continued store growth in a particular region, our business would suffer.
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We may record future goodwill impairment charges or other asset impairment charges which could negatively impact our future results of operations and financial condition.
We have previously recorded significant goodwill as a result of our acquisition of Vintage Stock. Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets which we review both on an annual basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If a determination is made that a significant impairment in value of goodwill, other intangible assets, or long-lived assets has occurred, such determination could require us to impair a substantial portion of our assets. Asset impairments could have a material adverse effect on our financial condition and results of operations.
RISKS RELATED TO OUR FLOORING MANUFACTURING SEGMENT
The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels, availability of credit and demand for housing. Significant or prolonged declines in the U.S. or global economies could have a material adverse effect on the Company’s flooring manufacturing business.
Downturns in the U.S. and global economies, along with the residential and commercial markets in such economies, negatively impact the floor covering industry and our flooring manufacturing business. Although difficult economic conditions have improved in the U.S., there may be additional downturns in the future that could cause the industry to deteriorate. A significant or prolonged decline in residential or commercial remodeling or new construction activity could materially adversely affect our business, financial condition, and results of operations.
Marquis may be unable to predict customer preferences or demand accurately, or to respond to technological developments.
Marquis operates in a market sector where demand is strongly influenced by rapidly changing customer preferences as to product design and technical features. Failure to respond quickly and effectively to changing customer demand or technological developments could materially adversely affect Marquis’ business, financial condition and results of operations and, indirectly, ours.
Marquis faces intense competition in the flooring industry that could decrease demand for its products or force it to lower its prices, which could have a material adverse effect on its business operations and prospects, financial condition, liquidity, cash flow, profitability, and results of operations generally.
The floor covering industry is highly competitive. Marquis faces competition from a number of manufacturers and independent distributors, many of whom have more resources than it. Maintaining its competitive position may require substantial investments in its product development efforts, manufacturing facilities, distribution network, and sales and marketing activities. Competitive pressures may also result in decreased demand for our products or force it to lower its prices. Moreover, a strong U.S. dollar, combined with lower fuel costs, may contribute to more attractive pricing for imports that compete with Marquis’ products, which may put pressure on its pricing. The occurrence of one or more of these factors could materially adversely affect its business, financial condition, and results of operations and, indirectly, ours.
In periods of rising costs, Marquis may be unable to pass raw materials, energy and fuel-related cost increases on to its customers, which could have a material adverse effect on its business operations and prospects, financial condition, liquidity, cash flow, profitability, and results of operations.
The prices of raw materials and fuel-related costs vary significantly with market conditions. Although Marquis generally attempts to pass on increases in raw material, energy, and fuel-related costs to its customers, its ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures, and market conditions for its products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered. During such periods of time, the occurrence of such events may materially adversely affect Marquis’ business, financial condition, and results of operations and, indirectly, ours.
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RISKS RELATED TO OUR STEEL MANUFACTURING SEGMENT
The demand for steel manufacturing segment's products may decrease if manufacturing in North America declines or if automakers, who manufacture their products in the U.S., do not introduce new models or their sales decline.
The products manufactured by our steel manufacturing segment typically follow the North American (primarily, the U.S.) manufacturing cycle, with a large emphasis on automotive manufacturing. If North American (primarily, the U.S.) manufacturing is transferred offshore, then the need for our products to make tools and dies will decrease, which will have a negative impact on the steel manufacturing segment’s business, financial condition (including, without limitation, its liquidity), results of operations, and cash flows. In addition, we rely heavily on the sale of our products to automakers who purchase our products when they retool production lines in connection with the introduction of new models. If those automakers do not introduce a new model in any given year, our sales may decrease which will have a negative impact on our business, financial condition (including, without limitation, our liquidity), results of operations, and cash flows and, indirectly, ours.
Limited availability, or volatility in prices of raw materials and energy may constrain operating levels and reduce profit margins.
Our steel manufacturing segment and other steel producers have periodically faced problems obtaining sufficient raw materials in a timely manner, and sometimes at all, due to a limited number of suppliers, delays, defaults, severe weather conditions, force majeure events (including public health crises, such as the COVID-19 pandemic and general national supply chain issues), shortages, or transportation problems (such as shortages of barges, vessels, rail cars or trucks, or disruption of rail lines, waterways, or natural gas transmission lines), resulting in production curtailments. As a result, we may be exposed to risks concerning pricing and availability of raw materials from third parties, as well as supply and logistics constraints moving its own raw materials to its plants. In addition, if the already limited number of suppliers consolidate, it would limit our steel manufacturing segment’s negotiating power for raw material purchases.
We have in the past, and may in the future, purchase raw materials from sources even when they are at above market prices. Additionally, any future decreases in iron ore, scrap, natural gas and oil prices may place downward pressure on steel prices. If steel prices decline, our steel manufacturing segment’s profit margins could temporarily be reduced, as higher cost inventory is turned over.
Shortages of qualified and trainable labor, increased labor costs, or our steel manufacturing segment’s failure to attract and retain other highly qualified personnel in the future could disrupt our operations and adversely affect our financial results.
Our steel manufacturing segment depends on skilled or trainable drug-free labor for the manufacture of its products. Its continued success depends on the active participation of its key employees. Our steel manufacturing segment, like other companies that reply on a trained blue-collar workforce, receives pressure from other manufacturers regarding the labor pool. Our steel manufacturing segment, aside from competing with other manufacturers, also competes with non-industrial blue-collar professions for labor. Should a significant employer move into our geographical area, such employer could draw from the current labor pool and require a substantial increase in training expense.
Our operational footprint, unplanned equipment outages, and other unforeseen disruptions may adversely impact our results of operations.
Our steel manufacturing segment has adjusted its business model over time to utilize its equipment and manufacturing facility fully. Production depends on running at a moderate rate of capacity. Outages due to power outages, weather, pandemics (including the Covid-19 pandemic), or machine outages affect its capability to produce at the level necessary to meet customer demand or at all.
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It is also possible that operations may be disrupted due to other unforeseen circumstances, such as union and other foreign tariffs, free trade agreements, trade regulations, laws, and policies. Our steel manufacturing segment is also exposed to similar risks involving major customers and suppliers, such as forcemajeure events of raw materials suppliers that have occurred and may occur in the future. Availability of raw materials and delivery of products to customers could be affected by logistical disruptions, such as shortages of barges, ocean vessels, rail cars or trucks, or unavailability of rail lines or of the locks on the Great Lakes or other bodies of water. To the extent that lost production could not be compensated for at unaffected facilities and depending on the length of the outage, our sales and our unit production costs could be adversely affected.
Our production and distribution workforce is unionized, and we may face labor disruptions that would interfere with our operations.
Precision Marshall’s manufacturing employees are covered by a collective bargaining agreement through the United Steelworkers and its warehouse and distribution workforce employees are covered by a collective bargaining agreement through the International Association of Aeronautical and Machinists. These agreements were successfully renegotiated during 2021 without a work stoppage, and were extended through September 2026 and April 2026, respectively. Future negotiations prior to the expiration of the collective bargaining agreements may result in labor unrest for which a strike or work stoppage is possible. Strikes and/or work stoppages could negatively affect Precision Marshall’s operational and financial results and may increase operating expenses and, indirectly, ours.
We rely on third parties for transportation services, and increases in costs or the availability of transportation may adversely affect our business and operations
Our steel manufacturing segment’s business depends on the transportation of a large number of products. It relies primarily on third parties for transportation of its products, as well as delivery of its raw materials. Any increase in the cost of the transportation of our raw materials or products, as a result of increases in fuel or labor costs, higher demand for logistics services, consolidation in the transportation industry, or otherwise, may adversely affect our steel manufacturing segment’s results of operations, as it may not be able to pass such cost increases on to its customers.
If any of these transportation service providers were to fail to deliver raw materials to us in a timely manner, it might be unable to manufacture and deliver its products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, it might be unable to replace them at a reasonable cost or at any cost, as there are a limited number of suppliers worldwide for our steel manufacturing segment’s raw materials.
In addition, such failure of a third-party transportation provider could harm our steel manufacturing segment's reputation, negatively affect its customer relationships and have a material adverse effect on its financial position and results of operations and, indirectly, ours.
We face risks relating to changes in U.S. and foreign tariffs, trade agreements, laws, and policies
Our steel manufacturing segment’s business depends on manufacturing products in North America. If tariffs were to rise disproportionally on raw materials compared to finished tools, we would be at risk for manufacturers to cease purchasing the products from it and instead purchasing products from third parties who are not subject to such tariffs, trade agreements, laws, and/or policies.
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The steel industry is highly cyclical, which may have an adverse effect on our results of operations.
Steel consumption is highly cyclical and generally follows economic and industrial conditions both worldwide and in regional markets. This volatility makes it difficult to balance the procurement of raw materials and energy with global steel prices, our steel production and customer product demand. Our steel manufacturing segment has implemented strategic initiatives to produce more viable results during periods of economic and market downturns; but, this may not be enough to mitigate the effect that the volatility inherent in the steel industry has on our results of operations.
Additionally, our steel manufacturing segment’s business is reliant on certain other industries that are cyclical in nature. Precision Marshall sells to distributors, who, in turn, sell to the automotive, appliance, defense, and construction-related industries. Some of these industries exhibit a great deal of sensitivity to general economic conditions and may also face meaningful fluctuations in demand based on a number of factors outside of our control, including regulatory factors, economic conditions, and raw material and energy costs. As a result, downturns, or volatility in any of the markets served could adversely affect our steel manufacturing segment’s financial position, results of operations and cash flows and, indirectly, ours.
We are subject to foreign currency risks, which may negatively impact our profitability and cash flows.
The purchase of raw material and certain necessary equipment are transactions that often take place with foreign countries. The weakening of the of the U.S. Dollar against the Euro negatively affects the price that Precision Marshall pays for raw materials and equipment. Volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on Precision Marshall’s reported financial results and condition and, indirectly, ours.
Compliance with existing and new environmental regulations, environmental permitting and approval requirements may result in delays or other adverse impacts on planned projects, our results of operations and cash flows.
Steel producers in the U.S., along with their customers and suppliers, are subject to numerous federal, state, and local laws and regulations relating to the protection of the environment. These laws and regulations concern the generation, storage, transportation, disposal, emission or discharge of pollutants, contaminants and hazardous substances into the environment, the reporting of such matters, and the general protection of public health and safety, natural resources, wildlife and the environment. Steel producers in the EU are subject to similar laws. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Additionally, compliance with certain state and local requirements could result in substantially increased capital requirements and operating costs. Compliance with current or future regulations could entail additional costs for additional systems and could have a negative impact on our results of operations and cash flows. Failure to comply with the requirements may result in administrative, civil, and criminal penalties, revocation of permits to conduct business or construct certain facilities, substantial fines or sanctions, enforcement actions (including orders limiting our operations or requiring corrective measures), natural resource damages claims, cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws, regulations, codes and common law. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, liability may be imposed without regard to contribution or to whether we knew of, or caused, the release of hazardous substances.
In addition, our steel manufacturing segment outsources all disposal of waste material, non-compliance by third party providers could result in additional costs to defend environmental claims or additional costs to replace the outsourced entities.
There can be no assurance that future approvals, licenses and permits will be granted or that our steel manufacturing segment will be able to maintain and renew the approvals, licenses, and permits it currently holds. Failure to do so could have a material adverse effect on our results of operations and cash flows. Furthermore, compliance with the environmental permitting and approval requirements may be costly and time consuming and could result in delays or other adverse impacts on planned projects, our results of operations and cash flows.
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Increasing pressure to reduce greenhouse gas (GHG) emissions from steelmaking operations to comply with EU regulations as well as societal expectations could increase costs to manufacture future raw materials or reduce the amount of materials being manufactured.
Precision Marshall relies on raw material sources in the EU and U.S. Tightening of those requirements in the EU and/or sources in the U.S. could deter steel produces from producing the raw material for our products or result in significant price increases of our raw material.
GENERAL RISK FACTORS
Adverse developments in our ongoing proceeding or future legal proceedings could have a material adverse effect on our business operations and prospects, reputation, financial condition, results of operations, or stock price.
We may be subject to investigations, arbitration proceedings, audits, regulatory inquiries and similar actions, including matters related to intellectual property, employment, securities laws, disclosures, tax, accounting, class action and product liability, as well as regulatory and other claims related to our business and our industry, which we refer to collectively as legal proceedings. We cannot predict the outcome of any particular proceeding, or whether ongoing investigations will be resolved favorably or ultimately result in charges or material damages, fines or other penalties, enforcement actions, bars against serving as an officer or director, or practicing before the SEC, or civil or criminal proceedings against us or members of our senior management.
Legal proceedings in general, and securities and class action litigation and regulatory investigations in particular, can be expensive and disruptive. Our insurance, to the extent maintained, may not cover all claims that may be asserted against us and we are unable to predict how long the legal proceedings to which we are currently subject will continue. An unfavorable outcome of any legal proceeding may have an adverse impact on our business, financial condition and results of operations, prospects, or our stock price. Any proceeding could negatively impact our reputation among our stakeholders. Furthermore, publicity surrounding ongoing legal proceedings, even if resolved favorably for us, could result in additional legal proceedings against us, as well as damage our image.
Due to our concentrated stock ownership, public stockholders may have no effective voice in our management and the trading price of our common stock may be adversely affected.
As of December 8, 2022, Isaac Capital Group LLC (“ICG”), together with Jon Isaac, our President and CEO and the President and sole member of ICG, control approximately 50.2% of the outstanding voting power of our company (assuming the exercise of all outstanding and exercisable warrants held by them). Jon Isaac has the sole power to vote the shares of our common stock owned by ICG. As a result, Jon Isaac, both individually and through ICG, is able to exercise significant influence over all matters that require us to obtain stockholder approval, including the election of directors to our Board and approval of significant corporate transactions that we may consider, such as a merger or other sale of our Company or its assets. Moreover, such a concentration of voting power could have the effect of delaying or preventing a third party from acquiring us. This significant concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with concentrated stock ownership.
Because we have no current plans to pay cash dividends on our common stock for foreseeable future, you may not receive any return on investment unless you sell your shares of common stock for a price greater than your purchase price for your shares.
We may retain future earnings, if any, for future operation, expansion, and debt repayment and, with the exception of dividends payable on shares of our Series E Preferred Stock, we have no current plans to pay cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on your investment would likely come only from an increase in the market value of our common stock. As a result, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater than your purchase price.
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Certain provisions of Nevada law, in our organizational documents and in contracts to which we are party may prevent or delay a change of control of our company.
We are subject to the Nevada anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Nevada corporations from engaging in a merger, consolidation, sales of its stock or assets, and certain other transactions with any stockholder, including all affiliates and associates of the stockholder, who owns 10% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 10% or more of the corporation’s voting stock, except in certain situations. In addition, our amended and restated articles of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include the following:
•
the authority of our Board of Directors to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, and privileges of these shares, without stockholder approval;
•
stockholders must comply with advance notice requirements to transact any business at the annual meeting;
•
all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent, unless such action or proposal is first approved by our Board of Directors;
•
special meetings of the stockholders may be called only by the Chairman of the Board, the Chief Executive Officer, or the President of our Company;
•
a director may be removed from office only for cause by the holders of at least two-thirds of the voting power entitled to vote at an election of directors;
•
our Board of Directors is expressly authorized to alter, amend or repeal our bylaws;
•
newly-created directorships and vacancies on our Board of Directors may only be filled by a majority of remaining directors, and not by our stockholders; and
•
cumulative voting is not allowed in the election of our directors.
These provisions of Nevada law and our articles of incorporation and bylaws could prohibit or delay mergers or other takeover or change of control of our company and may discourage attempts by other companies to acquire us, even if such a transaction would be beneficial to our stockholders.
ITEM 1B.Unresolved Staff Comments
None.
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ITEM 2.Properties
At September 30, 2022, we leased approximately 16,500 square feet of space located in Las Vegas, Nevada which we utilize as principal executive and administrative offices. SW Financial leases approximately 5,000 square feet of office space in Melville, New York, as its principal executive and administrative offices, and an additional 3,900 square feet of administrative office space in New York City, New York.
Retail Segment
Vintage Stock
At September 30, 2022, Vintage Stock leased all 68 of its stores under agreements that vary as to rental amounts, expiration dates, renewal options and other rental provisions. Vintage Stock leased its corporate offices in Joplin, Missouri.
The following is a breakdown by state and brand of Vintage Stock retail stores:
State Retail Stores Brand(s)
Arkansas 2 Vintage Stock
Colorado 3 EntertainMart
Idaho 2 EntertainMart
Illinois 1 Vintage Stock
Kansas 6 Vintage Stock and EntertainMart
Missouri 19 Vintage Stock, V-Stock and EntertainMart
Nebraska 1 EntertainMart
New Mexico 1 EntertainMart
Oklahoma 12 Vintage Stock
Texas 19 Movie Trading Co. and EntertainMart
Utah 2 EntertainMart
Flooring Manufacturing Segment
Marquis owns or leases all of the land, and owns all of the improvements on such leased land, as described in the following table, which also provides information regarding the general location and use at September 30, 2022:
Property Location
Coating Plant Chatsworth, Georgia
Corporate Offices and Warehouse Chatsworth, Georgia
Distribution Chatsworth, Georgia
Eton Tufting Facility Eton, Georgia
Machine Storage and Forklift Chatsworth, Georgia
Office and Storage Chatsworth, Georgia
Printing Facility Calhoun, Georgia
Sales Offices, Showroom and Warehouse Chatsworth, Georgia
Storage and Extrusion Dalton, Georgia
Tufting Department Chatsworth, Georgia
Twist and Heat Set Facility Chatsworth, Georgia
Warehouse Chatsworth, Georgia
Yarn Processing Facility Dalton, Georgia
Yarn Winding Facility Chatsworth, Georgia
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Steel Manufacturing Segment
At September 30, 2022, Precision Marshall leases the buildings for its two locations in Illinois and Pennsylvania, and Kinetic leases the buildings for its two locations in Wisconsin. Precision Marshall’s corporate office is located in Pennsylvania.
ITEM 3.Legal Proceedings
The information in response to this item is included in Note 17, Commitments and Contingencies, to the Consolidated Financial Statements included in Part II, Item 8, of this Form 10-K.
ITEM 4. Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Common Stock
Our common stock is traded on the Nasdaq Capital Market under the symbol “LIVE”.
The following table sets forth the quarterly high and low trading prices per share of our common stock during the last two fiscal years.
Quarter Ended High ($) Low ($)
Holders of Record
As of September 30, 2022, there were (i) 197 holders of record of our common stock, (ii) 29 holders of record of our Series E Preferred Stock, and (iii) no holders of record of our Series B Convertible Preferred Stock (“Series B Preferred Stock”). We have no record of the number of holders of our common stock who hold their shares in “street name” with various brokers.
Dividend Policy
We have two classes of authorized preferred stock. As of September 30, 2022, our Series E Preferred Stock had 47,840 shares issued and outstanding. Each share of Series E Preferred Stock is entitled to and receives a dividend of $0.015 per year. During the year ending September 30, 2022, dividends of approximately $720 were paid to holders of Series E Preferred Stock. At September 30, 2022, the Company had accrued and unpaid preferred stock dividends totaling an aggregate of approximately $200.
As of September 30, 2022, our Series B Preferred Stock had no shares issued and outstanding. Our Series B Preferred Stock is entitled to receive a dividend in the aggregate amount of $1.00 to be allocated on a pro rata basis among all of the then-issued and outstanding shares of such Series, if, when, and as our Board of Directors shall have declared it. The Board of Directors shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of our Company unless that $1.00 dividend has been declared and paid.
Presently, we do not pay dividends on shares of our common stock or shares of our Series B Preferred Stock. Our declaration and payment of cash dividends in the future and the amount thereof will depend upon our results of operations, financial condition, cash requirements, prospects, limitations imposed by credit agreements and/or indentures governing debt securities and other factors deemed relevant by our Board of Directors.
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Issuer Purchases of Equity Securities
On February 20, 2018, the Company announced a $10 million common stock repurchase plan. In October 2020, our Board of Directors approved an extension of the term of the repurchase plan from February 15, 2021 to June 1, 2021, and in March 2021 further extended the term of the repurchase plan from June 1, 2021 to June 1 2024.The following table provides information regarding repurchases of our common stock during the period of October 1, 2020 through September 30, 2022.
Securities Authorized for Issuance under Equity Compensation Plans
See “Item 11 – Executive Compensation – Executive Compensation Plan Information.”
Recent Sales of Unregistered Securities
None.
ITEM 6. Selected Financial Data
Not applicable.
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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, 2022, 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, 2022 (this “Form 10-K”).
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”.
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Retail Segment
Our Retail Segment is composed of Vintage Stock and ApplianceSmart.
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 68 retail locations strategically positioned across Arkansas, Colorado, Idaho, Illinois, Kansas, Missouri, Nebraska, New Mexico, Oklahoma, Texas, and Utah.
ApplianceSmart
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, 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 affected Live Ventures’ indirect subsidiary ApplianceSmart only and did not affect any other subsidiary of Live Ventures, or Live Ventures itself. On February 28, 2022, the court approved ApplianceSmart’s plan for reorganization (the “Plan”), discharging ApplianceSmart of certain debts according to the Plan resulting in the Company recording a gain of approximately $11.4 million, which includes a write-off or adjustment of approximately $11.5 million on the settlement of debts and other liabilities, offset by payments subject to the bankruptcy that were not included as debtor-in-possession liabilities of approximately $149,000. As of April 1, 2022, we have ceased operations of its one existing location, and are in the process of winding down operations, which will be immaterial to the consolidated financial statements.
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.
On July 1, 2022, Live acquired certain assets and intellectual property of Better Backers, a Georgia corporation, which was accomplished through an Asset Purchase Agreement.
Steel Manufacturing Segment
Our Steel Manufacturing segment is comprised of Precision Industries, Inc. (“Precision Marshall”), and its wholly-owned subsidiary The Kinetic Co., Inc. (“Kinetic”).
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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.
On June 28, 2022, Precision Marshall acquired Kinetic. Kinetic is a highly recognizable and regarded brand name in the production of industrial knives and hardened wear products for the tissue, metals, and wood industries and is known as a one-stop shop for in-house grinding, machining, and heat-treating. Kinetic was founded by the Masters family in 1948 and is headquartered in Greendale, Wisconsin. Kinetic manufactures more than 90 types of knives and numerous associated parts with modifications and customizations available to each. Kinetic employs approximately 100 non-union employees.
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.
Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as revenue and “Adjusted EBITDA.” Adjusted EBITDA is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization, stock-based compensation, and other non-cash or nonrecurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of the business, including the business’ ability to fund acquisitions and other capital expenditures, and to service its debt. Additionally, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate a company’s financial performance, subject to certain adjustments. Adjusted EBITDA does not represent cash flows from operations, as defined by GAAP, and should not be construed as an alternative to net income or loss and is indicative neither of our results of operations, nor of cash flows available to fund all of our cash needs. It is, however, a measurement that the Company believes is useful to investors in analyzing its operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities, and other measures of financial performance prepared in accordance with GAAP. Adjusted EBITDA is a non-GAAP financial measure. As companies often define non-GAAP financial measures differently, Adjusted EBITDA, as calculated by Live Ventures Incorporated, should not be compared to any similarly titled measures reported by other companies
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Results of Operations
The following table sets forth certain statement of income items and as a percentage of revenue, for the periods indicated (in $000’s):
Year Ended Year Ended
Selected Data:
Impairment expense 4,910 —
Adjusted EBITDA (a)
Adjusted EBITDA as a percentage of revenue
Flooring Manufacturing business 13.0 % 18.2 %
Steel Manufacturing business 16.9 % 13.4 %
Corporate and Other -31.7 % -86.9 %
Consolidated adjusted EBITDA as a percentage of revenue 13.4 % 16.3 %
The following table sets forth revenues by segment (in $000’s):
Year Ended Year Ended
Net % of Total Net % of Total
Revenue Revenue Revenue Total Revenue
Revenues
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The following table sets forth gross profit and gross profit as a percentage of total revenue by segment (in $000’s):
Year Ended Year Ended
Gross Gross Profit% Gross Gross Profit%
Profit of TotalRevenue Profit of TotalRevenue
Gross Profit
Revenues
Revenues increased by approximately $13.9 million to approximately $286.9 million for the year ended September 30, 2022 as compared to the year ended September 30, 2021 of approximately $273.0 million.
Retail segment revenue decreased by approximately $2.7 million, or 3.0%, to approximately $86.2 million for the year ended September 30, 2022, as compared to $88.8 million for the year ended September 30, 2021. Movies, Music, Games and Other revenue decreased by approximately $1.9 million, which was primarily due to reduced demand resulting from inflationary pressures, supply chain issues, and overall product sales mix. Appliance revenue decreased by approximately $796,000 due to the shutdown of operations as discussed above.
Flooring Manufacturing revenue increased by approximately $627,000, or 0.5%, to approximately $130.9 million for the year ended September 30, 2022, as compared to approximately $130.2 million for the year ended September 30, 2021. The increase was due to the passing on of product cost increases to customers, as well as the acquisition of Better Backers in July 2022.
Steel Manufacturing revenue increased by approximately $11.3 million, or 23.0%, to approximately $60.6 million for the year ended September 30, 2022, as compared to approximately $49.3 million for the year ended September 30, 2021. The increase is primarily due to passing on product cost increases to customers, as well as the acquisition of Kinetic during June 2022 (see Note 5 below).
Corporate and Other revenue increased by approximately $4.7 million, or 101.5%, to approximately $9.3 million for the year ended September 30, 2022, as compared to approximately $4.6 million for the year ended September 30, 2021. The increase is due to the addition of SW Financial as a VIE during June 2021.
Cost of Revenues
Cost of revenues increased by approximately $15.6 million, or 9.0% for the year ended September 30, 2022 as compared to the year ended September 30, 2021. Cost of revenue as a percentage of revenues was 65.9% for the year ended September 30, 2022, as compared to 63.6% for the year ended September 30, 2021. The increase is primarily attributable to the increases in revenues, as well as increased product costs due to inflationary pressures.
General and Administrative Expense
General and Administrative expense increased by approximately $2.3 million or 4.4%, for the year ended September 30, 2022 as compared to the year ended September 30, 2021, primarily due to the acquisition of Kinetic in June 2022, increases in employee compensation and related costs as a result of our Retail segment opening new locations, the consolidation of SW Financial in June 2021, partially offset by reductions in legal and other professional fees.
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Selling and Marketing Expense
Selling and marketing expense increased by approximately $1.0 million for the year ended September 30, 2022 as compared to the year ended September 30, 2021 primarily due to increased convention and trade show activity, which was largely canceled in fiscal 2021 due to COVID, as well as compensation associated with the Marquis sales force.
Loss on Impairment of Intangibles and Goodwill
For the year ended September 30, 2022, in connection with quantitative impairment testing performed on SW Financial, we recorded a $4.9 million charge for impairment of intangibles and goodwill. This amount includes approximately $3.7 million for full impairment of goodwill, and approximately $1.2 million in partial impairment of customer relationships and trade names.
Interest Expense, net
Interest expense, net decreased by approximately $1.0 million or 19.1%, for the year ended September 30, 2022 as compared to the year ended September 30, 2021. The decrease is primarily due to the payoff of higher interest rate debt and fully amortizing related debt discount during the year ended September 30, 2021, as well as favorable interest rates obtained from Precision's credit facility refinancing (see Note 10 of the consolidated financial statements), and the capitalization of interest charges by our Flooring Manufacturing segment during the year ended September 30, 2022.
Gain on Payroll Protection Program
During the year ended September 30, 2021, we 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, 2022.
Gain on Bankruptcy Settlement
During the year ended September 30, 2022, we recorded a gain of approximately $11.4 million due to the discharge of certain obligations relating to the ApplianceSmart bankruptcy as discussed above. 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.
Provision (Benefit) for Income Taxes
For the year ended September 30, 2022, the Company recorded an income tax provision of approximately $6.9 million, compared to a tax provision of approximately $8.7 million for the year ended September 30, 2021. The year over year decrease is primarily due to a bankruptcy gain exclusion, in the amount of $2.8 million, applicable to the gain recorded in connection with the ApplianceSmart bankruptcy.
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Results of Operations by Segment
The following table sets forth the results of operations by segment (in $000’s):
Flooring Steel Corporate & Flooring Steel Corporate &
Impairment Expense — — — 4,910 4,910 — — — — —
Retail Segment
Revenue for the year ended September 30, 2022 decreased by approximately $2.7 million, or 3.0%, as compared to the prior year, primarily due to reduced demand partially offset by price increases as a result of inflationary factors and supply chain issues, offset by increased retail pricing and additional locations added at Vintage Stock. Further, as of April 2022, ApplianceSmart shutdown operations. Retail sales at our Vintage Stock locations during the year ended September 30, 2021 benefitted from increased consumer discretional spending resulting from one-time stimulus payments in 2021. Cost of revenue as a percentage of revenue was 47.1% for the year ended September 30, 2022, as opposed to 45.9% for the year ended September 30, 2021. This increase is due to inflationary pressures and product mix. General and administrative expenses increased by approximately $1.2 million, and is primarily attributable to inflationary cost pressures and new stores opened in fiscal year 2022. Operating income for the year ended September 30, 2022 was approximately $12.6 million, as compared to approximately $16.3 million during the prior year period primarily due to those factors discussed above.
Flooring Manufacturing Segment
Revenue for the year ended September 30, 2022 increased moderately as compared to the prior year, primarily due to increases in sales prices that were passed on to customers, partially offset by an overall reduction in consumer demand, as well as the acquisition of Better Backers in July 2022. Cost of revenue as a percentage of revenue was 75.7% for the year ended September 30, 2022, as opposed to 70.9% for the year ended September 30, 2021. The increase is primarily due to increases in raw material costs, as compared to the prior year. General and administrative expenses decreased by approximately $1.1 million primarily due to one-time expenses incurred during the year ended September 30, 2021, and a reduction of variable employee compensation costs recognized during the year ended September 30, 2022. Sales and marketing expenses increased by approximately $1.2 million primarily due to increased convention and trade show activity, as well as increased compensation associated with the Marquis sales force. Operating income for the year ended September 30, 2022 was approximately $14.0 million, as compared to operating income of approximately $20.2 million for the prior year period.
Steel Manufacturing Segment
Revenue for the year ended September 30, 2022 increased by approximately $11.3 million, or 23%, as compared to the prior year, due to increased sales prices resulting from passing on product cost increases to customers, as well as the acquisition of Kinetic during June 2022. Cost of revenue as a percentage of revenue was 72.2% for the year ended September 30, 2022, as opposed to 75.8% for the year ended September 30, 2021. The decrease is due to improved manufacturing efficiencies, increased revenue due to price increases, and the acquisition of Kinetic. General and administrative expenses increased by approximately $1.9 million, or 33.9%, primarily due to an increase in
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compensation costs, as well as the acquisition of Kinetic. Operating income was approximately $9.0 million and approximately $5.9 million, for the years ended September 30, 2022 and 2021, respectively.
Corporate and Other Segment
Results for Corporate and Other includes our directory services business and our investment in SW Financial. Revenues for the year ended September 30, 2022 increased by approximately $4.7 million primarily due to the addition of SW Financial as a VIE during June 2021. Cost of revenue for the year ended September 30, 2022 increased proportionately with revenue due to inflationary pressures and the consolidation of SW Financial in June 2021. Operating loss for the year ended September 30, 2022 was approximately $9.7 million, as compared to a loss of approximately $6.6 million in the prior year. 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.
Adjusted EBITDA Reconciliation
The following tables present a reconciliation of Adjusted EBITDA from net income for the years ended September 30, 2022 and 2021 (in $000’s):
Year Ended
Depreciation and amortization 7,168 6,791
Stock-based compensation 37 489
Gain on bankruptcy settlement (11,352 ) (1,765 )
Gain/loss on extinguishment of debt 84 (6,150 )
Non-recurring loan costs — 274
Acquisition costs 1,470 —
Write-off of fixed assets 438 —
Impairment of goodwill and intangibles 4,910 —
Other non-recurring noncash items (196 ) —
Adjusted EBITDA decreased by approximately $6.1 million, or 13.8%, for the year ended September 30, 2022, as compared to the prior year period. The decrease is primarily due to decreases in revenue and gross profit, as discussed above.
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, allow for the repurchase of 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) Fifth Third Revolver Loan (“Fifth Third 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.
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As of September 30, 2022, we had total cash and restricted cash of approximately $4.6 million as well as approximately $26.4 million of available borrowing under our revolving credit facilities. The Company's restricted cash of approximately $890,000 is required collateral for a standby letter of credit for a customs bond, which is renewed annually. 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 restricted cash at September 30, 2022 was approximately $4.6 million compared to approximately $4.7 million at September 30, 2021, a decrease of approximately $100,000. Net cash provided by operations was approximately $14.6 million for the year ended September 30, 2022, as compared to net cash provided by operations of approximately $29.2 million for the same period in 2021. The decrease is primarily due to purchases of inventory and the timing of payments of income taxes and trade accounts payable.
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 $40.0 million for the year ended September 30, 2022 consisted primarily of purchases of property and equipment and our acquisitions of Kinetic and Better Backers. 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.
Cash Flows from Financing Activities
Our cash flows provided by financing activities of approximately $25.4 million for the year ended September 30, 2022 primarily consisted in net proceeds from revolver loans of approximately $21.6 million, and approximately $17.0 million in proceeds from the issuance of notes payable, partially offset by payments on notes payable and finance leases of approximately $10.6 million, and purchases of treasury stock of approximately $2.7 million. Proceeds from borrowings under revolver loans and the issuance of notes payable was primarily associated with the acquisition of Kinetic.
Our cash flows used in financing activities of approximately $16.1 million for the year ended September 30, 2021 primarily consisted of approximately $16.8 million for payments of notes payable, approximately $1.4 million in net payments under revolver loans, and approximately $421,000 for the purchase of treasury stock, partially offset by the issuance of notes payable of approximately of $2.3 million from proceeds received from the issuance of notes payable, and proceeds of approximately $323,000 from stock options exercised.
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 $78.4 million as of September 30, 2022 as compared to approximately $33.8 million as of September 30, 2021. The increase is primarily due to the net assets received from the acquisitions of Kinetic and Better Backers, increases in accounts receivable and inventories, and decreases in debtor-in-possession
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liabilities and accrued liabilities, partially offset by increases in the current portion of long-term debt and the current portion of operating lease obligations.
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 (in $000's):
Payments due by Period
Less ThanOne Year One to ThreeYears Three to FiveYears More ThanFive Years Total
Off-Balance Sheet Arrangements
At September 30, 2022, 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, 2022, 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
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2022 and 2021 F-3
Notes to Consolidated Financial Statements F-8
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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 sheets of Live Ventures Incorporated (the "Company") as of September 30, 2022 and 2021, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years 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, 2022 and 2021, and the results of their operations and cash flows for the years 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 audits. 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 audits 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter 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.
F-1
As described in Note 5 to the consolidated financial statements, Precision Marshall, a subsidiary of the Company, acquired 100% of the outstanding shares of The Kinetic Co., Inc. (“Kinetic”) and also entered into a real estate purchase agreement pursuant to which Precision received all of Kinetic's rights, titles, and interests in and to the land and improvements. The combined purchase price was approximately $25.0 million. As part of its purchase price allocation, the Company determined $1.0 million should be allocated to customer relationship and trade name intangible assets and approximately $12.9 million to property, plant and equipment (collectively “intangibles and fixed assets”).
We identified the Company’s valuation of Kinetic’s intangibles and fixed assets 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 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 intangibles and fixed assets.
Our audit procedures related to the Company’s estimate of the preliminary acquisition date fair value of the intangibles and fixed assets included the following, among others:
•
We read the purchase agreements to understand and evaluate the terms of the transaction to determine that the acquisition met the requirements of a business combination.
•
We evaluated the 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 processes and key assumptions for estimating the fair value of intangible assets and other acquired assets and liabilities.
•
We have tested the funds flow of the transactions and vouched appropriate proceeds and payments.
•
We utilized our valuation specialists to evaluate the adequacy and appropriateness of the methodologies and assumptions, including the 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 intangible assets, fixed assets and other assets and liabilities.
•
We assessed the reasonableness of management’s cash flow forecasts based on historical results, price increases and 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.
We have served as the Company's auditor since 2021.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
December 16, 2022
F-2
LIVE VENTURES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Assets
Income taxes receivable 4,403 —
Prepaid expenses and other current assets 2,477 1,640
Debtor in possession assets — 180
Right of use asset - operating leases 33,659 30,466
Deposits and other assets 647 682
Liabilities and Stockholders' Equity
Liabilities:
Income taxes payable — 876
Current portion of notes payable related parties 2,000 2,000
Current portion of lease obligations - operating leases 7,851 7,202
Current portion of lease obligations - finance leases 217 —
Debtor in possession liabilities — 11,135
Long-term debt, net of current portion 62,704 37,559
Lease obligation long term - operating leases 30,382 26,996
Lease obligation long term - finance leases 19,568 2,347
Notes payable related parties, net of current portion 2,000 2,000
Other non-current obligations 1,615 —
Commitments and contingencies
Stockholders' equity:
Equity attributable to Live stockholders 97,610 75,528
Non-controlling interest (448 ) (448 )
Total liabilities and stockholders' equity $ 278,637 $ 211,738
The accompanying notes are an integral part of these consolidated financial statements.
F-3
LIVE VENTURES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share)
Years Ended September 30,
Operating expenses:
Impairment expense 4,910 —
Other income (expense):
Gain on Payroll Protection Program loan forgiveness — 6,150
Loss on debt extinguishment (84 ) —
Other income (expense), net (1,370 ) 1,179
Net loss attributable to non-controlling interest — 180
Net income attributable to Live stockholders $ 24,741 $ 31,197
Income per share:
Weighted average common shares outstanding:
Dividends declared - Series B convertible preferred stock $ — $ —
Dividends declared - Series E convertible preferred stock $ — $ —
Dividends declared - Common stock $ — $ —
The accompanying notes are an integral part of these consolidated financial statements.
F-4
LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
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 )
Stock based compensation — — — — — — 37 — — — — 37
Conversion of Series B preferred stock (315,790 ) — — — 1,578,950 — — — — — — —
Purchase of common treasury stock — — — — (86,451 ) — — (2,696 ) — — — (2,696 )
The accompanying notes are an integral part of these consolidated financial statements.
F-5
LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended September 30,
Operating activities:
Depreciation and amortization 7,168 6,791
Loss on disposal of property and equipment 510 337
Amortization of debt issuance costs (78 ) 659
Gain on Payroll Protection Program loan forgiveness — (6,150 )
Loss on impairment of goodwill and intangibles 4,910 —
Gain on bankruptcy settlement (11,501 ) (1,765 )
Stock based compensation expense 37 489
Loss on write off of ROU asset 522 —
Amortization of right of use assets 9,229 (215 )
Change in reserve for uncollectible accounts 71 658
Change in reserve for obsolete inventory 582 1,239
Changes in assets and liabilities, net of acquisitions:
Prepaid expenses and other current assets 1,663 141
Change in deferred income taxes 6,022 3,818
Deposits and other assets 34 (457 )