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
The ongoing outbreak of COVID-19 has been declared a pandemic by the World Health Organization, continues to spread within the United States and many other parts of the world and may have a material adverse effect on our business operations, financial condition, liquidity and cash flow.
As the outbreak of the novel strain of coronavirus (COVID-19) continues to grow both in the U.S. and globally, there has been significant volatility in the financial markets and the adoption of emergency legislation to address the negative impacts of the pandemic. The severity, magnitude, and duration of the current COVID-19 pandemic is uncertain, rapidly changing, and hard to predict. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our supply chain partners, our employees and customers, customer sentiment in general, and traffic within shopping centers, and, where applicable, malls, containing our stores. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state, and local authorities to avoid large gatherings of people or self-quarantine may increase, which has already affected, and may continue to affect, traffic to the Vintage Stock store. During our 2020 fiscal year, for example, in response to the crisis and as a result of government mandates, Vintage Stock’s stores were closed on average 45 days. In addition, a COVID-19 outbreak could cause Marquis Industries and/or Precision to shut down one or more production plants, resulting in reduced capacity and possible delivery delays. Continued impacts of the pandemic could materially adversely affect our near-term and long-term revenues, earnings, liquidity, and cash flows, and may require significant actions in response, including but not limited to, employee furloughs, reduced store hours, store closings, expense reductions or discounting of pricing of our products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. Due to the speed with which the COVID-19 situation continues to develop, the breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration and ultimate impact; therefore, any negative impact on our business, financial condition (including without limitation our liquidity), results of operations, prospects, and cash flows cannot be reasonably estimated at this time, but the COVID-19 pandemic could lead to extended disruption of economic activity and the impact on our business, financial condition, results of operations, cash flows, and workforce availability could be material.
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:
• fluctuating demand for our products and services;
• changes in technologies favored by consumers,
• customer refunds or cancellations, and
• our ability to continue to bill through existing means;
• market acceptance of new or enhanced versions of our services or products;
• with respect to our manufacturing segment, changes in import tariffs;
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• technical difficulties or failures affecting our systems in general;
• the fixed nature of a significant amount of our operating expenses; and
Our obligations under our consolidated indebtedness are significant.
As of September 30, 2020, we had $85.3 million of total consolidated indebtedness outstanding consisting of:
Bank of America Revolver Loan $ —
Encina Business Credit Revolver Loan 14,886
Texas Capital Bank Revolver Loan 7,115
Crossroads Financial Revolver Loan 883
Encina Business Credit Term Loan 1,663
Note Payable Comvest Term Loan 5,554
Note Payable to the Sellers of Vintage Stock 10,000
Note #1 Payable to Banc of America Leasing & Capital LLC 1,229
Note #3 Payable to Banc of America Leasing & Capital LLC 1,862
Note #4 Payable to Banc of America Leasing & Capital LLC 572
Note #5 Payable to Banc of America Leasing & Capital LLC 2,538
Note #6 Payable to Banc of America Leasing & Capital LLC 758
Note #7 Payable to Banc of America Leasing & Capital LLC 4,681
Note #8 Payable to Banc of America Leasing & Capital LLC 3,091
Equipment loans 2,900
Note payable to the Sellers of Precision Marshall 2,500
Note Payable to Store Capital Acquisitions, LLC 9,243
Payroll Protection Program 6,151
Total notes payable 77,143
Isaac Capital Fund 2,000
Spriggs Investments, LLC 2,000
Note payable to the Sellers of Lonesome Oak 1,297
Total notes payable to related parties 8,123
Total indebtedness $ 85,266
These financial obligations may have important negative consequences for us, including:
• limiting our ability to satisfy our obligations;
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If we do not effectively manage our growth and business, our management, administrative, operational, and financial infrastructure and results of operations may be materially adversely affected.
We have expanded our business over the past few years through the acquisition of different businesses in different industries and we intend to continue to acquire additional businesses (and possibly in different industries) in the future. Significant expansion of our present operations will be required to capitalize on potential growth in market opportunities and will require us to add additional management personnel and 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. In order to manage our growth, we will be required to continue to implement and improve our operational, marketing, and financial systems, to expand existing operations, to attract and retain superior management and personnel, and to train, manage, and expand our employee base. There is no assurance that we will be able to expand our operations effectively, our systems, procedures and controls may be inadequate to support our expanded operations, and our management may fail to implement our business plan successfully.
We may not be able to secure additional capital to expand our existing operations.
Although we currently have no material long-term needs 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 our results of operations, market conditions, or unforeseen needs or opportunities. Our future liquidity and capital requirements will depend on numerous factors, including:
• the pace of expansion of our operations;
• our need to respond to competitive pressures; and
• future acquisitions of complementary products, technologies or businesses.
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.
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We have identified and disclosed in this Form 10-K material weaknesses in our internal control over financial reporting. If we are not able to remediate these material weaknesses and maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.
We need to devote significant resources and time to comply with the requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) with respect to internal control over financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess the design and operating effectiveness of our controls over financial reporting, which are necessary for us to provide reliable and accurate financial reports.
As reported in Part II – Item 9A, Controls and Procedures, there were material weaknesses in our internal controls over financial reporting at September 30, 2020. Specifically, management’s assessment concluded that the Company has the following material weaknesses: (a) lack of sufficient controls around the financial reporting process; (b) lack of proper segregation of duties within the financial reporting process; and (c) lack of evaluation of internal controls.
We expect our systems and controls to become increasingly complex to the extent that we integrate acquisitions and as our business grows. To effectively manage our company today and this anticipated complexity, we need to remediate these material weaknesses and continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to remediate these material weaknesses and implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results, cause us to fail to meet our financial reporting obligations, or make it more difficult to raise capital (or, if we are able to raise such capital, make such capital more expensive), one or more of which could adversely affect our business and/or jeopardize our listing on the Nasdaq Capital Market, any of which would harm 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, and the federal government have from time-to-time enacted minimumwageincreases, changes to eligibility for overtime pay, paid sick leave and mandatory vacation accruals, and similar requirements. These changes have increased our labor costs and may have a further negative impact on our labor costs in the future.
In addition, a significant number of our employees are paid at rates related to the applicable minimumwage. Federal, state and local proposals that increaseminimumwage requirements or mandate other employee matters could, to the extent implemented, materially increase our labor and other costs. Several states in which we operate have approved minimumwageincreases that are above the federal minimum. As more jurisdictions implement minimumwageincreases, we expect our labor costs will continue to increase. Our ability to respond to minimumwageincreases by prices depends on willingness of our customers to pay the higher prices and our perceived value relative to competitors. Our distributors and suppliers could also be affected by higher minimum wage, benefit standards and compliance costs, which could result in higher costs for goods and services supplied to us.
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We may not be able to adequately protect our intellectual property rights.
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 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.
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, prospects, financial condition, and results of operations. 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.
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:
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, prospects, financial condition, and results of operations.
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.
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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.
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 taxes. 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 Securities and Exchange Commission (“SEC”) and a letter from the SEC stating that it is conducting an investigation. The subpoena requested documents and information concerning, among other things, the restatement of the Company’s financial statements for the quarterly periods ended December 31, 2016, March 31, 2017, and June 30, 2017, the acquisition of Marquis Industries, Inc., Vintage Stock, Inc., and ApplianceSmart, Inc., and the change in auditors. 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
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Notice” from the Staff of the SEC relating to the Company’s previously-disclosed SEC investigation. The Wells Notices relate to, among other things, the Company’s reporting of its financial performance for its fiscal year ended September 30, 2016, certain disclosures related to executive compensation, and its previous acquisition of ApplianceSmart. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. The Wells Notices informed the Company and the Executives that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and each of the Executives that would allege certain violations of the federal securities laws.The Company and the Executives maintain that their actions were appropriate, and the Company and the Executives have engaged Orrick Herrington & Sutcliffe LLP, among others, to defend themselves, and intend to vigorously defend against any and all allegations brought forth.
On October 1, 2018, the Company received a letter from the SEC requesting information regarding a potential violation of Section 13(a) of the Securities Exchange Act of 1934, based upon the timing of the Company’s Form 8-K filed on February 14, 2018. The Company provided a response to the SEC on October 26, 2018. The Company is cooperating with the SEC in its inquiry.
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 successfully identify suitable acquisition candidates or investment opportunities, obtain sufficient financing on acceptable terms or at all to fund such strategic transactions, complete acquisitions and integrate 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:
• failure of due diligence during the acquisition process;
• adverse short-term effects on reported operating results;
• the diversion of management’s time and resources;
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 will acquire the company after completing due diligence.
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Our acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities or convertible debt securities, significant amortization expenses related to 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 do not pass the annual goodwill impairment test, excess goodwill will be charged to, and reduce, future earnings.
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.
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. Although we have entered into employment agreements with certain of these key members of management and provide incentives to stay with the business after it’s 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 materially adversely affect our business, financial condition, and results of operations.
RISKS RELATED TO OUR RETAIL SEGMENT
Vintage Stock
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. Some of these factors include consumer disposable income levels, consumer confidence in current and future economic conditions, levels of employment, consumer credit availability, consumer debt levels, inflation, political conditions and the effect of weather, natural disasters, and civil disturbances. These and other economic factors could adversely affect demand for Vintage Stock’s products, which may 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.
The video game industry has been cyclical in nature in response to the introduction and maturation of new technology. Two new consoles were introduced in November 2020. Following the introduction of 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 toward the new platforms. There is no guaranty that Vintage Stock will be allocated any of these new consoles for sale to its customers, or, if it is allocated new consoles for sale, that such allocation will be sufficient to meet customer demand. If the new video game consoles are not successful, or makers of video games do not make games to play on these new consoles, or games that the public finds interesting to play, Vintage Stock’s sales of new video game products could decline. In addition, the new consoles are “backwards compatible,” meaning that games on the prior generation consoles can 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, which could negatively impact Vintage Stock’s pre-owned business, which in turn could have a negative impact on our business, results of operations, financial condition, cash flow and liquidity.
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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 and Microsoft 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 reduce their purchases in favor of other forms of video, digital and game delivery. As a result, our sales and earnings could decline.
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 is 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.
ApplianceSmart
ApplianceSmart is subject to risks and uncertainties with respect to the actions and decisions of its creditors and other third parties who have interests in the Chapter 11 Case that may be inconsistent with ApplianceSmart’s plans.
ApplianceSmart is subject to risks and uncertainties associated with its voluntary proceedings under Chapter 11 of the Bankruptcy Code filed with the Bankruptcy Court on December 9, 2019 (the “Commencement Date”). For the duration of the bankruptcy proceedings, ApplianceSmart’s operations and our ability to execute the ApplianceSmart business strategy will be subject to risks and uncertainties associated with bankruptcy. These risks include:
• ApplianceSmart’s ability to continue as a going concern;
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• ApplianceSmart’s ability to fund and execute its business plan; and
• ApplianceSmart’s ability to obtain acceptable and appropriate financing.
These risks and uncertainties could significantly affect its business and operations in various ways. For example, negative publicity or events associated with the Chapter 11 Case could adversely affect its relationships with its vendors and employees, as well as with customers, which in turn could adversely affect its operations and financial condition. Also, pursuant to the Bankruptcy Code, ApplianceSmart requires Bankruptcy Court approval for transactions outside the ordinary course of business, which may limit its ability to respond to certain events in a timely manner or take advantage of certain opportunities. Because of the risks and uncertainties associated with the Chapter 11 Case, we cannot predict or quantify the ultimate impact that events occurring during the pendency of the Chapter 11 Case will have on ApplianceSmart’s or the Company’s consolidated business, financial condition, results of operations, or the certainty as to ApplianceSmart’s ability to continue as a going concern. As a result of the Chapter 11 Case, realization of assets and liquidation of liabilities are subject to uncertainty. While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, ApplianceSmart may sell or otherwise dispose of a portion or all of our assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.
ApplianceSmart’s businesses could suffer from a long and protracted restructuring.
ApplianceSmart’s future results are dependent upon the successful confirmation and implementation of a Chapter 11 plan of reorganization. Failure to obtain this approval in a timely manner could adversely affect ApplianceSmart’s operating results and cash flows, as its ability to obtain financing to fund its operations may be adversely affected by protracted bankruptcy proceedings. If a protracted reorganization or liquidation is to occur, there is a significant risk that ApplianceSmart’s enterprise value would be substantially eroded to the detriment of all stakeholders.
Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities of ApplianceSmart that will be subject to the plan of reorganization. Even if a plan of reorganization is approved and implemented, our operating results and cash flows may be adversely affected by the possible reluctance of prospective lenders to do business with a company that may have recently emerged from bankruptcy.
Operating as a Debtor in Possession under Chapter 11 of the Bankruptcy Code may restrict ApplianceSmart’s ability to pursue its business strategies.
Under Chapter 11 of the Bankruptcy Code, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court, which may limit ApplianceSmart’s ability to respond to certain events in a timely manner or take advantage of certain opportunities. ApplianceSmart must obtain Bankruptcy Court approval to, among other things:
• engage in certain transactions with its various stakeholders;
• buy or sell assets outside the ordinary course of business; and
Sufficient debtor-in-possession financing may not be available and ApplianceSmart’s emergence from the Chapter 11 Case is not assured.
If cash flows and borrowings under any debtor-in-possession financing are not sufficient to meet our liquidity requirements, it is uncertain whether we would be able to reorganize our business. The amount of distributions that will be available to our creditors and other holders of claims against and interests in us and our businesses, including
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holders of secured claims, in connection with our reorganization and consummating a plan of reorganization is uncertain. We will likely incur significant costs in connection with developing and seeking approval of a plan of reorganization, and financing, which may not be supported by certain of our stakeholders. If we were unable to develop a feasible plan of reorganization, or if we were unable to gain access to financing to operate our businesses during the Chapter 11 Case, it is possible that ApplianceSmart would have to liquidate a portion or all of its assets, in which case it is likely that holders of claims would receive substantially less favorable distributions than they would receive if ApplianceSmart were to emerge as a viable, reorganized business.
Our senior management team and other key personnel may not be able to execute the ApplianceSmart business plan as currently developed, given the substantial attention required of such individuals by the Chapter 11 Case.
The execution of the ApplianceSmart business plan also depends on the efforts of our senior management team and other key personnel to execute the ApplianceSmart business plan. Such individuals may be required to devote significant efforts to the prosecution of the Chapter 11 Case, thereby potentially impairing their abilities to execute the ApplianceSmart business plan and the business plan of the Company generally. Accordingly, our business plan may not be implemented as anticipated, which may cause its financial results to materially deviate from the current projections.
ApplianceSmart may be subject to claims that will not be discharged in the Chapter 11 Case, which could have a material adverse effect on its results of operations and profitability.
The Bankruptcy Code generally provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation and specified debts arising afterwards. With few exceptions, all claims that arose prior to the Commencement Date and before confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any material claims not ultimately discharged by the Bankruptcy Court could have an adverse effect on ApplianceSmart’s results of operations and profitability.
In certain limited instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert our Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for under a Chapter 11 proceeding because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
ApplianceSmart’s, and our consolidated, financial results may be volatile and may not reflect historical trends.
While in Chapter 11, we expect that ApplianceSmart’s, and our consolidated, financial results may be volatile as asset impairments and dispositions, restructuring activities, contract terminations and rejections, and claims assessments may significantly impact our consolidated financial statements. As a result, our historical financial performance may not be indicative of our financial performance after the Commencement Date. In addition, if ApplianceSmart emerges from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, as a result of revisions to ApplianceSmart’s operating plans pursuant to a plan of reorganization. Moreover, if ApplianceSmart emerges from Chapter 11, we may be required to adopt fresh-start accounting. If fresh-start accounting is applicable, our assets and liabilities will be recorded at fair value as of the fresh-start reporting date. The fair value of our assets and liabilities may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. If fresh-start accounting is required, our financial results after the application of fresh-start accounting may be materially different from historical trends.
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ApplianceSmart may not have sufficient cash to maintain its operations during the Chapter 11 Case or fund its emergence from the bankruptcy.
Because of ApplianceSmart’s financial condition, it will have heightened exposure to, and less ability to withstand, the operating risks that are customary in its industry, such as fluctuations in raw material prices and currency exchange rates. Any of these factors could result in the need for substantial additional funding. A number of other factors, including the Chapter 11 Case, ApplianceSmart’s financial results in recent years and the competitive environment it faces, adversely affect the availability and terms of funding that might be available to ApplianceSmart during, and upon emergence from, Chapter 11. As such, ApplianceSmart may not be able to source capital at rates acceptable to it, or at all, to fund its current operations or our exit from bankruptcy. The inability to obtain necessary additional funding on acceptable terms would have a material adverse impact on ApplianceSmart and on its ability to sustain our operations, both currently and upon emergence from bankruptcy.
A disruption in ApplianceSmart’s relationships with, or in the operations of, any of ApplianceSmart’s key suppliers could cause ApplianceSmart’s, and our, net sales and profitability to decline.
The success of ApplianceSmart’s business and growth strategy depends to a significant degree on the availability of open box and b-line product from our suppliers. ApplianceSmart does not have long-term supply agreements or exclusive arrangements with its any of its suppliers. ApplianceSmart typically orders its inventory through the issuance of individual purchase orders to vendors allowing ApplianceSmart to remain selective of the quality and type of product it purchases. ApplianceSmart has no contractual assurance of the continued supply of merchandise in the amount and assortment currently offered to its customers and may be subjected to rationing by suppliers. In addition, ApplianceSmart relies heavily on a relatively small number of suppliers.
ApplianceSmart’s suppliers also provide it with specific types of marketing allowances and volume rebates. If ApplianceSmart’s suppliers fail to continue these incentives, it could have a materially adverse effect on the breadth at which the Company can achieve brand awareness that translates to net sales.
The financial condition of ApplianceSmart’s suppliers may also adversely affect their access to capital liquidity with which to maintain their inventory, production levels and product quality and to operate their businesses, all of which could adversely affect its supply chain. Negative impacts on the financial condition of any of ApplianceSmart’s suppliers may cause suppliers to reduce their offerings of customer incentives and vendor allowances, cooperative marketing expenditures and product promotions. It may also cause them to change their pricing policies, which could impact the demand for their products.
Risk Factors Specific to Both ApplianceSmart and Vintage Stock
As a seller of certain consumer products, Vintage Stock and ApplianceSmart are subject to various federal, state, and local laws, regulations, and statutes related to product safety and consumer protection.
While we take steps to comply with these laws, there can be no assurance that we will be in compliance, and failure to comply with these laws could result in penalties which could have a negative impact on our business, financial condition and results of operations, cash flows and liquidity. We 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 our suppliers rely on foreign sources to manufacture a portion of the products 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 us, which could lower our sales and profitability.
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If we are unable to renew or enter into new leases on favorable terms, our revenue growth may decline.
All of Vintage Stock’s and ApplianceSmart’s retail stores are located in leased premises. If the cost of leasing existing stores increases, we cannot be certain that we will be able to maintain our existing store locations as leases expire. In addition, we may not be able to enter into new leases on favorable terms or at all, or we may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner. Our revenues and earnings may decline if we fail to maintain existing store locations, enter into new leases, locate alternative sites, or find additional sites for new store expansion.
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 and ApplianceSmart’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 our results of operations.
Our results of operations may fluctuate from quarter to quarter.
Our 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:
• the timing and allocations of new product releases;
• the timing of new store openings or closings;
• shifts in the timing or content or certain promotions or service offerings;
• the costs associated with the exit of unprofitable markets or stores.
These and other factors could affect our business, 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 effectively manage our new store openings could lower our sales and profitability.
Our growth strategy depends in part upon opening new stores and operating them profitably. Our 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:
• hire and train skilled associates;
• integrate new stores into our existing operations; and
• 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
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and replenish stores to keep our stores in stock at optimum levels and to move inventory efficiently. If our inventory or management information systems fail to adequately perform these functions, 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 of if these centers were unable to accommodate the continued store growth in a particular region, our business would suffer.
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.
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. If we were to borrow against our float rate credit facilities, a significant increase in interest rates could have an 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 the difficult economic conditions have improved in the U.S., there may be additional downturns that could cause the industry to deteriorate in the foreseeable future. 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.
We may be unable to predict customer preferences or demand accurately, or to respond to technological developments.
We operate in a market sector where demand is strongly influenced by rapidly changing customer preferences as to product design and technical features. Failure to quickly and effectively respond to changing customer demand or technological developments could materially adversely affect our business, financial condition and results of operations.
We face intense competition in the flooring industry that could decrease demand for our products or force us to lower prices, which could have a material adverse effect on our business.
The floor covering industry is highly competitive. We face competition from a number of manufacturers and independent distributors, many of whom have more resources than us. Maintaining our competitive position may require substantial investments in our product development efforts, manufacturing facilities, distribution network
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and sales and marketing activities. Competitive pressures may also result in decreased demand for our products or force us to lower prices. Moreover, a strong U.S. dollar combined with lower fuel costs may contribute to more attractive pricing for imports that compete with our products, which may put pressure on our pricing. The occurrence of one or more of these factors could materially adversely affect our business, financial condition and results of operations.
In periods of rising costs, we 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 our business.
The prices of raw materials and fuel-related costs vary significantly with market conditions. Although we generally attempt to pass on increases in raw material, energy and fuel-related costs to our customers, our ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for our 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 our business, financial condition and results of operations.
RISKS RELATED TO OUR STEEL MANUFACTURING SEGMENT
The demand of our 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.
The products manufactured by Precision Marshall 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 to offshore countries, then the need of our products to make tools and dies will decrease, which will have a negative impact on our business, financial condition (including, without limitation, our 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.
Limited availability, or volatility in prices of raw materials and energy may constrain operating levels and reduce profit margins.
Precision Marshall 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), 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 our own raw materials to our plants. In addition, if the already limited number of suppliers consolidate, it would limit our negotiating power for raw material purchases.
Precision Marshall has in the past, and may in the future continue to, purchase raw materials from sources even when they are above market cost. 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 profit margins on indexed contracts and spot business could be reduced.
Shortages of qualified and trainable labor, increased labor costs, or our failure to attract and retain other highly qualified personnel in the future could disrupt our operations and adversely affect our financial results.
We depend on skilled or trainable drug free labor for the manufacture of our products. Our continued success depends on the active participation of our key employees. Precision Marshall, like other companies that reply on a trained blue-collar workforce receives pressure from other manufactures regarding the labor pool. Precision Marshall, aside from competing with other manufacturers, also competes with non-industrial blue-collar professions
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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.
Precision Marshall has adjusted its business model over time to fully utilize its equipment and manufacturing facility. Our 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 effect Precision’s capability to produce at the level necessary to meet customer demand or at all.
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. We are also exposed to similar risks involving major customers and suppliers such as force majeure 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.
Our manufacturing employees are covered by a collective bargaining agreement through the United Steel Workers and our warehouse and distribution workforce employees are covered by a collective bargaining agreement through the International Aeronautical and Machinists Union. These agreements are scheduled to expire in December 2020 and April 2021, respectively. Future negotiations prior to the expiration of our collective agreements may result in labor unrest for which a strike or work stoppage is possible. Strikes and/or work stoppages could negatively affect our operational and financial results and may increase operating expenses.
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 business depends on the transportation of a large number of products. We rely primarily on third parties for transportation of our products as well as delivery of our 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 results of operations as we may not be able to pass such cost increases on to our customers.
If any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture and deliver our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at a reasonable cost or at any cost as there is a limited number of suppliers worldwide for our raw material.
In addition, such failure of a third-party transportation provider could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our financial position and results of operations.
We face risks relating to changes in U.S. and foreign tariffs, trade agreements, laws, and policies
Our business depends on manufacturing products in North America. If tariffs rise unproportionally on raw materials compared to finished tools, we are at risk for manufacturers to purchase the products that we sell 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. Precision Marshall 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 business is reliant on certain other industries that are cyclical in nature. We sell to the 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 we serve could adversely affect our financial position, results of operations and cash flows.
We are subject to foreign currency risks, which may negatively impact our profitability and cash flows.
The purchases raw material and certain necessary equipment are transactions often take place with foreign countries. The weakening of the of the U.S. dollar against the euro negatively affects our price for which we pay for raw material and equipment. Volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported financial results and condition.
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, Precision Marshall 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 we will be able to maintain and renew the approvals, licenses and permits we currently hold. 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 USA. Tightening of those requirements in the EU and/or sources in the USA 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
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 31, 2020, Isaac Capital Group LLC (“ICG”), together with Jon Isaac, our President and CEO and the President and sole member of ICG, control approximately 46.2% 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 shareholder 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 that which you paid for it.
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 that which you paid for it.
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:
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• cumulative voting is not allowed in the election of our directors.
These provisions of Nevada law and our articles 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.
ITEM 2.Properties
At September 30, 2020, we leased approximately 16,500 square feet of space located in Las Vegas, Nevada which we utilize as principal executive and administrative offices.
Retail Segment
Vintage Stock
At September 30, 2020, Vintage Stock leased all 62 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 1 EntertainMart
Idaho 1 EntertainMart
Illinois 1 Vintage Stock
Kansas 6 Vintage Stock
Missouri 18 Vintage Stock, V-Stock and EntertainMart
New Mexico 1 EntertainMart
Oklahoma 13 Vintage Stock
Texas 17 Movie Trading Co. and EntertainMart
Utah 2 EntertainMart
ApplianceSmart
At September 30, 2020, ApplianceSmart leased one retail store in Ohio.
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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, 2020:
Property Location
Corporate Offices and Warehouse Chatsworth, Georgia
Sales Offices, Showroom and Warehouse Chatsworth, Georgia
Warehouse Chatsworth, Georgia
Distribution Chatsworth, Georgia
Office and Storage Chatsworth, Georgia
Tufting Department Chatsworth, Georgia
Eton Tufting Facility Eton, Georgia
Machine Storage and Forklift Chatsworth, Georgia
Storage and Extrusion Dalton, Georgia
Twist and Heat Set Facility Chatsworth, Georgia
Yarn Processing Facility Dalton, Georgia
Yarn Winding Facility Chatsworth, Georgia
Printing Facility Calhoun, Georgia
Steel Manufacturing Segment
At September 30, 2020, Precision Marshall leases the buildings for its two locations in Illinois and Pennsylvania. Precision Marshall’s corporate office is located in Pennsylvania.
ITEM 3.Legal Proceedings
The information in response to this item is included in Note 14, 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
On September 30, 2020, there were (i) 195 holders of record of our common stock, (ii) 29 holders of record of our Series E Preferred Stock, and (iii) 2 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, 2020, our Series E Preferred Stock had 47,840 shares issued outstanding. Each share of Series E Preferred Stock is entitled to and receives a dividend of $0.015 per year. At September 30, 2020, the Company had accrued and unpaid preferred stock dividends totaling an aggregate of approximately $2 thousand.
Our Series B Preferred Stock, as of September 30, 2020 had 214,244 shares issued and outstanding. The shares, as a series, have waived their rights to dividends and are not entitled to dividends, unless they are declared by the Board of Directors are entitled to receive a dividend in the aggregate amount for all then-issued and outstanding shares of Series B Convertible Preferred Stock $1.00.
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,2 thousand 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, the Board approved an extension of the term of the repurchase plan from February 15, 2021 to June 1, 2021.The following table provides information regarding repurchases of common stock during the three months ended September 30, 2020.
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, 2020, 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, 2020 (this “Form 10-K”).
Stated in thousands of US dollars, except per share amounts.
Note about Forward-Looking Statements
This Form 10-K includes statements that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “intends,” “plans,” “expects,” or “anticipates,” and do not reflect historical facts.
Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to: (i) statements that are based on current projections and expectations about the markets in which we operate, (ii) statements about current projections and expectations of general economic conditions, (iii) statements about specific industry projections and expectations of economic activity, (iv) statements relating to our future operations, prospects, results, and performance, (v) statements about the Chapter 11 Case, (vi) statements that the cash on hand and additional cash generated from operations together with potential sources of cash through issuance of debt or equity will provide the Company with sufficient liquidity for the next 12 months, and (vii) statements that the outcome of pending legal proceedings will not have a material adverse effect on business, financial position and results of operations, cash flow or liquidity.
Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results, future performance and capital requirements and cause them to materially differ from those contained in the forward-looking statements include those identified in this Form 10-K under Item 1A “Risk Factors”, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors 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, Manufacturing, and Corporate & Other.
Under the Live Ventures brand, we seek opportunities to acquire profitable and well-managed companies. We will work closely with consultants who will 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 offering 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 all available 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 62 retail locations strategically positioned across Arkansas, Colorado, Idaho, Illinois, Kansas, Missouri, New Mexico, Oklahoma Texas and Utah.
ApplianceSmart
At September 30, 2020, ApplianceSmart Affiliated Holdings LLC and ApplianceSmart, Inc. (collectively “ApplianceSmart”) operated one store in Ohio. ApplianceSmart is a household appliance retailer with two product categories: one consisting of typical and commonly available, innovative appliances, and the other consisting of affordable value-priced, niche offerings such as close-outs, factory overruns, discontinued models, and special-buy appliances, including open box merchandise and others.
On December 9, 2019, ApplianceSmart filed a voluntary petition (the “Chapter 11 Case”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The bankruptcy affects Live Ventures’ indirect subsidiary ApplianceSmart only and does not affect any other subsidiary of Live Ventures, or Live Ventures itself. ApplianceSmart expects to continue to operate its business in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In addition, the Company reserves its right to file a motion seeking authority to use cash collateral of the lenders under the reserve-based revolving credit facility. The case is being administrated under the caption In re: ApplianceSmart, Inc. (case number 19-13887). Court filings and other information related to the Chapter 11 Case are available at the PACER Case Locator website for those registered to do so or at the Courthouse located at One Bowling Green, Manhattan, New York 10004.
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. We focus on the residential, niche commercial, and hospitality end-markets and serve thousands of customers.
Since commencing operations in 1995, Marquis has built a strong reputation for outstanding value, styling, and customer service. Its innovation has yielded products and technologies that differentiate its brands in the flooring marketplace. Marquis’s state-of-the-art operations enable high quality products, unique customization, and exceptionally short lead-times. Furthermore, the Company has recently invested in additional capacity to grow several attractive lines of business, including printed carpet and yarn extrusion.
Steel Manufacturing Segment
Our Steel Manufacturing segment is comprised of Precision Industries, Inc. (“Precision Marshall”).
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Precision Marshall is the North American leader in providing and manufacturing pre-finished de-carb free tool and die steel. For over 70 years, Precision Marshall has served steel distributors through quick and accurate service. Precision Marshall has led the industry with exemplary availability and value-added processing that saves distributors time and processing costs.
Founded in 1948, Precision Marshall “The Deluxe Company” has built a reputation of high integrity, speed of service and doing things the “Deluxe Way”. The term Deluxe refers to all aspects of the product and customer service to be head and shoulders above the rest. From order entry to packaging and delivery, Precision Marshall makes it easy to do business and backs all products and service with a guarantee.
Precision Marshall provides four key products to over 500 steel distributors in four product categories: Deluxe Alloy Plate, Deluxe Tool Steel Plate, Precision Ground Flat Stock, and Drill Rod. With over 5,000 distinct size grade combinations in stock every day, Precision Marshall arms tool steel distributors with deep inventory availability and same day shipment to their place of business or often ships direct to their customer saving time and handling.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of these statements requires us to make judgments and estimates. Some accounting policies have a significant and material impact on amounts reported in these financial statements. Estimates and assumptions are based on management's experience and other information available prior to the issuance of our financial statements. Our actual realized results may differ materially from management’s initial estimates as reported. Our critical and significant accounting policies include Trade and Other Receivables, Inventories, Goodwill, Revenue Recognition, Fair Value Measurements, Stock Based Compensation, Income Taxes, Segment Reporting and Concentrations of Credit Risk.
Results of Operations
The following table sets forth certain statement of income items and as a percentage of revenue, for the periods indicated:
Year Ended Year Ended
% of Total % of Total
Revenue Revenue
Statement of Income Data:
Gain on lease settlement, net 307 0.2 % — —
Bargain purchase gain 1,507 0.8 % — —
Provision (benefit) for income taxes 4,957 2.6 % (1,625 ) (0.8 )%
Net loss attributable to non-controlling interest 268 0.1 % — —
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The following table sets forth revenues by segment:
Year Ended Year Ended
Net % of Total Net % of Total
Revenue Revenue Revenue Total Revenue
Revenue
Retail
Steel manufacturing 7,962 4.2 % — —
The following table sets forth gross profit and gross profit as a percentage of total revenue by segment:
Year Ended Year Ended
Gross Gross Profit % Gross Gross Profit %
Profit of Total Revenue Profit of Total Revenue
Gross Profit
Retail
Steel manufacturing 1,163 0.6 % — —
Revenue
Revenue remained relatively flat at $191,720 for the year ended September 30, 2020 as compared to the year ended September 30, 2019 of $193,288.
Retail: The decrease in Movies, Music, Games and Other of $7,359 was primarily due to a lack of new content related to video games and lack of new movie releases as compared to the prior year. Appliance revenue decreased $19,779 due to the closure of certain retail locations were incurring continual decreases in sales resulting from increased competition.
Flooring Manufacturing revenues increased a total of $17,691 as a result of the development of new products and the acquisition of Lonesome Oak in January 2020.
Steel Manufacturing revenues were $7,962 represents revenues for the period of July 14, 2020 through September 30, 2020 due to the acquisition of Precision Marshall on July 14, 2020.
Cost of Revenue
Cost of revenue decreased $6,012, or 4.9% for the year ended September 30, 2020 as compared to the year ended September 30, 2019, primarily due primarily due primarily due to the closure of certain ApplianceSmart retail locations during 2019 and other cost saving measures, partially offset by the acquisitions of Lonesome Oak and Precision Marshall.
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General and Administrative Expense
General and Administrative expense decreased $9,279 or 17.6%, for the year ended September 30, 2020 as compared to the year ended September 30, 2019, primarily due to lower costs resulting from the decreased rent and employee costs associated with permanent closure of certain ApplianceSmart retail locations and the temporary closure of Vintage Stock retail locations due to COVID-19.
Selling and Marketing Expense
Selling and marketing expense decreased 3,443 or 23.3% for the year ended September 30, 2020 as compared to the year ended September 30, 2019 primarily due to reduced marketing efforts related to the permanent ApplianceSmart retail location closures and reduced travel activities due to COVID-19.
Interest Expense, net
Interest expense, net decreased $1,061 or 16.8%, for the year ended September 30, 2020 as compared to the year ended September 30, 2019, due to a decrease in certain interest rates and the continued efforts to repay certain debt obligations, partially offset by debt incurred as part of the Precision acquisition during July 2020.
Gain on Lease Settlement, net
During the year ended September 30, 2020, the Company recorded a net gain on lease settlement of $307 which consisted of impairment charges of $614 related to the decision to close additional ApplianceSmart retail locations resulting in a decrease to the associated right of use asset related to these leases, offset by a gain on lease settlement of $921 resulting from the extinguishment of the lease liability associated with the closed retail locations. There were no such transactions during the year ended September 30, 2019.
Bargain Purchase Gain
The bargain purchase gain of $1,507 for year ended September 30, 2020 was related to the acquisition of Precision Marshall. There were no similar bargain purchase gains for the year ended September 30, 2019.
Impairment Charges
Impairment charges of $525 for the year ended September 30, 2020 were related to the disposal of fixed assets that were no longer in use. Impairment charges of $3,222 for the year ended September 30, 2019, were related to the write down of intangibles associated with the ApplianceSmart customer list and trade names due to the bankruptcy filing in December 2019, the write down of lease intangibles related to the ApplianceSmart retail locations closed during the period and the write down of software that is no longer in use.
Provision (Benefit) for Income Taxes
For the year ended September 30, 2020, the Company recorded an income tax provision of $4,957 primarily due to the net income in the current period as compared to a tax benefit of $1,625 the year ended September 30, 2019. The rate for the year ended September 30, 2020 was impacted by state income taxes, net of federal benefit and non-deductible items related to the acquisition of Precision Marshall. The rate for the year ended September 30, 2019 was impacted by a significant change in valuation allowances, state income tax rates, net of federal benefit and carryforward adjustments.
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Results of Operations by Segment
Flooring Steel Corporate & Flooring Steel Corporate &
Retail Segment
Segment results for Retail include Vintage Stock and ApplianceSmart. Revenue for the year ended September 30, 2020 decreased $27,021, or 26.9%, as compared to the prior year, primarily due to the closure of certain ApplianceSmart retail locations during 2019. Cost of revenue for the year ended September 30, 2020 decreased $22,647 or 40.9%, as compared to the prior year period, primarily due to the closure of certain ApplianceSmart retail locations during 2019 and other cost saving measures. Operating income for the year ended September 30, 2020 was $8,737, as compared to operating loss of $4,103 the prior year period, primarily due to the decrease in general and administrative expense of $11,847 and $5,367 in sales and marketing expenses due to the closure of certain ApplianceSmart retail locations during 2019 and other cost saving measures.
Flooring Manufacturing Segment
Segment results for Flooring Manufacturing includes Marquis. Revenue for the year ended September 30, 2020 increased $17,691, or 19.2%, as compared to the prior year period, due to increased sales of carpets and hard surface products related to development of new products and the acquisition of Lonesome Oak, partially offset by a decrease in synthetic turf products due to the sale of equipment for this division during December 2018. Cost of revenue for the year ended September 30, 2020 increased proportionately with revenue, as compared to the prior year period. Operating income for the year ended September 30, 2020 increased $4,347, or 37.0%, as compared to the prior year period.
Steel Manufacturing Segment
Segment results for Steel Manufacturing includes Precision Marshall. The Company completed the acquisition of Precision Marshall in July 2020. The results of operations represent the period of July 2020 to September 2020.
Corporate and Other Segment
Segment results for Corporate and Other includes our directory services business. Revenues and operating income 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.
Liquidity and Capital Resources
Overview
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under our asset-based revolver lines of credit will provide sufficient liquidity to fund our operations, pay our scheduled loan payments, ability to repurchase shares under our share buyback program, and pay dividends on our shares of Series E Preferred Stock as declared by the Board of Directors, for at least the next 12 months.
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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 utilizes, (iii) Enica Revolver Loan (“Encina Revolver”) utilized by Precision Marshall. Additionally, we have an unsecured revolving line of credit with Isaac Capital Group (“ICG Revolver”) utilized by the Company.
As of September 30, 2020, we had total cash on hand of $8,984 and an additional $28,673 of available borrowing under our revolving credit facilities. As we continue to pursue acquisitions and other strategic transactions to expand and grow our business, we regularly monitor capital market conditions and may raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Coronavirus
In March 2020, there was a global outbreak of COVID-19 (Coronavirus) that has resulted in changes in global supply of certain products. The pandemic is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, the company’s supply chain partners, its employees and customers, customer sentiment in general, and traffic within shopping centers, and, where applicable, malls, containing its stores. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state, and local authorities to avoid large gatherings of people or self-quarantine are continuing to increase, which has already affected, and may continue to affect, traffic to the stores. As of March 31, 2020, Vintage Stock had closed all of its retail locations in response to the crisis. Beginning May 1, 2020, Vintage Stock began to reopen certain locations in compliance with government regulations. Additionally, as of June 30, 2020, all Vintage Stock retail locations were reopened while maintaining compliance with government mandates. The Company is unable to predict if additional periods of store closures will be needed or mandated. During March and April 2020, Marquis conducted rolling layoffs for certain employees, however, during May 2020, most employees have returned to their respective locations. Continued impacts of the pandemic could materially adversely affect the near-term and long-term revenues, earnings, liquidity, and cash flows, and may require significant actions in response, including but not limited to, employee furloughs, reduced store hours, store closings, expense reductions or discounting of pricing of products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on the business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that the Company is not aware of currently.
Sources of Liquidity
We utilize cash on hand and cash generated from operations and have funds available to us under our four revolving loan facilities to cover normal and seasonal fluctuations in cash flows and to support our various growth initiatives. Our cash and cash equivalents are carried at cost and consist primarily of demand deposits with commercial banks.
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BofA Revolver
Marquis may borrow funds for operations under the BofA Revolver subject to availability as described in Note 7 to the consolidated financial statements. The following tables summarize the BofA Revolver for the year ended and as of September 30, 2020:
During the year ended September 30, 2020
Cumulative borrowing during the period $ 121,924
Cumulative repayment during the period 123,073
Maximum borrowed during the period 11,347
Weighted average interest for the period 3.14 %
Total availability $ 21,732
Total outstanding -
Encina Revolver
Precision may borrow funds for operations under the Encina Revolver subject to availability as described in Note 7 to the consolidated financial statements. The following tables summarize the Encina Revolver for the period of July 14, 2020 through September 30, 2020 and as of September 30, 2020:
During the period of July 14, 2020 through September 30, 2020
Cumulative borrowing during the period $ 22,088
Cumulative repayment during the period 7,203
Maximum borrowed during the period 14,920
Weighted average interest for the period 6.50 %
Total availability $ 421
TCB Revolver
Vintage Stock may borrow funds for operations under the TCB Revolver subject to availability as described in Note 7 to the consolidated financial statements. The following tables summarize the TCB Revolver for the year ended and as of September 30, 2020:
During the year ended September 30, 2019
Cumulative borrowing during the period $ 66,362
Cumulative repayment during the period 69,837
Maximum borrowed during the period 11,799
Weighted average interest for the period 3.29 %
Total availability $ 5,520
Total outstanding 7,115
ICG Revolver
The Company may borrow funds for operations under the ICG Revolver subject to availability as described in Note 7 to the consolidated financial statements. As of September 30, 2020, the Company had not borrowed any funds and the full amount of $1,000 was available.
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Loan Covenant Compliance
We are in compliance with all loan covenants under our existing revolving and other loan agreements as of September 30, 2020, with the exception of covenants associated with the Crossroads Revolver (Note 7 to the Consolidated Financial Statements).
Payroll Protection Program
On May 4, 2020, Marquis entered into a promissory note (the “Marquis Promissory Note”) with Bank of America, N.A. that provides for a loan in the amount of $4,768 (the “Marquis PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The Marquis PPP Loan matures two years from the funding date of the Marquis PPP Loan and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred for six months after the date of disbursement. The Marquis Promissory Note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the use of Marquis PPP Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. On May 5, 2020, Marquis received the funds from the PPP Loan. During December 2020, Marquis completed its application for forgiveness of the Marquis PPP Loan. There is no assurance that the Marquis PPP Loan will be forgiven.
On April 27, 2020, Precision Marshall entered into a promissory note (the “Precision Promissory Note”) with Citizens Bank, N.A. that provides for a loan in the amount of $1,382 (the “Precision PPP Loan”). The Precision PPP Loan matures two years from the funding date of the Precision PPP Loan and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred until either the date the SBA remits the borrower’s loan forgiveness amount to the lender or ten months after the end of the borrower’s loan forgiveness covered period. The Precision Promissory Note contains events of default and other provisions customary for a loan of this type. On April 27, 2020, Precision received the funds from the PPP Loan. The Precision PPP Loan remained with Precision under the terms of the acquisition. During November 2020, Precision completed its application for forgiveness of the Precision PPP Loan. There is no assurance that the Precision PPP Loan will be forgiven.
Cash Flows from Operating Activities
The Company’s cash and cash equivalents at September 30, 2020 was $8,984 compared to $2,681 at September 30, 2019, an increase of $6,303. Net cash provided by operations was $28,791 for the year ended September 30, 2020 as compared to net cash provided by operations of $19,053 for the same period in 2019 primarily due to the results of operations discussed above.
Our primary source of cash inflows is from customer receipts from sales on account, factor accounts receivable proceeds 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 $8,776 for the year ended September 30, 2020 consisted of purchases of property and equipment and the acquisitions of Lonesome Oak and Precision Marshall. Our cash flows provided by investing activities of $100 for the year ended September 30, 2019 consisted of proceeds from the sale of equipment, offset by purchases of equipment and intangibles.
Cash Flows from Financing Activities
Our cash flows used in financing activities during the year ended September 30, 2020 consisted of $6,768 from the issuance of notes payable, offset by $5,974 in net payments under revolver loans, purchase of Series E preferred treasury stock and common treasury stock of $1,663 and payment on notes payable of $12,709.
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Our cash flows used in financing activities during the year ended September 30, 2019 consisted of $913 from the issuance of notes payable, $7,034 in net payments under revolver loans, payment of debt issuance costs of $223, purchase of treasury stock $888 and payment on notes payable $11,982.
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 $38,566 as of September 30, 2020 as compared to $20,727 as of September 30, 2019. Changes in working capital were primarily attributable to the acquisitions of Lonesome Oak and Precision Marshall and an increase in short term lease obligations due to the adoption of the new lease accounting standard.
Equipment Loans
Marquis has a master agreement and separate loan schedules (the “Equipment Loans”) with Banc of America Leasing & Capital, LLC which provide:
Note #1 is $5,000, secured by equipment. The Equipment Loan #1 is due September 2021, payable in 59 monthly payments of $84 beginning September 2016, with a final payment in the sum of $584, bearing interest at 3.9% per annum.
Note #3 is $3,680, secured by equipment. The Equipment Loan #3 is due December 2023, payable in 84 monthly payments of $52 beginning January 2017, bearing interest rate at 4.8% per annum.
Note #4 is $1,095, secured by equipment. The Equipment Loan #4 is due December 2023, payable in 81 monthly payments of $16 beginning April 2017, bearing interest at 4.9% per annum.
Note #5 is $3,932, secured by equipment. The Equipment Loan #5 is due December 2024, payable in 84 monthly payments of $55 beginning January 2018, bearing interest at 4.7% per annum.
Note #6 is $913, secured by equipment. The Equipment Loan #6 is due July 2024, payable in 60 monthly payments of $14 beginning August 2019, with a final payment of $197, bearing interest at 4.7% per annum.
Note #7 is $5,000, secured by equipment. The equipment loan #7 is due February 2027, payable in 84 monthly payments of $59 beginning March 2020, with the final payment of $809, bearing interest at 3.2% per annum.
Note #8 is $3,369, secured by equipment. The equipment loan #8 is due September 2027, payable in 84 monthly payments of $46 beginning October 2020, bearing interest at 4.0%.
At September 30, 2020 we owed $1,229, $1,862, $572, $2,538, $758, $4,681 and $3,091 on Equipment Loan Note #1 and Note #3 through Note #8, respectively. At September 30, 2019 we owed $2,057, $2,379, $731, $3,065 and $891 on Equipment Loan Note #1 and Note #3 through Note #6, respectively.
Lonesome Oak Equipment Loan
In connection with the acquisition of Lonesome Oak, the Company assumed an unsecured note in the amount payable to Extruded Fibers Inc. The note is noninterest bearing, with principal payable monthly in the amount of $100 for 36 months, beginning March 31, 2020 maturity date March 3, 2023.
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Real Estate Financing
During June 2016, we entered into a transaction with Store Capital Acquisitions, LLC. The transaction included a sale-leaseback of land owned by Marquis and a loan secured by the improvements on such land. The total aggregate proceeds received from the sale of the land and the loan was $10,000, which consisted of $644 from the sale of the land and a note payable of $9,356. In connection with the transaction, we entered into a lease with a 15-year term commencing on the closing of the transaction, which provides the Company an option to extend the lease upon the expiration of its term. The initial annual lease rate is $60. The proceeds from this transaction were used to pay down the BofA Revolver and Bank of America Term loans, related party loan, as well as to purchase a building from the previous owners of Marquis that was not purchased in the July 2015 transaction. At September 30, 2020 and September 30, 2019, we had $9,243 and $9,274 outstanding, respectively, on the Store Capital Acquisition, LLC loan. At September 30, 2020 and September 30, 2019, there are un-amortized debt issuance costs associated with this loan in the amounts of $411 and $422, respectively.
During July 2020, in connection with our acquisition of Precision Marshall, Precision Marshall entered into a transaction with Harold St Interests LLC. The transaction included a sale-leaseback of land owned by Precision Marshall. The total aggregate proceeds received from the sale of the land was $6,000. In connection with the transaction, we entered into a lease with a 20-year term commencing on the closing of the transaction, which provides the Company an option to extend the lease upon the expiration of its term. The initial annual lease rate is $485. The proceeds from this transaction were used to partially fund the acquisition of Precision Marshall.
Future Sources of Cash; New Products and Services
We may require additional debt financing and/or capital to finance new acquisitions, refinance existing indebtedness or other strategic investments in our business. Other sources of financing may include stock issuances and additional loans; or other forms of financing. Any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders.
Contractual Obligations
The following table summarizes our contractual obligations consisting of operating lease agreements and debt obligations and the effect such obligations are expected to have on our future liquidity and cash flows:
Payments due by Period
Off-Balance Sheet Arrangements
At September 30, 2020, 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, 2020, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required. We believe we are not subject in any material way to other forms of market risk, such as foreign currency exchange risk or foreign customer purchases or commodity price risk.
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ITEM 8. Financial Statement and Supplementary Data
LIVE VENTURES INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page
Reports of Independent Registered Public Accounting Firm
Report of WSRP, LLC F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2020 and 2019 F-2
Notes to Consolidated Financial Statements F-7
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Live Ventures Incorporated
Las Vegas, Nevada
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Live Ventures Incorporated (the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended September 30, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended September 20, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our 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 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 financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ WSRP, LLC
We have served as the Company’s auditor since 2018.
Salt Lake City, Utah
January 13, 2021
F-1
LIVE VENTURES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Assets
Income taxes receivable — 235
Prepaid expenses and other current assets 1,778 1,692
Debtor in possession assets 520 —
Right of use asset - operating leases 30,894 —
Deposits and other assets 223 90
Liabilities and Stockholders' Equity
Liabilities:
Income taxes payable 736 —
Current portion of long-term debt 11,986 7,897
Current portion of notes payable related parties 1,297 —
Current portion of lease obligations - operating leases 7,176 —
Debtor in possession liabilities 12,228
Long-term debt, net of current portion 63,390 47,819
Lease obligation long term - operating leases 28,101 —
Notes payable related parties, net of current portion 4,000 4,826
Other non-current obligations 734 654
Commitments and contingencies - Note 14
Stockholders' equity:
Equity attributable to Live stockholders 43,940 34,129
Non-controlling interest (268 ) —
Total liabilities and stockholders' equity $ 197,259 $ 122,453
The accompanying notes are an integral part of these consolidated financial statements.
F-2
LIVE VENTURES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(dollars in thousands, except per share)
Years Ended September 30,
Operating expenses:
Other (expense) income:
Gain on lease settlement, net 307 —
Bargain purchase gain 1,507 —
Total other (expense) income, net (4,806 ) (8,893 )
Income (loss) before income taxes 15,616 (5,637 )
Provision (benefit) for income taxes 4,957 (1,625 )
Net loss attributable to non-controlling interest 268 —
Net income (loss) attributable to Live stockholders $ 10,927 $ (4,012 )
Income (loss) per share:
Weighted average common shares outstanding:
Dividends declared - Series B convertible preferred stock $ — $ —
Dividends declared - Series E convertible preferred stock $ 1 $ 1
Dividends declared - Common stock $ — $ —
The accompanying notes are an integral part of these consolidated financial statements.
F-3
LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Series E preferred stock dividends — — — — — — — — — (1 ) — (1 )
Stock based compensation — — — — — — 142 — — — — 142
Fair value of warrant extension adjustment — — — — — — 128 — 128
Purchase of common treasury stock — — — — (119,238 ) — — (888 ) — — — (888 )
Net loss — — — — — — — — — (4,012 ) — (4,012 )
Series E preferred stock dividends — — — — — — — — — (1 ) — (1 )
Stock based compensation — — — — — — 86 — — — — 86
Fair value of warrant extension adjustment — — — — — — 462 — — — — 462
Purchase of common treasury stock — — — — (236,908 ) — — (1,660 ) — — — (1,660 )
The accompanying notes are an integral part of these consolidated financial statements.
F-4
LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended September 30,
Operating activities:
Depreciation and amortization 5,862 5,673
Gain on lease settlement, net (307 ) —
Gain on bargain purchase of acquisition (1,507 ) —
(Gain) Loss on disposal of property and equipment — 1,063
Charge off and amortization of debt issuance cost 471 283
Stock based compensation expense 86 142
Warrant extension fair value adjustment 462 128
Amortization of right of use assets 1,461 —
Deferred rent — 274
Change in reserve for uncollectible accounts 421 (589 )
Change in reserve for obsolete inventory (139 ) 665
Change in deferred income taxes 4,069 (1,648 )
Changes in assets and liabilities:
Prepaid expenses and other current assets — 931
Deposits and other assets 128 193
Income taxes payable 971 14
Net cash provided by operating activities 28,791 19,053
Investing activities:
Purchase of intangible assets (4 ) (222 )
Proceeds from the sale of property and equipment — 2,701
Purchases of property and equipment (3,882 ) (2,379 )
Lonesome Oak acquisition (550 ) —
Precision Marshall acquisition (4,340 ) —
Net cash provided by (used in) investing activities (8,776 ) 100
Financing activities:
Net borrowings (payments) under revolver loans (5,974 ) (7,034 )
Payments of debt issuance costs — (223 )
Purchase of Series E preferred treasury stock (3 ) —
Proceeds from issuance of notes payable 4,768 913
Purchase of common treasury stock (1,660 ) (888 )
Proceeds from (payments of) related party notes payable 2,000 (661 )
Debtor in possession cash (134 ) —
Net cash used in financing activities (13,712 ) (19,214 )
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)