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, 2023, 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, 2023 (this “Form 10-K”).
The following discussion includes forward-looking statements. Please refer to the Forward-Looking Statements section of this Form 10-K for important information about these types of statements.
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 five segments to our business: Retail-Entertainment, Retail-Flooring, Flooring Manufacturing, Steel Manufacturing, and Corporate & Other.
Under the Live Ventures brand, we seek opportunities to acquire profitable and well-managed companies. We work closely with consultants who help us identify target companies that fit within the criteria we have established for opportunities that will provide synergies with our businesses.
Our principal offices are located at 325 E. Warm Springs Road, Suite 102, Las Vegas, Nevada 89119, our telephone number is (702) 939-0231, and our corporate website (which does not form part of this report Form 10-K) is located at www.liveventures.com. Our common stock trades on the Nasdaq Capital Market under the symbol “LIVE”.
Retail-Entertainment Segment
Our Retail-Entertainment Segment is composed of Vintage Stock, Inc., doing business as Vintage Stock, V-Stock, Movie Trading Company and EntertainMart (collectively, “Vintage Stock”).
Vintage Stock is an award-winning specialty entertainment retailer that offers a large selection of entertainment products, including new and pre-owned movies, video games and music products, as well as ancillary products, such as books, comics, toys and collectibles, in a single location. With its integrated buy-sell-trade business model, Vintage Stock buys, sells and trades new and pre-owned movies, music, video games, electronics and collectibles through 70 retail locations strategically positioned across Arkansas, Colorado, Idaho, Illinois, Kansas, Missouri, Nebraska, New Mexico, Oklahoma, Texas, and Utah.
Retail-Flooring Segment
Our Retail-Flooring Segment is composed of Flooring Liquidators, Inc. (“Flooring Liquidators”).
Flooring Liquidators is a leading retailer and installer of flooring, carpeting, and countertops to consumers, builders, and contractors in California and Nevada, operating 19 warehouse-format stores and design centers. Over the years, the company has established a strong reputation for innovation, efficiency and service in the home renovation and improvement market. Flooring Liquidators serves retail and builder customers through two businesses: retail customers through its Flooring Liquidators retail stores, and builder and contractor customers through Elite Builder Services, Inc.
Flooring Manufacturing Segment
Our Flooring Manufacturing segment is comprised of Marquis Industries, Inc. (“Marquis”).
Marquis is a leading carpet manufacturer and distributor of carpet and hard-surface flooring products. Over the last decade, Marquis has been an innovator and leader in the value-oriented polyester carpet sector, which is currently the market’s fastest-growing fiber category. Marquis focuses on the residential, niche commercial, and hospitality end-markets and serves thousands of customers.
Since commencing operations in 1995, Marquis has built a strong reputation for outstanding value, styling, and customer service. Its innovation has yielded products and technologies that differentiate its brands in the flooring marketplace.
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Marquis’s state-of-the-art operations enable high quality products, unique customization, and short lead-times. Furthermore, the Company has recently invested in additional capacity to grow several attractive lines of business, including printed carpet and yarn extrusion.
On July 1, 2022, Marquis acquired certain assets and intellectual property related to the carpet-backing operations of Better Backers, a Georgia corporation.
On September 20, 2023, Marquis acquired the Harris Flooring Group® brands from Q.E.P., a designer, manufacturer, and distributor of a broad range of best-in-class flooring and installation solutions for commercial and home improvement projects.
Steel Manufacturing Segment
Our Steel Manufacturing segment is comprised of Precision Industries, Inc. (“Precision Marshall”), its wholly-owned subsidiary The Kinetic Co., Inc. (“Kinetic”), and Precision Metal Works, Inc. (“PMW”).
Precision Marshall
Precision Marshall is the North American leader in providing and manufacturing, pre-finished de-carb free tool and die steel. For over 75 years, Precision Marshall has served steel distributors through quick and accurate service. Precision Marshall has led the industry with exemplary availability and value-added processing that saves distributors time and processing costs.
Founded in 1948, Precision Marshall “The Deluxe Company” has built a reputation of high integrity, speed of service and doing things the “Deluxe Way”. The term Deluxe refers to all aspects of the product and customer service to be head and shoulders above the rest. From order entry to packaging and delivery, Precision Marshall makes it easy to do business and backs all products and service with a guarantee.
Precision Marshall provides four key products to over 500 steel distributors in four product categories: Deluxe Alloy Plate, Deluxe Tool Steel Plate, Precision Ground Flat Stock, and Drill Rod. With over 5,000 distinct size grade combinations in stock every day, Precision Marshall arms tool steel distributors with deep inventory availability and same day shipment to their place of business or often ships direct to their customer saving time and handling.
Kinetic
On June 28, 2022, Precision Marshall acquired Kinetic. Kinetic is a highly recognizable and regarded brand name in the production of industrial knives and hardened wear products for the tissue, metals, and wood industries and is known as a one-stop shop for in-house grinding, machining, and heat-treating. Kinetic is headquartered in Greendale, Wisconsin. Kinetic manufactures more than 90 types of knives and numerous associated parts with modifications and customizations available to each. Kinetic employs approximately 100 non-union employees.
PMW
On July 20, 2023, Precision Marshall acquired PMW. Founded nearly 76 years ago in 1947 in Louisville, Kentucky, PMW manufactures and supplies highly engineered parts and components across 400,000 square feet of manufacturing space. PMW offers world-class metal forming, assembly, and finishing solutions across diverse industries, including appliance, automotive, hardware, electrical, electronic, medical products, and devices.
Corporate and Other Segment
Our Corporate and Other segment consists of certain corporate general and administrative costs, Salomon Whitney LLC, which was shut down during the three months ended June 30, 2023, and operations of certain legacy products and service offerings for which we are no longer accepting new customers.
Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as “Adjusted EBITDA,” which is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization, stock-based compensation, and other non-cash or nonrecurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of the business, including the business’ ability to fund acquisitions and other capital expenditures, and to service its debt. Additionally, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate a
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company’s financial performance, subject to certain adjustments. Adjusted EBITDA does not represent cash flows from operations, as defined by GAAP, and should not be construed as an alternative to net income or loss and is indicative neither of our results of operations, nor of cash flows available to fund all of our cash needs. It is, however, a measurement that the Company believes is useful to investors in analyzing its operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities, and other measures of financial performance prepared in accordance with GAAP. As companies often define non-GAAP financial measures differently, Adjusted EBITDA, as calculated by the Company, should not be compared to any similarly titled measures reported by other companies. A reconciliation of net income, the closest GAAP measure, to Adjusted EBITDA is provided below.
Results of Operations
The following table sets forth certain statement of income items and as a percentage of revenue, for the periods indicated (in $000’s):
% of Total Revenue % of Total Revenue
Selected Data
Impairment expense — — % 4,910 1.7 %
Adjusted EBITDA (a)
Retail - Flooring 3,321 —
Adjusted EBITDA as a percentage of revenue
Retail - Entertainment 13.5 % 16.3 %
Retail - Flooring 4.4 % NA
Flooring Manufacturing 9.2 % 13.0 %
Steel Manufacturing 13.7 % 16.9 %
Corporate and other NA NA
Consolidated adjusted EBITDA as a percentage of revenue 8.9 % 13.4 %
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The following table sets forth revenues by segment (in $000’s):
Net Revenue % of Total Revenue Net Revenue % of Total Revenue
Revenue
The following table sets forth gross profit and gross profit as a percentage of total revenue by segment (in $000’s):
Gross Profit
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, Income Taxes, Segment Reporting and Concentrations of Credit Risk.
Revenue
Revenue increased by approximately $68.3 million to approximately $355.2 million for the year ended September 30, 2023 as compared to approximately $286.9 million for the year ended September 30, 2022.
Retail-Entertainment segment revenue decreased by approximately $8.0 million, or 9.3%, to approximately $78.1 million for the year ended September 30, 2023, as compared to $86.2 million for the year ended September 30, 2022, and was primarily due to reduced demand caused by a deterioration in economic conditions.
Our Retail-Flooring segment consists of Flooring Liquidators, which we acquired in January 2023. Revenue for the year ended September 30, 2023 was approximately $75.9 million. During the year ended September 30, 2023, Flooring Liquidators acquired certain assets of Cal Coast Carpet Warehouse, Inc.
Flooring Manufacturing revenue decreased by approximately $21.1 million, or 16.1%, to approximately $109.8 million for the year ended September 30, 2023, as compared to approximately $130.9 million for the year ended September 30, 2022. The decrease was due to reduced customer demand as a result of general economic conditions.
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Steel Manufacturing revenue increased by approximately $28.3 million, or 46.7%, to approximately $88.9 million for the year ended September 30, 2023, as compared to approximately $60.6 million for the year ended September 30, 2022. The increase is primarily due to the acquisitions of Kinetic during June 2022 and PMW during July 2023, partially offset by a decrease of $6.4 million from Precision Marshall. The decrease by Precision Marshall was due to reduced customer demand as a result of general economic conditions.
Corporate and Other revenue decreased by approximately $6.8 million, or 73.2%, to approximately $2.5 million for the year ended September 30, 2023, as compared to approximately $9.3 million for the year ended September 30, 2022. The decrease was primarily due to the shutdown and deconsolidation of SW Financial in May 2023.
Cost of Revenue
Cost of revenue increased by approximately $50.5 million, or 26.7% for the year ended September 30, 2023 as compared to the year ended September 30, 2022. Cost of revenue as a percentage of revenues was 67.5% for the year ended September 30, 2023, as compared to 65.9% for the year ended September 30, 2022. The increase was primarily attributable to inflationary cost increases, as well as the acquisition of PMW, which historically has generated lower margins, partially offset by the acquisition of Flooring Liquidators, which historically has generated higher margins.
General and Administrative Expense
General and administrative expense increased by approximately $32.1 million or 58.9%, for the year ended September 30, 2023 as compared to the year ended September 30, 2022, primarily due to the acquisitions of Kinetic in June 2022, Flooring Liquidators in January 2023, and PMW in July 2023, which collectively contributed $33.8 million of general and administrative expense. General and administrative expense for Flooring Liquidators was approximately $27.6 million for the year ended September 30, 2023, and was primarily comprised of compensation, rent, and amortization expense.
Selling and Marketing Expense
Selling and marketing expense increased by approximately $1.0 million for the year ended September 30, 2023 as compared to the year ended September 30, 2022 primarily due to convention and trade show activity in our Flooring Manufacturing segment and Retail-Flooring segment due to the acquisition of Flooring Liquidators.
Loss on Impairment of Intangibles and Goodwill
For the year ended September 30, 2022, in connection with quantitative impairment testing performed on SW Financial, we recorded a $4.9 million charge for impairment of intangibles and goodwill. This amount includes approximately $3.7 million for full impairment of goodwill, and approximately $1.2 million in partial impairment of customer relationships and trade names. There were no similar impairments recognized during the year ended September 30, 2023.
Interest Expense, net
Interest expense, net increased by approximately $8.5 million or 202.7%, for the year ended September 30, 2023 as compared to the year ended September 30, 2022. The increase is primarily due to increased debt balances related to the acquisitions of Flooring Liquidators, Kinetic, and PMW, and to fund operations, and also higher interest rates during the period.
Gain on Bankruptcy Settlement
During the year ended September 30, 2022, we recorded a gain of approximately $11.4 million due to the discharge of certain obligations relating to the ApplianceSmart bankruptcy. No similar gains or losses were recognized during the year ended September 30, 2023.
Provision for Income Taxes
For the year ended September 30, 2023, the Company recorded a provision for income tax of approximately $1.6 million, compared to a provision for income tax of approximately $6.9 million for the year ended September 30, 2022. The year over year decrease is primarily due to a decrease in net income due to overall reduced customer demand as a result of general economic conditions.
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Results of Operations by Segment
The following table sets forth the results of operations by segment (in $000’s):
For the Year Ended Sep 30, 2023 For the Year Ended Sep 30, 2022
Impairment Expense — — — — — — — — — — 4,910 4,910
Retail-Entertainment Segment
Revenue for the year ended September 30, 2023 decreased by approximately $8.0 million, or 9.3%, as compared to the prior year, primarily due to a deterioration in economic conditions. Cost of revenue as a percentage of revenue was 45.3% for the year ended September 30, 2023, as opposed to 47.1% for the year ended September 30, 2022. This decrease was primarily due to a higher percentage of used product sales, which generate higher margins. General and administrative expenses increased by approximately $440,000, and was primarily attributable to increased compensation and other general and administrative expenses related to a higher volume of retail locations open during the year. Operating income for the year ended September 30, 2023 was approximately $9.3 million, as compared to approximately $12.6 million during the prior year period primarily due to those factors discussed above.
Retail-Flooring Segment
Our Retail-Flooring segment consists of Flooring Liquidators, which we acquired in January 2023. Revenue for the year ended September 30, 2023 was approximately $75.9 million, and cost of revenue as a percentage of revenue was 63.%. Operating loss for the year ended September 30, 2023 was approximately $290,000.
Flooring Manufacturing Segment
Revenue for the year ended September 30, 2023 decreased by approximately $21.1 million, or 16.1%, as compared to the prior year, primarily due to reduced customer demand as a result of general economic conditions. Cost of revenue as a percentage of revenue was 78.2% for the year ended September 30, 2023, as opposed to 75.6% for the year ended September 30, 2022, and was primarily due to increases in raw material costs, as compared to the prior year. General and administrative expenses decreased slightly during the year ended September 30, 2023, as compared to the year ended September 30, 2022. Sales and marketing expenses increased slightly during the year ended September 30, 2023, as compared to the year ended September 30, 2022. Operating income for the year ended September 30, 2023 was approximately $6.1 million, as compared to operating income of approximately $14.2 million for the prior year period primarily due to those factors discussed above.
Steel Manufacturing Segment
Revenue for the year ended September 30, 2023 increased by approximately $28.3 million, or 46.7%, as compared to the prior year, primarily due to the acquisitions of Kinetic during June 2022 and PMW during July 2023. Cost of revenue as a percentage of revenue was 77.5% for the year ended September 30, 2023, as opposed to 72.2% for the year ended September 30, 2022. The increase was primarily due to the acquisition of PMW, which has historically generated lower margins. General and administrative expenses increased by approximately $4.0 million, or 54.4%, primarily due to the acquisitions of Kinetic and PMW, partially offset by reduced compensation expense at Precision Marshall. Operating income was approximately $8.0 million and $9.0 million, for the years ended September 30, 2023 and 2022, respectively.
Corporate and Other Segment
Revenues for the year ended September 30, 2023 decreased by approximately $6.8 million. The decrease was primarily due to the shutdown and deconsolidation of SW Financial in May 2023. Cost of revenue was 54.6% for the year ended
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September 30, 2023, as opposed to 62.8% for the year ended September 30, 2022. Operating loss for the year ended September 30, 2023 was approximately $7.6 million, as compared to a loss of approximately $9.7 million in the prior year. Revenues and operating income for our legacy directory services business continue to decline due to decreasing renewals. We expect revenue and operating income from this segment to continue to decrease in the future. We are no longer accepting new customers in our directory services business.
Adjusted EBITDA Reconciliation
The following table presents a reconciliation of Adjusted EBITDA to net income, its nearest GAAP measure, for the years ended September 30, 2023 and 2022 (in $000’s):
For the Year Ended September 30,
Stock-based compensation 446 37
Gain on bankruptcy settlement — (11,352)
Loss on extinguishment of debt — 84
SW Financial settlement gain (2,750) —
Disposition of SW Financial 1,697 —
Write-off of fixed assets — 438
Impairment of goodwill and intangibles — 4,910
Other non-recurring company initiatives 124 (196)
Adjusted EBITDA decreased by approximately $6.8 million, or 17.8%, for the year ended September 30, 2023, as compared to the prior year period. The decrease was primarily due to an overall decrease in operating income, as discussed above.
Liquidity and Capital Resources
Overview
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under our asset-based revolver lines of credit will provide sufficient liquidity to fund our operations, pay our scheduled loan payments, allow for the repurchase of shares under our share buyback program, and pay dividends on our shares of Series E Preferred Stock as declared by the Board of Directors, for at least the next 12 months.
We have the following five 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, (iii) two Fifth Third Bank Revolver Loans (“Fifth Third Revolvers”), one utilized by Precision Marshall and the other by PMW, and (iv) Eclipse Business Capital Revolver Loan (“Eclipse Revolver”) utilized by Flooring Liquidators. Additionally, we have an unsecured revolving line of credit with Isaac Capital Group (“ICG Revolver”), a related party, which is utilized by the Company.
As of September 30, 2023, we had total cash availability of approximately $37.1 million, comprised of approximately $4.3 million in cash, as well as approximately $32.8 million of available borrowing under our revolving credit facilities. As we continue to pursue acquisitions and other strategic transactions to expand and grow our business, we regularly monitor capital market conditions and may raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our
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operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Cash Flows from Operating Activities
The Company’s cash at September 30, 2023 was approximately $4.3 million compared to approximately $4.6 million at September 30, 2022, a decrease of approximately $300,000. Net cash provided by operations was approximately $26.0 million for the year ended September 30, 2023, as compared to net cash provided by operations of approximately $6.4 million for the same period in 2022. The increase is primarily due to a reduction in purchases of inventory, a reduction in income taxes receivable, as well as an increase in accrued liabilities during the period. For the year ended September 30, 2022, the Company has reclassified approximately $8.2 million from operating activities to financing activities in its consolidated statement of cash flows for the period, which relates to proceeds received from a failed sales and leaseback transaction as part of the Kinetic acquisition. The reclassification decreased fiscal year 2022 cash generated from operating activities from $14.6 million as previously reported to $6.4 million as adjusted.
Our primary sources of cash inflows are from customer receipts from sales on account, factored 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 approximately $64.0 million for the year ended September 30, 2023 consisted primarily of purchases of property and equipment and our acquisitions of Flooring Liquidators, PMW, and Cal Coast Carpets. Our cash flows used in investing activities of approximately $40.0 million for the year ended September 30, 2022 consisted primarily of purchases of property and equipment and our acquisitions of Kinetic and Better Backers.
Cash Flows from Financing Activities
Our cash flows provided by financing activities of approximately $37.6 million for the year ended September 30, 2023 primarily consisted of approximately $15.8 million in proceeds from the issuance of notes payable, net proceeds from revolver loans of approximately $13.7 million, proceeds from failed sales and leaseback transactions of $12.7 million, and proceeds from the issuance of related party debt of $7.0 million, partially offset by payments on notes payable and finance leases of approximately $10.5 million, and purchases of treasury stock of approximately $1.0 million. Proceeds from borrowings under revolver loans, the issuance of notes payable and related party notes payable was primarily associated with the acquisitions of Flooring Liquidators and PMW.
Our cash flows provided by financing activities of approximately $33.6 million for the year ended September 30, 2022 primarily consisted in net proceeds from revolver loans of approximately $21.6 million, approximately $17.0 million in proceeds from the issuance of notes payable, and proceeds from a failed sales and leaseback transaction of approximately $8.2 million, partially offset by payments on notes payable and finance leases of approximately $10.6 million, and purchases of treasury stock of approximately $2.7 million. Proceeds from borrowings under revolver loans and the issuance of notes payable was primarily associated with the acquisition of Kinetic.
Currently, the Company is not issuing common shares for liquidity purposes. We prefer to use asset-based lending arrangements and mezzanine financing together with Company provided capital to finance acquisitions and have done so historically. Occasionally, as our Company history has demonstrated, we will issue stock and derivative instruments linked to stock for services and/or debt settlement.
Working Capital
We had working capital of approximately $85.0 million as of September 30, 2023 as compared to approximately $78.4 million as of September 30, 2022. The increase is primarily due to the net assets received from the acquisitions of Flooring Liquidators and PMW, increases in accounts receivable and inventories, partially offset by increases in accounts payable, accrued liabilities, the current portion of long-term debt and the current portion of operating lease obligations.
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Future Sources of Cash; New Products and Services
We may require additional debt financing or capital to finance new acquisitions, refinance existing indebtedness or other strategic investments in our business. Other sources of financing may include stock issuances and additional loans; or other forms of financing. Any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders.
Contractual Obligations
The following table summarizes our contractual obligations consisting of debt obligations and lease agreements and the effect such obligations are expected to have on our future liquidity and cash flows (in $000's):
Payments due by Period
Less ThanOne Year One to ThreeYears Three to FiveYears More ThanFive Years Total
Off-Balance Sheet Arrangements
At September 30, 2023, 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, 2023, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required. We believe we are not subject in any material way to other forms of market risk, such as foreign currency exchange risk or foreign customer purchases or commodity price risk.
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ITEM 8. Financial Statement and Supplementary Data
LIVE VENTURES INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-8
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Live Ventures Incorporated
Las Vegas, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Live Ventures Incorporated (the "Company") as of September 30, 2023 and 2022, and the related consolidated statements of (loss) income, changes in stockholders' equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America ("US GAAP").
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
As described in Note 4 to the consolidated financial statements, the Company acquired Precision Metal Works, Inc. ("PMW"), a Kentucky-based Metal Stamping and Value-Added Manufacturing Company. PMW was acquired for a net purchase price of approximately $27 million. As part of its purchase price allocation, the Company determined $3.6 million should be allocated to customer relationship and trade name intangible assets and approximately $13.6 million to property, plant, and equipment.
In addition, the Company acquired 100% of the issued and outstanding equity interests of Flooring Liquidators, Inc., Elite Builder Services, Inc., 7 Day Stone, Inc., Floorable, LLC, K2L Leasing, LLC, and SJ & K Equipment, Inc. (collectively, "Flooring Liquidators"). Flooring Liquidators is comprised of leading retailers and installers of floors, carpets, and countertops to consumers, builders, and contractors in California and Nevada. Flooring Liquidators was acquired for a net purchase price of approximately $78.7 million. As part of its purchase price allocation, the Company determined approximately $21 million should be allocated to customer relationship and trade name intangible assets.
We identified the Company's valuation of the intangible assets and property, plant and equipment as a critical audit matter because of the significant estimates and assumptions management used in the estimate of the preliminary acquisition date
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fair value, including forecasts of future revenues and expenses and the selection of the discount rates. Auditing management's forecasts of future revenues and expenses as well as the selection of the discount rates involved a high degree of auditor judgment and increased audit effort, including the use of our valuation specialists, as changes in these assumptions could have a significant impact on the preliminary acquisition date fair value of the acquired intangible assets and property, plant, and equipment.
Our audit procedures related to the Company's estimate of the preliminary acquisition date fair value of the intangible assets and property, plant, and equipment included the following, among others:
•We read the purchase agreements to understand and evaluate the terms of the transaction to determine that the acquisition met the requirements of a business combination.
•We evaluated the analysis of the initial allocation of the purchase price accounting as well as the determination of the balance sheet classification of each component of the transaction.
•We obtained the Company's third-party expert valuation report to gain an understanding of the processes and key assumptions for estimating the fair value of intangible assets and other acquired assets and liabilities.
•We utilized our valuation specialists to evaluate the adequacy and appropriateness of the methodologies and assumptions, including the weighted-average cost of capital and the discount rate, used by the Company's third-party valuation expert in developing the estimated fair value of the intangible assets, property, plant, and equipment, and other assets and liabilities.
•We assessed the reasonableness of management's cash flow forecasts based on historical results, revenue growth assumptions and expected inflation.
•We performed independent calculations to test the reasonableness and mathematical accuracy of the fair values concluded on by the Company.
•We evaluated the qualifications of the Company's third-party valuation expert based on credentials, reputation and experience.
•We assessed the appropriateness of the disclosures in the consolidated financial statements.
We have served as the Company's auditor since 2021.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
December 22, 2023
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LIVE VENTURES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Assets
Cash and cash equivalents $ 4,309 $ 4,600
Prepaid expenses and other current assets 4,919 2,477
Right of use asset - operating leases 54,544 33,659
Liabilities and Stockholders' Equity
Liabilities:
Current portion of notes payable related parties 4,000 2,000
Current portion of lease obligations - operating leases 11,369 7,851
Current portion of lease obligations - finance leases 359 217
Long-term debt, net of current portion 78,710 59,704
Lease obligation long term - operating leases 48,156 30,382
Lease obligation long term - finance leases 32,942 19,568
Notes payable related parties, net of current portion 6,914 2,000
Other non-current obligations 4,104 1,615
Commitments and contingencies
Stockholders' equity:
Non-controlling interest — (448)
Total liabilities and stockholders' equity $ 421,815 $ 278,637
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES, INCORPORATED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(dollars in thousands, except per share)
Years Ended September 30,
Operating expenses:
Impairment expense — 4,910
Other income (expense):
Loss on disposition of SW Financial (1,696) —
SW Financial settlement 2,750 —
Gain on bankruptcy settlement — 11,352
Total other (expense) income, net (13,980) 5,689
(Loss) income per share:
Weighted average common shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Stock based compensation — — — — — — 37 — — — — 37
Conversion of Series B preferred stock (315,790) — — — 1,578,950 — — — — — — —
Purchase of common treasury stock — — — — (86,451) — — (2,696) — — — (2,696)
Stock based compensation — — — — — — 446 — — — — 446
Stock options exercised — — — — 12,148 — — — — — — —
Purchase of common treasury stock — — — — (39,092) — — (991) — — — (991)
Net income — — — — — — — — — (102) — (102)
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended September 30,
Operating activities:
Amortization of seller note discount 1,799 —
Loss on disposal of property and equipment 60 510
Amortization of debt issuance costs 78 (78)
Loss on impairment of goodwill and intangibles — 4,910
Gain on bankruptcy settlement — (11,501)
Stock based compensation expense 446 37
Loss on write off of ROU asset — 522
Amortization of right of use assets 4,800 1,050
Disposal of SW Financial, net of cash retained 1,509 —
Change in reserve for uncollectible accounts 1,436 71
Change in reserve for obsolete inventory 1,402 582
Changes in assets and liabilities, net of acquisitions:
Prepaid expenses and other current assets 2,558 1,663
Change in deferred income taxes (2,853) 6,022
Deposits and other assets (586) 34
Other liabilities (3) 31
Net cash provided by operating activities 25,995 6,401
Investing activities:
Better Backers acquisition — (3,166)
Flooring Liquidators acquisition, net of cash acquired (32,669) —
PMW acquisition, net of cash acquired (20,000) —
Purchases of property and equipment (10,002) (12,128)
Kinetic acquisition, net of cash acquired — (24,757)
Cal Coast Carpets acquisition (1,300) —
Proceeds from the sale of property and equipment 87 15
Net cash used in investing activities (63,884) (40,036)
Financing activities:
Proceeds from failed sales and leaseback transaction 12,737 8,179
Cash paid for taxes on net settlement of stock option exercise (28) —
Proceeds from issuance of notes payable 15,773 17,000
Purchase of common treasury stock (991) (2,696)
Payments for debt acquisition costs (98) —
Proceeds from issuance of related party notes payable 7,000 —
Payments on financing leases (2,419) (61)
Debtor in possession cash — 75
Net cash provided by financing activities 37,598 33,571
Net decrease in cash and cash equivalents (291) (64)
Cash and cash equivalents, beginning of year 4,600 4,664
Cash and cash equivalents, end of year $ 4,309 $ 4,600
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended September 30,
Supplemental cash flow disclosures:
Income taxes paid, net $ 379 $ 6,149
Noncash financing and investing activities:
Noncash holdback related to Flooring Liquidators acquisition $ 2,000 $ —
Noncash stock issued related to Flooring Liquidators acquisition $ 3,200 $ —
Noncash sellers note issued related to PMW acquisition $ 2,500 $ —
Noncash earnout related to PMW acquisition $ 2,675 $ —
The accompanying notes are an integral part of these consolidated financial statements.
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LIVE VENTURES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2023 AND 2022
Note 1: Background and Basis of Presentation
The accompanying consolidated financial statements include the accounts of Live Ventures Incorporated, a Nevada corporation, and its subsidiaries (collectively, “Live Ventures” or the “Company”). Live Ventures is a diversified holding company with a strategic focus on value-oriented acquisitions of domestic middle-market companies. The Company has five operating segments: Retail-Entertainment, Retail-Flooring, Flooring Manufacturing, Steel Manufacturing, and Corporate and Other. The Retail-Entertainment segment includes Vintage Stock, Inc. (“Vintage Stock”), which is engaged in the retail sale of new and used movies, music, collectibles, comics, books, games, game systems and components. The Retail-Flooring segment includes Flooring Liquidators, Inc. (“Flooring Liquidators”), which is engaged in the retail sale and installation of floors, carpets, and countertops. The Flooring Manufacturing segment includes Marquis Industries, Inc. (“Marquis”), which is engaged in the manufacture and sale of carpet and the sale of vinyl and wood floor coverings. The Steel Manufacturing Segment includes Precision Industries, Inc. (“Precision Marshall”), which is engaged in the manufacture and sale of alloy and steel plates, ground flat stock and drill rods, The Kinetic Co., Inc. (“Kinetic”), which is engaged in the production of industrial knives and hardened wear products for the tissue and metals industries, and Precision Metal Works, Inc. (“PMW”), which is engaged in metal forming, assembly, and finishing solutions across diverse industries, including appliance, automotive, hardware, electrical, electronic, medical products, and devices. PMW reports on a 13-week quarter, as opposed to the Company's calendar quarter reporting. However, the Company has determined that the difference in reporting periods has no material effect on its reported financial results.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries over which the Company exercises control, and a variable interest entity (“VIE”). The Company recorded a non-controlling interest within stockholders’ equity for the portion of the entity’s equity attributed to the consolidated entities that are not wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the prior period have been reclassified to conform to the current period presentation. These reclassifications have no material effect on the reported financial results. For the year ended September 30, 2022, the Company has reclassified approximately $8.2 million from operating activities to financing activities in its consolidated statement of cash flows for the period, which relates to proceeds received from a failed sales and leaseback transaction as part of the Kinetic acquisition (see Note 4). The reclassification decreased fiscal year 2022 cash generated from operating activities from $14.6 million as previously reported to $6.4 million as adjusted. The reclassification has no impact on overall cash flow, net income, or adjusted EBITDA for the year ended September 30, 2022, nor does it have any impact on the Company's financial covenants, or financial statements for the year ended September 30, 2023.
Non-controlling Interest
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of non-controlling interests (“NCI’s”) in partially owned consolidated subsidiaries and the loss control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI’s be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as an equity transaction rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when
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such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
In July 2020, the Company acquired a 50% interest in HiYield, LLC, a Nevada partnership (“HiYield”). As of September 30, 2023, the Company had ceased doing business through HiYield, and, consequently, recorded a write-off of the existing NCI balance of approximately $448,000 against paid-in capital.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made in connection with the accompanying consolidated financial statements include the estimated reserve for doubtful current and long-term trade and other receivables, the estimated reserve for excess and obsolete inventory, fair values in connection with the analysis of goodwill, other intangibles and long-lived assets for impairment, valuation allowance against deferred tax assets, lease terminations, and estimated useful lives for intangible assets and property and equipment.
Financial Instruments
Financial instruments consist primarily of cash equivalents, trade and other receivables, advances to affiliates and obligations under accounts payable, accrued expenses and notes payable. The carrying amounts of cash equivalents, trade receivables and other receivables, leases, accounts payable, accrued expenses and short-term notes payable approximate fair value because of the short maturity of these instruments. The fair value of the long-term debt is calculated based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements, unless quoted market prices are available (Level 2 inputs). The carrying amounts of long-term debt at September 30, 2023 and 2022 approximate fair value.
Cash and Cash Equivalents
Cash and Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents approximates carrying value.
Trade Receivables
The Company grants trade credit to customers under credit terms that it believes are customary in the industries in which it operates and does not require collateral to support customer trade receivables. Some of the Company’s trade receivables are factored primarily through two factors. Factored trade receivables are sold without recourse for substantially all of the receivables balances for credit approved accounts. The factor purchases the trade receivable(s) for the gross amount of the respective invoice(s), less factoring commissions, trade and cash discounts. The factor charges the Company a factoring commission for each trade account, which is between 0.45-0.50% of the gross amount of the invoice(s) factored on the date of the purchase, plus an additional rate of 0.0125% for each credit term extension of 30 days, or portion thereof. The minimum annual commission due the factor is approximately $200,000 per contract year. As of September 30, 2023 and 2022, the balance of factored trade receivables was approximately $4.3 million and $5.7 million, respectively.
The following table details the Company's trade receivables as of September 30, 2023 and 2022 ($000’s):
Trade receivables, net:
Less: Allowance for doubtful accounts (1,568) (132)
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts, which includes allowances for accounts and factored trade receivables, customer refunds, dilution and fees from local exchange carrier billing aggregators and other uncollectible
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accounts. The allowance for doubtful accounts is based upon historical bad debt experience and periodic evaluations of the aging and collectability of the trade receivables. This allowance is maintained at a level which the Company believes is sufficient to cover potential credit losses and trade receivables are only written off to bad debt expense as uncollectible after all reasonable collection efforts have been made. The Company has also purchased accounts receivable credit insurance to cover some non-factored trade and other receivables which helps reduce potential losses due to doubtful accounts. At September 30, 2023 and 2022, the allowance for doubtful accounts was approximately $1.6 million and $132,000, respectively. The increase is primarily due to the Company recording an allowance against the promissory note with ARCA Recycling, Inc. (“ARCA”) [see Note 16].
Inventories
Inventories are valued at the lower of the inventory’s cost (first in, first out basis or “FIFO”) or net realizable value of the inventory. Management compares the cost of inventory with its net realizable value and an allowance is made to write down inventory to net realizable value, if lower. Management also reviews inventory to determine if excess or obsolete inventory is present and a reserve is made to reduce the carrying value for inventory for such excess and or obsolete inventory. At years ended September 30, 2023 and 2022, the inventory reserves were approximately $3.8 million and $2.4 million, respectively.
The following table details the Company's inventories as of September 30, 2023 and 2022 ($000’s):
Inventory, net
Property and Equipment
Property and Equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of building and improvements are three to 40 years, transportation equipment is five to 10 years, machinery and equipment are three to 10 years, furnishings and fixtures are three to five years, and office and computer equipment are three to five years.
The Company periodically reviews its property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. The Company assesses recoverability based on several factors, including its intention with respect to its stores and those stores projected undiscounted cash flows. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows.
Goodwill
The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Under ASC 350, goodwill is not amortized; rather, it is tested for impairment on at least an annual basis. Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired.
The Company tests goodwill during the fourth quarter of each fiscal year or more frequently if events arise or circumstances change that indicate that goodwill may be impaired. The Company assesses whether goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying
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amount, including goodwill. If based on this qualitative assessment the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed, as required by ASC 350, to determine whether a goodwill impairment exists.
The quantitative test is used to compare the carrying amount of the reporting unit's assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. The determination of the fair value of the Company's reporting units is based, among other things, on estimates of the future operating performance of the reporting unit being valued. A goodwill impairment test is required to be completed, at minimum, once annually, and any resulting impairment loss recorded upon completion of the assessment. Changes in market conditions, among other factors, may have an impact on these estimates and require interim impairment assessments.
When performing the two-step quantitative impairment test, the Company's methodology includes the use of an income approach which discounts future net cash flows to their present value at a rate that reflects the Company's cost of capital, otherwise known as the discounted cash flow method (“DCF”). These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash flows include the continued market acceptance of the products and services offered by the businesses, the development of new products and services by the businesses and the underlying cost of development, the future cost structure of the businesses, and future technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of our reporting units. Any such impairment would be recognized in full in the reporting period in which it has been identified.
Intangible Assets
The Company’s intangible assets consist of customer relationship intangibles, favorable leases, trade names, licenses for the use of internet domain names, Universal Resource Locators, or URL’s, software, and marketing and technology related intangibles. Upon acquisition, estimates are made in valuing acquired intangible assets, which include but are not limited to, future expected cash flows from customer contracts, customer lists, and estimating cash flows from projects when completed; tradename and market position, as well as assumptions about the period of time that customer relationships will continue; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from the assumptions used in determining the fair values. All intangible assets are capitalized at their original cost and amortized over their estimated useful lives as follows: domain name and marketing – three to 20 years; software – three to 5 years, customer relationships – seven to 10 years, favorable leases – over the life of the lease, customer lists up to 20 years, trade names up to 20 years.
Revenue Recognition
General
The Company accounts for its sales revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). Topic 606 provides a five-step revenue recognition model that is applied to the Company’s customer contracts. Under this model we (i) identify the contract with the customer, (ii) identify our performance obligations in the contract, (iii) determine the transaction price for the contract, (iv) allocate the transaction price to our performance obligations and (v) recognize revenue when or as we satisfy our performance obligations.
Revenue is recognized upon transfer of control of the promised goods or the performance of the services to customers in an amount that reflects the consideration expected to be receive in exchange for those goods or services. The Company enters into contracts that may include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations.
Retail - Entertainment Segment
The Retail-Entertainment Segment derives revenue primarily from direct sales of entertainment products. Sales are generally of a cash-and-carry nature, and contain a single performance obligation. Consequently, revenue is recorded at the point in time in which the sale is made. Revenues are recorded net of sales taxes collected from customers.
Retail - Flooring Segment
The Retail-Flooring Segment derives revenue primarily from the sale of flooring products and installation services, which are recognized at the point-of-sale and over time, respectively. Retail sales are generally of a cash-and-carry nature, and
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contain a single performance obligation. Consequently, revenue is recorded at the point in time in which the sale is made. Installation services generally contain multiple performance obligations requiring revenue to be recognized over a period of time based on percentage of completion. All direct costs are either paid and or accrued for in the period in which the sale is recorded. Revenues are recorded net of sales taxes collected from customers. For the year ended September 30, 2023, revenue for retail and installation services sales was approximately $59.4 million and $16.4 million, respectively.
Flooring and Steel Manufacturing Segments
The Flooring Manufacturing Segment derives revenue primarily from the sale of carpet and hard surface flooring products, including shipping and handling amounts. The Steel Manufacturing Segments derives revenue primarily from the sale of steel plates, ground flat stock and drill rods, and tooling, including shipping and handling amounts. Revenue for these segments generally contain a single performance obligation and is recognized at the point title passes to the customer. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of taxes collected from customers. All direct costs are either paid and or accrued for in the period in which the sale is recorded.
Spare Parts
For spare parts sales, the Company transfers control and recognizes a sale when it ships the product to the customer or when the customer receives product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. The Company has no additional performance obligations other than spare parts sales that are material in the context of the contract. The amount of consideration received and revenue recognized varies due to sales incentives and returns offered to customers. When customers retain the right to return eligible products, the Company reduces revenue for the estimate of the expected returns, which is primarily based on an analysis of historical experience.
Shipping and Handling
The Company classifies shipping and handling charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.
Customer Liabilities
The Company recognizes the portion of the dollar value of prepaid stored-value products that ultimately is unredeemed (“breakage”) in accordance with ASU 2016-04 Liabilities- Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.
Because the Company expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product, the Company utilized the Redemption Pattern methodology. Under this methodology, the Company shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur.
The Company establishes a liability upon the issuance of merchandise credits and the sale of gift cards. Breakage income related to gift cards which are no longer reportable under state escheatment laws of approximately $12,000 and $65,000 for the years ended September 30, 2023 and 2022, respectively, is recorded in other income in our consolidated financial statements.
Advertising Expense
Advertising expense is charged to operations as incurred. Advertising expense totaled approximately $1.0 million and $445,000 for the years ended September 30, 2023 and 2022, respectively. The increase is due to the acquisition of Flooring Liquidators, as well as increased advertising costs among the Company's other subsidiaries.
Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows: Level 1 - inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or
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indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The fair value of inventory acquired as part of a business combination is based on a three-part valuation utilizing the comparable sales method which is based on Level 2 and Level 3 inputs. The comparative sales method utilizes the actual or expected selling prices of finished goods to customers in the ordinary course of business as the base amount that must be adjusted for factors that are generally relevant in determining the Fair Value of the inventory including:
•the time that would be required to dispose of this inventory;
•the expenses that would be expected to be incurred in the disposition; and
•a profit commensurate with the amount of investment in the assets and the degree of risk.
The fair value of property, plant and equipment, and goodwill acquired as part of a business combination is based on a third-party valuation utilizing the indirect method of cost approach which is based on Level 2 and Level 3 inputs. In the indirect method of Cost Approach, the Reproduction Cost New for each asset or group of assets is determined by indexing the original capitalized cost basis. The cost basis generally includes the base cost of the asset and certain contributory costs, such as sales tax, freight and handling charges, installation, general contractor’s costs, and engineering and design costs. The index factors used in this analysis are based on the asset type and manufacture date. Index factors were derived from various published sources including Marshall Valuation Service and the Bureau of Labor Statistics.
The fair value of debt assumed as part of a business combination is discounted utilizing implied interest rates, as applicable, which is based on Level 1 and Level 2 inputs.
Income Taxes
The Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than not that the asset will not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its Consolidated Statements of (Loss) Income.
Significant management judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether it is more likely than not (greater than 50% chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of the Company in future periods.
Lease Accounting
The Company leases retail stores, manufacturing and warehouse facilities, and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates through 2054 with various renewal options for additional periods. The agreements, which are classified as either operating or finance leases, generally provide for minimum and, in some cases percentage rent and require it to pay all insurance, taxes and other maintenance costs.
For contracts entered into on or after October 1, 2019, the Company assesses at contract inception whether the contract is, or contains, a lease. Generally, it determines that a lease exists when (i) the contract involves the use of a distinct identified asset, (ii) obtains the right to substantially all economic benefits from use of the asset and (iii) it has the right to direct the use of the asset.
At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs, such as brokerage commissions, less any lease incentives received. All
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right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of the Company’s incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities as of October 1, 2019 were based on the original lease terms.
Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the noncancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of the Company’s real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes, the Company’s proportionate share of actual property taxes, insurance, common area maintenance, and utilities. The Company has elected an accounting policy, as permitted by ASC 842, not to account for such payments as part of related lease payments. Consequently, such payments are recognized as operating expenses when incurred.
Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments. Finance lease payments are allocated between a reduction of the lease liability and interest expense, and the related asset is depreciated as described under “Property and Equipment” above.
Stock-Based Compensation
The Company from time to time grants restricted stock awards and options to employees, non-employees and Company executives and directors. Such awards are valued based on the grant date fair-value of the instruments. The value of each award is amortized on a straight-line basis over the vesting period.
Earnings Per Share
Earnings per share is calculated in accordance with ASC 260, “Earnings Per share”. Under ASC 260 basic earnings per share is computed using the weighted average number of common shares outstanding during the period, except that it does not include unvested restricted stock subject to cancellation. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants, options, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares, options and warrants is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected on an if-converted basis.
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a Company’s management organizes segments within the Company for making operating decisions and assessing performance. The Company determined it has five operating segments (See Note 19).
Concentration of Credit Risk
The Company maintains cash balances in bank accounts in each state the Company has business operations. The Company places its cash with high quality financial institutions. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution as of September 30, 2023. At times, balances may exceed federally insured limits. As of September 30, 2023, the Company had approximately $1.6 million of cash with financial institutions in excess of FDIC insurance limits.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new approach to estimate credit losses on certain types of financial instruments based on expected losses instead of incurred losses. It also modified the impairment model for available-for-sale debt securities and provided a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU No. 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2021 and the interim periods within those fiscal years. Early adoption is permitted. The Company has
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adopted this new accounting standard on its consolidated financial statements and related disclosures; however, adoption of this ASU has had no material impact on the Company's financial statements.
In March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. Effective December 31, 2021, the Secured Overnight Financing Rate (“SOFR”) replaced the USD London Interbank-Offered Rate (“LIBOR”) for most financial benchmarking. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. The Company has adopted this new accounting standard on its consolidated financial statements and related disclosures; however, adoption of this ASU has had no material impact on the Company's financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for the Company’s fiscal years beginning after December 15, 2021. The Company has adopted this new accounting standard on its consolidated financial statements and related disclosures; however, adoption of this ASU has had no material impact on the Company's financial statements.
Note 3: Variable Interest Entity
In May 2023, the Company shut down the operations and deconsolidated the assets and liabilities of SW Financial. The Company recognized a loss on deconsolidation of SW Financial's assets and liabilities of approximately $1.7 million, as detailed in the table below (in $000’s):
Accounts payable $ 242
Lease liabilities 728
Total deconsolidation of liabilities 970
Accounts receivable 130
Other current assets 187
Intangible assets
Customer Relationships 1,348
Tradenames 72
Subtotal Intangible Assets 1,420
Right-of-use assets 687
Other assets 55
Total deconsolidation of assets 2,666
Total loss on deconsolidation $ (1,696)
In connection with the shutdown, on March 31, 2023, the Company entered into a Settlement Agreement and Mutual Release (“Agreement I”) with Angia Holdings, LLC and Thomas Diamante and Lawrence Zelin (“Principals”). Agreement I stipulated that the Principals would pay the Company $1,000,000 within 10 days of the effective date of Agreement I, and an additional $1,000,000 within 45 days of the effective date of Agreement I if a joint venture, with terms acceptable to the Company, was not formed. The Principals made the initial $1,000,000 payment in April 2023, and, having failed to form a joint venture, made the second $1,000,000 payment in May 2023. The Company recorded a gain on receipt of the settlement amounts of $2,000,000
On August 30, 2023, the Company entered into a second Agreement with Angia Holdings, LLC and its Principals (“Agreement II”). Agreement II stipulated that the Principals would pay the Company and additional $1.5 million, of
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which $750,000 was received and recognized as income as of September 30, 2023. The remaining $750,000 will be recognized into income upon receipt.
Note 4: Acquisitions
Acquisition of QEP
On September 20, 2023, Marquis acquired the Harris Flooring Group® brands from Q.E.P., a designer, manufacturer, and distributor of a broad range of best-in-class flooring and installation solutions for commercial and home improvement projects. Specifically, Marquis acquired the Harris Flooring Group brands, inventory, and book of business and intends to retain all sales representatives. The purchase price was $10.1 million, consisting of $3.0 million in cash at close, and the recording of a deferred payment of $5.1 million and holdback of $2.0 million. The acquisition was determined to be an asset acquisition for accounting purposes. The entirety of the purchase was allocated to inventory.
Acquisition of PMW
On July 20, 2023 (“Effective Date”), the Company acquired PMW, a Kentucky-based Metal Stamping and Value-Added Manufacturing Company. PMW was acquired for total consideration of approximately $28 million, comprised of a $25 million purchase price, plus closing cash, and subject to working capital adjustments, with additional consideration of up to $3 million paid in the form of an earn-out. The purchase price was funded in part by a $2.5 million seller note, borrowings under a credit facility of $14.4 million, and proceeds under a sale and leaseback transaction of approximately $8.6 million. The acquisition involved no issuance of stock of the Company.
As of the Effective Date, the Company entered into a sales and leaseback transaction for two properties acquired, one located in Frankfort, Kentucky, and the other located in Louisville, Kentucky, with Legacy West Kentucky Portfolio, LLC (“Lessor”). The aggregate sales price of the Real Estate was approximately $14.5 million.The Louisville, Kentucky property was acquired on the Effective Date for $5.1 million in connection with an option of the Acquired Company to purchase that property.
The provisions of each of the two lease agreements include a 20-year lease term with twofive-year renewal options. The base rent under the Frankfort lease agreement is $34,977 per month for the first year of the term and a 2% per annum escalator thereafter. The base rent under the Louisville lease agreement is $63,493 per month for the first year of the term and a 2% per annum escalator thereafter. Both Lease Agreements are “net leases,” such that the lessees are also obligated to pay all taxes, insurance, assessments, and other costs, expenses, and obligations of ownership of the Real Property incurred by the lessor. Due to the highly specialized nature of the leased assets, the Company currently believes it is more likely than not that each of the twofive-year options will be exercised. The proceeds of $14.5 million, net of closing fees, from the sale-leaseback were used to assist in funding the acquisition of PMW.
The fair value of the purchase price components outlined above was $26.8 million due to fair value adjustments for the contingent consideration, cash acquired, and working capital adjustments, as detailed below (in $000's):
Fair value of earnout 2,675
Cash from balance sheet 1,602
Working capital adjustment (2,500)
Net purchase price $ 26,777
Under the preliminary purchase price allocation, the Company recognized goodwill of approximately $4.7 million, which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of July 20, 2023, as calculated by an independent third-party firm. Because the transaction was considered a stock purchase for tax purposes, none of the goodwill arising from the acquisition will deductible for tax purposes. The table below outlines the purchase price allocation of the purchase for PMW to the acquired identifiable assets, liabilities assumed and goodwill (in $000’s):
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Net purchase price $ 26,777
Accrued liabilities 5,771
Total liabilities assumed 16,559
Total consideration 43,336
Accounts receivable 12,613
Property, plant and equipment 13,616
Intangible assets 3,600
Other assets 849
Total assets acquired 38,670
Total goodwill $ 4,666
Proforma Information
The table below presents selected proforma information for the Company for the years ended September 30, 2023 and 2022, assuming that the acquisition had occurred on October 1, 2021 (the beginning of the Company’s 2022 fiscal year), pursuant to ASC 805-10-50. This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition occurred on that date, nor does it purport to predict the results of operations for future periods (in $000’s).
Year Ended September 30, 2023 As Reported Adjustments Proforma
Live (1) PMW (2) Adjustments (3) Total
Earnings per basic common share $ (0.03) $ (0.72)
Earnings per basic diluted share $ (0.03) $ (0.72)
Year Ended September 30, 2022 As Reported Adjustments Proforma
Live (4) PMW (5) Adjustments (3) Total
Earnings per basic common share $ 7.94 $ 8.43
Earnings per basic diluted share $ 7.84 $ 8.32
(1)Live for the year ended September 30, 2023. Includes PMW from July 20, 2023 through September 30, 2023.
(2)PMW from October 1, 2021 through the acquisition date of July 19, 2023.
(3)Reflects adjustments for (a) amortization expense of definite-lived intangible assets based on the preliminary fair value at the acquisition date, and (b) interest expense to include proforma interest expense that would have been incurred as a result of the acquisition financing obtained by the Company.
(4)Live for the year ended September 30, 2022.
(5) PMW for the period of October 1, 2021 through September 30, 2022.
Acquisition of Cal Coast Carpets
On June 2, 2023, Flooring Liquidators acquired certain fixed assets and other intangible assets of Cal Coast Carpets, Inc. (“Cal Coast”), and its Shareholders, which was effected through two Asset Purchase Agreements (“Agreement”, or collectively, “Agreements”). No liabilities were assumed as part of either transaction. The purchase price for the fixed assets acquired from Cal Coast was $35,000, and the intangible assets acquired from the Shareholders was approximately $1.265 million, for a total combined purchase price of $1.3 million. The intangible assets acquired were comprised of customer relationships, trade name, and non-compete agreements. The acquisition was determined to be an asset
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acquisition for accounting purposes and, as such, no goodwill was recorded as part of the transaction. The values assigned to the assets acquired are based on their estimates of fair value available as of June 2, 2023, as calculated by management.
The table below outlines the purchase price allocation of the purchase for Cal Coast to the acquired identifiable assets (in $000’s):
Property, plant and equipment $ 35
Intangible assets
Customer relationships 785
Non-compete agreement 55
Total intangible assets 1,265
Total assets acquired $ 1,300
Acquisition of Flooring Liquidators
On January 18, 2023, Live Ventures acquired 100% of the issued and outstanding equity interests (the “Equity Interests”) of Flooring Liquidators, Inc., Elite Builder Services, Inc., 7 Day Stone, Inc., Floorable, LLC, K2L Leasing, LLC, and SJ & K Equipment, Inc. (collectively, the “Acquired Companies”). The Acquired Companies are leading retailers and installers of floors, carpets, and countertops to consumers, builders and contractors in California and Nevada.
The acquisition was effected pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) with an effective date of January 18, 2023 by and among the Company, and Stephen J. Kellogg, as the seller representative of the equity holders of the Acquired Companies and individually in his capacity as an equity holder of the Acquired Companies, and the other equity holders of the Acquired Companies (collectively, the “Seller”). The purchase price for the Equity Interests was $83.8 million before any fair value considerations, and is comprised of the following:
•$41.8 million in cash to the Seller;
•$34.0 million (the “Note Amount”) to certain trusts for the benefit of Kellogg and members of his family (the “Kellogg Trusts”) pursuant to the issuance by the Company of a subordinated promissory note (the “Note”) in favor of the Kellogg Trusts;
•$4.0 million to the Kellogg 2022 Family Irrevocable Nevada Trust by issuance of 116,441 shares of Company Common Stock (as defined in the Purchase Agreement) (the “Share Amount”), calculated in the manner described in the Purchase Agreement;
•$2.0 million holdback; and
•$2.0 million of contingent consideration, comprised of $1.0 million in cash and $1.0 million in restricted stock units.
The fair value the purchase price components outlined above was $78.7 million due to fair value adjustments for the Note and restricted stock, as detailed below (in $000's):.
Fair value adjustment, sellers note (3,300)
Fair value adjustment, restricted stock (1,800)
Net purchase price $ 78,700
Under the purchase price allocation, the Company recognized goodwill of approximately $30.4 million, which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of January 18, 2023, as calculated by an independent third-party firm. The Company anticipates approximately $13.4 million of the goodwill arising from the acquisition to be fully deductible for tax purposes. The table below outlines the purchase price allocation of the purchase for Flooring Liquidators to the acquired identifiable assets, liabilities assumed and goodwill (in $000’s):
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Net purchase price $ 78,700
Accounts payable 5,189
Accrued liabilities 9,700
Total liabilities assumed 14,949
Total consideration 93,649
Accounts receivable 4,824
Property, plant and equipment 4,643
Intangible assets
Customer relationships 7,700
Non-compete agreements 1,625
Subtotal intangible assets 22,649
Total assets acquired 63,230
Proforma Information
The table below presents selected proforma information for the Company for the years ended September 30, 2023 and 2022, assuming that the acquisition had occurred on October 1, 2021 (the beginning of the Company’s 2022 fiscal year), pursuant to ASC 805-10-50. This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition occurred on that date, nor does it purport to predict the results of operations for future periods (in $000’s).
Year Ended September 30, 2023 As Reported Adjustments Proforma
Live (1) Flooring Liquidators (2) Adjustments (3) Total
Earnings per basic common share $ (0.03) $ (1.07)
Earnings per basic diluted share $ (0.03) $ (1.07)
Year Ended September 30, 2022 As Reported Adjustments Proforma
Live (4) Flooring Liquidators (5) Adjustments (3) Total
Earnings per basic common share $ 7.94 $ 8.92
Earnings per basic diluted share $ 7.84 $ 8.81
(1)Live for the year ended September 30, 2023. Includes Flooring Liquidators from January 18, 2023 through September 30, 2023.
(2)Flooring Liquidators from October 1, 2021 through the acquisition date of January 17, 2023.
(3)Reflects adjustments for (a) amortization expense of definite-lived intangible assets based on the preliminary fair value at the acquisition date, (b) interest expense to include proforma interest expense that would have been incurred as a
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result of the acquisition financing obtained by the Company, and (c) Elimination of revenues and costs of revenues associated with sales between Flooring Liquidators and the Company prior to acquisition.
(4)Live for the year ended September 30, 2022.
(5) Flooring Liquidators for the period of October 1, 2021 through September 30, 2022.
Acquisition of Better Backers
On July 1, 2022, Live acquired certain assets and intellectual property of Better Backers, a Georgia corporation, which was accomplished through an Asset Purchase Agreement (the “Asset Purchase Agreement”). No liabilities were assumed as part of the acquisition. The purchase price, which is subject to certain post-closing adjustments, was approximately $3.2 million, which is comprised of $1.8 million that was paid upon closing, and the $1.4 million present value of $1.5 million of non-compete payments to be made over a 24-month period. In order to expedite the transaction, the acquisition was originally made by Live, and the $1.8 million paid upon closing was funded with borrowings under the Live’s credit line with Isaac Capital Group, LLC (“ICG”). On August 18, 2022, Marquis repaid the $1.8 million to ICG and assumed ownership of Better Backers.
In connection with the acquisition, Marquis entered into two20-year building leases with Spyglass Estate Planning, LLC, a related party (see Note 16), with two options to renew for an additional five years each. The fair value of the buildings and improvement is approximately $9.3 million. The provisions of the lease agreements include an initial 24-month month-to-month rental period, during which the lessee may cancel with 90-day notice, followed by a 20-year lease term with twofive-year renewal options. Due to the highly specialized nature of the leased assets, Marquis currently believes that it is unlikely that it will cancel during the initial 24-month term, and that each of the twofive-year options will be exercised. The base rent under the lease agreements is approximately $73,000 and $32,000 per month, respectively, for the first year of the term, and a 2.5% per annum escalator. The lease agreements are each “net leases”, such that the lessee is also obligated to pay all taxes, insurance, assessments, and other costs, expenses, and obligations of ownership of the property. The Company has evaluated each lease and determined the rent amounts to be at market rates. These leases are being treated as finance leases for accounting purposes, as described in ASC 842 “Leases”.
Under the purchase price allocation, no goodwill was recognized. The values assigned to the assets acquired are based on their estimates of fair value available as of July 1, 2022, as calculated by management. The table below outlines the purchase price allocation of the purchase for Better Backers to the acquired identifiable assets (in $000’s):
Total purchase price $ 3,166
Property, plant and equipment 2,118
Intangible assets 300
Total assets acquired 3,166
Acquisition of Kinetic
On June 28, 2022, Precision Marshall acquired 100% of the issued and outstanding shares of common stock of The Kinetic Co., Inc. (“Kinetic”), a Wisconsin corporation, which was accomplished through a Purchase Agreement (the “Purchase Agreement”). In connection with the Purchase Agreement, Precision Marshall also entered into a Real Estate Purchase Agreement with Plant B-6, LLC, an affiliate of Kinetic, pursuant to which Precision Marshall received all of Kinetic's right, title, and interest in and to the land and improvements (collectively, the “Real Estate”) that Kinetic uses in its operations. The combined purchase price for the Kinetic shares and Real Estate was approximately $24.7 million, which was funded with approximately $11.0 million in borrowings under the company’s credit facility, approximately $8.3 million in proceeds from a failed sale and leaseback of the Real Estate, a subordinated promissory note in the amount of $3.0 million for the benefit of the Seller of Kinetic, $1.7 million of cash on-hand, a contingent earn-out liability valued at $997,000, and a working capital adjustment of approximately $400,000, which was paid in cash and a final fair value adjustment of approximately $312,000, which was noncash. The sale of the Real Estate was determined to be a failed sales and leaseback because the transaction did not meet the criteria for sales accounting as prescribed under ASC 842 “Leases”. Consequently, the transaction was treated as a financing transaction.
As of the date of acquisition, Precision Marshall entered into a sale and leaseback agreement with a third-party, independent of the Kinetic sellers, for the Real Estate. The sale price of the Real Estate was approximately $8.9 million, subject to closing fees of approximately $547,000.
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The provisions of the lease agreement include a 20-year lease term with twofive-year renewal options. The base rent under the lease agreement is $600,000 for the first year of the term and a 2% per annum escalator. The Lease Agreement is a “net lease,” such that the lessees are also obligated to pay all taxes, insurance, assessments, and other costs, expenses, and obligations of ownership of the Real Property incurred by the lessor. Due to the highly specialized nature of the leased assets, the Company currently believes that it is more likely than not that each of the twofive-year options will be exercised. The proceeds, net of closing fees, from the sale-leaseback were used to assist in funding the acquisition of Kinetic.
Under the purchase price allocation, the Company recognized goodwill of approximately $3.0 million, which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of June 28, 2022, as calculated by an independent third-party firm. Goodwill arising from the acquisition is expected to be fully deductible for tax purposes. The table below outlines the purchase price allocation of the purchase for Kinetic to the acquired identifiable assets, liabilities assumed and goodwill as of September 30, 2023 (in $000’s):
Total purchase price $ 24,732
Accounts payable 571
Accrued liabilities 1,848
Total liabilities assumed 2,419
Total consideration 27,151
Accounts receivable 3,073
Property, plant and equipment 12,855
Intangible assets 1,000
Other assets 480
Total assets acquired 24,124
Total goodwill $ 3,027
Proforma Information
The table below presents selected proforma information for the Company for the year ended September 30, 2022, assuming that the acquisition had occurred on October 1, 2021 (the beginning of the Company’s 2021 fiscal year), pursuant to ASC 805-10-50 (in $000's). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition occurred on that date, nor does it purport to predict the results of operations for future periods.
Year Ended September 30, 2022 As Reported Adjustments Proforma
Live (1) Kinetic (2) Adjustments (3) Total
Earnings per basic common share $ 7.94 $ 8.31
Earnings per basic diluted share $ 7.84 $ 8.21
(1)Live for the year ended September 30, 2022. Includes Kinetic from June 29, 2022 through September 30, 2022.
(2)Kinetic from October 1, 2021 through the acquisition date of June 28, 2022.
(3)Reflects adjustments for (a) amortization expense of definite-lived intangible assets based on the preliminary fair value at the acquisition date, (b) interest expense to include proforma interest expense that would have been incurred as a result of the acquisition financing obtained by the Company, and (c) certain other expenses to reflect the post-acquisition operating environment.
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Note 5: Property and Equipment
The following table details the Company's property and equipment as of September 30, 2023 and 2022, respectively (in $000’s):
Property and equipment, net:
Office, computer equipment and other 4,569 3,699
Depreciation expense was approximately $10.9 million and $6.2 million for the years ended September 30, 2023 and 2022, respectively.
Note 6: Leases
The following table details the Company's right of use assets and lease liabilities as of September 30, 2023 and 2022, respectively (in $000’s):
Right of use asset - operating leases $ 54,544 $ 33,659
Lease liabilities:
The weighted average remaining lease term for operating leases is 10.5 years. The Company’s weighted average discount rate for operating leases is 9.47%. Total cash payments for operating leases for the year ended September 30, 2023 were approximately $13.2 million.
The weighted average remaining lease term for finance leases is 27.6 years. The Company’s weighted average discount rate for finance leases is 11.69%. Total cash payments for finance leases for the year ended September 30, 2023 were approximately $2.4 million.
As discussed in Note 4, on June 28, 2022, Precision Marshall acquired all of the capital stock of Kinetic and certain Real Estate assets used in its operations. As of the date of execution of the Real Estate purchase, Precision Marshall sold the Real Estate, in exchange for which Precision Marshall entered into a 20-year lease, with two options to renew for an additional five years each, which the Company is reasonably certain to exercise. This transaction is being treated as a failed sales and leaseback arrangement for accounting purposes, as described in ASC 842 “Leases”.
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As discussed in Note 4, on July 1, 2022, Marquis acquired certain assets and intellectual property related to the carpet-backing operations of Better Backers. In connection with the acquisition, Marquis entered into two20-year building leases, with two options to renew for an additional five years each, which the Company is reasonably certain to exercise. These leases are being treated as finance leases for accounting purposes, as described in ASC 842 “Leases”.
As discussed in Note 4, on January 18, 2023, Live Ventures acquired 100% of the issued and outstanding equity interests of Flooring Liquidators, Inc., Elite Builder Services, Inc., 7 Day Stone, Inc., Floorable, LLC, K2L Leasing, LLC, and SJ & K Equipment, Inc. (collectively, the “Acquired Companies”). The Acquired Companies are leading retailers and installers of floors, carpets, and countertops to consumers, builders and contractors in California and Nevada. In connection with the acquisition, the Company acquired several real and personal property leases, which are a combination of both operating and finance leases, as described in ASC 842 “Leases”.
As discussed in Note 4, on July 20, 2023, the Company acquired PMW, a Kentucky-based Metal Stamping and Value-Added Manufacturing Company. As of the date of execution, the PMW sold two real properties in exchange for which PMW entered into a 20-year lease, with two options to renew for an additional five years each, which the Company is reasonably certain to exercise. This transaction is being treated as a failed sales and leaseback for accounting purposes, as described in ASC 842 “Leases”.
The Company records finance lease right of use assets as property and equipment. The balance, as of September 30, 2023 and September 30, 2022 is as follows (in $000’s):
Accumulated depreciation (702) (130)
Total present value of future lease payments of operating leases as of September 30, 2023 (in 000’s):
Twelve months ended September 30,
Less implied interest (27,970)
Present value of payments $ 59,525
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Total present value of future lease payments of finance leases as of September 30, 2023 (in 000’s):
Twelve months ended September 30,
Less implied interest (87,896)