UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

 

(Mark One)

 

 QUARTERLY Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2019

 

 TRANSITION Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _______________

 

Commission File Number 001-33937

 

Live Ventures Incorporated

(Exact name of registrant as specified in its charter)

  

Nevada

85-0206668

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

 

325 E. Warm Springs Road, Suite 102

Las Vegas, Nevada

89119

(Address of principal executive offices)

(Zip Code)

 

(702) 997-5968

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

LIVE

 

The NASDAQ Stock Market LLC (The NASDAQ Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 

 

Smaller reporting company 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

 

The number of shares of the issuer’s common stock, par value $0.001 per share, outstanding as of March 27, 2020 was 1,723,353.

 

 


 

INDEX TO FORM 10-Q FILING

FOR THE QUARTER ENDED DECEMBER 31, 2019

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I

 

 

 

 

 

 

 

 

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and September 30, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) for the Three Months December 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended December 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended December 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

OTHER INFORMATION

 

40

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

40

 

 

 

 

 

Item 1A.

 

Risk Factors

 

40

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

Item 3.

 

Defaults upon Senior Securities

 

41

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

41

 

 

 

 

 

Item 5.

 

Other Information

 

41

 

 

 

 

 

Item 6.

 

Exhibits

 

43

 

 

 

 

 

SIGNATURES

 

45

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LIVE VENTURES INCORPORATED

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

December 31, 2019

 

 

September 30, 2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

1,502

 

 

$

2,681

 

Trade receivables, net

 

 

9,109

 

 

 

11,901

 

Inventories, net

 

 

36,835

 

 

 

38,558

 

Income taxes receivable

 

 

161

 

 

 

235

 

Prepaid expenses and other current assets

 

 

1,964

 

 

 

2,377

 

Debtor in possession assets

 

 

2,688

 

 

 

 

Total current assets

 

 

52,259

 

 

 

55,752

 

Property and equipment, net

 

 

22,101

 

 

 

22,596

 

Right of use asset - operating leases

 

 

18,684

 

 

 

 

Deposits and other assets

 

 

50

 

 

 

90

 

Deferred taxes

 

 

4,743

 

 

 

4,869

 

Intangible assets, net

 

 

1,397

 

 

 

2,199

 

Goodwill

 

 

36,947

 

 

 

36,947

 

Total assets

 

$

136,181

 

 

$

122,453

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,783

 

 

$

14,144

 

Accrued liabilities

 

 

5,129

 

 

 

12,984

 

Lease obligation short term - operating leases

 

 

7,359

 

 

 

 

Current portion of long-term debt

 

 

15,989

 

 

 

7,897

 

Debtor in possession liabilities

 

 

13,568

 

 

 

 

Total current liabilities

 

 

47,828

 

 

 

35,025

 

Long-term debt, net of current portion

 

 

35,270

 

 

 

47,819

 

Lease obligation long term - operating leases

 

 

12,520

 

 

 

 

Notes payable related parties, net of current portion

 

 

4,826

 

 

 

4,826

 

Other non-current obligations

 

 

1,112

 

 

 

654

 

Total liabilities

 

 

101,556

 

 

 

88,324

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Series B convertible preferred stock, $0.001 par value, 1,000,000 shares authorized,

   214,244 shares issued and outstanding at December 31, 2019 and September 30, 2019

 

 

 

 

 

 

Series E convertible preferred stock, $0.001 par value, 200,000 shares authorized, 47,840  and 77,840 shares issued and outstanding at December 31, 2019 and September 30, 2019, respectively, with a liquidation preference of $0.30 per share outstanding

 

 

 

 

 

 

Common stock, $0.001 par value, 10,000,000 shares authorized, 1,784,310 and 1,826,009 shares issued and outstanding at December 31, 2019 and September 30, 2019, respectively

 

 

2

 

 

 

2

 

Paid in capital

 

 

64,219

 

 

 

63,924

 

Treasury stock common 303,876 shares as of December 31, 2019 and 262,177 shares as of September 30, 2019

 

 

(2,781

)

 

 

(2,438

)

Treasury stock Series E preferred 80,000 shares as of December 31, 2019 and 50,000 shares as of September 30, 2019

 

 

(7

)

 

 

(4

)

Accumulated deficit

 

 

(26,808

)

 

 

(27,355

)

Total stockholders' equity

 

 

34,625

 

 

 

34,129

 

Total liabilities and stockholders' equity

 

$

136,181

 

 

$

122,453

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

3


 

LIVE VENTURES, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(dollars in thousands, except per share)

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

Revenues

 

$

42,001

 

 

$

53,196

 

Cost of revenues

 

 

25,375

 

 

 

33,859

 

Gross profit

 

 

16,626

 

 

 

19,337

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

10,809

 

 

 

12,901

 

Sales and marketing expenses

 

 

2,330

 

 

 

4,346

 

Total operating expenses

 

 

13,139

 

 

 

17,247

 

Operating income

 

 

3,487

 

 

 

2,090

 

Other (expense) income:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,357

)

 

 

(1,653

)

Impairment charges

 

 

(1,207

)

 

 

 

Other income (expense)

 

 

(181

)

 

 

1,660

 

Total other (expense) income, net

 

 

(2,745

)

 

 

7

 

Income before provision for income taxes

 

 

742

 

 

 

2,097

 

Provision for income taxes

 

 

195

 

 

 

567

 

Net income

 

$

547

 

 

$

1,530

 

 

 

 

 

 

 

 

 

 

Dividends declared - series B convertible preferred stock

 

$

 

 

$

 

Dividends declared - series E convertible preferred stock

 

$

 

 

$

 

Dividends declared - common stock

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.79

 

Diluted

 

$

0.15

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

1,806,746

 

 

 

1,945,247

 

Diluted

 

 

3,540,953

 

 

 

3,696,030

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

4


 

LIVE VENTURES INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(dollars in thousands)

 

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

547

 

 

$

1,530

 

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,085

 

 

 

1,482

 

Amortization of right-of-use assets

 

 

327

 

 

 

 

Impairment charges

 

 

1,207

 

 

 

 

Gain or loss on disposal of property and equipment

 

 

47

 

 

 

(1,507

)

Amortization of debt issuance cost

 

 

108

 

 

 

97

 

Stock based compensation expense

 

 

29

 

 

 

47

 

Warrant extension fair value adjustment

 

 

266

 

 

 

 

Change in deferred rent

 

 

370

 

 

 

12

 

Change in reserve for uncollectible accounts

 

 

415

 

 

 

67

 

Change in reserve for obsolete inventory

 

 

(170

)

 

 

18

 

Change in deferred income taxes

 

 

126

 

 

 

527

 

Change in other

 

 

103

 

 

 

169

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

1,929

 

 

 

2,838

 

Inventories

 

 

439

 

 

 

3,993

 

Income taxes receivable

 

 

74

 

 

 

24

 

Prepaid expenses and other current assets

 

 

290

 

 

 

133

 

Deposits and other assets

 

 

9

 

 

 

15

 

Accounts payable

 

 

(2,182

)

 

 

(2,090

)

Accrued liabilities

 

 

(2,020

)

 

 

894

 

Net cash provided by operating activities

 

 

2,999

 

 

 

8,249

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of intangible assets

 

 

(4

)

 

 

(46

)

Proceeds from the sale of property and equipment

 

 

 

 

 

4,377

 

Purchase of property and equipment

 

 

(641

)

 

 

(496

)

Net cash provided by (used in) investing activities

 

 

(645

)

 

 

3,835

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net borrowings (payments) under revolver loans

 

 

(972

)

 

 

(7,347

)

Purchase of series E preferred treasury stock

 

 

(3

)

 

 

 

Purchase of common treasury stock

 

 

(343

)

 

 

(19

)

Debtor in possession - cash

 

 

(173

)

 

 

 

 

Payments on notes payable

 

 

(2,042

)

 

 

(3,258

)

Net cash used in financing activities

 

 

(3,533

)

 

 

(10,624

)

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(1,179

)

 

 

1,460

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

2,681

 

 

 

2,742

 

CASH AND CASH EQUIVALENTS, end of period

 

$

1,502

 

 

$

4,202

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

1,187

 

 

$

1,457

 

Income taxes paid (refunded)

 

$

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

5


 

LIVE VENTURES INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

(dollars in thousands)

 

 

 

 

Series B

Preferred Stock

 

 

Series E

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

Series E

Preferred

Stock

 

 

Common

Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Treasury

Stock

 

 

Treasury

Stock

 

 

Accumulated

Deficit

 

 

Total

Equity

 

Balance, September 30, 2019

 

 

214,244

 

 

$

 

 

 

77,840

 

 

$

 

 

 

1,826,009

 

 

$

2

 

 

$

63,924

 

 

$

(4

)

 

$

(2,438

)

 

$

(27,355

)

 

$

34,129

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

29

 

Warrant extension fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

266

 

 

 

 

 

 

 

 

 

 

 

 

266

 

Purchase of common treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,699

)

 

 

 

 

 

 

 

 

 

 

 

(343

)

 

 

 

 

 

(343

)

Purchase of Series E preferred stock

 

 

 

 

 

 

 

 

(30,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

(3

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

547

 

 

 

547

 

Balance, December 31, 2019

 

 

214,244

 

 

$

 

 

 

47,840

 

 

$

 

 

 

1,784,310

 

 

$

2

 

 

$

64,219

 

 

$

(7

)

 

$

(2,781

)

 

$

(26,808

)

 

$

34,625

 

 

 

 

Series B

Preferred Stock

 

 

Series E

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

Series E

Preferred

Stock

 

 

Common

Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Treasury

Stock

 

 

Treasury

Stock

 

 

Accumulated

Deficit

 

 

Total Equity

 

Balance, September 30, 2018

 

 

214,244

 

 

$

 

 

 

77,840

 

 

$

 

 

 

1,945,247

 

 

$

2

 

 

$

63,654

 

 

$

(4

)

 

$

(1,550

)

 

$

(22,654

)

 

$

39,448

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

47

 

Purchase of common treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,819

)

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,530

 

 

 

1,530

 

Balance, December 31, 2018

 

 

214,244

 

 

$

 

 

 

77,840

 

 

$

 

 

 

1,942,428

 

 

$

2

 

 

$

63,701

 

 

$

(4

)

 

$

(1,569

)

 

$

(21,124

)

 

$

41,006

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

6


 

LIVE VENTURES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018

(dollars in thousands, except per share)

Note 1:

Background and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Live Ventures Incorporated, a Nevada corporation, and its subsidiaries (collectively, the “Company”). Commencing in fiscal year 2015, the Company began a strategic shift in its business plan away from providing online marketing solutions for small and medium sized business to acquiring profitable companies in various industries that have demonstrated a strong history of earnings power. The Company continues to actively develop, revise and evaluate its products, services and its marketing strategies in its businesses. The Company has three operating segments: Manufacturing, Retail, and Online and Services. With Marquis Industries, Inc. (“Marquis”), the Company is engaged in the manufacture and sale of carpet and the sale of vinyl and wood floorcoverings. With Vintage Stock, Inc. (“Vintage Stock”), the Company is engaged in the retail sale of new and used movies, music, collectibles, comics, books, games, game systems and components. With ApplianceSmart, Inc. (“ApplianceSmart”), the Company is engaged in the sale of new major appliances through a retail store in Columbus, Ohio.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of the Company’s management, this interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results of operations for three months ended December 31, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2020. This financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of September 30, 2019 and for the fiscal year then ended included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 10, 2020 (the “2019 10-K”).

Note 2:

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements represent the consolidated financial position, results of operations and cash flows for Live Ventures and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation

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 estimate of dilution and fees associated with billings, the estimated reserve for doubtful current and long-term trade and other receivables, the estimated reserve for excess and obsolete inventory, estimated warranty reserve, estimated fair value and forfeiture rates for stock-based compensation, fair values in connection with the analysis of goodwill, other intangibles and long-lived assets for impairment, current portion of notes payable, 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, 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 December 31, 2019 and September 30, 2019 approximate fair value.

Cash and Cash Equivalents

Cash and Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Fair value of cash equivalents and restricted cash approximates carrying value.

7


 

Trade Receivables

The Company grants trade credit to customers under credit terms that it believes are customary in the industry it operates and does not require collateral to support customer trade receivables. Some of the Company’s trade receivables are factored primarily through two factors. Factored trade receivables are sold without recourse for substantially all of the balance receivable for credit approved accounts. The factor purchases the trade receivable(s) for the gross amount of the respective invoice(s), less factoring commissions, trade and cash discounts. The factor charges the Company a factoring commission for each trade account, which is between 0.75-1.00% of the gross amount of the invoice(s) factored on the date of the purchase, plus interest calculated at 3.25%-6% per annum. The minimum annual commission due the factor is $112 per contract year.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts, which includes allowances for accounts and factored trade receivables, customer refunds, dilution and fees from local exchange carrier billing aggregators and other uncollectible accounts. The allowance for doubtful accounts is based upon historical bad debt experience and periodic evaluations of the aging and collectability of the trade receivables. This allowance is maintained at a level which the Company believes is sufficient to cover potential credit losses and trade receivables are only written off to bad debt expense as uncollectible after all reasonable collection efforts have been made. The Company has also purchased accounts receivable credit insurance to cover non-factored trade and other receivables which helps reduce potential losses due to doubtful accounts. At December 31, 2019 and September 30, 2019, the allowance for doubtful accounts was $521 and $936, respectively.

Inventories

Manufacturing Segment

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 December 31, 2019 and September 30, 2019, the reserve for obsolete inventory was $92.

Retail and Online Segment

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. Merchandise inventory reserves as of December 31, 2019 and September 30, 2019 were $328 and $590, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of building and improvements are 3 to 40 years, transportation equipment is 5 to 10 years, machinery and equipment are 5 to 10 years, furnishings and fixtures are 3 to 5 years and office and computer equipment are 3 to 5 years. Depreciation expense was $915 and $1,128 for the three months ended December 31, 2019 and 2018, respectively.

We periodically review our property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with respect to our stores and those stores projected undiscounted cash flows. An impairment loss would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows.

Goodwill

The Company accounts for purchased goodwill and intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Under ASC 350, purchased goodwill are not amortized; rather, they are tested for impairment on at least an annual basis. Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired.

We test goodwill annually on July 1 of each fiscal year or more frequently if events arise or circumstances change that indicate that goodwill may be impaired. The Company assesses whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is

8


 

more likely than not that the fair value of a reporting unit is less than its’ carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed using a two-step approach required by ASC 350 to determine whether a goodwill impairment exists.

The first step of the quantitative test is to compare the carrying amount of the reporting unit's assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second step is required to be completed, which involves allocating the fair value of the reporting unit to each asset and liability using the guidance in ASC 805 (“Business Combinations, Accounting for Identifiable Intangible Assets in a Business Combination”), with the excess being applied to goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. The determination of the fair value of our reporting units is based, among other things, on estimates of future operating performance of the reporting unit being valued. We are required to complete an impairment test for goodwill and record any resulting impairment losses at least annually. Changes in market conditions, among other factors, may have an impact on these estimates and require interim impairment assessments.

When performing the two-step quantitative impairment test, the Company's methodology includes the use of an income approach which discounts future net cash flows to their present value at a rate that reflects the Company's cost of capital, otherwise known as the discounted cash flow method (“DCF”). These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash flows include the continued market acceptance of the products and services offered by the businesses, the development of new products and services by the businesses and the underlying cost of development, the future cost structure of the businesses, and future technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of our reporting units. Any such impairment would be recognized in full in the reporting period in which it has been identified.

There was no goodwill impairment for the three months ended December 31, 2019 or 2018.

Intangible Assets

The Company’s intangible assets consist of customer relationship intangibles, licenses for the use of internet domain names, Universal Resource Locators, or URL’s, software, and marketing and technology related intangibles. Upon acquisition, critical estimates are made in valuing acquired intangible assets, which include but are not limited to: future expected cash flows from customer contracts, customer lists, and estimating cash flows from projects when completed; tradename and market position, as well as assumptions about the period of time that customer relationships will continue; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from the assumptions used in determining the fair values. All intangible assets are capitalized at their original cost and amortized over their estimated useful lives as follows: domain name and marketing – 3 to 20 years; software – 3 to 5 years, customer relationships – 7 to 15 years, customer lists – 20 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determined lives may be adjusted. Intangible amortization expense is $170 and $353 for the three months ended December 31, 2019 and 2018, respectively.

Revenue Recognition

 

General

 

The Company accounts for its sales revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). Topic 606 provides a five-step revenue recognition model that is applied to the Company’s customer contracts. Under this model we (i) identify the contract with the customer, (ii) identify our performance obligations in the contract, (iii) determine the transaction price for the contract, (iv) allocate the transaction price to our performance obligations, and (v) recognize revenue when or as we satisfy our performance obligations.

 

Revenue is recognized upon transfer of control of the promised goods or the performance of the services to customers in an amount that reflects the consideration expected to be receive in exchange for those goods or services. The Company enters into contracts that may include various combinations of products and services, which are generally distinct and accounted for as separate performance obligations.

 

9


 

Manufacturing Segment

The Manufacturing Segment derives revenue primarily from the sale of carpet products, including shipping and handling amounts, which are recognized when the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales transaction price is fixed or determinable, (iii) title, ownership and risk of loss have been transferred to the customer, (iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of taxes collected from customers. All direct costs are either paid and or accrued for in the period in which the sale is recorded.

Retail and Online Segment

The Retail and Online Segment derives revenue primarily from direct sales of entertainment and appliance products and services, including shipping and handling amounts, which are recognized when the following requirements have been met: (i) there is persuasive evidence of an arrangement, (ii) the sales transaction price is fixed or determinable, (iii) title or use rights, ownership and risk of loss have been transferred to the customer, (iv) allocation of sales price to specific performance obligations, and (v) performance obligations are satisfied. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of taxes collected from customers. All direct costs are either paid and or accrued for in the period in which the sale is recorded.

Services Segment

The Services Segment recognizes revenue from directory subscription services as billed for and accepted by the customer. Directory services revenue is billed and recognized monthly for directory services subscribed. The Company has utilized outside billing companies to perform direct ACH withdrawals. For billings via ACH withdrawals, revenue is recognized when such billings are accepted by the customer. Customer refunds are recorded as an offset to gross Services Segment revenue.

Revenue for billings to certain customers that are billed directly by the Company and not through outside billing companies is recognized based on estimated future collections which are reasonably assured. The Company continuously reviews this estimate for reasonableness based on its collection experience.

Spare Parts

 

For spare part sales, we transfer control and recognize a sale when we ship the product to our customer or when the customer receives product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. We do not have any additional performance obligations other than spare part sales that are material in the context of the contract. The amount of consideration we receive and revenue we recognize varies due to sales incentives and returns we offer to our customers. When we give our customers the right to return eligible products, we reduce revenue for our estimate of the expected returns which is primarily based on an analysis of historical experience.

 

Warranties

 

Warranties are classified as either assurance type or service type warranties. A warranty is considered an assurance type warranty if it provides the consumer with assurance that the product will function as intended. A warranty that goes above and beyond ensuring basic functionality is considered a service type warranty. The Company offers certain limited warranties that are assurance type warranties and extended service arrangements that are service type warranties. Assurance type warranties are not accounted for as separate performance obligations under the revenue model. If a service type warranty is sold with a product or separately, revenue is recognized over the life of the warranty. The Company evaluates warranty offerings in comparison to industry standards and market expectations to determine appropriate warranty classification. Industry standards and market expectations are determined by jurisdictional laws, competitor offerings and customer expectations. Market expectations and industry standards can vary based on product type and geography. The Company primarily offers assurance type warranties.

 

We sell certain extended service arrangements separately from the sale of products. During 2019, the Company became the principal for certain extended service arrangements. Revenue related to these arrangements is recognized ratably over the contract term. The warranty reserve of $210 and $292 is included in accrued liabilities on the consolidated balance sheet at December 31, 2019 and September 30, 2019, respectively.

Shipping and Handling

The Company classifies shipping and handling charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.

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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, 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 for the three months ended December 31, 2019 and 2018, was $8 and $14, respectively.

Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows: Level 1 - inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. Level 2 – to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Income Taxes

The Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided on deferred taxes if it is determined that it is more likely than not that the asset will not be realized. The Company recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its Consolidated Statements of Income.

Significant management judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Company uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether it is more likely than not (greater than 50% chance) that the tax position will be sustained. The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of the Company in future periods.

Lease Accounting

We lease retail stores, warehouse facilities and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates through 2029 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance costs.  

 

For contracts entered into on or after October 1, 2019, we assess at contract inception whether the contract is, or contains, a lease. Generally, we determine that a lease exists when (i) the contract involves the use of a distinct identified asset, (ii) we obtain the right to substantially all economic benefits from use of the asset and (iii) we have the right to direct the use of the asset. In general, all of our leases are operating leases.

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At the lease commencement date, we recognize a right-of-use asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any prepayments to the lessor and initial direct costs such as brokerage commissions, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of our incremental borrowing rate for a collateralized loan with the same term as the underlying lease. The incremental borrowing rates used for the initial measurement of lease liabilities as of October 1, 2019 were based on the original lease terms.

 

Lease payments included in the measurement of lease liabilities consist of (i) fixed lease payments for the noncancelable lease term, (ii) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (iii) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. Certain of our real estate lease agreements require payments for non-lease costs such as utilities and common area maintenance. We have elected an accounting policy, as permitted by ASC 842, not to account for such payments separately from the related lease payments. Our policy election results in a higher initial measurement of lease liabilities when such non-lease payments are fixed amounts. Certain of our real estate lease agreements require variable lease payments that do not depend on an underlying index or rate, such as sales and value-added taxes and our proportionate share of actual property taxes, insurance and utilities. Such payments and changes in payments based on a rate or index are recognized in operating expenses when incurred.

 

Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. The lease payments are allocated between a reduction of the lease liability and interest expense. Amortization of the right-of-use asset for operating leases reflects amortization of the lease liability, any differences between straight-line expense and related lease payments during the accounting period, and any impairments

 

We adopted Accounting Standard Update (“ASU”) No. 2016-02 - Leases (Topic 842), as amended, or Accounting Standard Codification (“ASC 842”), as of October 1, 2019. The primary impact of ASC 842 on our consolidated financial statements is the recognition of right-of-use assets and related liabilities on our consolidated balance sheet for operating leases where we are the lessee. We elected to apply the requirements of the new standard on October 1, 2019 and we have not restated our consolidated financial statements for prior periods. Our adoption of ASC 842 did not have a material impact on the results of our operations or on our cash flows for the period presented.

 

We elected certain practical expedients under our transition method, including elections to not reassess (i) whether a contract is or contains a lease and (ii) the classification of existing leases. We also elected not to apply hindsight in determining whether optional renewal periods should be included in the lease term, which in some instances may impact the initial measurement of the lease liability and the calculation of straight-line expense over the lease term for operating leases. As a result of our transition elections, there was no change in our recognition of expense for leases that commenced prior to October 1, 2019.

 

Stock-Based Compensation

The Company from time to time grants stock options to employees, non-employees, and Company executives and directors. Such awards are valued based on the grant date fair-value of the instruments, net of estimated forfeitures. The value of each award is amortized on a straight-line basis over the vesting period.

 

Earnings Per Share

Earnings per share is calculated in accordance with ASC 260, “Earnings Per share”. Under ASC 260 basic earnings per share is computed using the weighted average number of common shares outstanding during the period except that it does not include unvested restricted stock subject to cancellation. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants, options, restricted shares and convertible preferred stock. The dilutive effect of outstanding restricted shares, options and warrants is reflected in diluted earnings per share by application of the treasury stock method. Convertible preferred stock is reflected on an if-converted basis.

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Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a Company’s management organizes segments within the Company for making operating decisions and assessing performance. The Company determined it has three reportable segments. The Company determined it has three reportable segments (See Note 15).

Concentration of Credit Risk

The Company maintains cash balances in bank accounts in each state the Company has business operations. Accounts are insured by the Federal Deposit Insurance Corporation up to $250  per institution. At times, balances may exceed federally insured limits.

Note 3:

Leases

We adopted ASU No. 2016-02, Leases (Topic 842) on October 1, 2019, the beginning of our fiscal year. The Company adopted the new standard prospectively and elected certain practical expedients permitted under the new standard’s transition guidance. This allows the Company to carry forward the historical lease classification and to not reassess the lease term for leases in existence as of the adoption date and to carry forward our historical accounting treatment for land easements on agreements existing on the adoption date. The Company also made policy elections for certain classes of underlying assets to not separate lease and non-lease components in a contract as permitted under the new standard.

We lease retail stores, warehouse facilities and office space. These assets and properties are generally leased under noncancelable agreements that expire at various dates through 2029 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases percentage rent and require us to pay all insurance, taxes and other maintenance costs. As a result, we recognize assets and liabilities for all leases with lease terms greater than 12 months. The amounts recognized reflect the present value of remaining lease payments for all leases. The discount rate used is an estimate of the Company’s blended incremental borrowing rate based on information available at lease commencement. In considering the lease asset value, the company considers fixed and variable payment terms, prepayments and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. See the Note 2 on Lease Accounting.

The weighted average remaining lease term is 2.5 years.  Our weighted average discount rate is 10.3%.  Total cash payments for the three months ended December 31, 2019 was $1,972. We did not enter into any new leases during the three months ended December 31, 2019.

 

The following table details our right of use assets and lease liabilities as of December 31, 2019:

 

 

 

December 31, 2019

 

Right of use asset - operating leases

 

$

18,684

 

Operating lease liabilities:

 

 

 

 

Current

 

 

7,359

 

Long term

 

 

12,520

 

 

Total present value of future lease payments as of December 31, 2019:

 

Twelve months ended December 31,

 

 

 

 

2020

 

$

7,359

 

2021

 

 

5,064

 

2022

 

 

3,267

 

2023

 

 

2,026

 

2024

 

 

1,132

 

Thereafter

 

 

2,193

 

Total

 

 

21,041

 

Less implied interest

 

 

(1,162

)

Present value of payments

 

$

19,879

 

 

During the three months ended, the Company incurred $1,207 of impairment charges related to the decision to close additional ApplianceSmart retail locations resulting in a decrease to the associated right of use asset related to these leases.  These locations physically closed during the three months ended March 31, 2020.  

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Note 4:

Balance Sheet Detail Information

 

 

 

December 31,

2019

 

 

September 30,

2019

 

Trade receivables, current, net:

 

 

 

 

 

 

 

 

Accounts receivable, current

 

$

9,434

 

 

$

12,641

 

Less: Reserve for doubtful accounts

 

 

(325

)

 

 

(740

)

 

 

$

9,109

 

 

$

11,901

 

Trade receivables , long term, net:

 

 

 

 

 

 

 

 

Accounts receivable, long term

 

$

196

 

 

$

196

 

Less: Reserve for doubtful accounts

 

 

(196

)

 

 

(196

)

 

 

$

 

 

$

 

Total trade receivables, net:

 

 

 

 

 

 

 

 

Gross trade receivables

 

$

9,630

 

 

$

12,837

 

Less: Reserve for doubtful accounts

 

 

(521

)

 

 

(936

)

 

 

$

9,109

 

 

$

11,901

 

Inventory, net

 

 

 

 

 

 

 

 

Raw materials

 

$

7,227

 

 

$

7,431

 

Work in progress

 

 

2,895

 

 

 

2,141

 

Finished goods

 

 

7,190

 

 

 

6,785

 

Merchandise

 

 

19,943

 

 

 

22,883

 

 

 

 

37,255

 

 

 

39,240

 

Less: Inventory reserves

 

 

(420

)

 

 

(682

)

 

 

$

36,835

 

 

$

38,558

 

Property and equipment, net:

 

 

 

 

 

 

 

 

Building and improvements

 

$

10,557

 

 

$

10,827

 

Transportation equipment

 

 

82

 

 

 

82

 

Machinery and equipment

 

 

20,299

 

 

 

20,035

 

Furnishings and fixtures

 

 

2,741

 

 

 

2,741

 

Office, computer equipment and other

 

 

2,651

 

 

 

2,544

 

 

 

 

36,330

 

 

 

36,229

 

Less: Accumulated depreciation

 

 

(14,229

)

 

 

(13,633

)

 

 

$

22,101

 

 

$

22,596

 

Intangible assets, net:

 

 

 

 

 

 

 

 

Domain name and marketing related intangibles

 

$

90

 

 

$

90

 

Lease intangibles

 

 

 

 

 

1,033

 

Customer relationship intangibles

 

 

2,689

 

 

 

2,689

 

Purchased software

 

 

120

 

 

 

808

 

 

 

 

2,899

 

 

 

4,620

 

Less: Accumulated amortization

 

 

(1,502

)

 

 

(2,421

)

 

 

$

1,397

 

 

$

2,199

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

1,349

 

 

$

3,316

 

Accrued sales and use taxes

 

 

649

 

 

 

1,176

 

Accrued property and other taxes

 

 

43

 

 

 

191

 

Accrued rent

 

 

563

 

 

 

604

 

Accrued gift card and escheatment liability

 

 

1,526

 

 

 

1,461

 

Accrued interest payable

 

 

180

 

 

 

181

 

Accrued accounts payable and bank overdrafts

 

 

271

 

 

 

591

 

Accrued professional fees

 

 

312

 

 

 

4,660

 

Customer deposits

 

 

78

 

 

 

240

 

Accrued expenses - other

 

 

158

 

 

 

564

 

 

 

$

5,129

 

 

$

12,984

 

 

 

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Note 5: