Note 4 - Subordinated Secured Notes Receivable

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

4.

     

Subordinated Notes Receivable

The Company received a

$7.4

million subordinated secured promissory note (the “Original Note”) from the Buyer as partial consideration for the sale of substantially all of our assets during the

first

quarter of

2018.

On

September 6, 2018,

the Buyer sold certain of its assets, including certain inventory and the Stone & Leigh tradename (the “S&L Asset Sale”) to Stone & Leigh, LLC (“S&L”), which is owned by a group which includes Matthew W. Smith, the Company’s former interim Chief Executive Officer. As a part of the S&L Asset Sale, the Buyer assigned to S&L certain of its rights and obligations under the original

$7.4

million subordinated secured promissory note. In connection with the assignment, the Company entered into an Amended and Restated Subordinated Secured promissory note with the Buyer (the “A&R Note”) and a new Subordinated Secured Promissory Note with S&L (the “New Note”).

We determined that the assignment of a portion of the Original Note to S&L resulted in an extinguishment of the note receivable under ASC

310,

Receivables

, requiring that the Original Note be derecognized and both the A&R Note and the New Note separately be recorded at fair value on the extinguishment date. As a result of this analysis, we recognized a

$448,000

gain on the extinguishment of the Original Note.

The A&R Note has a principal amount as of the assignment date of

$3.3

million. The note maturity remains

March 2, 2023,

at which time the total principal amount is due.  Interest on the principal balance of the note continues to accrue daily at an annual fixed rate of

6%.

 Cash interest payments begin upon certain availability thresholds defined in the Buyer’s senior secured loan facility. For the portions of the year which the availability thresholds were

not

met, accrued interest of

$337,000

was considered paid in kind and capitalized to the principal balance of the note. During portions of the year ended

December 31, 2018,

there was an event of default on the Buyer’s senior secured loan. An event of default on the Buyer’s senior secured loan triggers an event of default under the A&R Note. The default interest accrues at a fixed rate of

12%

per annum. The event of default was cured on

November 5, 2018

when the Buyer paid off the senior secured loan facility. The payoff resulted in the elimination of the availability thresholds and the Company began receiving cash interest payments. The Company received

$35,000

of cash interest for the year ended

December 31, 2018

on the A&R Note. 

During the

first

quarter

2018,

we evaluated the fair value of the Original Note, which resulted in a fair value adjustment of

$2.6

million.  Prior to the assignment date, we recorded accreted interest income on the fair value adjustment of the Original Note of

$199,000.

 We re-evaluated the fair value adjustment of the A&R Note at the assignment date, which resulted in a fair value adjustment of

$1.1

million on the

$3.3

million principal amount. Subsequent to the assignment date, we recorded accreted interest income on the fair value adjustment of the A&R Note of

$66,000

during the year.

Resulting from the interest being paid in kind, the accretion of the fair value adjustment, and the assignment of the

$4.4

million of the Original Note to S&L, the carrying value of the A&R Note decreased to

$2.4

million as of

December 31, 2018.

The New Note had a principal amount of

$4.4

million as of the assignment date. The New Note also matures on

March 2, 2023,

at which time the total principal amount is due. Interest on the New Note accrues at a fixed rate of

10%

per annum. In connection with the issuance of the New Note, the Company entered into an Intercreditor and Debt Subordination Agreement (the “New Subordination Agreement”) with Hale Partnership Fund, L.P. (a related party) as agent for a number of affiliated funds (collectively, the “Senior Lenders”). The New Subordination Agreement allowed the Company to receive payments, including monthly cash interest payments, from S&L unless such payment would result in an event of default under the Senior Note. Cash interest payments of

$141,000

were paid current during the year. On

December 17, 2018,

S&L paid off the Senior Lenders and began making principal payments on the New Note. As of

December 31, 2018,

the Company received

$60,000

of principal payments on the New Note.

At the assignment date, we evaluated the fair value of the New Note, which resulted in a fair value adjustment of

$945,000.

We recorded accreted interest income on the fair value adjustment of the New Note of

$62,000.

Resulting from the accretion of the fair value discount, the carrying amount of the New Note was

$3.5

million as of

December 31, 2018.

As of

December 31, 2018

and

2017,

subordinated notes receivable consisted of the following (in thousands):

	2018							2017
	Principal Balance		Discount			Balance		Principal Balance		Discount		Balance
A&R Note	$	3,376	$	(1,012	)	$	2,364		-		-		-
S&L Note		4,340		(822	)		3,518		-		-		-
	$	7,716	$	(1,834	)	$	5,882		-		-		-