Note 3 - Subordinated Notes Receivable

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

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

3.

      

Subordinated Note

s

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 “S&L Note”). The A&R Note has a principal amount as of the assignment date of

$3.3

million.

On

February 7, 2019,

the Company, Buyer and related parties entered into a Consent, Reaffirmation, and Joinder (the “Consent”) in connection with a new senior credit facility that Buyer expected to enter into with Alterna Capital Solutions, LLC (“Alterna”).  Pursuant to the Consent, Buyer delivered a Seconded Amended and Restated Subordinated Secured Promissory Note (the “Second A&R Note”) in favor of the Company. The Second A&R Note has a principal amount of

$3.2

million and remains payable

no

later than

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%.

The other terms of the Second A&R Note are substantially the same as those of the A&R Note. The Second A&R Note also remains guaranteed by Stanley Intermediate Holdings LLC, formerly Churchill Downs Intermediate Holdings LLC. Pursuant to the Consent, Buyer’s British Virgin Island parent company has also guaranteed the Second A&R Note.

On

February 25, 2019,

Buyer closed and funded its new senior credit facility with Alterna. Pursuant to the Consent, the Company entered into an Intercreditor and Debt Subordination Agreement, dated

February 25, 2019 (

the “Subordination Agreement”), with Alterna. The Subordination Agreement with Alterna is generally on the same terms as the subordination agreement the Company previously entered into with North Mill Capital, LLC in connection with the original subordinated secured promissory note dated

March 2, 2018

from Buyer in favor of the Company, except that principal payments on the Second A&R Note, before satisfaction of the of indebtedness to Alterna and termination of the Subordination Agreement, are conditioned upon (l)

no

event of default under the new senior credit facility existing or resulting from the payment,  (

2

) availability under the new senior credit facility to make the payment, (

3

) all tax and debt obligations of Stanley Furniture Company, LLC (“SFC”) being current and within their terms,  and (

4

) there being

no

delinquency in payables or other obligations of SFC to specified critical vendors. Cash interest payments of

$0

and

$49,000

were received during the

three

and

six

months ending

June 30, 2019,

respectively.

Despite Buyer paying interest on the Second A&R Note current during the

three

months ended

June 30, 2019

and making the contractual interest payment for the

third

quarter of

2019

subsequent to the period ended

June 30, 2019,

the Company concluded, based on current information and events in the Buyer’s business, that the Company does

not

believe it will be able to collect the amount due according to the Second A&R Note and determined that the note is other than temporarily impaired. This evaluation is generally based on an assessment of the borrower’s financial condition and the adequacy of the collateral securing the Second A&R Note. Given these facts and circumstances, we recorded an impairment loss of

$897,000.

As a result, the carrying value of the A&R Note decreased to

$1.3

million as of

June 30, 2019.

The S&L Note had a principal amount of

$4.4

million as of the assignment date. The S&L Note also matures on

March 2, 2023,

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

10%

per annum. Cash interest payments of

$89,000

and

$186,000

were received during the

three

and

six

months ending

June 30, 2019,

respectively. During the

three

and

six

months ending

June 30, 2019,

the Company received

$160,000

and

$803,000

of principal payments on the S&L Note, respectively.

At the assignment date, we evaluated the fair value of the S&L Note. We recorded accreted interest income on the fair value adjustment of the S&L Note of

$41,000

and

$90,000

for the

three

and

six

months ending

June 30, 2019,

respectively. Resulting from the accretion of the fair value discount and the principal payments, the carrying amount of the S&L Note was

$2.8

million as of

June 30, 2019.