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.

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 had a principal amount as of the assignment date of

$3.3

million.

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

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.

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)

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

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

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

) there being

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

$141,000

and

$35,000

were received during the years ending

December 31, 2019

and

2018,

respectively.

Despite Buyer paying interest quarterly in advance on the Second A&R Note, the Company concluded, based on current information and events in the Buyer’s business, that the Company did

not

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

$897,000

in the

second

quarter of

2019

resulting in the carrying value of the A&R Note decreasing to

$1.3

million as of

June 30, 2019.

August 21, 2019,

the Company delivered a notice of default to Buyer under the Second A&R Note. The Company delivered this notice after receiving information from Alterna that Buyer was presently in default under its credit facility with Alterna.

The Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with Buyer and certain affiliates (the “Loan Parties”) pursuant to which the Company has agreed to forbear from exercising its rights and remedies under the Second A&R Note until

February 24, 2020

or earlier in the event of (i) a default occurring under the Second A&R Note other than previous defaults acknowledged in the Forbearance Agreement or (ii) a breach of the Forbearance Agreement by the Loan Parties.

The Forbearance Agreement became effective on

November 1, 2019 (

the “Effective Date”) when Buyer paid the Company

$220,000

and certain other conditions were satisfied. Under the Forbearance Agreement, Buyer has also agreed to pay the Company

$200,000

on or before the

30th

day following the Effective Date,

$150,000

on or before the

60th

day following the Effective Date, and

$130,000

on or before the

90th

day following the Effective Date. The payment made on

November 1, 2019

and each of the following payments are referred to as a Forbearance Period Payment and will be applied to the outstanding principal balance of the Note. As of

December 31, 2019,

the Company received the principal payments on the effective date, the

day, and the

day, totaling

$570,000,

in accordance with the Forbearance Agreement.

Under the Forbearance Agreement, the Company has agreed to accept the discounted payments in satisfaction of the Second A&R Note if the forbearance period has

not

been terminated: (i) on or before the

90th

day after the Effective Date,

$2,230,000

less the sum of all Forbearance Period Payments and payments made to cure a minimum collateral value shortfall and (ii) after the

90th

day following the Effective Date,

$2,530,000

less Forbearance Period Payments and payments made to cure a minimum collateral value shortfall.

The Forbearance Agreement also includes customary representations and warranties of Loan Parties and certain releases by Loan Parties.

All amounts outstanding under the Ledgered Asset Based Lending Agreement between Alterna Capital Solutions, LLC (“Alterna”) and Buyer have been paid in full and the Intercreditor and Debt Subordination Agreement, dated

February 25, 2019,

executed by the Company in favor of Alterna is

longer effective.

In view of the impairment loss recorded by the Company in the

second

quarter of

2019

with respect to the Note, the Company does

not

anticipate recording any additional impairment charges at this time as a result of the Event of Default or the Forbearance Agreement. As of

December 31, 2019,

the outstanding principal amount of the Second A&R Note was

$2.6

million and the carrying value of the Note was

$709,000.

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

$356,000

and

$141,000

were received during the years ending

December 31, 2019

and

2018,

respectively. During the years ending

December 31, 2019

and

2018,

respectively, the Company received

$1,011,000

and

$60,000

of principal payments on the S&L Note.

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

$162,000

and

$62,000

for years ending

December 31, 2019

and

2018,

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

$3.3

million and the carrying amount was

$2.7

million as of

December 31, 2019.

A reconciliation of the activity in the Second A&R Note for the years ending

December 31, 2019

and

2018

is as follows (in thousands):

	Principal			Discount			Balance
Balance at January 1, 2018	$	-		$	-		$	-
New borrowings on subordinated note receivables		7,421			(2,607	)		4,814
Interest paid-in-kind		337			-			337
Extinguishment of debt		(4,400	)		1,330			(3,070	)
Capitalized legal fees		18			-			18
Accretion of discount		-			265			265
Balance at December 31, 2018	$	3,376		$	(1,012	)	$	2,364
Principal payments		(812	)		-			(812	)
Impairment		-			(897	)		(897	)
Accretion of discount		-			54			54
Balance at December 31, 2019	$	2,564		$	(1,855	)	$	709

A reconciliation of the activity in the S&L Note for the years ending

December 31, 2019

and

2018

is as follows (in thousands):

	Principal			Discount			Balance
Balance at January 1, 2018	$	-		$	-		$	-
New borrowings on subordinated note receivables		4,400			(884	)		3,516
Principal payments		(60	)		-			(60	)
Accretion of discount		-			62			62
Balance at December 31, 2018	$	4,340		$	(822	)	$	3,518
Principal payments		(1,011	)		-			(1,011	)
Accretion of discount		-			163			163
Balance at December 31, 2019	$	3,329		$	(659	)	$	2,670