Subordinated Notes Receivable

The Company received a

$7.4

million subordinated secured promissory 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 to 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.

A&R Note

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 Second Amended and Restated Subordinated Secured Promissory Note (the “Second A&R Note”) in favor of the Company. The Second A&R Note had a principal amount of

$3.2

million and remained payable

later than

March 2, 2023,

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

6%.

The other terms of the Second A&R Note were substantially the same as those of the A&R Note. The Second A&R Note was guaranteed by Stanley Intermediate Holdings LLC, formerly Churchill Downs Intermediate Holdings LLC. Pursuant to the Consent, Buyer's British Virgin Island parent company 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 was 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, were 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 Buyer being current and within their terms, and (

) there being

delinquency in payables or other obligations of Buyer to specified critical vendors.

Despite Buyer paying interest quarterly in advance on the Second A&R Note, the Company concluded during the

second

quarter of

2019,

based on the then current information and events in the Buyer's business, that the Company did

not

believe it would be able to collect the entire 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 present during the

second

quarter of

2019,

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 then in default under its credit facility with Alterna.

October 31, 2019,

the Company entered into a Forbearance Agreement with the Buyer and certain affiliates (the “Loan Parties”) pursuant to which the Company agreed, subject to certain conditions, to forbear until

February 24, 2020

from exercising its rights and remedies under the Second A&R Note issued by Buyer to the Company. On

February 24, 2020,

the Company and the Loan Parties entered into a letter agreement (the “Forbearance Extension Letter Agreement”) extended the outside termination date for the forbearance period under the Forbearance Agreement from

February 24, 2020

February 26, 2020.

The other terms and conditions of the Forbearance Agreement remained the same. The forbearance period terminated on

February 26, 2020

under the terms of the Forbearance Extension Letter Agreement and Forbearance Agreement.

The Company received payments on

January 31, 2020,

February 28, 2020,

and

March 4, 2020

$130,000,

$200,000

and

$350,000,

respectively, of the principal amount on the Second A&R Note from the Buyer.

March 6, 2020,

the Company and the Loan Parties entered into a letter agreement (the “Second Forbearance Extension Letter Agreement”) extended, subject to certain conditions, the outside termination date from

February 26, 2020

March 17, 2020.

The extension of the outside termination and the effectiveness of the Second Forbearance Extension Letter Agreement was conditioned on Buyer making payments to be applied to the outstanding principal balance of the Second A&R Note of

$250,000

on or before

March 12, 2020

and

$750,000

on or before

March 13, 2020.

The Second Forbearance Extension Letter Agreement also required the Buyer to make an additional

$391,970

payment on or before

March 17, 2020

to be applied to the outstanding principal balance of the Second A&R Note. The other terms and conditions of the Forbearance Agreement remained the same.

March 12

and

13,

2020,

the Company received payments from Buyer of

$250,000

and

$750,000,

respectively, pursuant to the Second Forbearance Extension Letter Agreement which payments were applied to the outstanding principal amount of the Second A&R Note.

March 16, 2020,

the Company received payment of

$392,000

from the Buyer resulting in satisfaction in full of the Second A&R Note pursuant to the terms of the Forbearance Agreement as amended. As a result of the payments received from Buyer in the

first

quarter of

2020

on the Second A&R Note, the Company recognized a gain of

$1.3

million on the payoff of the Second A&R Note during the

first

quarter of

2020.

The Company did

not

receive any cash interest payments during the year ended

December 31, 2020

as interest for the quarter was paid in advance on

December 31, 2019

and recorded as a principal payment.

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

December 31, 2020

and

2019

is as follows (in thousands):

	Principal			Discount			Balance
Balance at January 1, 2019	$	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
Interest paid-in-kind		25			-			25
Gain on settlement of debt		(529	)		1,855			1,326
Principal payments		(2,060	)		-			(2,060	)
Balance at December 31, 2020	$	-		$	-		$	-

S&L Note

The S&L Note had a principal amount of

$4.4

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

$252,000

and

$356,000

were accrued or received during the years ended

December 31, 2020

and

2019,

respectively. During the years ended

December 31, 2020

and

2019,

the Company received

$58,000

and

$1,011,000

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

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

$104,000

and

$163,000

for the years ended

December 31, 2020

and

2019,

respectively.

The Company recorded an impairment loss of

$833,000

and

during the years ended

December 31, 2020

and

2019.

Accordingly, the Company ceased accruing interest and accreting interest income on the fair value discount of the S&L Note on the date in the

third

quarter of

2020

the Company determined the note was other than temporarily impaired. The Company recognized the interest payments of

$58,000

received in the

fourth

quarter

2020

as reductions of the principal balance of the S&L Note.

As of

December 31, 2020,

the Company concluded that the estimated fair market value of the S&L Note will provide adequate cash required to repay the

$1.9

million carrying value of the S&L Note. The Company's estimated fair value of the S&L Note is based upon the estimated fair value of the collateral securing the note, namely cash, accounts receivables, and inventory. The determination of fair value involves management's judgment, including analysis of the impact of COVID-

on S&L's business and its customers, and the use of market and

third

-party estimates regarding collateral values. These collateral value estimates are based on the

three

-level valuation hierarchy for fair value for fair value measurement and represent Level

and

inputs. Level

inputs are quoted prices in active markets for identical assets or liabilities. Level

inputs are inputs other than quoted prices included within Level

that are observable for the asset or liability, either directly or indirectly.

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

December 31, 2020

and

2019

is as follows (in thousands):

	Principal			Discount			Balance
Balance at January 1, 2019	$	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
Principal payments		(58	)		-			(58	)
Accretion of discount		-			104			104
Impairment		-			(833	)		(833	)
Balance at December 31, 2020	$	3,271		$	(1,388	)	$	1,883