Note 4 - Subordinated Notes Receivable

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

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

4.         Subordinated Notes Receivable

The Company received the $7.4 million Original Note from the Buyer as partial consideration for the Asset Sale 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 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 Note.  In connection with the assignment, the Company entered into the A&R Note with the Buyer and the S&L Note with S&L.  The A&R Note had a principal amount as of the assignment date of $3.3 million. 

S&L Note

The S&L Note had a principal amount of $4.4 million as of the assignment date.  The S&L Note matured on March 2, 2023, at which time the total principal amount became due.  Interest on the S&L Note accrues at a fixed rate of 10% per annum.  No cash interest payments were accrued or received during the years ended December 31, 2022 and 2021.  During the years ended December 31, 2022 and 2021, the Company received $0 and $190,000 of principal payments on the S&L Note, respectively.

At the assignment date, the Company evaluated the fair value of the S&L Note. As a result of the Company’s recording of impairment losses, based on current information and events, including the impact of the COVID-19 pandemic on S&L’s business and its customers, 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 S&L Note was other than temporarily impaired.  As such, the Company did not record accreted interest income on the fair value adjustment of the S&L Note for the years ended December 31, 2022 and 2021.

The Company recognized interest payments of $0 and $190,000 received during the years ended December 31, 2022 and 2021, respectively, as reductions of the principal balance of the S&L Note.

During 2022, the Company concluded that S&L would not have adequate cash required to repay the carrying value of the S&L Note. Given the facts and circumstances, the Company recorded an impairment loss of $992,000 and $701,000 for the years ended December 31, 2022 and 2021, respectively. The Company’s estimated fair value of the S&L Note is based upon the estimated fair value of the collateral securing the S&L Note, namely cash, accounts receivables, and inventory. The determination of fair value involves management’s judgment, including analysis of the impact of the COVID-19 pandemic 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 measurement and represent Level 1 and 2 inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 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, 2022 and 2021 is as follows (in thousands):

	Principal			Discount			Balance
Balance at January 1, 2021	$	3,271		$	(1,388	)	$	1,883
Principal payments		(190	)		-			(190	)
Impairment		-			(701	)		(701	)
Balance at December 31, 2021	$	3,081		$	(2,089	)	$	992
Impairment		-			(992	)		(992	)
Balance at December 31, 2022	$	3,081		$	(3,081	)	$	-