Live Ventures Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2018, the company’s fiscal second quarter. The filing was signed May 16, 2018. Live Ventures is a holding company with Manufacturing, Retail and Online, and Services segments. ApplianceSmart’s results are included from its December 2017 acquisition.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $52.18 million; up 35.4% year over year | $92.55 million; up 30.9% |
| Gross profit / margin | $19.65 million / 37.7%, versus 42.8% | $36.05 million / 38.9%, versus 41.2% |
| Operating income | $4.07 million, down 22.7% | $7.99 million, down 10.7% |
| Net income | $1.92 million, versus $1.84 million | $3.80 million, versus $3.27 million |
| EPS | Basic $0.98; diluted $0.50 | Basic $1.93; diluted $1.01 |
- Cash flow: Six-month operating cash flow was $6.51 million, investing cash outflow $6.91 million, and financing cash outflow $1.07 million. Cash declined $1.47 million to $2.50 million. Purchases of property and equipment were $6.53 million.
- Liquidity: Current assets were $62.64 million and current liabilities $69.13 million at March 31, 2018. Cash was $2.50 million; reported additional availability was $9.80 million on the Bank of America revolver and $3.88 million on the Texas Capital revolver.
- Debt: Long-term debt, net of issuance costs, totaled $74.88 million, of which $45.82 million was classified current; a separate $2.00 million related-party note was outstanding. The Capitala term loan balance was $25.92 million and carried a reported weighted-average rate of 16.94% during the six months.
- Balance sheet changes: Compared with September 30, 2017, total assets rose to $137.32 million from $128.59 million, while inventory increased to $45.06 million from $34.50 million. Stockholders’ equity was $37.14 million.
Material changes versus prior period
- ApplianceSmart contributed new appliance sales after its December 30, 2017 acquisition. The transaction’s preliminary allocation recorded a $3.77 million bargain-purchase gain in the six-month results; none was recorded in the March quarter.
- Revenue growth also reflected higher Vintage Stock sales and increased hard-surface flooring revenue. However, gross margin declined, and operating income fell in both the quarter and six-month comparison as operating expenses grew.
- Manufacturing operating income decreased 40.6% for the quarter and 29.3% for six months. The company attributed a substantial synthetic-turf gross-profit decline to losing a major customer; it said a replacement customer was obtained in fiscal Q3.
- Six-month interest expense rose 23.1% year over year. The company also reported a $2.3 million increase in tax expense associated with remeasuring deferred taxes following the federal tax-rate change. The reported six-month effective tax rate was 50.1%.
Outlook, risks and unusual items
- Debt covenant default: The company was out of compliance with the Capitala term loan’s total-leverage covenant at March 31, 2018. Management said it did not expect to regain compliance until sometime in fiscal 2019 and was negotiating with Capitala and seeking alternative credit. No resolution had been reached by the filing date. There is no assurance a resolution or replacement financing will be available on acceptable terms.
- The covenant breach resulted in the Capitala term loan being classified as current. The filing identifies $25.92 million of Capitala debt within current notes payable, intensifying refinancing and liquidity risk.
- Management stated it believed cash, operating cash flow and revolver availability would fund operations and planned needs for at least 12 months. This assessment depends on continued access to revolver capacity and resolving the Capitala default; the filing provides no earnings or revenue guidance.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Material weaknesses cited included financial-reporting controls, segregation of duties, tax-provision review, cash-flow and balance-sheet classifications, and business-combination accounting. Remediation was underway but not yet completed or tested.
- The ApplianceSmart purchase-price allocation remained preliminary. The remaining purchase price was partly financed after quarter-end with a $3.92 million, 5% promissory note due April 2021; the company also paid $2.58 million in cash.
- Management said it was not accepting new customers in directory services and expected that segment’s revenue and operating income to continue declining. Modern Everyday was winding down remaining inventory, and LiveDeal.com had not generated revenue.
- The company reported routine litigation and did not expect pending matters to have a material adverse effect based on information available. It reported no off-balance-sheet arrangements.
Investor verification priorities
- Confirm whether the Capitala covenant default was waived, amended, or refinanced after May 16, 2018, and review any resulting maturity, pricing, or collateral changes.
- Assess actual revolver availability, borrowing-base restrictions, and liquidity after considering the covenant event and near-term debt classification.
- Track operating margins and cash conversion, particularly the impact of ApplianceSmart integration, manufacturing cost increases, and the replacement synthetic-turf customer.
- Review the completed ApplianceSmart purchase-price allocation and related-party financing terms and balances.
- Check progress in remediating the disclosed material weaknesses and whether subsequent filings report effective controls.
- Reconcile the significant tax expense and deferred-tax adjustment, including the effect of the federal rate change and available net operating loss carryforwards.