Live Ventures Incorporated — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016; comparative period is the three months ended December 31, 2015. The filing was signed February 9, 2017. Live Ventures is an acquisition-focused holding company with Manufacturing, Retail and Online, and Services segments. The quarter includes Vintage Stock results only from its November 3, 2016 acquisition date.
Key financial results
| Metric | Q1 FY2017 | Q1 FY2016 | Change / context |
|---|---|---|---|
| Revenue | $32.19 million | $20.10 million | Up 60.1%, mainly reflecting Vintage Stock |
| Gross profit / margin | $12.65 million / 39.3% | $6.41 million / 31.9% | Margin improved 7.4 percentage points |
| Operating income / margin | $3.68 million / 11.4% | $1.05 million / 5.2% | Operating income up 251.3% |
| Net income attributable to Live Ventures | $1.43 million | $176,148 | Prior-period net income included $124,194 attributable to noncontrolling interest |
| EPS | $0.71 basic; $0.37 diluted | $0.06 basic; $0.05 diluted | Share counts and per-share data reflect a 1-for-6 reverse split |
| Operating cash flow | $4.99 million | $2.73 million | Increase of $2.26 million |
| Investing cash flow | $(62.18) million | $(0.09) million | Primarily Vintage Stock acquisition and equipment purchases |
| Financing cash flow | $58.00 million | $(2.04) million | Acquisition-related borrowing and equipment financing |
Interest expense rose to $1.45 million from $345,483, primarily due to financing for Vintage Stock. The income tax provision was $842,909, including $768,135 of deferred tax expense; the reported effective tax rate was 37.1%.
Financial position and liquidity
- At December 31, 2016, cash was $1.59 million; current assets were $46.32 million and current liabilities $22.04 million.
- Reported notes payable, net of issuance costs, totaled $73.51 million, including $6.23 million current and $67.29 million long-term. The balance sheet separately reports a $2.00 million related-party note payable. Debt increased substantially following the acquisition.
- Debt includes the Capitala term loan, with a reported weighted-average rate of 16.08% for its partial-period borrowings, and a $10 million seller note bearing 8% interest. Revolving facilities are floating-rate and secured by subsidiary assets.
- At quarter-end, reported additional borrowing availability was $8.35 million under the Bank of America revolver and $4.17 million under the Texas Capital Bank revolver. Management stated the facilities, cash and operating cash generation were expected to support liquidity for at least 12 months, and reported compliance with debt covenants.
- Total assets were $120.34 million, including $39.07 million of goodwill from the Vintage Stock acquisition. Stockholders’ equity was $29.01 million.
Material changes and segment performance
- Vintage Stock acquisition: Acquired 100% of the retailer on November 3 for reported consideration of $57.65 million. The preliminary purchase-price allocation included $39.07 million goodwill and was subject to completion. The acquisition contributed $14.78 million of quarterly Retail and Online revenue and $1.74 million operating income for the included period.
- Retail and Online: Revenue was $14.78 million versus $3.64 million; operating income was $1.74 million versus a prior-period operating loss of approximately $0.90 million. Vintage Stock’s used merchandise generated a reported 78.4% gross margin, while new merchandise generated 27.0%.
- Manufacturing: Revenue increased 6.2% to $17.19 million, while operating income was broadly stable at $1.72 million. Carpet gross margin declined to 25.4% from 28.9%, which management attributed partly to costs of equipment replacement; hard-surface margin improved.
- Services: Revenue declined 17.7% to $224,407 and operating income declined 17.6% to $213,841. Management expects the legacy directory-services business to continue declining and is no longer accepting new customers.
- General and administrative expense increased to $7.06 million, including $5.37 million attributed to Vintage Stock for the included period and $347,610 of one-time acquisition costs. Selling and marketing expense decreased to $1.91 million, largely with lower Kitchen and Home activity.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management expects improved carpet and synthetic-turf margins as new equipment and employee training improve efficiency; it expects Services revenue and operating income to keep declining.
- Management may seek additional debt or equity financing for acquisitions or strategic investments; equity financing could dilute existing shareholders. Retail expansion, acquisitions, and store openings require capital.
- Disclosed risks include discretionary consumer spending, seasonal holiday sales, video-game and physical-media obsolescence from digital delivery, competition, store leases and new-store execution, supply disruptions, data security, and possible impairment of goodwill or other assets. Floating-rate borrowings create interest-rate exposure.
- Disclosure controls and procedures were determined to be ineffective because accounting-process documentation, internal controls and testing were inadequate. Management said it was working to remediate the deficiencies. Vintage Stock was 48.1% of consolidated assets and 45.6% of quarterly revenue; integration into internal-control assessment was ongoing.
- The Vintage Stock purchase allocation was preliminary. The quarter also included a 1-for-6 reverse stock split and issuance of Series B preferred shares, including shares exchanged for common stock and shares issued to settle a $2.8 million accrued liability. Series B shares and warrants are convertible or exercisable into common shares, creating potential dilution.
- The company disclosed no off-balance-sheet arrangements and no subsequent events. A concluded lease dispute remained unpaid, with $52,261 accrued; management did not expect other pending matters to have a material adverse effect based on information available.
Important facts for investors to verify
- Vintage Stock’s post-acquisition operating performance, integration costs, and final purchase-price allocation, especially the $39.07 million goodwill balance.
- Debt service capacity, cash generation, borrowing-base availability, covenant compliance, and exposure to variable rates and the Capitala loan’s high interest cost.
- Progress in remediating ineffective disclosure controls, particularly as Vintage Stock represents a significant share of consolidated operations.
- Potential dilution from Series B preferred stock, preferred-stock warrants, options, and other equity instruments; compare diluted EPS with basic EPS and outstanding share counts.
- Whether management’s expected manufacturing-margin improvement occurs, and how retail seasonality, physical-media demand, and the declining Services segment affect results.