LIVE Ventures Incorporated — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; comparison is with the fiscal year ended September 30, 2015. This is an annual report, not a standalone fourth-quarter report.
Business context
Live Ventures shifted from an online-marketing-focused business toward acquiring profitable companies. Marquis Industries, a flooring and yarn manufacturer, was consolidated from July 2015 and contributed a full year of results in FY2016. The company reported three segments: Manufacturing, Marketplace Platform, and Services. It acquired specialty retailer Vintage Stock after year-end, on November 3, 2016.
Financial highlights
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $78.95 million | $33.37 million |
| Gross profit | $19.97 million | $11.25 million |
| Gross margin | 25.3% | 33.7% |
| Operating income (loss) | $2.32 million | $(10.14) million |
| Net income (loss) attributable to Live Ventures | $17.83 million | $(14.67) million |
| Basic / diluted EPS | $6.33 / $5.40 | $(5.58) / $(5.58) |
| Operating cash flow | $6.06 million | $(1.02) million |
| Cash and cash equivalents at year-end | $0.77 million | $2.73 million |
| Working capital at year-end | $11.25 million | $14.81 million |
- Segment revenue: Manufacturing $72.51 million, up 353%; Marketplace Platform $5.44 million, down 65.7%; Services $1.01 million, down 32.6%. Management attributed the overall revenue increase mainly to Marquis.
- Segment operating results: Manufacturing income was $6.53 million; Marketplace Platform had a $5.17 million loss; Services income was $0.96 million.
- Debt: Notes payable totaled $15.89 million gross, including $1.79 million current; a separate $2.00 million related-party note was also outstanding. Debt included a $9.35 million Store Capital loan and $4.93 million equipment loan. The Bank of America revolver had $0.22 million drawn and the term loan had no balance at year-end.
- Liquidity: Current assets were $25.22 million and current liabilities $13.59 million. Cash fell by $1.96 million during the year. Management stated that available cash was expected to fund operations for the next 12 months, while warning that this depended on cash generation and financing availability.
Changes versus prior year and unusual items
- Revenue growth principally reflected a full year of Marquis results, versus only a short post-acquisition period in FY2015. Marketplace and legacy-services revenues continued to decline as the company reduced investment in those activities.
- Net income included a $12.52 million deferred tax benefit after management reversed its valuation allowance, citing expected realization of tax assets through profitable operations. The balance sheet consequently recorded $12.52 million of deferred tax assets.
- Results also included a $4.57 million bargain-purchase gain from finalizing the Marquis purchase-price allocation. The final allocation removed provisional Marquis goodwill and recognized customer-relationship intangibles.
- Other income included settlement and asset-sale gains, and a $915,500 gain related to settling a software obligation with shares. Conversely, a $2.80 million fee associated with the Kingston agreement was recorded as interest expense and accrued as a liability.
- FY2015 included $3.71 million of impairment charges on goodwill and intangible assets; no such impairment was recorded in FY2016.
- The filing’s audited statements show a clean opinion on the financial statements. However, management concluded that disclosure controls and internal control over financial reporting were ineffective at September 30, 2016, citing delayed completion of the Marquis purchase-price allocation and financial-reporting inconsistencies. The auditor did not audit internal control effectiveness.
Outlook, risks, and subsequent events
- Management expected Marketplace Platform and Services revenue to continue declining. It anticipated Manufacturing expenses to remain near FY2016 run rates as a share of revenue and continued to evaluate acquisitions and other strategic investments; no quantified earnings or revenue guidance was provided.
- Key disclosed risks include acquisition integration and financing, manufacturing exposure to housing and construction cycles, competition and raw-material cost changes, dependence on key acquired-business personnel, and the need for additional capital. The company also noted that future equity or debt financing could dilute shareholders or increase costs.
- Marquis’s Bank of America facilities included a fixed-charge-coverage covenant; the company was at the lowest pricing tier at year-end. An October 2016 agreement kept that tier in effect through October 2017, after which pricing was to be adjusted quarterly based on the ratio.
- On November 3, 2016, Live Ventures acquired Vintage Stock for an approximately $58 million purchase price, with total transaction value and expenses of about $60 million. Funding included approximately $12 million of revolving debt, $30 million of term debt, a $10 million subordinated seller note, and $8 million of company capital. Vintage Stock reported calendar-2015 revenue of $61.6 million and net income of $12.2 million. Purchase accounting and pro forma information were incomplete when the 10-K was filed.
- The company reported a $52,261 accrued judgment in the concluded J3 Harmon lease case; it said it was unaware of collection activity. Other routine litigation was not expected by management to have a material effect, subject to litigation uncertainties.
Most important facts for investors to verify
- How much of FY2016’s $17.83 million attributable net income reflects recurring operations versus the deferred tax benefit, bargain-purchase gain, and other unusual items.
- Vintage Stock’s final purchase accounting, pro forma contribution, integration performance, and total debt and financing costs after acquisition.
- Marquis’s covenant compliance, borrowing-base availability, cash generation, and ability to service its debt and long-term lease obligations.
- Whether management remediated the disclosed control deficiencies and what procedures support the reported financial information.
- The terms and potential dilution from shares agreed to be issued for the software settlement and Kingston agreement, and the effect of the company’s related-party financing arrangements.