Business context and reporting period
Live Ventures Incorporated is a diversified holding company with Manufacturing (Marquis Industries), Retail and Online (Vintage Stock and ApplianceSmart), and Services (directory services) segments. This Form 10-Q covers the fiscal quarter and six months ended March 31, 2020; dollar amounts below are in millions unless stated otherwise. The filing was signed May 15, 2020.
Financial performance and position
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Revenue | $46.431 | $46.973 | $88.432 | $100.169 |
| Gross profit / margin | $17.776 / 38.3% | $18.651 / 39.7% | $34.402 / 38.9% | $37.988 / 37.9% |
| Operating income / margin | $3.068 / 6.6% | $2.046 / 4.4% | $6.555 / 7.4% | $4.137 / 4.1% |
| Net income | $2.285 | $0.473 | $2.832 | $2.004 |
| Diluted EPS | $0.66 | $0.13 | $0.81 | $0.53 |
- Cash flow: Six-month operating cash flow was $6.571, versus $6.986 in the prior-year period. Investing used $2.412 and financing used $5.344. Cash declined $1.185 to $1.496.
- Liquidity: Working capital was $8.584, down from $20.727 at September 30, 2019. At March 31, cash was $1.496; reported availability was $17.725 under Marquis’s Bank of America revolver and $3.433 under Vintage Stock’s Texas Capital Bank revolver.
- Debt and leases: Long-term debt, net of issuance costs, was $63.333, including $20.940 classified current. Related-party notes totaled $4.826. The balance sheet also reported $12.804 of debtor-in-possession liabilities and operating lease liabilities of $22.788 in present value ($7.429 current). Total liabilities were $121.890.
- Returns: No dividends were declared. The company repurchased 106,567 common shares for $0.759 during the six-month period.
Material changes versus prior comparable periods
- Quarterly revenue was nearly flat year over year, but gross margin declined 1.4 percentage points. Operating income rose 50%, while net income increased to $2.285 from $0.473.
- Six-month revenue fell 12%, chiefly reflecting lower ApplianceSmart sales and closures, and reduced synthetic-turf revenue after exiting that line. Manufacturing revenue increased, partly due to the Lonesome Oak acquisition, which was consolidated from January 31, 2020.
- Six-month operating income rose 58% despite lower revenue, helped by lower general and administrative and marketing expenses. Net income increased 41%; the comparison also reflects a $1.518 million prior-year gain on the synthetic-turf business sale and current-period lease-settlement and warrant fair-value items.
- On the balance sheet, current assets increased but current liabilities rose more, primarily reflecting acquisition-related items, lease accounting adoption, higher current debt and debtor-in-possession liabilities.
Outlook, risks, contingencies and unusual items
- COVID-19: Management said the pandemic could materially adversely affect revenue, earnings, liquidity and cash flows, with impacts dependent on uncertain developments. Vintage Stock had closed all 62 locations at March 31; by May 14, all but four had reopened. Marquis conducted rolling layoffs in March and April, with employees returned to work in May. Marquis said it could not rely on BofA revolver availability to fund operations amid expected losses and potential lender restrictions.
- Management outlook: Management stated that cash, operating cash generation and borrowing sources were expected to fund operations and scheduled commitments for at least 12 months. This assessment is subject to pandemic impacts, lender access and other uncertainties; no specific earnings or revenue guidance was provided. Management expected the Services segment to continue declining and was no longer accepting new directory-services customers.
- ApplianceSmart Chapter 11: ApplianceSmart filed for Chapter 11 in December 2019 and continued operating as debtor-in-possession. The filing says the proceeding affects that indirect subsidiary, not Live Ventures or its other subsidiaries. Related claims and litigation include matters stayed by the bankruptcy and settlements noted in the filing.
- Financing and covenant developments: At March 31, the company reported covenant compliance except for Crossroads Revolver covenants. Subsequent April agreements waived certain Texas Capital Bank and Comvest defaults and changed testing or payment terms. The BofA revolver was due in July 2020 under its amended terms; Texas Capital Bank’s facility matured in November 2020. Marquis received a $4.768 million PPP loan in May at 1% interest; forgiveness was not assured. The CEO-related ICG provided a $1 million revolving facility in April at 10% interest.
- Unusual earnings item: The quarter included a $1.448 million gain from extinguishing ApplianceSmart lease liabilities; the six-month net lease-settlement gain was $0.241 million after $1.207 million of impairment charges. Warrant-extension fair-value adjustments contributed to current-period other expense.
- Governance and reporting risk: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, citing material weaknesses in segregation of duties, written control documentation, evaluation procedures and documentation of reconciliations. The company said remediation was ongoing without a specific completion timeline. The SEC investigation disclosed in the filing remained ongoing, and the company said it was cooperating.
Important facts for investors to verify
- Whether COVID-related closures, demand changes and supply-chain disruptions materially altered results or cash needs after March 31, and the pace of Vintage Stock’s full reopening.
- Current availability and conditions under the BofA and Texas Capital Bank facilities, covenant compliance after the April waivers, and refinancing or repayment of near-term maturities.
- The financial exposure and potential recoveries associated with ApplianceSmart’s Chapter 11 case, DIP liabilities, related-party note and pending claims.
- Whether PPP loan forgiveness was obtained and what costs or obligations remained under its terms.
- Progress in remediating the disclosed material weaknesses and any developments in the SEC investigation.
- The final purchase-price allocation for Lonesome Oak and whether acquisition-related performance supports the reported manufacturing growth.