Live Ventures Incorporated — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2020; fiscal year ends September 30. Amounts are in thousands of dollars, except per-share data, unless otherwise noted. The filing was signed August 14, 2020.
Business context
Live Ventures is an acquisition-focused holding company with Manufacturing (Marquis flooring), Retail and Online (Vintage Stock and ApplianceSmart), and Services (directory subscriptions) segments. ApplianceSmart was operating under Chapter 11; the filing states that this bankruptcy applies to that subsidiary, not the parent or its other subsidiaries. Vintage Stock’s locations, closed during the pandemic, had all reopened by June 30.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $42.472m vs. $47.043m; down 10% | $130.904m vs. $147.212m; down 11% |
| Gross profit / margin | $16.713m / 39.4%; prior year $19.246m / 40.9% | $51.115m / 39.0%; prior year $57.234m / 38.9% |
| Operating income / margin | $5.990m / 14.1%; prior year $3.809m / 8.1% | $12.545m / 9.6%; prior year $7.945m / 5.4% |
| Net income | $3.585m vs. $1.480m | $6.451m vs. $3.484m |
| Basic / diluted EPS | $2.18 / $1.07; prior year $0.78 / $0.41 | $3.72 / $1.87; prior year $1.81 / $0.95 |
For the quarter, lower revenue and gross profit were more than offset by reduced general and administrative and selling and marketing expenses. Management attributed the expense reductions primarily to ApplianceSmart closures and COVID-related temporary Vintage Stock closures. Manufacturing revenue increased, partly following the January 2020 Lonesome Oak acquisition; Retail and Online revenue declined sharply. For the nine months, operating income improved despite lower sales, while 2019 other income included a $1.518m gain from the sale of the synthetic turf business.
- Cash flow: Nine-month operating cash flow was $18.075m, investing cash flow was negative $2.992m, and financing cash flow was negative $12.075m. Cash increased to $5.689m from $2.681m at September 30, 2019.
- Balance sheet and liquidity: Current assets were $65.163m and current liabilities $53.562m, giving working capital of $11.601m, down from $20.727m at September 30, 2019. Management cited acquisition-related balances, lease liabilities, current debt and debtor-in-possession liabilities among the changes.
- Debt: Net notes payable were $57.325m, plus $4.826m of related-party notes and $12.022m of debtor-in-possession liabilities. Operating lease liabilities totaled $25.339m. Current maturities of notes payable were $18.075m.
- Credit availability: The filing reported $22.455m available under Marquis’s Bank of America revolver, $5.681m under Vintage Stock’s Texas Capital Bank revolver, and $1.000m under the related-party ICG revolver. Marquis said COVID-related conditions could limit its access to the Bank of America facility and that it could not rely on that availability to fund operations.
- Segment results: Nine-month Manufacturing revenue was $75.747m and operating income $9.381m; Retail and Online revenue was $54.733m and operating income $2.770m; Services revenue was $0.424m and operating income $0.394m.
Material changes, outlook and risks
- COVID-19: The company warned that further closures, weaker consumer traffic and spending, supply-chain disruption, and other pandemic developments could materially affect revenues, earnings, liquidity and cash flows. Marquis conducted rolling layoffs in March and April; employees returned to their locations in May.
- Debt and covenants: Vintage Stock received lender waivers and covenant relief, with specified covenant restrictions waived through September 30, 2020. The filing reported covenant compliance at June 30 except for the Crossroads Revolver, associated with ApplianceSmart. Texas Capital Bank’s revolver was scheduled to mature in November 2020. Marquis’s Bank of America facility was amended July 6, 2020, after the reporting date; the filing describes the maturity as July 2020 before amendment and January 2025 after the January amendment, so the operative terms should be checked in the amendments.
- Chapter 11 and contingencies: ApplianceSmart’s bankruptcy and related creditor matters remain material. A PPP loan of $4.768m was received by Marquis; the company intended to seek forgiveness of some or all of it, but stated forgiveness was not assured.
- Subsequent acquisition and financing: On July 14, 2020, Live Ventures acquired Precision Industries for stated aggregate cash consideration of $31.475m, subject to adjustments. The acquisition was financed in part through an asset-based facility with Encina, including a revolving commitment up to $23.5m subject to a borrowing base, and separate $2m loans from ICG and Spriggs Investments. These transactions occurred after quarter-end.
- SEC investigation: Three executives received Wells Notices on August 12, 2020, after quarter-end. The SEC staff indicated a preliminary intent to recommend enforcement actions relating to historical financial reporting, executive compensation disclosures and the ApplianceSmart acquisition. The company and executives said they would defend themselves; a Wells Notice is not a formal charge or final finding.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, citing material weaknesses including insufficient segregation of duties, inadequate written control documentation, and deficiencies in control evaluation and documentation. No specific remediation completion date was provided.
- Management outlook: As of June 30, management believed cash, operating cash generation and available revolver capacity would fund operations and obligations for at least 12 months. This assessment predates the Precision acquisition and related financing; no formal earnings guidance was provided. Management expects the Services segment to continue declining and is no longer accepting new directory-services customers.
Investor verification priorities
- Confirm current liquidity, borrowing-base availability and covenant status, particularly after the Precision acquisition and the applicable amendments to the credit facilities.
- Review ApplianceSmart’s Chapter 11 developments, the Crossroads covenant issue, and the extent of any continuing parent guarantees or other exposure.
- Assess Precision’s purchase accounting, final consideration adjustments, debt and post-acquisition contribution to results; the filing’s acquisition figures are subsequent-event disclosures.
- Track the SEC investigation and Wells Notice process, including any resulting enforcement action or financial-reporting consequences.
- Monitor the effectiveness and remediation of the disclosed material weaknesses and the reliability of future reporting.
- Evaluate the sustainability of improved operating income given lower consolidated sales, COVID-related uncertainty, cost reductions, and the differing trends across segments.