Live Ventures Incorporated — Form 10-Q
Business context and period: Unaudited fiscal first quarter ended December 31, 2015, compared with the three months ended December 31, 2014. Live Ventures is a diversified holding company; its July 2015 acquisition of Marquis Industries added carpet and flooring manufacturing. Effective November 30, 2015, the company acquired the remaining 20% of Marquis and thereafter owned it wholly.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $20.10 million | $8.01 million |
| Gross profit / margin | $6.41 million / 31.9% | $3.24 million / 40.4% |
| Operating income (loss) | $1.05 million | $(0.87) million |
| Net income (loss), consolidated | $300,342 | $(4.95) million |
| Net income (loss) attributable to Live Ventures | $176,148 | $(4.95) million |
| Basic and diluted EPS | $0.01 | $(0.33) |
| Operating cash flow | $2.73 million | $(1.30) million |
| Cash and cash equivalents at period-end | $3.32 million | — |
Revenue rose 151%, principally from Marquis, which contributed $16.19 million. Marketplace revenue fell 52% to $3.64 million, while legacy services revenue declined 33% to $273,000. Manufacturing generated $4.55 million gross profit at a 28.1% margin. Marketplace operating loss was $904,000; manufacturing operating income was $1.69 million. Reported comparisons are affected by the acquisition: Marquis was not included in the reported prior-year results. The filing presents unaudited pro forma Q1 FY2015 revenue of $23.06 million and net loss of $4.35 million as if Marquis had been acquired before that period.
Gross margin declined largely because manufacturing carries higher costs than the marketplace business, despite improved marketplace gross margin. The prior-year loss also included substantial noncash debt-related interest charges; net interest expense was $345,000 this quarter versus $4.19 million a year earlier. The current-quarter tax provision was $414,000, primarily for Marquis income that could not be offset against Live Ventures’ tax losses.
Liquidity, debt and other balance-sheet matters
At December 31, 2015, current assets were $24.52 million and current liabilities $11.39 million, for working capital of $13.13 million (down from $14.81 million at September 30, 2015). Cash increased $596,000 during the quarter. Operating cash generation was partly offset by $2.04 million of financing outflows, including $1.50 million paid toward the Marquis minority-interest purchase; investing outflows were $94,000.
Debt totaled $16.82 million, including $7.77 million outstanding on the revolver and $7.39 million on the term loan. A further $5.65 million was owed on a related-party mezzanine loan bearing 12.5% interest to an entity whose managing member is the CEO. The Bank of America facilities are secured by substantially all Marquis assets and mature in July 2020. A $500,000 note issued for the minority-interest purchase was paid January 20, 2016. The company also had a $327,000 liability under a share-price guarantee related to an earlier acquisition.
Outlook, risks and unusual items
- Management stated that available cash was expected to fund operations for the next 12 months, but also said additional capital may be needed for operations, product development or acquisitions. Financing could dilute shareholders; failure to obtain financing or generate positive cash flow could require changes to business plans or threaten continued operations.
- Management expects legacy-services revenue to continue declining and noted that marketplace resources have been reduced. It provided no quantified earnings or revenue guidance.
- The Marquis acquisition accounting and valuation of certain inventory and property were still under review. Management identified these matters as contributing to ineffective internal controls over financial reporting; disclosure controls were also judged ineffective.
- The Bank of America loan requires a fixed-charge coverage ratio of at least 1.05 to 1; the filing states the company had until July 5, 2016 to achieve compliance. At quarter-end it was classified at Level II for the loan pricing table.
- A $1.5 million software purchase remained unpaid and accrued; the company could pay in cash or 800,000 common shares by June 30, 2016.
- The company reported ordinary-course legal proceedings and said management did not expect them to have a material adverse effect, while acknowledging outcomes cannot be assured. Cash balances may exceed FDIC-insured limits.
Most important facts for investors to verify
- Whether Marquis sustains its reported revenue, margins and operating contribution, and how results compare with the filing’s pro forma prior-year figures.
- Compliance with the fixed-charge coverage covenant and the availability and cost of borrowing under the secured credit facilities.
- Cash needs and the resolution of the $1.5 million software obligation, including whether shares are issued.
- Progress on acquisition purchase-price allocation, inventory valuation and remediation of the disclosed control weaknesses.
- Related-party mezzanine debt terms and repayment capacity, alongside other potential dilution from warrants, options and preferred shares.