LIVE Ventures Incorporated — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; unaudited consolidated results compared with the three months ended December 31, 2016. Live Ventures operates in Manufacturing, Retail and Online, and Services, including Marquis Industries, Vintage Stock, and newly acquired ApplianceSmart.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $40.37 million | $32.19 million | +25.4% |
| Gross profit / margin | $16.40 million / 40.6% | $12.65 million / 39.3% | +29.7% |
| Operating income / margin | $3.92 million / 9.7% | $3.68 million / 11.4% | +6.6% |
| Net income / margin | $1.88 million / 4.7% | $1.43 million / 4.4% | +31.4% |
| Diluted EPS | $0.50 | $0.37 | |
| Cash provided by operating activities | $6.30 million | $3.18 million |
- Gross margin improved, but operating margin declined as general and administrative expense rose 47.3% to $10.40 million. Net interest expense increased 70.3% to $2.47 million.
- Quarter-end cash was $1.78 million, down from $3.97 million at September 30, 2017. Current assets were $56.59 million and current liabilities $65.27 million.
- Net debt as reported, after unamortized issuance costs, was $72.60 million, plus a $2.00 million related-party note. The balance sheet classifies $42.99 million of long-term debt as current.
- Operating cash flow was $6.30 million; investing activities used $5.33 million, including $5.32 million for property and equipment; financing activities used $3.16 million. Cash decreased by $2.19 million.
Material changes versus the prior period
- Retail and Online revenue rose 44.1%, reflecting a full comparable quarter of Vintage Stock operations versus the partial period included in the prior-year quarter. ApplianceSmart contributed only one day of operations after its December 30 acquisition.
- Manufacturing revenue increased 9.8%, led by hard-surface flooring; segment operating income fell 12.7%. Services revenue declined 12.6% as directory-service renewals decreased.
- ApplianceSmart’s preliminary purchase accounting recorded a $3.77 million bargain-purchase gain, materially boosting other income and pre-tax earnings. The allocation remains subject to change; the acquisition contributed one day of sales and expenses.
- The federal tax-rate change enacted in December led to an approximately $2.3 million increase in tax expense from adjusting deferred tax balances. The reported effective tax rate was 64.6%, versus 37.1%.
Outlook, risks and unusual items
- Management said cash, operating cash generation, and available revolver capacity should fund operations and obligations for at least 12 months. At quarter-end, stated availability was $11.62 million under the Bank of America revolver and $6.21 million under the Texas Capital Bank revolver.
- Capitala covenant default: Vintage Stock was not in compliance with the Capitala Term Loan total-leverage covenant at December 31. The $27.42 million loan was classified as short-term. Management did not expect to regain compliance until sometime in fiscal 2019 and was seeking a waiver, other resolution, or alternative financing; no resolution had been reached by the filing date. The filing provides no assurance that acceptable financing or a resolution will be obtained.
- ApplianceSmart’s $6.5 million purchase price was payable by March 31, 2018, subject to the transaction’s financing and escrow arrangements. The purchase-price allocation was preliminary.
- Management expects Services revenue and operating income to continue declining and is no longer accepting new directory-services customers. It also said it would not invest further in Modern Everyday and was selling remaining inventory.
- Management reported that disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses in financial reporting, segregation of duties, tax-provision review, cash-flow and balance-sheet classifications, and business-combination accounting. Remediation was underway but not complete.
- The company disclosed routine litigation and said it did not expect pending matters to have a material adverse effect, based on information then available. It reported no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Live Ventures resolves the Capitala leverage-covenant default, avoids acceleration or other lender remedies, and secures any needed refinancing on acceptable terms.
- Whether the stated revolver availability and management’s 12-month liquidity assessment remain reliable given the covenant breach, scheduled debt service, and ApplianceSmart payment obligation.
- The final ApplianceSmart purchase accounting, including whether the $3.77 million bargain-purchase gain changes, and the transaction’s subsequent operating contribution.
- How much of earnings growth reflects recurring operations versus the one-time acquisition gain and tax-rate remeasurement; reported adjusted earnings are not provided.
- Progress in remediating the disclosed material weaknesses and whether the controls become effective and sustainable.