Live Ventures Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; filed August 15, 2016. The company is a diversified holding company whose businesses include carpet and flooring manufacturer Marquis Industries, an online marketplace, and legacy merchant services. Marquis was acquired in July 2015; Live Ventures bought the remaining 20% interest in November 2015.
Financial results
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Revenue | $19.99 million | $59.94 million |
| Gross profit / margin | $5.10 million / 25.5% | $17.12 million / 28.6% |
| Operating income (loss) | $1.06 million | $3.30 million |
| Pre-tax income | $1.11 million | $3.05 million |
| Income tax benefit | $12.25 million | $11.84 million |
| Net income attributable to Live Ventures | $13.37 million; diluted EPS $0.70 | $14.76 million; diluted EPS $0.77 |
- Cash flow: Nine-month operating cash flow was $7.05 million, versus $1.50 million used in the comparable 2015 period. Investing used $2.69 million, including $3.34 million of property and equipment purchases, partly offset by asset-sale proceeds. Financing used $3.96 million. Cash increased $406,000 to $3.13 million.
- Liquidity: Working capital was $12.10 million, down from $14.81 million at September 30, 2015. Current assets were $24.00 million and current liabilities $11.90 million.
- Debt: The notes-payable table reports $19.18 million of debt before a $416,000 discount, including $8.54 million outstanding on Bank of America’s revolver and term loan. A separate related-party mezzanine loan had $1.99 million outstanding at 12.5% interest. The company reported $30.84 million total liabilities.
- Balance sheet: Total assets were $52.07 million and equity was $21.23 million at June 30, 2016. A $12.25 million deferred tax asset was recognized following a valuation-allowance reduction.
Changes versus the prior comparable period
- Revenue rose 580% for the quarter and 294% for the nine-month period, primarily because Marquis was included after its July 2015 acquisition. Manufacturing contributed $19.24 million of quarterly revenue and $53.88 million for nine months.
- Nine-month online marketplace revenue fell 62% to $5.28 million; legacy services revenue fell 34% to $773,000. Management expects both segments’ revenue to continue declining as resources shift toward acquisitions and manufacturing.
- Nine-month gross margin declined to 28.6% from 41.5%, reflecting the larger share of manufacturing revenue. Manufacturing gross margin was 28.1% for the nine months.
- Operating results improved from losses in 2015 to income in 2016, but reported net income was substantially boosted by the tax benefit from reducing the deferred-tax valuation allowance. The benefit was based on expected use of tax-loss carryforwards against Marquis profits.
- Prior-year results included significant noncash financing and stock-compensation expenses; their absence contributed to the improvement in comparative results.
Outlook, risks and unusual items
- Management said existing cash should fund operations for the next 12 months, but also stated that additional capital may be needed for growth or acquisitions. Financing could include debt or equity and may dilute existing shareholders; failure to raise capital or generate positive cash flow could force changes to business plans or threaten operations.
- In June 2016, the company received aggregate proceeds of $10.00 million through a land sale-leaseback and a loan secured by property improvements. It used proceeds to reduce debt and purchase a building. The transaction included a 15-year lease and a $9.36 million secured note; the company recorded a $43,520 land-sale loss.
- The company had $1.50 million of accrued software costs unpaid at June 30, 2016; the agreement permits payment in cash or 800,000 common shares by December 31, 2016.
- Management reported disclosure controls and internal control over financial reporting were ineffective as of June 30, 2016, citing deficiencies in inventory valuation and the Marquis acquisition purchase-price allocation.
- Legal proceedings are ongoing. Management did not expect pending matters to have a material adverse effect based on information then available, but outcomes cannot be assured. The filing reported no off-balance-sheet arrangements requiring disclosure.
- The company repurchased 123,663 shares for $202,005 during the nine months and had announced a $10 million repurchase program. Potentially dilutive options, warrants and preferred shares totaled approximately 4.72 million securities before dilution calculations.
Important facts for investors to verify
- How sustainable Marquis’s revenue, margins and operating cash generation are, and whether marketplace and legacy-service declines continue.
- Whether the $12.25 million deferred tax asset is realizable; quarterly and year-to-date earnings rely materially on the valuation-allowance reduction.
- Debt terms, borrowing availability and covenant compliance, including the related-party loan and the long-term obligations tied to the real-estate transaction.
- Progress in remediating the disclosed inventory-valuation and acquisition-accounting control deficiencies.
- The final software-payment method and any resulting share dilution, along with the potential dilution from outstanding warrants and options.