Live Ventures Incorporated — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended March 31, 2016. The company is a diversified holding company whose businesses include online marketplaces, legacy merchant services, consumer products, and carpet manufacturing. Marquis Industries, acquired in July 2015, drove the major year-over-year changes. Live Ventures acquired the remaining 20% interest in Marquis on November 30, 2015 for $2.0 million.
Financial highlights
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | 2016: $19.84 million; 2015: $4.26 million | 2016: $39.94 million; 2015: $12.27 million |
| Gross profit | 2016: $5.61 million; 2015: $1.94 million | 2016: $12.02 million; 2015: $5.17 million |
| Operating income (loss) | 2016: $1.20 million; 2015: $(1.09) million | 2016: $2.25 million; 2015: $(1.96) million |
| Net income (loss) attributable to Live Ventures | 2016: $1.22 million; 2015: $(1.10) million | 2016: $1.39 million; 2015: $(6.04) million |
| EPS, basic / diluted | 2016: $0.07 / $0.06; 2015: $(0.07) / $(0.07) | 2016: $0.08 / $0.07; 2015: $(0.39) / $(0.39) |
- Six-month gross margin was 30.1%, versus 42.1% in 2015; the filing attributes the decline principally to manufacturing’s lower margin mix. Marquis’s six-month gross margin was 27.9%.
- Six-month operating cash flow was $3.41 million, compared with cash used of $0.94 million in 2015. Investing activities used $0.12 million and financing activities used $2.60 million. Cash increased by $0.69 million to $3.42 million.
- At March 31, 2016, working capital was $14.55 million, total current assets $26.37 million, and current liabilities $11.82 million. Total assets were $40.26 million.
- Debt included $16.35 million of notes payable and $5.65 million due under a related-party mezzanine loan, or approximately $22.00 million combined. Bank of America revolver and term balances were $8.04 million and $7.15 million. The related-party loan bears 12.5% interest and is owed to an entity managed by the CEO.
Changes and management commentary
- Six-month revenue rose 226%, primarily because Marquis contributed $34.64 million. Marketplace revenue fell 58% to $4.78 million as the company shifted resources away from that business; legacy services revenue fell 33% to $0.53 million, and management expected further decline.
- Operating results improved from losses to profits, reflecting Marquis’s contribution and, for the six-month comparison, substantially lower unusual debt-related interest charges than in 2015.
- Other income included a $316,000 benefit from removing a contingent acquisition liability related to Modern Everyday after reaching an agreement with the holder of shares subject to a price guarantee.
- Management stated that cash on hand was expected to fund operations for the next 12 months. It also said additional capital could be needed for growth, acquisitions, or strategic investments; financing could dilute shareholders, and inability to raise capital or generate positive cash flow could require changes to business plans or threaten operations.
- The company had not yet reached the July 5, 2016 deadline for compliance with the Bank of America fixed-charge-coverage covenant. The required ratio is at least 1.05 to 1. Management reported a Level II pricing tier at March 31.
Risks, contingencies, and unusual matters
- Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, citing deficiencies related to inventory valuation and the Marquis acquisition purchase-price allocation. The acquisition accounting remained preliminary, including analysis of inventory, property and equipment, and the mezzanine loan.
- A $1.5 million software purchase remained unpaid and recorded in accrued liabilities. The company could pay in cash or 800,000 common shares by June 30, 2016.
- Management said pending litigation was not expected to have a material adverse effect based on information then available, while acknowledging outcomes could be adverse. The filing provides no clear quantified exposure.
- A 100% valuation allowance was maintained against deferred tax assets. Marquis incurred $413,980 of income tax expense for the period it filed separately.
- The company announced a $10 million stock-repurchase program and bought 53,510 shares for $80,292 during the six months.
Important facts for investors to verify
- How much of the revenue and earnings improvement reflects Marquis, and whether its margins and operating performance are sustainable.
- Progress on the disclosed control deficiencies, inventory valuation, and final Marquis purchase-price allocation.
- Compliance with the Bank of America coverage covenant after its July 2016 testing period, and the company’s capacity to service approximately $22 million of combined debt.
- How the $1.5 million software obligation was settled, and whether further borrowing, equity issuance, or acquisitions affect liquidity and dilution.
- The reconciliation of share counts: the filing reports 16,859,197 shares outstanding at March 31 and 16,862,450 as of May 10, 2016.