Live Ventures Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. The filing was signed August 14, 2018. Live Ventures is a holding company with Manufacturing, Retail and Online, and Services segments; its businesses include Marquis, Vintage Stock, ApplianceSmart, and legacy directory services.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Revenue | $54.7 million | $147.2 million |
| Gross profit; gross margin | $18.8 million; 34.4% | $54.9 million; 37.3% |
| Operating income; operating margin | $0.9 million; 1.6% | $8.9 million; 6.0% |
| Net income | $2.1 million | $5.9 million |
| Diluted earnings per share | $0.56 | $1.56 |
- For the nine months, operating cash flow was $9.7 million, investing cash outflow was $8.4 million, and financing cash outflow was $2.9 million. Cash declined $1.7 million to $2.3 million.
- At June 30, current assets were $64.0 million and current liabilities were $36.6 million. Cash was $2.3 million, with a further $0.75 million restricted as collateral for a letter of credit.
- Debt included $75.7 million of notes payable and $5.8 million of related-party notes payable. Total liabilities were $102.3 million. Current maturities included $14.1 million of other long-term debt and $0.4 million of related-party debt.
Changes versus the prior comparable period
- Third-quarter revenue rose 32.1% year over year, mainly reflecting ApplianceSmart, acquired December 30, 2017. Nine-month revenue rose 31.3%; the filing notes the prior-year nine-month comparison does not include a full nine months of Vintage Stock.
- Despite higher revenue, third-quarter gross margin fell to 34.4% from 41.1%, and operating income declined 83.3% to $0.9 million. Nine-month gross margin fell to 37.3% from 41.1%, and operating income declined 38.0%.
- Third-quarter net income was down 2.4% year over year. Nine-month net income increased 8.9%, but included a $7.4 million bargain-purchase gain from ApplianceSmart ($3.6 million recognized in the quarter). The gain was non-cash and is deducted in the operating cash flow reconciliation.
- ApplianceSmart contributed significant revenue but also increased operating expenses. Retail and Online reported a $2.0 million third-quarter operating loss, compared with $2.3 million income a year earlier; Manufacturing and Services also reported lower operating income.
- In June, Vintage Stock refinanced its Capitala term loan with a $24 million Comvest term loan and the company contributed approximately $4 million in equity. The Capitala loan was repaid, and $742,000 of unamortized issuance costs was charged to interest expense. The TCB revolver limit was reduced to $12 million.
Outlook, risks and unusual items
- Management said cash, operating cash generation, and availability under the Bank of America and Texas Capital revolvers were expected to fund operations and scheduled payments for at least 12 months. At quarter-end, stated availability was $7.2 million and $1.1 million, respectively.
- The company reported compliance with its loan covenants at June 30, 2018. However, the Comvest facility includes financial and operating covenants, secured substantially by Vintage Stock assets, and a limited company guaranty tied to leverage. Interest rates on borrowings are generally variable; the filing reports a 9.5% Comvest margin for the first six months, in addition to the applicable reference rate.
- Management expects Services revenue and operating income to continue declining; the company no longer accepts new directory-services customers. LiveDeal.com had not generated revenue, and the company was evaluating alternative uses. It also said it would not invest additional funds in Modern Everyday and was selling remaining inventory.
- Disclosure controls and internal control over financial reporting were deemed ineffective. The filing identifies material weaknesses involving financial reporting controls, segregation of duties, tax-provision review, cash-flow and balance-sheet classifications, and accounting for business combinations. Remediation had begun but was not complete.
- The SEC issued a subpoena and stated it was conducting an investigation concerning, among other matters, prior-period financial-statement restatements, acquisitions, and the auditor change. The company said it was cooperating; the SEC letter stated the inquiry was not a conclusion that anyone had violated the law. The company also disclosed ordinary-course litigation and said management did not expect pending matters to have a material adverse effect.
- The company recognized approximately $2.3 million of additional tax expense for the nine-month period from adjusting deferred taxes for the federal tax-rate change. It reported no uncertain tax positions.
- A $10 million common-stock repurchase program was announced in February; the filing reports 12,077 shares purchased under the program in March and April. No formal revenue or earnings guidance is provided.
Important facts for investors to verify
- Whether ApplianceSmart can improve Retail and Online profitability, given the segment’s third-quarter operating loss and acquisition-related expense burden.
- Cash generation, revolver borrowing-base availability, upcoming debt maturities, variable-rate interest exposure, and compliance with Comvest and other loan covenants.
- Progress and independent evidence of remediation of the disclosed material weaknesses, especially controls over acquisitions, taxes, and financial reporting.
- Developments or outcomes in the SEC investigation concerning restatements, acquisitions, and the auditor change.
- The sustainability of reported earnings: nine-month income includes the $7.4 million bargain-purchase gain, while operating income declined.