Live Ventures Incorporated — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2017. The filing was signed May 11, 2017. Live Ventures operates Manufacturing, Retail and Online, and Services segments and is pursuing growth through acquisitions.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2017 | $38.54 million | $70.73 million |
| Revenue, 2016 | $19.84 million | $39.94 million |
| Gross profit, 2017 | $16.48 million | $29.12 million |
| Gross margin, 2017 | 42.8% | 41.2% |
| Operating income, 2017 | $5.27 million | $8.95 million |
| Net income attributable to Live Ventures, 2017 | $1.84 million | $3.27 million |
| Basic / diluted EPS, 2017 | $0.89 / $0.47 | $1.61 / $0.84 |
- Revenue rose 94.2% for the quarter and 77.1% for the six-month period versus 2016. Gross margin improved from 28.3% to 42.8% for the quarter and from 30.1% to 41.2% for the six-month period.
- Quarterly operating income increased 339.8%; six-month operating income increased 298.5%. Net income attributable to Live Ventures increased 51.1% for the quarter and 134.4% for the six-month period.
- Six-month net cash provided by operating activities was $5.21 million, compared with $3.41 million in 2016. Investing activities used $54.51 million, principally for the Vintage Stock acquisition and equipment. Financing activities provided $49.28 million.
- At March 31, cash was $752,449; current assets were $47.31 million and current liabilities were $19.53 million. Inventory was $33.65 million, up from $11.05 million at September 30, 2016.
- Total liabilities were $90.55 million, including net notes payable of $74.85 million and a $2.00 million related-party note. Total notes payable before unamortized issuance costs were $76.32 million. Debt rose substantially following the Vintage Stock acquisition.
- Available borrowing at March 31 was $10.03 million under Marquis’s Bank of America revolver and $2.25 million under Vintage Stock’s Texas Capital revolver. The company said it was in compliance with debt covenants.
Material changes and business developments
- Live Ventures acquired 100% of Vintage Stock on November 3, 2016, for stated consideration of $57.65 million. Vintage Stock contributed $19.95 million of quarterly revenue and $34.75 million of six-month revenue; the prior-year comparable periods did not include it.
- The acquisition was financed in part with a $29.87 million Capitala term loan, a $10 million seller note, and borrowings under Vintage Stock’s revolving facility. Capitala’s weighted-average interest rate through March 31 was 16.20%; the seller note bears 8% interest. The acquisition-date purchase-price allocation remained preliminary and included $39.07 million of goodwill.
- Manufacturing revenue was broadly stable in the quarter, while six-month segment operating income improved modestly. Retail and Online returned to segment operating profitability, largely reflecting Vintage Stock. Services revenue and operating income continued to decline.
- Management said it would not invest additional funds in Modern Everyday and was selling remaining inventory. LiveDeal.com had produced no revenue to date; the company was evaluating alternative uses for the platform. Telco was no longer accepting new customers.
- A 1-for-6 reverse stock split took effect December 5, 2016. Series B preferred shares and warrants, along with options, materially increase potential diluted share count; weighted-average diluted shares were 3.92 million for the quarter versus 2.06 million basic shares.
Outlook, risks and unusual items
- Liquidity outlook: Management believed cash, operating cash generation, and borrowing availability would be sufficient for at least 12 months. It also said it may seek additional debt or equity financing for acquisitions or other strategic investments, which could dilute shareholders.
- No specific revenue, earnings, or margin guidance was provided. Management expects Services revenue and operating income to continue declining.
- Interest expense rose to $2.04 million for the quarter and $3.48 million for six months, primarily because of Vintage Stock acquisition financing. Floating-rate debt creates exposure to higher interest rates; the Capitala term loan carries a high stated rate.
- Retail risks include discretionary consumer spending, competition from digital delivery and changing gaming technology, seasonal sales, lease renewals, new-store execution, inventory and refurbishment disruptions, and data security. The filing also identifies potential goodwill and other asset impairment risk.
- Modern Everyday’s remaining inventory was being discounted for sale. The filing reports $347,610 of one-time Vintage acquisition expenses in the six months ended March 31. It also records $73,092 of breakage income on customer liabilities.
- Management concluded disclosure controls and procedures were not effective, citing insufficient definition and documentation of accounting processes and controls. Remediation was underway; integration of the significant Vintage Stock business into internal-control assessments remained in progress.
- The company disclosed ordinary-course legal proceedings but said management did not expect pending matters to have a material adverse effect based on information available. It reported no off-balance-sheet arrangements requiring disclosure.
Important facts for investors to verify
- Vintage Stock’s post-acquisition performance, store growth, and contribution to comparable operating results, separate from acquisition-driven revenue growth.
- Debt service capacity and covenant headroom, particularly the high-cost Capitala loan, the limited $2.25 million of Vintage Stock revolver availability, and upcoming principal maturities.
- Whether operating cash flow can support working-capital needs, planned investment, and debt payments while cash on hand remains low.
- The final Vintage Stock purchase-price allocation, including the valuation and impairment sensitivity of $39.07 million of goodwill and acquired intangibles.
- Remediation of ineffective disclosure controls and integration of Vintage Stock into internal controls.
- The tax-rate presentation: the filing gives a 42.1% effective rate for the six months in Note 14, while MD&A cites an estimated 39.7% rate; the precise reconciliation is not clear from the filing text.
- Potential dilution: compare basic and diluted earnings per share and assess the effects of preferred stock, warrants, options, and other convertible securities.