Live Ventures Incorporated — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. The filing was signed January 13, 2016. The company changed its name from LiveDeal, Inc. to Live Ventures Incorporated effective October 7, 2015.
Business context
In FY2015, Live Ventures shifted from an online-marketing-focused strategy toward acquiring profitable businesses. Its July 2015 acquisition of an 80% interest in Marquis Industries added carpet manufacturing, yarn production and flooring resale. The company also operated LiveDeal.com and consumer-products businesses, but decided to close Live Goods and DealTicker and discontinued Velocity Local. Management expects legacy and online marketplace revenues to be diluted as the company diversifies.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $33.37 million | $7.27 million |
| Gross profit / margin | $11.25 million / 33.7% | $2.04 million / 28.1% |
| Operating loss | $10.14 million | $4.50 million |
| Net loss attributable to Live Ventures | $14.67 million | $4.66 million |
| Basic and diluted loss per share | $0.93 | $0.35 |
| Cash used in operating activities | $1.02 million | $5.19 million |
Revenue rose 359%, principally due to Marquis, which contributed $16.01 million after its July acquisition, and a full year of Modern Everyday revenue versus about 1.5 months in FY2014. Marketplace revenue was $15.87 million; legacy/services revenue declined 25% to $1.49 million. Gross margin improved, reflecting higher-margin product mix and better marketplace margins; Marquis reported a 26.2% gross margin.
Operating loss widened amid higher general and administrative and marketing costs and a $3.71 million impairment charge. Interest expense was $4.49 million, including substantial noncash debt-related charges. Net loss included $376,000 of income tax expense, as Marquis filed separately and its income could not be offset against the parent’s tax losses.
At September 30, 2015, cash was $2.73 million, down from $8.11 million; working capital was $14.81 million, up from $9.50 million. Total assets were $40.66 million and total liabilities were $32.40 million. Notes payable totaled $16.01 million, plus $6.50 million owed under a related-party mezzanine loan. Marquis had $7.23 million outstanding on its revolver and $7.63 million on its term loan. The company reported $8.27 million of total equity, including $1.95 million of noncontrolling interest.
Investing activities used $5.57 million, mainly for acquisitions. Financing activities provided $1.20 million, versus $13.91 million in FY2014, when the company raised $13.68 million net from common-stock sales. Common shares outstanding increased from 14.53 million to 16.90 million during FY2015.
Material changes, outlook and risks
- Acquisition and financing: Marquis was acquired through a transaction described as approximately $30 million in aggregate value. Bank of America provided term and revolving facilities; Marquis could borrow up to $15 million on the revolver subject to eligibility. The related-party Isaac Capital Fund loan carried 12.5% interest, with principal due in January 2021. Bank debt is secured by substantially all Marquis assets and includes financial covenants.
- Outlook: Management estimated manufacturing could generate approximately $60–65 million in annual revenue. Management believed cash on hand and operating cash, together with potential debt or equity financing, would fund the next 12 months, but warned there was no assurance of profitability or positive operating cash flow and that additional capital might be needed.
- Acquisition accounting and assets: Marquis purchase-price allocation was preliminary. The filing says Marquis properties were listed for sale for $13 million, with an intention to lease them back. A $1.5 million software purchase was recorded as accrued, payable in cash or up to 800,000 shares by June 30, 2016.
- Unusual items and contingencies: The company recorded $3.71 million of impairment charges, including $2.54 million for intangible assets and $1.17 million for Modern Everyday goodwill. A $316,000 liability related to a minimum-value guarantee on shares issued in the Modern Everyday acquisition. A concluded lease lawsuit remained unpaid and accrued at $52,261. The filing describes routine litigation as subject to uncertainty.
- Governance and reporting risk: Management concluded disclosure controls and internal control over financial reporting were not effective at year-end, citing deficiencies in inventory valuation analysis and Marquis purchase-price allocation. The external auditor expressed no opinion on internal-control effectiveness. The financial-statement audit opinion was unqualified.
- Other risks: Management identified acquisition integration and financing needs, flooring-industry exposure to housing and construction cycles, competition and raw-material cost pressures, and risks from online-marketplace competition and regulation. The CEO’s related entity beneficially controlled approximately 43.3% of common shares, and that entity’s affiliated fund provided the mezzanine loan.
Important facts for investors to verify
- Marquis’s post-acquisition performance, the basis for the $60–65 million annual revenue estimate, and the final purchase-price allocation.
- Availability and use of the revolver, compliance with Bank of America covenants, debt-service capacity and the terms and repayment of the related-party loan.
- Cash conversion and working-capital requirements, including receivables, inventory valuation and factoring arrangements; management’s 12-month liquidity assessment.
- Remediation of the disclosed control deficiencies and whether subsequent reporting demonstrates effective controls.
- Progress and proceeds from the proposed property sales and any resulting leaseback obligations.
- Potential dilution from outstanding warrants and options, the software payment election, and future financing; also review related-party approvals and terms.