ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the three months ended December 31, 2021, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”) should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (the “2021 Form 10-K”).
Note about Forward-Looking Statements
This Quarterly Report on Form 10-Q includes statements that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “intends,” “plans,” “expects,” or “anticipates,” and do not reflect historical facts.
Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to: (i) statements that are based on current projections and expectations about the markets in which we operate, (ii) statements about current projections and expectations of general economic conditions, (iii) statements about specific industry projections and expectations of economic activity, (iv) statements relating to our future operations, prospects, results, and performance, (v) statements about the Chapter 11 Case, (vi) statements that the cash on hand and additional cash generated from operations together with potential sources of cash through issuance of debt or equity will provide the Company with sufficient liquidity for the next 12 months, and (vii) statements that the outcome of pending legal proceedings will not have a material adverse effect on business, financial position and results of operations, cash flow or liquidity.
Forward-looking statements involve risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results, future performance and capital requirements and cause them to materially differ from those contained in the forward-looking statements include those identified in our 2021 Form 10-K under Item 1A “Risk Factors” and Part II, Item 1A. "Risk Factors" below, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors may generally affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained on our website www.liveventures.com or any other websites referenced in this Quarterly Report are not part of this Quarterly Report.
Our Company
Live Ventures Incorporated is a holding company of diversified businesses, which, together with our subsidiaries, we refer to as the “Company”, “Live Ventures”, “we”, “us” or “our”. We acquire and operate companies in various industries that have historically demonstrated a strong history of earnings power. We currently have three segments to our business: Retail, Flooring Manufacturing, Steel Manufacturing, and Corporate & Other.
Under the Live Ventures brand, we seek opportunities to acquire profitable and well-managed companies. We work closely with consultants who help us identify target companies that fit within the criteria we have established for opportunities that will provide synergies with our businesses.
Our principal offices are located at 325 E. Warm Springs Road, Suite 102, Las Vegas, Nevada 89119, our telephone number is (702) 939-0231, and our corporate website (which does not form part of this Quarterly Report Form 10-Q) is located at www.liveventures.com. Our common stock trades on the Nasdaq Capital Market under the symbol “LIVE”.
Retail Segment
Our Retail Segment is composed of Vintage Stock, Inc. ("Vintage Stock") and ApplianceSmart, Inc. ("ApplianceSmart").
Vintage Stock
Vintage Stock Holdings LLC, Vintage Stock, V-Stock, Movie Trading Company and EntertainMart (collectively, “Vintage Stock”) is an award-winning specialty entertainment retailer that offers a large selection of entertainment products, including new and pre-owned movies, video games and music products, as well as ancillary products, such as books, comics, toys and collectibles, in a single location. With its integrated buy-sell-trade business model, Vintage Stock buys, sells and trades new and pre-owned movies, music, video games,
21
electronics and collectibles through 66 retail locations strategically positioned across Arkansas, Colorado, Idaho, Illinois, Kansas, Missouri, Nebraska, New Mexico, Oklahoma, Texas, and Utah.
ApplianceSmart
ApplianceSmart operates one store in Reynoldsburg, Ohio. ApplianceSmart is a household appliance retailer with two product categories: one consisting of typical and commonly available, innovative appliances, and the other consisting of affordable value-priced, offerings such as close-outs, factory overruns, discontinued models, and special-buy appliances, including open box merchandise and others.
On December 9, 2019, ApplianceSmart filed a voluntary petition (the “Chapter 11 Case”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The bankruptcy affects Live Ventures’ indirect subsidiary ApplianceSmart only and does not affect any other subsidiary of Live Ventures, or Live Ventures itself. ApplianceSmart expects to continue to operate its business in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In addition, the Company reserves its right to file a motion seeking authority to use cash collateral of the lenders under the reserve-based revolving credit facility. The case is being administrated under the caption In re: ApplianceSmart, Inc. (case number 19-13887). Court filings and other information related to the Chapter 11 Case are available at the PACER Case Locator website for those registered to do so or at the Courthouse located at One Bowling Green, Manhattan, New York 10004.
At December 31, 2021, ApplianceSmart operated one store in Ohio. ApplianceSmart is a household appliance retailer with two product categories: one consisting of typical and commonly available, innovative appliances, and the other consisting of affordable value-priced, niche offerings such as close-outs, factory overruns, discontinued models, and special-buy appliances, including open box merchandise and others.
On October 13, 2021, a hearing was held to consider approval of the Disclosure Statement filed by ApplianceSmart in conjunction with its bankruptcy proceedings. On December 14, 2021, a hearing was held to confirm ApplianceSmart’s plan for reorganization (the “Plan”). A final decree is expected upon the full satisfaction of the Plan, at which time ApplianceSmart will emerge from Chapter 11.
Flooring Manufacturing Segment
Our Flooring Manufacturing segment is comprised of Marquis Industries, Inc. ("Marquis").
Marquis Affiliated Holdings LLC and wholly-owned subsidiaries (“Marquis”). Marquis is a leading carpet manufacturer and distributor of carpet and hard-surface flooring products. Over the last decade, Marquis has been an innovator and leader in the value-oriented polyester carpet sector, which is currently the market’s fastest-growing fiber category. Marquis focuses on the residential, niche commercial, and hospitality end-markets and serves thousands of customers.
Since commencing operations in 1995, Marquis has built a strong reputation for outstanding value, styling, and customer service. Its innovation has yielded products and technologies that differentiate its brands in the flooring marketplace. Marquis’s state-of-the-art operations enable high quality products, unique customization, and exceptionally short lead-times. Furthermore, the Company has recently invested in additional capacity to grow several attractive lines of business, including printed carpet and yarn extrusion.
Steel Manufacturing Segment
Our Steel Manufacturing segment is comprised of Precision Industries, Inc. (“Precision Marshall”).
Precision Marshall is the North American leader in providing and manufacturing pre-finished de-carb free tool and die steel. For nearly 75 years, Precision Marshall has served steel distributors through quick and accurate service. Precision Marshall has led the industry with exemplary availability and value-added processing that saves distributors time and processing costs.
Founded in 1948, Precision Marshall “The Deluxe Company” has built a reputation of high integrity, speed of service and doing things the “Deluxe Way”. The term Deluxe refers to all aspects of the product and customer service to be head and shoulders above the rest. From order entry to packaging and delivery, Precision Marshall makes it easy to do business and backs all products and service with a guarantee.
22
Precision Marshall provides four key products to over 500 steel distributors in four product categories: Deluxe Alloy Plate, Deluxe Tool Steel Plate, Precision Ground Flat Stock, and Drill Rod. With over 5,000 distinct size grade combinations in stock every day, Precision Marshall arms tool steel distributors with deep inventory availability and same day shipment to their place of business or often ships direct to their customer saving time and handling.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP. Preparation of these statements requires us to make judgments and estimates. Some accounting policies have a significant and material impact on amounts reported in these financial statements. Estimates and assumptions are based on management's experience and other information available prior to the issuance of our financial statements. Our actual realized results may differ materially from management’s initial estimates as reported. Our significant accounting policies include Trade and Other Receivables, Inventories, Goodwill, Revenue Recognition, Fair Value Measurements, Stock Based Compensation, Income Taxes, Segment Reporting and Concentrations of Credit Risk. For a summary of our significant accounting policies and the means by which we develop estimates thereon, see Part II, Item 8 – Financial Statements - Notes to unaudited condensed consolidated financial statements Note 2 – summary of significant accounting policies in our 10-K report as filed on December 28, 2021.
Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as revenue and “Adjusted EBITDA.” Adjusted EBITDA is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization, stock-based compensation, and other non-cash or nonrecurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of the business, including the business’ ability to fund acquisitions and other capital expenditures, and to service its debt. Additionally, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate a company's financial performance, subject to certain adjustments. Adjusted EBITDA does not represent cash flows from operations, as defined by GAAP, and should not be construed as an alternative to net income or loss and is indicative neither of our results of operations, nor of cash flows available to fund all of our cash needs. It is, however, a measurement that the Company believes is useful to investors in analyzing its operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities, and other measures of financial performance prepared in accordance with GAAP. Adjusted EBITDA is a non-GAAP financial measure. As companies often define non-GAAP financial measures differently, Adjusted EBITDA, as calculated by Live Ventures, Incorporated, should not be compared to any similarly titled measures reported by other companies.
23
Results of Operations Three Months Ended December 31, 2021 and 2020
The following table sets forth certain statement of income items and as a percentage of revenue, for the three months ended December 31, 2021 and 2020 (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2021
|
|
|
For the Three Months Ended December 31, 2020
|
|
|
|
|
|
|
% of Total
Revenue
|
|
|
|
|
|
% of Total
Revenue
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
75,158
|
|
|
|
100.0
|
%
|
|
$
|
62,454
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
47,542
|
|
|
|
63.3
|
%
|
|
|
40,185
|
|
|
|
64.3
|
%
|
Gross profit
|
|
|
27,616
|
|
|
|
36.7
|
%
|
|
|
22,269
|
|
|
|
35.7
|
%
|
General and administrative expenses
|
|
|
14,157
|
|
|
|
18.8
|
%
|
|
|
12,279
|
|
|
|
19.7
|
%
|
Sales and marketing expenses
|
|
|
3,052
|
|
|
|
4.1
|
%
|
|
|
2,699
|
|
|
|
4.3
|
%
|
Operating income
|
|
|
10,407
|
|
|
|
13.8
|
%
|
|
|
7,291
|
|
|
|
11.7
|
%
|
Interest expense, net
|
|
|
(1,017
|
)
|
|
|
(1.4
|
)%
|
|
|
(1,470
|
)
|
|
|
(2.4
|
)%
|
Gain on disposal of fixed assets
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
129
|
|
|
|
0.2
|
%
|
Other income
|
|
|
116
|
|
|
|
0.2
|
%
|
|
|
779
|
|
|
|
1.2
|
%
|
Income before provision for income taxes
|
|
|
9,506
|
|
|
|
12.6
|
%
|
|
|
6,729
|
|
|
|
10.8
|
%
|
Provision for income taxes
|
|
|
2,960
|
|
|
|
3.9
|
%
|
|
|
1,450
|
|
|
|
2.3
|
%
|
Net income
|
|
$
|
6,546
|
|
|
|
8.7
|
%
|
|
$
|
5,279
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail business
|
|
$
|
5,202
|
|
|
|
|
|
$
|
5,182
|
|
|
|
|
Flooring Manufacturing business
|
|
|
5,255
|
|
|
|
|
|
|
5,098
|
|
|
|
|
Steel Manufacturing business
|
|
|
1,844
|
|
|
|
|
|
|
497
|
|
|
|
|
Corporate & Other
|
|
|
(199
|
)
|
|
|
|
|
|
(847
|
)
|
|
|
|
Total Adjusted EBITDA
|
|
$
|
12,102
|
|
|
|
|
|
$
|
9,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail business
|
|
|
19.8
|
%
|
|
|
|
|
|
23.2
|
%
|
|
|
|
Flooring Manufacturing business
|
|
|
16.0
|
%
|
|
|
|
|
|
16.9
|
%
|
|
|
|
Steel Manufacturing business
|
|
|
14.9
|
%
|
|
|
|
|
|
5.1
|
%
|
|
|
|
Corporate & Other
|
|
|
-5.4
|
%
|
|
|
|
|
|
-664.0
|
%
|
|
|
|
Consolidated adjusted EBITDA as a percentage of revenue
|
|
|
16.1
|
%
|
|
|
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) See reconciliation of net income to Adjusted EBITDA below.
The following table sets forth revenues by segment (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2021
|
|
|
For the Three Months Ended December 31, 2020
|
|
|
|
Net
Revenue
|
|
|
% of
Total
Revenue
|
|
|
Net
Revenue
|
|
|
% of
Total
Revenue
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
Movies, Music, Games and Other
|
|
$
|
26,115
|
|
|
|
34.7
|
%
|
|
$
|
22,074
|
|
|
|
35.3
|
%
|
Appliances
|
|
|
96
|
|
|
|
0.1
|
%
|
|
|
296
|
|
|
|
0.5
|
%
|
Flooring Manufacturing
|
|
|
32,872
|
|
|
|
43.7
|
%
|
|
|
30,222
|
|
|
|
48.4
|
%
|
Steel Manufacturing
|
|
|
12,366
|
|
|
|
16.5
|
%
|
|
|
9,735
|
|
|
|
15.6
|
%
|
Corporate & Other
|
|
|
3,709
|
|
|
|
4.9
|
%
|
|
|
127
|
|
|
|
0.2
|
%
|
Total Revenue
|
|
$
|
75,158
|
|
|
|
100.0
|
%
|
|
$
|
62,454
|
|
|
|
100.0
|
%
|
24
The following table sets forth gross profit earned by segment and gross profit as a percentage of total revenue for each segment (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2021
|
|
|
For the Three Months Ended December 31, 2020
|
|
|
|
Gross
Profit
|
|
|
Gross
Profit % of Total Revenue
|
|
|
Gross
Profit
|
|
|
Gross
Profit % of Total Revenue
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
Movies, Music, Games and Other
|
|
$
|
13,400
|
|
|
|
17.8
|
%
|
|
$
|
11,916
|
|
|
|
19.1
|
%
|
Appliances
|
|
|
(10
|
)
|
|
|
0.0
|
%
|
|
|
131
|
|
|
|
0.2
|
%
|
Flooring Manufacturing
|
|
|
9,029
|
|
|
|
12.0
|
%
|
|
|
8,325
|
|
|
|
13.3
|
%
|
Steel Manufacturing
|
|
|
3,615
|
|
|
|
4.8
|
%
|
|
|
1,776
|
|
|
|
2.8
|
%
|
Corporate & Other
|
|
|
1,582
|
|
|
|
2.1
|
%
|
|
|
121
|
|
|
|
0.2
|
%
|
Total Gross Profit
|
|
$
|
27,616
|
|
|
|
36.7
|
%
|
|
$
|
22,269
|
|
|
|
35.7
|
%
|
Revenue
Revenue increased approximately $12.7 million, or 20%, to $75.2 million for the three months ended December 31, 2021, as compared to the corresponding prior year period. The increase is primarily attributable to the increased revenue in the Retail Segment of $3.8 million and the consolidation of SW Financial in 2021 resulting in an increase of $3.6 million as compared to the prior year period. The increase in the retail segment was primarily due to increased retail pricing and the opening of three new stores during the three months ended December 31, 2021. Also contributing to the increase in revenue, were increases in the Flooring Manufacturing segment of $2.7 million and Steel Manufacturing Segment of $2.6 million. These increases were primarily attributable to increased sales pricing and increased demand.
Cost of Revenue
Cost of revenue increased by 18% to approximately $47.5 million for the three months ended December 31, 2021 as compared to approximately $40.2 million for the three months ended December 31, 2020. The increase is primarily attributable to the increases in revenues.
General and Administrative Expense
General and Administrative expenses increased by 15% to approximately $14.2 million for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020 primarily due to increases in employee compensation and related costs.
Selling and Marketing Expense
Selling and marketing expense increased by 13% to approximately $3.1 million for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, primarily due to increased compensation associated with the Marquis sales force.
Interest Expense, net
Interest expense, net decreased by 31% for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, primarily due to a decrease in certain interest rates and the continued efforts to repay certain debt obligations.
25
Results of Operations by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2021
|
|
|
For the Three Months Ended December 31, 2020
|
|
|
|
Retail
|
|
|
Flooring
Manufacturing
|
|
|
Steel
Manufacturing
|
|
|
Corporate
& Other
|
|
|
Total
|
|
|
Retail
|
|
|
Flooring
Manufacturing
|
|
|
Steel
Manufacturing
|
|
|
Corporate
& Other
|
|
|
Total
|
|
Revenue
|
|
$
|
26,211
|
|
|
$
|
32,872
|
|
|
$
|
12,366
|
|
|
$
|
3,709
|
|
|
$
|
75,158
|
|
|
$
|
22,370
|
|
|
$
|
30,222
|
|
|
$
|
9,735
|
|
|
$
|
127
|
|
|
$
|
62,454
|
|
Cost of Revenue
|
|
|
12,821
|
|
|
|
23,843
|
|
|
|
8,751
|
|
|
|
2,127
|
|
|
|
47,542
|
|
|
|
10,323
|
|
|
|
21,897
|
|
|
|
7,959
|
|
|
|
6
|
|
|
|
40,185
|
|
Gross Profit
|
|
|
13,390
|
|
|
|
9,029
|
|
|
|
3,615
|
|
|
|
1,582
|
|
|
|
27,616
|
|
|
|
12,047
|
|
|
|
8,325
|
|
|
|
1,776
|
|
|
|
121
|
|
|
|
22,269
|
|
General and
Administrative
Expense
|
|
|
8,454
|
|
|
|
1,639
|
|
|
|
1,821
|
|
|
|
2,243
|
|
|
|
14,157
|
|
|
|
7,420
|
|
|
|
1,941
|
|
|
|
1,527
|
|
|
|
1,391
|
|
|
|
12,279
|
|
Selling and
Marketing
Expense
|
|
|
126
|
|
|
|
2,782
|
|
|
|
140
|
|
|
|
4
|
|
|
|
3,052
|
|
|
|
134
|
|
|
|
2,234
|
|
|
|
105
|
|
|
|
226
|
|
|
|
2,699
|
|
Operating Income
(Loss)
|
|
$
|
4,810
|
|
|
$
|
4,608
|
|
|
$
|
1,654
|
|
|
$
|
(665
|
)
|
|
$
|
10,407
|
|
|
$
|
4,493
|
|
|
$
|
4,150
|
|
|
$
|
144
|
|
|
$
|
(1,496
|
)
|
|
$
|
7,291
|
|
Retail Segment
Segment results for Retail include Vintage Stock and ApplianceSmart. Revenue for the three months ended December 31, 2021 increased by approximately $4.0 million, or 17%, as compared to the prior year, primarily due to increased retail pricing and additional locations added at Vintage Stock, offset by decreasing sales by ApplianceSmart, primarily due to decreases in sales resulting from increased competition. Retail price increases were primarily due to higher product costs relating to inflationary pressures that were passed on to customers. Cost of revenue increased proportionately with the increase in revenue. Operating income for the three months ended December 31, 2021 was approximately $4.8 million, as compared to operating income of approximately $4.5 million for the prior year period.
Flooring Manufacturing Segment
Segment results for Flooring Manufacturing includes Marquis. Revenue for the three months ended December 31, 2021 increased by approximately $2.7 million, or 9%, as compared to the prior year period, primarily due to greater demand for various grades of flooring, as well increases in sales prices. The shift in demand in flooring grades was generally toward higher priced product. Sales price increases were primarily due to higher product costs relating to inflationary pressures that were passed on to customers. Cost of revenue for the three months ended December 31, 2021 increased proportionately with revenue, as compared to the prior year period. Operating income for the three months ended December 31, 2021 was approximately $4.6 million, as compared to operating income of approximately $4.2 million for the prior year period.
Steel Manufacturing Segment
Segment results for Steel Manufacturing includes Precision Marshall. Revenue for the three months ended December 31, 2021 increased by $2.6 million, or 27%, as compared to the prior year period, primarily due to increased sales prices resulting from rising costs. Cost of revenue for the three months ended December 31, 2021 decreased, as compared to the prior year period, as a percentage of sales due to improved manufacturing efficiencies and increased revenue due to price increases. Operating income for the three months ended December 31, 2021 was approximately $1.7 million, as compared to operating income of approximately $144,000 in the prior period. The increase in operating income is primarily due to an increase in gross profit.
Corporate and Other Segment
Segment results for Corporate and Other includes our directory services business and our investment in SW Financial. Revenues for the three months ended December 31, 2021 increased by $3.6 million primarily due to the addition of SW Financial as a VIE during fiscal 2021. Cost of revenue for the three months ended December 31, 2021 increased proportionately with revenue for the reason stated. Operating loss for the three months ended December 31, 2021 was approximately ($665,000), as compared to a loss of approximately ($1.5 million) in the prior period. Revenues and operating income for our directory services business continue to decline due to decreasing renewals. We expect revenue and operating income from this segment to continue to decrease in the future. We are no longer accepting new customers in our directory services business. We anticipate revenues from our investment in SW Financial to trend upward in the future.
Adjusted EBITDA Reconciliation
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The following table presents a reconciliation of Adjusted EBITDA from net income (in 000's):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
December 31, 2021
|
|
|
December 31, 2020
|
|
Net income
|
|
$
|
6,546
|
|
|
$
|
5,279
|
|
Depreciation and amortization
|
|
|
1,549
|
|
|
|
1,714
|
|
Stock-based compensation
|
|
|
18
|
|
|
|
17
|
|
Interest expense, net
|
|
|
1,017
|
|
|
|
1,470
|
|
Income tax expense
|
|
|
2,960
|
|
|
|
1,450
|
|
Other
|
|
|
12
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
12,102
|
|
|
$
|
9,930
|
|
Liquidity and Capital Resources
As of December 31, 2021, we had total cash on hand of approximately $10.0 million and approximately $28.8 million of available borrowing under our revolving credit facilities. As we continue to pursue acquisitions and other strategic transactions to expand and grow our business, we regularly monitor capital market conditions and may raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under our asset-based revolver lines of credit will provide sufficient liquidity to fund our operations, pay our scheduled loan payments, ability to repurchase shares under our share buyback program, and pay dividends on our shares of Series E Preferred Stock as declared by the Board of Directors, for at least the next 12 months.
Working Capital
We had working capital of approximately $42.5 million as of December 31, 2021, as compared to working capital of approximately $33.8 million as of September 30, 2021.
Cash Flows from Operating Activities
The Company’s cash, as of December 31, 2021, was approximately $10 million compared to approximately $4.7 million as of September 30, 2021, an increase of approximately $5.3 million. Net cash provided by operations was approximately $4.2 million for the three months ended December 31, 2021 as compared to net cash provided by operations of approximately $7.7 million for the three months ended December 31, 2020. The decrease was primarily due to purchases of inventory, as well as payments on accrued liabilities.
Our primary sources of cash inflows are from customer receipts from sales on account, factored accounts receivable proceeds, receipts for securities sales commissions, and net remittances from directory services customers processed in the form of ACH billings. Our most significant cash outflows include payments for raw materials and general operating expenses, including payroll costs and general and administrative expenses that typically occur within close proximity of expense recognition.
Cash Flows from Investing Activities
Our cash flows used in investing activities of approximately $3.1 million for the three months ended December 31, 2021 consisted of purchases of property and equipment. Our cash flows used in investing activities of approximately $3.3 million for the three months ended December 31, 2020 consisted primarily of purchases of property and equipment.
Cash Flows from Financing Activities
Our cash flows provided by financing activities of approximately $4.2 million during the three months ended December 31, 2021 consisted of net proceeds from notes payable of approximately $5.5 million, and approximately $2.0 million in net payments under revolver loans, partially offset by payments of notes payable and financing leases of approximately $3.4 million.
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Our cash flows used in financing activities of approximately $6.2 million during the three months ended December 31, 2020 consisted of payments on notes payable of approximately $4.7 million, and approximately $3.3 million net payments under revolver loans, partially offset by the issuance of notes payable of approximately $2.1 million associated with the acquisition of a facility by Marquis, and purchases of treasury stock in the amount of $383,000.
Currently, we are not issuing common shares for liquidity purposes. We prefer to use asset-based lending arrangements and mezzanine financing together with Company provided capital to finance acquisitions and have done so historically. Occasionally, as our Company history has demonstrated, we will issue stock and derivative instruments linked to stock for services and/or debt settlement.
Future Sources of Cash; New Products and Services
We may require additional debt financing or capital to finance new acquisitions, refinance existing indebtedness or other strategic investments in our business. Other sources of financing may include stock issuances and additional loans; or other forms of financing. Any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure control and Procedures. We carried out an evaluation, under the supervision, and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2021, the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure due to material weaknesses in internal control over financial reporting further described below.
Despite the identified material weaknesses, management concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP. Frazier & Deeter, LLC, the Company’s independent registered public accounting firm, has issued an unqualified opinion on our consolidated financial statements as of and for the year ended September 30, 2021. They were not engaged to perform, and did not perform, an audit of internal control over financial reporting. These material weaknesses have no impact on our consolidated financial statements in prior years.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management, including the Company’s CEO and CAO, do not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent or detect all errors and all fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the following: judgements in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes, controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) of 2013 regarding Internal Control – Integrated Framework. Based on our assessment using those criteria, our management concluded that our internal controls over financial reporting were ineffective as of December 31, 2021. Management noted the following deficiencies that management believes to be material weaknesses:
•
The Company does not have sufficient written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act;
•
Management has not established appropriate and rigorous procedures for evaluating internal controls over financial reporting for all of its subsidiaries; and
•
Management does not have sufficient resources to maintain adequate segregation of duties and maintain its internal control environment
In response to the above identified weaknesses in our internal control over financial reporting, we plan to improve the documentation of our internal control policies and procedures and develop an internal testing plan to document our evaluation of effectiveness of the internal controls. We expect to conclude these remediation initiatives during the fiscal year ended September 30, 2022. We continue to
29
evaluate testing of our internal control policies and procedures, including assessing internal and external resources that may be available to complete these tasks, but do not know when these tasks will be completed.
A material weakness (within the meaning of PCAOB Auditing Standard No. 2201) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A ""significant deficiency" is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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