Liquidity Services, Inc. — Form 10-Q Summary
Business context and period: The company operates online marketplaces and related services for business and government sellers of surplus, salvage, and used assets. This fiscal third-quarter report covers the three and nine months ended June 30, 2019; financial figures are unaudited and in U.S. dollars.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $56.9 million, up 12.5% year over year | $167.7 million, down 2.4% |
| Gross profit / margin | $28.6 million / 50.2%, versus $27.1 million / 53.7% | $84.2 million / 50.2%, versus $84.9 million / 49.4% |
| Operating loss | $4.6 million, versus $3.2 million | $14.1 million, versus $15.4 million |
| Net loss / diluted loss per share | $4.6 million / $0.14, versus $3.7 million / $0.12 | $14.0 million / $0.43, versus $10.6 million / $0.33 |
| Adjusted EBITDA | $0.2 million, versus a loss of $0.2 million | Loss of $0.5 million, versus a loss of $5.4 million |
For the nine months, operating cash flow was a use of $7.2 million, compared with $1.6 million provided a year earlier. Investing activities used $14.7 million, including net purchases of short-term investments and capital expenditures; capital expenditures were $4.8 million. Cash and cash equivalents were $36.4 million at June 30, with $30.0 million in short-term investments. Current assets were $90.8 million and current liabilities $67.5 million. The company reported no debt.
Total assets were $190.7 million and stockholders’ equity was $121.1 million. Segment gross profit increased at GovDeals and RSCG, while CAG gross profit declined. For the quarter, consolidated GMV was $168.1 million, up from $163.6 million; for the nine months, GMV was $482.1 million, up from $471.1 million.
Material changes and drivers
- Quarterly revenue growth reflected higher RSCG sales and fee revenue, including increased marketplace activity, and growth at GovDeals. Nine-month revenue declined mainly because CAG revenue fell following the wind-down of the DoD Surplus Contract.
- RSCG nine-month revenue rose 28.5%; CAG revenue fell 39.0%. The prior-year period included $25.6 million more revenue associated with the Surplus Contract. The Scrap Contract also had lower revenue and GMV.
- Quarterly costs included higher cost of goods sold, partly reflecting more purchase-model transactions, and increased general and administrative expense. Lower technology and operations costs partly offset these increases.
- Quarterly net loss worsened year over year; nine-month net loss also increased, in part because the prior-year period included tax benefits. The company recorded a $2.3 million increase in the estimated Machinio earn-out liability during the nine months.
Outlook, commentary, and risks
- The DoD declined to exercise the Scrap Contract options and directed a phase-out beginning June 10, 2019. The contract is scheduled to conclude September 30, 2019; it represented 8.2% of quarterly revenue and 7.8% of nine-month revenue in 2019. The company recorded related employee severance costs.
- Management reported that its LiquidityOne technology platform was deployed after quarter-end, completing the strategic initiative. Further work is planned on a consolidated marketplace, recommendations, marketing, analytics, and integration of retail supply transaction volume. No specific revenue or earnings guidance was provided.
- Management said existing cash and cash equivalents should meet anticipated cash needs for at least the next 12 months. Future cash needs depend on growth, technology and marketplace investment, and other business plans.
- Amazon-related inventory purchases represented 43.9% of nine-month cost of goods sold, creating vendor concentration. Other stated risks include reliance on internet-based marketplaces, competition, economic conditions, technology change, and sellers changing or ending contracts.
- The company recorded a $0.6 million estimated liability for a California sales-tax audit and $1.7 million of business realignment expenses for the nine months. It also disclosed a guarantee of up to £10 million related to a UK defined-benefit pension plan; the plan was overfunded at the reporting date.
- ASC 606 was adopted in fiscal 2019. The filing’s comparison indicates the standard reduced fee revenue by about $0.3 million for the quarter and nine months; the reported June 30 accumulated deficit was $0.8 million greater than it would have been without adoption.
Important facts for investors to verify
- Track the financial and operating impact of the Scrap Contract ending, including replacement business and the effect on CAG.
- Monitor whether LiquidityOne and planned marketplace integration improve revenue growth, margins, and operating cash flow.
- Review cash conversion and working-capital movements, particularly seller payables, inventory, and accounts receivable.
- Assess exposure to Amazon as a major inventory source and the timing and amount of the Machinio earn-out, which had a $3.6 million fair value liability at June 30.
- Follow the California sales-tax audit, restructuring obligations, and the pension guarantee.