Business context and reporting period
Liquidity Services, Inc. operates online marketplaces and related services for corporate and government sellers of surplus, returned, used and scrap assets. This Form 10-K covers the fiscal year ended September 30, 2018; it is an annual report, not a standalone fourth-quarter filing. The company reports five segments: Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), GovDeals, Machinio, and Corporate & Other.
In July 2018, the company acquired used-equipment listing platform Machinio. Registered buyers grew 5.9% to approximately 3.36 million; GMV was $626.4 million.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $224.5 million | $270.0 million |
| Gross profit and margin | $109.7 million; 48.9% | $124.5 million; 46.1% |
| Operating loss | $21.4 million | $40.0 million |
| Net loss / diluted loss per share | $11.6 million / $0.36 | $39.2 million / $1.25 |
| Adjusted EBITDA | $(7.3) million | $(21.6) million |
| GMV | $626.4 million | $629.3 million |
| Cash from operations | $0.6 million | $(31.7) million |
Fourth-quarter FY 2018 revenue was $52.7 million, gross profit was $24.9 million, net loss was $1.0 million and diluted loss per share was $0.03. The comparable FY 2017 quarter reported revenue of $61.4 million, gross profit of $27.8 million, net loss of $13.9 million and diluted loss per share of $0.44.
At September 30, 2018, cash and cash equivalents were $58.4 million, short-term investments were $20.0 million, working capital was $34.5 million, total liabilities were $72.2 million and stockholders’ equity was $129.7 million. The company reported no debt. Management said existing cash and cash equivalents were expected to meet anticipated needs for at least 12 months. Investing activities used $37.1 million, primarily for Machinio, short-term investments and capital expenditures.
Material changes versus the prior comparable period
- Revenue fell 16.9%, while GMV declined only 0.5%; revenue reflects the company’s transaction mix and includes gross resale proceeds under its purchase model.
- CAG revenue declined $57.1 million, primarily because the DoD Surplus Contract was lost and wound down, with lower Scrap Contract and commercial activity also contributing. The Surplus Contract represented 12.4% of FY 2018 revenue, down from 27.6% in FY 2017.
- RSCG revenue increased 7.3% and GovDeals revenue increased 12.5%. GovDeals GMV rose 14.9%; RSCG GMV rose 12.7%.
- Cost reductions and an improved gross margin helped narrow the operating and net losses. Operating cash flow improved by $32.3 million, from a $31.7 million use to $0.6 million provided, helped by profitability and working-capital movements, including receivable collections and inventory sales.
- Registered buyers increased, but auction participants fell to 2.08 million from 2.29 million and completed transactions declined to 481,000 from 530,000; the filing attributes much of the activity decline to the Surplus Contract wind-down.
Outlook, commentary, risks and unusual items
Management’s strategy emphasizes maximizing seller recovery, growing marketplace volume, expanding technology-enabled and recurring services, and improving expense leverage. It described LiquidityOne platform development and consolidation as a major ongoing initiative: GovDeals and AuctionDeals launched on the platform in FY 2018, with further marketplace and ERP rollouts planned for FY 2019. The filing provides no quantified revenue or earnings guidance.
- The DoD Scrap Contract base term expires September 30, 2019, with two one-year extension options exercisable by the DLA. The company’s reliance on DoD and Amazon inventory is a material concentration risk; Amazon-sourced inventory represented 33.7% of cost of goods sold in FY 2018.
- Machinio contributed $0.7 million in revenue and a $0.9 million operating loss after acquisition. Its purchase consideration included cash, company equity and contingent earn-out consideration; the sellers may receive up to $5.0 million in earn-outs.
- The company recorded $1.9 million of business realignment costs in FY 2018 and expected most of the $1.4 million remaining liability to be paid in 2019. It also recorded an income tax benefit of $9.3 million, including effects of the Tax Act and deferred-tax valuation allowance changes.
- A securities class action was settled for $17 million paid by insurance carriers; final court approval was granted October 5, 2018. The filing reports the derivative action was dismissed and a subsequent shareholder demand was rejected by the board.
- The company disclosed an FY 2018 employee email-account data breach that may have exposed employee personally identifiable information. Management and the auditor concluded internal controls over financial reporting were effective; Machinio was excluded from the assessment following its acquisition.
- Key risks include successful and timely implementation and adoption of LiquidityOne and the new ERP system, competition, inventory and commodity-price exposure, seller and buyer retention, cybersecurity and privacy regulation, and changes in major vendor or government contracts.
Important facts for investors to verify
- Whether the DLA extends or renews the Scrap Contract after its September 2019 base-term expiration, and the resulting effect on CAG revenue and profit.
- Whether ongoing RSCG and GovDeals growth can offset the continuing loss of Surplus Contract volume and the decline in auction participation and completed transactions.
- Whether LiquidityOne and ERP rollouts meet management’s schedule and deliver the expected operating efficiencies without disruption or additional material costs.
- Machinio’s progress toward acquisition earn-out performance targets, integration milestones and profitability.
- The sustainability of improved cash flow and liquidity, including the impact of working capital, restructuring payments, investment spending and the company’s continuing net losses.
- Developments in remediation or consequences of the employee data breach, and any significant changes to internal controls as Machinio is integrated.