Business Context and Reporting Period
Liquidity Services, Inc. operates online marketplaces for new, surplus and scrap assets, serving corporate and government sellers and professional buyers. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 31, 2017; comparisons are to the same periods in 2016. Amounts below are U.S. dollars.
Key Financial Metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $72.3 million, down 16.8% from $86.9 million | $143.1 million, down 6.3% from $152.8 million |
| Net loss | $8.3 million, versus $0.9 million | $16.6 million, versus $6.0 million |
| Loss per diluted share | $0.26, versus $0.03 | $0.53, versus $0.20 |
| Adjusted EBITDA (non-GAAP) | Loss of $4.4 million, versus income of $2.9 million | Loss of $8.8 million, versus loss of $0.4 million |
| Operating cash flow | Not separately presented | Cash used of $14.4 million, versus cash provided of $24.7 million |
For the quarter, operating loss was $8.4 million and net margin was negative 11.4%; cost of goods sold was 47.8% of revenue, compared with 46.0%. For the six months, operating loss was $16.7 million and cost of goods sold was 46.7% of revenue, compared with 43.7%.
At March 31, cash and cash equivalents were $116.1 million; current assets were $164.2 million and current liabilities $79.4 million. The company reported no debt. Cash declined $18.4 million from September 30, 2016. Six-month investing cash use was $4.0 million, primarily for capitalized software, equipment and leasehold improvements. Approximately $18.7 million of cash was held overseas and was not available for domestic operations without potential repatriation taxes.
Material Changes Versus Prior Comparable Period
- GMV increased 7.0% to $163.7 million for the quarter and 6.2% to $323.4 million for the six months, even as reported revenue fell. Management attributed this divergence to increased consignment activity offsetting lower principal-transaction activity and lower DoD volumes.
- Quarterly revenue declined in commercial marketplaces and the DoD business; GovDeals revenue rose 25.8%. For the six months, GovDeals revenue rose 16.8%, while DoD and commercial revenue declined.
- Higher distributions under the new Scrap contract increased client distributions to $5.0 million for the quarter and $9.5 million for the six months. These costs reflect the contract’s 64.5% revenue-sharing payment to the DLA.
- The company decided in January 2017 to exit TruckCenter’s land-based, live auction and retail business. The quarter included $1.1 million of related realignment costs; the six-month period also included a $0.1 million impairment of an intangible asset related to that business.
- Quarterly and six-month losses widened. The six-month operating cash-flow comparison was also affected by a $34.7 million prior-year income-tax recovery.
Outlook, Risks and Unusual Items
- Management stated existing cash should cover anticipated needs for at least the next 12 months. It expects continued spending on the LiquidityOne platform and related services; the customer sales module began amortization in the second quarter.
- The DLA exercised a one-year extension of the Surplus contract, which now runs through December 14, 2017; two further one-year options are at the DLA’s discretion. The DLA may terminate for convenience. The Scrap contract has a three-year base term through September 30, 2019, plus two one-year options, and also permits termination for convenience.
- The Surplus contract generated 27.1% of quarterly revenue and 28.5% of six-month revenue. A separate commercial client arrangement generated 16.7% and 14.8%, respectively, making contract volumes and renewals important risks.
- Management expects future tax rates to remain near zero until there is sufficient evidence to reverse the valuation allowance and recognize deferred tax assets. A $5.4 million valuation-allowance charge was recorded during the six months.
- The company reported a $19.0 million goodwill impairment in fiscal 2016 and noted that further impairment remains possible if business performance, customer relationships or other assumptions weaken. It also holds a $11.3 million remaining promissory note from the buyer of Jacobs Trading, primarily classified as a long-term asset.
- Pending matters include a securities class action with remaining claims relating to the retail division and a consolidated derivative action in Delaware. The company says the allegations are without merit and cannot estimate potential liability.
- The company guarantees certain pension-scheme obligations up to £10 million. At March 31, plan assets exceeded plan liabilities by approximately $0.1 million.
Most Important Facts for Investors to Verify
- Whether revenue and profitability stabilize despite rising GMV, particularly in commercial and DoD markets.
- Surplus contract performance and renewal prospects, and the impact of its higher purchase-cost terms; Scrap contract margins under revenue sharing.
- Cash burn, working-capital needs and planned investment in LiquidityOne and other marketplaces.
- Realized collectability of the Jacobs Trading promissory note and valuation of Level 3 commercial participation assets.
- Potential effects of the pending litigation, pension guarantee, valuation allowance and any further goodwill or asset impairment.