Liquidity Services, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports the quarter ended September 30, 2019 (FY2019 Q4). The company operates online marketplaces and related services for surplus, salvage and used assets.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $226.5 million | $224.5 million |
| Gross profit / margin | $113.3 million / 50.0% | $109.7 million / 48.9% |
| Operating loss | $19.5 million | $21.7 million |
| Net loss | $19.3 million | $11.6 million |
| Loss per share, diluted | $0.58 | $0.36 |
| GMV | $639.9 million | $626.4 million |
| Operating cash flow | $(6.2) million | $0.6 million |
FY2019 Q4 revenue was $58.8 million, versus $52.7 million in FY2018 Q4. Gross profit was $29.0 million versus $24.9 million; net loss was $5.2 million versus $1.0 million.
At year-end, cash and cash equivalents were $36.5 million and short-term investments were $30.0 million, down from combined cash and investments of $78.4 million a year earlier. Working capital was $21.1 million versus $34.5 million. The company reported no debt outstanding. FY2019 investing cash outflow was $15.7 million, including $5.9 million of capital expenditures; financing cash inflow was $0.5 million.
Changes and drivers
- Revenue rose 0.9% year over year, while net loss widened by $7.6 million. The tax provision swung from a $9.3 million benefit in FY2018 to a $1.2 million expense in FY2019, including the effect of a valuation allowance and other tax items.
- RSCG revenue increased 24.9% to $127.3 million, with GMV up 19.1%; improved margins in certain retail programs supported higher segment gross margin.
- GovDeals revenue increased 9.0% to $32.9 million, reflecting higher volume and seller growth.
- CAG revenue fell 31.6% to $60.2 million. The wind-down of the DoD Surplus and Scrap contracts reduced revenue and GMV; the Scrap Contract concluded September 30, 2019, following the Surplus Contract’s June 2018 conclusion.
- Technology and operations expense declined 15.1%, partly from restructuring and contract wind-downs; sales and marketing and general and administrative expenses increased.
Outlook, risks and unusual items
- Management’s strategy emphasizes maximizing seller recovery, growing transaction volume, expanding services and improving expense leverage. No numerical revenue or earnings guidance is provided. Management said existing cash and cash equivalents should meet anticipated needs for at least 12 months.
- The new e-commerce platform was completed in 2019. An aggregated marketplace launched in November 2019 in beta, with further capabilities and category integration planned incrementally during FY2020. Management expects continued investment in marketplace technology and related tools.
- Amazon-sourced merchandise represented 43.6% of consolidated cost of goods sold, up from 33.7% in FY2018, creating significant vendor concentration risk. The DoD Scrap Contract’s conclusion also removes a source of revenue.
- Other key risks include marketplace adoption and technology execution, competition, inventory and commodity-price exposure, cybersecurity and privacy, and reliance on third-party cloud and shipping providers. The filing disclosed a 2018 employee email-account breach that may have exposed employee personal information.
- FY2019 other operating expense included $3.5 million from an increase in the estimated Machinio earn-out liability and $1.6 million of restructuring costs. The earn-out liability was $4.8 million at year-end and is expected to settle in FY2020; eligible consideration can reach $5.0 million.
- The company held an $8.3 million JTC promissory note balance at September 30, 2019. A subsequent October 2019 agreement established a new repayment schedule and provided additional collateral; management judged collection probable. A $0.6 million California sales-tax audit liability was paid in FY2020 Q1.
- Machinio goodwill was $14.6 million; its estimated fair value exceeded carrying value by about 11% in the annual impairment test. The company recorded no goodwill impairment.
Investor verification priorities
- Reconcile the continuing net loss and cash outflow with progress toward management’s stated profitability and growth strategy.
- Track Amazon inventory availability and terms, and quantify the ongoing impact of the DoD contract exits on CAG.
- Monitor aggregated marketplace adoption, migration and integration costs, and whether technology investments improve buyer activity and seller recovery.
- Review liquidity and collections, including the JTC note repayment schedule, the Machinio earn-out settlement, and cash held overseas.
- Check the Machinio earn-out assumptions and goodwill headroom, as well as the effect of the valuation allowance on future tax benefits.
Note: The filing’s selected-data table and adjusted EBITDA reconciliation show different FY2019 adjusted EBITDA values; the filing text does not provide a clear single value.