LIQUIDITY SERVICES INC quarterly report, Q3 FY2020

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Liquidity Services, Inc. — Form 10-Q Summary

Business context and reporting period

Liquidity Services operates online marketplaces and related services for surplus and used assets, across four reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. This fiscal third-quarter report covers the three and nine months ended June 30, 2020; dollar amounts below are in millions unless noted.

Financial performance and liquidity

  • Third-quarter revenue: $47.7 million, down 16.1% from $56.9 million. Gross merchandise volume (GMV) was $130.1 million, down 22.6%.
  • Profitability: Operating income was $0.2 million versus an operating loss of $4.6 million a year earlier. Net income was $0.2 million, or $0.01 per diluted share, versus a $4.6 million net loss, or $0.14 per share. Gross profit margin increased to 52.9% from 50.2%.
  • Nine-month results: Revenue was $150.1 million, down 10.5%; net loss was $9.2 million, compared with a $14.0 million loss in the prior-year period. Gross profit margin was 51.2%, versus 50.2%.
  • Segment trends: Q3 RSCG revenue rose 7.3% and Machinio revenue rose 22.4%; GovDeals revenue fell 35.1% and CAG fell 57.2%. CAG’s decline included the prior-year Scrap Contract’s completion and reduced activity amid COVID-19 restrictions.
  • Cash flow: Nine-month operating cash flow was $9.2 million, versus cash used of $7.2 million a year earlier. Investing activities provided $28.9 million, including net short-term investment maturities and a $2.5 million promissory-note payment. Capital expenditures were $3.6 million.
  • Balance sheet and liquidity: At June 30, cash and cash equivalents were $72.7 million; current assets were $94.9 million and current liabilities $80.2 million. Total liabilities were $88.6 million and stockholders’ equity $110.2 million. The company reported no debt. Cash included $30.0 million in money-market funds.

Changes, outlook, risks, and unusual items

  • COVID-19 restrictions reduced marketplace activity, particularly in April, as government and commercial facilities curtailed operations. Management reported GMV and revenue improving in May and June as closures eased, but said the pace and duration of recovery remain difficult to predict.
  • Temporary expense controls helped return the company to quarterly net income. Management said it restored full pay and back pay for current employees, brought some furloughed employees back, and planned to resume technology and marketing investment. It expects the temporary cash-flow benefit from extended vendor terms and delayed buyer pickups to unwind and believes existing cash will cover anticipated needs for at least 12 months.
  • No quantified earnings or revenue guidance was provided. Management described longer-term opportunities in online and low-touch transactions, reverse supply-chain services, and marketplace technology.
  • Amazon-sourced merchandise represented 60.4% of consolidated cost of goods sold in Q3, up from 41.6% in the prior-year quarter. This represents a material supplier concentration.
  • The company paid the $5.0 million Machinio earn-out during the first half of fiscal 2020. It also held a $5.7 million outstanding promissory note from Jacobs Trading (JTC); management considered collection probable but said recoverability depends on JTC’s performance and scheduled payments.
  • COVID-19-related impairment testing in March found goodwill fair-value headroom of 21% for CAG and 12% for Machinio; no impairment was recorded, and management reported no trigger for another interim test in Q3. Estimates depend on uncertain pandemic-related forecasts.
  • Q3 business realignment expenses were $0.3 million, related to COVID-19 position eliminations. Prior-year results included effects from the now-completed Department of Defense Scrap Contract and the Machinio earn-out valuation.
  • Management identified the pandemic and its possible duration or resurgence, economic and buyer-demand weakness, operational restrictions, shipping delays, and foreign-exchange movements as risks. It also noted reliance on significant commercial sellers and uncertainty in the JTC note’s collection.

Important facts for investors to verify

  • Whether the May–June recovery continued after quarter-end and how it affected GMV, revenue, and segment performance.
  • Whether cash-flow gains from temporary working-capital measures reverse as expected, and whether liquidity remains adequate through the recovery.
  • Amazon vendor-contract terms and the company’s ability to diversify this substantial cost-of-goods-sold exposure.
  • JTC’s scheduled repayments and any changes to management’s assessment of the $5.7 million note’s recoverability.
  • Whether COVID-19 assumptions, especially for CAG and Machinio, change enough to affect goodwill or long-lived asset values.