Liquidity Services, Inc. — Form 10-Q Summary
Business context and reporting period. The company operates online marketplaces and related services for businesses and government agencies selling surplus, returned, used, and scrap assets. This unaudited report covers the three months ended December 31, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended December 31, 2017. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total revenue | $54.1 | $61.1 |
| Gross profit / gross margin | $26.5 / 49.0% | $30.2 / 49.4% |
| Operating loss | $(5.1) | $(6.5) |
| Net loss | $(5.0) | $(1.2) |
| Loss per share, basic and diluted | $(0.15) | $(0.04) |
| Adjusted EBITDA (non-GAAP) | $(1.7) | $(3.0) |
| Cash used in operating activities | $(8.1) | Cash provided: $3.5 |
Cash and cash equivalents were $38.5 million at December 31, 2018, with $30.0 million in short-term investments, for combined cash and investments of $68.5 million. Total current assets were $93.6 million and current liabilities were $62.8 million. The company reported no debt. Total assets were $192.9 million and stockholders’ equity was $126.5 million.
Cash declined $19.9 million during the quarter. Investing activities used $11.6 million, including a $10.0 million purchase of short-term investments and $1.6 million of capital expenditures. Management said existing cash and cash equivalents should be sufficient for anticipated cash needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue declined 11.6% to $54.1 million. The main factor was the prior-year Surplus Contract with the Department of Defense (DoD), which had contributed $16.2 million of revenue in the prior-year quarter and was fully wound down by June 2018.
- Segment results were mixed: CAG revenue fell to $15.5 million from $32.1 million, largely due to the Surplus Contract wind-down and lower Scrap Contract volume and commodity prices. RSCG revenue rose to $29.5 million from $20.5 million; GovDeals rose to $7.7 million from $7.0 million. Machinio, acquired in July 2018, contributed $1.0 million.
- Consolidated gross profit fell 12.3% to $26.5 million, while gross margin edged down to 49.0% from 49.4%. Technology and operations expense declined 30.8%, partly reflecting the contract wind-down and lower platform-development costs. Sales and marketing and general and administrative expenses increased.
- Operating loss improved to $5.1 million from $6.5 million, but net loss widened to $5.0 million from $1.2 million. The prior-year quarter included a $4.8 million income tax benefit; the current quarter recorded a $0.3 million tax provision.
- Operating cash flow moved from $3.5 million provided to $8.1 million used, reflecting working-capital movements, including accounts receivable, accounts payable, seller payables, and inventory.
Outlook, commentary, risks and unusual items
- Outlook and investment: No specific revenue or earnings guidance was provided. Management expects to continue spending on the LiquidityOne platform and related tools, and said it plans to fund capital expenditures primarily from operating cash flow.
- DoD Scrap Contract: The contract generated 7.5% of current-quarter revenue. Its 36-month base term expires September 30, 2019, with two 12-month extension options exercisable by the DLA. The DLA may terminate it for convenience on written notice; the filing does not establish whether an extension will be exercised.
- Concentration and operating risks: The Amazon commercial merchandise contract represented 40.5% of cost of goods sold, versus 19.4% in the prior-year quarter. The company also identifies reliance on the internet and technology, competition, economic trends, and the possibility that significant sellers change or end their contracts as risks.
- Accounting change: The company adopted ASC 606 on October 1, 2018 using the modified retrospective method; comparative-period figures were not restated. Adoption reduced current-quarter reported revenue by $146,000 versus the amount absent adoption. The opening retained-earnings adjustment was a $730,000 increase.
- Other items: The company recorded $350,000 of business realignment expenses, including costs related to its IronDirect exit, completed in January 2019. The previously disclosed securities class action was settled for $17 million paid by insurance carriers, with final court approval in October 2018. The company has a contingent payment related to Machinio of up to $5.0 million in 2020; its recorded fair value was $1.4 million at quarter-end.
- Liquidity and contingencies: The company guaranteed certain UK pension-fund obligations up to £10 million; the plan was reported overfunded at quarter-end. Management cited no material off-balance-sheet arrangements and no debt at December 31, 2018.
Important facts for investors to verify
- Whether the DLA extends the Scrap Contract beyond September 30, 2019, and the contract’s future revenue and margin contribution.
- Whether RSCG growth and other segments can offset the completed Surplus Contract wind-down and CAG weakness.
- Whether operating cash flow improves and the company maintains adequate liquidity while funding LiquidityOne and other investments.
- The significance of Amazon-related purchasing concentration and any changes in that commercial relationship.
- The effects of ASC 606 and the Machinio acquisition on reported revenue, earnings, cash flow, and contingent consideration.