Business context and reporting period
Liquidity Services, Inc. operates online marketplaces for surplus, salvage and scrap assets, serving corporate and government sellers. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 31, 2018; the fiscal year ends September 30. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Total revenue | $60.1 million, down 16.9% year over year | $121.2 million, down 15.3% |
| Gross profit / margin | $27.5 million / 45.8% | $57.7 million / 47.6% |
| Operating loss | $5.6 million | $12.0 million |
| Net loss | $5.7 million; diluted loss per share $0.18 | $6.9 million; diluted loss per share $0.22 |
| Adjusted EBITDA (non-GAAP) | Loss of $2.2 million | Loss of $5.2 million |
Compared with the prior-year periods, net loss narrowed from $8.3 million to $5.7 million for the quarter and from $16.6 million to $6.9 million for six months. Six-month results included a $4.4 million income tax benefit, principally related to the Tax Cuts and Jobs Act; management reported a $5.2 million tax benefit from the Act’s deferred-tax remeasurement and AMT-credit changes.
Six-month operating cash flow was positive $6.5 million, versus cash use of $14.4 million a year earlier. Investing activities used $0.9 million, including $1.6 million of capital expenditures; financing activities provided $0.01 million. Cash rose to $99.7 million from $94.3 million at September 30, 2017. Current assets were $125.0 million and current liabilities $65.3 million. The company reported no debt and said existing cash should cover anticipated needs for at least 12 months.
Material changes versus prior periods
- The principal driver of lower consolidated revenue was CAG: quarterly revenue fell 32.1% to $25.2 million; six-month revenue fell 28.1% to $57.2 million. Lower sales and service revenue under DoD contracts, lower CAG commercial activity and a shift to lower-value scrap commodities contributed.
- The company lost the bid for replacement DoD Surplus Contract awards, made its final inventory purchase in December 2017 and is winding down the contract. Revenue from it was $27.8 million in the first six months of FY2018; the company expects further decline in Q3 and no revenue from the contract in future periods.
- GovDeals grew: six-month revenue increased 13.6% to $14.1 million. RSCG six-month revenue declined 2.3% to $47.4 million, while GMV increased 14.7%, reflecting a shift toward consignment transactions.
- Consolidated GMV decreased 7.0% for the quarter and 4.9% for six months. Registered buyers increased to 3.249 million from 3.171 million at September 30, 2017, while auction participants and completed transactions declined year over year, largely in connection with the Surplus Contract wind-down.
- Operating expenses declined, including technology and operations costs, as the company continued restructuring and cost reductions. Six-month restructuring costs were approximately $1.8 million.
Outlook, risks and unusual items
Management expects the Surplus Contract wind-down to be completed in FY2018 and anticipates its lost profits will be largely offset by restructuring and realignment benefits. The company plans further LiquidityOne platform launches and expects to incur additional development and implementation costs. No formal revenue or earnings guidance is provided.
Key exposures include dependence on government and commercial seller relationships, contract renewals and awards, competition, economic conditions and technology execution. The Surplus and Scrap DoD contracts together represented a material share of revenue; the Scrap Contract base term runs through September 30, 2019, subject to DLA termination-for-convenience rights and extension options. Amazon-sourced merchandise represented 24.1% of six-month cost of goods sold.
On April 18, 2018, after quarter-end, the parties reached an agreement in principle to settle the Howard securities class action, with the company’s insurance carriers to pay $17 million. The settlement remains subject to definitive documentation and court approval; completion is not assured. The company also has an ongoing shareholder demand being evaluated by a board special committee. A guarantee of up to £10 million supports obligations to a UK pension fund; plan assets exceeded liabilities by approximately $2.1 million at March 31, 2018.
The company was still assessing the accounting effects of the new revenue-recognition standard, due for adoption October 1, 2018, and could not yet reasonably estimate the quantitative impact. It also had not completed its accounting for certain international tax provisions of the Tax Act. Approximately $8.9 million of foreign earnings were considered indefinitely reinvested; $14.7 million of cash was held overseas.
Important facts for investors to verify
- Progress and remaining costs of the Surplus Contract wind-down, and whether expected restructuring savings offset lost profits.
- Final court approval, insurance funding and conditions of the proposed $17 million securities-litigation settlement.
- Trends in CAG commercial activity, GovDeals growth, RSCG transaction mix and overall GMV.
- The eventual financial-statement impact of adopting the new revenue standard and completing Tax Act accounting.
- Liquidity and working-capital trends, including cash held for sellers, and performance of the LiquidityOne rollout.