Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The quarter covers January–March 2020; the filing was signed May 7, 2020. Amounts below are in millions of dollars unless stated otherwise.
Business context
Liquidity Services operates online marketplaces and related services for surplus, salvage, and used assets. Its reportable segments are GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. The company reported that it served more than 13,000 sellers and had approximately 3.675 million registered buyers as of March 31, 2020.
Financial performance
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Total revenue | $52.8 | $56.8 | $102.3 | $110.9 |
| Gross profit | $26.2 | $29.2 | $51.5 | $55.7 |
| Gross profit margin | 49.6% | 51.4% | 50.4% | 50.2% |
| Operating loss | $(4.5) | $(4.5) | $(9.4) | $(9.6) |
| Net loss | $(4.2) | $(4.4) | $(9.4) | $(9.4) |
| Basic and diluted loss per share | $(0.13) | $(0.13) | $(0.28) | $(0.29) |
| Company-defined Adjusted EBITDA (non-GAAP) | $(1.6) | $0.9 | $(3.6) | $(0.7) |
Quarterly total revenue declined 7.0% year over year; six-month revenue declined 7.7%. For the quarter, GMV was $144.3 million, down 7.1%, and completed transactions were approximately 150,000 versus 153,000. For the six months, GMV was $292.9 million, down 6.7%. These marketplace activity measures reflect lower volume, particularly in CAG, as well as the prior-year comparison with the completed Scrap Contract.
- Segment trends, quarter: GovDeals revenue rose 1.6% and RSCG revenue rose 6.6%; CAG revenue fell 48.6%, including a $4.3 million reduction associated with the concluded Scrap Contract. Excluding that contract, CAG revenue fell 24.9%. Machinio revenue rose 24.2%.
- Operating costs: Quarterly cost of goods sold increased 7.3% despite lower consolidated revenue, while technology and operations and general and administrative expenses fell 13.7% and 14.2%. Sales and marketing rose 10.7%; depreciation and amortization increased 35.4%.
- Cash flow, six months: Cash used in operating activities was $12.1 million, compared with $11.6 million used a year earlier. Investing activities provided $19.7 million, largely reflecting net maturities of short-term investments and a $2.5 million promissory-note principal payment. Financing activities used $1.7 million.
Balance sheet and liquidity
At March 31, 2020, cash and cash equivalents were $41.8 million and short-term investments were $10.0 million, for $51.8 million in combined cash and short-term investments. Total assets were $182.1 million and total liabilities were $74.0 million. The company reported no debt. It had $11.2 million of operating lease liabilities and $0.3 million of finance lease liabilities. Management stated that available cash, cash equivalents, and short-term investments were expected to cover anticipated cash needs for at least 12 months.
Cash increased from $36.5 million at September 30, 2019, while short-term investments declined from $30.0 million. The company had $5.7 million outstanding on a promissory note from Jacobs Trading, LLC (JTC), including $1.1 million classified as current; management considered collection probable but said recoverability depends on JTC’s future performance and repayment.
Outlook, risks, and unusual items
- COVID-19: Government and business closures, restrictions on facility access, and limits on buyer inspection and pickup began affecting activity in mid-March. Management expected lower marketplace transactions in the short term and potentially longer, adversely affecting GMV, results, and cash flows. It reported seller facilities beginning to reopen and anticipated activity would rise as restrictions eased, while emphasizing that timing and scale were difficult to predict. No quantified earnings or revenue guidance was provided.
- Response: The company implemented remote work where possible, safety measures at facilities, furloughs and salary reductions, reduced discretionary spending and some technology investment, and sought more flexible vendor payment terms. Management said these actions were expected to reduce expenses while in effect. Salary and director-fee reductions were extended for May and June, subject to review.
- Impairment estimates: COVID-19 prompted interim goodwill and long-lived-asset impairment tests; no impairment charge was recorded. CAG and Machinio goodwill fair values exceeded carrying values by 21% and 12%, respectively. The valuations rely on forecasts of pandemic effects and duration, making them sensitive to uncertain assumptions.
- Contract and supplier concentration: Amazon-sourced merchandise represented 55.3% of consolidated cost of goods sold in the quarter and 51.9% for the six months. The DoD Scrap Contract ended September 30, 2019, reducing CAG comparisons. The filing identifies dependence on seller contracts, economic conditions, technology, competition, and COVID-19 disruptions as risks.
- Other items: The company paid the $5.0 million Machinio earn-out during the quarter. It recorded a $0.2 million earn-out fair-value expense for the six-month period. No material litigation was reported. The UK pension-plan guarantee is capped at £10 million.
Important facts for investors to verify
- Whether COVID-19-related seller closures, buyer access constraints, and transaction volume declines persist or recover across segments.
- Whether CAG and Machinio meet the forecasts underpinning their relatively limited goodwill valuation headroom, and whether later impairment testing results in a charge.
- Whether JTC makes scheduled promissory-note payments and the remaining $5.7 million is collected.
- How reliance on Amazon vendor agreements affects RSCG costs, inventory availability, and margins.
- Whether cost-conservation measures and cash resources are sufficient if operating cash outflows continue; reported six-month operating cash flow was negative $12.1 million.
- Whether reported results and cash flow remain comparable after the Scrap Contract’s expiration and the adoption of lease accounting, which added operating lease assets and liabilities beginning October 1, 2019.