Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context and results
Liquidity Services operates online marketplaces and related services for surplus, salvage, and scrap assets. Its reportable segments are Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and GovDeals. The quarter’s year-over-year comparisons were significantly affected by the wind-down of the DoD Surplus Contract, which the company did not retain in a rebid.
| Metric | Three months ended June 30, 2018 | Prior-year quarter | Nine months ended June 30, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $50.6 | $65.5 | $171.8 | $208.7 |
| Gross profit | $27.1 | $29.9 | $84.9 | $96.7 |
| Gross margin | 53.7% | 45.7% | 49.4% | 46.3% |
| Operating loss | $(3.1) | $(8.8) | $(15.2) | $(25.4) |
| Net loss | $(3.7) | $(8.6) | $(10.6) | $(25.2) |
| Basic and diluted loss per share | $(0.12) | $(0.27) | $(0.33) | $(0.80) |
| Adjusted EBITDA (non-GAAP) | $(0.2) | $(5.2) | $(5.4) | $(13.9) |
For the quarter, revenue declined 22.7%, while GMV increased 1.7% to $163.6 million. For the nine months, revenue declined 17.7% and GMV declined 2.7% to $471.1 million. CAG revenue fell 56.4% in the quarter and 36.6% year to date, primarily because of the Surplus Contract wind-down. RSCG revenue rose 12.0% in the quarter and 2.4% year to date; GovDeals revenue rose 12.8% and 13.3%, respectively. Segment-level gross margins improved in CAG and RSCG for the quarter, while GovDeals’ margin eased.
Cash flow, liquidity, and balance sheet
- Cash and cash equivalents were $83.4 million at June 30, 2018, down from $94.3 million at September 30, 2017. The company also held $10.0 million in short-term investments, for combined cash and short-term investments of $93.4 million.
- Current assets were $121.2 million and current liabilities $65.6 million. Total liabilities were $72.1 million; the company reported no debt.
- Operating cash flow was positive $1.6 million for the nine months, versus cash used of $14.3 million in the prior-year period. Management attributed the improvement to better profitability and working-capital changes, including receivable collections and inventory sales.
- Investing cash outflow was $11.9 million, including the $10.0 million short-term investment purchase and $2.7 million of capital expenditures. Cash decreased by $10.9 million over the nine months.
- Management stated existing cash was expected to meet anticipated needs for at least 12 months. The filing notes that cash held on behalf of sellers is included in reported cash and corresponding liabilities.
Changes, outlook, and notable items
- The Surplus Contract wind-down was completed by June 30, 2018. The contract contributed $27.9 million, or 16.2%, of nine-month 2018 revenue, compared with $58.1 million, or 27.8%, in the prior-year period. The continuing DoD Scrap Contract has a base term through September 30, 2019, with two extension options; the DLA may terminate it for convenience.
- Cost reductions and restructuring helped narrow operating and net losses. Nine-month restructuring costs were approximately $2.1 million; $1.7 million remained accrued at June 30, 2018, expected to be paid in fiscal 2018 and 2019.
- The company reported a $3.8 million income tax benefit for the nine months, including a provisional $5.2 million benefit related to the Tax Act’s lower tax rate and AMT credit treatment. Accounting for certain international Tax Act provisions remained incomplete.
- On July 10, 2018, after quarter-end, the company acquired Machinio for approximately $16.7 million net cash, $2.0 million in equity, and contingent consideration of up to $5.0 million payable in 2020. Management described continued LiquidityOne platform development, with further marketplace launches planned beginning in fiscal 2019 and additional implementation costs expected.
- A securities class-action settlement was preliminarily approved in June. The company’s insurers agreed to pay $17 million; final court approval was scheduled for October 5, 2018, and effectiveness remained subject to approval and other conditions. A separate shareholder demand was under review by a board special committee; the derivative lawsuit had been dismissed.
- Key business exposures include dependence on government and commercial seller contracts, competition, technology execution, and market and currency conditions. Amazon-sourced merchandise represented 41.0% of quarterly cost of goods sold and 28.5% for the nine-month period. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether growth in GovDeals and RSCG, GMV trends, and cost reductions can offset the lost Surplus Contract revenue and support a return to profitability.
- The renewal or extension prospects and termination risk of the DoD Scrap Contract, and the operating economics of the remaining CAG business.
- Final approval and effectiveness of the $17 million insurer-funded settlement, and any company costs or exposure associated with the shareholder demand.
- The cash, equity, and contingent-consideration terms of the Machinio acquisition, its subsequent performance, and the effect on liquidity.
- The final accounting impact of adopting the new revenue-recognition standard in fiscal 2019; the company said it could not yet reasonably estimate the quantitative impact.
- Whether reported liquidity adequately reflects seller funds held in cash, and the company’s ability to sustain positive operating cash flow while funding LiquidityOne and other investments.