Liquidity Services, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; unaudited. Unless noted, amounts are USD millions. The company operates online marketplaces for corporate and government sellers of surplus, used and scrap assets.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $70.8 | $65.9 | +7.5% |
| Net loss | $(8.4) | $(5.2) | Loss widened |
| Loss from operations | $(8.3) | $(7.4) | Loss widened |
| Adjusted EBITDA | $(4.3) | $(3.3) | Loss widened |
| Operating cash flow | $(5.0) | $(8.3) | Cash use declined |
Product-sale revenue was $48.0 million, down from $50.1 million; fee revenue rose to $22.8 million from $15.7 million. Gross merchandise volume (GMV) increased 5.5% to $159.7 million. Cost of goods sold rose 20% to $32.3 million, or 45.7% of revenue versus 40.8%; client distributions rose to $4.5 million from $2.4 million. Operating margin was approximately negative 11.7%, compared with negative 11.3%; net margin was negative 11.9%, versus negative 7.9%. A $0.9 million fair-value gain on a commercial participation asset was recorded as other operating income.
Liquidity and balance sheet
At December 31, 2016, cash and cash equivalents were $126.9 million, current assets $177.1 million and current liabilities $85.8 million. The company had no debt; its $75 million credit facility had been terminated in March 2016 with no borrowings outstanding. Cash declined $7.6 million during the quarter. Capital expenditures were $2.3 million. Management believes existing cash will meet anticipated needs for at least 12 months. Approximately $22.0 million of cash was held overseas and was not available for domestic operations without potential repatriation taxes.
Changes, outlook and risks
- Revenue growth primarily reflected stronger commercial marketplaces and state and local government sales; DoD business revenue declined 2.6%. GMV rose in commercial and GovDeals marketplaces but fell 21.1% in DoD businesses, amid lower surplus volume and scrap pricing.
- The new three-year DLA Scrap Contract began in the quarter and requires a 64.5% payment to the DLA on gross resale proceeds. The Surplus Contract was extended through December 14, 2017; the DLA has three further one-year extension options and may terminate for convenience. Surplus Contract revenue represented 29.9% of quarterly revenue.
- On January 30, 2017, the company decided to exit its TruckCenter land-based auction and retail business, estimating $0.7–$1.1 million in expenses, mostly in the quarters ending March 31 and June 30, 2017. This is a subsequent event, not a Q1 expense.
- Management reported no goodwill impairment indicators in the quarter, following a $19.0 million goodwill impairment charge in Q4 FY2016. A $2.6 million deferred-tax valuation allowance charge was recorded in Q1; management expects future tax rates to be near zero.
- Key risks include dependence on DLA contracts and government inventory availability, competitive and retail-market conditions, and execution of the LiquidityOne platform and other marketplace initiatives. The company reported ongoing securities class-action and derivative litigation; it believes the claims are without merit but cannot estimate potential liability.
- No specific revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Most important facts to verify
- Whether marketplace growth can offset persistent operating losses and rising purchase-model costs.
- Performance and economics of the new Scrap Contract, and DLA extension or termination decisions for the Surplus Contract.
- Cash generation, including the accessibility of overseas cash and the funding needs of LiquidityOne and other initiatives.
- Actual TruckCenter exit costs and the outcome or eventual estimability of the disclosed litigation exposure.