Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Unaudited results; dollar figures are in millions unless otherwise noted. The company operates online marketplaces and services for surplus and used assets through GovDeals, Capital Assets Group (CAG), Retail Supply Chain Group (RSCG), and Machinio.
Financial performance
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Total revenue | $56.8; down 5.5% year over year | $110.9; down 8.6% |
| Operating loss | $4.5, versus $5.7 loss | $9.6, versus $12.2 loss |
| Net loss | $4.4, or $0.13 per diluted share, versus $5.7 loss, or $0.18 per share | $9.4, or $0.29 per diluted share, versus $6.9 loss, or $0.22 per share |
| Gross profit / margin | $29.2 / 51.4%, versus $27.5 / 45.8% | $55.7 / 50.2%, versus $57.7 / 47.6% |
| Adjusted EBITDA (non-GAAP) | $0.9, versus $(2.2) | $(0.7), versus $(5.2) |
Quarterly fee revenue increased 14.4% to $19.4 million, while purchase-model revenue fell 13.3% to $37.4 million. For the six-month period, fee revenue was essentially flat at $37.8 million and purchase-model revenue declined 12.3% to $73.1 million. GMV was $155.4 million in the quarter, up 2.1%, and $313.9 million for six months, up 2.1%.
Segment trends: In the quarter, RSCG revenue increased 26.4% to $34.0 million and gross profit rose 42.6% to $12.3 million. GovDeals revenue increased 8.5% to $7.7 million. CAG revenue declined 45.6% to $13.7 million, primarily reflecting the completed wind-down of the DoD Surplus Contract and lower Scrap Contract volume and commodity prices. Machinio, acquired in July 2018, contributed $1.4 million of quarterly fee revenue.
Cash, liquidity, and balance sheet
- At March 31, 2019, cash and cash equivalents were $33.9 million and short-term investments were $30.0 million, compared with $58.4 million and $20.0 million, respectively, at September 30, 2018.
- Six-month operating cash flow was negative $11.6 million, versus positive $6.5 million a year earlier. Management attributed the deterioration primarily to working-capital movements, including receivables, inventory, accounts payable, and seller payables.
- Six-month investing cash outflow was $13.0 million, including $30.0 million of certificate-of-deposit purchases and $3.0 million of capital expenditures, partly offset by $20.0 million of investment maturities. Financing cash inflow was $0.1 million.
- Total liabilities were $68.6 million and stockholders’ equity was $124.5 million. The company reported no debt at March 31, 2019. Management said existing cash and cash equivalents should cover anticipated cash needs for at least 12 months.
Material changes, outlook, and risks
- The Surplus Contract had contributed $27.8 million, or 22.9%, of revenue in the first six months of 2018; its operations were wound down by June 2018. This was a principal driver of lower CAG and consolidated revenue. The current DoD Scrap Contract base term expires September 30, 2019; the DLA may exercise two 12-month extensions or terminate for convenience.
- Amazon-related purchases represented 49.4% of quarterly cost of goods sold and 44.9% for the six-month period, up substantially from the comparable periods. The DoD Scrap Contract contributed 7.6% of revenue in both the quarter and six-month period.
- The company adopted ASC 606 on October 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. The adoption increased quarterly fee revenue by $0.2 million and increased the March 31 accumulated deficit by $1.0 million versus the prior accounting basis.
- A $1.3 million quarterly increase in the estimated Machinio earn-out liability contributed to other operating expense; the liability was $2.7 million at March 31. The contingent consideration may be up to $5.0 million, payable in 2020.
- On April 23, 2019, the company announced a strategic reorganization and expected approximately $1.1 million of employee termination costs in the quarter ending June 30, 2019. It also exited IronDirect in January 2019. No formal revenue or earnings guidance was provided.
- Management cited risks including dependence on the internet and technology, competition, economic conditions, and the possibility that commercial sellers may change or end their asset-disposition arrangements. Currency movements can affect reported results. The company reported no pending or threatened legal matter it believed would have a material adverse effect.
Important facts for investors to verify
- Whether the Scrap Contract is extended beyond September 30, 2019, and the effect of any renewal, termination, or revised terms.
- Whether RSCG growth and GovDeals momentum can offset the Surplus Contract’s absence and CAG weakness.
- Working-capital trends and the sustainability of liquidity, particularly given six-month operating cash outflow and increased inventory.
- Amazon supplier concentration, the $2.7 million Machinio earn-out estimate, and the announced $1.1 million reorganization charge.
- Comparability of year-over-year results after ASC 606 adoption, since prior-period figures were not restated.