Liquidity Services, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates ecommerce marketplaces for surplus and salvage goods and assets through GovDeals, Capital Assets Group (CAG), and Retail Supply Chain Group (RSCG).
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $61.1 | $70.8 |
| Gross profit / margin | $30.2 / 49.4% | $34.0 / 48.0% |
| Operating loss | $(6.5) | $(8.3) |
| Net loss | $(1.2) | $(8.4) |
| Loss per diluted share | $(0.04) | $(0.27) |
| Operating cash flow | $3.5 provided | $5.0 used |
| Capital expenditures | $1.0 | $2.3 |
Cash and cash equivalents were $96.8 million at December 31, 2017, versus $94.3 million at September 30, 2017. Current assets were $128.7 million and current liabilities $65.7 million. The company reported no debt. It said existing cash should meet anticipated needs for at least 12 months. Total assets were $204.8 million.
The $4.8 million income tax benefit included a $3.5 million benefit from remeasuring deferred taxes for the U.S. tax-rate reduction and a $1.7 million benefit from AMT credit changes, partly offset by other tax items. These tax effects materially reduced the reported net loss.
Material changes versus prior year
- Revenue fell 13.7%; gross merchandise volume (GMV) declined 2.8% to $155.4 million. Completed transactions fell to 122,280 from 129,000, while registered buyers rose to 3.209 million from 3.018 million a year earlier.
- CAG revenue declined 24.6% to $32.1 million, mainly from lower Surplus Contract sales and services, a changed Scrap Contract commodity mix, and weaker commercial activity. GovDeals revenue grew 21.1% to $7.0 million; RSCG revenue declined 4.3% to $20.5 million despite higher GMV, reflecting a shift toward consignment transactions.
- Operating costs decreased, including technology and operations, sales and marketing, and general and administrative expenses. However, other operating expenses included $1.3 million of business realignment costs; the prior-year period included $0.9 million of income from a fair-value change.
- Operating cash flow improved by $8.5 million year over year, reflecting improved profitability and working-capital movements, including receivable collections and inventory sales.
Outlook, risks, and unusual items
- Loss of DoD Surplus Contract: The DLA selected other bidders for replacement contracts. Liquidity Services made its final inventory purchase under its existing contract in December 2017 and is winding it down, with completion expected in FY2018. The contract contributed $16.2 million, or 26.5% of quarterly revenue. Management expected revenue to decline further in Q2 and Q3 FY2018 and no revenue from the contract thereafter. Management said restructuring and cost reductions were expected to offset the lost profits, but did not quantify the offset.
- Restructuring: The company recorded approximately $1.3 million of realignment costs in the quarter. It expected most of the $3.2 million remaining liability at December 31, 2017, to be paid in FY2018, with the remainder in FY2019.
- Tax and accounting: The company had not completed its accounting for all effects of the Tax Cuts and Jobs Act, including international provisions. It also could not yet reasonably estimate the financial impact of adopting the new revenue-recognition standard, required beginning October 1, 2018.
- Legal matters: A securities class action related to alleged historical statements about the retail division had been certified as a class; the company said it could not estimate potential liability. A related derivative action was dismissed, but former plaintiffs made a shareholder demand that the board’s Audit Committee was evaluating.
- Other exposures: A parent guarantee covers certain U.K. pension obligations up to £10 million; plan assets exceeded liabilities by approximately $2.0 million at quarter-end. The company identified reliance on significant seller and government contracts, competition, technology changes, and economic conditions as business risks.
- Management stated that the company had no material off-balance-sheet arrangements. Its disclosure controls were assessed as effective; rollout of a new ERP system had changed certain internal controls, with no reported material adverse effect.
Important facts for investors to verify
- How quickly the Surplus Contract wind-down reduces revenue and whether cost savings actually offset lost profits.
- GovDeals and RSCG growth, segment margins, and the effect of purchase-versus-consignment mix on reported revenue and GMV.
- The sustainability of operating cash generation and the company’s substantial cash balance as restructuring and platform-development costs continue.
- Final tax-law accounting, the impact of the new revenue standard, and developments in the securities litigation and shareholder demand.