LIQUIDITY SERVICES, INC. FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include but are not limited to the factors set forth in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 and subsequent filings with theSecurities and Exchange Commission (SEC). You can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this document and are expressly qualified in their entirety by the cautionary statements included in this document. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events. The following discussion should be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this document. Overview The Company operates a network of e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. The Company's marketplaces provide professional buyers access to a global, organized supply of new, surplus, and scrap assets presented with digital images and other relevant product information. Additionally, the Company enables its corporate and government sellers to enhance their financial return on offered assets by providing a liquid marketplace and value-added services that encompass the consultative management, valuation, and sale of surplus assets. The Company's services include program management, valuation, asset management, reconciliation, refurbishment and recycling, fulfillment, marketing and sales, warehousing and transportation, buyer support, compliance and risk mitigation, as well as self-directed service tools for its sellers. The Company organizes the products on its marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, fleet and transportation equipment and specialty equipment. Currently, the Company's marketplaces are: www.liquidation.com, www.govdeals.com, www.networkintl.com, www.secondipity.com, and www.go-dove.com. We also operate a global search engine for used machinery and equipment at www.machinio.com. The Company has over 13,000 sellers, including Fortune 1000 and Global 500 organizations as well as federal, state, and local government agencies.
Impacts of the COVID-19 Pandemic
The Company has been closely monitoring the COVID-19 pandemic. By mid-March, the
Company began to experience an impact on its operations, resulting from the
actions taken by governments and private sector entities to limit the spread of
COVID-19. These actions included meaningful restrictions on economic activity,
including business closures, limitations on the operations of business activity,
or significant prioritization of essential business functions. As direct
correlation to these actions, the flow of assets into our network of
marketplaces has been hindered as seller facilities have been closed, which has
reduced ability of their employees to process assets and for buyers to pick-up
or arrange for shipping of assets.
Our RSCG segment expects to continue to support retailer needs, including online
retailers, through our Liquidation.com marketplace even if at a lower than
average volume in the short-term. As long as we can ensure the safety of our
employees, we will maintain our warehouse operations in support of the essential
supply-chain needs of our sellers and buyers. As the pandemic restrictions
subside, we expect retailers to address their reverse supply chain needs in a
more comprehensive way, turning to third-party vendors such as ourselves to
address any accumulation of returns or excess inventory during the
shelter-in-place and safer-at-home phases of the pandemic.
We expect lower volume from our GovDeals segment until state government
re-opening phases take place. As the economy re-opens and the business climate
improves, we believe our government sellers will resume their selling activity
over time.
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We also expect our CAG segment to see reduced volumes as many seller facilities
are closed and restrict buyer inspection of assets, asset pick-up, and in many
cases, employee cataloging of assets for sale. Yet, we believe the need for
liquidity from our sellers in the CAG segment and the demand for value-priced
equipment from our buyers will create future, positive conditions of supply and
demand within our CAG segment. We have a longstanding market-maker reputation
for selling high-value equipment globally across numerous industries and will
continue to support the needs of our traditional seller base. At the same time,
we will offer our new, expanded, and timely solution to sell-in-place with our
self-service, low-touch solution on AllSurplus.com, which aligns with our long
term strategy.
The likelihood, magnitude and timing of these events across our segments is
difficult to predict and we expect to be negatively impacted by a lower number
of transactions on our marketplaces in the short-term, and possibly longer,
which will have an adverse effect on our results of operations and cash flows.
As a result, prior trends in the Company's results of operations may not be
applicable throughout the duration of the COVID-19 pandemic.
We are starting to see seller facilities reopen across the globe and anticipate
activity will increase steadily as long as governments continue to reduce
restrictions related to COVID-19. In the longer term we are highly focused on
creating the efficiencies for ourselves, our sellers and our buyers by focusing
on the people, processes and technologies that will deliver optimal liquidity in
the reverse supply chain and further enable our growth through an asset light,
low-touch self-service marketplace solution.
Our Responses to the COVID-19 Pandemic
The following are just a few examples of our commitment to our mission during this unprecedented time:
•We immediately took numerous steps to help customers and employees practice social distancing and other safety measures in keeping with current health-expert recommendations: •instituted work-from-home measures for all employees except essential warehouse and call center employees; •created safe work environments for those coming into facilities including social distancing enforcement and skeleton crews and regular cleanings; •implemented new safety procedures for buyer pickups at our warehouse facilities and reduced shipping fees on parcels to limit person-to-person contact; and •enforced travel restrictions on all employees and leveraged video conference technology. •In mid-March, we acted quickly and aggressively to conserve resources in April by taking the following temporary actions: •eliminating CEO salary payments and reducing executive salaries by 50%; •implementing material furloughs and salary reductions in line with reduced business activity; •eliminating cash compensation for members of the Board of Directors; •restricting travel and related expenses; •delaying some immediate investments in our technology platform; and •addressing more flexible payment terms with vendors and service providers.
Our Marketplace Transactions
We believe our ability to create liquid marketplaces for surplus and salvage assets generates a continuous flow of goods from our corporate and government sellers. This flow of goods in turn attracts an increasing number of professional buyers to our marketplaces. During the twelve months endedMarch 31, 2020 , the approximate number of registered buyers increased from 3,580,000 to 3,675,000, or 2.7%.
Our revenue. Substantially all of our revenue is earned through the following transaction models:
Purchase model. Under our purchase transaction model, we recognize revenue within the Revenue line item on the Consolidated Statements of Operations from the resale of inventory that we purchased from sellers. We consider these sellers to be our vendors. We pay our sellers either a fixed amount or a portion of the net or gross proceeds received from our completed sales based on the value we receive from the sale, in some cases, after deducting a required return to us that we have negotiated with the seller. Because we are the principal in purchase transaction model sales, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. The proceeds paid by buyers also include transaction fees, referred to as buyer premiums. For the three and six months endedMarch 31, 2020 , our purchase transaction model accounted for 24.7% and 22.6% of our GMV, and 66.6% and 64.1% of our total revenues, respectively. For the three and six months endedMarch 31, 2019 , our purchase transaction model accounted for 24.0% 23 -------------------------------------------------------------------------------- and 22.9% of our GMV, and 65.8% and 65.9% of our total revenues, respectively. These amounts included sales of commercial merchandise sourced from vendor contracts with Amazon.com, Inc. by our RSCG segment. The commercial merchandise we purchased under these contracts represented 55.3% and 51.9% of consolidated Costs of goods sold for three and six months endedMarch 31, 2020 and 49.4% and 44.9% of consolidated Costs of goods sold for three and six months endedMarch 31, 2019 . For the three and six months endedMarch 31, 2019 , purchase model revenues also included revenue earned from the sale of property obtained under the Scrap Contract, which concluded onSeptember 30, 2019 , and accounted for 7.6% of our total revenue for the those periods. Consignment model - fee revenue. Under our consignment transaction model, we enable our sellers to sell goods they own in our marketplaces and we charge them a commission fee based on the gross or net proceeds received from such sales. The revenue from our consignment transaction model is recognized within the Fee revenue line item on the Consolidated Statements of Operations. Because we are the agent in consignment model sales, our commission fee revenue, which we refer to as seller commissions, represents a percentage of the sales price the buyer pays upon completion of a transaction. We vary the percentage amount of the seller commission depending on the various value-added services we provide to the seller to facilitate the transaction. For example, we generally increase the percentage amount of the commission if we take possession, handle, ship, or provide enhanced product information for the merchandise. In most cases we collect the seller commission by deducting the appropriate amount from the sales proceeds prior to the distribution to the seller after completion of the transaction. In addition to seller commissions, we also collect buyer premiums. For the three and six months endedMarch 31, 2020 , our consignment model accounted for 75.3% and 77.4% of our GMV, and 27.6% and 29.7% of our total revenues, respectively. For the three and six months endedMarch 31, 2019 , our consignment model accounted for 76.0% and 77.1% of our GMV, and 29.4% and 29.6% of our total revenues, respectively. Other - fee revenue. We also earn non-consignment fee revenue from Machinio's sales listing subscription service, as well as other services including returns management and refurbishment of assets, as well as asset valuation services. For the three and six months endedMarch 31, 2020 , our other revenues accounted for 5.8% and 6.2% of our total revenues, respectively. For the three and six months endedMarch 31, 2019 , our other revenues accounted for 4.9% and 4.5% of our total revenues, respectively Industry trends. While we are experiencing challenges presented by the COVID-19 pandemic, we believe there are several industry trends positively impacting the long-term growth of our business including: (1) the increase in the volume of returned merchandise handled both online and in stores as online and omni-channel retail grow as a percentage of overall retail sales; (2) the increase in government regulations and the need for corporations to have sustainability solutions necessitating verifiable recycling and remarketing of surplus assets; (3) the increase in outsourcing by corporate and government organizations of disposition activities for surplus and end-of-life assets as they focus on reducing costs, improving transparency, compliance and working capital flows, and increasingly prefer service providers with a proven track record, innovative scalable solutions and the ability to make a strategic impact in the reverse supply chain, which we expect to increase our seller base; (4) an increase in buyer demand for surplus merchandise as consumers trade down by purchasing less expensive goods and seek greater value from their purchases, which results in lower per unit prices and margins in our retail goods vertical, and (5) in the long-term we expect innovation in the retail supply chain will increase the pace of product obsolescence and, therefore, increase the supply of surplus assets. Our Vendor Agreements Our commercial agreements. We have vendor contracts with Amazon.com, Inc. under which we acquire and sell commercial merchandise. The property we purchased under these contracts represented 55.3% and 49.4% of consolidated cost of goods sold for the three months endedMarch 31, 2020 and 2019, respectively, and 51.9%, and 44.9% of consolidated cost of goods sold for the six months endedMarch 31, 2020 and 2019, respectively. Scrap Contract. Under the Scrap Contract, which concluded onSeptember 30, 2019 , we acquired, managed and sold all non-electronic scrap property of theDoD turned into the DLA, and paid the DLA a revenue-sharing payment equal to 64.5% of the gross resale proceeds. Scrap property generally consisted of items determined by theDoD to have no use beyond their base material content, such as metals, alloys, and building materials. We bore all of the costs for the sorting, merchandising and sale of the property. The resale transactions for scrap property sourced under this contract followed the purchase model. For the three and six months endedMarch 31, 2019 , the resale of scrap property that we purchased under the Scrap Contract accounted for approximately 2.8% of our GMV and 7.6% of our total revenues. The results of the Scrap Contract were included in our CAG segment. 24 --------------------------------------------------------------------------------
Key Business Metrics
Our management periodically reviews certain key business metrics for operational planning purposes and to evaluate the effectiveness of our operational strategies, allocation of resources and our capacity to fund capital expenditures and expand our business. These key business metrics include:
Gross merchandise volume (GMV). GMV is the total sales value of all merchandise sold by us or our sellers through our marketplaces or by us through other channels during a given period of time. We review GMV because it provides a measure of the volume of goods being sold in our marketplaces and thus the activity of those marketplaces. GMV also provides a means to evaluate the effectiveness of investments that we have made and continue to make, including in the areas of buyer and seller support, value-added services, product development, sales and marketing, and operations. Total Registered Buyers. We grow our buyer base through a combination of marketing and promotional efforts. A person becomes a registered buyer by completing an online registration process on one of our marketplaces. As part of this process, we collect business and personal information, including name, title, company name, business address and contact information, and information on how the person intends to use our marketplaces. Each prospective buyer must also accept our terms and conditions of use. Following the completion of the online registration process, we verify each prospective buyer's e-mail address and confirm that the person is not listed on any banned persons list maintained internally or by theU.S. federal government. After the verification process, which is completed generally within 24 hours, the registration is approved and activated, and the prospective buyer is added to our registered buyer list. Total registered buyers, as of a given date, represent the aggregate number of persons or entities who have registered on one of our marketplaces. We use this metric to evaluate how well our marketing and promotional efforts are performing. Total registered buyers exclude duplicate registrations, buyers who are suspended from utilizing our marketplaces and those buyers who have voluntarily removed themselves from our registration database. In addition, if we become aware of registered buyers that are no longer in business, we remove them from our database. As ofMarch 31, 2020 and 2019, we had approximately 3,675,000 and 3,580,000 registered buyers, respectively. Total auction participants. For each auction we manage, the number of auction participants represents the total number of registered buyers who have bid one or more times in that auction. As a result, a registered buyer who bids, or participates, in more than one auction is counted as an auction participant in each auction in which he or she participates. Thus, total auction participants for a given period is the sum of the auction participants in each auction conducted during that period. We use this metric to allow us to compare our online auction marketplaces to our competitors, including other online auction sites and traditional on-site auctioneers. In addition, we measure total auction participants on a periodic basis to evaluate the activity level of our base of registered buyers and to measure the performance of our marketing and promotional efforts. During the three months endedMarch 31, 2020 and 2019, approximately 490,000 and 540,000, respectively, total auction participants participated in auctions on our marketplaces. During the six months endedMarch 31, 2020 and 2019, approximately 943,000 and 1,033,200, respectively, total auction participants participated in auctions on our marketplaces. Completed transactions. Completed transactions represents the number of auctions in a given period from which we have recorded revenue. Similar to GMV, we believe that completed transactions is a key business metric because it provides an additional measurement of the volume of activity flowing through our marketplaces. During the three months endedMarch 31, 2020 and 2019, we completed approximately 150,000 and 153,000 transactions, respectively. During the six months endedMarch 31, 2020 and 2019, we completed approximately 286,000 and 297,500 transactions, respectively.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA. EBITDA is a supplemental non-GAAP financial measure
and is equal to net (loss) income plus interest and other expense, net excluding
the non-service components of net periodic pension (benefit) expense; provision
(benefit) for income taxes; and depreciation and amortization. Interest and
other expense, net, can include non-operating gains and losses, such as from
foreign currency fluctuations. Our definition of Adjusted EBITDA differs from
EBITDA because we further adjust EBITDA for stock-based compensation expense,
acquisition costs such as transaction expenses and changes in earn out
estimates, business realignment expense, deferred revenue purchase accounting
adjustments, and goodwill and long-lived asset impairment.
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--------------------------------------------------------------------------------We believe EBITDA and Adjusted EBITDA are useful to an investor in evaluating our performance for the following reasons:
•Depreciation and amortization expense primarily relates to property and
equipment and the amortization of intangible assets. These expenses are non-cash
charges that have fluctuated significantly in the past. As a result, we believe
that adding back these non-cash charges is useful in evaluating the operating
performance of our business on a consistent basis from year-to-year.
•As a result of varying federal and state income tax rates, we believe that
presenting a financial measure that adjusts for provision (benefit) for income
taxes is useful to investors when evaluating the operating performance of our
business on a consistent basis from year to year.
•The authoritative guidance for stock-based compensation requires all
share-based payments to employees, including grants of employee stock options,
restricted stock and stock appreciation rights to be recognized in the income
statement based on their estimated fair values. We believe adjusting for this
stock-based compensation expense is useful to investors when evaluating the
operating performance of our business on a consistent basis from year to year.
•The authoritative guidance related to business combinations requires the
initial recognition of contingent consideration at fair value with subsequent
changes in fair value recorded through the statements of operations, and
disallows the capitalization of transaction costs. We believe adjusting for
these acquisition related expenses is useful to investors when evaluating the
operating performance of our business on a consistent basis from year-to-year.
•We believe adjusting for business realignment expense is useful to investors
when evaluating the operating performance of our business on a consistent basis
from year-to-year, as these expenses are outside our ordinary course of
business.
•We believe isolating non-cash charges, such as amortization and depreciation,
and other items, such as impairment costs incurred outside our ordinary course
of business, provides additional information about our cost structure, and, over
time, helps track our performance.
•We believe EBITDA and Adjusted EBITDA are important indicators of our
operational strength and the performance of our business because they provide a
link between profitability and operating cash flow.
•We also believe that analysts and investors use EBITDA and Adjusted EBITDA as
supplemental measures to evaluate the overall operating performance of companies
in our industry.
Our management uses EBITDA and Adjusted EBITDA:
•as measurements of operating performance because they assist us in comparing
our operating performance on a consistent basis as they remove the impact of
items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual
operating budget;
•to allocate resources to enhance the financial performance of our business;
•to evaluate the effectiveness of our operational strategies; and
•to evaluate our capacity to fund capital expenditures and expand our business.
EBITDA and Adjusted EBITDA as calculated by us are not necessarily comparable to
similarly titled measures used by other companies. In addition, EBITDA and
Adjusted EBITDA: (a) do not represent net (loss) income or cash flows from
operating activities as defined by GAAP; (b) are not necessarily indicative of
cash available to fund our cash flow needs; and (c) should not be considered as
alternatives to net (loss) income, income from operations, cash provided by
operating activities or our other financial information as determined under
GAAP.
We prepare Adjusted EBITDA by adjusting EBITDA to eliminate the impact of items
that we do not consider indicative of our core operating performance. You are
encouraged to evaluate these adjustments and the reasons we consider them
appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is
subject to all of the limitations applicable to EBITDA. Our presentation of
Adjusted EBITDA should not be construed as an implication that our future
results will be unaffected by unusual or non-recurring items.
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The table below reconciles net loss to EBITDA and Adjusted EBITDA for the
periods presented.
Six Months Ended
Three Months Ended March 31, March 31,
2020 2019 2020 2019
(in thousands) (Unaudited)
Net loss $ (4,238)
(167) (376) (332) (608)
Provision for income taxes 43 328 501 594
Depreciation and amortization 1,577 1,165 3,149 2,369
EBITDA (2,785) (3,245) (6,116) (7,029)
Stock compensation expense2 1,231 2,581 2,270 4,094
Acquisition costs and impairment of long-lived
assets3 - 38 5 119
Business realignment expenses3,4 - 5 - 39
Fair value adjustments to acquisition earn-outs3 - 1,300 200 1,400
Deferred revenue purchase accounting adjustment - 258 3 690
Adjusted EBITDA $ (1,554) $ 937 $ (3,638) $ (687)
1 Represents Interest and other income, net, per the Statement of Operations,
excluding the non-service components of net periodic pension (benefit) expense.
2 Excludes the impact of forfeitures of stock awards by employees terminated by
business realignment actions, which is included in the business realignment
expenses line. There were no impacts for the three and six months ended March
31, 2020 and 2019.
3 Acquisition costs, impairment of long-lived assets, fair value adjustments to
acquisition earn-outs, and business realignment expenses are components of Other
operating expenses on the Statements of Operations.
4 Business realignment expense includes the amounts accounted for as exit costs
under ASC 420 as described in Note 10 to the Consolidated Financial Statements,
and the related impacts of business realignment actions subject to other
accounting guidance. There were no related impacts for the three and six months
ended March 31, 2020 and 2019.
Critical Accounting Policies and Estimates
The Company's critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year endedSeptember 30, 2019 , and in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements. As discussed in Note 2 - Summary of Significant Accounting Policies, we adopted ASC 842, Leases, as ofOctober 1, 2019 , using a modified retrospective approach where our Consolidated Balance Sheet as ofSeptember 30, 2019 was not changed. Relative to the most recent annual report on Form 10-K, there have been no other material changes to the Company's accounting policies used in preparing these interim consolidated financial statements. As ofJuly 1, 2019 , the Company performed its annual impairment testing using a fair-value based test for all reporting units, and determined the fair value for each of its reporting units with goodwill balances substantially exceeded their carrying values except for the Machinio reporting unit, which exceeded its carrying value by approximately 11%. As ofMarch 31, 2020 , in response change in economic conditions resulting from the COVID-19 pandemic, the Company performed an interim impairment test using a fair-value based test for all reporting units with goodwill balances, and determined that the fair value for each of its reporting units with goodwill balances substantially exceeded their carrying values except for CAG and Machinio, which exceeded their carrying values by approximately 21% and 12%, respectively. The Company determined the fair value of the CAG and Machinio reporting units using a discounted cash flow (DCF) analysis. The DCF analysis relied on significant assumptions and judgments about the forecasts of future cash flows over the five-year projection period, including revenues, gross profit margins, operating expenses, income taxes, capital expenditures, working capital, and an estimate of the impact and duration of COVID-19 on those factors. A long-term growth rate of 2.5% was applied thereafter. These forecasts of future cash flows represent the Company's best estimate using information that is currently available. However, given the uncertainty associated with the COVID-19 pandemic, including its extent and duration, actual results could differ significantly from those estimates. The cash flows for CAG and Machinio were discounted at a weighted average cost of capital (WACC) of 17% and 26%, respectively, and reflected an increase in the equity risk premium caused by the emergence of the COVID-19 pandemic. Given the uncertainty that COVID-19 has introduced into the equity markets, the Company performed a sensitivity analysis that noted 27 --------------------------------------------------------------------------------
that the CAG and Machinio WACCs would need to increase by over 180 and 260 basis points, respectively, to impact the recovery of goodwill.
The Company will continue to monitor these reporting units for changes that could impact the recoverability of goodwill, which will depend on changes to the extent and duration of the COVID-19 pandemic, and its impact on the equity markets.
Components of Revenue and Expenses
Revenue. Refer to the discussion in the Our revenue section above, and to Note 2 - Summary of Significant Accounting Policies in our Annual Report on Form 10-K for discussion of the Company's related accounting policies.
Cost of goods sold. Refer to the discussion in Note 2 - Summary of Significant Accounting Policies in our Annual Report on Form 10-K for discussion of the Company's Costs of goods sold and related accounting policies.
Seller distributions. Under the Scrap Contract, which concluded onSeptember 30, 2019 , we acquired scrap property from the DLA for resale and paid the DLA seller distributions equal to 64.5% of the gross resale proceeds. Technology and operations. Technology expenses consist primarily of the cost of technical staff who develop, deploy, and maintain our marketplaces and corporate infrastructure. These personnel also develop and upgrade the software systems that support our operations, such as sales processing. Technology expenses also includes certain costs associated with our e-commerce platform. Because our marketplaces and support systems require frequent upgrades and enhancements to maintain viability, we have determined that the useful life for certain internally developed software is less than one year. As a result, we expense those costs as incurred. However, where we determine that the useful life of the internally developed software will be greater than one year, we capitalize development costs in accordance with ASC 350-40, Internal-use software. As such, we are capitalizing certain development costs associated with our e-commerce platform, as well as other software development activities. Operations expenses consist primarily of operating costs, including buyer relations, shipping logistics and distribution center operating costs. Sales and marketing. Sales and marketing expenses include the cost of our sales and marketing personnel as well as the cost of marketing and promotional activities. These activities include all sales and marketing-related activity, including but not limited to trade shows and online marketing campaigns such as paid search advertising. General and administrative. General and administrative expenses include all corporate and administrative functions that support our operations and provide an infrastructure to facilitate our future growth. These expenses are generally more fixed in nature than our other operating expenses and do not significantly vary in response to the volume of merchandise sold through our marketplaces. Depreciation and amortization. Depreciation and amortization expenses consist of depreciation of property and equipment, amortization of internally developed software, and amortization of intangible assets. Other operating expenses (income). Other operating expense includes the change in fair value of contingent consideration, as well as business realignment expenses, including those associated with restructuring initiatives and the exit of certain business operations. Interest and other (income) expense, net. Interest (income) expense and other expense, net consists of interest income on short-term investments and the promissory note issued to JTC, the components of net periodic pension (benefit) other than the service component, and impacts of foreign currency fluctuations. Income taxes. For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax (loss) income. Our effective income tax rate before discrete items was (5.6%) for the six months endedMarch 31, 2020 . The effective tax rate differed from the statutory federal rate of 21% primarily as a result of the valuation allowance charge on current year losses and the impact of foreign, state, and local income taxes and permanent tax adjustments. 28 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, our operating
results:
Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2020 2019 $ Change % Change 2020 2019 $ Change % Change Revenue$ 35,203 $ 37,355 $ (2,152) (5.8) %$ 65,552 $ 73,090 $ (7,538) (10.3) % Fee revenue 17,621 19,445 (1,824) (9.4) 36,776 37,763 (987) (2.6) Total revenue 52,824 56,800 (3,976) (7.0) 102,328 110,853 (8,525) (7.7) Costs and expenses from operations: Cost of goods sold (excludes depreciation and amortization) 26,619 24,807 1,812 7.3 50,795 49,763 1,032 2.1 Seller distributions - 2,775 (2,775) (100.0) - 5,399 (5,399) (100.0) Technology and operations 11,586 13,429 (1,843) (13.7) 22,827 25,953 (3,126) (12.0) Sales and marketing 10,109 9,135 974 10.7 19,714 18,116 1,598 8.8 General and administrative 7,397 8,624 (1,227) (14.2) 15,104 17,258 (2,154) (12.5) Depreciation and amortization 1,577 1,165 412 35.4 3,149 2,369 780 32.9 Other operating (income) expenses (12) 1,350 (1,362) (100.9) 181 1,555 (1,374) (88.4) Total costs and expenses 57,276 61,285 (4,009) (6.5) 111,770 120,413 (8,643) (7.2) Loss from operations (4,452) (4,485) 33 0.7 (9,442) (9,560) 118 1.2 Interest and other income, net (257) (451) 194 43.0 (509) (770) 261 33.9 Loss before provision for income taxes (4,195) (4,034) (161) (4.0) (8,933) (8,790) (143) (1.6) Provision for income taxes 43 328 (285) (86.9) 501 594 (93) (15.7) Net loss$ (4,238) $ (4,362) $ 124 2.8 %$ (9,434) $ (9,384) $ (50) (0.5) % 29
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The following table presents segment GMV, revenue, gross profit (which is
calculated as total revenue less cost of goods sold (exclusive of depreciation
and amortization) and Seller distributions), and gross profit margin for the
periods indicated:
Three Months Ended March 31, Six Months Ended March 31,
(dollars in thousands) 2020 2019 2020 2019
GovDeals:
GMV $ 77,158 $ 77,390 $ 156,349 $ 153,698
Total revenue 7,822 7,697 15,837 15,355
Gross profit 7,278 7,042 14,724 14,103
Gross profit margin 93.0 % 91.5 % 93.0 % 91.8 %
RSCG:
GMV 44,320 41,899 84,190 77,343
Total revenue 36,257 34,011 67,954 63,489
Gross profit 12,394 12,287 22,699 21,836
Gross profit margin 34.2 % 36.1 % 33.4 % 34.4 %
CAG:
GMV 22,822 36,070 52,355 82,429
Total revenue 7,039 13,684 14,981 29,165
Gross profit 4,922 8,614 10,736 17,496
Gross profit margin 69.9 % 62.9 % 71.7 % 60.0 %
Machinio:
GMV - - - -
Total revenue 1,706 1,374 3,556 2,366
Gross profit 1,611 1,265 3,374 2,143
Gross profit margin 94.4 % 92.1 % 94.9 % 90.6 %
Corporate & Other:
GMV - 34 - 469
Total revenue - 34 - 478
Gross profit - 10 - 113
Gross profit margin - % 29.4 % - % 23.6 %
Consolidated:
GMV 144,300 155,393 292,894 313,939
Total revenue 52,824 56,800 102,328 110,853
Gross profit 26,205 29,218 51,533 55,691
Gross profit margin 49.6 % 51.4 % 50.4 % 50.2 %
Three Months Ended
Segment Results GovDeals. Revenue from our GovDeals segment increased 1.6%, or$0.1 million , and GMV decreased 0.3%, or$0.2 million . Beginning in mid-March, GovDeals began to experience reduced volumes resulting from government facility closures in response to the COVID-19 pandemic, which also prevented buyer pickups and ability to complete related transactions. As a result of the increase in revenues and an increase in gross profit margin, gross profit increased 3.4%, or$0.2 million . Gross profit margin increased 1.5%, primarily due to a decline in vehicle sales which required transportation costs to arrive at the point of sale. 30 -------------------------------------------------------------------------------- RSCG. Revenue from our RSCG segment increased 6.6%, or$2.2 million , due to a 5.8%, or$2.4 million , increase in GMV driven by growing volumes within existing seller accounts and launching new programs with mid-sized and large retailers, and an increase in the mix of transactions performed under the purchase model. Beginning in mid-March, RSCG began to experience reduced volumes resulting from retailers prioritizing their attention and resources to meet the demands for essential goods in response to the COVID-19 pandemic. Buyer demand has been mixed, with some buyers increasing their average purchases and some decreasing, depending on varying circumstances. As a result of the increase in revenues, partially offset by a decline in gross profit margin, gross profit increased 0.9%, or$0.1 million . Gross profit margin decreased 1.9% primarily due to increased shipping costs and an increase in mix from lower margin product categories. CAG. Revenue and GMV from the CAG segment decreased 48.6%, or$6.6 million , and 36.7%, or$13.2 million , respectively. The conclusion of the Scrap Contract caused revenue and GMV to each decline by$4.3 million . Excluding the impact of the completed Scrap Contract, revenue decreased by 24.9%, or$2.3 million , and GMV decreased by 28.1%, or$8.9 million . The declines were driven by the COVID-19 pandemic, which had a larger effect on CAG, as travel restrictions and facility closures inChina early in the quarter interrupted supply from sellers and prevented buyers from inspecting goods already for sale. This trend affected our EMEA and North American regions in March as the pandemic spread. In addition, the North American region experienced softness in its industrial and bio-pharma verticals. Gross profit within the CAG segment decreased 42.9%, or$3.7 million , due to a$1.4 million impact from the completion of the Scrap Contract, and the impacts of the revenue declines. Gross profit margin increased to 69.9% from 62.9% due the completion of the Scrap Contract, which had lower gross profit margins than the remaining business, partially offset by an increase in mix of revenues earned from the purchase model. Machinio. Revenue from our Machinio segment increased 24.2%, or$0.3 million , due to an increase in subscription activity, and due to revenue earned from deferred revenues no longer containing effects from purchase accounting. As a result of the increase in revenues, gross profit increased 27.4%, or$0.3 million . However, beginning in March, Machinio began to experience a reduction in traffic due to the COVID-19 pandemic. Corporate & Other. The changes in revenue, GMV, gross profit and gross profit margin are due to the Company's exit from the IronDirect business inJanuary 2019 . Consolidated Results
Revenue - Total consolidated revenue decreased
Cost of goods sold. Cost of goods sold increased
Seller distributions. Seller distributions decreased
Technology and operations expenses. Technology and operations expenses decreased$1.8 million , or 13.7%. The decrease included$1.4 million due to the completion of the Scrap Contract and$1.6 million in reductions in Corporate and CAG (excluding the Scrap Contract) driven by benefits from restructuring and other organizational changes performed in fiscal 2019. These decreases were partially offset by a$1.2 million increase in RSCG and GovDeals driven by increased customer support and operations expenses from the continued growth in those segments. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased technology and operations expenses while they are in effect. Sales and marketing expenses. Sales and marketing expenses increased$1.0 million , or 10.7%, due to a$0.4 million increase in sales expenses driven by the increases in revenues at GovDeals, RSCG and Machinio, and a$0.3 million increase in marketing labor and expenses to promote our new e-commerce technology platform and develop our consolidated marketplace. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased sales and marketing expenses while they are in effect. General and administrative expenses. General and administrative expenses decreased$1.2 million , or 14.2%, and was impacted by the completion of the Scrap Contract and by benefits from restructuring and other organizational changes performed in fiscal 2019. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased general and administrative expenses while they are in effect. 31 -------------------------------------------------------------------------------- Other operating expenses. Other operating expense for the three months endedMarch 31, 2020 was not significant. Other operating expense of$1.4 million for the three months endedMarch 31, 2019 represents the increase in the fair value of the Machinio earn-out liability and acquisition related costs. Interest and other income, net. Interest and other income, net, decreased by$0.2 million due to a decline in the holdings of short-term investments and also in their interest rates.
Provision for income taxes. Provision for income taxes decreased
Six Months Ended
Segment Results
GovDeals. Revenue from our GovDeals segment increased 3.1%, or$0.5 million , due to a 1.7%, or$2.7 million increase in GMV from adding new sellers. However, beginning in mid-March, GovDeals began to experience reduced volumes resulting from government facility closures in response to the COVID-19 pandemic, which also prevented buyer pickups and ability to complete related transactions. As a result of the increase in revenues and an increase in gross profit margin, gross profit increased 4.4%, or$0.6 million . Gross profit margin increased 1.2%, primarily due to a decline in vehicle sales which required transportation costs to arrive at the point of sale. RSCG. Revenue from our RSCG segment increased 7.0%, or$4.5 million , due to an 8.9%, or$6.8 million , increase in GMV driven by growing volumes within existing seller accounts and launching new programs with mid-sized and large retailers. Beginning in mid-March, RSCG began to experience reduced volumes resulting from retailers prioritizing their attention and resources to meet the demands for essential goods in response to the COVID-19 pandemic. Buyer demand has been mixed, with some buyers increasing their average purchases and some decreasing, depending on varying circumstances. As a result of the increase in revenues, partially offset by a decline in gross profit margin, gross profit increased 4.0%, or$0.9 million . Gross profit margin decreased 1.0% primarily due to increased shipping costs and an increase in mix from lower margin product categories. CAG. Revenue and GMV from the CAG segment decreased 48.6%, or$14.2 million , and 36.5%, or$30.1 million , respectively. The conclusion of the Scrap Contract caused revenue and GMV to each decline by$8.4 million . Excluding the impact of the completed Scrap Contract, revenue decreased by 28.3%, or$5.9 million , and GMV decreased by 29.4%, or$21.8 million . The declines were driven by the COVID-19 pandemic, which had a larger effect on CAG, as travel restrictions and facility closures inChina early in the quarter interrupted supply from sellers and prevented buyers from inspecting goods already for sale. This trend affected our EMEA and North American regions in March as the pandemic spread. The declines were also influenced by a strong prior year performance in theAsia-Pacific region , and associated with softness in the energy, industrial, and bio-pharma verticals inNorth America . Gross profit within the CAG segment decreased 38.6%, or$6.8 million , due to a$2.9 million impact from the completion of the Scrap Contract, and as a result of reduction in revenues. Gross profit margin increased to 71.7% from 60.0% due the completion of the Scrap Contract, which had lower gross profit margins than the remaining business, and from the increase in mix of revenues earned from the consignment model. Machinio. Revenue from our Machinio segment increased 50.3%, or$1.2 million , due to an increase in subscription activity, and due to revenue earned from deferred revenues no longer containing effects from purchase accounting. As a result of the increase in revenues, gross profit increased 57.4%, or$1.2 million . Corporate & Other. The changes in revenue, GMV, gross profit and gross profit margin are due to the Company's exit from the IronDirect business inJanuary 2019 . Consolidated Results
Revenue - Total consolidated revenue decreased
Cost of goods sold. Cost of goods sold increased
Seller distributions. Seller distributions decreased
32
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Technology and operations expenses. Technology and operations expenses
decreased $3.1 million , or 12.0%. The decrease included $2.7 million due to the
completion of the Scrap Contract and $2.3 million in reductions in Corporate and
CAG (excluding the Scrap Contract) driven by benefits from restructuring and
other organizational changes performed in fiscal 2019. These decreases were
partially offset by a $2.2 million increase in RSCG and GovDeals driven by
increased customer support and operations expenses from the continued growth in
those segments. Due to the timing of implementation, the actions taken to reduce
operating expenses in response to the COVID-19 pandemic did not have a
significant impact this period, but are expected to result in decreased
technology and operations expenses while they are in effect.
Sales and marketing expenses. Sales and marketing expenses increased $1.6
million , or 8.8%, due to a $0.4 million increase in sales expenses driven by the
increases in revenues at GovDeals and RSCG, partially offset by the reduced
revenues in CAG, and a $1.1 million increase in marketing labor and expenses to
promote our new e-commerce technology platform and develop our consolidated
marketplace. Due to the timing of implementation, the actions taken to reduce
operating expenses in response to the COVID-19 pandemic did not have a
significant impact this quarter, but are expected to result in decreased sales
and marketing expenses while they are in effect.
General and administrative expenses. General and administrative expenses
decreased $2.2 million , or 12.5%, and were impacted by the completion of the
Scrap Contract and by benefits from restructuring and other organizational
changes performed in fiscal 2019. Due to the timing of implementation, the
actions taken to reduce operating expenses in response to the COVID-19 pandemic
did not have a significant impact this quarter, but are expected to result in
decreased general and administrative expenses while they are in effect.
Other operating expenses. Other operating expense of $0.2 million for the six
months ended March 31, 2020 represents the increase in fair value of the
Machinio earn-out liability. Other operating expense of $1.6 million for the six
months ended March 31, 2019 represents the increase in the fair value of the
Machinio earn-out liability and acquisition related costs.
Interest and other income, net. Interest and other income, net, decreased by
$0.3 million due to a decline in the holdings of short-term investments and also
in their interest rates.
Provision for income taxes. Provision for income taxes decreased
Liquidity and Capital Resources
Our operational cash needs primarily relate to working capital, including staffing costs, technology expenses and capital used for inventory purchases, which we have funded through cash generated from operations. From time to time, we may use our capital resources for other activities, such as contract start-up costs, joint ventures and acquisitions. As ofMarch 31, 2020 , we had$41.8 million in cash as well as$10.0 million in short-term investments. We expect that the COVID-19 pandemic may cause the Company's GMV, EBITDA and cash position to decline in the short-term although the Company's actions taken to conserve resources and the speed at which business activity may return may mitigate these short-term declines. These mitigation efforts include salary reductions, furloughs, moderation in discretionary spending and non-essential investments, and amendments to vendor payment terms. However, we believe that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for at least the next twelve months. In fiscal 2019, we deployed our new e-commerce technology platform. We expect to continue to invest in enhancements to our marketplace capabilities and for the implementation of tools for data-driven product recommendations, omni-channel behavioral marketing and predictive analytics and integrated services for our retail supply chain segment.
During the second quarter of fiscal 2020 the Company paid the
We did not record a provision for deferredU.S. tax expense on the undistributed earnings of foreign subsidiaries because we intend to indefinitely reinvest the earnings of these foreign subsidiaries outsidethe United States . The amount of such undistributed foreign earnings was$4.0 million as ofMarch 31, 2020 . As ofMarch 31, 2020 andSeptember 30, 2019 ,$16.9 million and$21.0 million , respectively, of cash and cash equivalents was held outside of theU.S. 33 -------------------------------------------------------------------------------- We are authorized to repurchase issued and outstanding shares of our common stock under a share repurchase program approved by our Board of Directors. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discontinued or suspended at any time and will be funded using our available cash. We did not repurchase shares under this program during the six months endedMarch 31, 2020 or 2019. As ofMarch 31, 2020 , we are authorized to repurchase up to an additional$10.1 million in shares under this program. Most of our sales are recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers, and PayPal, an Internet based payment system, as methods of payments. As a result, we are not subject to significant collection risk, as goods are generally not shipped before payment is received.
Changes in Cash Flows: Six Months Ended
Net cash used in operating activities was$12.1 million and$11.6 million for the six months endedMarch 31, 2020 and 2019, respectively. The$0.5 million increase in cash used in operations between periods was attributable to the$3.8 million portion of the Machinio earn-out payment associated with its increase in value post-acquisition, partially offset by$2.1 million of lower net income as adjusted for non-cash items, and$1.1 million of final payments of seller distributions associated with the completion of the Scrap Contract. Our working capital accounts are subject to natural variations depending on the timing of cash receipts and payments, and our variations in our transaction volumes are related to settlements between our buyers and sellers. Net cash provided by investing activities was$19.7 million for the six months endedMarch 31, 2020 , and$13.0 million was used by investing activities for the six months endedMarch 31, 2019 . The$32.7 million increase in cash provided by investing activities was driven by a$30.0 million increase in activity related to short-term investments which are used to manage the Company's excess cash balances, and$2.5 million principal payment on the promissory note issued to JTC. As discussed in Note 2 - Summary of Significant Accounting Policies to the Company's consolidated financial statements, the Company concluded that it remains probable that the Company will collect the amounts related to the promissory note issued to JTC. However, the Company will continue to monitor for changes that could impact the recoverability of the promissory note, which will depend on JTC's subsequent operating performance and ability to make the payments required by the new repayment schedule. Net cash used in financing activities was$1.7 million for the six months endedMarch 31, 2020 . The$1.9 million increase in cash used by financing activities consisted of$1.2 million the portion of the Machinio earn-out payment that represented its fair value at the date of acquisition, and$0.6 million taxes paid associated with net settlement of stock compensation awards. Net settlement was not used in the prior year comparable period. Capital Expenditures. Our capital expenditures consist primarily of capitalized software, computers and purchased software, office equipment, furniture and fixtures, and leasehold improvements. The timing and volume of such capital expenditures in the future will be affected by the addition of new sellers or buyers or expansion of existing seller or buyer relationships. We intend to fund those expenditures primarily from operating cash flows. Our capital expenditures for the six months endedMarch 31, 2020 were$2.8 million . As ofMarch 31, 2020 , we had no significant outstanding commitments for capital expenditures. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the development and deployment of new marketplaces, the introduction of new value-added services and the costs to establish additional distribution centers.
Off-Balance Sheet Arrangements
We do not have any transactions, agreements or other contractual arrangements that could be considered material off-balance sheet arrangements.
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