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, 2021 , 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 unaudited condensed consolidated financial statements and related notes and the information contained elsewhere in this document.
Overview
About us.Liquidity Services is a leading global commerce company providing trusted marketplace platforms that power the circular economy. We create a better future for organizations, individuals, and the planet by capturing and unleashing the intrinsic value of surplus. We connect millions of buyers and thousands of sellers through our leading auction marketplaces, search engines, asset management software, and related services. Our comprehensive solutions enable the transparent, efficient, sustainable recovery of value from excess items owned by business and government sellers. Our business delivers value to shareholders through its ability to unleash the intrinsic value of surplus from our marketplace platforms. These platforms ignite and enable a self-reinforcing cycle of value creation where buyers and sellers attract one another in ever-increasing numbers. The result is a continuous flow of goods that becomes increasingly valuable as more participants join the platform, thereby creating positive network effects that benefit sellers, buyers, and shareholders. Results from our operations are organized into four reportable segments:Retail Supply Chain Group (RSCG),Capital Assets Group (CAG), GovDeals, andMachinio . See Note 14 - Segment Information to the condensed consolidated financial statements for more information regarding our reportable segments. OnNovember 1, 2021 , the Company purchased all of the issued and outstanding shares of stock ofBid4Assets, Inc. (Bid4Assets), aMaryland corporation based inSilver Spring, MD . Bid4Assets auctions distressed real estate for the federal government, sheriffs, county tax-collectors, financial institutions and real estate funds. See Note 3 - Bid4Assets Acquisition for more information regarding this transaction. 24 --------------------------------------------------------------------------------
Impacts of the COVID-19 Pandemic
The Company has been closely monitoring the COVID-19 pandemic. InApril 2020 , the Company experienced the largest impacts on its operations thus far stemming from the initial actions taken by governments and the private sector to limit the spread of COVID-19. The restrictions on economic activity were caused, in part, by business closures, limitations on the operations of business activity and significant prioritization of essential business functions. SinceMay 2020 , we have seen subsequent increases in GMV and revenues as businesses and governments re-opened from government ordered closures which, combined with cost control measures, generated positive net income since the third quarter of fiscal 2020. However, COVID-19 and its variants continue to impact the global economy, supply chains, and the ability to conduct commerce due to ongoing travel restrictions in various countries, and lockdowns reintroduced within regions ofChina . Additionally, the COVID-19 pandemic in combination with various macroeconomic factors, has impacted the supply chain of new vehicles, and construction and heavy equipment production, which in turn negatively affected the supply of used vehicles and construction and heavy equipment being sold inNorth America . At this time, the likelihood, magnitude and timing of business developments across our reportable segments are difficult to predict given the current economic uncertainty, unknown duration and overall impact of the global pandemic. As a result, prior trends in the Company's results of operations may not be applicable throughout the duration of the COVID-19 pandemic. Throughout the COVID-19 pandemic, the Company has actively monitored its liquidity position and working capital needs. During fiscal 2021 and during the three and nine months endedJune 30, 2022 , the Company determined that its liquidity position and working capital were more than sufficient to meet its projected needs. As discussed in Note 10 - Stockholders' Equity, onDecember 6, 2021 , the Company's Board of Directors authorized the repurchase of up to$20 million of the Company's outstanding shares of common stock throughDecember 31, 2023 . The Company repurchased 1,159,066 shares for$20.0 million during the six months endedMarch 31, 2022 . OnMay 13, 2022 , the Company's Board of Directors authorized a new stock repurchase plan of up to$12 million of our outstanding shares of common stock throughJune 30, 2024 . The Company repurchased 408,211 shares for$5.4 million during the three months endedJune 30, 2022 . As ofJune 30, 2022 , the Company may repurchase an additional$6.6 million of shares under this program.
Effects of Inflation
Rising inflation in both theU.S. and internationally has weighed on the global economy, increasing prices for energy, shipping, and labor, among other areas of the macroeconomic environment. These events have caused a rise in borrowing costs as well, partly driven by actions taken by central banks to curb rising inflation. Currently, the Company is unable to predict the likelihood, magnitude and timing of inflationary risk to our business, if any. However, the Company does not believe inflation has had a material effect on our operating expenses. As a marketplace operator, the GMV, revenues and costs of revenues that result from our primarily auction-based sales may be influenced by macroeconomic factors, including but not limited to inflation, whose impacts may vary across each of our individual asset classes.
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 endedJune 30, 2022 , the approximate number of registered buyers increased from 3,970,000 to 4,844,000, or 22%. Of the increase, approximately 16% is attributable to the Bid4Assets registered buyer base acquired during the three months endedDecember 31, 2021 . 25 --------------------------------------------------------------------------------
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 Purchase revenues line item on the Condensed 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 nine months endedJune 30, 2022 , our purchase transaction model accounted for 10.8% and 12.8% of our Gross Merchandise Volume (GMV), respectively, and 50.8% and 53.3% of our total revenues, respectively. For the three and nine months endedJune 30, 2021 , our purchase transaction model accounted for 14.8% and 16.3% of our Gross Merchandise Volume (GMV), respectively, and 54.3% and 56.0% of our total revenues, respectively. These amounts included sales of commercial merchandise sourced from vendor contracts with Amazon.com, Inc. by our RSCG reportable segment. See further discussion regarding our Amazon.com, Inc. contracts at Note 2 - Summary of Significant Accounting Policies. 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 upon auction close or upon collection of auction proceeds, depending upon the settlement service level selected by the seller. Revenue under the consignment model is recorded within the Consignment and other fee revenues line item on the Condensed 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 nine months endedJune 30, 2022 , our consignment model accounted for 89.2% and 87.2% of our GMV, respectively, and 40.9% and 39.0% of our total revenues, respectively. For the three and nine months endedJune 30, 2021 , our consignment model accounted for 85.2% and 83.7% of our GMV, respectively, and 37.4% and 36.2% of our total revenues, respectively. Other - fee revenue. We also earn non-consignment fee revenue fromMachinio's Advertising and System subscription services, as well as other services including returns management, refurbishment of assets, and asset valuation services. Non-consignment fee revenue is recorded within the Consignment and other fee revenues line item on the Condensed Consolidated Statements of Operations. Other revenues accounted for 8.3% and 7.7% of our total revenues for the three and nine months endedJune 30, 2022 , respectively, and 8.2% and 7.8% of our total revenues for the three and nine months endedJune 30, 2021 , respectively Industry trends. We believe there are several industry trends positively impacting the long-term growth of our business including: •the increase in volume of returned merchandise handled both online and in stores as online and omni-channel retail grow as a percentage of overall retail sales; •the increase in government regulations and the need for corporations to have sustainability solutions with verifiable recycling and remarketing of surplus assets; •the increase in outsourcing surplus disposition and end-of-life assets by corporations and government entities as they focus on reducing costs, improving transparency, compliance and working capital, and increasingly prefer service providers with proven track records, innovative scalable solutions and the ability to make a strategic impact in the reverse supply chain; •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 could impact our long term growth; •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; •the increase in demand from sellers and buyers to transact in a low touch, online solution as compared to live, in-person auctions or public sale events. 26 --------------------------------------------------------------------------------
Our Vendor Agreements
Our commercial agreements. We have multiple vendor contracts with Amazon.com, Inc. under which the Company acquires and sells commercial merchandise. While purchase model transactions account for less than 20% of our total GMV, the cost of inventory for purchase model transactions is the most significant component of our consolidated Costs of goods sold. The property purchased under these contracts with Amazon.com, Inc. represented 61.1% and 63.5% of consolidated Cost of goods sold for the three months endedJune 30, 2022 and 2021, respectively, and 57.7% and 61.7% of consolidated Cost of goods sold for the nine months endedJune 30, 2022 and 2021, respectively. These contracts are included within our RSCG reportable segment. Our agreements with our other sellers are generally terminable at will by either party.
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 ofJune 30, 2022 , and 2021, we had approximately 4,844,000 and 3,970,000 registered buyers, respectively. Of the increase, approximately 16% is attributable to the Bid4Assets registered buyer base acquired during the three months endedDecember 31, 2021 . 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 endedJune 30, 2022 , and 2021, approximately 884,000 and 617,000, respectively, total auction participants participated in auctions on our marketplaces. During the nine months endedJune 30, 2022 , and 2021, approximately 2,355,000 and 1,695,000, 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 endedJune 30, 2022 , and 2021, we completed approximately 253,000 and 185,000 transactions, respectively. During the nine months endedJune 30, 2022 , and 2021, we completed approximately 709,000 and 511,000 transactions, respectively. 27 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
Non-GAAP EBITDA and Non-GAAP Adjusted EBITDA. Non-GAAP EBITDA is a supplemental non-GAAP financial measure and is equal to net income (loss) plus interest and other income, net excluding the non-service components of net periodic pension (benefit); provision for income taxes; and depreciation and amortization. Interest and other income, net, can include non-operating gains and losses, such as from foreign currency fluctuations. Our definition of Non-GAAP Adjusted EBITDA differs from Non-GAAP EBITDA because we further adjust Non-GAAP 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.
We believe Non-GAAP EBITDA and Non-GAAP 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 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 Condensed Consolidated 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 Non-GAAP EBITDA and Non-GAAP 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 Non-GAAP EBITDA and Non-GAAP Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry.
Our management uses Non-GAAP EBITDA and Non-GAAP 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.
Non-GAAP EBITDA and Non-GAAP Adjusted EBITDA as calculated by us are not
necessarily comparable to similarly titled measures used by other companies. In
addition, Non-GAAP EBITDA and Non-GAAP Adjusted EBITDA: (a) do not represent net
income (loss) 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 income (loss), income
(loss) from operations, cash provided by (used in) operating activities or our
other financial information as determined under GAAP.
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We prepare Non-GAAP Adjusted EBITDA by adjusting Non-GAAP 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,
Non-GAAP Adjusted EBITDA is subject to all of the limitations applicable to
Non-GAAP EBITDA. Our presentation of Non-GAAP Adjusted EBITDA should not be
construed as an implication that our future results will be unaffected by
unusual or non-recurring items.
The table below reconciles Net income to Non-GAAP EBITDA and Non-GAAP Adjusted EBITDA for the periods presented.
.
Three Months Ended June 30, Nine Months Ended June 30,
2022 2021 2022 2021
(in thousands) (Unaudited)
Net income $ 16,408
196 (157) 214 (191)
Provision for income taxes 2,183 429 4,254 1,133
Depreciation and amortization 2,641 1,705 7,546 5,246
Non-GAAP EBITDA $ 21,428 $ 10,396 $ 43,993 $ 24,381
Stock compensation expense 1,884 1,803 6,156 5,793
Acquisition costs and impairment of long-lived
and other assets2 43 1,136 295 1,338
Business realignment expenses2, 3 - - - 5
Fair value adjustments to acquisition earn-outs (11,500) - (20,000) -
Non-GAAP Adjusted EBITDA $ 11,855 $ 13,335 $ 30,444 $ 31,517
1 Represents Interest and other expenses (income), net, per the Statement of
Operations, excluding the non-service components of net periodic pension
(benefit).
2 Acquisition costs, impairment of long-lived assets and other assets, and
business realignment expenses are components of Other operating expenses, net on
the Statements of Operations.
3 Business realignment expense includes the amounts accounted for as exit costs
under ASC 420, Exit or Disposal Cost Obligations, and the related impacts of
business realignment actions subject to other accounting guidance.
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, 2021 , and in Note 2 - Summary of Significant Accounting Policies to the condensed consolidated financial statements. The following discussion is a supplement to the disclosures referenced in connection with accounting estimates made in preparing the preliminary purchase accounting for the acquisition Bid4Assets as ofNovember 1, 2021 . Business combinations. The Company recognizes all of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred. Restructuring costs incurred in periods subsequent to the acquisition date are expensed when incurred. Subsequent changes to the purchase price (i.e., working capital adjustments) or other fair value adjustments determined during the measurement period are recorded as an adjustment to goodwill, with the exception of contingent consideration, which is recognized in the statement of operations in the period it is modified. 29 -------------------------------------------------------------------------------- Intangible assets. Intangible assets consist of contract intangibles, brand and technology, and patent and trademarks. Intangible assets are amortized using the straight-line method over their estimated useful lives. The preliminary fair value of acquired intangible assets, excluding goodwill, arising from the Bid4Assets acquisition was$16.5 million . This balance consisted of the following identified intangible assets, each with their own significant assumptions used, as follows: •Contract Intangibles - We valued the contract intangibles using the multi-period excess earnings method, an income approach valuation model. The significant assumptions used in the income approach includes estimates about future expected cash flows from supplier contracts, the attrition rate, and the discount rate. •Developed Software - We valued the developed software by applying the relief-from-royalty method, an income approach valuation model. The significant assumptions used in the relief-from-royalty method include estimates about future expected cash flows from the developed software, the royalty rate, the obsolescence factor and the discount rate. •Trade Name - We valued the trade name acquired using a relief-from-royalty method. The significant assumptions used in the relief-from-royalty method include future expected cash flows from the trade name, the royalty rate, and the discount rate. Earn-out liability. Shareholders of Bid4Assets are eligible to receive up to$37.5 million in cash, payable based on Bid4Assets' achievement of trailing twelve-month EBITDA targets measured at the end of each calendar quarter until the quarter endedDecember 31, 2022 . The earn-out consideration was preliminarily fair valued at approximately$28.0 million as of the acquisition date, with fair value subsequently measured to be$4.5 million as ofJune 30, 2022 . The significant unobservable inputs used in the fair value measurement categorized within Level 3 of the fair value hierarchy included estimated results of operations over the earn-out period, a high level of volatility of gross profit and operating expenses given the nature of the business model and its economic environment create a wider range of potential outcomes over the earn-out period, and the discount rate.Goodwill .Goodwill represents the costs in excess of the fair value of net assets acquired through acquisitions by the Company. Pursuant to our preliminary purchase price allocation, goodwill arising from the acquisition was determined to be$30.0 million . See Note 3 - Bid4Assets Acquisition for further information. As discussed in Note 11 - Fair Value Measurement, the fair value of the Bid4Assets earn-out liability declined by$20.0 million during the nine months endedJune 30, 2022 , due to timing changes impacting the level of auction events and transactions that are expected to occur during the earn-out period endingDecember 31, 2022 . These timing changes have not reflected substantive changes to the long-term outlook for real estate sales within the GovDeals segment and were not considered a triggering event for testing goodwill or long-lived assets for impairment as ofJune 30, 2022 . The Company will continue to monitor for changes that could impact the recoverability of its goodwill.
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.
Technology and operations. Technology expenses primarily consist of the cost of
technical staff (including stock compensation), third party services, licenses,
and infrastructure, all as required to develop, configure , deploy, maintain,
and secure our marketplace platforms, business operational systems, and
facilities. Technology expenses are net of the required capitalization of costs
associated with enhancing our marketplace platforms and other software
development activities.
Depreciation and amortization of capitalized software development costs,
purchased software, acquired developed software intangible assets, and computer
hardware are included within Depreciation and amortization in the accompanying
Consolidated Statements of Operations. Technology expenses are presented
separately from Costs of goods sold (excluding depreciation and amortization) in
the Consolidated Statements of Operations, as these expenses provide for the
general availability of our marketplace platforms and other business operational
systems and are not attributable to specific revenue generating transaction
activity occurring on our marketplaces.
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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 platforms, 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 expenses (income) includes impairment of long-lived and other assets, the change in fair value of contingent consideration, impacts of lease terminations, as well as business realignment expenses, including those associated with restructuring initiatives and the exit of certain business operations. Interest and other income, net. Interest and other income, net consists of interest income on interest bearing checking accounts, money market funds, and the prior promissory note issued to JTC, interest and unused commitment fees in connection with the Company's Credit Agreement, 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 income (loss). Our effective income tax rate after discrete items was 11.7% for the nine months endedJune 30, 2022 . The effective tax rate differed from the statutory federal rate of 21% primarily as a result of the impact of foreign, state, and local income taxes and permanent tax adjustments, the most significant of which was the exclusion of the$20.0 million non-cash gain from the fair market value adjustment of the Bid4Assets acquisition earn-out liability.. . 31 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, our operating
results:
Three Months Ended June 30, Nine Months Ended June 30,
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Purchase revenues $ 35,507 $ 37,862 $ (2,355) (6.2) % $ 109,109 $ 104,902 $ 4,207 4.0 %
Consignment and other fee
revenues 34,359 31,804 2,555 8.0 95,739 82,302 13,437 16.3
Total revenues 69,866 69,666 200 0.3 204,848 187,204 17,644 9.4
Costs and expenses from
operations:
Cost of goods sold (excludes
depreciation and amortization) 28,932 28,543 389 1.4 85,662 77,501 8,161 10.5
Technology and operations 13,782 12,307 1,475 12.0 41,573 34,952 6,621 18.9
Sales and marketing 10,900 9,661 1,239 12.8 32,217 27,679 4,538 16.4
General and administrative 6,389 7,676 (1,287) (16.8) 21,672 21,578 94 0.4
Depreciation and amortization 2,641 1,705 936 54.9 7,546 5,246 2,300 43.8
Fair value adjustment of
acquisition earn-outs (11,500) - (11,500) NM (20,000) - (20,000) NM
Other operating expenses, net 27 1,180 (1,153) (97.7) 18 1,390 (1,372) (98.7)
Total costs and expenses 51,171 61,072 (9,901) (16.2) 168,688 168,346 342 0.2
Income from operations 18,695 8,594 10,101 117.5 36,160 18,858 17,302 91.7
Interest and other expenses
(income), net 104 (254) 358 140.9 (73) (468) 395 84.4
Income before provision for
income taxes 18,591 8,848 9,743 110.1 36,233 19,326 16,907 87.5
Provision for income taxes 2,183 429 1,754 408.9 4,254 1,133 3,121 275.5
Net income $ 16,408 $ 8,419 $ 7,989 94.9% $ 31,979 $ 18,193 $ 13,786 75.8%
NM = not meaningful
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The following table presents reportable segment GMV, revenue, segment gross
profit (which is calculated as total revenue less cost of goods sold (exclusive
of depreciation and amortization)), and segment gross profit as a percentage of
total revenue for the periods indicated:
Three Months Ended June 30, Nine Months Ended June 30,
(dollars in thousands) 2022 2021 2022 2021
GovDeals:
GMV $ 222,238 $ 146,058 $ 559,429 $ 364,601
Total revenue $ 16,587 $ 14,658 $ 45,130 $ 36,448
Segment gross profit $ 15,765 $ 13,965 $ 42,913 $ 34,544
Segment gross profit as a 95.0 % 95.3 % 95.1 % 94.8 %
percentage of total revenue
RSCG:
GMV $ 60,476 $ 61,231 $ 172,930 $ 171,557
Total revenue $ 42,374 $ 44,095 $ 122,883 $ 118,083
Segment gross profit $ 15,942 $ 17,755 $ 46,818 $ 48,315
Segment gross profit as a 37.6 % 40.3 % 38.1 % 40.9 %
percentage of total revenue
CAG:
GMV $ 42,292 $ 37,379 $ 129,674 $ 106,222
Total revenue $ 7,796 $ 8,467 $ 27,996 $ 25,872
Segment gross profit $ 6,271 $ 7,099 $ 21,076 $ 20,445
Segment gross profit as a 80.4 % 83.8 % 75.3 % 79.0 %
percentage of total revenue
Machinio:
GMV $ - $ - $ - $ -
Total revenue $ 3,109 $ 2,446 $ 8,839 $ 6,801
Segment gross profit $ 2,956 $ 2,304 $ 8,379 $ 6,399
Segment gross profit as a 95.1 % 94.2 % 94.8 % 94.1 %
percentage of total revenue
Consolidated:
GMV $ 325,006 $ 244,668 $ 862,033 $ 642,380
Total revenue $ 69,866 $ 69,666 $ 204,848 $ 187,204
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Three Months Ended
Segment Results GovDeals. Total revenues from our GovDeals reportable segment increased 13.2%, or$1.9 million , due to a 52.2%, or$76.2 million , increase in GMV from adding new sellers and increasing volumes with existing sellers across several key categories, including transportation and real estate. In addition, increased recovery rates on assets sold were driven by our growing buyer base, automated asset promotion tools, and favorable macroeconomic factors in certain asset categories, such as transportation assets. However, this has been partially offset by lower volumes of used vehicles made available for sale, as new vehicle production disruptions impact government agency vehicle fleet retirement timelines. As GovDeals real estate sales increase through the integration with Bid4Assets, GovDeals revenue as a percent of GMV is expected to decline, as these higher value real estate sales are generally conducted at a lower take-rate than our traditional GovDeals asset categories. For that reason, revenue as a percentage of GMV decreased to 7.5% from 10.0% last year. As a result of the increase in revenues, segment gross profit increased 12.9%, or$1.8 million . Segment gross profit as a percentage of total revenue remained relatively consistent between the periods. RSCG. Revenue from our RSCG reportable segment decreased 3.9%, or$1.7 million , due to a 1.2%, or$0.8 million , decrease in GMV as expanded diversification in client programs, sales channels, and its distribution network were offset by changes in retail consumer behavior, as some client returns management programs provided fewer higher value products than in the prior year. Segment gross profit decreased by 10.2%, or$1.8 million , due to that unfavorable change in the mix of inventory handled by the RSCG segment during the current quarter, causing segment gross profit as a percentage of total revenue to decrease by 2.7%. CAG. Revenue from the CAG reportable segment decreased by 7.9%, or$0.7 million , primarily due to the impacts of the COVID-19 lockdowns inChina , as GMV increases 13.1%, or$4.9 million were offset by an increase in sales conducted with partner organizations. As a result of the decrease in revenues, segment gross profit decreased 11.7%, or$0.8 million . Segment gross profit as a percentage of total revenues decreased 3.4% due to inherent variations in the mix of assets sourced and sold by the CAG segment in any given period. Further, challenged global supply chains are experiencing heightened disruptions from the Russian invasion ofUkraine and its impacts on international trade and energy markets, and the recent COVID-19 lockdowns in regions ofChina , which could limit the volume of assets made available for sale in any quarterly period.Machinio . Revenue from ourMachinio reportable segment increased 27.1%, or$0.7 million , due to an increase in subscription activity through a greater number of subscribers and increased pricing. As a result of the increase in revenues, gross profit increased 28.3%, or$0.7 million . Segment gross profit as a percentage of total revenue increased 0.9% due to the growth in subscribers and pricing. Consolidated Results Total revenues - Total consolidated revenue increased$0.2 million , or 0.3%. Refer to the discussion of Segment Results above for discussion of the increase in revenue. Cost of goods sold (excludes depreciation and amortization). Cost of goods sold increased$0.4 million , or 1.4%, largely consistent with the change in total revenues. Technology and operations expenses. Technology and operations expenses increased$1.5 million , or 12.0%, as we are investing in technology and operations to continue our growth and diversification efforts, including RSCG's expansion of its distribution network and launching AllSurplus Deals as a new marketplace offering consumers deals for curbside pickup. Sales and marketing expenses. Sales and marketing expenses increased$1.2 million , or 12.8%, as we are investing in our sales and marketing functions to continue our growth, including promotional efforts to expand our market share in key verticals, and to promote new business initiatives including our AllSurplus Deals consumer marketplace. General and administrative expenses. General and administrative expenses decreased$1.3 million , or 16.8%, primarily due to changes in expected attainment of certain variable compensation targets, and partially offset by increased corporate support costs to support the anticipated growth resulting from the investments in our technology, operations, sales and marketing functions.
Depreciation and amortization. Depreciation and amortization expense increased
34
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Fair value adjustment of acquisition earn-outs. Fair value adjustment of
acquisition earn-outs reflects an $11.5 million non-cash gain due to a reduction
in the fair value of the Bid4Assets earn-out liability during the three months
ended June 30, 2022 . See Note 11 - Fair Value Measurement for further
information.
Other operating expenses, net. Other operating expenses, net decreased $1.2
million due to the $1.1 million loss during the three months ended June 30,
2021 , following the full satisfaction and discharge of JTC's indebtedness to the
Company. Refer to the discussion in Note 2 - Summary of Significant Accounting
Policies.
Interest and other expenses (income), net. Interest and other expenses
(income), net increased
Provision for income taxes. Provision for income taxes increased$1.8 million primarily due to the increase in our effective tax rate following the release of our valuation allowance on US deferred tax assets during the fiscal year endedSeptember 30, 2021 .
Nine Months Ended
GovDeals. Total revenues from our GovDeals reportable segment increased 23.8%, or$8.7 million , due to a 53.4%, or$194.8 million , increase in GMV from adding new sellers and increasing volumes with existing sellers across several key categories, including transportation and real estate. In addition, increased recovery rates on assets sold were driven by our growing buyer base, automated asset promotion tools, and favorable macroeconomic factors in certain asset categories, such as transportation assets. However, this has been partially offset by lower volumes of used vehicles made available for sale, as new vehicle production disruptions impact government agency vehicle fleet retirement timelines. As GovDeals real estate sales increase through the integration with Bid4Assets, GovDeals revenue as a percent of GMV is expected to decline, as these higher value real estate sales are generally conducted at a lower take-rate than our traditional GovDeals asset categories. For that reason, revenue as a percentage of GMV decreased to 8.1% from 10.0% last year. As a result of the increase in revenues, segment gross profit increased 24.2%, or$8.4 million . Segment gross profit as a percentage of total revenue remained relatively consistent between the periods. RSCG. Revenue from our RSCG reportable segment increased 4.1%, or$4.8 million , due to a 0.8%, or$1.4 million , increase in GMV as it continues to expanded diversification in client programs, sales channels, and its distribution network, as well as an increase in the mix of transactions conducted under the purchase model. Segment gross profit as a percentage of total revenue decreased by 3.1%, or$1.5 million , and was impacted by changes in retail consumer behavior, as some client returns management programs provided fewer higher value products than in the prior year. As a result, segment gross profit as a percentage of total revenue decreased by 2.8%. CAG. Revenue from the CAG reportable segment increased by 8.2%, or$2.1 million , due to a 22.1%, or$23.5 million , increase in GMV driven by increasing opportunities to obtain and sell inventory under our purchase model, and strong consignment sales in the energy and heavy equipment categories. Revenues did not increase at the same rate as GMV due to increases in the mix of transactions conducted with partner organizations. As a result of the increase in revenues, segment gross profit increased 3.1%, or$0.6 million . Segment gross profit as a percentage of total revenue decreased 3.7% due to inherent variations in the mix of assets sourced and sold by the CAG segment in any given period. Further, challenged global supply chains are experiencing heightened disruptions from the Russian invasion ofUkraine and its impacts on international trade and energy markets, and the recent COVID-19 lockdowns in regions ofChina , which could limit the volume of assets made available for sale in any quarterly period.Machinio . Revenue from ourMachinio reportable segment increased 30.0%, or$2.0 million , due to an increase in subscription activity through a greater number of subscribers and increased pricing. As a result of the increase in revenues, segment gross profit increased 30.9%, or$2.0 million . Segment gross profit as a percentage of total revenue increased 0.7% due to the growth in subscribers and pricing. Consolidated Results Total revenues - Total consolidated revenue increased$17.6 million , or 9.4%. Refer to the discussion of Segment Results above for discussion of the increase in revenue. 35 -------------------------------------------------------------------------------- Cost of goods sold (excludes depreciation and amortization). Cost of goods sold increased$8.2 million , or 10.5%, which changed at a higher rate than Revenue primarily due to an increase in principal transactions at our RSCG and CAG reportable segments.
Technology and operations expenses. Technology and operations expenses
increased
Sales and marketing expenses. Sales and marketing expenses increased$4.5 million , or 16.4%, as we are investing in our sales and marketing functions to continue our growth, including promotional efforts to expand our market share in key verticals, and to promote new business initiatives including our AllSurplus Deals consumer marketplace. General and administrative expenses. General and administrative expenses increased$0.1 million , or 0.4%, primarily due to increased corporate support costs to support the anticipated growth resulting from the investments in our technology, operations, sales and marketing functions, partially offset by changes in expected attainment of certain variable compensation targets.
Depreciation and amortization. Depreciation and amortization expense increased
Fair value adjustment of acquisition earn-outs. Fair value adjustment of acquisition earn-outs reflects a$20.0 million non-cash gain due to a reduction in the fair value of the Bid4Assets earn-out liability during the nine months endedJune 30, 2022 . See Note 11 - Fair Value Measurement for further information.
Other operating expenses, net. Other operating expenses, net decreased
Interest and other expenses (income), net. Interest and other expenses (income), net decreased$0.4 million primarily related to no further interest income associated with the JTC promissory note following the full satisfaction and discharge of JTC's indebtedness to the Company during the nine months endedJune 30, 2021 . Refer to the discussion in Note 2 - Summary of Significant Accounting Policies. Provision for income taxes. Provision for income taxes increased$3.1 million primarily due to the increase in our effective tax rate following the release of our valuation allowance on US deferred tax assets during the fiscal year endedSeptember 30, 2021 .
Liquidity and Capital Resources
Our operational cash needs primarily relate to working capital, including staffing costs, technology expenses, leases of real estate and equipment used in our operations, and capital used for inventory purchases, which we have funded through existing cash balances and 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, share repurchases and acquisitions. As ofJune 30, 2022 , we had$88.3 million in cash and cash equivalents, which we believe is sufficient to meet the Company's anticipated cash needs one year from issuance of these financial statements. The Company maintains a$25.0 million Credit Agreement dueMarch 31, 2024 (Credit Agreement). The Company may draw upon the Credit Agreement for general corporate purposes. Repayments of any borrowings under the Credit Agreement shall become available for redraw at any time by the Company. The interest rate on borrowings under the Credit Agreement is a variable rate per annum equal to the Daily Simple Secured Overnight Financing Rate (SOFR) in effect plus a margin ranging from 1.25% to 1.75%. Interest is payable monthly. During the three and nine months endedJune 30, 2022 , the Company did not make any draws under the Credit Agreement. As ofJune 30, 2022 , the Company had no outstanding indebtedness under the Credit Agreement and our borrowing availability was$25.0 million . 36 -------------------------------------------------------------------------------- The obligations under the Credit Agreement are unconditionally guaranteed by us and each of our existing and subsequently acquired or organized domestic subsidiaries and secured on a first priority basis by a security interest (subject to permitted liens) in substantially all assets owned by us, and each of our other domestic subsidiaries, subject to limited exceptions. The Credit Agreement contains certain financial and non-financial restrictive covenants including, among others, the requirement to maintain a minimum level of earnings before interest, income taxes, depreciation and amortization (EBITDA). The Credit Agreement contains a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions, investments and acquisitions, indebtedness and liens, and dividends and other restricted payments. As ofMarch 31, 2022 , the Company was in full compliance with the terms and conditions of the Credit Agreement. Most of our sales are recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers, andPayPal , 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. The COVID-19 pandemic has caused the Company's GMV and revenues to fluctuate, and the Company initially implemented cost control measures to protect against the uncertainties created by the severe economic restrictions in its initial phases. From a cash flow perspective, the Company employed working capital management practices, primarily in the form of temporary extensions to vendor payment terms, and also experienced accumulation in its payables to sellers balance due to COVID-19 restrictions, which continue to be a factor in certain countries, causing some buyer delays in their ability to pick up purchased assets. The Company is prepared to reimplement these measures should it face conditions consistent with the initial phases of the COVID-19 pandemic.
We expect to continue to invest in enhancements to our e-commerce technology platform, marketplace capabilities and tools for data-driven product recommendations, omni-channel behavioral marketing, expanded analytics, and buyer/seller payment optimization.
We do not have any transactions, agreements or other contractual arrangements that could be considered material off-balance sheet arrangements.
OnNovember 1, 2021 , the Company purchased all of the issued and outstanding shares of stock of Bid4Assets. Bid4Assets is a leading online marketplace focused on conducting real property auctions for the government, including tax foreclosure sales and sheriff's sales. Our investment through the acquisition of Bid4Assets will support continued growth in the GovDeals reportable segment, particularly in our real estate vertical. The preliminary acquisition date fair value of the consideration transferred to the former shareholders of Bid4Assets was approximately$42.7 million consisting of$14.7 million in cash (net of working capital adjustments totaling$0.3 million ) and earn-out consideration with a preliminary fair value of approximately$28.0 million . As part of the acquisition of Bid4Assets, former shareholders of Bid4Assets are eligible to receive earn-out consideration of up to$37.5 million in cash. See Note 3 - Bid4Assets Acquisition for further information. During the three months endedMarch 31, 2021 , the fair value of the earn-out liability was reduced by$8.5 million to$19.5 million , due to a decline in the auction events and transactions that are expected to be completed during the earn-out period endingDecember 31, 2022 , which included extended timelines to advance legislation that allows for online auctions of foreclosed real estate in certain target markets, and other client specific delays in bringing foreclosed real estate to auction.
During the three months ended
These changes resulted from events occurring subsequent to the
As of
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$8.1 million as ofJune 30, 2022 . As ofJune 30, 2022 andSeptember 30, 2021 ,$21.1 million and$22.4 million , respectively, of Cash and cash equivalents was held outside of theU.S. 37 -------------------------------------------------------------------------------- From time to time, we have been 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. The Company had no remaining share repurchase authorization as ofSeptember 30, 2021 . OnDecember 6, 2021 , the Company's Board of Directors authorized a new stock repurchase plan of up to$20.0 million of the Company's outstanding shares of common stock throughDecember 31, 2023 . The Company repurchased 1,159,066 shares for$20.0 million during the six months endedMarch 31, 2022 . OnMay 13, 2022 , the Company's Board of Directors authorized a new stock repurchase plan of up to$12 million of our outstanding shares of common stock throughJune 30, 2024 . The Company repurchased 408,211 shares for$5.4 million during the three months endedJune 30, 2022 . As ofJune 30, 2022 , the Company may repurchase an additional$6.6 million of shares under this program.
Changes in Cash Flows: Nine Months Ended
Net cash provided by operating activities was$31.1 million and$54.3 million for the nine months endedJune 30, 2022 , and 2021, respectively. The$23.1 million decrease in cash provided by operating activities between periods was attributable to cash flows associated with accounts payable and payables to sellers which had a net decrease of$16.2 million due to reduced rates of change in the underlying transaction volumes during the current period. Our working capital accounts are subject to natural variations depending on the rate of change of our transaction volumes, the timing of cash receipts and payments, and variations in our transaction volumes related to settlements between our buyers and sellers. As GovDeals real estate sales with settlement services increase through the integration with Bid4Assets, operating cash flow fluctuations from accounts payable and payables to sellers are expected to become more variable. The amount of cash received and settled will be substantially higher than our take rate on such transactions, and the timing of auction events, cash collection period, and payment of settlements relative to period end dates can potentially drive substantial cash movements to the extent the timing of such activities cross fiscal periods. There have been no other significant changes to the working capital requirements for the Company. Net cash (used in) provided by investing activities was$(17.4) million and$0.9 million for the nine months endedJune 30, 2022 , andJune 30, 2021 , respectively. The$18.3 million increase in cash used in investing activities was driven by an increase of$2.8 million in new property and equipment purchases from expansion of our distribution network, and$11.2 million in cash paid at closing to acquire Bid4Assets onNovember 1, 2021 , net of cash acquired. See Note 3 - Bid4Assets Acquisition for further information. Net cash used in financing activities was$31.0 million and$19.4 million for the nine months endedJune 30, 2022 , andJune 30, 2021 , respectively. The$11.6 million increase in cash used in financing activities was primarily driven by a$9.3 million increase in share repurchases and an earn-out payment of$3.5 million made in connection with the Bid4Assets acquisition, offset by$1.6 million in lower taxes paid in connection with the net settlement of stock compensation awards. 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 our existing cash balances and operating cash flows. Our capital expenditures for the nine months endedJune 30, 2022 , andJune 30, 2021 , were$6.3 million and$3.5 million , respectively. This increase was primarily driven by enhancements to our platforms and marketplaces, as well as the expansion of our RSCG distribution network. As ofJune 30, 2022 , 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. 38
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