LIQUIDITY SERVICES INC (LQDT) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and the information contained under the caption "Selected Consolidated Financial Data" contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could vary materially from those indicated, implied, or suggested by these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
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.
We believe our ability to create liquid marketplaces for surplus and idle assets generates a continuous flow of goods from our sellers. This valuable and reliable flow of goods, in turn, attracts an increasing number of buyers to our marketplaces. Increasing numbers of buyers to our marketplaces, in turn, attracts more sellers to our marketplaces which, in turn, reinforces a valuable and reliable flow of surplus assets. During the past three fiscal years, we have conducted over 1,863,000 online transactions generating $2.1 billion in gross merchandise volume or 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.
During the year ended September 30, 2021, the number of registered buyers grew from 3,772,000 to 4,031,000, or 6.9%. We believe the continuous flow of goods in our marketplaces attracts a growing buyer base which creates a self-sustaining cycle for our buyers and sellers. We generated GMV of $886.7 million and revenue of $257.5 million through multiple sources, including transaction fees from sellers and buyers, proceeds from the sale of products we purchased from sellers, and value-added service charges. Our GMV has grown at a compound annual growth rate of 11.5% since 2006.
Our Machinio segment, which operates a global search engine platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors, grew revenue 32.5% during the year ended September 30, 2021.
Results from our operations are organized into four reportable segments: Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), GovDeals, and Machinio. See Note 16 - Segment Information to the Consolidated Financial Statements for more information regarding our segments.
On November 1, 2021, we acquired Bid4Assets, Inc. (Bid4Assets), a Maryland corporation based in Silver Spring, MD. Bid4Assets auctions distressed real estate for the federal government, sheriffs, county tax-collectors, financial institutions and real estate funds. See Note 17 - Subsequent Events for more information regarding this transaction.
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Impacts of the COVID-19 Pandemic
The Company has been closely monitoring the COVID-19 pandemic. In April 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. Since May 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 for the third and fourth quarters of fiscal 2020, and continued throughout fiscal 2021. However, COVID-19 and its variants continue to impact the global economy and the ability to conduct cross-border commerce due to ongoing travel restrictions in various countries. At this time, the likelihood, magnitude and timing of business developments across our 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 each quarter of fiscal 2021 including during the three months ended September 30, 2021, the Company determined that its liquidity position and working capital were more than sufficient to meet its projected needs. As discussed in Note 11 - Equity Transactions, during the year ended September 30, 2021, the Company repurchased a total of 1,591,963 shares for $31.1 million.
See Part I, Item 1A, Risk Factors, for an additional discussion of risks related to the COVID-19 pandemic.
Industry Trends
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 the disposition of surplus and end-of-life assets by corporations and government entities 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; (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; (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; and (6) 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.
Revenues
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. Revenue from our purchase transaction model accounted for 56.8%, 62.0% and 65.3%, of our total revenue for the years ended September 30, 2021, 2020 and 2019, respectively. These amounts included sales of commercial merchandise sourced from multiple vendor contracts with Amazon.com, Inc. by our RSCG segment. The commercial merchandise we purchased under this contract represented 60.7%, 55.1% and 43.6%, of Cost of goods sold for the years ended September 30, 2021, 2020 and 2019, respectively. The merchandise sold under our purchase transaction model accounted for 16.4%, 20.9% and 23.0%, of our GMV for the years ended September 30, 2021, 2020 and 2019.
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
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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. Revenue from our consignment model accounted for 36.0%, 31.8% and 29.4%, of our total revenue for the years ended September 30, 2021, 2020 and 2019, respectively, and 83.6%, 79.1% and 77.0%, of our GMV for the years ended September 30, 2021, 2020 and 2019, respectively.
Other — fee revenue. We also earn non-consignment fee revenue from Machinio Advertising sales listing subscription and Machinio System services, as well as other services including returns management, refurbishment of assets, and asset valuation services. Other revenues accounted for 7.2%, 6.2% and 5.3% of our total revenue for the years ended September 30, 2021, 2020 and 2019, respectively.
Our Vendor Agreements
Commercial agreements. We have multiple vendor contracts with Amazon.com, Inc. under which we acquire and sell commercial merchandise. The property we purchased under this contract represented 60.7%, 55.1% and 43.6%, of cost of goods sold for the years ended September 30, 2021, 2020 and 2019, respectively. This contract is included within our RSCG segment. Our agreements with our other sellers are generally terminable at will by either party.
DoD agreement. Historically, we had a material vendor contract with the DoD referred to as the Scrap Contract. This contract was included in the results of our CAG segment. Under the Scrap Contract, which concluded on September 30, 2019, we acquired, managed and sold all non-electronic scrap property of the DoD 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 the DoD 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.
Resale of scrap property that we purchased under the Scrap Contract accounted for 7.4% of our total revenues and 2.6% of our GMV in the year ended September 30, 2019.
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. Our GMV for the year ended September 30, 2021 was $886.8 million.
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 the U.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 of September 30, 2021 and 2020, we had 4,031,000 and 3,772,000 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
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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 years ended September 30, 2021, 2020, and 2019, 2,279,000, 1,899,000, and 2,085,000 participants participated in auctions on our marketplaces, respectively. Largely as a result of the wind-down of the Scrap Contract, there was a decrease in auction participants during 2020 compared with 2019.
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 years ended September 30, 2021, 2020, and 2019, we completed 703,000, 553,000 and 607,000 transactions, respectively.
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 over the requisite vesting period. 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 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.
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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.
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 (loss) to Non-GAAP EBITDA and Non-GAAP Adjusted EBITDA for the periods presented.
| Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||||||||
| Net income (loss) | $ | 50,949 | $ | (3,774) | $ | (19,260) | |||||
| Interest and other income, net(1) | (76) | (577) | (1,101) | ||||||||
| Provision (benefit) for income taxes | (23,370) | 801 | 1,200 | ||||||||
| Depreciation and amortization | 6,969 | 6,290 | 5,091 | ||||||||
| EBITDA | 34,472 | 2,740 | (14,070) | ||||||||
| Stock compensation expense(2) | 6,947 | 5,660 | 6,823 | ||||||||
| Acquisition costs and impairment of goodwill and long-lived assets(3) | 1,464 | 5 | 102 | ||||||||
| Business realignment expenses(4) | 5 | 405 | 1,578 | ||||||||
| Fair value adjustment to acquisition earn-out liability(3) | — | 200 | 3,500 | ||||||||
| Deferred revenue purchase accounting adjustment | — | 3 | 818 | ||||||||
| Adjusted EBITDA | $ | 42,888 | $ | 9,013 | $ | (1,249) |
(1) Interest expense and other income, net excludes non-services pension and other postretirement benefit expense.
(2) Excludes the impact of forfeitures of stock awards by employees terminated by business realignment actions. That impact is included in the business realignment expense line.
(3) Acquisition costs and impairment of long-lived assets, and fair value adjustments to acquisition earn-out liability are included in 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 14 to the Consolidated Financial Statements, and the related impacts of business realignment actions subject to other accounting guidance. Those related impacts were $317 thousand for the year ended September 30, 2019, due to forfeitures of stock awards by terminated employees. No related impacts were associated with the other periods presented.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements, included in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K with their accompanying notes, have been prepared in accordance with GAAP, which requires management of the Company to make assumptions, judgments and estimates that affect amounts reported in its consolidated financial statements. Accounting policies and estimates are considered to be "critical" when the nature of the estimate includes subjective or sensitive assumptions or judgments that can have a material impact on the financial condition or operating performance of the Company. Actual results may differ from these estimates.
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We consider the following accounting policies to be critical: revenue recognition, business combinations, valuation of goodwill and other intangible assets, and income taxes. Refer to Note 2 - Summary of Significant Accounting Policies to the Company's consolidated financial statements for further details on these accounting policies.
We consider the following accounting estimates to be critical: valuation of goodwill and other intangible assets (Notes 7 and 8), and income taxes (Note 10). Refer to these individually referenced notes and Note 2 - Summary of Significant Accounting Policies to the Company's consolidated financial statements for further details on these accounting estimates. The following discussion is a supplement to the disclosures referenced.
Valuation allowance. A valuation allowance is recorded against deferred tax assets for tax purposes if, based on the weight of all available evidence, in management's judgement it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Due to years of pre-tax losses (a cumulative three-year pre-tax loss), the Company has recorded significant valuation allowances, primarily related to net operating losses for US Federal income tax purposes.
In its assessment as of September 30, 2021, the Company has cumulative income from the past three years in the US, including six consecutive fiscal quarters of income. The Company also expects its US income in future years to realize its deferred tax assets, including realizing substantially all of its US net operating losses prior to their expiration dates. The Company considered these factors the be the most relevant to its assessment when weighing all available evidence, and concluded that it is now more-likely-than-not that its US deferred tax assets would be realized. As a result, the Company recorded a net $27.9 million reduction to its US valuation allowance, to bring the total US valuation allowance down to $0.5 million as of September 30, 2021.
In addition, the Company’s remaining $13.3 million of valuation allowances are on the deferred tax assets of in certain international jurisdictions, as negative evidence, including cumulative losses in recent years, continues to exist in those jurisdictions. See additional discussion of the valuation allowance within Note 10 - Income Taxes.
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 to the Company's consolidated financial statements in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for discussion of the Company's related accounting policies.
Cost of goods sold. Refer to Note 2 - Summary of Significant Accounting Policies to the Company's consolidated financial statements in Part IV, Item 15(a)(1) of this 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 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 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.
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Acquisition costs and impairment of goodwill and long-lived assets. Acquisition costs and impairment of goodwill and long-lived assets consist of expenses incurred to complete a business combination, and impairment of goodwill and long-lived assets.
Other operating expenses (income). Other operating expense includes the change in fair value of financial instruments and 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, net. Interest and other income, 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. During the years ended September 30, 2021, 2020, and 2019, the Company had an effective income tax rate of (84.74)%, (26.9)% and (6.6)%, respectively, which included federal, state and foreign income taxes.
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Results of Operations
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 gross profit margin for the periods indicated ($ in thousands):
| Year Ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| GovDeals: | ||||||||||||
| GMV | $ | 498,742 | $ | 325,993 | $ | 327,455 | ||||||
| Total revenue | 49,579 | 32,806 | 32,936 | |||||||||
| Gross profit | 47,030 | 30,721 | 30,386 | |||||||||
| Gross profit margin | 94.9 | % | 93.6 | % | 92.3 | % | ||||||
| RSCG: | ||||||||||||
| GMV | 229,290 | 181,473 | 156,096 | |||||||||
| Total revenue | 158,806 | 136,491 | 127,321 | |||||||||
| Gross profit | 64,564 | 49,727 | 44,967 | |||||||||
| Gross profit margin | 40.7 | % | 36.4 | % | 35.3 | % | ||||||
| CAG: | ||||||||||||
| GMV | 158,736 | 112,384 | 155,855 | |||||||||
| Total revenue | 39,645 | 29,481 | 60,242 | |||||||||
| Gross profit | 29,324 | 22,714 | 32,679 | |||||||||
| Gross profit margin | 74.0 | % | 77.0 | % | 54.2 | % | ||||||
| Machinio: | ||||||||||||
| GMV | — | — | — | |||||||||
| Total revenue | 9,559 | 7,213 | 5,598 | |||||||||
| Gross profit | 8,992 | 6,813 | 5,196 | |||||||||
| Gross profit margin | 94.1 | % | 94.4 | % | 92.8 | % | ||||||
| Corporate & Other, including elimination adjustments: | ||||||||||||
| GMV | — | — | 469 | |||||||||
| Total revenue | (57) | (51) | 428 | |||||||||
| Gross profit | (57) | (51) | 52 | |||||||||
| Gross profit margin | NM | NM | 12.2 | % | ||||||||
| Consolidated: | ||||||||||||
| GMV | 886,768 | 619,850 | 639,876 | |||||||||
| Total revenue | 257,531 | 205,940 | 226,525 | |||||||||
| Gross profit | 149,853 | 109,924 | 113,280 | |||||||||
| Gross profit margin | 58.2 | % | 53.4 | % | 50.0 | % |
NM = not meaningful
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Year Ended September 30, 2021 Compared to Year Ended September 30, 2020
Segment Results
GovDeals. Revenue from our GovDeals segment increased 51.1%, or $16.8 million, due to a 53.0%, or $172.7 million, increase in GMV from adding new sellers and increasing volumes with existing sellers across several key categories, including transportation and real estate, and an increase in recovery rates on assets sold, driven by our growing buyer base, automated asset promotion tools, and favorable macroeconomic factors in certain asset categories, such as transportation assets. The fiscal year ended September 30, 2020 also contained the negative impact of the economic restrictions put in place at the onset of the COVID-19 pandemic. As a result of the increase in revenues, gross profit increased 53.1%, or $16.3 million, and gross profit margin increased from 93.6% to 94.9%.
RSCG. Revenue from our RSCG segment increased 16.3%, or $22.3 million due to a 26.3%, or $47.8 million, increase in GMV driven by growing volumes within existing seller accounts and launching new programs with large and mid-sized and large retailers looking to capitalize on the secular growth in online retail. Revenues did not increase at the same rate as GMV due to an increase in the mix of transactions conducted under the consignment model. As a result of the increase in revenues, gross profit increased 29.8%, or $14.8 million. Gross profit margin increased from 36.4% to 40.7% due to an increase in the mix of transactions conducted under the consignment model and improved recovery rates on assets sold.
CAG. Revenue from the CAG segment increased by 34.5%, or $10.2 million due to a 41.2%, or $46.4 million increase in GMV due to continued growth of our industrial and heavy equipment categories, increases in principal transactions across the EMEA and Asia-Pacific regions, and increased use of the consignment model internationally. Revenues did not increase at the same rate as GMV due to increases in transactions using partner organizations and in the mix of transactions conducted under the consignment model. As a result of the increase in revenues, gross profit increased 29.1%, or $6.6 million. Gross profit margin decreased from 77.0% to 74.0%.
Machinio. Revenue from our Machinio segment increased 32.5%, or $2.3 million, due to an increase in subscription activity. As a result of the increase in revenues, gross profit increased 32.0%, or $2.2 million.
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Consolidated Results
The following table sets forth, for the periods indicated, our operating results (dollars in thousands):
| Year Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ Change | % Change | ||||||||||||
| Revenue | $ | 146,151 | $ | 127,580 | $ | 18,571 | 14.6 | % | |||||||
| Fee revenue | 111,380 | 78,360 | 33,020 | 42.1 | % | ||||||||||
| Total revenue | 257,531 | 205,940 | 51,591 | 25.1 | % | ||||||||||
| Costs and expenses from operations: | |||||||||||||||
| Cost of goods sold (excludes depreciation and amortization) | 107,678 | 96,016 | 11,662 | 12.1 | % | ||||||||||
| Technology and operations | 47,673 | 42,158 | 5,515 | 13.1 | % | ||||||||||
| Sales and marketing | 37,635 | 35,629 | 2,006 | 5.6 | % | ||||||||||
| General and administrative | 28,938 | 29,166 | (228) | (0.8) | % | ||||||||||
| Depreciation and amortization | 6,969 | 6,290 | 679 | 10.8 | % | ||||||||||
| Acquisition costs and impairment of goodwill and long-lived assets | 1,464 | 5 | 1,459 | NM | |||||||||||
| Other operating expenses | 6 | 573 | (567) | (99.0) | % | ||||||||||
| Total costs and expenses | 230,363 | 209,837 | 20,526 | 9.8 | % | ||||||||||
| Income (loss) from operations | 27,168 | (3,897) | 31,065 | NM | |||||||||||
| Interest and other income, net | (411) | (924) | 513 | (55.5) | % | ||||||||||
| Income (loss) before income taxes | 27,579 | (2,973) | 30,552 | NM | |||||||||||
| (Benefit) provision for income taxes | (23,370) | 801 | (24,171) | NM | |||||||||||
| Net income (loss) | $ | 50,949 | $ | (3,774) | $ | 54,723 | NM |
NM = not meaningful
Revenue. Total consolidated revenue increased $51.6 million, or 25.1%. Refer to the discussion of Segment Results above for discussion of the decrease in revenue.
Cost of goods sold (excludes depreciation and amortization). Cost of goods sold increased $11.7 million, or 12.1%, which changed at a lower rate than revenue primarily due to lower cost of sales associated with principal transactions, which benefited from higher recovery rates during the period, and an increase in the mix of transactions conducted under the consignment model.
Technology and operations expenses. Technology and operations expenses increased $5.5 million, or 13.1%, to support the increased transaction volumes in the RSCG and CAG segments.
Sales and marketing expenses. Sales and marketing expenses increased $2.0 million, or 5.6%, primarily due to increase in marketing expenses to promote our consolidated marketplace and expand market share in key verticals.
General and administrative expenses. General and administrative expenses were consistent between the year ended September 30, 2021 and 2020.
Depreciation and amortization. Depreciation and amortization expense increased $0.7 million, or 10.8%, due to an increase in amortization of capitalized software related to the continued development and enhancement of our marketplace platform and tools.
Interest and other income, net. Interest and other income, net increased $0.5 million, due the effect of changes in foreign exchange rates.
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Provision (benefit) for income taxes. Provision for income taxes decreased $24.2 million to a benefit of $23.4 million from an expense of $0.8 million due to a release of $27.9 million of valuation allowance netted against $3.3 million deferred tax expense and $1.2 million state and foreign income taxes. The Company's effective income tax rate was (84.7%) for the twelve months ended September 30, 2021. The 2021 effective tax rate differed from the statutory federal rate of 21.0% primarily as a result of the release of the valuation allowance on deferred tax assets and the impact of foreign, state, and local taxes and permanent tax adjustments.
Year Ended September 30, 2020 Compared to Year Ended September 30, 2019
Segment Results
GovDeals. Revenue from our GovDeals segment decreased 0.4%, or $0.1 million, due to a 0.4%, or $1.5 million, decrease in GMV primarily resulting from decreased activity due to limitations on government facility operations in response to the COVID-19 pandemic. These declines were mostly offset by increasing transaction activity as those facilities re-opened, as well as increased recovery rates on vehicles sales. Gross profit within this segment increased 1.1%, or $0.3 million, and gross profit margin increased from 92.3% to 93.6%, as fewer of the vehicles sold during the year ended September 30, 2020 required transportation costs to arrive at the point of sale.
RSCG. Revenue from our RSCG segment increased 7.2%, or $9.2 million due to a 16.3%, or $25.4 million, increase in GMV driven by growing volumes within existing seller accounts and launching new programs with large and mid-sized retailers. As a result of the increase in revenues, gross profit increased 10.6%, or $4.8 million. Gross profit margin increased from 35.3% to 36.4% due the improved margins on certain retail programs.
CAG. Revenue and GMV from the CAG segment decreased 51.1%, or $30.8 million, and 27.9%, or $43.5 million, respectively. The conclusion of the Scrap Contract caused revenue and GMV to each decline by $16.8 million. Excluding the impact of the completed Scrap Contract, revenue decreased by 32.3%, or $14.0 million, and GMV decreased by 19.2%, or $26.7 million. These declines were primarily driven by lower activity due to limitations on commercial facility operations and global travel restrictions in response to the COVID-19 pandemic. These restrictions had a larger impact on principal transactions than on transactions using our lower-touch consignment model. The declines were also influenced by a strong prior year performance with principal transactions in the Asia-Pacific region. Gross profit within the CAG segment decreased 30.5%, or $10.0 million, due to a $5.9 million impact from the completion of the Scrap Contract and the reduction in revenues. Gross profit margin increased from 54.2% to 77.0% due the completion of the Scrap Contract, which had lower gross profit margins than the remaining business, and due to the larger impact of the COVID-19 pandemic on principal transactions.
Machinio. Revenue from our Machinio segment increased 28.8%, or $1.6 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 31.1%, or $1.6 million.
Corporate & Other. The changes in revenue, GMV, gross profit and gross profit margin are primarily due to the Company's exit from the IronDirect business in January 2019. The activity for the year ended September 30, 2020 represents elimination adjustments.
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Consolidated Results
The following table sets forth, for the periods indicated, our operating results (dollars in thousands):
| Year Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ Change | % Change | ||||||||||||
| Revenue | $ | 127,580 | $ | 147,889 | $ | (20,309) | (13.7) | % | |||||||
| Fee revenue | 78,360 | 78,636 | (276) | (0.4) | |||||||||||
| Total revenue | 205,940 | 226,525 | (20,585) | (9.1) | |||||||||||
| Costs and expenses from operations: | |||||||||||||||
| Cost of goods sold (excludes depreciation and amortization) | 96,016 | 102,414 | (6,398) | (6.2) | |||||||||||
| Seller distributions | — | 10,831 | (10,831) | (100.0) | |||||||||||
| Technology and operations | 42,158 | 51,594 | (9,436) | (18.3) | |||||||||||
| Sales and marketing | 35,629 | 36,703 | (1,074) | (2.9) | |||||||||||
| General and administrative | 29,166 | 34,249 | (5,083) | (14.8) | |||||||||||
| Depreciation and amortization | 6,290 | 5,091 | 1,199 | 23.6 | |||||||||||
| Acquisition costs and impairment of goodwill and long-lived assets | 5 | 102 | (97) | (95.1) | |||||||||||
| Other operating expenses | 573 | 5,049 | (4,476) | (88.7) | |||||||||||
| Total costs and expenses | 209,837 | 246,033 | (36,196) | (14.7) | |||||||||||
| Income (loss) from operations | (3,897) | (19,508) | 15,611 | (80.0) | |||||||||||
| Interest and other income, net | (924) | (1,448) | 524 | (36.2) | |||||||||||
| Loss before income taxes | (2,973) | (18,060) | 15,087 | (83.5) | |||||||||||
| Provision for income taxes | 801 | 1,200 | (399) | NM | |||||||||||
| Net loss | $ | (3,774) | $ | (19,260) | $ | 15,486 | (80.4) | % |
NM = not meaningful
Total Revenue. Total consolidated revenue decreased $20.6 million, or 9.1%. Refer to the discussion of Segment Results above for discussion of the decrease in revenue.
Cost of goods sold. Cost of goods sold decreased $6.4 million, or 6.2%, primarily due to revenue declines in CAG, partially offset by the revenue increases in RSCG.
Seller distributions. Seller distributions decreased $10.8 million, or 100.0%, due to the completion of the Scrap Contract.
Technology and operations expenses. Technology and operations expenses decreased $9.4 million, or 18.3%. The decrease included $5.2 million due to the conclusion of the Scrap Contract in fiscal year 2019, $5.7 million reductions in Corporate and CAG (excluding the Scrap Contract) driven by benefits from restructuring and other organizational changes performed in fiscal 2019, and actions taken to reduce operating expenses in response to the COVID-19 pandemic. However, the impact of the actions taken to reduce our operating expenses in response to the COVID-19 pandemic will lessen as business conditions continue to recover. These decreases were partially offset by a $1.5 million increase in RSCG and GovDeals driven by increased customer support and operations expenses from the continued growth in those segments.
Sales and marketing expenses. Sales and marketing expenses decreased $1.1 million, or 2.9%, due to actions taken to reduce operating expenses in response to the COVID-19 pandemic in the year ended September 30, 2020, partially offset by increased marketing expenses to promote our new e-commerce technology platform and consolidated marketplace. However, the impact of the action taken in response to COVID-19 on our operating expense levels will lessen as business conditions continue to recover.
General and administrative expenses. General and administrative expenses decreased $5.1 million, or 14.8%, and was impacted by actions taken to reduce operating expenses in response to the COVID-19 pandemic in the year ended September 30, 2020, benefits from restructuring and other organizational changes performed in fiscal 2019, and the completion of the Scrap Contract in fiscal 2019. The impact of the actions taken to reduce operating expenses in response to the COVID-19 pandemic will lessen as business conditions continue to recover.
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Depreciation and amortization expenses. Depreciation and amortization expenses increased $1.2 million, or 23.6%, primarily due the launch of our new e-commerce technology platform and related change of useful lives of internally developed software for internal-use, both occurring in the fourth quarter of fiscal 2019.
Acquisition costs and impairment of goodwill and long-lived assets. Acquisition costs and impairment of goodwill and long-lived assets were not significant for the years ended September 30, 2020 and 2019.
Other operating expense. Other operating expense of $0.6 million represents $0.4 million of business realignment expenses that were incurred related to the elimination of certain positions in response to the COVID-19 pandemic, and a $0.2 million increase in fair value of the Machinio earn-out liability. Other operating expense of $5.0 million during the year ended September 30, 2019 includes $1.6 million of business realignment expenses, and a $3.5 million increase in the fair value of the Machinio earn-out liability.
Interest and other income, net. Interest and other income, net, declined $0.5 million, primarily due to a decline in the holdings of short-term investments and also in their interest rates.
Provision for income taxes. Income taxes decreased $0.4 million, to an expense of $0.8 million for the year ended September 30, 2020, from an expense of $1.2 million for the year ended September 30, 2019 due to lower state tax expense and the release of $0.2 million of unrecognized tax benefits related to foreign operations. The Company’s effective income tax rate was (26.9)% for the twelve months ended September 30, 2020. The fiscal 2020 effective tax rate differed from the statutory federal rate of 21.0% primarily as a result of the valuation allowance on deferred tax assets, state taxes, and the impact of permanent tax adjustments.
Net loss. Net loss for the year ended September 30, 2020, decreased $15.5 million, to $3.8 million, compared to a loss of $19.3 million for the year ended September 30, 2019, due to the reasons described above.
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 of September 30, 2021, we had $106.3 million in cash and cash equivalents.
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.
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. As a result of our actions taken in response to these headwinds, the Company’s cash and cash equivalents balance is $106.3 million as of September 30, 2021, which we believe is sufficient to meet the Company’s anticipated cash needs one year from issuance of these financial statements.
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.
As incentive for Company and employee performance as based on certain management objectives, the Company may pay a cash bonus to its employees at management's discretion. Further, as described in Note 9 - 401(k) Benefit Plan, our 401(k) Plan also allows the Company to make discretionary matching contributions. We do not expect these matters to have a material impact on our liquidity.
We did not record a provision for deferred U.S. tax expense on the undistributed earnings of foreign subsidiaries because we intend to indefinitely reinvest the earnings of these foreign subsidiaries outside the United States. The amount of such undistributed foreign earnings was $6.9 million as of September 30, 2021. As of September 30, 2021, and September 30, 2020, $22.4 million and $19.5 million, respectively, of cash and cash equivalents was held outside of the U.S.
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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.
As of the fiscal year ended September 30, 2020, we had $6.1 million of remaining share repurchase authorization. On March 8, 2021, our Board of Directors authorized an additional $10 million of share repurchases of the Company's outstanding shares of common stock through March 31, 2023. We repurchased 957,079 shares for $16.1 million under this program during the six months ended March 31, 2021.
On May 3, 2021, the Company's Board of Directors authorized a new stock repurchase plan (the “May 3, 2021 Stock
Repurchase Plan”) of up to $15 million of our outstanding shares of common stock through June 30, 2023. We repurchased 634,884 shares for $15.0 million under this program during the year ended September 30, 2021. As of September 30, 2021, we had no share repurchase authorization remaining. On December 6, 2021, the Company's Board of Directors authorized the repurchase of up to $20.0 million of the Company's outstanding shares of common stock through December 31, 2023.
On November 1, 2021, the Company entered into a definitive agreement to purchase all of the issued and outstanding shares of stock of Bid4Assets, Inc. (Bid4Assets), a pioneer in internet-based public auctions of real property. Upon closing, the Company paid $15 million in cash, including the assumption of a minimum working capital amount of $0.3 million. Shareholders of Bid4Assets are eligible to receive earn-out consideration of up to $37.5 million in cash, payable based on Bid4Assets' achievement of certain EBITDA targets measured as of each trailing twelve-month period and determined at the end of each calendar quarter, for the period from October 1, 2021 until the quarter ended December 31, 2022. See Note 17 - Subsequent Events for more information regarding this transaction.
Changes in Cash Flows: 2021 Compared to 2020
Net cash provided by operating activities was $65.4 million and $16.5 million for the year ended September 30, 2021 and 2020, respectively. The $48.9 million increase in cash provided by operations between periods was attributable to $33.2 million of higher net income as adjusted for non-cash items; changes in payables to sellers, driven by increasing transaction volumes; changes to accounts payable, accrued expenses and other liabilities driven by increasing transaction volumes and management of working capital; and partially offset by a $7.0 million increase in inventory driven by the continued growth in our RSCG and CAG segments. 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. However, there have been no significant changes to the working capital requirements for the Company.
Net cash provided by (used in) investing activities was $(1.0) million for the year ended September 30, 2021, and $28.6 million for the year ended September 30, 2020. The $(29.7) million decrease in cash provided by investing activities was driven by a $30.0 million net impact of maturities of Short-term investments as the Company transitioned to using cash equivalent money market funds in its treasury strategy. This activity was partially offset by a $1.5 million increase in proceeds of principal payments from the JTC promissory note during the year ended September 30, 2021 due to receipt of $3.5 million from the First Amendment to the Forbearance Agreement with JTC as discussed in Note 2 - Summary of Significant Accounting Policies.
Net cash used in financing activities was $(34.7) million for the year ended September 30, 2021, and $(5.7) million for the year ended September 30, 2020. The $29.0 million increase in cash used by financing activities primarily driven by $27.2 million to repurchase common stock and a $3.3 million increase in taxes paid associated with net settlement of stock compensation awards, primarily from the vesting of awards with market conditions due to the achievement of increases in the Company's share price.
Changes in Cash Flows: 2020 Compared to 2019
Net cash provided by (used in) operating activities was $16.5 million and $(6.2) million for the year ended September 30, 2020 and 2019, respectively. The $22.7 million increase in cash provided by operations between periods was to attributable changes in accounts payable and payables to sellers driven by timing of payments, including an increase in the seller settlement cycle for sellers being paid by check due to the COVID-19 pandemic; and $12.5 million of lower net loss as adjusted for non-cash items, including the impact of temporary cost control measures. These changes were partially offset by the $3.8 million portion of the Machinio earn-out payment associated with its increase in value post-acquisition, and the 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
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our buyers and sellers. However, the Company expects to use working capital in the near-term as activity in payables to seller normalizes, and as the Company makes its annual bonus payments in the first quarter of fiscal 2021.
Net cash provided by (used in) investing activities was $28.6 million for the year ended September 30, 2020, and $(15.7) million for the year ended September 30, 2019. The $44.4 million increase in cash provided by investing activities was driven by a $40.0 million increase in activity related to short-term investments which are used to manage the Company's excess cash balances, and $2.8 million of principal payments on the promissory note issued to JTC. The Company continued to monitor for changes that could impact the recoverability of the promissory note, which was dependent upon JTC's subsequent operating performance and ability to make the payments required by the new repayment schedule. JTC made all of its scheduled payments during the year ended September 30, 2020.
Net cash (used in) provided by financing activities was $(5.7) million for the year ended September 30, 2020, and $0.5 million for the year ended September 30, 2019. The $6.2 million increase in cash used by financing activities consisted of $4.0 million to repurchase common stock, $1.2 million as the portion of the Machinio earn-out payment that represented its fair value at the date of acquisition, and a $0.6 million increase in taxes paid associated with net settlement of stock compensation awards.
Capital Expenditures
Capital expenditures. Our capital expenditures consist primarily of capitalized software, warehouse equipment, 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 year ended September 30, 2021 were $5.4 million. As of September 30, 2021, 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. We may seek to enter agreements with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expense and could result in covenants that would restrict our operations. There is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.
New Accounting Pronouncements
Information regarding our adoption of new accounting and reporting standards is discussed in Note 2 to the consolidated financial statements included in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K.