Liquidity Services 10Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-51813

LIQUIDITY SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware						52-2209244
(State or Other Jurisdiction of						(I.R.S. Employer
Incorporation or Organization)						Identification No.)

6931 Arlington Road, Suite 200, Bethesda, MD						20814
(Address of Principal Executive Offices)						(Zip Code)

(202) 467-6868

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Securities registered to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value

LQDT

Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐						Accelerated filer ☒

Non-accelerated filer ☐						Smaller reporting company ☐

						Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of August 1, 2022 was 35,584,486.

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statement of Stockholders' Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to the Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 5.	Other Information	40

Item 6.	Exhibits	42

SIGNATURES		43

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Liquidity Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in Thousands, Except Par Value)


	June 30, 2022		September 30, 2021
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	88,286	$	106,335

Accounts receivable, net of allowance for doubtful accounts of $383 and $490	8,127		5,866
Inventory, net	14,355		12,468
Prepaid taxes and tax refund receivable	1,489		1,713
Prepaid expenses and other current assets	8,083		5,460
Total current assets	120,340		131,842
Property and equipment, net of accumulated depreciation of $23,018 and $18,558	19,025		17,634
Operating lease assets	14,400		13,478
Intangible assets, net	17,237		3,453
Goodwill	89,247		59,872
Deferred tax assets	16,689		23,822
Other assets	5,872		5,475
Total assets	$	282,810	$	255,576
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	47,206	$	40,611
Accrued expenses and other current liabilities	24,799		25,975
Current portion of operating lease liabilities	4,644		4,250

Deferred revenue	4,920		4,624
Payables to sellers	45,322		33,713
Total current liabilities	126,891		109,173
Operating lease liabilities	10,836		10,098
Other long-term liabilities	414		1,290
Total liabilities	138,141		120,561
Commitments and contingencies (Note 13)	0		0
Stockholders’ equity:
Common stock, $0.001 par value; 120,000,000 shares authorized; 35,576,454 shares issued and outstanding at June 30, 2022; 35,457,095 shares issued and outstanding at September 30, 2021	36		35
Additional paid-in capital	256,572		252,017
Treasury stock, at cost; 3,794,038 shares at June 30, 2022 and 2,222,083 shares at September 30, 2021	(62,176)		(36,628)
Accumulated other comprehensive loss	(10,481)		(9,011)
Accumulated deficit	(39,282)		(71,398)
Total stockholders’ equity	144,669		135,015
Total liabilities and stockholders’ equity	$	282,810	$	255,576

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Liquidity Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Dollars in Thousands, Except Per Share Data)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
	(Unaudited)
Purchase revenues	$	35,507	$	37,862	$	109,109	$	104,902
Consignment and other fee revenues	34,359		31,804		95,739		82,302
Total revenues	69,866		69,666		204,848		187,204
Costs and expenses from operations:
Cost of goods sold (excludes depreciation and amortization)	28,932		28,543		85,662		77,501

Technology and operations	13,782		12,307		41,573		34,952
Sales and marketing	10,900		9,661		32,217		27,679
General and administrative	6,389		7,676		21,672		21,578
Depreciation and amortization	2,641		1,705		7,546		5,246
Fair value adjustments of acquisition earn-outs	(11,500)		—		(20,000)		—
Other operating expenses, net	27		1,180		18		1,390
Total costs and expenses	51,171		61,072		168,688		168,346
Income from operations	18,695		8,594		36,160		18,858
Interest and other expenses (income), net	104		(254)		(73)		(468)
Income before provision for income taxes	18,591		8,848		36,233		19,326
Provision for income taxes	2,183		429		4,254		1,133
Net income	$	16,408	$	8,419	$	31,979	$	18,193
Basic income per common share	$	0.51	$	0.25	$	0.98	$	0.55
Diluted income per common share	$	0.50	$	0.24	$	0.94	$	0.52
Basic weighted average shares outstanding	31,908,864		33,371,906		32,482,326		33,345,580
Diluted weighted average shares outstanding	33,078,568		35,437,761		34,013,233		35,006,898

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Liquidity Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Dollars in Thousands)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
	(Unaudited)
Net income	$	16,408	$	8,419	$	31,979	$	18,193
Other comprehensive (loss) income:
Foreign currency translation	(1,170)		23		(1,470)		1,042
Other comprehensive (loss) income	(1,170)		23		(1,470)		1,042
Comprehensive income	$	15,238	$	8,442	$	30,509	$	19,235

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Liquidity Services, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(Dollars In Thousands)


	Common Stock					Treasury Stock
	Shares	Amount		Additional Paid-in Capital		Shares	Amount		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total
	(Unaudited)
Balance at September 30, 2021	35,457,095	$	35	$	252,017	(2,222,083)	$	(36,628)	$	(9,011)	$	(71,398)	$	135,015
Net income	—	—		—		—	—		—		3,602		3,602
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units	131,070	1		—		—	—		—		—		1
Taxes paid associated with net settlement of stock compensation awards	(40,239)	—		(851)		—	—		—		—		(851)
Forfeitures of restricted stock awards	(14,855)	—		—		—	—		—		—		—
Common stock repurchased	—	—		—		(147,185)	(2,963)		—		—		(2,963)
Common stock surrendered in the exercise of stock options	—	—		100		(4,678)	(100)		—		—		—
Stock compensation expense	—	—		2,270		—	—		—		—		2,270
Foreign currency translation and other	—	—		—		—	—		(131)		136		5
Balance at December 31, 2021	35,533,071	$	36	$	253,536	(2,373,946)	$	(39,691)	$	(9,142)	$	(67,660)	$	137,079
Net income	—	—		—		—	—		—		11,970		11,970
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units	320,943	—		—		—	—		—		—		—
Taxes paid associated with net settlement of stock compensation awards	(47,124)	—		(958)		—	—		—		—		(958)
Forfeitures of restricted stock awards	(242,902)	—		—		—	—		—		—		—
Common stock repurchased	—	—		—		(1,011,881)	(17,035)		—		—		(17,035)

Stock compensation expense	—	—		2,102		—	—		—		—		2,102
Foreign currency translation	—	—		—		—	—		(169)		—		(169)
Balance at March 31, 2022	35,563,988	$	36	$	254,680	(3,385,827)	$	(56,726)	$	(9,311)	$	(55,690)	$	132,989
Net income	—	—		—		—	—		—		16,408		16,408
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units	18,373	—		—		—	—		—		—		—
Taxes paid associated with net settlement of stock compensation awards	(5,907)	—		(92)		—	—		—		—		(92)

Common stock repurchased	—	—		—		(408,211)	(5,450)		—		—		(5,450)

Stock compensation expense	—	—		1,984		—	—		—		—		1,984
Foreign currency translation and other	—	—		—		—	—		(1,170)		—		(1,170)
Balance at June 30, 2022	35,576,454	$	36	$	256,572	(3,794,038)	$	(62,176)	$	(10,481)	$	(39,282)	$	144,669

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Liquidity Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars In Thousands)


	Nine Months Ended June 30,
	2022		2021
	(Unaudited)
Operating activities
Net income	$	31,979	$	18,193
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,546		5,246
Stock compensation expense	6,156		5,793
Inventory adjustment to net realizable value	98		—
Provision for doubtful accounts	68		269
Deferred tax provision	3,410		96
(Gain) loss on disposal of property and equipment	(29)		87
Gain on termination of lease	(240)		—
Impairment of long-lived and other assets	31		1,338
Change in fair value of earn-out liability	(20,000)		—
Changes in operating assets and liabilities:
Accounts receivable	(2,215)		(420)
Inventory	(1,985)		(8,192)
Prepaid and deferred taxes	224		57
Prepaid expenses and other assets	(2,788)		(2,477)
Operating lease assets and liabilities	451		5
Accounts payable	6,635		17,791
Accrued expenses and other current liabilities	(5,955)		2,242


Deferred revenue	296		1,262
Payables to sellers	8,233		13,256
Other liabilities	(778)		(275)
Net cash provided by operating activities	31,137		54,271
Investing activities
Cash paid for business acquisition, net of cash acquired	(11,164)		—
Purchases of property and equipment, including capitalized software	(6,292)		(3,488)
Increase in intangibles	(19)		(23)
Proceeds from sales of property and equipment	42		68
Proceeds from promissory note	—		4,343


Net cash (used in) provided by investing activities	(17,433)		900
Financing activities
Payments of the principal portion of finance lease liabilities	(75)		(35)
Payment of debt issuance costs	(91)		—
Taxes paid associated with net settlement of stock compensation awards	(1,901)		(3,545)
Proceeds from exercise of stock options	—		353
Payment of earnout liability related to business acquisition	(3,500)		—
Common stock repurchased	(25,447)		(16,143)
Net cash used in financing activities	(31,014)		(19,370)
Effect of exchange rate differences on cash and cash equivalents	(739)		829
Net (decrease) increase in cash and cash equivalents	(18,049)		36,630
Cash and cash equivalents at beginning of period	106,335		76,036
Cash and cash equivalents at end of period	$	88,286	$	112,666
Supplemental disclosure of cash flow information
Cash paid for income taxes, net	$	592	$	907

Non-cash: Earnout liability for acquisition activity	$	4,500	$	—
Non-cash: Common stock surrendered in the exercise of stock options	$	100	$	1,502

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Organization

Liquidity Services, Inc. (the Company) 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.

Results from our operations are organized into 4 reportable segments: Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), GovDeals, and Machinio. See Note 14 - Segment Information for more information.

We were incorporated in Delaware in November 1999 as Liquidation.com, Inc. and commenced operations in early 2000.

On November 1, 2021, the Company purchased all of the issued and outstanding shares of stock of 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 3 - Bid4Assets Acquisition for more information regarding this transaction.

The Company's operations are subject to certain risks and uncertainties, many of which are associated with technology-oriented companies, including, but not limited to, the Company's dependence on use of the Internet; the effect of general business and economic trends including any future economic impact from the COVID-19 pandemic, inflationary pressures, and impacts from interest rate changes; the Company's susceptibility to rapid technological change; actual and potential competition by entities with greater financial and other resources; and the potential for the commercial sellers from which the Company derives a significant portion of its inventory to change the way they conduct their disposition of surplus assets or to otherwise terminate or not renew their contracts with the Company.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal, recurring adjustments considered necessary for a fair presentation, have been included, and intercompany transactions and accounts have been eliminated in consolidation. The information disclosed in the notes to the condensed consolidated financial statements for these periods is unaudited. Operating results for the three and nine months ended June 30, 2022, are not necessarily indicative of the results that may be expected for the year ending September 30, 2022, or for any future period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts in the condensed consolidated financial statements and accompanying notes. For the three and nine months ended June 30, 2022, these estimates required the Company to make assumptions about the extent and duration of restrictions on cross-border transactions and the impact of the COVID-19 pandemic on macroeconomic conditions and, in turn, the Company's results of operations. As there remains uncertainty associated with the COVID-19 pandemic, the Company will continue to update its assumptions as conditions change. Actual results could differ significantly from those estimates.

Contract Assets and Liabilities

Contract assets reflect an estimate of expenses that will be reimbursed upon settlement with a seller. The contract asset balance was $0.9 million as of June 30, 2022, and $0.6 million as of September 30, 2021, and is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

Contract liabilities reflect obligations to provide services for which the Company has already received consideration, and generally arise from up-front payments received in connection with Machinio's subscription services. The contract liability balance was $4.9 million as of June 30, 2022, and $4.6 million as of September 30, 2021, and is included in the line item Consignment and other fee revenue on the Condensed Consolidated Balance Sheets. Of the September 30, 2021, contract liability balance, $4.3 million was earned as Other fee revenue during the nine months ended June 30, 2022.

Performance obligations for Machinio's subscription services are satisfied over time as the Company provides the services over the term of the subscription. As of June 30, 2022, the Company has a remaining performance obligation of $4.9 million for these subscription services, and the Company expects to recognize the substantial majority of that amount as Other fee revenue over the next 12 months.

Contract Costs

Contract costs relate to sales commissions paid on subscription contracts that are capitalized. Contract costs are amortized over the expected life of the customer contract. The contract cost balance was $1.8 million as of June 30, 2022, and $1.6 million as of September 30, 2021, and is included in the line items Prepaid expenses and other current assets and Other assets on the Condensed Consolidated Balance Sheets. Amortization expense was $0.3 million and $0.8 million during the three and nine months ended June 30, 2022, respectively, and $0.2 million and $0.5 million during the three and nine months ended June 30, 2021, respectively.

Other Assets - Promissory Note

On September 30, 2015, the Company sold certain assets related to its Jacobs Trading business to Tanager Acquisitions, LLC (Tanager). In connection with the disposition, Tanager assumed certain liabilities related to the Jacobs Trading business. Tanager issued a $12.3 million five-year interest-bearing promissory note to the Company.

On October 10, 2019, the Company entered into a Forbearance Agreement and Amendment to Note, Security Agreement and Guaranty Agreement (the "Forbearance Agreement") with Tanager (now known as Jacobs Trading, LLC) and certain of its affiliates (collectively, "JTC"). In exchange for additional collateral, security, and a higher interest rate, the Company granted JTC a new repayment schedule that requires quarterly payments to be made from August 2020 to August 2023. Upon execution of the Forbearance Agreement, JTC repaid $2.5 million in principal plus $0.4 million in accrued interest. As of March 31, 2021, JTC had repaid $7.7 million of the $12.3 million owed to the Company and had an outstanding principal balance of $4.6 million.

On May 13, 2021, the Company entered into the First Amendment to the Forbearance Agreement with JTC, providing JTC with full satisfaction and discharge from its indebtedness upon receipt of a $3.5 million payment made on May 17, 2021. As a result, the Company recorded a $1.1 million loss as a component of Other operating expenses, net in its Condensed Consolidated Statement of Operations during the three months ended June 30, 2021, representing the difference between the $4.6 million outstanding balance of principal and accrued interest and the $3.5 million payment received. There was no impact on the unaudited financial statements from this transaction as of and for the three and nine months ended June 30, 2022.

Risk Associated with Certain Concentrations

For the majority of buyers that receive goods before payment to the Company is made, credit evaluations are performed. However, for the remaining buyers, goods are not shipped before payment is made, and as a result the Company is not subject to significant collection risk from those buyers.

For consignment sales transactions, funds are typically collected from buyers and are held by the Company on the sellers' behalf. The funds are included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company releases the funds to the seller, less the Company's commission and other fees due, through Accounts payable after the buyer has accepted the goods or within 30 days, depending on the state where the buyer and seller conduct business.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash in banks within interest bearing and earnings allowance checking accounts, as well as cash equivalent money market funds, all of which may at times exceed federally insured limits (FDIC and/or SIPC), and Accounts receivable. The Company deposits its cash in interest bearing checking accounts, or acquires cash equivalent money market funds, each with financial institutions that the Company considers to be of high credit quality.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

Additionally, the Company has multiple vendor contracts with Amazon.com, Inc. under which the Company acquires and sells commercial merchandise. 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 ended June 30, 2022, and 2021, respectively, and 57.7% and 61.7% of consolidated Cost of goods sold for the nine months ended June 30, 2022, and 2021, respectively. These contracts are included within the RSCG reportable segment.

Recent Accounting Pronouncements

Accounting Standards Adopted

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The Company adopted the new standard on a prospective basis effective October 1, 2021. This accounting standard has not had a material impact on the Company's condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), or Accounting Standards Codification (ASC) 326. ASC 326, including all amendments and related guidance, was designed to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASC 326 will require estimation of expected credit losses using a methodology that takes into consideration a broad range of reasonable and supportable information. The guidance will be effective for the Company beginning on October 1, 2023 and will be applied on a modified-retrospective basis, with any cumulative-effect adjustment recorded to retained earnings on the adoption date. The Company is in the process of evaluating the impact ASC 326 will have on its condensed consolidated financial statements and expects to estimate credit losses on its financial assets such as its Accounts receivable. While the Company has not experienced significant credit losses historically, the materiality of the impact of adoption will depend on events and conditions as of the date of adoption, which cannot be determined conclusively at this time.

3. Bid4Assets Acquisition

On November 1, 2021, the Company purchased all of the issued and outstanding shares of stock of Bid4Assets, Inc. (Bid4Assets), a Maryland corporation. Bid4Assets is a leading online marketplace focused on conducting real property auctions for the government, including tax foreclosure sales and sheriff's sales. The results of Bid4Assets' operations are included within our GovDeals reportable segment and reporting unit.

As of June 30, 2022, the Company's purchase price allocation related to this acquisition is preliminary and subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The revisions may have a significant impact on our condensed consolidated financial statements. The allocation of the purchase price will be finalized once all information that was known and knowable as of the acquisition date is obtained and analyzed, but not to exceed one year from the acquisition date.

The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income taxes, the valuation of intangible assets acquired and earn-out liability, and the residual goodwill. The preliminary amounts assigned to intangible assets by type for this acquisition were based upon our valuation model and historical experiences with entities with similar business characteristics. During the three months ended March 31, 2022, we recorded a measurement period adjustment of $1.1 million for the earn-out consideration fair value with a corresponding increase to Goodwill, based on facts and circumstances in existence as of the effective date of the acquisition related to the discount rates associated with the expected earn-out payments. This resulted in a change to the total consideration transferred and goodwill balance seen below as compared to our previously reported preliminary purchase accounting results as of December 31, 2021.

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 $28.0 million. Former shareholders of Bid4Assets are eligible to receive earn-out consideration of 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 ended December 31, 2022.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

The Company's preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the Bid4Assets acquisition date of November 1, 2021, is as follows:


(in thousands)	Fair Value
Cash and cash equivalents	$	3,576
Intangible assets	16,500
Other assets	346
Total assets acquired	20,422
Payables to sellers	3,715
Operating lease liabilities	204
Deferred tax liabilities	3,724
Total liabilities assumed	7,642
Net identifiable assets acquired	$	12,780
Goodwill	29,960
Total consideration transferred	$	42,739

The excess of purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The goodwill associated with our acquisition includes the acquired assembled work force, and the value associated with the opportunity to leverage the workforce to continue to grow by adding additional customer relationships or new solutions in the future. Based on management's preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, goodwill of approximately $30.0 million was recorded. The total goodwill arising from the acquisition is included in the GovDeals reportable segment and reporting unit and is not deductible for tax purposes.

The known intangible assets acquired were determined to consist of, and preliminarily fair valued at, the following:


(in thousands)	Useful Life (in years)	Fair Value
Contract intangibles	8	$	13,900
Developed software	3	2,200
Trade name	3	400
Total identifiable intangible assets		$	16,500

Contract Intangibles

We recorded contract intangibles separately from goodwill based upon determination of the length, strength, and contractual nature of the relationship that Bid4Assets shared with its suppliers. 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. We are amortizing the contract intangibles, preliminarily valued at $13.9 million, on a straight-line basis over a useful life of eight years, which is materially consistent with the expected pattern of economic benefit.

Developed Software

Developed software primarily consists of intellectual property of the Bid4Assets e-commerce marketplace and associated mailing lists. 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. We are amortizing the acquired developed technology, preliminarily valued at $2.2 million, on a straight-line basis over a useful life of three years, which is materially consistent with the expected pattern of economic benefit.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

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. We are amortizing the trade name, preliminarily valued at $0.4 million, on a straight-line basis over a useful life of three years, which is materially consistent with the expected pattern of economic benefit.

Contingent Consideration

During the nine months ended June 30, 2022, and as a result of the acquisition of Bid4Assets, the Company recorded preliminary contingent consideration in the amount of $28.0 million on its Condensed Consolidated Balance Sheets. See further discussion of this matter within Note 11 - Fair Value Measurement.

Other Information

Revenue, net income (loss), and pro forma information related to the Bid4Assets acquisition was immaterial to the condensed consolidated financial statements and its related notes for the three and nine months ended June 30, 2022.

4. Earnings per Share

Basic net income per share is computed by dividing Net income for the period by the weighted average number of shares outstanding during the period. Diluted net income per share is computed by dividing Net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The calculation of Diluted net income per share excludes all anti-dilutive common shares.

The computation of Basic and Diluted net income per share is as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
Numerator:
Net income	$	16,408	$	8,419	$	31,979	$	18,193
Denominator:
Basic weighted average shares outstanding	31,908,864		33,371,906		32,482,326		33,345,580
Dilutive impact of stock options, RSUs and RSAs	1,169,704		2,065,855		1,530,907		1,661,318
Diluted weighted average shares outstanding	33,078,568		35,437,761		34,013,233		35,006,898
Basic income per common share	$	0.51	$	0.25	$	0.98	$	0.55
Diluted income per common share	$	0.50	$	0.24	$	0.94	$	0.52
Stock options, RSUs and RSAs excluded from income (loss) per diluted share because their effect would have been anti-dilutive	1,303,147		198,308		1,290,073		592,588

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

5. Leases

The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up to 4.6 years. Some of the leases have options to extend or terminate the leases. The exercise of such options is generally at the Company’s discretion. The lease agreements do not contain any significant residual value guarantees or restrictive covenants. The Company also subleases excess corporate office space. The Company's finance leases and related balances are not significant.

The components of lease expense are:


	Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Finance lease – lease asset amortization	$	19	$	18	$	61	$	50
Finance lease – interest on lease liabilities	5		4		15		14
Operating lease cost	1,406		1,218		4,318		3,873
Operating lease impairment expense	—		—		—		172
Short-term lease cost	101		45		218		166
Variable lease cost (1)	405		360		958		1,178
Sublease income	(22)		(34)		(90)		(141)
Total net lease cost	$	1,914	$	1,611	$	5,480	$	5,312

(1) Variable lease costs primarily relate to the Company's election to combine non-lease components such as common area maintenance, insurance and taxes related to its real estate leases. To a lesser extent, the Company's equipment leases have variable costs associated with usage and subsequent changes to costs based upon an index.

Maturities of lease liabilities are:


	June 30, 2022
(in thousands)	Operating Leases		Finance Leases
2022	$	1,408	$	29
2023	5,293		117
2024	4,392		97
2025	3,600		69
2026	2,139		66
Thereafter	396		12
Total lease payments (1)	$	17,228	$	390
Less: imputed interest (2)	(1,748)		(39)
Total lease liabilities	$	15,480	$	351

(1) The weighted average remaining lease term is 3.5 years for operating leases and 3.8 years for finance leases.

(2) The weighted average discount rate is 6.2% for operating leases and 5.5% for finance leases.

Supplemental disclosures of cash flow information related to leases are:


	Nine Months Ended June 30,
(in thousands)	2022		2021
Cash paid for amounts included in operating lease liabilities	$	3,190	$	3,225
Cash paid for amounts included in finance lease liabilities	75		35
Non-cash: lease liabilities arising from new operating lease assets obtained	4,664		885
Non-cash: lease liabilities arising from new finance lease assets obtained	179		130
Non-cash: adjustments to lease assets and liabilities1	(196)		3,705

(1) These include adjustments due to lease modifications, renewals, and other related adjustments.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

6. Goodwill

The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows:


(in thousands)	CAG		GovDeals		Machinio		Total
Balance at September 30, 2020	$	21,550	$	23,731	$	14,558	$	59,839
Translation adjustments	33		—		—		33
Balance at September 30, 2021	$	21,583	$	23,731	$	14,558	$	59,872
Bid4Assets acquisition (see Note 3)	—		29,960		—		29,960
Translation adjustments	(585)		—		—		(585)
Balance at June 30, 2022	$	20,998	$	53,691	$	14,558	$	89,247

The increase in the goodwill balance of approximately $30.0 million at the GovDeals reportable segment and reporting unit during the nine months ended June 30, 2022, is due to the Bid4Assets acquisition. See Note 3 - Bid4Assets Acquisition for further information.

Goodwill is tested for impairment at the beginning of the fourth quarter and during interim periods whenever events or circumstances indicate that the carrying value may not be recoverable. As discussed in Note 11 – Fair Value Measurement, the fair value of the Bid4Assets earn-out liability declined by $11.5 million during the three months ended June 30, 2022, due to timing changes impacting the level of auction events and transactions that are expected to occur during the earn-out period ending December 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 of June 30, 2022. The Company has also continued to evaluate the impact of the COVID-19 pandemic and other ongoing macroeconomic disruptions on the recoverability of its goodwill. The Company did not identify any indicators of impairment that required an interim goodwill impairment test during the nine months ended June 30, 2022.

7. Intangible Assets

Intangible assets consist of the following:


		June 30, 2022						September 30, 2021
(in thousands)	Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Contract intangibles	6 - 8	17,000		(3,225)		13,775		3,100		(1,679)		1,421
Technology	3 - 5	5,300		(2,738)		2,562		2,700		(1,755)		945
Patent and trademarks	3 - 10	2,379		(1,480)		899		2,360		(1,273)		1,087
Total intangible assets		$	24,679	$	(7,443)	$	17,236	$	8,160	$	(4,707)	$	3,453

The gross carrying amount of total intangible assets increased by $16.5 million during the nine months ended June 30, 2022, primarily due to the Bid4Assets acquisition. The acquired developed software and trade name are included in the above line items of Technology and Patent and trademarks, respectively. See Note 3 - Bid4Assets Acquisition for further information.

Future expected amortization of intangible assets at June 30, 2022, is as follows:


(in thousands)	Expected Amortization Expense
Years ending September 30,
Remainder of 2022	$	983
2023	3,792
2024	3,255
2025	2,014
2026 and thereafter	7,192

Total	$	17,236

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

Intangible asset amortization expense was $1.0 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively, and $2.7 million and $1.0 million for the nine months ended June 30, 2022 and 2021, respectively. The increase in intangible amortization expense was primarily due to the Bid4Assets acquisition.

The Company has continued to evaluate the impact of the COVID-19 pandemic, ongoing macroeconomic disruptions, and the subsequent financial performance of Bid4Assets, on the recoverability of its long-lived assets. The Company did not identify any indicators of impairment requiring an interim impairment test on material long-lived assets during the three and nine months ended June 30, 2022.

8. Income Taxes

The Company’s interim effective income tax rate is based on management’s best current estimate of the Company's expected annual effective income tax rate. The Company recorded pre-tax income in the first nine months of fiscal year 2022 and its corresponding effective tax rate is 11.7% compared to 5.9% for the first nine months of fiscal year 2021. The change in the effective tax rate for the nine months ended June 30, 2022, as compared to the same period in the prior year was primarily due to state and foreign taxes, and the utilization of net operating losses. The effective tax rate differed from the U.S. 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.

The Company applies the authoritative guidance related to uncertainty in income taxes. ASC 740, Income Taxes, states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of technical merits. The Company identified no new uncertain tax positions during the nine months ended June 30, 2022. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the United Kingdom. As of June 30, 2022, the Company has no open income tax examinations in the U.S. and the statute of limitations for years prior to 2018 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal year 2018 may be adjusted upon examination by tax authorities if they are utilized.

9. Debt

On February 10, 2022, the Company entered into a credit facility agreement (Credit Agreement) with Wells Fargo Bank, N.A. Terms of the Credit Agreement provide for revolving loans (Line of Credit) up to a maximum aggregate principal amount of $25.0 million with a $10.0 million sublimit for standby letters of credit. The Credit Agreement ends on March 31, 2024, at which time any remaining amounts outstanding are due immediately.

The applicable interest rate on any draws under the Line of Credit 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. The Company pays an Unused Commitment Fee, on a quarterly basis, equal to 0.05% per annum on the daily amount of the Line of Credit available, but unused. The Company also pays a Letter of Credit Fee, on a quarterly basis, equal to 1.25% on the daily amount available to be drawn for standby letters of credit. Interest incurred on any draws under the Line of Credit, as well as the Unused Commitment Fee and Letter of Credit Fee, are included within Interest and other expenses (income), net in the Condensed Consolidated Statements of Operations.

The Company may draw upon the Line of Credit for general corporate purposes. Repayments of any borrowings under the Line of Credit shall become available for redraw at any time by the Company.

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 of June 30, 2022, the Company was in full compliance with the terms and conditions of the Credit Agreement.

During the three and nine months ended June 30, 2022, the Company did not make any draws under the Credit Agreement. As of June 30, 2022, the Company had no outstanding borrowings under the Credit Agreement.

During the three and nine months ended June 30, 2022, interest expense incurred by the Company under the Credit Agreement was immaterial to the condensed consolidated financial statements.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

10. Stockholders’ Equity

The changes in stockholders’ equity for the prior year comparable period are as follows:


	Common Stock					Treasury Stock
(dollars in thousands)	Shares	Amount		Additional Paid-in Capital		Shares	Amount		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total
Balance at September 30, 2020	34,082,406	$	34	$	247,892	(547,508)	$	(3,983)	$	(9,782)	$	(122,346)	$	111,815
Net income	—	—		—		—	—		—		4,514		4,514
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units	151,845	—		197		—	—		—		—		197
Taxes paid associated with net settlement of stock compensation awards	(7,703)	—		(57)		—	—		—		—		(57)
Forfeitures of restricted stock awards	(13,733)	—		—		—	—		—		—		—
Common stock repurchased	—	—		—		(309,496)	(4,103)		—		—		(4,103)
Common stock surrendered in the exercise of stock options	—	—		169		(9,384)	(169)		—		—		—
Stock compensation expense	—	—		1,801		—	—		—		—		1,801
Foreign currency translation	—	—		—		—	—		896		—		896
Balance at December 31, 2020	34,212,815	$	34	$	250,002	(866,388)	$	(8,255)	$	(8,886)	$	(117,832)	$	115,063
Net income	—	—		—		—	—		—		5,260		5,260
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units	1,079,955	1		154		—	—		—		—		155
Taxes paid associated with net settlement of stock compensation awards	(177,463)	—		(3,145)		—	—		—		—		(3,145)

Common stock repurchased	—	—		—		(647,583)	(12,040)		—		—		(12,040)
Common stock surrendered in the exercise of stock options	—	—		1,333		(73,228)	(1,333)		—		—		—
Stock compensation expense	—	—		1,522		—	—		—		—		1,522
Foreign currency translation	—	—		—		—	—		123		—		123
Balance at March 31, 2021	35,115,307	$	35	$	249,866	(1,587,199)	$	(21,628)	$	(8,763)	$	(112,572)	$	106,938
Net income	—	—		—					—		8,419		8,419
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units	318,242	—		—		—	—		—		—		—
Taxes paid associated with net settlement of stock compensation awards	(15,834)	—		(343)		—	—		—		—		(343)
Stock compensation expense	—	—		1,525		—	—		—		—		1,525
Foreign currency translation and other	—	—		—		—	—		23		(1)		22
Balance at June 30, 2021	35,417,715	$	35	$	251,048	(1,587,199)	$	(21,628)	$	(8,740)	$	(104,154)	$	116,561

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

Stock Compensation Incentive Plans

The Company has several incentive plans under which stock options, restricted stock units (RSUs), restricted stock awards (RSAs), and cash-settled stock appreciation rights (SARs) have been issued, including the Third Amended and Restated 2006 Omnibus Long-Term Incentive Plan, as amended (LTIP), and a plan and private placement issuances related to the Company’s acquisition of Machinio and Bid4Assets. During the nine months ended June 30, 2022, the Company's shareholders approved an amendment to the LTIP to increase the number of shares of common stock reserved for issuance from 19,100,000 to 20,300,000. Accordingly, as of June 30, 2022, the Company has reserved a total of 20,300,000 shares of its common stock for exercises of stock options, vesting of RSUs, and grants of RSAs under these plans. Vesting of RSUs and grants of RSAs count as 1.5x shares against the plan reserves. As of June 30, 2022, 2,353,049 shares of common stock remained available for use under the LTIP.

Stock Compensation Expense

The table below presents the components of share-based compensation expense (in thousands):


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
Equity-classified awards:
Stock options	$	505	$	762	$	2,097	$	2,491
RSUs & RSAs	1,478		763		4,259		2,357
Total equity-classified awards	$	1,983	$	1,525	$	6,356	$	4,848
Liability-classified awards:
SARs	(99)		278		(200)		945
Total stock compensation expense:	$	1,884	$	1,803	$	6,156	$	5,793

The table below presents the components of share-based compensation expense by line item within our Condensed Consolidated Statements of Operations (in thousands):


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
Stock Compensation Expense by Line Item
Technology and operations	$	321	$	261	$	906	$	885
Sales and marketing	464		459		1,496		1,493
General and administrative	1,099		1,083		3,754		3,415
Total stock compensation expense:	$	1,884	$	1,803	$	6,156	$	5,793

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

Stock Options and RSUs & RSAs

The following table presents stock option and RSUs & RSAs grant activity:


	Nine Months Ended
	June 30, 2022
Stock Options granted:
Options containing only service conditions:	131,712
Weighted average exercise price	$	22.13
Weighted average grant date fair value	$	10.83

Options containing performance or market conditions:	129,945
Weighted average exercise price	$	22.17
Weighted average grant date fair value	$	10.30

RSUs & RSAs granted:
RSUs & RSAs containing only service conditions:1	354,934
Weighted average grant date fair value	$	21.78

RSUs & RSAs containing performance or market conditions:1	451,085
Weighted average grant date fair value	$	18.84

________________

1 55,000 RSUs containing service conditions and 70,000 RSUs containing performance conditions were granted by private placement.

The stock options and RSUs & RSAs containing only service conditions will vest over a four-year service period. The stock options and RSUs & RSAs containing performance conditions will vest upon the achievement of specified financial targets of the Company, a segment, or a division of a segment. The stock options and RSUs & RSAs containing market conditions will vest upon the achievement of specified increases in the Company’s share price. Vesting is measured the first day of each fiscal quarter over the four-year terms of the awards, starting with the first fiscal quarter after the first anniversary of the grant date, based upon the trailing 20-days average of the Company’s share price.

The range of assumptions used to determine the fair value of stock options containing only service conditions using the Black-Scholes option-pricing model during the nine months ended June 30, 2022, were as follows:


						Nine Months Ended
						June 30, 2022
Dividend yield						—
Expected volatility						57.0% - 61.2%
Risk-free interest rate						1.1% - 1.8%
Expected term						4.5 - 7.4 years

The range of assumptions used to determine the fair value of stock options and RSUs & RSAs containing market conditions using Monte Carlo simulations during the nine months ended June 30, 2022, were as follows:


						Nine Months Ended
						June 30, 2022
Dividend yield						—
Expected volatility						57.2% - 62.9%
Risk-free interest rate						1.1% - 1.5%
Expected holding period (% of remaining term)						29.4% - 100.0%

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

SARs

During the nine months ended June 30, 2022, the Company did not issue any SARs, 7,475 SARs were exercised requiring the Company to make cash payments of $0.1 million, and 3,250 SARs were canceled. As of June 30, 2022, 31,320 SARs were outstanding.

Share Repurchase Program

From time to time, we may be 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 of September 30, 2021. On December 6, 2021, the Company's Board of Directors authorized a new stock repurchase plan of up to $20 million of the Company's outstanding shares of common stock through December 31, 2023. The Company repurchased 1,159,066 shares for $20.0 million during the six months ended March 31, 2022.

On May 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 through June 30, 2024. The Company repurchased 408,211 shares for $5.4 million during the three months ended June 30, 2022. As of June 30, 2022, the Company may repurchase an additional $6.6 million of shares under this program.

Other Share Repurchases

Separate from the share repurchase program, our stock incentive plans allow for participants to exercise stock options by surrendering shares of common stock equivalent in value to the exercise price due.

During the three months ended June 30, 2022, and June 30, 2021, no shares of common stock were surrendered by participants in the exercise of stock options. During the nine months ended June 30, 2022, and June 30, 2021, participants surrendered 4,678 and 82,612 shares of common stock, respectively, in the exercise of stock options. Any shares surrendered to the Company in this manner are not available for future grant.

11. Fair Value Measurement

The Company measures and records certain assets and liabilities at fair value on a recurring basis. Authoritative guidance issued by the FASB establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1: Quoted market prices in active markets for identical assets or liabilities;

Level 2: Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3: Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

The Company held $20.0 million and $40.0 million of money market funds considered cash equivalents at June 30, 2022, and September 30, 2021, respectively. Money market funds held at June 30, 2022, and September 30, 2021, were measured at fair value and classified as Level 1 assets within the fair value hierarchy. There were no transfers between levels during the periods presented.

During the nine months ended June 30, 2022, and as a result of the acquisition of Bid4Assets, the Company recorded preliminary fair value of contingent consideration in the amount of $28.0 million on its Condensed Consolidated Balance Sheets as of the acquisition date. The contingent consideration is based on Bid4Assets' achievement of trailing twelve-month EBITDA targets measured at the end of each calendar quarter until the quarter ended December 31, 2022. The liability for this consideration is included in Accrued expenses and other current liabilities within the Condensed Consolidated Balance Sheets.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

The Company's estimate of the fair value of the earn-out consideration was informed by the Monte Carlo valuation method and considered potential outcomes based upon the terms and conditions of the merger agreement. The fair value measurements utilized were classified as Level 3 assets within the fair value hierarchy under the provisions of ASC 820, Fair Value Measurements, and ASC 805, Business Combinations. 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, volatility of gross profit and operating expenses, and the discount rate. The earn-out consideration was preliminarily valued at approximately $28.0 million as of the acquisition date. Fair value of the earn-out consideration will be remeasured at the end of each calendar quarter until December 31, 2022.

The changes in earn-out liability measured at fair value for which the Company has used Level 3 inputs to determine fair value during the three and nine months ended June 30, 2022, is as follows (in thousands):


	Earn-out Liability
Balance at September 30, 2021	$	—
Earn-out from business acquisition	26,900


Balance at December 31, 2021	$	26,900
Measurement period adjustment	1,100
Change in fair value	(8,500)
Balance at March 31, 2022	$	19,500
Payment of achieved earn-out threshold	(3,500)
Change in fair value	(11,500)
Balance at June 30, 2022	$	4,500

During the three months ended March 31, 2022, the Company recorded a measurement period adjustment of $1.1 million for the preliminary earn-out consideration fair value with a corresponding increase to goodwill, based on facts and circumstances in existence as of the effective date of the acquisition related to the discount rates associated with the expected earn-out payments. See further discussion in Note 3 - Bid4Assets Acquisition. In addition, the fair value of the earn-out liability was reduced by $8.5 million to $19.5 million, primarily due to a decline in the auction events and transactions that are expected to be completed during the earn-out period ending December 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 June 30, 2022, the fair value of the earn out liability was reduced by $11.5 million, primarily due to further client specific delays in bringing foreclosed real estate to auction.

These changes resulted from events occurring subsequent to the November 1, 2021, acquisition date and therefore, were not known nor knowable at that time. As a result, these changes in fair value were recorded as a gain within Fair value adjustments of acquisition earn-outs in the Condensed Consolidated Statements of Operations.

As of March 31, 2022, Bid4Assets achieved a trailing twelve-month EBITDA threshold resulting in a $3.5 million payment made by the Company during the three months ended June 30, 2022. As of June 30, 2022, Bid4Assets has not achieved any additional trailing twelve-month EBITDA thresholds.

The remaining $4.5 million in earn-out liability as of June 30, 2022, is recorded within Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

When valuing its Level 3 liability, management's estimation of fair value is based on the best information available in the circumstances and may incorporate management's own assumptions around market demand which could involve a level of judgment, taking into consideration a combination of internal and external factors.

The Company’s financial assets and liabilities not measured at fair value are cash, accounts receivable, and accounts payable. The Company believes the carrying values of these instruments approximate fair value.

As of June 30, 2022, the Company had no non-financial instruments measured at fair value on a non-recurring basis other than fair value measurements associated with the preliminary purchase accounting for Bid4Assets. See Note 3 - Bid4Assets Acquisition for more information. As of September 30, 2021, the Company did not have any material assets or liabilities measured at fair value on a non-recurring basis.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

12. Defined Benefit Pension Plan

Certain employees of Liquidity Services UK Limited (GoIndustry), which the Company acquired in July 2012, are covered by the Henry Butcher Pension Fund and Life Assurance Scheme (the Scheme), a qualified defined benefit pension plan. The Company guarantees GoIndustry's performance on all present and future obligations to make payments to the Scheme for up to a maximum of £10 million British pounds. The Scheme was closed to new members on January 1, 2002.

The net periodic (benefit) is recognized within Interest and other income, net in the Condensed Consolidated Statements of Operations, and for the three and nine months ended June 30, 2022 and 2021, included the following components:


	Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)	2022		2021		2022		2021

Interest cost	$	122	$	142	$	384	$	343
Expected return on plan assets	(219)		(245)		(686)		(637)
Amortization of prior service cost	5		6		15		17

Total net periodic (benefit)	$	(92)	$	(97)	$	(287)	$	(277)

13. Legal Proceedings and Other Contingencies

The Company reserves for contingent liabilities based on ASC 450, Contingencies, when it determines that a liability is probable and reasonably estimable. From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of the business.

Former Employee Matters

In May 2021, the Company’s former Vice President, Human Resources filed a complaint against the Company in federal court in Montgomery County, Maryland, alleging wrongful termination on the basis of gender, race, and age. The parties have completed the discovery phase of this case. On April 4, 2022, the Company filed a motion for summary judgment. The Company believes this claim is without merit and cannot estimate a range of potential liability, if any, at this time. The Company’s employment practices liability insurance carrier, CNA, has accepted tender of this claim.

In October 2021, the Company’s former Chief Marketing Officer filed a claim with the Equal Employment Opportunity Commission (the “EEOC”), alleging wrongful termination on the basis of race and age and that the Company retaliated against him. The Company submitted its position statement to the EEOC on February 8, 2022. The Company believes these claims are without merit and cannot estimate a range of potential liability, if any, at this time. CNA has accepted tender of these claims as well.

Unless otherwise noted, based on the information currently available, there are no claims or actions pending or threatened against the Company that, if adversely determined, would have, in Company’s management’s judgement based on the information known to management, a material adverse effect on the Company.

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

14. Segment Information

The Company provides operating results in 4 reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Asset Group (CAG), and Machinio. Descriptions of our reportable segments are as follows:

•The GovDeals reportable segment provides self-directed service solutions that enable local and state government entities including city, county and state agencies located in the United States and Canada, to sell surplus, salvage and real estate assets through the GovDeals and Bid4Assets marketplaces (see Note 3 Bid4Assets Acquisition).

•The RSCG reportable segment consists of marketplaces that enable corporations located in the United States and Canada to sell surplus and salvage consumer goods. RSCG also offers a suite of services that includes returns management, asset recovery, and e-commerce services. This segment uses the Liquidation.com, Secondipity and AllSurplus marketplaces. Through the end of third quarter fiscal 2021, RSCG operated the Liquidation.com DIRECT marketplace for truckload quantities of retail surplus. Those assets are now sold on the Liquidation.com marketplace.

•The CAG reportable segment provides managed and self-directed service solutions to sellers and consists of marketplaces that enable commercial businesses to sell surplus and idle assets. CAG also offers a suite of services that includes surplus management, asset valuation, asset sales and marketing. Commercial seller assets are located across the Americas, Europe, Australia, Asia, and Africa. This segment uses the GoIndustry DoveBid and AllSurplus marketplaces.

•The Machinio reportable segment operates a global search engine platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors.

We also report results of Corporate & Other, including elimination adjustments.

Decisions concerning the allocation of the Company’s resources are made by the Company’s Chief Operating Decision Maker (CODM), which is the Company's Chief Executive Officer, with oversight by the Board of Directors. The Company reports reportable segment information based on the internal performance measures used by the CODM to assess the performance of each operating segment in a given period. In connection with that assessment, the CODM uses segment gross profit to evaluate the performance of each segment. Segment gross profit is calculated as total revenue less cost of goods sold (excludes depreciation and amortization).

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)

The following table sets forth certain financial information for the Company's reportable segments:


		Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)		2022		2021		2022		2021
GovDeals:
	Purchase revenues	$	—	$	—	$	—	$	—
	Consignment and other fee revenues	16,587		14,658		45,130		36,448
	Total revenue	16,587		14,658		45,130		36,448
	Segment gross profit	$	15,765	$	13,965	$	42,913	$	34,544

RSCG:
	Purchase revenues	$	33,788	$	35,923	$	99,838	$	95,997
	Consignment and other fee revenues	8,586		8,172		23,045		22,086
	Total revenue	42,374		44,095		122,883		118,083
	Segment gross profit	$	15,942	$	17,755	$	46,818	$	48,315

CAG:
	Purchase revenues	$	1,719	$	1,939	$	9,271	$	8,905
	Consignment and other fee revenues	6,077		6,528		18,725		16,967
	Total revenue	7,796		8,467		27,996		25,872
	Segment gross profit	$	6,271	$	7,099	$	21,076	$	20,445

Machinio:
	Purchase revenues	$	—	$	—	$	—	$	—
	Consignment and other fee revenues	3,109		2,446		8,839		6,801
	Total revenue	3,109		2,446		8,839		6,801
	Segment gross profit	$	2,956	$	2,304	$	8,379	$	6,399

Corporate & Other, including elimination adjustments:
	Purchase revenues	$	—	$	—	$	—	$	—
	Consignment and other fee revenues	—		—		—		—
	Total revenue	—		—		—		—
	Segment gross profit	$	—	$	—	$	—	$	—

Consolidated:
	Purchase revenues	$	35,507	$	37,862	$	109,109	$	104,902
	Consignment and other fee revenues	34,359		31,804		95,739		82,302
	Total revenue	69,866		69,666		204,848		187,204
	Segment gross profit	$	40,934	$	41,123	$	119,186	$	109,703

The following table reconciles segment gross profit used in the reportable segments to the Company's consolidated results:


		Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)		2022		2021		2022		2021
Reconciliation:
	Segment gross profit	$	40,934	$	41,123	$	119,186	$	109,703
	Total operating expenses	33,739		32,529		103,026		90,845
	Fair value adjustment of acquisition earn-outs	(11,500)		—		(20,000)		—
	Interest and other expenses (income), net	104		(254)		(73)		(468)
	Income before provision for income taxes	$	18,591	$	8,848	$	36,233	$	19,326

The percent of our revenues that came from transactions conducted outside of the United States for the three months ended June 30, 2022, and 2021 was 11.9% and 14.4%, respectively, and the percent of our revenues that came from transactions conducted outside of the United States for the nine months ended June 30, 2022, and 2021 was 13.6% and 16.2%, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended September 30, 2021, and subsequent filings with the Securities 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, and Machinio. See Note 14 - Segment Information to the condensed consolidated financial statements for more information regarding our reportable segments.

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 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 of China. 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 in North 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 ended June 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, on December 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 through December 31, 2023. The Company repurchased 1,159,066 shares for $20.0 million during the six months ended March 31, 2022.

Effects of Inflation

Rising inflation in both the U.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 ended June 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 ended December 31, 2021.

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 ended June 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 ended June 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 ended June 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 ended June 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 from Machinio'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 ended June 30, 2022, respectively, and 8.2% and 7.8% of our total revenues for the three and nine months ended June 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.

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 ended June 30, 2022 and 2021, respectively, and 57.7% and 61.7% of consolidated Cost of goods sold for the nine months ended June 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 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 June 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 ended December 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 ended June 30, 2022, and 2021, approximately 884,000 and 617,000, respectively, total auction participants participated in auctions on our marketplaces. During the nine months ended June 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 ended June 30, 2022, and 2021, we completed approximately 253,000 and 185,000 transactions, respectively. During the nine months ended June 30, 2022, and 2021, we completed approximately 709,000 and 511,000 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. 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.

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	$	8,419	$	31,979	$	18,193
Interest and other expenses (income), net1	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 ended September 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 of November 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.

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 ended December 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 of June 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 ended June 30, 2022, due to timing changes impacting the level of auction events and transactions that are expected to occur during the earn-out period ending December 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 of June 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.

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 ended June 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.. .

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

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 percentage of total revenue	95.0		%	95.3		%	95.1		%	94.8		%

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 percentage of total revenue	37.6		%	40.3		%	38.1		%	40.9		%

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 percentage of total revenue	80.4		%	83.8		%	75.3		%	79.0		%

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 percentage of total revenue	95.1		%	94.2		%	94.8		%	94.1		%







Consolidated:
	GMV	$	325,006		$	244,668		$	862,033		$	642,380
	Total revenue	$	69,866		$	69,666		$	204,848		$	187,204

Three Months Ended June 30, 2022, Compared to the Three Months Ended June 30, 2021

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 in China, 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 of Ukraine and its impacts on international trade and energy markets, and the recent COVID-19 lockdowns in regions of China, which could limit the volume of assets made available for sale in any quarterly period.

Machinio. Revenue from our Machinio 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 $0.9 million, or 54.9%, primarily due to the increase in intangible assets following our acquisition of Bid4Assets on November 1, 2021.

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 $0.4 million primarily due to the effect of changes in foreign exchange rates.

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 ended September 30, 2021.

Nine Months Ended June 30, 2022, Compared to the Nine Months Ended June 30, 2021

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 of Ukraine and its impacts on international trade and energy markets, and the recent COVID-19 lockdowns in regions of China, which could limit the volume of assets made available for sale in any quarterly period.

Machinio. Revenue from our Machinio 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.

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 $6.6 million, or 18.9%, as we are investing in technology and operations to continue our growth, 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 $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 $2.3 million, or 43.8%, primarily due to the increase in intangible assets following our acquisition of Bid4Assets on November 1, 2021.

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 ended June 30, 2022. See Note 11 - Fair Value Measurement for further information.

Other operating expenses, net. Other operating expenses, net decreased $1.4 million primarily related to the $1.1 million loss during the nine 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 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 ended June 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 ended September 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 of June 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 due March 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 ended June 30, 2022, the Company did not make any draws under the Credit Agreement. As of June 30, 2022, the Company had no outstanding indebtedness under the Credit Agreement and our borrowing availability was $25.0 million.

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 of March 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, 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. 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.

On November 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 ended March 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 ending December 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 June 30, 2022, the fair value of the earn out liability was reduced by $11.5 million, due to further client specific delays in bringing foreclosed real estate to auction.

These changes resulted from events occurring subsequent to the November 1, 2021, acquisition date and therefore, were not known nor knowable at that time.

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 $8.1 million as of June 30, 2022. As of June 30, 2022 and September 30, 2021, $21.1 million and $22.4 million, respectively, of Cash and cash equivalents was held outside of the U.S.

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 of September 30, 2021. On December 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 through December 31, 2023. The Company repurchased 1,159,066 shares for $20.0 million during the six months ended March 31, 2022.

Changes in Cash Flows: Nine Months Ended June 30, 2022 Compared to the Nine Months Ended June 30, 2021

Net cash provided by operating activities was $31.1 million and $54.3 million for the nine months ended June 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 ended June 30, 2022, and June 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 on November 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 ended June 30, 2022, and June 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 ended June 30, 2022, and June 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 of June 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate sensitivity. As of June 30, 2022, we do not have any debt, and we are not holding any short-term investments. Our cash and cash equivalents balance of $88.3 million is maintained within various interest bearing and earnings allowance checking accounts, as well as cash equivalent money market funds. Changes in interest rates on these checking accounts are not expected to have a significant impact to our consolidated results of operations. Our investment policy requires us to invest funds in excess of current operating requirements. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss.

Exchange rate sensitivity. Because of the number of countries and currencies we operate in, movements in currency exchange rates may affect our results. We report our operating results and financial condition in U.S. dollars. Our U.S. operations earn revenues and incur expenses primarily in U.S. dollars. Outside the United States, we predominantly generate revenues and expenses in the local currency. When we translate the results and net assets of these operations into U.S. dollars for reporting purposes, movements in exchange rates will affect reported results and net assets. Volatile market conditions arising from the COVID-19 pandemic and/or ongoing hostilities in Ukraine may result in significant changes in exchange rates, which could affect our results of operations expressed in U.S. dollars.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 30, 2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the three months ended June 30, 2022, no change occurred in our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding the Company's legal proceedings may be found in Note 13 of the accompanying Notes to the condensed consolidated financial statements.

Item 1A. Risk Factors

Risks Related to Russian Invasion of Ukraine.

On February 24, 2022, Russian forces invaded Ukraine, and sustained conflict and disruption in the region is likely. Impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by Canada, the United Kingdom, the European Union, the United States and other nations against officials, individuals, regions, and industries in Russia, Ukraine, and Belarus, could adversely affect the global economy and financial markets and thus adversely affect our business, financial condition and results of operations as well as the price of our common stock. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial.

Total revenues directly associated with Russia and Ukraine are not material to our consolidated financial results. However, our business is exposed to the broader economic volatility associated with the invasion. For example, increased volatility in energy, steel and other metal scrap prices caused several clients to delay scheduled projects or suspend them indefinitely. In addition, some clients in Europe have suspended asset sales out of concern for increased scarcity of parts and other resources. To the extent the broader economic volatility associated with the invasion continues affecting project timelines and asset values, particularly in Europe and in the energy market globally, our results of operations could be adversely affected.

Our Machinio segment uses a small number of independent contractors based in Ukraine and Russia. If these independent contractors are unable to perform their duties due to local instability or political, economic or military conditions, then our Machinio segment’s ability to provide certain services and the development of new services or enhancement of existing services could be delayed, and our results of operations could be adversely affected.

The conflict and related sanctions could also increase the risk of cyber-attacks launched against businesses based in the countries which have imposed sanctions, including the United States. We are based in the United States and have business interests around the world. An increase in the prevalence of cyber-attacks increases the risk that our e-commerce marketplaces, information technology systems, networks, and services could be affected, magnifying the cyber-related risks described in our Annual Report on Form 10-K for fiscal year ended September 30, 2021.

Turbulent economic conditions may negatively affect our business and results of operations.

Our business may be adversely affected by turbulence in economic conditions such as employment levels, wage and salary levels, global supply chain constraints, trends in consumer confidence and spending, reductions in consumer net worth, interest rates, inflation, foreign exchange rate fluctuations, the availability of consumer credit and taxation policies. Consumer purchases in general may decline during recessions, periods of prolonged declines in the equity markets or housing markets and periods when disposable income and perceptions of consumer wealth are lower.

In addition to the other information set forth in this report, you should carefully consider the factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

The following table presents information about our repurchases of common stock during the three months ended June 30, 2022 (in thousands, except share and per share amounts):


Period	Total Number of Shares Purchased1		Average Price Paid Per Share			Total Number of Shares Purchased as a Part of a Publicly Announced Program	Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs
April 1, 2022 to April 30, 2022	—	0	$	—	0	—	$	—
May 1, 2022 to May 31, 2022	305,690		$	13.30		305,690	$	7,935
June 1, 2022 to June 30, 2022	102,521		$	13.48		102,521	$	6,553
Total	408,211					408,211

1 Separate from the share repurchase program, our stock incentive plans allow for participants to exercise stock options by surrendering shares of common stock equivalent in value to the exercise price due. During the three months ended June 30, 2022, participants surrendered 0 shares of common stock in the exercise of stock options, respectively. Any shares surrendered to the Company in this manner are not available for future grant.

As of June 30, 2022, the Company had $6.6 million authorization to repurchase shares under the May 13, 2022 Stock Repurchase Plan.

Item 5. Other Information

None

Item 6. Exhibits


Exhibit No.						Description
2.1						Stock Purchase Agreement, dated July 10, 2018, by and among the Company, Machinio, Corp., the stockholders of Machinio, Corp., and Shareholder Representative Services., LLC., incorporated herein by reference to Exhibit 2.1 to the Company's Quarterly Report on 10-Q, filed with SEC on August 2, 2018.
2.2						Agreement and Plan of Merger, effective as of November 1, 2021, by and among the Company, Liquidity Services RE Ventures, Inc., Bid4Assets, USA B4A Sellers Rep LLC and certain holders of the outstanding stock of Bid4Assets, incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on November 1, 2021.
3.1						Fourth Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-129656), filed with the SEC on January 17, 2006.
3.2						Amended and Restated Bylaws dated August 2, 2016, incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on 10-Q, filed with SEC on August 4, 2016.
31.1						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1						Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101						The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statement of Stockholders' Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Consolidated Financial Statements.
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LIQUIDITY SERVICES, INC.
		(Registrant)


August 4, 2022	By:	/s/ William P. Angrick, III
		William P. Angrick, III
		Chairman of the Board of Directors
		and Chief Executive Officer


August 4, 2022	By:	/s/ Jorge A. Celaya
		Jorge A. Celaya
		Chief Financial Officer

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Liquidity Services (LQDT) 10-Q2022 Q3 Quarterly report

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