LIQUIDITY SERVICES INC 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Interest rate sensitivity. 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. As of September 30, 2023, we hold cash and cash equivalents and short-term investments that are subject to varying interest rates based upon their maturities. A hypothetical 100 basis point decline in interest rates would impact our pre-tax earnings by less than $1.0 million on an annualized basis. 51 As of September 30, 2023, we do not have any debt; however, should the Company draw on our Letter of Credit in the future, such draw would incur interest as determined by the Daily Simple Secured Overnight Financing Rate (SOFR) in effect plus a margin ranging from 1.25% to 1.75%. 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 generate revenues and incur expenses in both U.S. dollars and local currencies. Our primary foreign exchange exposures include British Pounds, Canadian Dollars, Chinese Yuan, Euros, and Hong Kong Dollars. When we translate the results and net assets of our international operations into U.S. dollars for financial reporting purposes, movements in exchange rates will affect our reported results. Volatile market conditions arising from ongoing macroeconomic conditions such as rising interest rates at federal banks and armed conflicts around the world, may result in significant changes in exchange rates, which could affect our results of operations expressed in U.S. dollars. A hypothetical 10% decrease in foreign exchange rates reduce our total expected revenues by approximately 1%. The potential impact on pre-tax earnings would be less as total expected expenses would also decrease. Item 8. Financial Statem ents and Supplementary Data. The consolidated financial statements and accompanying notes are included in Part IV, Item 15(a)(1) of this Annual Report on Form 10-K. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure. None. Item 9A. Contr ols and Procedures. Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This "Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in the certifications. The report of Deloitte & Touche LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting is set forth below in this section. This section should be read in conjunction with the certifications and the Deloitte & Touche LLP report for a more complete understanding of the topics presented. Evaluation of Disclosure Controls and Procedures Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures and our internal control over financial reporting as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls includes an evaluation of some components of our internal control over financial reporting. Internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below. 52 The evaluation of our disclosure controls included a review of the controls' objectives and design, our implementation of the controls and their effect on the information generated for use in this Form 10-K. In the course of the controls evaluation, we reviewed identified data errors, control deficiencies and, where appropriate, sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the Chief Executive Officer and Chief Financial Officer, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our disclosure controls are also evaluated on an ongoing basis by our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls, and to modify them as necessary. Our intent is to maintain the disclosure controls as dynamic systems that change as conditions warrant. Based upon the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Form 10-K, our disclosure controls were effective to ensure assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the SEC, and that material information related to Liquidity Services and our consolidated subsidiaries is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared. We reviewed the results of management's evaluation with the Audit Committee of our Board of Directors. Management Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP; and (c) provide reasonable assurance regarding authorization to effect the acquisition, use, or disposition of Company assets, as well as the prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Management assessed our internal control over financial reporting as of September 30, 2023, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. This assessment is supported by testing and monitoring performed by our finance organization. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Our independent registered public accounting firm, Deloitte & Touche LLP, independently assessed the effectiveness of the Company's internal control over financial reporting. Deloitte & Touche LLP has issued an attestation report, which is included at the end of this section. Inherent Limitations on Effectiveness of Controls A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Other inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 53 Changes in Internal Control over Financial Reporting During the three months ended September 30, 2023, 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. 54 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Liquidity Services, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Liquidity Services, Inc. and subsidiaries (the “Company”) as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the fiscal year ended September 30, 2023, of the Company and our report dated December 7, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte and Touche LLP McLean, Virginia December 7, 2023 Item 9B. Other Information. Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 55 PA RT III Item 10. Directors, Exec utive Officers and Corporate Governance. Incorporated by reference from the Company's Proxy Statement relating to its 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after September 30, 2023. Code of Ethics, Governance Guidelines and Committee Charters We have adopted a Code of Conduct that applies to all of our directors, officers and employees, including our principal executive, principal financial and principal accounting officers, or persons performing similar functions. The Code of Conduct is available on our website at http://investors.liquidityservices.com . We intend to disclose future amendments to certain provisions of the Code of Conduct, and waivers of the Code of Conduct granted to executive officers and directors, on the website within four business days following the date of the amendment or waiver. Item 11. Executive Compensation. Incorporated by reference from the Company's Proxy Statement relating to its 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after September 30, 2023. Item 12. Security Owners hip of Certain Beneficial Owners and Management and Related Stockholders Matters. Incorporated by reference from the Company's Proxy Statement relating to its 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after September 30, 2023. Item 13. Certain Relations hips and Related Transactions, and Director Independence. Incorporated by reference from the Company's Proxy Statement relating to its 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after September 30, 2023. Item 14. Principal Account ant Fees and Services. Incorporated by reference from the Company's Proxy Statement relating to its 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days after September 30, 2023. 56 PART IV Item 15. Exhibits and Fi nancial Statement Schedules. (a) Page (1) The following documents related to the financial statements are filed as part of this report: Reports of Independent Registered Public Accounting Firms (PCAOB ID No.'s 34 and 42 , respectively) 58 Consolidated Balance Sheets as of September 30, 2023, and 2022 61 Consolidated Statements of Operations for the years ended September 30, 2023, 2022, and 2021 62 Consolidated Statements of Comprehensive Income for the years ended September 30, 2023, 2022, and 2021 63 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2023, 2022, and 2021 64 Consolidated Statements of Cash Flows for the years ended September 30, 2023, 2022, and 2021 65 Notes to the Consolidated Financial Statements 66 (2) The following financial statement schedule is filed as part of this report: Schedules for the three years ended September 30, 2023, 2022, and 2021: II—Valuation and Qualifying Accounts 96 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required or are inapplicable and therefore have been omitted. (3) The documents required to be filed as exhibits to this report under Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in this report, which list is incorporated herein by reference. 57 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Liquidity Services, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Liquidity Services, Inc. and subsidiaries (the "Company") as of September 30, 2023 and 2022, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the two years in the period ended September 30, 2023, and the related notes and schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 7, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue - Refer to Note 2 to the consolidated financial statements Critical Audit Matter Description The Company earns revenue on transactions where (1) they resell inventory that they purchase from sellers, (2) from the sale of inventory that is sold on a consignment basis, and (3) from other non-consignment fee transactions. When acting as a principal, the Company purchases an asset or assets from a seller and then seeks to sell the asset or assets to a buyer. The Company then recognizes as purchase revenue the gross proceeds from the sale, including buyer's premiums. When the Company is acting as an agent, its performance obligation is to arrange for the seller to sell an asset or assets to the buyer directly. The Company recognizes consignment and other fee revenues based on the sales commissions that are paid to the Company by the sellers for utilizing the Company's services. Consideration is variable based on units, final auction prices, or other factors, until the buyer’s purchase of the asset or assets is complete, or the service has been provided. 58 We identified a critical audit matter related to revenue transactions recorded, which required an increased extent of effort, including the need for us to involve professionals with expertise in information technology ("IT"), to identify, test, and evaluate the Company’s systems, applications and automated controls. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s revenue transactions included the following, among others: • With the assistance of our IT specialists, we: o Identified the significant systems used to process revenue transactions and tested the general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls. o Performed testing of system interface controls and automated controls relevant to revenue processes. • We tested internal controls within the relevant revenue processes, including those in place to reconcile the various systems to the Company’s general ledger. • We either developed an independent expectation of revenue and compared such expectation to the amounts recorded by the Company, or performed detailed transaction testing for a sample of revenue transactions, which included the following: o Agreed the selected revenue transaction amounts recognized to underlying source documents. o Tested the classification of each transaction as either purchase revenue, where the Company acts as a principal and records revenue based on the gross value of the asset sale, or commission and other fee revenue, where the Company acts as an agent and records only the fee earned net of the sale transaction value. /s/ Deloitte and Touche LLP McLean, Virginia December 7, 2023 We have served as the Company’s auditor since 2021. 59 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Liquidity Services, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the consolidated statement of operations, comprehensive income, stockholders' equity and cash flows for the year ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended September 30, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Ernst & Young LLP We served as the Company's auditor from 2001 to 2021. Tysons, Virginia December 9, 2021 60 Liquidity Services, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands, Except Par Value) September 30, 2023 2022 Assets Current assets: Cash and cash equivalents $ 110,281 $ 96,122 Short-term investments 7,891 1,819 Accounts receivable, net of allowance for doubtful accounts of $ 1,424 and $ 449 7,848 11,792 Inventory, net 11,116 11,679 Prepaid taxes and tax refund receivable 1,783 1,631 Prepaid expenses and other current assets 7,349 6,551 Total current assets 146,268 129,594 Property and equipment, net 17,156 19,094 Operating lease assets 9,888 13,207 Intangible assets, net 12,457 16,234 Goodwill 89,388 88,910 Deferred tax assets 7,050 13,628 Other assets 6,762 7,437 Total assets $ 288,970 $ 288,104 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 39,115 $ 41,982 Accrued expenses and other current liabilities 23,809 23,304 Current portion of operating lease liabilities 4,101 4,540 Deferred revenue 4,701 4,439 Payables to sellers 48,992 49,238 Total current liabilities 120,718 123,503 Operating lease liabilities 6,581 9,687 Other long-term liabilities 137 378 Total liabilities 127,436 133,568 Commitments and contingencies (Note 15) Stockholders’ equity: Common stock, $ 0.001 par value; 120,000,000 shares authorized; 36,142,346 shares issued and outstanding at September 30, 2023; 35,724,057 shares issued and outstanding at September 30, 2022 36 36 Additional paid-in capital 265,945 258,275 Treasury stock, at cost; 5,433,045 shares at September 30, 2023, and 3,813,199 shares at September 30, 2022 ( 84,031 ) ( 62,554 ) Accumulated other comprehensive loss ( 10,457 ) ( 10,285 ) Accumulated deficit ( 9,958 ) ( 30,936 ) Total stockholders’ equity 161,533 154,536 Total liabilities and stockholders’ equity $ 288,970 $ 288,104 See accompanying notes to the consolidated financial statements. 61 Liquidity Services, Inc. and Subsidiaries Consolidated Statemen ts of Operations (Dollars in Thousands, Except Per Share Data) Year Ended September 30, 2023 2022 2021 Purchase revenues $ 172,089 $ 151,271 $ 146,151 Consignment and other fee revenues 142,373 128,779 $ 111,380 Total revenue 314,462 280,050 257,531 Costs and expenses from operations: Cost of goods sold (excludes depreciation and amortization) 142,322 119,407 107,678 Technology and operations 57,078 55,522 47,673 Sales and marketing 49,443 43,224 37,635 General and administrative 28,074 28,282 28,938 Depreciation and amortization 11,255 10,322 6,969 Fair value adjustment of acquisition earn-outs — ( 24,500 ) — Other operating expenses, net 186 388 1,470 Total costs and expenses 288,358 232,645 230,363 Income from operations 26,105 47,405 27,168 Interest and other income, net ( 2,912 ) ( 248 ) ( 411 ) Income before provision for income taxes 29,016 47,653 27,579 Provision (benefit) for income taxes 8,039 7,329 ( 23,370 ) Net income $ 20,978 $ 40,324 $ 50,949 Basic income per common share $ 0.68 $ 1.25 $ 1.53 Diluted income per common share $ 0.65 $ 1.20 $ 1.45 Basic weighted average shares outstanding 31,075,648 32,292,978 33,333,557 Diluted weighted average shares outstanding 32,074,561 33,719,424 35,024,108 See accompanying notes to the consolidated financial statements. 62 Liquidity Services, Inc. and Subsidiaries Consolidated Statements of Comp rehensive Income (Dollars In Thousands) Year Ended September 30, 2023 2022 2021 Net income $ 20,978 $ 40,324 $ 50,949 Other comprehensive (loss) income: Defined benefit pension plan—unrecognized amounts ( 1,411 ) 1,836 170 Foreign currency translation 1,238 ( 3,110 ) 601 Other comprehensive (loss) income ( 173 ) ( 1,274 ) 771 Comprehensive income $ 20,805 $ 39,050 $ 51,720 See accompanying notes to the consolidated financial statements. 63 Liquidity Services, Inc. and Subsidiaries Consolidated State ments of Stockholders' Equity (Dollars In Thousands) Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Shares Amount Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Loss) Total Balance at September 30, 2020 34,082,406 $ 34 $ 247,892 ( 547,508 ) $ ( 3,983 ) $ ( 9,782 ) $ ( 122,346 ) $ 111,815 Net income — — — — — — 50,949 50,949 Exercise of common stock options and vesting of restricted stock 1,605,618 1 444 — — — — 445 Tax settlements associated with stock compensation expense ( 217,196 ) — ( 3,915 ) — — — — ( 3,915 ) Forfeiture of restricted stock awards ( 13,733 ) — — — — — — — Common stock repurchases — — — ( 1,591,963 ) ( 31,143 ) — — ( 31,143 ) Common stock surrendered in the exercise of stock options — — 1,502 ( 82,612 ) ( 1,502 ) — — — Stock compensation expense — 6,094 — — — — 6,094 Defined benefit pension plan—unrecognized amounts, net of taxes — — — — — 170 170 Foreign currency translation and other — — — — — 601 ( 1 ) 600 Balance at September 30, 2021 35,457,095 $ 35 $ 252,017 ( 2,222,083 ) $ ( 36,628 ) $ ( 9,011 ) $ ( 71,398 ) $ 135,015 Net income — — — — — — 40,324 40,324 Exercise of common stock options, grants of restricted stock awards, and vesting of restricted stock units 664,921 1 ( 1 ) — — — — — Taxes paid associated with net settlement of stock compensation awards ( 140,202 ) — ( 2,805 ) — — — — ( 2,805 ) Common stock repurchases — — — ( 1,567,277 ) ( 25,447 ) — — ( 25,447 ) Common stock surrendered in the exercise of stock options — — 478 ( 23,839 ) ( 479 ) — — ( 1 ) Forfeiture of restricted stock awards ( 257,757 ) — — — — — — — Stock compensation expense — — 8,586 — — — — 8,586 Defined benefit pension plan—unrecognized amounts, net of taxes — — — — — 1,836 — 1,836 Foreign currency translation — — — — — ( 3,110 ) 138 ( 2,972 ) Balance at September 30, 2022 35,724,057 $ 36 $ 258,275 ( 3,813,199 ) $ ( 62,554 ) $ ( 10,285 ) $ ( 30,936 ) $ 154,536 Net income — — — — — — 20,978 20,978 Exercise of common stock options, grants of restricted stock awards, and vesting of restricted stock units 500,540 — 495 — — — — 495 Taxes paid associated with net settlement of stock compensation awards ( 82,252 ) — ( 1,261 ) — — — — ( 1,261 ) Common stock repurchases — — — ( 1,607,141 ) ( 21,277 ) — — ( 21,277 ) Common stock surrendered in the exercise of stock options — — 200 ( 12,705 ) ( 200 ) — — — Forfeiture of restricted stock awards — — — — — — — — Stock compensation expense — — 8,235 — — — — 8,235 Defined benefit pension plan—unrecognized amounts, net of taxes — — — — — ( 1,411 ) — ( 1,411 ) Foreign currency translation and other — — — — — 1,238 1 1,239 Balance at September 30, 2023 36,142,345 $ 36 $ 265,945 ( 5,433,045 ) $ ( 84,031 ) $ ( 10,458 ) $ ( 9,958 ) $ 161,533 See accompanying notes to the consolidated financial statements. 64 Liquidity Services, Inc. and Subsidiaries Consolidated Statem ents of Cash Flows (Dollars In Thousands) Year Ended September 30, 2023 2022 2021 Operating activities Net income $ 20,978 $ 40,324 $ 50,949 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,255 10,322 6,969 Change in fair value of earn-out liability — ( 24,500 ) — Stock compensation expense 8,191 8,482 6,947 Inventory adjustment to net realizable value 1,048 194 174 Provision for doubtful accounts 1,390 136 297 Deferred tax expense (benefit) 6,578 6,287 ( 24,510 ) Impairment of long-lived and other non-current assets — 31 1,338 (Gain) loss on disposal of property and equipment ( 36 ) ( 14 ) 80 Gain on disposal of lease assets — ( 240 ) ( 23 ) Changes in operating assets and liabilities: Accounts receivable 2,725 ( 6,290 ) ( 843 ) Inventory ( 479 ) 441 ( 7,035 ) Prepaid taxes and tax refund receivable ( 152 ) 82 ( 61 ) Prepaid expenses and other assets ( 1,166 ) ( 1,805 ) ( 2,022 ) Operating lease assets and liabilities ( 228 ) 396 ( 79 ) Accounts payable ( 2,889 ) 1,548 18,554 Accrued expenses and other current liabilities 277 ( 2,653 ) 6,060 Deferred revenue 262 ( 185 ) 1,369 Payables to sellers ( 581 ) 13,000 7,543 Other liabilities ( 157 ) ( 723 ) ( 290 ) Net cash provided by operating activities 47,016 44,833 65,417 Investing activities Purchases of property and equipment, including capitalized software ( 5,386 ) ( 8,121 ) ( 5,419 ) Proceeds from note receivable — — 4,343 Purchase of short-term investments ( 8,037 ) ( 1,820 ) — Maturities of short-term investments 1,923 — — Cash paid for business acquisition, net of cash acquired — ( 11,164 ) — Other investing activities, net 68 21 72 Net cash (used in) provided by investing activities ( 11,432 ) ( 21,084 ) ( 1,004 ) Financing activities Payments of the principal portion of finance lease liabilities ( 101 ) ( 99 ) ( 42 ) Payments of debt issuance costs — ( 91 ) — Proceeds from exercise of common stock options, net of tax 496 — 445 Taxes paid associated with net settlement of stock compensation awards ( 1,262 ) ( 2,806 ) ( 3,915 ) Payment of earn-out liability related to business acquisition — ( 3,500 ) — Common stock repurchases ( 21,198 ) ( 25,447 ) ( 31,143 ) Net cash used in financing activities ( 22,065 ) ( 31,943 ) ( 34,655 ) Effect of exchange rate differences on cash and cash equivalents 640 ( 2,019 ) 541 Net increase (decrease) in cash and cash equivalents 14,159 ( 10,213 ) 30,299 Cash and cash equivalents at beginning of year 96,122 106,335 76,036 Cash and cash equivalents at end of year $ 110,281 $ 96,122 $ 106,335 Supplemental disclosure of cash flow information Cash paid for income taxes, net $ 1,590 $ 885 $ 1,442 Non-cash: Common stock surrendered in the exercise of stock options $ 200 $ 479 $ 1,502 See accompanying notes to the consolidated financial statements. 65 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Organ ization Liquidity Services, Inc. (Liquidity Services, the Company) is a leading global commerce company providing trusted online marketplace platforms that power the circular economy. We create a better future for organizations, individuals, and the planet by using technology to capture and unleash the intrinsic value of surplus. We connect millions of buyers and thousands of sellers through our leading e-commerce 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 by unleashing the intrinsic value of surplus through our online marketplace platforms. These platforms ignite and enable a self-reinforcing cycle of value creation where buyers and sellers attract one another in greater numbers. The result of this cycle is a continuous flow of goods that becomes increasingly valuable as more participants join the platforms, thereby creating positive network effects that benefit sellers, buyers, and shareholders. Liquidity Services was incorporated in Delaware in November 1999 as Liquidation.com, Inc. and commenced operations in early 2000. On November 1, 2021, our GovDeals segment acquired Bid4Assets, Inc. (Bid4Assets), a Maryland corporation based in Silver Spring, MD. Bid4Assets is a leading online marketplace focused on conducting real property auctions for government entities, including tax foreclosure sales and sheriff's sales. See Note 3 - Bid4Assets Acquisition for more information regarding this transaction. Operating Segments The Company has four reportable segments under which we conduct business: GovDeals, Capital Assets Group (CAG), Retail Supply Chain Group (RSCG), and Machinio. Further information and operating results of our reportable segments can be found in Note 16 - Segment Information . • GovDeals . The GovDeals reportable segment provides solutions that enable government entities including city, county, state and federal agencies located in the United States and Canada and related commercial businesses to sell surplus property and real estate assets through our GovDeals and Bid4Assets marketplaces (see Note 3 - Bid4Assets Acquisition ). • RSCG . The RSCG reportable segment consists of marketplaces that enable corporations located in the United States and Canada to sell excess, returned, and overstocked consumer goods. RSCG also offers a suite of services that includes returns management, asset recovery, and e-commerce solutions. This segment uses multiple selling channels across our network of marketplaces and others to optimize the best combination of velocity, volume, and value. • CAG . The CAG reportable segment provides solutions to sellers and consists of marketplaces that enable commercial businesses to sell surplus assets. The core verticals in which CAG operates include industrial manufacturing, oil and gas, heavy equipment, biopharma, and electronics. CAG also offers a suite of services that includes surplus management, asset valuation, asset sales and marketing. CAG benefits from a global base of buyers and sellers enabling the sale and redeployment of assets wherever they’re most likely to generate the best value and highest use across the world. This segment primarily uses the AllSurplus and GovDeals marketplaces. • Machinio . 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. Machinio also offers the Machinio System service that provides equipment sellers with a suite of online marketing tools that includes website hosting, email marketing, and inventory management, to support and enable equipment sellers’ online business. 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 inflationary pressures and impacts from interest rate changes; armed conflicts around the world; 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. 66 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates. Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In addition, in the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. 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 Consolidated Stateme nts of Operations in the period it is modified. All subsequent changes to a valuation allowance or uncertain tax position that relate to the acquired company and existed at the acquisition date that occur both within the measurement period and as a result of facts and circumstances that existed at the acquisition date, are recognized as an adjustment to goodwill. All other changes in valuation allowances are recognized as a reduction or increase to income tax expense or as a direct adjustment to additional paid-in capital as required. Cash and Cash Equivalents The Company considers all highly liquid securities purchased with an initial maturity of three months or less to be cash equivalents and are included as a current asset in the line-item Cash and cash equivalents within our Consolidated Balance Sheets. Interest income earned through our cash and cash equivalents are recorded to Interest and other income, net within the Consolidated Statements of Operations. Short-term Investments The Company's short-term investments are designated as held-to-maturity investment securities, recorded at amortized cost, and are included as a current asset in the line-item Short-term investments within our Consolidated Balance Sheets as their maturity is less than one year from the balance sheet date. Interest income earned through our short-term investments are recorded to Interest and other income, net within the Consolidated Statements of Operations. Accounts Receivable Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Changes in allowances, which are included in Sales and marketing within the Consolidated Statements of Operations, are based on management’s judgment, which considers historical bad debt experience, a specific review of all significant outstanding invoices, customer-specific information and relevant conditions, and an assessment of general economic conditions. As of September 30, 2023 , the Company's bad debt allowance was $ 1.4 million. 67 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Inventory Inventory consists of property obtained for resale, generally through the online auction process, and is stated at the lower of cost or net realizable value in the line-item Inventory, net on the Consolidated Balance Sheets. Cost is generally determined using the specific identification method. Costs associated with our warehouse operations are expensed as incurred and included within Technology and operations expenses in the Consolidated Statements of Operations. Charges for unsellable inventory, as well as for inventory written down to net realizable value, are included in Cost of goods sold in the period in which they have been determined to occur. As of September 30, 2023 , the Company's Inventory, net on its Consolidated Balance Sheet reflects adjustments to net realizable value of $ 1.0 million. Adjustments to net realizable value reflected in the Inventory, net balances as of September 30, 2022 , were immaterial . Prepaid expenses and other current assets Prepaid expenses and other current assets include the short-term portion of contract assets (described in "Contract Assets and Liabilities"), capitalized sales commissions paid (described in "Contract Costs"), as well as other miscellaneous prepaid expenses. 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 disposi tion, 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 of 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 12, 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 component of Other operating expenses in its Consolidated Statements of Operations during the year ended September 30, 2021, representing the difference between the $ 4.6 million outstanding balance of principal and accrued interest and the $ 3.5 mi llion payment received. There was no impact on the consolidated financial statements from the Forbearance Agreement as of and during the fiscal years ended September 30, 2022 and 2023. Property and Equipment Property and equipment are recorded at cost, and depreciated or amortized on a straight-line basis over the following estimated useful lives: Computers and purchased software One to five years Equipment Two to five years Furniture and fixtures Five to seven years Internally developed software for internal-use Two to five years Leasehold improvements Shorter of lease term or useful life Buildings Thirty-nine years Vehicles Five years Land Not depreciated 68 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Leases The Company determines if an arrangement is a lease upon inception. A contract is or contains a lease if the contract provides the right to control the use of an identified asset for a period of time. Lease assets and liabilities are recognized at the lease commencement date at an amount equal to the present value of the lease payments to be made over the lease term. The lease payments represent the combination of lease and nonlease components. The discount rate used to determine the present value is the Company’s incremental borrowing rate for a duration that is consistent with the lease term, as the rates implicit in the Company’s leases are generally not determinable. The Company’s incremental borrowing rate is estimated using publicly available information for companies with comparable financial profiles, adjusted for the impact of collateralization. The lease term includes the impacts of options to extend or terminate the lease only if it is reasonably certain that the option will be exercised. Lease expense related to operating lease assets and liabilities is recognized on a straight-line basis over the lease term. Lease expense related to finance lease assets is recognized on a straight-line basis over the shorter of the useful life of the asset or the lease term, while lease expense related to finance lease liabilities is recognized using the interest method. Lease-related payments not included in the determination of the lease assets and liabilities, such as variable lease payments, are expensed as incurred. Lease assets and liabilities are not recognized when the lease term is 12 months or less; however, short-term lease expense is still recognized on a straight-line basis over the lease term. Balances related to the Company's operating leases are included within Operating lease assets, Current portion of operating lease liabilities, and Operating lease liabilities (non-current portion of operating lease liabilities) on the Consolidated Balance Sheets. Balances related to the Company's finance leases are included within Other assets (finance lease assets), Accrued expenses and other current liabilities (current portion of finance lease liabilities), and Other long-term liabilities (non-current portion of finance lease liabilities) on the Consolidated Balance Sheets. Lease assets are assessed for impairment in accordance with the Company’s accounting policy for the impairment of long-lived assets. 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. Impairment of Long-Lived Assets Long-lived assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by comparing the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the es timated fair value of the assets. The Company did no t record impairment charges on material long-lived assets during the years ended September 30, 2023, 2022, and 2021 . Goodwill Goodwill represents the costs in excess of the fair value of net assets acquired through acquisitions by the Company. The Company reviews goodwill for impairment annually on July 1, or more frequently if events or circumstances indicate impairment may exist. Examples of such events or circumstances could include a significant change in business climate or the loss of a significant contract. 69 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) In evaluating goodwill for impairment, the Company may first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, no further testing of goodwill assigned to the reporting unit is required. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company applies a fair value-based test. In applying a fair value-based test, the Company determines the fair value of each of its reporting units and compares that amount to the carrying amount of the respective reporting units, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, no impairment loss is recognized. If, instead, the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in the amount of the excess carrying value. Deferred Revenue Deferred revenue is primarily derived from Machinio Advertising and System subscriptions that range primarily from one to twenty-four months. Subscription fees are recognized ratably over the term of the agreements. Revenue Recognition In the Consolidated Statements of Operations, revenue from the resale of inventory that the Company purchases from sellers is recognized within Purchase revenues. Revenue from the sale of inventory that the Company sells on a consignment basis, and other non-consignment fee revenue, which includes Machinio's subscription services, is recognized within Consignment and other fee revenues. The Company recognizes revenue when or as performance obligations are satisfied and control is transferred to the customer. Revenue is recognized in the amount that reflects the consideration to which the Company expects to be entitled. Revenue is also evaluated to determine whether the Company should report the gross proceeds as revenue, when the Company acts as the principal in the arrangement, or the Company should report its revenue on a net basis, when the Company acts as an agent. Specifically, when other parties are involved in providing goods or services to a customer, the Company must determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself, or to arrange for another party to provide them. The Company evaluates the following factors to determine if it is acting as a principal: (a) whether the Company is primarily responsible for fulfilling the promise to provide the asset or assets; (b) whether the Company has inventory risk of the asset or assets before they are transferred to the buyer; and (c) whether the Company has discretion in establishing the price for the asset or assets. The Company enters into contracts with buyers and sellers. The Company has master agreements with some sellers pertaining to the sale of a flow of surplus assets over the term of the master agreement; however, a revenue contract for accounting purposes exists when the Company agrees to sell a specific asset or assets. When acting as a principal (a “purchase” arrangement), the Company purchases an asset or assets from a seller and then the Company seeks to sell the asset or assets to a buyer. The Company recognizes as Purchase revenues the gross proceeds from the sale, including buyer's premiums. In purchase arrangements, the contract with the seller is not a revenue contract in the scope of the revenue recognition guidance; rather, it is a purchase of inventory. When the Company is acting as an agent (a “consignment” arrangement), its performance obligation is to arrange for the seller to sell an asset or assets to the buyer directly. The Company recognizes Consignment revenues, which are composed of buyer's premiums and/or sales commissions, based on the amounts that are paid to the Company by the buyers and sellers for utilizing the Company's services, which represent a percentage of the gross transaction proceeds. 70 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) For the Company’s CAG segment, certain transactions may involve cooperation with third parties to satisfy the performance obligation of arranging for the sale of assets to a buyer, with proceeds shared among the parties. When the Company controls whether to use third parties to fulfill its performance obligation, it is considered the principal and revenue is recognized based on the gross purchase or consignment proceeds, with amounts due to third parties recognized as an expense. When the seller requests multiple parties to fulfill its performance obligation, the Company is considered the agent and revenue is recognized based on the net purchase or consignment proceeds to be retained by the Company. In both purchase and consignment arrangements, the Company sometimes provides varying levels of services to the seller, such as returns management, refurbishment of assets, or valuation services. These services are considered integrated with the broader performance obligation to sell the seller’s assets to a buyer. Other services provided to sellers are not capable of being distinct, like providing access to the Company’s e-commerce marketplaces or promoting the asset or assets for sale, because they could not benefit the seller separately from the sale of their assets. The consideration received from buyers and sellers includes (a) buyer’s premiums, (b) seller’s commissions, and (c) fees for services, including reimbursed expenses. Consideration is variable based on units, final auction prices, or other factors, until the buyer’s purchase of the asset or assets is complete, or the service has been provided. Recognition of variable consideration that is based on the results of auctions or purchases by buyers is constrained until those transactions have been finalized. The Company estimates and recognizes amounts related to sales returns, discounts, or rebates promised to customers, and reimbursed expenses; however, those estimates are not significant relative to the Company's consolidated revenues. Revenue is recognized when or as the performance obligation is satisfied. Variable consideration is allocated to individual performance obligations when the variable consideration is related to satisfying that performance obligation. The Company's revenue is generally recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers and other methods of payments. Goods are generally not shipped before payment is received. For certain transactions, payment is due upon invoice and the payment terms vary depending on the segments. The Company collects and remits sales taxes on merchandise that it purchases and sells and has elected the practical expedient to exclude such sales tax amounts from the transaction price. The Company also provides shipping and handling services in some arrangements and has elected the practical expedient to treat those activities as fulfillment costs and will recognize the costs of these services at the time revenue is recognized for the related assets sold. If the Company is acting as a principal for the combined obligation, amounts received from customers for shipping are recognized as Revenue, and amounts paid for shipping are recognized as Costs of goods sold. If the Company is acting as an agent for the combined obligation, shipping revenue and costs will be netted and recognized within Costs of goods sold. The Company’s purchase and consignment performance obligations are satisfied at the point in time when control of the asset is transferred to the buyer or when the service is completed. The Company determines when control has transferred by evaluating the following five indicators: (a) whether the Company has a present right to payment for the asset or assets; (b) whether the buyer has legal title to the asset; (c) whether the buyer has physical possession of the asset or assets; (d) whether the buyer has the significant risks and rewards of ownership; and (e) whether the buyer has accepted the asset or assets. For the Company's Machinio segment, the performance obligation has been identified as the stand ready obligation to provide access to the Machinio subscription services, which it satisfies over time and recognizes as other fee revenues. As of September 30, 2023 , the Machinio segment had a remaining performance obligation of $ 4.7 million; the Company expects to recognize the substantial majority of that amount as Fee Revenue over the next 12 months. Cost of Goods Sold Cost of goods sold includes direct and incremental costs of purchasing inventory, transporting property for auction, shipping and handling costs, and credit card transaction fees. For transactions where the Company resells inventory that was purchased from sellers, the cost of goods sold includes the cost of that inventory, generally using specific identification. There are no inventory costs associated with consignment sales. 71 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 and $ 0.9 million as of September 30, 2023, and 2022, respectively, and is included in the line-item Prepaid expenses and other current assets on the Consolidated Balance Sheets. Contract liabilities reflect obligations to provide services for which the Company has already received consideration, and generally arise from upfront payments received in connection with Machinio's subscription services. The contract liability balance was $ 4.7 million and $ 4.4 million as of September 30, 2023, and 2022, respectively, and is included in the line-item Deferred revenue on the Consolidated Balance Sheet. Of the September 30, 2022 contract liability balance, $ 4.4 million was earned as Fee Revenue during the year ended September 30, 2023. Contract Costs Contract costs relate to sales commissions paid on subscription contracts that are capitalized within our Machinio segment. Contract costs are amortized over the expected life of the customer contract. The contract cost balance was $ 2.2 million and $ 1.8 million as of September 30, 2023, and 2022 , respectively, and is included in the line-item Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets. Amortization expense was $ 1.3 million and $ 1.1 million during the year ended September 30, 2023, and 2022 , respectively. 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 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 non-interest bearing, interest-bearing, and earnings allowance checking accounts, as well as cash equivalent money market funds, all of which exceed the applicable U.S. federal (FDIC and/or SIPC) and local jurisdiction (foreign banking institutions) insurance limits, and Accounts receivable. The Company deposits its cash in interest bearing checking accounts, acquires cash equivalent money market funds, and holds short-term investments designated as held-to-maturity investment securities, each with financial institutions that the Company considers to be of high credit quality. Management continually monitors the financial institutions with whom we conduct business and responds appropriately, when necessary, to manage potential risk exposure to our cash balances above the insurance limits. We have multiple vendor contracts with Amazon.com, Inc. under which we acquire and sell 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. $ 5.8 million and $ 8.1 million of inventory purchased under such contracts with Amazon.com, Inc. is included in our Consolidated Inventory balances as of September 30, 2023, and 2022 , respectively. Our vendor contracts with respect to sourcing or consigning merchandise for our RSCG segment generally reflect the concentration dynamics inherent to the retail industry. 72 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Income Taxes The Company accounts for income taxes using an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and income tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which the taxes are expected to be paid or recovered. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such determination, the Company considers all available positive and negative evidence to estimate whether future taxable income will be generated to permit use of the existing deferred tax asset. The resulting net tax asset reflects management's estimate of the amount that will be realized. The Company applies the authoritative guidance related to uncertainty in income taxes. Accounting Standards Codification (ASC) 740 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 resolutions of any related appeals or litigation processes, on the basis of technical merits. The Company’s policy is to recognize interest and penalties in the period in which they occur in the income tax provision. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and in foreign jurisdictions including, among others, Canada and the U.K. Stock-Based Compensation The Company has incentive plans under which stock options, restricted stock units, restricted stock awards, and stock appreciation rights are issued. The awards issued can contain service conditions, performance conditions based upon Company financial results, and/or market conditions based upon changes in the Company's stock price. Service- and performance-based stock awards are measured at fair value on their grant date. Stock options and stock appreciation rights are measured at fair value using the Black-Scholes option-pricing model; however, because the stock appreciation rights are cash settled, they are also measured at fair value in each reporting period. The Black-Scholes option-pricing model includes assumptions for the expected term, volatility, and dividend yield, each of which are determined in reference to the Company's historical results. Where applicable, the expected term assumption is derived separately for homogenous groups within the overall award population. Restricted stock units and restricted stock awards are measured at fair value using the closing price of the Company's stock on the grant date. For service-based stock awards, the Company recognizes expense on a straight-line basis over the service period, which is generally a period of one to four years . For performance-based stock awards, the Company recognizes expense on a straight-line basis over the derived service period expected to be required to achieve the performance condition. The Company records a cumulative adjustment to compensation expense for performance-based awards if there is a change in determination of whether it is probable that the performance condition will be achieved. Market-based stock awards are measured at fair value on their grant date using a Monte Carlo simulation. The Monte Carlo simulation includes assumptions for the expected term, volatility, and dividend yield, each of which are determined in reference to the Company's historical results. For market-based stock option and restricted stock awards, the Company recognizes expense on a straight-line basis over the derived service period determined by the Monte Carlo simulation, for each stock price target within the award. The Company accelerates expense when a stock price target is achieved prior to the derived service period. The Company, however, does not reverse expense recognized if the stock price target(s) are not ultimately achieved, as required by equity accounting for market-based awards. For market-based stock appreciation rights, because they are cash settled, they are measured at fair value in each reporting period. The Company recognized expense on a straight-line basis over the derived service period determined by the Monte Carlo simulation in each reporting period, for each stock price target within the award. The Company accelerates expense when a stock price target is achieved prior to the derived service period, and reverses expense recognized if the stock price target(s) are not ultimately achieved, as required by liability accounting for market-based awards. The Company recognizes the impact of forfeitures in the period they occur. Compensation expense from the stock awards is included in the same lines on the Consolidated Statements of Operations as the cash compensation to the employees receiving the stock awards. 73 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Excess tax benefits realized from stock awards are reported as cash flows from operating activities on the Consolidated Statements of Cash Flows. Advertising Costs Advertising expenditures are expensed as incurred. Advertising costs charged to expense were $ 4.5 million, $ 4.6 million, and $ 3.2 million for the years ended September 30, 2023, 2022, and 2021 , respectively. Treasury Stock Treasury stock is presented at cost, including any applicable excise taxes, commissions and fees, as a reduction of stockholders’ equity in the Consolidated Balance Sheets and Consolidated Statement of Stockholders' Equity. Treasury stock held by us may be retired or reissued in the future. Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is primarily the local currency. The translation of the subsidiary's financial statements into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation adjustments are recognized in Accumulated other comprehensive loss, a separate component of stockholders' equity. Realized and unrealized foreign currency transaction gains and losses are included in Interest and other income, net in the Consolidated Statements of Operations. Accumulated Other Comprehensive Loss The following table shows the changes in accumulated other comprehensive loss, net of taxes (in thousands): Foreign Currency Translation Adjustments Net Change Pension and Other Postretirement Benefit Plans Accumulated Other Comprehensive Loss Balance at September 30, 2020 $ ( 8,085 ) $ ( 1,697 ) $ ( 9,782 ) Current-period other comprehensive income 601 170 771 Balance at September 30, 2021 ( 7,484 ) ( 1,527 ) ( 9,011 ) Current-period other comprehensive (loss) ( 3,110 ) 1,836 ( 1,274 ) Balance at September 30, 2022 ( 10,594 ) 309 ( 10,285 ) Current-period other comprehensive (loss) 1,238 ( 1,411 ) ( 173 ) Balance at September 30, 2023 $ ( 9,356 ) $ ( 1,102 ) $ ( 10,458 ) 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 consolidated financial statements. 74 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Accounting Standards Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) , or 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, due to the fact that the Company was classified as a smaller reporting company defined by the SEC at the time the rule was effective for public business entities. The guidance 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 consolidated financial statements and expects to estimate credit losses on its financial assets such as its Accounts receivable and money market funds. We do not expect the adoption of this ASU will have a material impact on our consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . It will require organizations to provide enhanced disclosures primarily regarding significant segment expenses. The guidance will be effective for the Company beginning with its Annual Report on Form 10-K for the fiscal year ending September 30, 2025. The guidance is required to be applied on a retrospective basis, with all such required disclosures to be made with regard to all fiscal years presented in the financial statements. The Company is currently evaluating the effect that the adoption of this ASU may have on its consolidated financial statements. 3. Bid4Assets Acquisition On November 1, 2021, our GovDeals segment 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. The 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 were 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. The Company's 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 3,847 Total liabilities assumed 7,766 Net identifiable assets acquired $ 12,656 Goodwill 30,083 Total consideration transferred $ 42,739 75 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, Goodwill of approximately $ 30.1 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 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, 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, 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. 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, 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 year ended September 30, 2022, and as a result of the acquisition of Bid4Assets, the Company recorded contingent consideration in the amount of $ 28.0 million on its Consolidated Balance Sheets. Through and as of the final measurement period ended December 31, 2022, $ 3.5 million in earn-out payments were made. See further discussion of this matter within Note 13 - Fair Value Measurement . Other Information Revenue, net income (loss), and pro forma information related to the Bid4Assets acquisition was immaterial to the consolidated financial statements and its related notes for the years ended September 30, 2023, and 2022. 4. Earnings Per Share 76 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company calculates basic EPS by dividing net income by the weighted-average number of common shares outstanding during the reporting period, excluding unvested restricted stock awards. The Company calculates diluted net income per share by dividing net income by the weighted-average number of common shares and potentially dilutive common shares outstanding during the reporting period using the treasury stock method. The Company's potentially dilutive common shares include stock options, restricted stock units, and restricted stock awards. For such awards that have performance- or market-conditions, they are considered dilutive only when those performance- or market-conditions have been satisfied as of the reporting date; however, in periods of a net loss, the Company's diluted EPS will equal its basic EPS, as all its potential common shares are anti-dilutive in that case. In periods of net income, the calculation of diluted net income per share will exclude all anti-dilutive common shares. The computation of basic and diluted net income per share is as follows: Year Ended September 30, 2023 2022 2021 Numerator: Net income $ 20,978 $ 40,324 $ 50,949 Denominator: Basic weighted average shares outstanding 31,075,648 32,292,978 33,333,557 Dilutive impact of stock options, RSUs and RSAs 998,913 1,426,446 1,690,551 Diluted weighted average shares outstanding 32,074,561 33,719,424 35,024,108 Basic income per common share $ 0.68 $ 1.25 $ 1.53 Diluted income per common share $ 0.65 $ 1.20 $ 1.45 Stock options, RSUs and RSAs excluded from income per diluted share because their effect would have been anti-dilutive 1,808,606 1,009,288 420,454 5. Property and Equipment Property and equipment, including equipment under capital lease obligations, consists of the following: September 30, 2023 2022 (in thousands) Computers and purchased software $ 2,151 $ 2,058 Developed software for internal-use 25,820 22,168 Equipment 9,337 8,536 Leasehold improvements 2,979 3,256 Building 2,158 2,158 Furniture and fixtures 413 527 Vehicles 1,383 1,406 Land 754 754 Construction in progress 2,249 1,812 Total property and equipment 47,244 42,675 Less: Accumulated depreciation and amortization ( 30,088 ) ( 23,581 ) Total property and equipment, net $ 17,156 $ 19,094 Depreciation and amortization expense related to property and equipment for the years ended September 30, 2023, 2022, and 2021 , was $ 7.4 million, $ 6.5 million, and $ 5.6 million, respectively. Included in those amounts is amortization of internally developed software for internal use of $ 5.6 million, $ 4.7 mi llion, and $ 3.9 million, respectively. The Company did no t record impairment charges on material property and equipment during the years ended September 30, 2023, 2022, and 2021 . 6. Leases 77 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up t o 5.3 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: September 30, 2023 2022 Finance lease – lease asset amortization $ 78 $ 80 Finance lease – interest on lease liabilities 11 21 Operating lease cost 5,328 5,695 Operating lease impairment expense — — Short-term lease cost 413 337 Variable lease cost (1) 1,300 1,368 Sublease income ( 88 ) ( 111 ) Total net lease cost $ 7,042 $ 7,390 (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: September 30, 2023 Operating Leases Finance Leases 2024 $ 4,629 $ 97 2025 3,854 68 2026 2,418 65 2027 560 12 2028 144 — Thereafter 49 — Total lease payments (1) 11,654 242 Less: imputed interest (2) $ ( 928 ) $ ( 18 ) Total lease liabilities $ 10,726 $ 224 (1) The weighted average remaining lease term is 2.8 years for operating leases and 2.9 years for finance leases. (2) The weighted average discount rate is 6.2 % for operating leases and 5.6 % for finance leases. Supplemental disclosures of cash flow information related to leases are: Years Ended September 30, 2023 2022 Cash paid for amounts included in operating lease liabilities $ 4,754 $ 4,368 Cash paid for amounts included in finance lease liabilities $ 101 $ 99 Non-cash: lease liabilities arising from new operating lease assets obtained $ 725 $ 4,664 Non-cash: lease liabilities arising from new finance lease assets obtained $ — $ 175 Non-cash: adjustments to lease assets and liabilities (1) $ 418 $ ( 196 ) (1) These include adjustments due to lease modifications, renewals, and other related adjustments. 78 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 7. Goodwill The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows: Goodwill (in thousands) GovDeals CAG Machinio Total Balance at September 30, 2020 $ 23,731 $ 21,550 $ 14,558 $ 59,839 Translation adjustments — 33 — 33 Balance at September 30, 2021 $ 23,731 $ 21,583 $ 14,558 $ 59,872 Addition: Bid4Assets acquisition 30,083 — — 30,083 Translation adjustments — ( 1,045 ) — ( 1,045 ) Balance at September 30, 2022 $ 53,814 $ 20,538 $ 14,558 $ 88,910 Translation adjustments — 478 — 478 Balance at September 30, 2023 $ 53,814 $ 21,016 $ 14,558 $ 89,388 Accumulated goodwill impairment losses as of September 30, 2023, and 2022 were $ 168.6 million. Impairment Analysis 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 of July 1, 2023, the Company performed a quantitative fair-value-based test for each of our reporting units, determining that each of our reporting units with goodwill balances substantially exceeded their carrying values. The fair value test was performed utilizing the discounted cash flow method under the Income approach and the guideline company method under the Market approach, the results of which were weighted 75 :25, respectively, in the ending determined fair value. The Company did no t record impairment charges on its goodwill during the years ended September 30, 2023, 2022, and 2021. The Company did not identify any indicators of impairment that required an interim goodwill impairment test during the three months ended September 30, 2023 . 8. Intangible Assets Intangible assets consist of the following: September 30, 2023 September 30, 2022 (in thousands) Useful Life (in years) Weighted average useful Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Contract intangibles 6 - 8 8.0 $ 17,000 $ ( 6,043 ) $ 10,957 $ 17,000 $ ( 3,789 ) $ 13,211 Technology 3 - 5 6.1 5,300 ( 4,361 ) 939 5,300 ( 3,089 ) 2,211 Patent and trademarks 7 - 10 9.1 2,375 ( 1,814 ) 561 2,381 ( 1,569 ) 812 Total intangible assets, net $ 24,675 $ ( 12,218 ) $ 12,457 $ 24,681 $ ( 8,447 ) $ 16,234 Future expected amortization of intangible assets at September 30, 2023, is as follows: Year Ending September 30, Amortization (in thousands) 2024 $ 3,254 2025 2,013 2026 1,768 2027 1,761 2028 1,752 Thereafter 1,909 Total $ 12,457 79 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Amortization expense related to intangible assets for the years ended September 30, 2023, 2022, and 2021 was $ 3.8 million, $ 3.7 million, and $ 1.3 million, respectively. The increase in intangible amortization expense during the year ended September 30, 2022, was primarily due to the Bid4Assets acquisition. The Company did no t record impairment charges on any intangible assets during the years ended September 30, 2023, 2022, and 2021. The Company did not identify any indicators of impairment requiring an interim impairment test on material long-lived assets during the year ended September 30, 2023 . 9. 401(k) Benefit Plan The Company has a retirement plan (the Plan), which is intended to be a qualified plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan is a defined contribution plan available to all eligible employees and allows participants to contribute up to the legal maximum of their eligible compensation, not to exceed the maximum tax-deferred amount allowed by the Internal Revenue Service. The Plan also allows the Company to make discretionary matching contributions. During the fiscal year ended September 30, 2023, the Company stopped accepting investments in the Company’s stock fund under the Plan and all shares of the Company and other Plan interests held in the stock fund under the Plan were reinvested into non-Company investment vehicles. On March 28, 2023, the Company filed a post-effective amendment on Form S-8 with the SEC to deregister all of the previously registered shares and other Plan interests that remained unissued and unsold under the Plan. As a result, interests in the Plan no longer require registration under the Securities Exchange Act of 1934, as amended. On October 2, 2023, the Company filed a Form 15 to suspend the duty of the Plan to file reports under Section 15(d) of the Securities Exchange Act of 1934, as amended. For the years ended September 30, 2023, 2022, and 2021 , the Company recorded expenses of $ 1.4 million, $ 1.0 million, and $ 1.1 million, respectively, related to its contributions to the Plan. 10. Income Taxes The components of the provision for income taxes of continuing operations are as follows: Year Ended September 30, 2023 2022 2021 (in thousands) Current tax provision (benefit): U.S. Federal $ — $ — $ — State 1,179 487 293 Foreign 282 555 847 1,461 1,042 1,140 Deferred tax provision (benefit): U.S. Federal 5,251 4,962 ( 23,315 ) State 1,280 1,275 ( 1,252 ) Foreign 47 50 57 6,578 6,287 ( 24,510 ) Total provision (benefit) $ 8,039 $ 7,329 $ ( 23,370 ) Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: 80 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) September 30, 2023 2022 (in thousands) Deferred tax assets: Net operating losses—Foreign $ 16,403 $ 12,409 Net operating losses—U.S. 14,581 24,054 Accrued vacation and bonus 831 701 Inventory capitalization 486 683 Inventory reserves 243 24 Allowance for doubtful accounts 363 113 Stock compensation expense 3,288 2,198 Operating lease liabilities 3,552 3,565 Other 386 845 Total deferred tax assets before valuation allowance 40,133 44,592 Less: valuation allowance ( 16,029 ) ( 12,259 ) Net deferred tax assets 24,104 32,333 Deferred tax liabilities: Amortization of intangibles 2,666 3,453 Amortization of goodwill 7,964 7,595 Depreciation 1,004 938 Capitalized costs 1,440 2,786 Operating/right of use assets 3,365 3,325 Pension liability 615 608 Total deferred tax liabilities $ 17,054 $ 18,705 Net deferred taxes $ 7,050 $ 13,628 81 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The reconciliation of the U.S. federal statutory rate to the effective rate for continuing operations is as follows: Year Ended September 30, 2023 2022 2021 U.S. statutory rate 21.0 % 21.0 % 21.0 % Stock-based stock compensation expense ( 1.3 )% ( 2.0 )% ( 14.1 )% Nondeductible compensation expense 0.5 % 2.0 % 5.5 % Fair value adjustments of acquisition earn-outs — % ( 10.8 )% — % Other permanent items 0.1 % ( 0.4 )% 0.1 % State taxes 7.8 % 3.3 % 3.0 % Net foreign rate differential — % 0.1 % 0.5 % Unrecognized tax benefits ( 0.5 )% 0.0 % 0.1 % Change in valuation allowance 1.4 % ( 3.3 )% ( 98.9 )% Write-down of deferred tax assets on share-based stock compensation 0.2 % 0.5 % 0.7 % Write-down of deferred tax assets on net operating loss ( 0.8 )% 4.2 % ( 2.8 )% Other ( 0.7 )% 0.8 % 0.2 % Effective rate 27.7 % 15.4 % ( 84.7 )% As of September 30, 2023, and 2022, the Company had federal and state deferred tax assets of $ 6.6 million and $ 13.4 million, respectively, related to available federal and state net operating loss (NOL) carryforwards, foreign tax credit carryforwards, and other U.S. deductible temporary differences. The federal and state NOL carryforwards expire beginning in 2038 and 2024, respectively. The Company's ability to use these various carryforwards to offset any taxable income generated in future taxable periods may be limited under Section 382 and other federal tax provisions. The foreign tax credit carryforwards expire beginning in 2024. At September 30, 2023 and 2022, the Company had deferred tax assets related to available foreign NOL carryforwards of $ 16.4 million and $ 12.4 million, respectively. All but $ 0.5 million of our foreign NOLs maintain an indefinite carry forward life. The NOLs with limited carryforward periods will expire beginning in 2027. The Company evaluates the recoverability of its deferred tax assets on a jurisdictional basis by considering whether deferred tax assets will be realized on a more likely than not basis. To the extent a portion or all of the applicable deferred tax assets do not meet the more likely than not threshold, a valuation allowance is recorded. Consideration was given to the tax planning strategies and, when applicable, future taxable income as to how much of the relevant deferred tax asset could be realized on a more likely than not basis. The Company has recorded a valuation allowance of $ 16.0 million and $ 12.3 million against its gross deferred tax asset balance at September 30, 2023 and 2022, respectively. At each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of September 30, 2023, the Company determined that there was sufficient positive evidence to conclude that it is more likely than not that all of its U.S. deferred tax assets are realizable, except for $ 0.2 million of foreign tax credit carry forwards that expire beginning in 2024. The Tax Act and Jobs Act of 2017 (the Tax Act) subjects a U.S. shareholder to a minimum tax on "global intangible low-taxed income" (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A Topic 740 No. 5. Accounting for Global Intangible Low-Taxed Income states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. The Company has elected to recognize the resulting tax on GILTI as an expense in the period the tax is incurred. The Inflation Reduction Act (IRA) was enacted on August 16, 2022. The IRA includes provisions imposing a 1 % excise tax on share repurchases that occur after December 31, 2022, and introduces a 15 % corporate alternative minimum tax (CAMT) on adjusted financial statement income. The CAMT will be effective for us beginning in fiscal year 2024. We currently are not expecting the IRA to have a material adverse impact on our financial statements. 82 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) On November 1, 2021, the Company acquired 100 % of the stock of Bid4Assets, Inc. for $ 42.7 million. Under the acquisition method of accounting, the Company recorded a net deferred tax liability of $ 3.8 million composed primarily of acquired intangibles netted against NOLs and other deferred assets. The total amount of NOLs, which are subject to limitations under Section 382, were $ 1.2 million. The Company has not recorded a provision for deferred U.S. tax expense on the undistributed earnings of foreign subsidiaries since the Company intends to indefinitely reinvest the earnings of these foreign subsidiaries outside the U.S. The amount of such undistributed foreign earnings was $ 10.6 million as of September 30, 2023. As of September 30, 2023, and 2022, $ 19.1 million and $ 20.3 million, respectively, of cash and cash equivalents was held overseas and not available to fund domestic operations without incurring taxes upon repatriation. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands): Year Ended September 30, 2023 2022 2021 Beginning balance at October 1 $ 143 $ 143 $ 123 Additions based on positions related to the current year — — — Additions for tax positions of prior years — — 20 Reductions for tax positions of prior years ( 143 ) — — Settlements — — — Balance at September 30 — $ 143 $ 143 The Company applies the authoritative guidance related to uncertainty in income taxes. ASC 740 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 resolutions of any related appeals or litigation processes, on the basis of the technical merits. During 2023, the Company did not identify any new uncertain tax positions and released $ 0.1 million of prior year uncertain tax positions related to foreign operations. The Company recognizes interest and penalties in the period in which they occur in the income tax provision. 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 U.K. The Company has no open income tax examinations in the U.S. and the statute of limitations for years prior to 2020 is now closed; however, certain tax attribute carryforwards that were generated prior to fiscal year 2020 may be adjusted upon examination by tax authorities if they are utilized. 11. Debt On Februar y 10, 2022, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (the Credit Agreement). Terms of the Credit Agreement provide for revolving loans (the 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. During the year ended September 30, 2023, the Credit Agreement was amended to extend the maturity date by 12 months to March 31, 2025 (the First Amendment). No other changes, including with respect to the borrowing terms of capacities, were made to the Credit Agreement as a result of the First Amendment. 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 (as defined in the Credit Agreement), on a quarterly basis, equal to 0.05 % per annum on the daily amount of the available, but unused, balance on the Line of Credit. The Company also pays a Line of Credit Fee (as defined in the Credit Agreement), 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 (income) expense, 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. 83 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 September 30, 2023, the Company was in full compliance with the terms and conditions of the Credit Agreement. During the year ended September 30, 2023, the Company did not make any draws under the Credit Agreement. As of September 30, 2023 , the Company had no outstanding borrowings under the Credit Agreement. During the year ended September 30, 2023 , interest expense incurred by the Company under the Credit Agreement was immaterial to the consolidated financial statements. 12. Equity Transactions 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, and a plan and private placement issuances related to the Company’s acquisition of Machinio and Bid4Assets. As of September 30, 2023 , 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 September 30, 2023, 972,531 shares of common stock remained available for use. Stock Compensation Expense The table below presents the components of share-based compensation expense (in thousands): Year Ended September 30, 2023 2022 2021 Equity-classified awards: Stock options $ 2,002 $ 2,673 $ 3,117 RSUs & RSAs 6,233 5,912 2,977 Total Equity-classified award 8,235 8,585 6,094 Liability-classified awards: SARs ( 44 ) ( 104 ) 853 Total stock compensation expense: $ 8,191 $ 8,481 $ 6,947 The Company’s total liabilities for liability-classified stock compensation awards were $ 0 and $ 0.2 million as of September 30, 2023 and 2022, respectively. The table below presents the components of share-based compensation expense by line item within our Consolidated Statements of Operations (in thousands): Year Ended September 30, 2023 2022 2021 Stock Compensation Expense by Line Item Technology and operations $ 1,226 $ 1,307 $ 1,016 Sales and marketing 2,363 2,148 1,541 General and administrative 4,602 5,026 4,390 Total stock compensation expense: $ 8,191 $ 8,481 $ 6,947 Share-Based Award Activity Stock Options The table below presents stock option activity (aggregate intrinsic value in thousands): 84 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Stock Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value Outstanding as of September 30, 2022 2,705,436 $ 10.76 5.58 $ 18,397 Granted 353,958 $ 14.43 $ — Exercised ( 372,362 ) $ 7.34 $ 2,997 Forfeited ( 34,019 ) $ 15.23 $ 143 Expired ( 23,816 ) $ 40.11 $ — Outstanding as of September 30, 2023 2,629,197 $ 11.41 5.12 $ 18,549 Vested and expected to vest as of September 30, 2023 2,614,187 $ 11.35 5.11 $ 18,549 Exercisable as of September 30, 2023 1,851,754 $ 9.59 4.05 $ 15,924 Of the 777,443 stock options not yet exercisable as of September 30, 2023 , 449,438 can become exercisable by satisfying service conditions only, and 328,005 can become exercisable by satisfying service and performance or market conditions. Stock options containing only service conditions generally vest over periods of one to four years and expire five to ten years from the date of grant. Stock compensation cost is expensed ratably over the entire service period. As of September 30, 2023 , there was $ 2.6 million of unrecognized compensation cost related to stock options containing only service conditions, which is expected to be recognized over a weighted-average period of 2.2 years. The range of assumptions used to determine the fair value of stock options using the Black-Scholes option-pricing model during the years ended September 30, 2023, 2022, and 2021 were as follows: Year Ended September 30, 2023 2022 2021 Dividend yield — — — Expected volatility 56.9 % - 62.2 % 57.0 % - 62.2 % 51.0 % - 55.9 % Risk-free interest rate 3.4 % - 3.9 % 1.1 % - 3.5 % 0.4 % - 0.8 % Expected term 4.5 - 7.6 years 4.5 - 7.4 years 4.6 - 7.6 years The weighted-average grant date fair value of options granted during the year-ended September 30, 2023, 2022, and 2021 was $ 7.49 , $ 10.70 , and $ 4.81 , respectively. The total intrinsic value of options exercised during 2023, 2022, and 2021 was $ 3.0 million, $ 3.8 million, and $ 15.0 million, respectively. Stock options containing performance conditions are discussed separately in the section below. RSUs & RSAs The table below presents RSU & RSA activity (aggregate fair value in thousands): RSU & RSA Weighted- Average Grant Date Fair Value Weighted- Average Remaining Contractual Term (years) Aggregate Fair Value Outstanding as of September 30, 2022 1,102,039 $ 18.66 2.94 $ 17,919 Granted 767,233 $ 15.16 $ 11,628 Vested ( 252,228 ) $ 14.56 $ 3,773 Forfeited ( 59,703 ) $ 17.22 $ 909 Outstanding as of September 30, 2023 1,557,341 $ 17.65 2.56 $ 27,440 Expected to vest as of September 30, 2023 1,487,341 $ 17.46 2.66 $ 26,207 Of the outstanding RSUs & RSAs as of September 30, 2023 , 835,526 can vest by satisfying service conditions only, and 721,815 can vest by satisfying service and performance or market conditions. 85 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) RSUs containing only service conditions vest ratably each year over periods of one to four years . Stock compensation cost is expensed ratably over the entire service period. As of September 30, 2023 , there was $ 10.3 million of unrecognized compensation cost related to RSUs containing only service conditions, which is expected to be recognized over a weighted-average period of 2.7 years. RSUs and RSAs containing performance conditions and market conditions are discussed separately in the section below. SARs The table below presents SAR award activity (aggregate intrinsic value in thousands): SARs Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value Outstanding as of September 30, 2022 24,150 $ 6.11 0.25 $ 245 Exercised ( 24,150 ) $ 6.11 $ 193 Forfeited — $ — $ — Outstanding as of September 30, 2023 — $ — $ — Vested and expected to vest as of September 30, 2023 — $ — $ — Exercisable as of September 30, 2023 — $ — $ — The Company made cash payments of $ 0.2 million, $ 0.2 million and $ 0.4 million to settle SARs exercised during the years ended September 30, 2023, 2022, and 2021, respectively. As of September 30, 2023 , there were no SARs outstanding. No new SARs were awarded during the year ended September 30, 2023. The fair value of outstanding SARs containing only service conditions is estimated using the Black-Scholes option-pricing model. The range of assumptions used to determine the fair value of outstanding SARs as of September 30, 2023, 2022, and 2021 were as follows: Year Ended September 30, 2023 2022 2021 Dividend yield — — — Expected volatility — 71.7 % 78.3 % Risk-free interest rate — 4.0 % 0.1 % Expected term — 0.25 1.25 As of September 30, 2022, and 2021, the weighted-average fair value of SARs outstanding was $ 9.82 and $ 18.86 per award, respectively. SARs containing performance conditions and market conditions are discussed separately in the section below. Stock Awards Containing Performance and Market Conditions Stock awards containing performance conditions vest upon the achievement of specified financial targets of the Company or its business units. Vesting is generally measured on 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 twelve months performance of the Company or its business units. When it is probable that the performance targets will be achieved, stock compensation expense is recognized ratably over the derived service period. If the Company determines that achievement of the performance targets is no longer probable, the Company no longer records expense and reverses all previously recognized expense. As of September 30, 2023, there was $ 0.9 million of unrecognized compensation costs related to stock options and RSUs & RSAs, containing performance conditions that are considered probable of being met, which is expected to be recognized over a weighted-average period of approximately 1 year. 86 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Stock awards containing market conditions 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 award, 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. Stock compensation cost is expensed on a straight-line basis over the derived service period for each stock price target within the award. The Company accelerates expense when a stock price target is achieved prior to the derived service period. For equity-classified awards, the Company does not reverse expense recognized if the stock price target(s) are not ultimately achieved, but expense is reversed when such situations occur for liability classified awards. As of September 30, 2023 , there was $ 1.4 million of unrecognized compensation costs related to stock options, RSUs and SARs, containing market conditions, which is expected to be recognized over a weighted-average period of 1.6 years. The fair value of stock options, RSUs and SARs containing market conditions is estimated using Monte Carlo simulations. The range of assumptions used to determine the fair value of these awards during the years ended September 30, 2023, 2022, and 2021 were as follows: Year Ended September 30, 2023 2022 2021 Dividend yield — — — Expected volatility — 57.2 % - 62.9 % 51.6 % - 54.6 % Risk-free interest rate — 1.1 % - 1.5 % 0.3 % - 0.9 % Expected holding period (% of remaining term) — 29.4 % - 100.0 % 31.7 % - 100.0 % There were no awards containing market conditions for which to determine their fair value during the year ended September 30, 2023. 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. On December 6, 2021, and May 13, 2022, the Company's Board of Directors authorized new stock repurchase plans of up to $ 20 million and $ 12 million, respectively. The Company repurchased 408,211 shares for $ 5.4 million during the year ended September 30, 2022. On December 6, 2022, March 13, 2023, and September 8, 2023, the Company's Board of Directors authorized new stock repurchase plans of up to $ 8.4 million, $ 8.0 million and $ 15.2 million, respectively. The Company repurchased 1,607,141 shares for $ 21.2 million during the year ended September 30, 2023. As of September 30, 2023, the Company had $ 17.0 million of remaining share repurchase authorization through December 31, 2025. 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 year ended September 30, 2023, and September 30, 2022 , participants surrendered 12,705 and 23,839 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. 87 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 13. Fair Value Measurement The Company measures and records in the accompanying consolidated financial statements 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. Cash and cash equivalents . The Compan y had $ 51.4 million and $ 22.0 million of money market funds considered cash equivalents as of September 30, 2023, and 2022, respectively. These assets were measured at fair value as of September 30, 2023, and 2022, and were classified as Level 1 assets within the fair value hierarchy. There were no transfers between levels during the periods presented. Contingent consideration. During the year ended September 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 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 Consolidated Balance Sheets. The Company's initial 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 operating results (expense components ranged from 20 % to 55 %), and the discount rate ( 13 %). The earn-out consideration was valued at approximately $ 28.0 million as of the acquisition date. Fair value of the earn-out consideration was 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 year ended September 30, 2022, was as follows (in thousands): Contingent Consideration Balance at September 30, 2021 $ — Earn-out from business acquisition 26,900 Measurement period adjustment 1,100 Payment of achieved earn-out threshold ( 3,500 ) Change in fair value ( 24,500 ) Balance at September 30, 2022 $ — During the year ended September 30, 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. Based on results as of March 31, 2022, Bid4Assets achieved a trailing twelve-month EBITDA threshold resulting in a $ 3.5 million payment made by the Company to the former shareholders of Bid4Assets. 88 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) During the twelve months ended September 30, 2022, the fair value of the earn-out liability was reduced by $ 24.5 million, such that no amount of fair value was determined present as of September 30, 2022. This reduction was due to a decline in the auction events and transactions that were expected to be completed during the earn-out period ended 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. These changes resulted from events occurring subsequent to the November 1, 2021, acquisition date and therefore, were not known nor knowable at that time. These changes in fair value were recorded as a gain within Fair value adjustment of acquisition earn-outs in the Consolidated Statements of Operations. Other Information . 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, short-term investments, accounts receivable, and accounts payable. The Company believes the carrying values of these instruments approximate fair value. As of September 30, 2023, the Company had no non-financial instruments measured at fair value on a non-recurring basis. As of September 30, 2023, and 2022 , the Company did no t have any material assets or liabilities measured at fair value on a non-recurring basis. 14. 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 Company recognizes the funded status of its postretirement benefit plans, with a corresponding noncash adjustment to accumulated other comprehensive loss, net of tax, in stockholders' equity. The funded status is measured as the difference between the fair value of the Scheme's assets and the benefit obligation of the Scheme. The net periodic benefit cost is recognized within Interest and other income , net in the C onsolidated Statements of Operations, and for the years ended September 30, 2023, 2022, and 2021, included the following components: Year Ended September 30, 2023 2022 2021 (in thousands) Interest cost $ 794 $ 446 $ 438 Expected return on plan assets ( 876 ) ( 775 ) ( 793 ) Amortization of prior service cost 26 19 21 Settlement loss recognized — 61 — Total net periodic benefit $ ( 56 ) $ ( 249 ) $ ( 334 ) 89 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following table provides a reconciliation of benefit obligations, plan assets, and funded status related to the Company's qualified defined benefit pension plan for the years ended September 30, 2023, and 2022: Year Ended September 30, 2023 2022 (in thousands) Change in benefit obligation Beginning balance $ 13,329 $ 26,955 Interest cost 794 446 Benefits paid ( 761 ) ( 634 ) Actuarial gain ( 786 ) ( 7,613 ) Foreign currency exchange rate changes 1,271 ( 5,825 ) Ending balance $ 13,847 $ 13,329 Year Ended September 30, 2023 2022 (in thousands) Change in plan assets Beginning balance at fair value $ 16,554 $ 28,208 Actual return on plan assets ( 1,344 ) ( 5,056 ) Benefits paid ( 761 ) ( 634 ) Employer's contributions 293 134 Plan Settlements — ( 1,182 ) Foreign currency exchange rate changes 1,590 ( 4,916 ) Ending balance at fair value $ 16,332 $ 16,554 Overfunded status of the Scheme $ 2,485 $ 3,225 The pension asset of $ 2.5 million is rec orded in Other long-term assets in the Consolidated Balance Sheets. Because the Scheme is closed to new participants, the accumulated benefit obligation is equal to the projected benefit obligation , which was $ 13.8 million and $ 13.3 million at September 30, 2023 and 2022, respectively. During the year ended September 30, 2022, the Company extended early settlement offers to all members of the Scheme. There was no material impact to the consolidated financial statements as a result of the early settlement offers. The amounts recognized in Other comprehensive income (loss) related to the Company's qualified defined benefit pension plan, net of taxes, and the related foreign currency translation adjustments, for the years ended September 30, 2023, and 2022, is shown in the following table: Year Ended September 30, 2023 2022 (in thousands) Accumulated other comprehensive income (loss) at beginning of year $ 278 $ ( 1,885 ) Net actuarial loss ( 334 ) ( 328 ) Foreign currency translation adjustments ( 1,038 ) 2,491 Accumulated other comprehensive (loss) income at end of year $ ( 1,094 ) $ 278 The plan complies with the funding provisions of the U.K. Pensions Act 2004 and the Occupational Pension Schemes Regulations Act 2005. The Company does not plan to make contributions to the plan in the near future. 90 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Actuarial Assumptions The actuarial assumptions used to determine the benefit obligations at September 30, 2023 and 2022, and to determine the net periodic (benefit) cost for the year were as follows: September 30, 2023 September 30, 2022 Discount rate to determine net periodic (benefit) cost 5.50 % 2.00 % Expected return on plan assets 6.45 % 4.82 % Discount rate to determine benefit obligations 5.70 % 5.50 % Rate of increases to deferred CPI linked benefits 3.20 % 3.40 % Rate of increases to deferred RPI linked benefits 3.80 % 3.80 % Mortalit y— 101 % for males and 98 % for females of S3PMA mortality tables, projected in line with the 2021 Continuous Mortality Investigation projection model and a 1.3 % per annum long-term rate of impr ovement. Estimated Future Benefit Payments The Company's pension plan expects to make the following benefit payments to participants over the next 10 years: Pension Benefits (in thousands) Year ending September 30, 2023 $ 1,126 2024 931 2025 858 2026 888 2027 823 2028 through 2033 4,924 Total $ 9,550 Fair Value Measurements The investment policy and strategy of the plan assets, as established by the Trustees (the "Trustees") of the plan, strive to maximize the likelihood of achieving primary objectives of the investment policy established for the plan, which are: • Funding—to ensure that the Plan is fully funded using assumptions that contain a modest margin for prudence. Where an actuarial valuation reveals a deficit, a recovery plan will be put in place which will take into account the financial covenant of the employer; • Stability—to have due regard to the likely level and volatility of required contributions when setting the Plan's investment strategy; and • Security—to ensure that the solvency position of the Scheme is expected to improve. The Trustees will take into account the strength of employer's covenant when determining the expected improvement in the solvency position of the Plan. 91 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The assets are allocated among government bonds, corporate bonds, and diversified funds. The assets are not rebalanced, but the allocation is reviewed on a periodic basis to ensure that the investments are appropriate to the Scheme's circumstances. The Trustees review the investment policy on an ongoing basis, to determine whether a change in the policy or asset allocation targets is necessary. The basis of the Trustees’ strategy is to divide the Scheme’s assets between a “growth” portfolio, comprising assets such as multi-asset / diversified growth funds, and a “stabilizing” portfolio, comprising assets such as government bonds (both fixed and inflation-linked) and corporate bonds. The Trustees recognize the benefits of diversification across asset classes, as well as within them, in reducing the risk that results from investing in any one particular market. The Company has elected to use a bid value of Scheme assets to calculate the expected return on assets in the net periodic benefit cost. The assets consisted of the following as of September 30, 2023, and 2022: September 30, 2023 September 30, 2022 Government bonds 59.7 % 0.0 % Equity securities 0.0 % 21.6 % Corporate bonds 29.8 % 51.1 % Diversified fund 10.1 % 27.0 % Cash 0.4 % 0.3 % Total 100.0 % 100.0 % The expected long-term rate of return for the plan's total assets is based on the expected returns of each of the above categories, weighted based on the current target allocation for each class. The Trustees evaluate whether adjustments are needed based on historical returns to more accurately reflect expectations of future returns. The Company is required to present certain fair value disclosures related to its postretirement benefit plan assets, even though those assets are not included in the Company's Consolidated Balance Sheets. The following table presents the fair value of the assets of the Company's qualified defined benefit pension plan by asset category and their level within the fair value hierarchy. Balance as of September 30, 2023 Level 1 Level 2 Level 3 Total (in thousands) Government bonds $ — $ 9,757 $ — $ 9,757 Corporate bonds — 4,860 — 4,860 Diversified fund — 1,653 — 1,653 Cash 61 — — 61 Total $ 61 $ 16,270 $ — $ 16,331 Balance as of September 30, 2022 Level 1 Level 2 Level 3 Total (in thousands) Equity securities $ — $ 3,582 $ — $ 3,582 Corporate bonds — 8,462 — 8,462 Diversified fund — 4,467 — 4,467 Cash 43 — — 43 Total $ 43 $ 16,511 $ — $ 16,554 Valuation Techniques The Company relies on pricing inputs from investment fund managers to value investments. The fund manager prices the underlying securities using independent external pricing sources. 15. Legal Proceedings 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; however, unless otherwise noted, there are no claims or actions pending or threatened against the Company that, if adversely determined, would in the Company's management's judgment have a material adverse effect on the Company. 92 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Former Employee Matters In May 2021, the Company’s former Vice President, Human Resources filed a complaint against the Company in the United States District Court for the District of Maryland (the “District Court”), alleging wrongful termination on the basis of gender, race, and age. The Company’s employment practices liability insurance carrier, CNA, accepted tender of these claims. In December 2022, the District Court granted the Company’s motion to dismiss with respect to the age discrimination claim but denied the motion with respect to the race and gender claims. Trial on the race and gender claims began on October 30, 2023. The jury was unable to reach a unanimous verdict on either claim and the judge declared a mistrial on November 6, 2023. To date, a retrial date has not been set. The Company continues to assert substantial defenses and cannot estimate a range of potential liability, if any, at this time. On December 28, 2022, the Company’s former Chief Marketing Officer (the “Former CMO”) filed a complaint (the “Original Complaint”) in the District Court, alleging wrongful termination on the basis of race and age and that the Company retaliated against him. On April 26, 2023, the Former CMO filed an amended complaint with the District Court, alleging the same claims made in the Original Complaint. The Company filed a motion to dismiss certain of the Former CMO’s claims on September 1, 2023. The District Court has not yet ruled on the motion. The Company asserts substantial defenses and cannot estimate a range of potential liability, if any, at this time. CNA has accepted tender of these claims as well. 16. Segment Information The Company provides operating results in four reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. Descriptions of our reportable segments are as follows: • GovDeals . The GovDeals reportable segment provides solutions that enable government entities including city, county, state and federal agencies located in the United States and Canada and related commercial businesses to sell surplus property and real estate assets through our GovDeals and Bid4Assets marketplaces (see Note 3 - Bid4Assets Acquisition ). • RSCG . The RSCG reportable segment consists of marketplaces that enable corporations located in the United States and Canada to sell excess, returned, and overstocked consumer goods. RSCG also offers a suite of services that includes returns management, asset recovery, and e-commerce solutions. This segment uses multiple selling channels across our network of marketplaces and others to optimize the best combination of velocity, volume, and value. • CAG . The CAG reportable segment provides solutions to sellers and consists of marketplaces that enable commercial businesses to sell surplus assets. The core verticals in which CAG operates include industrial manufacturing, oil and gas, heavy equipment, biopharma, and electronics. CAG also offers a suite of services that includes surplus management, asset valuation, asset sales and marketing. CAG benefits from a global base of buyers and sellers enabling the sale and redeployment of assets wherever they’re most likely to generate the best value and highest use across the world. This segment primarily uses the AllSurplus and GovDeals marketplaces. • Machinio . 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. Machinio also offers the Machinio System service that provides equipment sellers with a set of online marketing tools that includes website hosting, email marketing, and inventory management, which support and enable equipment sellers’ online business. 93 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 direct profit to evaluate the performance of each segment. Segment direct profit, previously referred to as segment gross profit, continues to be calculated as total revenue less cost of goods sold (excludes depreciation and amortization). The following table sets forth certain financial information for the Company's reportable segments: Year Ended September 30, (in thousands) 2023 2022 2021 GovDeals: Purchase revenue $ — $ — $ — Consignment and other fee revenues 62,010 59,352 49,579 Total revenue 62,010 59,352 49,579 Segment direct profit $ 58,810 $ 56,408 $ 47,030 RSCG: Purchase revenue $ 161,780 $ 134,092 $ 130,790 Consignment and other fee revenues 38,438 32,007 28,016 Total revenue 200,218 166,100 158,806 Segment direct profit $ 68,068 $ 63,704 $ 64,564 CAG: Purchase revenue $ 10,309 $ 17,179 $ 15,361 Consignment and other fee revenues 28,167 25,396 24,284 Total revenue 38,476 42,575 39,645 Segment direct profit $ 32,215 $ 29,120 $ 29,324 Machinio: Purchase revenue $ — $ — $ — Consignment and other fee revenues 13,821 12,083 9,559 Total revenue 13,821 12,083 9,559 Segment direct profit $ 13,110 $ 11,471 $ 8,992 Corporate & Other, including elimination adjustments: Purchase revenue $ — $ — $ — Consignment and other fee revenues ( 62 ) ( 60 ) ( 57 ) Total revenue ( 62 ) ( 60 ) ( 57 ) Segment direct profit $ ( 62 ) $ ( 60 ) $ ( 57 ) Consolidated: Purchase revenue $ 172,089 $ 151,271 $ 146,151 Consignment and other fee revenues 142,373 128,779 111,380 Total revenue 314,462 280,050 257,531 Total Segment direct profit $ 172,140 $ 160,643 $ 149,853 94 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following table reconciles segment direct profit used in the reportable segments to the Company's consolidated results:  Year Ended September 30, (in thousands) 2023 2022 2021 Reconciliation: Total segment direct profit $ 172,140 $ 160,643 $ 149,853 Other costs and expenses from operations (1) 145,850 137,350 121,215 Fair value adjustment of acquisition earn-outs — ( 24,500 ) — Interest and other (income) expense, net ( 2,726 ) 140 1,058 Income before provision for income taxes $ 29,016 $ 47,653 $ 27,579 (1) Other costs and expenses from operations is defined as Total costs and expenses from operations per the Consolidated Statements of Operations, less Cost of goods sold (which is included in the calculation of Segment direct profit). Total segment assets reconciled to consolidated amounts are as follows:  September 30, (in thousands) 2023 2022 Segment Assets: GovDeals $ 256,215 $ 237,697 RSCG 110,592 99,430 CAG 96,828 96,393 Machinio 36,362 32,771 Corporate & Other ( 211,026 ) ( 178,188 ) Total Segment Assets: $ 288,970 $ 288,104 Revenue attributed to countries that represent a significant portion of consolidated revenues are as follows:  Year Ended September 30, (in thousands) 2023 2022 2021 Revenue by geographic area United States $ 278,734 $ 237,720 $ 214,162 Rest of the world 35,729 42,330 43,369 Consolidated $ 314,462 $ 280,050 $ 257,531 Total long-lived assets by geographic areas are as follows:  September 30, (in thousands) 2023 2022 Assets by geographic area United States $ 17,039 $ 18,867 Rest of the world 117 227 Total Long-lived Assets $ 17,156 $ 19,094 95 Liquidity Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) LIQUIDITY SERVICES, INC. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands) Balance at beginning of period Charged (credited) to expense Reductions Balance at end of period Deferred tax valuation allowance (deducted from net deferred tax assets) Year ended September 30, 2021 $ 41,788 ( 27,975 ) — $ 13,813 Year ended September 30, 2022 13,813 ( 1,554 ) — 12,259 Year ended September 30, 2023 $ 12,259 3,770 — $ 16,029 Allowance for doubtful accounts (deducted from accounts receivable) Year ended September 30, 2021 $ 389 297 ( 196 ) $ 490 Year ended September 30, 2022 490 136 ( 177 ) 449 Year ended September 30, 2023 $ 449 1,392 ( 417 ) $ 1,424 Provision for inventory allowance (deducted from inventory) Year ended September 30, 2021 $ 300 174 ( 300 ) $ 174 Year ended September 30, 2022 174 96 ( 174 ) 96 Year ended September 30, 2023 $ 96 1,048 ( 100 ) $ 1,044 96 EXHIBIT INDEX Exhibit No. Description 2.1 Stock Purchase Agreement, dated July 10, 2018, by and between 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 Form 10-Q, filed with the SEC on August 2, 2018. 2.2 Purchase and Sale Agreement, dated September 22, 2015, by and between Jacobs Trading, LLC and Tanager Acquisitions, LLC, incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed with the SEC on October 6, 2015. 2.3 First Amendment to Purchase and Sale Agreement dated September 30, 2015 by and between Jacobs Trading, LLC and Tanager Acquisitions, LLC . 2.4 Agreement and Plan of Merger, dated November 1, 2021, by and among the Company, Liquidity Services RE Ventures, Inc., Bid4Assets, 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 Current Report on 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. 3.1.1 Certificate of Amendment to the Company’s Fourth Amended and Restated Certificate of Incorporation, incorporated herein by reference to Appendix A to the Company’s Schedule 14A filed with the SEC on January 24, 2023. 3.2 Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on August 5, 2022. 4.1 Form of Certificate of Common Stock of the Company, incorporated herein by reference to Exhibit 4.1 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (Registration No. 333-129656), filed with the SEC on February 21, 2006. 4.2 Description of Securities 10.1 Credit Agreement, dated February 10, 2022, by and between Liquidity Services, Inc., and Wells Fargo Bank, National Association, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on February 10, 2022. 10.1.1 First Amendment to Credit Agreement, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on April 4, 2023. 10.2# Form of Amended and Restated Executive Employment Agreement, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on January 20, 2023. 10.3# Form of Change in Control Agreement, incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed with the SEC on January 20, 2023. 10.4# Form of Indemnification Agreement for directors and officers, incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on February 2, 2023 10.5# Form of Employee Agreement Regarding Confidentiality, Intellectual Property, and Competitive Activities, incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on February 2, 2023. 97 10.8# Liquidity Services, Inc. Third Amended and Restated 2006 Omnibus Long-Term Incentive Plan, incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, filed with the SEC on January 28, 2020. 10.8.1# 2022 Amendment to the Liquidity Services, Inc. Third Amended and Restated 2006 Omnibus Long-Term Incentive Plan, incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, filed with the SEC on January 24, 2022. 10.9# Machinio Corp. 2014 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8, filed with the SEC on July 10, 2018. 10.10# Form of Notice of Time-Based Stock Option Grant. 10.11# Form of Notice of Time-Based Restricted Stock Units Grant. 10.12# Form of Notice of Performance Based Stock Option Grant. 10.13# Form of Notice of Performance-Based Restricted Stock Units Grant. 10.14# Liquidity Services Inc. Annual Incentive Plan, adopted on December 2, 2020, incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K, filed with the SEC on December 11, 2020. 16.1 Letter of Ernst & Young LLP, dated December 27, 2021 21.1 List of Subsidiaries. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Ernst & Young LLP. 24.1 Power of Attorney (included on signature page). 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. 99.1 Revised Liquidity Services, Inc. Clawback Policy, incorporated herein by reference to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 3, 2023. 101 The following materials from the Registrant's Annual Report on Form 10-K for the year ended September 30, 2023, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2023 and 2022, (ii) Consolidated Statements of Operations for each of the three years in the period ended September 30, 2023, (iii) Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended September 30, 2023, (iv) Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2023, (v) Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 2023, and (vi) Notes to Consolidated Financial Statements. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). # Indicates management contract or compensatory plan. Item 16. F orm 10-K Summary. None. 98 SIG NATURES Pursuant to the requirements of Section 13 or 15(d) 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 on December 7, 2023. LIQUIDITY SERVICES, INC. By: /s/ WILLIAM P. ANGRICK, III William P. Angrick, III Chairman of the Board of Directors and Chief Executive Officer We, the undersigned directors and officers of Liquidity Services, Inc., hereby severally constitute William P. Angrick, III, Jorge A. Celaya, and Mark A. Shaffer, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 7, 2023. Signature Title /s/ WILLIAM P. ANGRICK, III William P. Angrick, III Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/ JORGE A. CELAYA Jorge A. Celaya Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ PHILLIP A. CLOUGH Phillip A. Clough Director /s/ KATHARIN S. DYER Katharin S. Dyer Director /s/ GEORGE H. ELLIS George H. Ellis Director /s/ THIERNO A. FALL Thierno A. Fall Director /s/ BEATRIZ V. INFANTE Beatriz V. Infante Director /s/ EDWARD J. KOLODZIESKI Edward J. Kolodzieski Director /s/ JAIME MATEUS-TIQUE Jaime Mateus-Tique Director 99