LIQUIDITY SERVICES INC 10-Q

Item 1. Financial Statements. Liquidity Services, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands, Except Par Value) December 31, 2020 September 30, 2020 (Unaudited) Assets Current assets: Cash and cash equivalents $ 77,844 $ 76,036 Accounts receivable, net of allowance for doubtful accounts of $ 396 and $ 389 4,801 5,322 Inventory, net 9,931 5,607 Prepaid taxes and tax refund receivable 1,442 1,652 Prepaid expenses and other current assets 6,853 5,962 Total current assets 100,871 94,579 Property and equipment, net of accumulated depreciation of $ 15,300 and $ 14,555 17,697 17,843 Operating lease assets 13,273 10,561 Intangible assets, net 4,427 4,758 Goodwill 60,126 59,839 Deferred tax assets 792 806 Other assets 8,068 8,248 Total assets $ 205,254 $ 196,634 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 25,258 $ 21,957 Accrued expenses and other current liabilities 17,411 19,124 Current portion of operating lease liabilities 3,956 3,818 Deferred revenue 3,429 3,255 Payables to sellers 27,239 26,170 Total current liabilities 77,293 74,324 Operating lease liabilities 10,006 7,499 Other long-term liabilities 2,892 2,996 Total liabilities 90,191 84,819 Commitments and contingencies (Note 11) 0 0 Stockholders’ equity: Common stock, $ 0.001 par value; 120,000,000 shares authorized; 34,212,815 shares issued and outstanding at December 31, 2020; 34,082,406 shares issued and outstanding at September 30, 2020 34 34 Additional paid-in capital 250,002 247,892 Treasury stock, at cost; 866,388 shares at December 31, 2020 and 547,508 shares at September 30, 2020 ( 8,255 ) ( 3,983 ) Accumulated other comprehensive loss ( 8,886 ) ( 9,782 ) Accumulated deficit ( 117,832 ) ( 122,346 ) Total stockholders’ equity 115,063 111,815 Total liabilities and stockholders’ equity $ 205,254 $ 196,634 See accompanying notes to the unaudited consolidated financial statements. 3 Table of Contents Liquidity Services, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in Thousands, Except Per Share Data) Three Months Ended December 31, 2020 2019 (Unaudited) Revenue $ 31,071 $ 30,349 Fee revenue 24,680 19,155 Total revenue 55,751 49,504 Costs and expenses from operations: Cost of goods sold (excludes depreciation and amortization) 22,573 24,176 Technology and operations 10,573 11,241 Sales and marketing 9,108 9,605 General and administrative 6,996 7,707 Depreciation and amortization 1,871 1,572 Other operating expenses 4 193 Total costs and expenses 51,125 54,494 Income (loss) from operations 4,626 ( 4,990 ) Interest and other income, net ( 185 ) ( 252 ) Income (loss) before provision for income taxes 4,811 ( 4,738 ) Provision for income taxes 297 458 Net income (loss) $ 4,514 $ ( 5,196 ) Basic income (loss) per common share $ 0.14 $ ( 0.15 ) Diluted income (loss) per common share $ 0.13 $ ( 0.15 ) Basic weighted average shares outstanding 33,176,895 33,545,235 Diluted weighted average shares outstanding 34,911,119 33,545,235 See accompanying notes to the unaudited consolidated financial statements. 4 Table of Contents Liquidity Services, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (Dollars in Thousands) Three Months Ended December 31, 2020 2019 (Unaudited) Net income (loss) $ 4,514 $ ( 5,196 ) Other comprehensive income: Foreign currency translation 896 833 Other comprehensive income 896 833 Comprehensive income (loss) $ 5,410 $ ( 4,363 ) See accompanying notes to the unaudited consolidated financial statements. 5 Table of Contents Liquidity Services, Inc. and Subsidiaries Consolidated Statement of Stockholders’ Equity (Dollars In Thousands) Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Shares Amount Accumulated Other Comprehensive Loss Accumulated Deficit Total (Unaudited) Balance at September 30, 2020 34,082,406 $ 34 $ 247,892 ( 547,508 ) ( 3,983 ) $ ( 9,782 ) $ ( 122,346 ) $ 111,815 Net income — — — — — — 4,514 4,514 Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units 151,845 — 197 — — — — 197 Taxes paid associated with net settlement of stock compensation awards ( 7,703 ) — ( 57 ) — — — — ( 57 ) Forfeitures of restricted stock awards ( 13,733 ) — — — — — — — Common stock repurchased — — — ( 309,496 ) ( 4,103 ) — — ( 4,103 ) Common stock surrendered in the exercise of stock options — — 169 ( 9,384 ) ( 169 ) — — — Stock compensation expense — — 1,801 — — — — 1,801 Foreign currency translation — — — — — 896 — 896 Balance at December 31, 2020 34,212,815 $ 34 $ 250,002 ( 866,388 ) $ ( 8,255 ) $ ( 8,886 ) $ ( 117,832 ) $ 115,063 See accompanying notes to the unaudited consolidated financial statements. 6 Table of Contents Liquidity Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars In Thousands) Three Months Ended December 31, 2020 2019 (Unaudited) Operating activities Net income (loss) $ 4,514 $ ( 5,196 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,871 1,572 Stock compensation expense 2,229 1,039 Provision for doubtful accounts 15 21 Deferred tax provision 32 100 (Gain) on disposal of property and equipment ( 1 ) ( 12 ) Change in fair value of earnout liability — 200 Changes in operating assets and liabilities: Accounts receivable 506 734 Inventory ( 4,324 ) 35 Prepaid and deferred taxes 208 ( 77 ) Prepaid expenses and other assets ( 1,235 ) ( 725 ) Operating lease assets and liabilities ( 89 ) ( 97 ) Accounts payable 3,301 ( 5,337 ) Accrued expenses and other current liabilities ( 1,994 ) ( 9,409 ) Distributions payable — ( 1,675 ) Deferred revenue 174 ( 359 ) Payables to sellers 1,069 658 Other liabilities ( 238 ) ( 75 ) Net cash provided by (used in) operating activities 6,038 ( 18,603 ) Investing activities Increase in intangibles ( 5 ) ( 20 ) Purchases of property and equipment, including capitalized software ( 1,363 ) ( 1,330 ) Proceeds from sales of property and equipment 14 12 Proceeds from promissory note 508 2,553 Purchases of short-term investments — ( 25,000 ) Maturities of short-term investments — 30,000 Net cash (used in) provided by investing activities ( 846 ) 6,215 Financing activities Payments of the principal portion of finance lease liabilities ( 9 ) ( 8 ) Taxes paid associated with net settlement of stock compensation awards ( 58 ) ( 498 ) Proceeds from exercise of stock options 197 2 Common stock repurchased ( 4,103 ) — Net cash used in financing activities ( 3,973 ) ( 504 ) Effect of exchange rate differences on cash and cash equivalents 589 578 Net increase (decrease) in cash and cash equivalents 1,808 ( 12,314 ) Cash and cash equivalents at beginning of period 76,036 36,497 Cash and cash equivalents at end of period $ 77,844 $ 24,183 Supplemental disclosure of cash flow information Cash paid for income taxes, net $ 208 $ 9 Non-cash: Common stock surrendered in the exercise of stock options $ ( 169 ) $ — See accompanying notes to the unaudited consolidated financial statements. 7 Table of Contents Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements 1. Organization Liquidity Services, Inc. (the Company) operates a network of e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 600 product categories . The Company’s marketplaces provide professional buyers access to a global, organized supply of new, surplus and idle assets presented with digital images and other relevant product information. Additionally, the Company enables corporate and government sellers to enhance their financial return on offered assets by providing a liquid marketplace and value-added services that encompass the consultative management, valuation and sale of surplus assets. The Company's services include program management, valuation, asset management, reconciliation, refurbishment and recycling, fulfillment, marketing and sales, warehousing and transportation, buyer support, compliance and risk mitigation, as well as self-directed service tools for its sellers. The Company organizes the products on its marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, heavy equipment, fleet and transportation equipment and specialty equipment. The Company’s marketplaces are: www.allsurplus.com, www.liquidation.com, www.govdeals.com, www.networkintl.com, www.secondipity.com, and www.go-dove.com. The Company also operates a global search engine for listing used machinery and equipment for sale at www.machinio.com. The Company has four reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio. See Note 12 for Segment Information. 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 the extent and duration of the COVID-19 pandemic; the Company's susceptibility to rapid technological change; actual and potential competition by entities with greater financial and other resources; and the potential for the commercial sellers from which the Company derives a significant portion of its inventory to change the way they conduct their disposition of surplus assets or to otherwise terminate or not renew their contracts with the Company. 2. Summary of Significant Accounting Policies Unaudited Interim Financial Information The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal, recurring adjustments considered necessary for a fair presentation, have been included, and intercompany transactions and accounts have been eliminated in consolidation. The information disclosed in the notes to the consolidated financial statements for these periods is unaudited. Operating results for the three months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021 or for any future period. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts in the consolidated financial statements and accompanying notes. For the three months ended December 31, 2020, these estimates required the Company to make assumptions about the extent and duration of the COVID-19 pandemic and its impacts on the Company's results of operations. As there remains uncertainty associated with the COVID-19 pandemic, the Company will continue to update its assumptions as conditions change. Actual results could differ significantly from those estimates. Contract Assets and Liabilities Contract assets reflect an estimate of expenses that will be reimbursed upon settlement with a seller. The contract asset balance was $ 0.4 million as of December 31, 2020 and $ 0.4 million as of September 30, 2020, 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 up-front payments received in connection with Machinio's subscription services. The contract liability balance was $ 3.4 million as of December 31, 2020 and $ 3.3 million as of September 30, 2020, and is included in the line item Deferred revenue on the Consolidated Balance Sheets. Of the September 30, 2020 contract liability balance, $ 1.4 million was earned as Fee revenue during the three months ended December 31, 2020. 8 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) For the Company's Machinio business segment, performance obligations are satisfied over time as the Company provides the services over the term of the subscription. At December 31, 2020, the Machinio business segment had a remaining performance obligation of $ 3.4 million; the Company expects to recognize the substantial majority of that amount as Fee Revenue over the next 12 months. Contract Costs Contract costs relate to sales commissions paid on subscription contracts that are capitalized. Contract costs are amortized over the expected life of the customer contract. The contract cost balance w as $ 0.9 million a s of December 31, 2020 and $ 0.7 million as of September 30, 2020 and is included in the line item Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheet. Amortization expense was immaterial during the three months ended December 31, 2020 and 2019. Other Assets - Promissory Note On September 30, 2015, the Company sold certain assets related to its Jacobs Trading business to Tanager Acquisitions, LLC (Tanager). In connection with the disposition, Tanager assumed certain liabilities related to the Jacobs Trading business. Tanager issued a $ 12.3 million five-year interest-bearing promissory note to the Company. On October 10, 2019, the Company entered into a Forbearance Agreement and Amendment to Note, Security Agreement and Guaranty Agreement (the "Forbearance Agreement") with Tanager (now known as Jacobs Trading, LLC) and certain of its affiliates (collectively, "JTC"). In exchange for additional collateral, security, and a higher interest rate, the Company granted JTC a new repayment schedule that requires quarterly payments to be made from August 2020 to August 2023. Upon execution of the Forbearance Agreement, JTC repaid $ 2.5 million in principal, plus $ 0.4 million in accrued interest. JTC had the opportunity to prepay the full amount remaining before May 15, 2020 at a $ 0.5 million discount. Of the $ 12.3 million owed to t he Company, $ 7.3 million has been repaid as of December 31, 2020. Of the $ 5.0 million in principal outstanding at December 31, 2020, $ 3.4 million was recorded in Other assets, and $ 1.6 million in Prepaid expenses and other current assets based on the scheduled repayment dates. 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 in the consolidated financial statements. The Company releases the funds to the seller, less the Company's commission and other fees due, to the seller 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 and cash equivalents in banks over FDIC limits, Short-term investments, and Accounts receivable. The Company deposits its Cash and cash equivalents with and acquires Short-term investments from financial institutions that the Company considers to be of high credit quality. Additionally, the Company has multiple vendor contracts with Amazon.com, Inc. under which it acquires and sells commercial merchandise. The property purchased under this contract represented 60.0 % and 48.3 % of consolidated Cost of goods sold for the three months ended December 31, 2020 and 2019, respectively. These contracts are included within the RSCG segment. Earnings per Share For the three months ended December 31, 2020, diluted weighted average common shares outstanding contains 1,734,225 shares representing the dilutive impact of stock options, RSUs and RSAs. 1,711,221 s tock options, RSUs and RSAs were excluded from the computation of diluted weighted average common shares outstanding as they were anti-dilutive. For the three months ended December 31, 2019, basic and diluted weighted average common shares were the same because the Company operated at a net loss, causing any inclusion of potentially dilutive securities in the computation of diluted net income (loss) per share to be anti-dilutive. See Note 7 for the amounts of outstanding stock options, restricted stock awards and restricted stock units that could potentially dilute net income (loss) per share in the future. 9 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) Recent Accounting Pronouncements Accounting Standards Adopted On October 1, 2020, the Company adopted ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract . The Company has not identified any significant impacts as a result of adoption of this ASU however, material impacts could be experienced if and when the Company implements cloud computing arrangements in the future. 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 and will be applied on a modified-retrospective basis, with any cumulative-effect adjustment recorded to retained earnings on the adoption date. The Company is in the process of evaluating the impact ASC 326 will have on its consolidated financial statements and expects to estimate credit losses on its financial assets such as its Accounts receivable, money market funds and promissory note. While the Company has not experienced significant credit losses historically, the materiality of the impact of adoption will depend on events and conditions as of the date of adoption, which cannot be determined conclusively at this time. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes . ASU 2019-12 seeks to improve the consistent application of and simplify the guidance for the accounting for income taxes. The ASU removes certain exceptions to the general principals in ASC 740, Income Taxes , and clarifies and amends other existing guidance. The ASU will become effective for the Company beginning October 1, 2021. The Company is currently evaluating the effect that the adoption of this ASU may have on its consolidated financial statements. 10 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 3. Leases The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up t o 5.5 years . Some of the leases have options to extend or terminate the leases. The exercise of such options is generally at the Company’s discretion. The lease agreements do not contain any significant residual value guarantees or restrictive covenants. The Company also subleases excess corporate office space. The Company's finance leases and related balances are not significant. The components of lease expense are: Three Months Ended December 31, (in thousands) 2020 2019 Finance lease – lease asset amortization $ 16 $ 21 Finance lease – interest on lease liabilities 5 7 Operating lease cost 1,389 1,336 Short-term lease cost 74 21 Variable lease cost (1) 363 331 Sublease income ( 76 ) ( 119 ) Total net lease cost $ 1,771 $ 1,597 (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: December 31, 2020 (in thousands) Operating Leases Finance Leases 2021 $ 3,605 $ 42 2022 4,173 55 2023 3,302 56 2024 2,301 56 2025 1,786 55 Thereafter 744 50 Total lease payments (1) $ 15,911 $ 314 Less: imputed interest (2) ( 1,949 ) ( 57 ) Total lease liabilities $ 13,962 $ 257 (1) The weighted average remaini ng lease term is 3.9 years for operating leases and 5.6 years for finance leases. (2) The weighted average discount rate is 6.6 % for operating leases and 7.5 % for finance leases. Supplemental disclosures of cash flow information related to leases are: Three Months Ended December 31, (in thousands) 2020 2019 Cash paid for amounts included in operating lease liabilities $ 1,240 $ 1,266 Cash paid for amounts included in finance lease liabilities 9 8 Non-cash: lease liabilities arising from new operating lease assets obtained (1) 468 12,188 Non-cash: lease liabilities arising from new finance lease assets obtained — 10 Non-cash: adjustments to lease assets and liabilities 3,187 1,598 (1) The December 31, 2019 a mount includes $ 12.2 million of lease liabilities recognized upon the adoption of ASC 842 on October 1, 2019. 11 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 4. Goodwill The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows: (in thousands) CAG GovDeals Machinio Total Balance at September 30, 2019 $ 21,178 $ 23,731 $ 14,558 $ 59,467 Translation adjustments 372 — — 372 Balance at September 30, 2020 $ 21,550 $ 23,731 $ 14,558 $ 59,839 Translation adjustments 287 — — 287 Balance at December 31, 2020 $ 21,837 $ 23,731 $ 14,558 $ 60,126 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. The Company did not identify any indicators of impairment that required an interim impairment test during the three months ended December 31, 2020. The Company has continued to evaluate the impact of the COVID-19 pandemic on the recoverability of its goodwill. As there have been favorable developments in the factors that previously indicated an interim goodwill impairment test was necessary during the prior fiscal year, the Company did not identify any indicators of impairment that required an interim goodwill impairment test during the three months ended December 31, 2020. 5. Intangible Assets Intangible assets consist of the following: December 31, 2020 September 30, 2020 (dollars in thousands) Useful Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Contract intangibles 6 $ 3,100 $ ( 1,292 ) $ 1,808 $ 3,100 $ ( 1,162 ) $ 1,938 Technology 5 2,700 ( 1,350 ) 1,350 2,700 ( 1,215 ) 1,485 Patent and trademarks 7 - 10 2,333 ( 1,064 ) 1,269 2,329 ( 994 ) 1,335 Total intangible assets $ 8,133 $ ( 3,706 ) $ 4,427 $ 8,129 $ ( 3,371 ) $ 4,758 Future expected amortization of intangible assets at December 31, 2020, is as follows: (in thousands) Expected Amortization Expense Years ending September 30, Remainder of 2021 $ 1,002 2022 1,328 2023 1,184 2024 646 2025 267 Total $ 4,427 Intangible asset amortization expense was $ 0.3 million and $ 0.3 million for the three months ended December 31, 2020 and 2019, respectively. The Company has continued to evaluate the impact of the COVID-19 pandemic on the recoverability of its long-lived assets. As there have been favorable developments in the factors that previously indicated an interim long-lived assets impairment test was necessary during the prior fiscal year, the Company did not identify any indicators of impairment that required an interim long-lived assets impairment test during the three months ended December 31, 2020. 12 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 6. Income Taxes The Company’s interim effective income tax rate is based on management’s best current estimate of the Company's expected annual effective income tax rate. The Company recorded pre-tax income in the first three months of fiscal year 2021 and its corresponding effective tax rate is 6.2 % compared to ( 9.7 %) for the first three months of fiscal year 2020. The change in the effective tax rate for the three months ended December 31, 2020 as compared to the same period in the prior year was primarily due to state and foreign taxes. Tax expense in the three months ended December 31, 2020 is due to state and foreign taxes paid. The effective tax rate differed from the U.S. statutory federal rate of 21% primarily as a result of the utilization of net operating losses and the impact of foreign, state, and local income taxes and permanent tax adjustments. The Company applies the authoritative guidance related to uncertainty in income taxes. ASC Topic 740, Income Taxes , states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of technical merits. The Company identified no new uncertain tax positions during the three months ended December 31, 2020. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the United Kingdom. As of December 31, 2020, none of the Company's federal or state income tax returns are under examination, however, we remain subject to examination for certain of our foreign income tax returns. The Company has no open income tax examinations in the U.S. and the statute of limitations for years prior to 2017 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal year 2017 may be adjusted upon examination by tax authorities if they are utilized. The Company's Hong Kong subsidiary is currently under examination for fiscal years 2015 through 2017. On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, accelerates the recovery of alternative minimum tax (AMT) credits into fiscal year 2020. During fiscal year 2020, the Company recovered its full AMT refund of $ 1.7 million. Prior to the CARES Act, the Company’s AMT credits were recoverable in fiscal years 2021 through 2023. The CARES Act also permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, NOLs incurred in fiscal years 2019, 2020, and 2021 may be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect the NOL provisions of the CARES Act to result in a material cash benefit. 7. Stockholders’ Equity The changes in stockholders’ equity for the prior year comparable period is as follows: Common Stock (dollars in thousands) Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Balance at September 30, 2019 33,687,115 $ 34 $ 242,686 $ ( 7,973 ) $ ( 118,572 ) $ 116,175 Net loss — — — — ( 5,196 ) ( 5,196 ) Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units 283,164 — 2 — — 2 Taxes paid associated with net settlement of stock compensation awards ( 67,688 ) — ( 498 ) — — ( 498 ) Forfeitures of restricted stock awards ( 15,000 ) — — — — — Stock compensation expense — — 1,121 — — 1,121 Foreign currency translation — — — 833 — 833 Balance at December 31, 2019 33,887,591 $ 34 $ 243,311 $ ( 7,140 ) $ ( 123,768 ) $ 112,437 13 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) Stock Compensation Incentive Plans The Company has several incentive plans under which stock options, restricted stock units (RSUs), restricted stock awards (RSAs), and cash-settled stock appreciation rights (SARs) have been issued, including the Third Amended and Restated 2006 Omnibus Long-Term Incentive Plan, as amended, and a plan and private placement issuances related to the Company’s acquisition of Machinio. As of December 31, 2020, the Company has reserved at total of 19,100,000 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 1.5 x shares against the plan reserves. As of December 31, 2020, 2,037,876 shares of common stock remained available for use. Stock Compensation Expense Stock-based compensation expense was $ 2.2 million for the three months ended December 31, 2020, which included $ 1.8 million of expense related to equity-classified stock options and RSUs & RSAs (restricted stock units and awards) and a $ 0.4 million benefit related to liability-classified SARs (cash-settled stock appreciation rights). Stock Options and RSUs & RSAs The following table presents stock option and RSUs & RSAs grant activity: Three Months Ended December 31, 2020 Stock Options granted: Options containing only service conditions: 509,600 Weighted average exercise price $ 9.72 Weighted average grant date fair value $ 3.98 Options containing performance or market conditions: 509,600 Weighted average exercise price $ 9.72 Weighted average grant date fair value $ 3.97 RSUs & RSAs granted: RSUs & RSAs containing only service conditions: 91,950 Weighted average grant date fair value $ 9.48 RSUs & RSAs containing performance or market conditions: 121,950 Weighted average grant date fair value $ 7.30 The stock options and RSUs & RSAs containing only service conditions will vest over a four year service period. The stock options and RSUs & RSAs containing performance conditions will vest upon the achievement of specified financial targets of the Company or its business units. The stock options and RSUs & RSAs containing market conditions will vest upon the achievement of specified increases in the Company’s share price. Vesting is measured the first day of each fiscal quarter over the four-year terms of the awards, starting with the first fiscal quarter after the first anniversary of the grant date, based upon the trailing 20-days average of the Company’s share price. The range of assumptions used to determine the fair value of stock options containing only service conditions using the Black-Sc holes option-pricing model during the three months ended December 31, 2020 include a dividend yield of 0.0 %, expected volatility rates of 51.0 % to 51.7 %, risk-free interest rates of 0.36 % to 0.42 %, and expected terms of 4.6 to 5.0 years. The range of assumptions used to determine the fair value of stock options and RSUs & RSAs containing market conditions using Monte Carlo simulations during the three months ended December 31, 2020 include a dividend yield of 0.0 %, expected volatility rates of 51.6 % to 54.6 %, risk-free interest rates of 0.3 % to 0.9 %, and expected holding period (% of remaining term for stock options only) of 31.7 % to 100 %. 14 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) SARs During the three months ended December 31, 2020, the Company did no t issue any SARs, 28,379 SARs were exercised requiring the Company to make cash payments of $ 0.2 million, and 72,681 SARs were canceled. As of December 31, 2020 , 59,750 SARs were outstanding. Share Repurchase Program We are authorized to repurchase issued and outstanding shares of our common stock under a share repurchase program approved by our Board of Directors. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discontinued or suspended at any time and will be funded using our available cash. The Company repurchased 309,496 shares for $ 4.1 million under this program during the three months ended December 31, 2020 . As of December 31, 2020 , the Company may repurchase an additional $ 2.0 million of shares under this program. Other Share Repurchases Separate from the share repurchase program, our stock incentive plans allow for participants to exercise stock options by surrendering shares of common stock equivalent in value to the exercise price due. During the three months ended December 31, 2020, participants surrendered 9,384 shares of common stock in the exercise of stock options. Any shares surrendered to the Company in this manner are not available for future grant. 8. Fair Value Measurement The Company measures and records certain assets and liabilities at fair value on a recurring basis. Authoritative guidance issued by the FASB establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels: Level 1: Quoted market prices in active markets for identical assets or liabilities; Level 2: Inputs other than Level 1 inputs that are either directly or indirectly observable; and Level 3: Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use. The Company had $ 30.0 million of money market funds considered cash equivalents at December 31, 2020 and September 30, 2020 . These assets were measured at fair value at December 31, 2020 and September 30, 2020 and were cl assified as Level 1 assets within the fair value hierarchy. The Company’s financial assets and liabilities not measured at fair value are cash, accounts receivable, a promissory note, and accounts payable. The Company believes the carrying values of these assets and liabilities approximate fair value. As of December 31, 2020 and September 30, 2020, the Company did no t have any assets or liabilities measured at fair value on a non-recurring basis. 9. 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. 15 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) The net periodic (benefit) is recognized within Interest and other income, net in the Consolidated Statements of Operations, and for the three months ended December 31, 2020 and 2019 included the following components: Three Months Ended December 31, (in thousands) 2020 2019 Interest cost 107 109 Expected return on plan assets ( 194 ) ( 200 ) Amortization of prior service cost 5 5 Total net periodic (benefit) $ ( 82 ) $ ( 86 ) 16 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 10. Business Realignment Expenses Business realignment expenses are associated with management changes, exiting certain businesses, or other cost saving actions, and include employee severance and benefit costs associated with terminations, occupancy costs associated the ceased use of facilities, and other related costs, such as impairments. Business realignment expenses are recorded as a component of Other operating expenses on the Consolidated Statements of Operations. For the year ended September 30, 2020, business realignment expenses were incurred related to the elimination of certain positions in response to the COVID-19 pandemic. The table below sets forth the significant components and activity in the liability for business realignment initiatives during the year ended September 30, 2020 and for the three months ended December 31, 2020, on a segment and consolidated basis: (in thousands) Liability Balance at September 30, 2019 Adoption of ASC 842 Business Realignment Expenses Cash Payments Liability Balance at September 30, 2020 Business Realignment Expenses Cash Payments Liability Balance at December 31, 2020 Employee severance and benefit costs: GovDeals $ — $ — $ 29 $ ( 25 ) $ 4 $ — $ ( 4 ) $ — RCSG — — 84 ( 64 ) 20 — ( 20 ) — CAG 414 — 120 ( 481 ) 53 5 ( 58 ) — Corporate & Other 238 — 172 ( 410 ) — — — — Total employee severance and benefit costs $ 652 $ — $ 405 $ ( 980 ) $ 77 $ 5 $ ( 82 ) $ — Occupancy and other costs: CAG 169 ( 169 ) — — — — — — Corporate & Other — — — — — — — — Total occupancy and other costs $ 169 $ ( 169 ) $ — $ — $ — $ — $ — $ — Total business realignment $ 821 $ ( 169 ) $ 405 $ ( 980 ) $ 77 $ 5 $ ( 82 ) $ — 17 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 11. Legal Proceedings and Other Contingencies The Company reserves for contingent liabilities based on ASC 450, Contingencies , when it determines that a liability is probable and reasonably estimable. From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of the business. On December 22, 2020, the Company’s former Vice President, Human Resources filed a claim with the Equal Employment Opportunity Commission for wrongful termination on the basis of gender, race, and age. Separately, he has alleged wage and hour violations under Maryland law for failure to pay his fiscal year 2020 performance bonus. The Company believes the allegations are without merit and cannot estimate a range of potential liability, if any, at this time. The Company’s employment practices liability insurance carrier, CNA, has accepted tender of these claims. 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. 12. Segment Information The Company provides operating results in four reportable segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Asset Group (CAG), and Machinio. Descriptions of our reportable segments are as follows: • The GovDeals reportable segment provides self-directed service solutions in which sellers list their own assets, and it consists of marketplaces that enable local and state government entities including city, county and state agencies, as well as quasi-governmental businesses located in the United States and Canada to sell surplus and salvage assets. GovDeals also offers a suite of services to sellers that includes asset sales and marketing. • The RSCG reportable segment consists of marketplaces that enable corporations located in the United States and Canada to sell surplus and salvage consumer goods and retail capital assets. RSCG also offers a suite of services that includes returns management, asset recovery, and e-commerce services. This segment includes the Company's Liquidation.com, Liquidation.com DIRECT, and Secondipity marketplaces. • The CAG reportable segment provides full-service solutions to sellers and it consists of marketplaces that enable commercial businesses to sell surplus and idle assets. CAG also offers a suite of services that includes surplus management, asset valuation, asset sales and marketing. Commercial sellers are located in the United States, Europe, Australia and Asia. This segment includes the Company's Network International and GoIndustry DoveBid marketplaces and self-directed service solutions for commercial businesses on the AllSurplus marketplace. • The Machinio reportable segment operates a global online platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors. We also report results of Corporate & Other, including elimination adjustments. Decisions concerning the allocation of the Company’s resources are made by the Company’s Chief Operating Decision Maker (CODM), which is the Company's Chief Executive Officer, with oversight by the Board of Directors. The Company reports segment information based on the internal performance measures used by the CODM to assess the performance of each operating segment in a given period. In connection with that assessment, the CODM uses segment gross profit to evaluate the performance of each segment. Segment gross profit is calculated as total revenue less cost of goods sold (excludes depreciation and amortization). 18 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) The following table sets forth certain financial information for the Company's reportable segments: Three Months Ended December 31, (in thousands) 2020 2019 GovDeals: Revenue $ — $ — Fee revenue 10,818 8,015 Total revenue 10,818 8,015 Gross profit $ 10,203 $ 7,446 RSCG: Revenue $ 28,161 $ 27,826 Fee revenue 6,745 3,871 Total revenue 34,906 31,697 Gross profit $ 14,627 $ 10,305 CAG: Revenue $ 2,910 $ 2,523 Fee revenue 5,003 5,419 Total revenue 7,913 7,942 Gross profit $ 6,358 $ 5,814 Machinio: Revenue $ — $ — Fee revenue 2,114 1,850 Total revenue 2,114 1,850 Gross Profit $ 1,991 $ 1,763 Corporate & Other, including elimination adjustments: Revenue $ — $ — Fee revenue — — Total revenue — — Gross profit $ — $ — Consolidated: Revenue $ 31,071 $ 30,349 Fee revenue 24,680 19,155 Total revenue 55,751 49,504 Gross profit $ 33,178 $ 25,328 The following table presents a reconciliation of gross profit used in the reportable segments to the Company's consolidated results: Three Months Ended December 31, (in thousands) 2020 2019 Reconciliation: Gross profit $ 33,178 $ 25,328 Operating expenses 28,548 30,125 Other operating expenses 4 193 Interest and other income, net ( 185 ) ( 252 ) Income (loss) before provision for income taxes $ 4,811 $ ( 4,738 ) 19 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) The percent of our revenues that came from transactions conducted outside of the United States for the three months ended December 31, 2020 and 2019 was 9.6 % and 13.9 %, respectively. 20