LIQUIDITY SERVICES INC 10-Q

Item 1. Financial Statements. Liquidity Services, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands, Except Par Value) June 30, 2021 September 30, 2020 (Unaudited) Assets Current assets: Cash and cash equivalents $ 112,666 $ 76,036 Accounts receivable, net of allowance for doubtful accounts of $ 634 and $ 389 5,470 5,322 Inventory, net 13,799 5,607 Prepaid taxes and tax refund receivable 1,600 1,652 Prepaid expenses and other current assets 5,970 5,962 Total current assets 139,505 94,579 Property and equipment, net of accumulated depreciation of $ 17,834 and $ 14,555 17,003 17,843 Operating lease assets 12,008 10,561 Intangible assets, net 3,777 4,758 Goodwill 60,023 59,839 Deferred tax assets 762 806 Other assets 5,325 8,248 Total assets $ 238,403 $ 196,634 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 39,748 $ 21,957 Accrued expenses and other current liabilities 22,226 19,124 Current portion of operating lease liabilities 4,081 3,818 Deferred revenue 4,517 3,255 Payables to sellers 39,426 26,170 Total current liabilities 109,998 74,324 Operating lease liabilities 8,872 7,499 Other long-term liabilities 2,972 2,996 Total liabilities 121,842 84,819 Commitments and contingencies (Note 12) 0 0 Stockholders’ equity: Common stock, $ 0.001 par value; 120,000,000 shares authorized; 35,417,715 shares issued and outstanding at June 30, 2021; 34,082,406 shares issued and outstanding at September 30, 2020 35 34 Additional paid-in capital 251,048 247,892 Treasury stock, at cost; 1,587,199 shares at June 30, 2021 and 547,508 shares at September 30, 2020 ( 21,628 ) ( 3,983 ) Accumulated other comprehensive loss ( 8,740 ) ( 9,782 ) Accumulated deficit ( 104,154 ) ( 122,346 ) Total stockholders’ equity 116,561 111,815 Total liabilities and stockholders’ equity $ 238,403 $ 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 June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (Unaudited) Revenue $ 37,862 $ 30,442 $ 104,902 $ 95,994 Fee revenue 31,804 17,280 82,302 54,056 Total revenue 69,666 47,722 187,204 150,050 Costs and expenses from operations: Cost of goods sold (excludes depreciation and amortization) 28,543 22,494 77,501 73,289 Technology and operations 12,307 9,515 34,952 32,342 Sales and marketing 9,661 7,412 27,679 27,126 General and administrative 7,676 6,217 21,578 21,321 Depreciation and amortization 1,705 1,567 5,246 4,716 Other operating expenses 1,180 319 1,390 500 Total costs and expenses 61,072 47,524 168,346 159,294 Income (loss) from operations 8,594 198 18,858 ( 9,244 ) Interest and other income, net ( 254 ) ( 224 ) ( 468 ) ( 733 ) Income (loss) before provision for income taxes 8,848 422 19,326 ( 8,511 ) Provision for income taxes 429 209 1,133 710 Net income (loss) $ 8,419 $ 213 $ 18,193 $ ( 9,221 ) Basic income (loss) per common share $ 0.25 $ 0.01 $ 0.55 $ ( 0.27 ) Diluted income (loss) per common share $ 0.24 $ 0.01 $ 0.52 $ ( 0.27 ) Basic weighted average shares outstanding 33,371,906 33,695,936 33,345,580 33,621,740 Diluted weighted average shares outstanding 35,437,761 33,815,332 35,006,898 33,621,740 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 June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (Unaudited) Net income (loss) $ 8,419 $ 213 $ 18,193 $ ( 9,221 ) Other comprehensive income (loss): Foreign currency translation 23 424 1,042 ( 46 ) Other comprehensive income (loss) 23 424 1,042 ( 46 ) Comprehensive income (loss) $ 8,442 $ 637 $ 19,235 $ ( 9,267 ) 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 Net income — — — — — — 5,260 5,260 Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units 1,079,955 1 154 — — — — 155 Taxes paid associated with net settlement of stock compensation awards ( 177,463 ) — ( 3,145 ) — — — — ( 3,145 ) Common stock repurchased — — — ( 647,583 ) ( 12,040 ) — — ( 12,040 ) Common stock surrendered in the exercise of stock options — — 1,333 ( 73,228 ) ( 1,333 ) — — — Stock compensation expense — — 1,522 — — — — 1,522 Foreign currency translation — — — — — 123 — 123 Balance at March 31, 2021 35,115,307 $ 35 $ 249,866 ( 1,587,199 ) $ ( 21,628 ) $ ( 8,763 ) $ ( 112,572 ) $ 106,938 Net income — — — — — — 8,419 8,419 Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units 318,242 — — — — — — — Taxes paid associated with net settlement of stock compensation awards ( 15,834 ) — ( 343 ) — — — — ( 343 ) Stock compensation expense — — 1,525 — — — — 1,525 Foreign currency translation and other — — — — — 23 ( 1 ) 22 Balance at June 30, 2021 35,417,715 $ 35 $ 251,048 ( 1,587,199 ) $ ( 21,628 ) $ ( 8,740 ) $ ( 104,154 ) $ 116,561 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) Nine Months Ended June 30, 2021 2020 (Unaudited) Operating activities Net income (loss) $ 18,193 $ ( 9,221 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,246 4,716 Stock compensation expense 5,793 3,785 Provision for doubtful accounts 269 131 Deferred tax provision 96 228 Loss (gain) on disposal of property and equipment 87 ( 29 ) Change in fair value of earnout liability — 200 Impairment of long-lived and other assets 1,338 — Changes in operating assets and liabilities: Accounts receivable ( 420 ) 1,415 Inventory ( 8,192 ) ( 1,572 ) Prepaid and deferred taxes 57 ( 551 ) Prepaid expenses and other assets ( 2,477 ) 942 Operating lease assets and liabilities 5 ( 165 ) Accounts payable 17,791 13,951 Accrued expenses and other current liabilities 2,242 ( 9,525 ) Distributions payable — ( 1,675 ) Deferred revenue 1,262 ( 23 ) Payables to sellers 13,256 6,072 Other liabilities ( 275 ) 522 Net cash provided by operating activities 54,271 9,201 Investing activities Increase in intangibles ( 23 ) ( 53 ) Purchases of property and equipment, including capitalized software ( 3,488 ) ( 3,608 ) Proceeds from sales of property and equipment 68 47 Proceeds from promissory note 4,343 2,553 Purchases of short-term investments — ( 25,000 ) Maturities of short-term investments — 55,000 Net cash provided by investing activities 900 28,939 Financing activities Payments of the principal portion of finance lease liabilities ( 35 ) ( 26 ) Taxes paid associated with net settlement of stock compensation awards ( 3,545 ) ( 564 ) Proceeds from exercise of stock options 353 36 Payment of earnout liability related to business acquisition — ( 1,200 ) Common stock repurchased ( 16,143 ) — Net cash (used in) financing activities ( 19,370 ) ( 1,754 ) Effect of exchange rate differences on cash and cash equivalents 829 ( 154 ) Net increase in cash and cash equivalents 36,630 36,232 Cash and cash equivalents at beginning of period 76,036 36,497 Cash and cash equivalents at end of period $ 112,666 $ 72,729 Supplemental disclosure of cash flow information Cash paid for income taxes, net $ 907 $ 203 Non-cash: Common stock surrendered in the exercise of stock options $ 1,502 $ — 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 power the circular economy which benefits businesses, society, and the environment through the safe and effective resale and redeployment of surplus assets; reducing waste, carbon emissions and transportation costs; and by creating markets for items that would otherwise be landfilled. The Company's marketplaces enable buyers and sellers to transact in an efficient, automated environment offering over 600 product categories and provide professional buyers access to a global, organized supply of new, surplus and idle assets presented with digital images and other relevant product information. The Company's marketplaces enable 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.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 13 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 travel restrictions and the COVID-19 pandemic's impact on current and future macroeconomic conditions; 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 and nine months ended June 30, 2021 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 and nine months ended June 30, 2021, these estimates required the Company to make assumptions about the extent and duration of restrictions on cross-border transactions and the impact of the COVID-19 pandemic on macroeconomic conditions and, in turn, the Company's results of operations. As there remains uncertainty associated with the COVID-19 pandemic, the Company will continue to update its assumptions as conditions change. Actual results could differ significantly from those estimates. Contract Assets and Liabilities Contract assets reflect an estimate of expenses that will be reimbursed upon settlement with a seller. The contract asset balance was $ 0.4 million as of June 30, 2021 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. 8 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) Contract liabilities reflect obligations to provide services for which the Company has already received consideration, and generally arise from up-front payments received in connection with Machinio's subscription services. The contract liability balance was $ 4.5 million as of June 30, 2021 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, $ 3.0 million was earned as Fee revenue during the nine months ended June 30, 2021. 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 June 30, 2021, the Machinio business segment had a remaining performance obligation of $ 4.5 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 $ 1.5 million a s of June 30, 2021 and $ 0.7 million as of September 30, 2020 and is included in the line items Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets. Amortization expense was $ 0.2 million and $ 0.5 million during the three and nine months ended June 30, 2021 and was $ 0.1 million and $ 0.3 million during the three and nine months ended June 30, 2020. Other Assets - Promissory Note On September 30, 2015, the Company sold certain assets related to its Jacobs Trading business to Tanager Acquisitions, LLC (Tanager). In connection with the disposition, Tanager assumed certain liabilities related to the Jacobs Trading business. Tanager issued a $ 12.3 million five-year interest-bearing promissory note to the Company. On October 10, 2019, the Company entered into a Forbearance Agreement and Amendment to Note, Security Agreement and Guaranty Agreement (the "Forbearance Agreement") with Tanager (now known as Jacobs Trading, LLC) and certain of its affiliates (collectively, "JTC"). In exchange for additional collateral, security, and a higher interest rate, the Company granted JTC a new repayment schedule that requires quarterly payments to be made from August 2020 to August 2023. Upon execution of the Forbearance Agreement, JTC repaid $ 2.5 million in principal, plus $ 0.4 million in accrued interest. As of March 31, 2021, JTC had repaid $ 7.7 million of the $ 12.3 million owed to the Company and had an outstanding principal balance of $ 4.6 million. On May 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 Statement of Operations during the three and nine months ended June 30, 2021, representing the difference between the $ 4.6 million outstanding balance of principal and accrued interest and the $ 3.5 million payment received. 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 and cash equivalent money market funds in accounts which may at times exceed federally insured limits (FDIC and/or SIPC), and Accounts receivable. The Company deposits its cash and acquires cash equivalent money market funds with financial institutions that the Company considers to be of high credit quality. 9 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) Additionally, the Company has multiple vendor contracts with Amazon.com, Inc. under which the Company acquires and sells commercial merchandise. The property purchased under these contracts with Amazon.com, Inc. represented 63.5 % and 60.4 % of consolidated Cost of goods sold for the three months ended June 30, 2021 and 2020, respectively, and 61.7 % and 54.5 % of consolidated Cost of goods sold for the nine months ended June 30, 2021 and 2020, respectively. These contracts are included within the RSCG segment. 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 . This accounting standard has not had a material impact on the Company's consolidated financial statements as no significant implementations of cloud computing arrangements have occurred since adoption. 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 and money market funds. 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 does not expect the adoption of this ASU will have a material impact on its consolidated financial statements. 3. Earnings per Share Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The calculation of diluted net income per share excludes all anti-dilutive common shares. The computation of basic and diluted net income per share is as follows: Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 Numerator: Net income (loss) $ 8,419 $ 213 $ 18,193 $ ( 9,221 ) Denominator: Basic weighted average shares outstanding 33,371,906 33,695,936 33,345,580 33,621,740 Dilutive impact of stock options, RSUs and RSAs 2,065,855 119,396 1,661,318 — Diluted weighted average shares outstanding 35,437,761 33,815,332 35,006,898 33,621,740 Basic income (loss) per common share $ 0.25 $ 0.01 $ 0.55 $ ( 0.27 ) Diluted income (loss) per common share $ 0.24 $ 0.01 $ 0.52 $ ( 0.27 ) Stock options, RSUs and RSAs excluded from income (loss) per diluted share because their effect would have been anti-dilutive 198,308 3,841,385 592,588 4,829,473 10 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 4. Leases The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up t o 5.0 years . Some of the leases have options to extend or terminate the leases. The exercise of such options is generally at the Company’s discretion. The lease agreements do not contain any significant residual value guarantees or restrictive covenants. The Company also subleases excess corporate office space. The Company's finance leases and related balances are not significant. The components of lease expense are: Three Months Ended June 30, Nine Months Ended June 30, (in thousands) 2021 2020 2021 2020 Finance lease – lease asset amortization $ 18 $ 16 $ 50 $ 53 Finance lease – interest on lease liabilities 4 6 14 18 Operating lease cost 1,218 1,310 3,873 3,990 Operating lease impairment expense — — 172 — Short-term lease cost 45 48 166 92 Variable lease cost (1) 360 371 1,178 1,122 Sublease income ( 34 ) ( 61 ) ( 141 ) ( 200 ) Total net lease cost $ 1,611 $ 1,690 $ 5,312 $ 5,075 (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. 11 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) Maturities of lease liabilities are: June 30, 2021 (in thousands) Operating Leases Finance Leases 2021 $ 1,284 $ 26 2022 4,509 103 2023 3,602 103 2024 2,501 83 2025 1,852 55 Thereafter 822 50 Total lease payments (1) $ 14,570 $ 420 Less: imputed interest (2) ( 1,617 ) ( 59 ) Total lease liabilities $ 12,953 $ 361 (1) The weighted average remaini ng lease term is 3.6 years for operating leases and 4.4 years for finance leases. (2) The weighted average discount rate is 6.6 % for operating leases and 7.0 % for finance leases. Additionally, the Company has approximately $ 4.8 million of future payment obligations related to executed warehouse lease agreements that have not yet commenced as of June 30, 2021. Supplemental disclosures of cash flow information related to leases are: Nine Months Ended June 30, (in thousands) 2021 2020 Cash paid for amounts included in operating lease liabilities $ 3,225 $ 3,642 Cash paid for amounts included in finance lease liabilities 35 26 Non-cash: lease liabilities arising from new operating lease assets obtained (1) 885 12,188 Non-cash: lease liabilities arising from new finance lease assets obtained 130 10 Non-cash: adjustments to lease assets and liabilities 3,705 1,592 (1) Nine months ended June 30, 2020 amount includes $ 12.2 million of lease liabilities recognized upon the adoption of ASC 842 on October 1, 2019. 5. 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 184 — — 184 Balance at June 30, 2021 $ 21,734 $ 23,731 $ 14,558 $ 60,023 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 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 ended September 30, 2020, the Company did not identify any indicators of impairment that required an interim goodwill impairment test during the three and nine months ended June 30, 2021. 12 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 6. Intangible Assets Intangible assets consist of the following: June 30, 2021 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 $ ( 1,550 ) $ 1,550 $ 3,100 $ ( 1,162 ) $ 1,938 Technology 5 2,700 ( 1,620 ) 1,080 2,700 ( 1,215 ) 1,485 Patent and trademarks 7 - 10 2,350 ( 1,203 ) 1,147 2,329 ( 994 ) 1,335 Total intangible assets $ 8,150 $ ( 4,373 ) $ 3,777 $ 8,129 $ ( 3,371 ) $ 4,758 Future expected amortization of intangible assets at June 30, 2021, is as follows: (in thousands) Expected Amortization Expense Years ending September 30, Remainder of 2021 $ 333 2022 1,330 2023 1,186 2024 648 2025 280 Total $ 3,777 Intangible asset amortization expense was $ 0.3 million and $ 0.3 million for the three months ended June 30, 2021 and 2020, respectively, and $ 1.0 million and $ 1.0 million for the nine months ended June 30, 2021 and 2020, respectively. The Company has continued to evaluate the impact of the COVID-19 pandemic on the recoverability of its long-lived assets. The Company has not identified indicators of impairment requiring an interim impairment test on material long-lived assets during the three and nine months ended June 30, 2021. 7. Income Taxes The Company’s interim effective income tax rate is based on management’s best current estimate of the Company's expected annual effective income tax rate. The Company recorded pre-tax income in the first nine months of fiscal year 2021 and its corresponding effective tax rate is 5.9 % compared to ( 8.4 %) for the first nine months of fiscal year 2020. The change in the effective tax rate for the nine months ended June 30, 2021 as compared to the same period in the prior year was primarily due to state and foreign taxes. Tax expense in the nine months ended June 30, 2021 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 nine months ended June 30, 2021. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the United Kingdom. As of June 30, 2021, 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 2018 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal year 2018 may be adjusted upon examination by tax authorities if they are utilized. 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. 13 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 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. 8. 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 Net loss — — — — ( 4,238 ) ( 4,238 ) Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units 111,272 — 32 — — 32 Taxes paid associated with net settlement of stock compensation awards ( 10,065 ) — ( 60 ) — — ( 60 ) Stock compensation expense — — 1,244 — — 1,244 Foreign currency translation — — — ( 1,303 ) — ( 1,303 ) Balance at March 31, 2020 33,988,798 $ 34 $ 244,527 $ ( 8,443 ) $ ( 128,006 ) $ 108,112 Net income — — — — 213 213 Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units 34,185 — 1 — — 1 Taxes paid associated with net settlement of stock compensation awards ( 1,210 ) — ( 6 ) — — ( 6 ) Stock compensation expense — — 1,494 — — 1,494 Foreign currency translation and other — — — 424 — 424 Balance at June 30, 2020 34,021,773 $ 34 $ 246,016 $ ( 8,019 ) $ ( 127,793 ) $ 110,238 14 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 June 30, 2021, 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 June 30, 2021, 1,901,415 shares of common stock remained available for use. Stock Compensation Expense The table below presents the components of share-based compensation expense (in thousands): Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 Equity-classified awards: Stock options $ 762 $ 546 $ 2,491 $ 1,523 RSUs & RSAs 763 948 2,357 2,337 Total equity-classified awards $ 1,525 $ 1,494 $ 4,848 $ 3,860 Liability-classified awards: SARs 278 22 945 ( 75 ) Total stock compensation expense: $ 1,803 $ 1,516 $ 5,793 $ 3,785 Stock Options and RSUs & RSAs The following table presents stock option and RSUs & RSAs grant activity: Nine Months Ended June 30, 2021 Stock Options granted: Options containing only service conditions: 558,673 Weighted average exercise price $ 10.69 Weighted average grant date fair value $ 4.49 Options containing performance or market conditions: 549,600 Weighted average exercise price $ 10.51 Weighted average grant date fair value $ 4.34 RSUs & RSAs granted: RSUs & RSAs containing only service conditions: 139,945 Weighted average grant date fair value $ 13.48 RSUs & RSAs containing performance or market conditions: 139,600 Weighted average grant date fair value $ 9.22 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 segments. 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. 15 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 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 nine months ended June 30, 2021 were as follows: Nine Months Ended June 30, 2021 Dividend yield — Expected volatility 51.0 % - 55.9 % Risk-free interest rate 0.4 % - 0.8 % Expected term 4.6 - 7.6 years The range of assumptions used to determine the fair value of stock options and RSUs & RSAs containing market conditions using Monte Carlo simulations during the nine months ended June 30, 2021 were as follows: Nine Months Ended June 30, 2021 Dividend yield — Expected volatility 51.6 % - 54.6 % Risk-free interest rate 0.3 % - 0.9 % Expected holding period (% of remaining term) 31.7 % - 100.0 % SARs During the nine months ended June 30, 2021, the Company did no t issue any SARs, 43,959 SARs were exercised requiring the Company to make cash payments of $ 0.4 million, and 73,681 SARs were canceled. As of June 30, 2021 , 43,170 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. As of the fiscal year ended September 30, 2020, we had $ 6.1 million of remaining share repurchase authorization. On March 8, 2021, our Board of Directors authorized an additional $ 10 million of share repurchases of the Company's outstanding shares of common stock through March 31, 2023. We repurchased 647,583 shares for $ 12.0 million and 957,079 shares for $ 16.1 million under this program during the three and six months ended March 31, 2021 , respectively. As of March 31, 2021 , we had no remaining authorization to repurchase shares under these programs. On May 3, 2021, the Company's Board of Directors authorized a new stock repurchase plan (the “May 3, 2021 Stock Repurchase Plan”) of up to $ 15 million of our outstanding shares of common stock through June 30, 2023. We made no repurchases under the May 3, 2021 Stock Repurchase Plan during the three months ended June 30, 2021. Other Share Repurchases Separate from the share repurchase program, our stock incentive plans allow for participants to exercise stock options by surrendering shares of common stock equivalent in value to the exercise price due. During the three months ended June 30, 2021, no shares of common stock were surrendered by participants in the exercise of stock options. During the nine months ended June 30, 2021, participants surrendered 82,612 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. 16 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 9. 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 $ 40.0 million of money market funds considered cash equivalents at June 30, 2021 and September 30, 2020. These assets were measured at fair value at June 30, 2021 and September 30, 2020 and were classified as Level 1 assets within the fair value hierarchy. There were no transfers between levels during the periods presented. The Company’s financial assets and liabilities not measured at fair value are cash, accounts receivable, and accounts payable. The Company believes the carrying values of these assets and liabilities approximate fair value. As of June 30, 2021 and September 30, 2020, the Company did no t have any material assets or liabilities measured at fair value on a non-recurring basis. 10. Defined Benefit Pension Plan Certain employees of Liquidity Services UK Limited (GoIndustry), which the Company acquired in July 2012, are covered by the Henry Butcher Pension Fund and Life Assurance Scheme (the Scheme), a qualified defined benefit pension plan. The Company guarantees GoIndustry's performance on all present and future obligations to make payments to the Scheme for up to a maximum of £ 10 million British pounds. The Scheme was closed to new members on January 1, 2002. The net periodic (benefit) is recognized within Interest and other income, net in the Consolidated Statements of Operations, and for the three and nine months ended June 30, 2021 and 2020 included the following components: Three Months Ended June 30, Nine Months Ended June 30, (in thousands) 2021 2020 2021 2020 Interest cost $ 142 $ 119 $ 343 $ 336 Expected return on plan assets ( 245 ) ( 192 ) ( 637 ) ( 595 ) Amortization of prior service cost 6 5 17 15 Total net periodic (benefit) $ ( 97 ) $ ( 68 ) $ ( 277 ) $ ( 244 ) During the three months ended June 30, 2021, the Company extended early settlement offers to all members of the Scheme. The impact of the potential pension settlement, which could be significant, has not been reflected in the financial statements for the three and nine months ended June 30, 2021 as the window for members to respond to the early settlement offer extends into the three months ended September 30, 2021. 17 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 11. 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 employee 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, 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 June 30, 2021 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 ) $ — 18 Liquidity Services, Inc. and Subsidiaries Notes to the Unaudited Consolidated Financial Statements - (Continued) 12. 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 (the “Plaintiff”) filed a claim with the Equal Employment Opportunity Commission for wrongful termination on the basis of gender, race, and age. The Equal Employment Opportunity Commission subsequently assigned Plaintiff’s claim to the Montgomery County Office of Human Rights for investigation, which, in turn, dismissed Plaintiff’s claim after plaintiff filed a complaint in the United States District Court for the District of Maryland Southern Division on May 19, 2021. The Company believes this claim is without merit and cannot estimate a range of potential liability, if any, at this time. The Company’s employment practices liability insurance carrier, CNA, has accepted tender of this claim. Separately, Plaintiff also alleged outside of the above process wage and hour violations under Maryland law for failure to pay his fiscal year 2020 performance bonus. The parties settled the wage and hour claims for an immaterial amount in May 2021. 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. 13. 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 GoIndustry DoveBid marketplace and self-directed and full-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). 19 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 June 30, Nine Months Ended June 30, (in thousands) 2021 2020 2021 2020 GovDeals: Revenue $ — $ — $ — $ — Fee revenue 14,658 6,021 36,448 21,858 Total revenue 14,658 6,021 36,448 21,858 Gross profit $ 13,965 $ 5,637 $ 34,544 $ 20,361 RSCG: Revenue $ 35,923 $ 29,454 $ 95,997 $ 89,857 Fee revenue 8,172 4,099 22,086 11,650 Total revenue 44,095 33,553 118,083 101,507 Gross profit $ 17,755 $ 12,022 $ 48,315 $ 34,721 CAG: Revenue $ 1,939 $ 988 $ 8,905 $ 6,137 Fee revenue 6,528 5,384 16,967 15,216 Total revenue 8,467 6,372 25,872 21,353 Gross profit $ 7,099 $ 5,892 $ 20,445 $ 16,628 Machinio: Revenue $ — $ — $ — $ — Fee revenue 2,446 1,776 6,801 5,332 Total revenue 2,446 1,776 6,801 5,332 Gross Profit $ 2,304 $ 1,677 $ 6,399 $ 5,051 Corporate & Other, including elimination adjustments: Revenue $ — $ — $ — $ — Fee revenue — — — — Total revenue — — — — Gross profit $ — $ — $ — $ — Consolidated: Revenue $ 37,862 $ 30,442 $ 104,902 $ 95,994 Fee revenue 31,804 17,280 82,302 54,056 Total revenue 69,666 47,722 187,204 150,050 Gross profit $ 41,123 $ 25,228 $ 109,703 $ 76,761 The following table reconciles gross profit used in the reportable segments to the Company's consolidated results: Three Months Ended June 30, Nine Months Ended June 30, (in thousands) 2021 2020 2021 2020 Reconciliation: Gross profit $ 41,123 $ 25,228 $ 109,703 $ 76,761 Operating expenses 31,349 24,711 89,455 85,505 Other operating expenses 1,180 319 1,390 500 Interest and other income, net ( 254 ) ( 224 ) ( 468 ) ( 733 ) Income (loss) before provision for income taxes $ 8,848 $ 422 $ 19,326 $ ( 8,511 ) The percent of our revenues that came from transactions conducted outside of the United States for the three months ended June 30, 2021 and 2020 was 14.4 % and 11.2 %, respectively, and the percent of our revenues that came from transactions conducted outside the United States for the nine months ended June 30, 2021 and 2020 was 16.2 % and 12.5 %, respectively. 20