What changed in this filing

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Item 9A. Controls and Procedures

2022-12-08 compared with 2021-12-09 · 415 added, 309 removed, 1124 unchanged (39% of the section changed)

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This "Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in the certifications.

The report of Ernst & Young LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting is set forth below in this section.

This section should be read in conjunction with the certifications and the Ernst & Young LLP report for a more complete understanding of the topics presented.

The report of Deloitte & Touche LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting is set forth below in this section.

This section should be read in conjunction with the certifications and the Deloitte & Touche LLP report for a more complete understanding of the topics presented.

Evaluation of Disclosure Controls and Procedures

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This assessment is supported by testing and monitoring performed by our finance organization.

As permitted by SEC guidance with respect to newly acquired entities, management excluded Bid4Assets, which was acquired on November 1, 2022, from its assessment of internal control over financial reporting.

The financial statements of Bid4Assets, Inc., constitute less than 2.5% of revenues and total assets (excluding goodwill and intangible assets which were integrated into the Company’s systems and control environment), in the consolidated financial statement amounts as of and for the year ended September 30, 2022.

We are in the process of evaluating Bid4Assets' existing controls and procedures and integrating Bid4Assets into our internal control over financial reporting.

See Note 3 - Bid4Assets Acquisition , in the Notes to the Consolidated Financial Statements for further discussion of the Bid4Assets acquisition and its impact on our consolidated financial statements.

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.

Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of the company's internal control over financial reporting.

Ernst & Young LLP has issued an attestation report, which is included at the end of this section.

Our independent registered public accounting firm, Deloitte & Touche LLP, independently assessed the effectiveness of the Company's internal control over financial reporting.

Deloitte & Touche LLP has issued an attestation report, which is included at the end of this section.

Inherent Limitations on Effectiveness of Controls

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To the Stockholders and the Board of Directors of Liquidity Services, Inc.

and Subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited Liquidity Services, Inc.

and Subsidiaries’ internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, Liquidity Services, Inc.

and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Liquidity Services, Inc.

as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated December 9, 2021 expressed an unqualified opinion thereon.

We have audited the internal control over financial reporting of Liquidity Services, Inc.

and subsidiaries (the “Company”) as of September 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the fiscal year ended September 30, 2022, of the Company and our report dated December 8, 2022, expressed an unqualified opinion on those financial statements.

As described in Management Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Bid4Assets, Inc., which was acquired on November 1, 2021.

Accordingly, our audit did not include the internal control over financial reporting at Bid4Assets, Inc.

Basis for Opinion

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and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Tysons, Virginia

/s/ Deloitte and Touche LLP

McLean, Virginia

December 8, 2022

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On December 6, 2022, the Company's Board of Directors authorized the repurchase of up to $8.4 million of the Company's outstanding shares of common stock through December 31, 2024.

This authorization is in addition to the $6.6 million remaining under the May 13, 2022 authorization to repurchase up to $12.0 million in shares through June 30, 2024.

The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and the existence of alternative investment opportunities.

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The repurchase program does not obligate the Company to acquire any particular amount of common shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

Directors, Executive Officers and Corporate Governance.

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(1) The following documents related to the financial statements are filed as part of this report:

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firms (PCAOB ID No.'s 34 and 42 , respectively)

Consolidated Balance Sheets as of September 30, 202 2 and 20 21

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To the Stockholders and the Board of Directors of Liquidity Services, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Liquidity Services, Inc.

and subsidiaries (the Company) as of September 30, 2022, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended September 30, 2022, and the related notes and schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and the results of its operations and its cash flows for the year ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 8, 2022 expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Earn-Out Obligation - Refer to Notes 3 and 13 to the Consolidated Financial Statements

Critical Audit Matter Description

On November 1, 2021, the Company purchased all of the issued and outstanding shares of stock of Bid4Assets, Inc.

(“Bid4Assets”).

The preliminary acquisition date fair value of the consideration transferred to the former shareholders of Bid4Assets was approximately $42.7 million consisting of $14.7 million in cash and earn-out consideration with a preliminary fair value of approximately $28.0 million.

As part of the acquisition of Bid4Assets, former shareholders of Bid4Assets are eligible to receive earn-out consideration of up to $37.5 million in cash.

During the year ended September 30, 2022, the fair value of the earn-out liability was reduced by $28.0 million to $0 million, primarily due to a decline in the auction events and transactions that were expected to be completed during the earn-out period ending December 31, 2022.

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

Of the total change in the earn-out liability, $24.5 million was recorded as a fair value gain within the consolidated statements of operations.

We identified the earn-out obligation as a critical audit matter because of the increased auditor judgment and extent of effort required to audit the initial fair value of the earn-out liability and to evaluate whether an adjustment is required in periods after the acquisition.

Adjustments made during the measurement period pertaining to facts and circumstances that existed as of the acquisition date are recognized as adjustments to goodwill, while adjustments resulting from events that occurred after the acquisition date are recognized in earnings.

There was a high degree of auditor judgment and an increased extent of effort to audit the reasonableness of the inputs used in the fair value measurement including the estimated results of operations over the earn-out period, volatility of operating results and the discount rate.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the initial fair value of the earn-out liability and subsequent adjustments made to it included the following, among others:

• We tested the effectiveness of controls over the valuation of the earn-out obligation, including management’s controls over the development of key judgments including the estimated results of operations over the earn-out period, volatility of operating results, and the discount rate.

• We read the executed purchase agreement, to understand the provisions of the earn-out obligation, including evaluating the substance and classification of the contingent payment.

• We evaluated the reasonableness of projections of future earnings for the earn-out obligation models by comparing the projections to (1) historical results, (2) industry data, and (3) peer companies.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology;

(2) key valuation assumptions, including the discount rates;

and (3) testing the mathematic accuracy of the valuations.

• Evaluated subsequent changes to estimated results of operations used in the fair value measurement to determine if such changes represent facts that were known and knowable at the time of the acquisition.

Revenue - Refer to Note 2 to the Consolidated Financial Statements

Critical Audit Matter Description

The Company earns revenue on transactions where (1) they resell inventory that they purchase from sellers, (2) from the sale of inventory that is sold on a consignment basis, and (3) from other non-consignment fee transactions.

When acting as a principal, the Company purchases an asset or assets from a seller and then seeks to sell the asset or assets to a buyer.

The Company then recognizes as purchase revenue the gross proceeds from the sale, including buyer's premiums.

When the Company is acting as an agent, its performance obligation is to arrange for the seller to sell an asset or assets to the buyer directly.

The Company recognizes consignment and other fee revenues based on the sales commissions that are paid to the Company by the sellers for utilizing the Company's services.

Consideration is variable based on units, final auction prices, or other factors, until the buyer’s purchase of the asset or assets is complete, or the service has been provided.

We identified a critical audit matter related to revenue transactions recorded, which required an increased extent of effort, including the need for us to involve professionals with expertise in information technology (IT), to identify, test, and evaluate the Company’s systems, applications and automated controls.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company’s revenue transactions included the following, among others:

• With the assistance of our IT specialists, we:

◦ Identified the significant systems used to process revenue transactions and tested the general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls.

◦ Performed testing of system interface controls and automated controls relevant to revenue processes.

• We tested internal controls within the relevant revenue processes, including those in place to reconcile the various systems to the Company’s general ledger.

• For certain components of revenue, we developed an independent expectation of revenue and compared such expectation to the amounts recorded by the Company.

• For certain components of revenue, we performed detailed transaction testing for a sample of revenue transactions, which included the following:

◦ Agreed the selected revenue transaction amounts recognized to underlying source documents.

◦ Tested the classification of each transaction as either purchase revenue, where the Company acts as a principal and records revenue based on the gross value of the asset sale, or commission and other fee revenue, where the Company acts as an agent and records only the fee earned net of the sale transaction value.

/s/ Deloitte and Touche LLP

McLean, Virginia

December 8, 2022

We have served as the Company’s auditor since 2021.

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Liquidity Services, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Liquidity Services, Inc.

and Subsidiaries (the Company) as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with U.S.

We have audited the accompanying consolidated balance sheet of Liquidity Services, Inc.

and Subsidiaries (the Company) as of September 30, 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the two years in the period ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2021, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 9, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Valuation Allowance

Description of the Matter As described in Note 10 to the consolidated financial statements, at September 30, 2021, the Company had deferred tax assets related to deductible temporary differences and carryforwards of $54.3 million, net of a $13.8 million valuation allowance.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of all available evidence, in management’s judgment it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

During the year ended September 30, 2021, the Company reduced its valuation allowance by $27.9 million as a result of a change in its estimate of forecasted future taxable income.

Auditing management’s assessment of the realizability of its deferred tax assets involved complex auditor judgment because management’s estimate of future taxable income is highly judgmental as it requires the evaluation of positive and negative evidence of realization, including the consideration of historical operating losses, and is based on assumptions that may be affected by future performance, market or economic conditions.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets.

This included controls over management’s scheduling of the future reversal of existing taxable temporary differences, identification and use of available tax planning strategies and projections of future taxable income.

To test the Company’s assessment of the realizability of its deferred tax assets, our substantive audit procedures included, among others, testing the Company’s scheduling of the reversal of existing temporary taxable differences.

We evaluated the assumptions used by the Company to develop projections of future taxable income by jurisdiction and tested the completeness and accuracy of the underlying data used in its projections.

For example, we compared the projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends.

We also assessed the historical accuracy of management’s projections and compared the projections of future taxable income with other forecasted financial information prepared by the Company.

We further evaluated management’s sensitivity analyses of the significant assumptions to consider the changes in realizability of deferred tax assets that would result from changes in the assumptions.

In addition, we evaluated the adequacy of the Company’s financial statement disclosures.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2001.

We served as the Company's auditor from 2001 to 2021.

Tysons, Virginia

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Cash and cash equivalents $ 96,122 $ 106,335

Short-term investments 1,819 —

Accounts receivable, net of allowance for doubtful accounts of $ 449 and $ 490

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Operating lease liabilities 9,687 10,098

Deferred taxes and other long-term liabilities 1,290 2,996

Other long-term liabilities 378 1,290

Total liabilities 133,568 120,561

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2022 2021 2020

Revenue $ 146,151 $ 127,580 $ 147,889

Fee revenue 111,380 78,360 78,636

Total revenue 257,531 205,940 226,525

Purchase revenues $ 151,271 $ 146,151 $ 127,580

Consignment and other fee revenues 128,779 111,380 78,360

Total revenues 280,050 257,531 205,940

Costs and expenses from operations:

Cost of goods sold (excludes depreciation and amortization) 119,407 107,678 96,016

Seller distributions — — 10,831

Technology and operations 55,522 47,673 42,158

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Depreciation and amortization 10,322 6,969 6,290

Acquisition costs and impairment of goodwill and long-lived assets 1,464 5 102

Other operating expenses 6 573 5,049

Fair value adjustment of acquisition earn-outs ( 24,500 ) — 200

Other operating expenses, net 388 1,470 378

Total costs and expenses 232,645 230,363 209,837

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Income (loss) before income taxes 47,653 27,579 ( 2,973 )

(Benefit) provision for income taxes ( 23,370 ) 801 1,200

Provision (benefit) for income taxes 7,329 ( 23,370 ) 801

Net income (loss) $ 40,324 $ 50,949 $ ( 3,774 )

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Other comprehensive (loss) income:

Defined benefit pension plan—unrecognized amounts, net of taxes 170 ( 2,293 ) ( 540 )

Foreign currency translation, net of taxes 601 484 ( 984 )

Other comprehensive income (loss), net of taxes 771 ( 1,809 ) ( 1,524 )

Defined benefit pension plan—unrecognized amounts 1,836 170 ( 2,293 )

Foreign currency translation ( 3,110 ) 601 484

Other comprehensive (loss) income ( 1,274 ) 771 ( 1,809 )

Comprehensive income (loss) $ 39,050 $ 51,720 $ ( 5,583 )

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Forfeiture of restricted stock awards ( 15,000 ) — — — — — — —

Common stock repurchases — — — ( 547,508 ) ( 3,983 ) — — ( 3,983 )

Stock compensation expense — — 5,689 — — — — 5,689

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Balance at September 30, 2020 34,082,406 $ 34 $ 247,892 ( 547,508 ) ( 3,983 ) $ ( 9,782 ) $ ( 122,346 ) $ 111,815

Net Loss — — — — — — ( 3,774 ) ( 3,774 )

Net income — — — — — — 50,949 50,949

Exercise of common stock options and vesting of restricted stock 1,605,618 1 444 — — — — 445

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Common stock repurchases — — — ( 1,591,963 ) ( 31,143 ) — — ( 31,143 )

Common stock surrendered in the exercise of stock options — — 1,502 ( 82,612 ) ( 1,502 ) — — —

Stock compensation expense — — 6,094 — — — — 6,094

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Provision for doubtful accounts 136 297 200

Deferred tax (benefit) expense ( 24,510 ) 106 136

Deferred tax expense (benefit) 6,287 ( 24,510 ) 106

Impairment of long-lived and other non-current assets 31 1,338 —

Loss (gain) on disposal of property and equipment 80 ( 29 ) ( 15 )

(Gain) loss on disposal of property and equipment ( 14 ) 80 ( 29 )

Gain on disposal of lease assets ( 240 ) ( 23 ) —

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Other liabilities ( 723 ) ( 290 ) 1,183

Net cash provided by (used in) operating activities 65,417 16,478 ( 6,242 )

Net cash provided by operating activities 44,833 65,417 16,478

Investing activities

Increase in intangibles ( 33 ) ( 62 ) ( 23 )

Purchases of property and equipment, including capitalized software ( 8,121 ) ( 5,419 ) ( 4,186 )

Proceeds from note receivable — 4,343 2,824

Proceeds from sale of property and equipment 105 71 247

Purchase of short-term investments ( 1,820 ) — ( 25,000 )

Maturities of short-term investments — — 55,000

Cash paid for business acquisition, net of cash acquired ( 11,164 ) — —

Other investing activities, net 21 72 9

Net cash (used in) provided by investing activities ( 21,084 ) ( 1,004 ) 28,647

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Payments of the principal portion of finance lease liabilities ( 99 ) ( 42 ) ( 34 )

Payments of debt issuance costs ( 91 ) — —

Proceeds from exercise of common stock options, net of tax — 445 111

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Supplemental disclosure of cash flow information

Cash paid (received for) for income taxes, net of refunds 1,442 ( 1,519 ) 1,008

Cash paid (received) for income taxes, net $ 885 $ 1,442 $ ( 1,519 )

Common stock surrendered in the exercise of stock options $ 479 $ 1,502 $ —

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Liquidity Services, Inc.

(the Company) is a leading global commerce company providing trusted marketplace platforms that power the circular economy.

(Liquidity Services, the Company) is a leading global commerce company providing trusted marketplace platforms that power the circular economy.

We create a better future for organizations, individuals, and the planet by capturing and unleashing the intrinsic value of surplus.

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Our comprehensive solutions enable the transparent, efficient, sustainable recovery of value from excess items owned by business and government sellers.

We believe our ability to create liquid marketplaces for surplus and idle assets generates a continuous flow of goods from our sellers.

This valuable and reliable flow of goods, in turn, attracts an increasing number of buyers to our marketplaces.

Increasing numbers of buyers to our marketplaces, in turn, attracts more sellers to our marketplaces which, in turn, reinforces a valuable and reliable flow of surplus assets.

Our business delivers value to shareholders by unleashing the intrinsic value of surplus through our marketplace platforms.

These platforms ignite and enable a self-reinforcing cycle of value creation where buyers and sellers attract one another in growing numbers.

The result of this cycle is a continuous flow of goods that becomes increasingly valuable as more participants join the platforms, thereby creating positive network effects that benefit sellers, buyers, and shareholders.

Results from our operations are organized into four reportable segments:

Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), GovDeals, and Machinio.

See Note 16 to the Consolidated Financial Statements for Segment Information.

We were incorporated in Delaware in November 1999 as Liquidation.com, Inc.

GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG) and Machinio.

See Note 16 - Segment Information for more information regarding our segments.

Liquidity Services was incorporated in Delaware in November 1999 as Liquidation.com, Inc.

and commenced operations in early 2000.

On November 1, 2021, we acquired Bid4Assets.

On November 1, 2021, we acquired Bid4Assets, Inc.

(Bid4Assets), a Maryland corporation based in Silver Spring, MD.

Bid4Assets auctions distressed real estate for the federal government, sheriffs, county-tax collectors, financial institutions, and real estate funds.

See Note 17 - Subsequent Events for more information regarding this transaction.

Bid4Assets is a leading online marketplace focused on conducting real property auctions for the government, including tax foreclosure sales and sheriff's sales.

See Note 3 - Bid4Assets Acquisition for more information regarding this transaction.

The Company's operations are subject to certain risks and uncertainties, many of which are associated with technology-oriented companies, including, but not limited to, the Company's dependence on use of the Internet;

the effect of general business and economic trends, including the extent and duration of the COVID-19 pandemic;

the effect of general business and economic trends including any future economic impact from the COVID-19 pandemic, inflationary pressures, and impacts from interest rate changes;

the Company's susceptibility to rapid technological change;

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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 year ended September 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.

For the year ended September 30, 2022, these estimates required the Company to make assumptions about the extent and duration of continued restrictions on cross-border transactions and the impact of the COVID-19 pandemic and other disruptions on macroeconomic conditions and, in turn, the Company's results of operations.

As there remains uncertainty associated with the Pandemic, the Company will continue to update its assumptions as conditions change.

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Restructuring costs incurred in periods subsequent to the acquisition date are expensed when incurred.

Subsequent changes to the purchase price ( i.e.

, working capital adjustments) or other fair value adjustments determined during the measurement period are recorded as an adjustment to goodwill, with the exception of contingent consideration, which is recognized in the statement of operations in the period it is modified.

Subsequent changes to the purchase price (i.e., working capital adjustments) or other fair value adjustments determined during the measurement period are recorded as an adjustment to goodwill, with the exception of contingent consideration, which is recognized in the statement of operations in the period it is modified.

All subsequent changes to a valuation allowance or uncertain tax position that relate to the acquired company and existed at the acquisition date that occur both within the measurement period and as a result of facts and circumstances that existed at the acquisition date are recognized as an adjustment to goodwill.

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The Company considers all highly liquid securities purchased with an initial maturity of three months or less to be cash equivalents.

Short-term Investments

The Company's short-term investments are designated as held-to-maturity investment securities, recorded at amortized cost, and are included as a current asset in the line-item Short-term investments within our Consolidated Balance Sheets as their maturity is less than one-year from the balance sheet date.

Interest income earned through our short-term investments are recorded to Interest and other income, net within the Consolidated Statements of Operations.

Accounts Receivable

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Charges for unsellable inventory, as well as for inventory written down to net realizable value, are included in Cost of goods sold in the period in which they have been determined to occur.

As of September 30, 2021 and September 30, 2020, the Company's inventory reflects write-downs of $ 0.2 million and $ 0.3 million, respectively.

Write-downs reflected in the inventory balances as of September 30, 2022, were immaterial .

As of September 30, 2021, the Company's inventory reflects write-downs of $ 0.2 million.

Prepaid expenses and other current assets

Prepaid expenses and other current assets include the short-term portion of a promissory note (described in "Other Assets"), as well as other miscellaneous prepaid expenses.

Prepaid expenses and other current assets include the short-term portion of contract assets (described in "Contract Assets and Liabilities"), capitalized sales commissions paid (described in "Contract Costs"), as well as other miscellaneous prepaid expenses.

Other Assets - Promissory Note

On September 30, 2015, the Company sold certain assets related to its Jacobs Trading business to Tanager Acquisitions, LLC (Tanager).

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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 year ended September 30, 2021, representing the difference between the $ 4.6 million outstanding balance of principal and accrued interest and the $ 3.5 million payment received.

Liquidity Services, Inc.

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Notes to Consolidated Financial Statements (Continued)

As a result, the Company recorded a $ 1.1 million loss as component of Other operating expenses in its Consolidated Statements of Operations during the year ended September 30, 2021, representing the difference between the $ 4.6 million outstanding balance of principal and accrued interest and the $ 3.5 million payment received.

There was no impact on the consolidated financial statements from the Forebearance Agreement as of and during the fiscal year ended September 30, 2022.

Property and Equipment

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Computers and purchased software One to five years

Office/operational equipment Three to five years

Office/operational equipment Two to five years

Furniture and fixtures Five to seven years

Internally developed software for internal-use Five years

Internally developed software for internal-use Two to five years

Leasehold improvements Shorter of lease term or useful life

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Lease assets and liabilities are not recognized when the lease term is 12 months or less, however, short-term lease expense is still recognized on a straight-line basis over the lease term.

Balances related to the Company's finance leases are included with Other assets (finance lease assets), Accrued expenses and other liabilities (current portion of finance lease liabilities), and Deferred taxes and other long-term liabilities (non-current portion of finance lease liabilities).

Balances related to the Company's operating leases are included within Operating lease assets, Current portion of operating lease liabilities, and Operating lease liabilities (non-current portion of operating lease liabilities).

Balances related to the Company's finance leases are included within Other assets (finance lease assets), Accrued expenses and other current liabilities (current portion of finance lease liabilities), and Other long-term liabilities (non-current portion of finance lease liabilities).

Lease assets are assessed for impairment in accordance with the Company’s accounting policy for the impairment of long-lived assets.

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Intangible assets are amortized using the straight-line method over their estimated useful lives.

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Impairment of Long-Lived Assets

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The Company did no t record impairment charges on material long-lived assets during the years ended September 30, 2022, 2021 and 2020.

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Goodwill represents the costs in excess of the fair value of net assets acquired through acquisitions by the Company.

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If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company applies a fair value-based test.

The Company generally tests its goodwill for impairment using a fair-value based test, where the Company determines the fair value of each of its reporting units and compares that amount to the carrying amount of the respective reporting units, including goodwill.

In applying a fair value-based test, the Company determines the fair value of each of its reporting units and compares that amount to the carrying amount of the respective reporting units, including goodwill.

If the fair value of the reporting unit exceeds its carrying amount, no impairment loss is recognized.

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Deferred Revenue

Deferred revenue is primarily derived from Machinio Advertising and System subscriptions that range from one to forty months.

Deferred revenue is primarily derived from Machinio Advertising and System subscriptions that range primarily from one to twenty-four months.

Subscription fees are recognized ratably over the term of the agreements.

Revenue Recognition

In the Consolidated Statements of Operations, revenue from the resale of inventory that the Company purchases from sellers is recognized within Revenue.

Revenue from the sale of inventory that the Company sells on a consignment basis, and other non-consignment fee revenue, which includes Machinio's sales listing subscription service as well as other services including returns management and refurbishment of assets, is recognized within Fee Revenue.

The Company adopted the Financial Accounting Standard Board's (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) effective October 1, 2018.

In the Consolidated Statements of Operations, revenue from the resale of inventory that the Company purchases from sellers is recognized within Purchase revenues.

Revenue from the sale of inventory that the Company sells on a consignment basis, and other non-consignment fee revenue, which includes Machinio's subscription services, is recognized within Consignment and other fee revenues.

The Company recognizes revenue when or as performance obligations are satisfied and control is transferred to the customer.

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When acting as a principal (a “purchase” arrangement), the Company purchases an asset or assets from a seller and then the Company seeks to sell the asset or assets to a buyer.

The Company recognizes as Revenue the gross proceeds from the sale, including buyer's premiums.

The Company recognizes as Purchase revenues the gross proceeds from the sale, including buyer's premiums.

In purchase arrangements, the contract with the seller is not a revenue contract in the scope of the revenue recognition guidance;

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When the Company is acting as an agent (a “consignment” arrangement), its performance obligation is to arrange for the seller to sell an asset or assets to the buyer directly.

The Company recognizes Fee Revenue based on the sales commissions that are paid to the Company by the sellers for utilizing the Company's services;

in this situation, sales commissions represent a percentage of the gross proceeds from the sale that the seller pays to the Company upon completion of the transaction.

The Company recognizes Consignment revenues, which are composed of buyers premium’s and/or sales commissions, based on the amounts that are paid to the Company by the buyers and sellers for utilizing the Company's services, which represent a percentage of the gross transaction proceeds.

Liquidity Services, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Continued)

In both purchase and consignment contracts, the Company sometimes provides distinct services to the seller, such as returns management, refurbishment of assets, or valuation services.

These services are distinct because the seller could benefit from the services separately from the asset sale, and as such they are treated as separate performance obligations.

Some services provided to sellers are not distinct, like providing access to the Company’s e-commerce marketplaces or promoting the asset or assets for sale, because they could not benefit the seller separately from the sale of the asset or assets.

For the Company’s CAG segment, certain transactions may involve cooperation with third parties to satisfy the performance obligation of arranging for the sale of assets to a buyer, with proceeds shared among the parties.

When the Company controls whether to use third parties to fulfill its performance obligation, it is considered the principal and revenue is recognized based on the gross purchase or consignment proceeds, with amounts due to third parties recognized as an expense.

When the seller requests multiple parties to fulfill its performance obligation, the Company is considered the agent and revenue is recognized based on the net purchase or consignment proceeds to be retained by the Company.

In both purchase and consignment arrangements, the Company sometimes provides varying levels of services to the seller, such as returns management, refurbishment of assets, or valuation services.

These services are considered integrated with the broader performance obligation to sell the seller’s assets to a buyer.

Other services provided to sellers are not capable of being distinct, like providing access to the Company’s e-commerce marketplaces or promoting the asset or assets for sale, because they could not benefit the seller separately from the sale of their assets.

The consideration received from buyers and sellers includes (1) buyer’s premiums, (2) seller’s commissions, and (3) fees for services, including reimbursed expenses.

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The Company estimates and recognizes amounts related to sales returns, discounts or rebates promised to customers, and reimbursed expenses, however, those estimates are not significant relative to the Company's consolidated revenues.

The total transaction price is allocated to each distinct performance obligation and revenue is recognized when or as the performance obligation is satisfied.

Variable consideration is allocated to individual performance obligations when the variable consideration is related to satisfying that performance obligation and consistent with the allocation objective.

The Company's revenue is generally recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers and PayPal, an Internet-based payment system, as methods of payments.

Revenue is recognized when or as the performance obligation is satisfied.

Variable consideration is allocated to individual performance obligations when the variable consideration is related to satisfying that performance obligation.

The Company's revenue is generally recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers and other methods of payments.

Goods are generally not shipped before payment is received.

For certain transactions, payment is due upon invoice and the payment terms vary depending on the business segment.

The Company collects and remits sales taxes on merchandise that it purchases and sells and has elected the practical expedient to report such amounts under the net method in its Consolidated Statements of Operations.

The Company also provides shipping and handling services in some arrangements and has elected the practical expedient to treat those activities as a fulfillment cost.

For certain transactions, payment is due upon invoice and the payment terms vary depending on the segments.

The Company collects and remits sales taxes on merchandise that it purchases and sells and has elected the practical expedient to exclude such sales tax amounts from the transaction price.

The Company also provides shipping and handling services in some arrangements and has elected the practical expedient to treat those activities as a fulfillment costs and will recognize the costs of these services at the time revenue is recognized for the related assets sold.

If the Company is acting as a principal for the combined obligation, amounts received from customers for shipping are recognized as Revenue, and amounts paid for shipping are recognized as Costs of goods sold.

If the Company is acting as an agent for the combined obligation, shipping revenue and costs will be netted and recognized within Costs of goods sold.

The Company’s performance obligations are satisfied when control of the asset is transferred to the buyer or when the service is completed.

The Company’s purchase and consignment performance obligations are satisfied at the point in time when control of the asset is transferred to the buyer or when the service is completed.

The Company determines when control has transferred by evaluating the following five indicators:

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and (5) whether the buyer has accepted the asset or assets.

For the Company's Machinio business segment, the performance obligation is satisfied over time as the Company provides the services over the term of the subscription.

At September 30, 2021, the Machinio business segment had a remaining performance obligation of $ 4.6 million;

For the Company's Machinio segment, the performance obligation has been identified as the stand ready obligation to provide access to the Machinio subscription services, which it satisfies over time and recognizes as other fee revenues.

As of September 30, 2022, the Machinio segment had a remaining performance obligation of $ 4.4 million;

the Company expects to recognize the substantial majority of that amount as Fee Revenue over the next 12 months.

Cost of Goods Sold

Cost of goods sold includes the costs of purchasing inventory, transporting property for auction, shipping and handling costs, and credit card transaction fees.

Cost of goods sold includes direct and incremental costs of purchasing inventory, transporting property for auction, shipping and handling costs, and credit card transaction fees.

For transactions where the Company resells inventory that was purchased from sellers, the cost of goods sold includes the cost of that inventory, generally using specific identification.

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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, after the buyer has accepted the goods or within 30 days, depending on the state where the buyer and seller conduct business.

The amount of cash held on behalf of the sellers is recorded as Payables to sellers in the accompanying Consolidated Balance Sheets.

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.

The funds are included in Cash and cash equivalents on the Consolidated Balance Sheets.

The Company releases the funds to the seller, less the Company's commission and other fees due, through Accounts payable after the buyer has accepted the goods or within 30 days, depending on the state where the buyer and seller conduct business.

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

The Company deposits its cash in interest bearing chec king accounts, or acquires cash equivalent money market funds, each with 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 60.7 %, 55.1 %, and 43.6 % of cost of goods sold for the years ended September 30, 2021, 2020, and 2019, respectively.

This contract is included within the RSCG segment.

The property purchased under these contracts represented 55 %, 61 %, and 55 % of cost of goods sold for the years ended September 30, 2022, 2021, and 2020, respectively.

This con tract is included within the RSCG segment.

The Company accounts for income taxes using an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and income tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which the taxes are expected to be paid or recovered.

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The awards issued can contain service conditions, performance conditions based upon Company financial results, and/or market conditions based upon changes in the Company's stock price.

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Service- and performance-based stock awards are measured at fair value on their grant date.

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For performance-based stock awards, the Company recognizes expense on a straight-line basis over the derived service period expected to be required to achieve the performance condition.

The Company records a cumulative adjustment to compensation

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

expense for performance-based awards if there is a change in determination of whether it is probable that the performance condition will be achieved.

The Company records a cumulative adjustment to compensation expense for performance-based awards if there is a change in determination of whether it is probable that the performance condition will be achieved.

Market-based stock awards are measured at fair value on their grant date using a Monte Carlo simulation.

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Balance at September 30, 2022 $ ( 10,594 ) $ 309 $ ( 10,285 )

Net Income (Loss) Per Share (EPS)

See discussion of our Net income (loss) per share (EPS) determination and related calculations below at Note 3 Earnings Per Share .

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.

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The Company adopted the new standard on a prospective basis effective October 1, 2021.

This accounting standard has not had a material impact on the Company's consolidated financial statements.

Accounting Standards Not Yet Adopted

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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 guidance will be effective for the Company beginning on October 1, 2023, due to the fact that the Company was classified as a smaller reporting company defined by the SEC at the time the rule was effective for public business entities.

The guidance will be applied on a modified-retrospective basis, with any cumulative-effect adjustment recorded to retained earnings on the adoption date.

The Company is in the process of evaluating the impact ASC 326 will have on its consolidated financial statements and expects to estimate credit losses on its financial assets such as its Accounts receivable and money market funds.

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.

Bid4Assets Acquisition

On November 1, 2021, the Company purchased all of the issued and outstanding shares of stock of Bid4Assets, Inc.

(Bid4Assets), a Maryland corporation.

Bid4Assets is a leading online marketplace focused on conducting real property auctions for the government, including tax foreclosure sales and sheriff's sales.

The results of Bid4Assets' operations are included within our GovDeals reportable segment and reporting unit.

As of September 30, 2022, the Company's purchase price allocation related to this acquisition is preliminary and subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date.

The revisions may have a significant impact on our consolidated financial statements.

The allocation of the purchase price will be finalized once all information that was known and knowable as of the acquisition date is obtained and analyzed, but not to exceed one year from the acquisition date.

Liquidity Services, Inc.

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Notes to Consolidated Financial Statements (Continued)

The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income taxes, the valuation of intangible assets acquired and earn-out liability, and the residual goodwill.

The preliminary amounts assigned to intangible assets by type for this acquisition were based upon our valuation model and historical experiences with entities with similar business characteristics.

During the three months ended March 31, 2022, we recorded a measurement period adjustment of $ 1.1 million for the earn-out consideration fair value with a corresponding increase to Goodwill, based on facts and circumstances in existence as of the effective date of the acquisition related to the discount rates associated with the expected earn-out payments.

This resulted in a change to the total consideration transferred and goodwill balance seen below as compared to our previously reported preliminary purchase accounting results as of December 31, 2021.

The preliminary acquisition date fair value of the consideration transferred to the former shareholders of Bid4Assets was approximately $ 42.7 million consisting of $ 14.7 million in cash (net of working capital adjustments totaling $ 0.3 million) and earn-out consideration with a preliminary fair value of $ 28.0 million.

Former shareholders of Bid4Assets are eligible to receive earn-out consideration of up to $ 37.5 million in cash, payable based on Bid4Assets' achievement of trailing twelve-month EBITDA targets measured at the end of each calendar quarter until the quarter ended December 31, 2022.

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

(in thousands) Fair Value

Cash and cash equivalents $ 3,576

Intangible assets 16,500

Other assets 346

Total assets acquired 20,422

Payables to sellers 3,715

Operating lease liabilities 204

Deferred tax liabilities 3,847

Total liabilities assumed 7,766

Net identifiable assets acquired $ 12,656

Goodwill 30,083

Total consideration transferred $ 42,739

The excess of purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as Goodwill.

The Goodwill associated with our acquisition includes the acquired assembled work force, and the value associated with the opportunity to leverage the workforce to continue to grow by adding additional customer relationships or new solutions in the future.

Based on management's preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, Goodwill of approximately $ 30.1 million was recorded.

The total Goodwill arising from the acquisition is included in the GovDeals reportable segment and reporting unit and is not deductible for tax purposes.

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

(in thousands) Useful Life (in years) Fair Value

Contract intangibles 8 $ 13,900

Developed software 3 2,200

Trade name 3 400

Total identifiable intangible assets $ 16,500

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Contract Intangibles

We recorded contract intangibles separately from goodwill based upon determination of the length, strength, and contractual nature of the relationship that Bid4Assets shared with its suppliers.

We valued the contract intangibles using the multi-period excess earnings method, an income approach valuation model.

The significant assumptions used in the income approach includes estimates about future expected cash flows from supplier contracts, the attrition rate, and the discount rate.

We are amortizing the contract intangibles, preliminarily valued at $ 13.9 million, on a straight-line basis over a useful life of eight years , which is materially consistent with the expected pattern of economic benefit.

Developed Software

Developed software primarily consists of intellectual property of the Bid4Assets e-commerce marketplace and associated mailing lists.

We valued the developed software by applying the relief-from-royalty method, an income approach valuation model.

The significant assumptions used in the relief-from-royalty method include estimates about future expected cash flows from the developed software, the royalty rate, the obsolescence factor and the discount rate.

We are amortizing the acquired developed technology, preliminarily valued at $ 2.2 million, on a straight-line basis over a useful life of three years , which is materially consistent with the expected pattern of economic benefit.

We valued the trade name acquired using a relief-from-royalty method.

The significant assumptions used in the relief-from-royalty method include future expected cash flows from the trade name, the royalty rate, and the discount rate.

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

Contingent Consideration

During the year ended September 30, 2022, and as a result of the acquisition of Bid4Assets, the Company recorded preliminary contingent consideration in the amount of $ 28.0 million on its Consolidated Balance Sheets.

See further discussion of this matter within Note 13 - Fair Value Measurement .

Other Information

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

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Earnings Per Share

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1,009,288 420,454 3,526,055

DoD Contract with DLA Disposition Services

During the year ended September 30, 2019, the Company had a material vendor contract with the Department of Defense (DoD), the Scrap Contract, which concluded on September 30, 2019.

Under the Scrap Contract, the Company was the remarketer of all DoD non-electronic scrap turned into the Defense Logistics Agency (DLA) available for sale within the United States, Puerto Rico, and Guam.

The Company paid a revenue-sharing payment to the DLA under this contract equal to 64.5 % of the gross resale proceeds of the scrap property, and the Company bore all of the costs for the sorting, merchandising and sale of the property.

Revenue from the Scrap Contract accounted for 7.4 % of the Company's consolidated revenue for the year ended September 30, 2019.

Liquidity Services, Inc.

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Computers and purchased software $ 2,058 $ 1,981

Internally developed software for internal-use 18,942 13,860

Office/Operational equipment 6,373 5,781

Developed software for internal-use 22,168 18,942

Equipment 8,536 6,373

Leasehold improvements 3,256 3,244

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The Company did no t record impairment charges on material property and equipment during the years ended September 30, 2022, 2021 and 2020.

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The Company has operating leases for its corporate offices, warehouses, vehicles and equipment.

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Maturities of lease liabilities are:

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

September 30, 2022

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2026 2,139 65

2025 1,441 30

Thereafter — —

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(2) The weighted average discount rate is 6.2 % for operating leases and 5.6 % for finance leases.

Additionally, the Company has approximately $ 1.9 million of future payment obligations related to an executed warehouse lease agreement that has not yet commenced as of September 30, 2021 .

Supplemental disclosures of cash flow information related to leases are:

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adjustments to lease assets and liabilities 1

(1) Year ended September 30, 2020 a mount includes $ 12.2 million of lease liabilities recognized upon the adoption of ASC 842 on October 1, 2019 (see Note 2).

( 196 ) 3,756

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

Liquidity Services, Inc.

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

Goodwill (in thousands) CAG GovDeals Machinio Total

Goodwill (in thousands) GovDeals CAG Machinio Total

Balance at September 30, 2019 $ 23,731 $ 21,178 $ 14,558 $ 59,467

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Balance at September 30, 2021 $ 23,731 $ 21,583 $ 14,558 $ 59,872

Bid4Assets acquisition (see Note 3) 30,083 — — 30,083

Translation adjustments — ( 1,045 ) — ( 1,045 )

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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.

Pursuant to ASC 350, Goodwill and Other , the Company may utilize the optional qualitative assessment for its reporting units.

The qualitative assessment considers trends in macroeconomic conditions, industry and market conditions, cost factors, and overall performance of the reporting unit.

After assessing the totality of these factors and trends, if it is determined that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further steps are required.

If not however, then the Company will perform the quantitative impairment test.

As discussed in Note 13 – Fair Value Measurement , the fair value of the Bid4Assets earn-out liability declined by $ 24.5 million during the fiscal year ended September 30, 2022, due to timing changes impacting the level of auction events and transactions that are expected to occur during the earn-out period ending December 31, 2022.

These timing changes have not reflected substantive changes to the long-term outlook for real estate sales within the GovDeals segment and were not considered a triggering event for testing goodwill or long-lived assets for impairment as of September 30, 2022.

The Company has also continued to evaluate the impact of the COVID-19 pandemic and other ongoing macroeconomic disruptions on the recoverability of its Goodwill.

The Company did not identify any indicators of impairment that required an interim goodwill impairment test during the three months ended September 30, 2022.

As of July 1, 2022, the Company performed its annual impairment test using the optional qualitative assessment for each of our reporting units.

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Contract intangibles 6 - 8

7.5 $ 17,000 $ ( 3,789 ) $ 13,211 $ 3,100 $ ( 1,679 ) $ 1,421

Brand and technology 3 - 5

4.2 5,300 ( 3,089 ) 2,211 2,700 ( 1,755 ) 945

Patent and trademarks 7 - 10

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Total intangible assets, net $ 24,681 $ ( 8,447 ) $ 16,234 $ 8,160 $ ( 4,707 ) $ 3,453

The gross carrying amount of total intangible assets increased by $ 16.5 million during the year ended September 30, 2022, primarily due to the Bid4Assets acquisition.

The acquired developed software and trade name are included in the above line items of Technology and Patent and trademarks, respectively.

See Note 3 - Bid4Assets Acquisition for further information.

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

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

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(in thousands)

Thereafter 3,654

Total $ 16,234

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Amortization expense related to intangible assets for the years ended September 30, 2022, 2021 and 2020 was $ 3.7 million, $ 1.3 million and $ 1.3 million, respectively.

The increase in intangible amortization expense was primarily due to the Bid4Assets acquisition.

The Company did no t record impairment charges on any intangible assets during the years ended September 30, 2022, 2021 and 2020.

The Company has continued to evaluate the impact of the COVID-19 pandemic, ongoing macroeconomic disruptions, and the subsequent financial performance of Bid4Assets, on the recoverability of its long-lived assets.

The Company did not identify any indicators of impairment requiring an interim impairment test on material long-lived assets during the year ended September 30, 2022.

401(k) Benefit Plan

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Inventory capitalization 683 219

Inventory reserves 24 —

Allowance for doubtful accounts 113 96

Stock compensation expense 2,198 1,415

Operating lease assets 3,605 2,236

Operating lease liabilities 3,565 3,605

Depreciation — 2,339

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Amortization of goodwill 7,595 7,322

Depreciation 938 —

Capitalized costs 2,786 5,602

Operating lease liabilities 3,394 2,059

Operating/right of use assets 3,325 3,394

Pension liability 608 238

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Nondeductible compensation expense 2.0 % 5.5 % ( 6.0 ) %

Fair value adjustments of acquisition earn-outs ( 10.8 ) % — % — %

Other permanent items ( 0.4 ) % 0.1 % ( 1.1 ) %

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Consideration was given to the tax planning strategies and, when applicable, future taxable income as to how much of the relevant deferred tax asset could be realized on a more likely than not basis.

The Company has recorded a valuation allowance of $ 13.8 million and $ 41.8 million against its gross deferred tax asset balance at September 30, 2021 and September 30, 2020, respectively.

The Company has recorded a valuation allowance of $ 12.3 million and $ 13.8 million against its gross deferred tax asset balance at September 30, 2022 and 2021, respectively.

At each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As of September 30, 2021, in part because in the current year we achieved three years of cumulative pre-tax income in the U.S.

federal jurisdiction, the Company determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred tax assets of $ 27.9 million are realizable.

It therefore recorded a net valuation allowance release of $ 27.9 million for the year ended September 30, 2021.

On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the 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 does not expect the NOL provisions of the CARES Act to result in a material cash benefit.

As of September 30, 2022, the Company determined that there was sufficient positive evidence to conclude that it is more likely than not that all of its U.S.

deferred tax assets are realizable, except for $ 0.5 million of foreign tax credit carry forwards that expire beginning in 2023.

The Tax Act and Jobs Act of 2017 ("The Tax Act") subjects a U.S.

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On July 10, 2018, the Company acquired 100 % of the stock of Machinio for $ 19.9 million.

Under the acquisition method of accounting, the Company recorded a net deferred tax liability of $ 0.7 million comprised primarily of acquired intangibles netted

Under the acquisition method of accounting, the Company recorded a net deferred tax liability of $ 0.7 million comprised primarily of acquired intangibles netted against NOLs and other deferred assets and recognized a $ 0.7 million tax benefit from a reduction to its valuation allowance.

The total amount of acquired NOLs, which are subject to limitations under Section 382, were $ 1.4 million.

On November 1, 2021, the Company acquired 100 % of the stock of Bid4Assets, Inc.

for $ 42.7 million.

Under the acquisition method of accounting, the Company recorded a net deferred tax liability of $ 3.8 million comprised primarily of acquired intangibles netted against NOLs and other deferred assets.

The total amount of NOLs, which are subject to limitations under Section 382, were $ 1.2 million.

Liquidity Services, Inc.

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Notes to Consolidated Financial Statements (Continued)

against NOLs and other deferred assets and recognized a $ 0.7 million tax benefit from a reduction to its valuation allowance.

The total amount of acquired NOLs, which are subject to limitations under Section 382, were $ 1.4 million.

The Company has not recorded a provision for deferred U.S.

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ASC 740 states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

During 2021, the Company recorded a charge of $ 0.1 million due to unrecognized tax benefits related to foreign operations.

During 2022, the Company did not identify any new uncertain tax positions.

The Company recognizes interest and penalties in the period in which they occur in the income tax provision.

4 unchanged sentences

However, certain tax attribute carryforwards that were generated prior to fiscal year 2019 may be adjusted upon examination by tax authorities if they are utilized.

On February 10, 2022, the Company entered into a credit facility agreement (Credit Agreement) with Wells Fargo Bank, N.A.

Terms of the Credit Agreement provide for revolving loans (Line of Credit) up to a maximum aggregate principal amount of $ 25.0 million with a $ 10.0 million sublimit for standby letters of credit.

The Credit Agreement ends on March 31, 2024, at which time any remaining amounts outstanding are due immediately.

The applicable interest rate on any draws under the Line of Credit is a variable rate per annum equal to the Daily Simple Secured Overnight Financing Rate (SOFR) in effect plus a margin ranging from 1.25 % to 1.75 %.

Interest is payable monthly.

The Company pays an Unused Commitment Fee (as fined in the Credit Agreement), on a quarterly basis, equal to 0.05 % per annum on the daily amount of the available, but unused, balance on the Line of Credit.

The Company also pays a Letter of Credit Fee (as defined in the Credit Agreement), on a quarterly basis, equal to 1.25 % on the daily amount available to be drawn for standby letters of credit.

Interest incurred on any draws under the Line of Credit, as well as the Unused Commitment Fee and Letter of Credit Fee, are included within Interest and other income, net in the Consolidated Statements of Operations.

The Company may draw upon the Line of Credit for general corporate purposes.

Repayments of any borrowings under the Line of Credit shall become available for redraw at any time by the Company.

The Credit Agreement contains certain financial and non-financial restrictive covenants including, among others, the requirement to maintain a minimum level of earnings before interest, income taxes, depreciation and amortization (EBITDA).

The Credit Agreement contains a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions, investments and acquisitions, indebtedness and liens, and dividends and other restricted payments.

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

During the year ended September 30, 2022, the Company did not make any draws under the Credit Agreement.

As of September 30, 2022, the Company had no outstanding borrowings under the Credit Agreement.

During the year ended September 30, 2022, interest expense incurred by the Company under the Credit Agreement was immaterial to the consolidated financial statements.

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Equity Transactions

1 unchanged sentence

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 September 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.

During the year ended September 30, 2022, the Company's shareholders approved an amendment to the LTIP to increase the number of shares of common stock reserved for issuance from $ 19.1 million to $ 20.3 million.

Accordingly, as of September 30, 2022, the Company has reserved at total of $ 20.3 million 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 September 30, 2021, 1,993,244 sha res of common stock remained available for use.

As of September 30, 2022, 2.3 million sha res of common stock remained available for use.

Stock Compensation Expense

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$ 8,481 $ 6,947 $ 5,660

The Company’s total liabilities for liability-classified stock comp ensation awards was $ 0.5 million and $ 0.1 million as of September 30, 2021 and 2020, the current portion of which was $ 0.3 million and $ 0.1 million , respectively.

The Company’s total liabilities for liability-classified stock compensation awards was $ 0.2 million and $ 0.5 million as of September 30, 2022 and 2021, the current portion of which was $ 0.2 million and $ 0.3 million, respectively.

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

Year Ended September 30,

2022 2021 2020

Stock Compensation Expense by Line Item

Technology and operations $ 1,307 $ 1,016 $ 385

Sales and marketing 2,148 1,541 1,502

General and administrative 5,026 4,390 3,773

Total stock compensation expense:

$ 8,481 $ 6,947 $ 5,660

Liquidity Services, Inc.

49 unchanged sentences

Of the outstanding RSUs & RSAs as of September 30, 2022, 647,674 can vest by satisfying service conditions only, and 454,365 can vest by satisfying service and performance or market conditions .

RSUs containing only service conditions vest ratably each year ov er periods of one to four years .

RSUs containing only service conditions vest ratably each year over periods of one to four years .

Stock compensation cost is expensed ratably over the entire service period.

12 unchanged sentences

The 12,000 SARs not yet exercisable as of September 30, 2022 can become exercisable by satisfying service conditions only.

As of September 30, 2021, there was $ 0.3 million of unrecognized compensation cost related to SARs containing service conditions, which is expected to be recognized over a weighted-average period of 1.3 years .

The Company made cash paym ents of $ 0.4 million, $ 0.6 million and $ 0.5 million to settle SARs exercised during the years ended September 30, 2021, 2020 and 2019, respectively.

As of September 30, 2022, there was approximately $ 0.1 million of unrecognized compensation cost related to SARs containing service conditions, which is expected to be recognized over a weighted-average period of 0.25 years.

The Company made cash payments of $ 0.2 million, $ 0.4 million and $ 0.6 million to settle SARs exercised during the years ended September 30, 2022, 2021 and 2020, respectively.

Liquidity Services, Inc.

7 unchanged sentences

Expected volatility 71.7 % 78.3 % 55.0 % - 68.8 %

55.0 % - 68.8 %

38.2 % - 48.8 %

Risk-free interest rate 4.0 % 0.1 % 0.1 % - 0.1 %

0.1 % - 0.1 %

1.3 % - 1.7 %

Expected term 0.25 1.25 0.0 - 2.3 years

0.0 - 2.3 years

0.1 - 3.3 years

As of September 30, 2021 and 2020, the weighted-average fair value of SARs outstanding w as $ 18.86 and $ 0.63 per award, respectively.

As of September 30, 2022, 2021, and 2020, the weighted-average fair value of SARs outstanding was $ 9.82 , $ 18.86 , and $ 0.63 per award, respectively.

SARs containing performance conditions and market conditions are discussed separately in the section below.

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Notes to Consolidated Financial Statements (Continued)

As of the fiscal year ended September 30, 2020, we had $ 6.1 million of remaining share repurchase authorization.

On March 8, 2021, our Board of Directors authorized an additional $ 10 million of share repurchases of the Company's outstanding shares of common stock through March 31, 2023.

We repurchased 957,079 shares for $ 16.1 million under this program during the six months ended March 31, 2021.

On May 3, 2021, the Company's Board of Directors authorized a new stock repurchase plan (the “May 3, 2021 Stock Repurchase Plan”) of up to $ 15 million of our outstanding shares of common stock through June 30, 2023.

We repurchased 634,884 shares for $ 15.0 million under this program during the year ended September 30, 2021 .

On December 6, 2021, the Company's Board of Directors authorized the repurchase of up to $ 20 million of the Company's outstanding shares of common stock through December 31, 2023.

The Company had no remaining share repurchase authorization as of September 30, 2021.

On December 6, 2021, the Company's Board of Directors authorized a new stock repurchase plan of up to $ 20 million of the Company's ou tstanding shares of common stock through December 31, 2023.

The Company repurchased 1,159,066 shares for $ 20.0 million during the six months ended March 31, 2022.

On May 13, 2022, the Company's Board of Directors authorized a new stock repurchase plan of up to $ 12 million of our outstanding shares of common stock through June 30, 2024.

The Company repurchased 408,211 shares for $ 5.4 million during the year ended September 30, 2022 under the May 2022 Repurchase Plan.

As of September 30, 2022, the Company may repurchase an additional $ 6.6 million of shares under the May 2022 Repurchase Plan.

On December 6, 2022, the Company's Board of Directors authorized the repurchase of up to an additional $ 8.4 million of the Company's outstanding shares of common stock through December 31, 2024.

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 year ended September 30, 2021 , participants surrendered 82,612 shares of common stock in the exercise of stock options.

During the year ended September 30, 2022 and September 30, 2021, participants surrendered 23,839 and 82,612 shares of common stock in the exercise of stock options, respectively.

Any shares surrendered to the Company in this manner are not available for future grant.

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

Cash and cash equivalents .

The Company had $ 22.0 million and $ 40.0 million of money market funds considered cash equivalents at September 30, 2022, and 2021, respectively.

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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.

Contingent consideration.

During the year ended September 30, 2022, and as a result of the acquisition of Bid4Assets, the Company recorded preliminary fair value of contingent consideration in the amount of $ 28.0 million on its Consolidated Balance Sheets as of the acquisition date.

The contingent consideration is based on Bid4Assets' achievement of trailing twelve-month EBITDA targets measured at the end of each calendar quarter until the quarter ended December 31, 2022.

The liability for this consideration is included in Accrued expenses and other current liabilities within the Consolidated Balance Sheets.

The Company's initial estimate of the fair value of the earn-out consideration was informed by the Monte Carlo valuation method and considered potential outcomes based upon the terms and conditions of the merger agreement.

The fair value measurements utilized were classified as Level 3 assets within the fair value hierarchy under the provisions of ASC 820, Fair Value Measurements , and ASC 805, Business Combinations .

The significant unobservable inputs used in the fair value measurement categorized within Level 3 of the fair value hierarchy included estimated results of operations over the earn-out period, volatility of operating results (expense components ranged from 20 % to 55 %), and the discount rate ( 13 %).

The earn-out consideration was preliminarily valued at approximately $ 28.0 million as of the acquisition date.

Fair value of the earn-out consideration will be remeasured at the end of each calendar quarter until December 31, 2022.

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

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Contingent Consideration

Balance at September 30, 2021 $ —

Earn-out from business acquisition 26,900

Measurement period adjustment 1,100

Payment of achieved earn-out threshold ( 3,500 )

Change in fair value ( 24,500 )

Balance at September 30, 2022 $ —

During the year ended September 30, 2022, the Company recorded a measurement period adjustment of $ 1.1 million for the preliminary earn-out consideration fair value with a corresponding increase to goodwill, based on facts and circumstances in existence as of the effective date of the acquisition related to the discount rates associated with the expected earn-out payments.

Based on results as of March 31, 2022, Bid4Assets achieved a trailing twelve-month EBITDA threshold resulting in a $ 3.5 million payment made by the Company to the former shareholders of Bid4Assets.

During the twelve months ended September 30, 2022, the fair value of the earn-out liability was reduced by $ 24.5 million, such that no amount of fair value was determined present as of September 30, 2022.

This reduction was due to a decline in the auction events and transactions that are expected to be completed during the earn-out period ending December 31, 2022, which included extended timelines to advance legislation that allows for online auctions of foreclosed real estate in certain target markets, and other client specific delays in bringing foreclosed real estate to auction.

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

These changes in fair value were recorded as a gain within Fair value adjustment of acquisition earn-outs in the Consolidated Statements of Operations.

Other Information .

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

The Company’s financial assets and liabilities not measured at fair value are cash, short-term investments, accounts receivable, and accounts payable.

The Company believes the carrying values of these instruments approximate fair value.

As of September 30, 2022 , the Company had no non-financial instruments measured at fair value on a non-recurring basis other than fair value measurements associated with the preliminary purchase accounting for Bid4Assets.

See Note 3 - Bid4Assets Acquisition for more information .

As of September 30, 2022 and 2021, the Company did no t have any material assets or liabilities measured at fair value on a non-recurring basis.

15 unchanged sentences

Amortization of prior service cost 19 21 19

Settlement loss recognized 61 — —

Total net periodic benefit $ ( 249 ) $ ( 334 ) $ ( 347 )

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Benefits paid ( 634 ) ( 781 )

Employer's contributions 134 —

Plan Settlements ( 1,182 ) —

Foreign currency exchange rate changes ( 4,916 ) 1,141

5 unchanged sentences

There was no material impact to the consolidated financial statements as a result of the early settlement offers.

The amounts recognized in other comprehensive (income) loss related to the Company's qualified defined benefit pension plan, net of taxes, and the related foreign currency translation adjustments, for the years ended September 30, 2021 and 2020, is shown in the following table:

The amounts recognized in Other comprehensive (loss) income related to the Company's qualified defined benefit pension plan, net of taxes, and the related foreign currency translation adjustments, for the years ended September 30, 2022 and 2021, is shown in the following table:

Liquidity Services, Inc.

40 unchanged sentences

The assets consisted of the following as of September 30, 2022 and 2021:

September 30, 2022 September 30, 2021

Equity securities 21.6 % 21.0 %

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The fund manager prices the underlying securities using independent external pricing sources.

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.

For the year ended September 30, 2019, business realignment expenses were incurred related to:

management changes associated with a strategic reorganization of the Company's go-to-market strategy for self-directed and fully-managed market place services, the conclusion of the Scrap contract, and other cost saving actions.

Legal Proceedings

The Company reserves for contingent liabilities based on ASC 450, Contingencies, when it determines that a liability is probable and reasonably estimable.

From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of the business.

However, unless otherwise noted, there are no claims or actions pending or threatened against the Company that, if adversely determined, would in the Company's management's judgment have a material adverse effect on the Company.

Liquidity Services, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Continued)

The table below sets forth the significant components and activity in the liability for business realignment initiatives during the year ended September 30, 2021, on a segment and consolidated basis:

(in thousands) Liability

September 30,

2019 Adoption of ASC 842 Business

Expenses Cash

Payments Liability

September 30,

2020 Business

Expenses Cash

Payments Liability

September 30,

Employee severance and benefit costs:

GovDeals $ — $ — $ 29 $ ( 25 ) $ 4 $ — $ ( 4 ) $ —

RSCG — — 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 ) $ —

Legal Proceedings

The Company reserves for contingent liabilities based on ASC 450, Contingencies , when it determines that a liability is

probable and reasonably estimable.

From time to time, the Company may become involved in litigation relating to claims

arising in the ordinary course of the business.

Former Employee Matters

On December 22, 2020, the Company’s former Vice President, Human Resources (the “HR Plaintiff”) filed a claim with the Equal Employment Opportunity Commission (“EEOC”) for wrongful termination on the basis of gender, race, and age.

The EEOC subsequently assigned HR Plaintiff’s claim to the Montgomery County Office of Human Rights for

investigation, which, in turn, dismissed HR Plaintiff’s claim after HR Plaintiff filed a complaint in the United States District Court for the District of Maryland Southern Division on May 19, 2021.

In May 2021, the Company’s former Vice President, Human Resources filed a complaint against the Company in federal court in Montgomery County, Maryland, alleging wrongful termination on the basis of gender, race, and age.

The parties have completed the discovery phase of this case.

On April 4, 2022, the Company filed a motion for summary judgment.

As of the date hereof, the court has not issued its ruling on the motion.

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, HR 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 Company and HR Plaintiff settled the wage and hour claims for an immaterial amount in May 2021.

On October 22, 2021, the Company’s former Chief Marketing Officer (“Marketing Plaintiff”) filed a claim with the EEOC alleging that the Company discriminated against him on the basis of his race and age and that the Company retaliated against him.

In October 2021, the Company’s former Chief Marketing Officer filed a claim with the Equal Employment Opportunity Commission (the “EEOC”), alleging wrongful termination on the basis of race and age and that the Company retaliated against him.

The Company submitted its position statement to the EEOC on February 8, 2022.

As of the date hereof, the EEOC has not communicated the results of its investigation to the Company.

The Company believes these claims are without merit and cannot estimate a range of potential liability, if any, at this time.

CNA has accepted tender of the claims.

Separately, Marketing Plaintiff also alleged wage and hour violations under Maryland law for failure to pay his fiscal year 2021 performance bonus.

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.

CNA has accepted tender of these claims as well.

Segment Information

2 unchanged sentences

Descriptions of our reportable segments are as follows:

• The GovDeals reportable segment provides self-directed service solutions that enable local and state government entities including city, county and state agencies, located in the United States and Canada to sell surplus and

Liquidity Services, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

salvage assets through our GovDeals marketplace.

Through the end of fiscal 2019, GovDeals provided self-directed service solutions to commercial businesses as part of the Auction Deals marketplace.

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

• The RSCG reportable segment consists of marketplaces that enable corporations located in the United States and Canada to sell surplus and salvage consumer goods.

RSCG also offers a suite of services that includes returns management, asset recovery, and e-commerce services.

This segment includes the Company's Liquidation.com and Secondipity marketplaces.

This segment uses the Liquidation.com, Secondipity and AllSurplus marketplaces.

Through the end of third quarter fiscal 2021, RSCG operated the Liquidation.com DIRECT marketplace for truckload quantities of retail surplus.

2 unchanged sentences

CAG also offers a suite of services that includes surplus management, asset valuation, asset sales and marketing.

Commercial seller assets are located across North America, Europe, Australia, Asia, and Africa.

This segment includes the Company's Network International and GoIndustry DoveBid marketplaces and, beginning in fiscal 2020, self-directed service solutions for commercial businesses on the AllSurplus marketplace.

Prior to the conclusion of the Scrap Contract, CAG sold scrap assets from the DoD on its Government Liquidation marketplace.

Commercial seller assets are located across the Americas, Europe, Australia, Asia, and Africa.

This segment uses the GoIndustry DoveBid and AllSurplus marketplaces.

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

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

For the year ended September 30, 2019, Corporate & Other included a previously existing operating segment that did not meet the quantitative thresholds to be a reportable segment, IronDirect.

The Company exited the IronDirect business in January 2019.

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.

The Company reports reportable segment information based on the internal performance measures used by the CODM to assess the performance of each operating segment in a given period.

In connection with that assessment, the CODM uses segment gross profit to evaluate the performance of each segment.

Segment gross profit is calculated as total revenue less cost of goods sold and seller distributions (excludes depreciation and amortization).

Segment gross profit is calculated as total revenue less cost of goods sold (excludes depreciation and amortization).

Liquidity Services, Inc.

5 unchanged sentences

2022 2021 2020

Revenue $ — $ — $ —

Fee revenue 49,579 32,806 32,936

Purchase revenue $ — $ — $ —

Consignment and other fee revenues 59,352 49,579 32,806

Total revenue 59,352 49,579 32,806

Gross profit 47,030 30,721 30,386

Revenue 130,790 118,398 110,736

Fee revenue 28,016 18,093 16,585

Segment gross profit 56,408 47,030 30,721

Purchase revenue 134,092 130,790 118,398

Consignment and other fee revenues 32,007 28,016 18,093

Total revenue 166,100 158,806 136,491

Gross profit 64,564 49,727 44,967

Revenue 15,361 9,182 36,684

Fee revenue 24,284 20,299 23,558

Segment gross profit 63,704 64,564 49,727

Purchase revenue 17,179 15,361 9,182

Consignment and other fee revenues 25,396 24,284 20,299

Total revenue 42,575 39,645 29,481

Gross profit 29,324 22,714 32,679

Revenue — — —

Fee revenue 9,559 7,213 5,598

Segment gross profit 29,120 29,324 22,714

Purchase revenue — — —

Consignment and other fee revenues 12,083 9,559 7,213

Total revenue 12,083 9,559 7,213

Gross profit 8,992 6,813 5,196

Segment gross profit 11,471 8,992 6,813

Corporate & Other, including elimination adjustments:

Revenue — — 469

Fee revenue ( 57 ) ( 51 ) ( 41 )

Purchase revenue — — —

Consignment and other fee revenues ( 60 ) ( 57 ) ( 51 )

Total revenue ( 60 ) ( 57 ) ( 51 )

Gross profit ( 57 ) ( 51 ) 52

Segment gross profit ( 60 ) ( 57 ) ( 51 )

Consolidated:

Revenue 146,151 127,580 147,889

Fee revenue 111,380 78,360 78,636

Purchase revenue 151,271 146,151 127,580

Consignment and other fee revenues 128,779 111,380 78,360

Total revenue 280,050 257,531 205,940

Gross profit 149,853 109,924 113,280

The following table presents a reconciliation between gross profit used in the reportable segments and the Company's consolidated results:

Total segment gross profit 160,643 149,853 109,924

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

Year Ended September 30,

2 unchanged sentences

Reconciliation:

Gross profit 149,853 109,924 113,280

Operating expenses 122,679 113,248 127,739

Other operating expenses 6 573 5,049

Total segment gross profit 160,643 149,853 109,924

Total operating expenses 113,238 122,685 113,821

Interest and other income, net ( 248 ) ( 411 ) ( 924 )

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Total Long-lived Assets $ 19,094 $ 17,634

Subsequent Event

On November 1, 2021, the Company entered into a definitive agreement to purchase all of the issued and outstanding shares of stock of Bid4Assets, Inc.

(Bid4Assets), a pioneer in internet-based public auctions of real property.

This acquisition will support our growth objectives for the GovDeals reportable segment.

Upon closing, the Company paid $ 15 million in cash, including the assumption of a minimum working capital amount of $ 0.3 million.

Shareholders of Bid4Assets are eligible to receive earn-out consideration of up to $ 37.5 million in cash, payable based on Bid4Assets' achievement of certain EBITDA targets measured as of each trailing twelve-month period and determined at the end of each calendar quarter, for the period from October 1, 2021 until the quarter ended December 31, 2022.

The Company is currently evaluating the purchase price accounting for this transaction and as such, the final accounting treatment could result in material changes to our balance sheet and earnings during fiscal 2022.

LIQUIDITY SERVICES, INC.

and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Quarterly Results (Unaudited)

The following table sets forth for the eight most recent quarters the selected unaudited quarterly consolidated statement of operations data.

The unaudited quarterly consolidated statement of operations data has been prepared on the same basis as the Company's audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of this data.

Three months ended

2020 June 30,

2021 June 30,

(in thousands, except share and per share data)

Revenue $ 49,504 $ 52,824 $ 47,722 $ 55,890 $ 55,751 $ 61,786 $ 69,666 $ 70,328

Gross profit (excludes depreciation and amortization) $ 25,328 $ 26,205 $ 25,228 $ 33,163 $ 33,178 $ 35,401 $ 41,213 $ 40,061

Income (loss) before income taxes $ ( 4,738 ) $ ( 4,195 ) $ 422 $ 5,538 $ 4,811 $ 5,667 $ 8,848 $ 8,253

Net income (loss) $ ( 5,196 ) $ ( 4,238 ) $ 213 $ 5,447 $ 4,514 $ 5,260 $ 8,419 $ 32,756

Basic income (loss) per common share $ ( 0.15 ) $ ( 0.13 ) $ 0.01 $ 0.16 $ 0.14 $ 0.16 $ 0.25 $ 0.98

Diluted income (loss) per common share $ ( 0.15 ) $ ( 0.13 ) $ 0.01 $ 0.16 $ 0.13 $ 0.15 $ 0.24 $ 0.93

Basic weighted average shares outstanding 33,545,235 33,624,889 33,695,936 33,584,040 33,176,895 33,491,395 33,371,906 33,297,879

Diluted weighted average shares outstanding 33,545,235 33,624,889 33,815,332 33,986,862 34,911,119 35,559,747 35,437,761 35,294,326

LIQUIDITY SERVICES, INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

24 unchanged sentences

333-129656), filed with the SEC on January 17, 2006.

3.2 Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 4, 2016.

3.2 Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on August 5, 2022.

4.1 Form of Certificate of Common Stock of the Company, incorporated herein by reference to Exhibit 4.1 to Amendment No.

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4.2 Description of Securities

10.1 Credit Agreement, dated February 10, 2022, by and between Liquidity Services, Inc., and Wells Fargo Bank, National Association, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on February 10, 2022.

10.2# Executive Employment Agreement, dated June 13, 2016, by and between the Company and William P.

Angrick, III, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on June 17, 2016.

10.2# Executive Employment Agreement dated July 20, 2015 by and between the Company and Jorge Celaya, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 23, 2015.

10.3# Executive Employment Agreement, dated November 5, 2019, by and between the Company and John Daunt, incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K, filed with the SEC on December 10, 2019.

10.4# Executive Employment Agreement, dated June 13, 2019, by and between the Company and Steven Weiskircher, incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 1, 2019.

10.5# Executive Employment Agreement by and between the Company and Mark A.

10.3# Executive Employment Agreement dated July 20, 2015, by and between the Company and Jorge A.

Celaya, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 23, 2015.

10.4# Executive Employment Agreement, dated November 5, 2019, by and between the Company and John P.

Daunt, incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K, filed with the SEC on December 10, 2019.

10.5# Executive Employment Agreement, dated June 13, 2019, by and between the Company and Steven J.

Weiskircher, incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 1, 2019.

10.6# Executive Employment Agreement, dated July 13, 2016, by and between the Company and Mark A.

Shaffer, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 13, 2016.

10.7# Executive Employment Agreement, dated October 1, 2020, by and between the Company and Novelette Murray, incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K, filed with the SEC on December 8, 2020.

10.7# Executive Employment Agreement, dated January 27, 2005, by and between the Company and James M.

Rallo, incorporated herein by reference to Exhibit 10.6.1 to Amendment No.

3 to the Company's Registration Statement on Form S-1 (Registration No.

333-129656), filed with the SEC on February 1, 2006.

10.7.1# Amendment to Executive Employment Agreement between the Company and James M.

Rallo, dated January 25, 2006, incorporated herein by reference to Exhibit 10.6.2 to Amendment No.

3 to the Company's Registration Statement on Form S-1 (Registration No.

333-129656), filed with the SEC on February 1, 2006.

10.7.2# Severance Agreement and General Release, dated May 6, 2019, by and between James M.

Rallo and the Company, incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2019.

10.8# Executive Employment Agreement, dated January 10, 2018, by and between the Company and Roger Gravley, incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 1, 2018.

10.8.1# Letter Agreement, dated March 2, 2018, by and between the Company and Roger Gravley, incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 3, 2018.

10.8.2# Retirement Agreement and General Release dated May 13, 2019 by and between the Company and Roger Gravley, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, field with the SEC on May 17, 2019.

10.8# Executive Employment Agreement, dated March 15, 2012, by and between the Company and Michael Lutz, incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K, filed with the SEC on December 10, 2019.

4 unchanged sentences

333-129656), filed with the SEC on February 1, 2006.

10.12# Notice of Award, Statement and Release Document (Sales Contract Number 14-0091-0002), dated July 25, 2014, between the Company and DLA Disposition Services, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on July 30, 2014.

10.13# Supplemental Agreement No.

1 to Surplus Usable Property Sales Contract (Sales Contract Number 14-0091-0002), dated December 6, 2016, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on December 8, 2016.

10.11# Liquidity Services, Inc.

Third Amended and Restated 2006 Omnibus Long-Term Incentive Plan, incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, filed with the SEC on January 28, 2020.

10.11.1# 2022 Amendment to the Liquidity Services, Inc.

10.12# Machinio Corp.

6 unchanged sentences

Annual Incentive Plan, adopted on December 2, 2020, incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K, filed with the SEC on December 11, 2020.

16.1 Letter of Ernst & Young LLP, dated December 27, 2021

21.1 List of Subsidiaries .

23.1 Consent of Deloitte & Touche LLP .

23.2 Consent of Ernst & Young LLP.

40 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures