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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

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

For the transition period from                 to                

Commission file number 0-51813
lqdt-20220331_g1.jpg
 
LIQUIDITY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

 
Delaware 52-2209244
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
  
6931 Arlington Road, Suite 200, Bethesda, MD

 20814
(Address of Principal Executive Offices) (Zip Code)
 
(202) 467-6868
(Registrant’s Telephone Number, Including Area Code) 
 
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Securities registered to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.001 par valueLQDTNasdaq
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☐
 
Accelerated filer ☒
   
Non-accelerated filer ☐
 
Smaller reporting company ☐
Emerging growth company ☐

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

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

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of May 2, 2022 was 35,576,022.



INDEX

2
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Liquidity Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Par Value)
March 31, 2022September 30, 2021
 (Unaudited)
Assets  
Current assets:  
Cash and cash equivalents$84,264 $106,335 
Accounts receivable, net of allowance for doubtful accounts of $336 and $490
6,606 5,866 
Inventory, net13,079 12,468 
Prepaid taxes and tax refund receivable1,715 1,713 
Prepaid expenses and other current assets6,508 5,460 
Total current assets112,172 131,842 
Property and equipment, net of accumulated depreciation of $21,656 and $18,558
18,243 17,634 
Operating lease assets14,085 13,478 
Intangible assets, net18,209 3,453 
Goodwill89,691 59,872 
Deferred tax assets18,508 23,822 
Other assets5,911 5,475 
Total assets$276,819 $255,576 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$41,029 $40,611 
Accrued expenses and other current liabilities37,946 25,975 
Current portion of operating lease liabilities4,306 4,250 
Deferred revenue5,067 4,624 
Payables to sellers44,238 33,713 
Total current liabilities132,586 109,173 
Operating lease liabilities10,831 10,098 
Other long-term liabilities413 1,290 
Total liabilities143,830 120,561 
Commitments and contingencies (Note 13)00
Stockholders’ equity:  
Common stock, $0.001 par value; 120,000,000 shares authorized; 35,563,988 shares issued and outstanding at March 31, 2022; 35,457,095 shares issued and outstanding at September 30, 2021
36 35 
Additional paid-in capital254,680 252,017 
Treasury stock, at cost; 3,385,827 shares at March 31, 2022 and 2,222,083 shares at September 30, 2021
(56,726)(36,628)
Accumulated other comprehensive loss(9,311)(9,011)
Accumulated deficit(55,690)(71,398)
Total stockholders’ equity132,989 135,015 
Total liabilities and stockholders’ equity$276,819 $255,576 
 
See accompanying notes to the unaudited condensed consolidated financial statements.

3
Liquidity Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Data)



 Three Months Ended March 31,Six Months Ended March 31,
 2022202120222021
(Unaudited)
Revenue$37,384 $35,968 $73,602 $67,040 
Fee revenue30,891 25,818 61,381 50,498 
Total revenue68,275 61,786 134,983 117,538 
Costs and expenses from operations:   
Cost of goods sold (excludes depreciation and amortization)28,968 26,385 56,730 48,958 
Technology and operations13,872 12,085 27,790 22,644 
Sales and marketing11,273 8,910 21,317 18,018 
General and administrative7,053 6,892 15,284 13,902 
Depreciation and amortization2,603 1,670 4,906 3,541 
Fair value adjustments of acquisition earn-outs(8,500)— (8,500)— 
Other operating expenses (income) 23 206 (10)210 
Total costs and expenses55,292 56,148 117,517 107,273 
Income from operations12,983 5,638 17,466 10,265 
Interest and other income, net(46)(29)(177)(214)
Income before provision for income taxes13,029 5,667 17,643 10,479 
Provision for income taxes1,059 407 2,071 704 
Net income $11,970 $5,260 $15,572 $9,775 
Basic income per common share$0.37 $0.16 $0.48 $0.29 
Diluted income per common share$0.35 $0.15 $0.45 $0.28 
Basic weighted average shares outstanding32,561,903 33,491,395 32,769,057 33,332,417 
Diluted weighted average shares outstanding34,004,568 35,559,747 34,382,149 34,914,549 
 
See accompanying notes to the unaudited condensed consolidated financial statements.

4
Liquidity Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Dollars in Thousands)



 Three Months Ended March 31,Six Months Ended March 31,
 2022202120222021
(Unaudited)
Net income$11,970 $5,260 $15,572 $9,775 
Other comprehensive (loss) income:    
Foreign currency translation(169)123 (300)1,019 
Other comprehensive (loss) income(169)123 (300)1,019 
Comprehensive income$11,801 $5,383 $15,272 $10,794 
 
See accompanying notes to the unaudited condensed consolidated financial statements.


5
Liquidity Services, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(Dollars In Thousands)






 Common StockTreasury Stock
 SharesAmountAdditional
Paid-in
Capital		SharesAmountAccumulated
Other
Comprehensive
Loss		Accumulated
Deficit		Total
(Unaudited)
Balance at September 30, 202135,457,095 $35 $252,017 (2,222,083)$(36,628)$(9,011)$(71,398)$135,015 
Net income— — — — — — 3,602 3,602 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units            131,070 1 — — — — — 1 
Taxes paid associated with net settlement of stock compensation awards(40,239)— (851)— — — — (851)
Forfeitures of restricted stock awards(14,855)— — — — — — — 
Common stock repurchased— — — (147,185)(2,963)— — (2,963)
Common stock surrendered in the exercise of stock options— — 100 (4,678)(100)— — — 
Stock compensation expense — — 2,270 — — — — 2,270 
Foreign currency translation and other— — — — — (131)136 5 
Balance at December 31, 202135,533,071 $36 $253,536 (2,373,946)$(39,691)$(9,142)$(67,660)$137,079 
Net income— — — — — — 11,970 11,970 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units320,943 — — — — — — — 
Taxes paid associated with net settlement of stock compensation awards(47,124)— (958)— — — — (958)
Forfeitures of restricted stock awards(242,902)— — — — — — — 
Common stock repurchased— — — (1,011,881)(17,035)— — (17,035)
Common stock surrendered in the exercise of stock options— — — — — — — — 
Stock compensation expense— — 2,102 — — — — 2,102 
Foreign currency translation— — — — — (169)— (169)
Balance at March 31, 202235,563,988 $36 $254,680 (3,385,827)$(56,726)$(9,311)$(55,690)$132,989 


See accompanying notes to the unaudited condensed consolidated financial statements.
6
Liquidity Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars In Thousands)

 Six Months Ended March 31,
 20222021
(Unaudited)
Operating activities  
Net income $15,572 $9,775 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization4,906 3,541 
Stock compensation expense4,272 3,990 
Inventory adjustment to net realizable value98 — 
Provision for doubtful accounts11 175 
Deferred tax provision1,590 64 
Gain on disposal of property and equipment(13)44 
Gain on termination of lease(240)— 
Impairment of long-lived and other assets31 203 
Change in fair value of earn-out liability(8,500)— 
Changes in operating assets and liabilities:  
Accounts receivable(637)(594)
Inventory(709)(7,517)
Prepaid and deferred taxes(3)57 
Prepaid expenses and other assets(1,230)(1,358)
Operating lease assets and liabilities422 (52)
Accounts payable393 14,947 
Accrued expenses and other current liabilities(8,121)2,003 
Deferred revenue442 916 
Payables to sellers7,149 5,383 
Other liabilities(806)(262)
Net cash provided by operating activities14,627 31,315 
Investing activities  
Cash paid for business acquisition, net of cash acquired(11,164)— 
Purchases of property and equipment, including capitalized software(3,572)(2,418)
Increase in intangibles(8)(21)
Proceeds from sales of property and equipment17 35 
Proceeds from promissory note— 824 
Net cash used by investing activities(14,727)(1,580)
Financing activities  
Payments of the principal portion of finance lease liabilities(51)(17)
Payment of debt issuance costs(91)— 
Taxes paid associated with net settlement of stock compensation awards(1,809)(3,202)
Proceeds from exercise of stock options— 351 
Common stock repurchased(19,998)(16,143)
Net cash used by financing activities(21,949)(19,011)
Effect of exchange rate differences on cash and cash equivalents(22)853 
Net (decrease) increase in cash and cash equivalents(22,071)11,577 
Cash and cash equivalents at beginning of period106,335 76,036 
Cash and cash equivalents at end of period$84,264 $87,613 
Supplemental disclosure of cash flow information  
Cash paid for income taxes, net$350 $508 
Non-cash: Earnout liability for acquisition activity$19,500 $— 
Non-cash: Common stock surrendered in the exercise of stock options$100 $1,502 
See accompanying notes to the unaudited condensed consolidated financial statements.
7
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

1.    Organization

Liquidity Services, Inc. (the Company) is a leading global commerce company providing trusted marketplace platforms that power the circular economy. We create a better future for organizations, individuals, and the planet by capturing and unleashing the intrinsic value of surplus. We connect millions of buyers and thousands of sellers through our leading auction marketplaces, search engines, asset management software, and related services. Our comprehensive solutions enable the transparent, efficient, sustainable recovery of value from excess items owned by business and government sellers.

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

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

On November 1, 2021, the Company purchased all of the issued and outstanding shares of stock of Bid4Assets, Inc. (Bid4Assets), a Maryland corporation based in Silver Spring, MD. Bid4Assets auctions distressed real estate for the federal government, sheriffs, county tax-collectors, financial institutions and real estate funds. See Note 3 - Bid4Assets Acquisition for more information regarding this transaction.

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

2.     Summary of Significant Accounting Policies

Unaudited Interim Financial Information
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal, recurring adjustments considered necessary for a fair presentation, have been included, and intercompany transactions and accounts have been eliminated in consolidation. The information disclosed in the notes to the condensed consolidated financial statements for these periods is unaudited. Operating results for the three and six months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending September 30, 2022, or for any future period. 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts in the condensed consolidated financial statements and accompanying notes. For the three and six months ended March 31, 2022, these estimates required the Company to make assumptions about the extent and duration of restrictions on cross-border transactions and the impact of the COVID-19 pandemic on macroeconomic conditions and, in turn, the Company's results of operations. As there remains uncertainty associated with the COVID-19 pandemic, the Company will continue to update its assumptions as conditions change. Actual results could differ significantly from those estimates.

Contract Assets and Liabilities

Contract assets reflect an estimate of expenses that will be reimbursed upon settlement with a seller. The contract asset balance was $0.8 million as of March 31, 2022, and $0.6 million as of September 30, 2021, and is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.

8
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


Contract liabilities reflect obligations to provide services for which the Company has already received consideration, and generally arise from up-front payments received in connection with Machinio's subscription services. The contract liability balance was $5.1 million as of March 31, 2022, and $4.6 million as of September 30, 2021, and is included in the line item Deferred revenue on the Condensed Consolidated Balance Sheets. Of the September 30, 2021, contract liability balance, $3.4 million was earned as Fee revenue during the six months ended March 31, 2022.

Performance obligations for Machinio's subscription services are satisfied over time as the Company provides the services over the term of the subscription. As of March 31, 2022, the Company has a remaining performance obligation of $5.1 million for these subscription services, and the Company expects to recognize the substantial majority of that amount as Fee revenue over the next 12 months.

Contract Costs

Contract costs relate to sales commissions paid on subscription contracts that are capitalized. Contract costs are amortized over the expected life of the customer contract. The contract cost balance was $1.8 million as of March 31, 2022, and $1.6 million as of September 30, 2021, and is included in the line items Prepaid expenses and other current assets and Other assets on the Condensed Consolidated Balance Sheets. Amortization expense was $0.3 million and $0.5 million during the three and six months ended March 31, 2022, and $0.2 million and $0.3 million during the three and six months ended March 31, 2021.

Other Assets - Promissory Note

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

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

On May 12, 2021, the Company entered into the First Amendment to the Forbearance Agreement with JTC, providing JTC with full satisfaction and discharge from its indebtedness upon receipt of a $3.5 million payment made on May 17, 2021. As a result, the Company recorded a $1.1 million loss as a component of Other operating expenses in its Condensed Consolidated Statement of Operations during the three months ended June 30, 2021, representing the difference between the $4.6 million outstanding balance of principal and accrued interest and the $3.5 million payment received. There was no impact on the unaudited financial statements from this transaction as of and for the three and six months ended March 31, 2022, and March 31, 2021.

Risk Associated with Certain Concentrations

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

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

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

9
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


Additionally, the Company has multiple vendor contracts with Amazon.com, Inc. under which the Company acquires and sells commercial merchandise. The property purchased under these contracts with Amazon.com, Inc. represented 51.7% and 61.2% of consolidated Cost of goods sold for the three months ended March 31, 2022, and 2021, respectively, and 56.0% and 60.6% of consolidated Cost of goods sold for the six months ended March 31, 2022, and 2021, respectively. These contracts are included within the RSCG reportable segment.

Recent Accounting Pronouncements
 
Accounting Standards Adopted

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

Accounting Standards Not Yet Adopted

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

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

As of March 31, 2022, the Company's purchase price allocation related to this acquisition is preliminary and subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The revisions may have a significant impact on our condensed consolidated financial statements. The allocation of the purchase price will be finalized once all the information that was known and knowable as of the acquisition date is obtained and analyzed, but not to exceed one year from the acquisition date.

The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income taxes, 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.

10
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


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

(in thousands)Fair Value
Cash and cash equivalents$3,576 
Intangible assets16,500 
Other assets346 
Total assets acquired20,422 
Payables to sellers3,715 
Operating lease liabilities204 
Deferred tax liabilities3,724 
Total liabilities assumed7,642 
Net identifiable assets acquired$12,780 
Goodwill29,960 
Total consideration transferred$42,739 

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

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

(in thousands)Useful Life (in years)Fair Value
Contract intangibles8$13,900 
Developed software32,200 
Trade name3400 
Total identifiable intangible assets$16,500 

Contract Intangibles

We recorded contract intangibles separately from goodwill based upon determination of the length, strength, and contractual nature of the relationship that Bid4Assets shared with its suppliers. We valued the contract intangibles using the multi-period excess earnings method, an income approach valuation model. The significant assumptions used in the income approach includes estimates about future expected cash flows from supplier contracts, the attrition rate, and the discount rate. We are amortizing the contract intangibles, preliminarily valued at $13.9 million, on a straight-line basis over a useful life of eight years, which is materially consistent with the expected pattern of economic benefit.

Developed Software

Developed software primarily consists of intellectual property of the Bid4Assets e-commerce marketplace and associated mailing lists. We valued the developed software by applying the relief-from-royalty method, an income approach valuation model. The significant assumptions used in the relief-from-royalty method include estimates about future expected cash flows from the developed software, the royalty rate, the obsolescence factor and the discount rate. We are amortizing the acquired developed technology, preliminarily valued at $2.2 million, on a straight-line basis over a useful life of three years, which is materially consistent with the expected pattern of economic benefit.

11
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


Trade Name

We valued the trade name acquired using a relief-from-royalty method. The significant assumptions used in the relief-from-royalty method include future expected cash flows from the trade name, the royalty rate, and the discount rate. We are amortizing the trade name, preliminarily valued at $0.4 million, on a straight-line basis over a useful life of three years, which is materially consistent with the expected pattern of economic benefit.

Contingent Consideration

During the six months ended March 31, 2022, and as a result of the acquisition of Bid4Assets, the Company recorded preliminary contingent consideration in the amount of $28.0 million on its Condensed Consolidated Balance Sheets. See further discussion of this matter within Note 11 - Fair Value Measurement.

Other Information

Revenue, net income (loss), and pro forma information related to the Bid4Assets acquisition was immaterial to the condensed consolidated financial statements and its related notes for the three and six months ended March 31, 2022.

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

The computation of basic and diluted net income per share is as follows:

Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Numerator:
Net income $11,970 $5,260 $15,572 $9,775 
Denominator:
Basic weighted average shares outstanding32,561,903 33,491,395 32,769,057 33,332,417 
Dilutive impact of stock options, RSUs and RSAs1,442,665 2,068,352 1,613,092 1,582,132 
Diluted weighted average shares outstanding34,004,568 35,559,747 34,382,149 34,914,549 
Basic income per common share$0.37 $0.16 $0.48 $0.29 
Diluted income per common share$0.35 $0.15 $0.45 $0.28 
Stock options, RSUs and RSAs excluded from income (loss) per diluted share because their effect would have been anti-dilutive
1,327,292 367,539 1,246,493 969,089 

12
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


5.    Leases

The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up to 4.8 years. Some of the leases have options to extend or terminate the leases. The exercise of such options is generally at the Company’s discretion. The lease agreements do not contain any significant residual value guarantees or restrictive covenants. The Company also subleases excess corporate office space. The Company's finance leases and related balances are not significant.

The components of lease expense are:

Three Months Ended March 31,Six Months Ended March 31,
(in thousands)2022202120222021
Finance lease – lease asset amortization$21 $16 $42 $32 
Finance lease – interest on lease liabilities5 5 10 10 
Operating lease cost1,434 1,249 2,912 2,655 
Operating lease impairment expense — 172 0 172 
Short-term lease cost64 47 117 121 
Variable lease cost (1)
169 455 553 818 
Sublease income(30)(30)(67)(106)
Total net lease cost$1,663 $1,914 $3,567 $3,702 
(1) Variable lease costs primarily relate to the Company's election to combine non-lease components such as common area maintenance, insurance and taxes related to its real estate leases. To a lesser extent, the Company's equipment leases have variable costs associated with usage and subsequent changes to costs based upon an index.
Maturities of lease liabilities are:
March 31, 2022
(in thousands)Operating LeasesFinance Leases
2022$2,641 $58 
20234,782 117 
20243,882 98 
20253,176 69 
20262,139 66 
Thereafter396 12 
Total lease payments (1)
$17,016 $420 
Less: imputed interest (2)
(1,879)(44)
Total lease liabilities$15,137 $376 

(1) The weighted average remaining lease term is 3.8 years for operating leases and 4.0 years for finance leases.
(2) The weighted average discount rate is 6.4% for operating leases and 5.5% for finance leases.
Supplemental disclosures of cash flow information related to leases are:
Six Months Ended March 31,
(in thousands)20222021
Cash paid for amounts included in operating lease liabilities$2,060 $2,251 
Cash paid for amounts included in finance lease liabilities 51 17 
Non-cash: lease liabilities arising from new operating lease assets obtained3,158 885 
Non-cash: lease liabilities arising from new finance lease assets obtained 179 — 
Non-cash: adjustments to lease assets and liabilities1
(198)3,286 
(1) These include adjustments due to lease modifications, renewals, and other related adjustments.
13
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


6.    Goodwill
 
The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows:
(in thousands)CAGGovDealsMachinioTotal
Balance at September 30, 2020
$21,550 $23,731 $14,558 $59,839 
Translation adjustments33 — — 33 
Balance at September 30, 2021
$21,583 $23,731 $14,558 $59,872 
Bid4Assets acquisition (see Note 3)— 29,960 — 29,960 
Translation adjustments(141)— — (141)
Balance at March 31, 2022
$21,442 $53,691 $14,558 $89,691 
The increase in the goodwill balance of approximately $30.0 million at the GovDeals reportable segment and reporting unit during the six months ended March 31, 2022, is due to the Bid4Assets acquisition. See Note 3 - Bid4Assets Acquisition for further information.

Goodwill is tested for impairment at the beginning of the fourth quarter and during interim periods whenever events or circumstances indicate that the carrying value may not be recoverable. As discussed in Note 11 – Fair Value Measurements, the fair value of the Bid4Assets earn-out liability declined by $8.5 million during the three months ended March 31, 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 March 31, 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 six months ended March 31, 2022.

7.    Intangible Assets
 
Intangible assets consist of the following:   
  March 31, 2022September 30, 2021
(in thousands)Useful
Life
(in years)		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Contract intangibles
6 - 8
17,000 (2,661)14,339 3,100 (1,679)1,421 
Technology
3 - 5
5,300 (2,387)2,913 2,700 (1,755)945 
Patent and trademarks
3 - 10
2,368 (1,411)957 2,360 (1,273)1,087 
Total intangible assets $24,668 $(6,459)$18,209 $8,160 $(4,707)$3,453 
 
The gross carrying amount of total intangible assets increased by $16.5 million during the six months ended March 31, 2022 due to the Bid4Assets acquisition. The acquired developed software and trade name are included in the above line items of Technology and Patent and trademarks, respectively. See Note 3 - Bid4Assets Acquisition for further information.

Future expected amortization of intangible assets at March 31, 2022, is as follows: 
(in thousands)Expected Amortization Expense
Years ending September 30,
Remainder of 2022
$1,967 
20233,791 
20243,253 
20252,013 
2026 and thereafter7,185 
Total$18,209 
 
Intangible asset amortization expense was $1.0 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively, and $1.8 million and $0.7 million for the six months ended March 31, 2022 and 2021, respectively.
14
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)



The Company has continued to evaluate the impact of the COVID-19 pandemic, ongoing macroeconomic disruptions, and the subsequent financial performance of Bid4Assets, on the recoverability of its long-lived assets. The Company did not identify any indicators of impairment requiring an interim impairment test on material long-lived assets during the three and six months ended March 31, 2022.

8.    Income Taxes

The Company’s interim effective income tax rate is based on management’s best current estimate of the Company's expected annual effective income tax rate. The Company recorded pre-tax income in the first six months of fiscal year 2022 and its corresponding effective tax rate is 11.7% compared to 6.7% for the first six months of fiscal year 2021. The change in the effective tax rate for the six months ended March 31, 2022, as compared to the same period in the prior year was primarily due to state and foreign taxes, and the utilization of net operating losses. The effective tax rate differed from the U.S. statutory federal rate of 21% primarily as a result of the impact of foreign, state, and local income taxes and permanent tax adjustments.

The Company applies the authoritative guidance related to uncertainty in income taxes. ASC 740, Income Taxes, states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of technical merits. The Company identified no new uncertain tax positions during the six months ended March 31, 2022. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the United Kingdom. As of March 31, 2022, the Company has no open income tax examinations in the U.S. and the statute of limitations for years prior to 2018 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal year 2018 may be adjusted upon examination by tax authorities if they are utilized.

9.     Debt

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

The applicable interest rate on any draws under the Line of Credit is a variable rate per annum equal to the Daily Simple Secured Overnight Financing Rate (SOFR) in effect plus a margin ranging from 1.25% to 1.75%. Interest is payable monthly. The Company pays an Unused Commitment Fee, on a quarterly basis, equal to 0.05% per annum on the daily amount of the Line of Credit available, but unused. The Company also pays a Letter of Credit Fee, on a quarterly basis, equal to 1.25% on the daily amount available to be drawn for standby letters of credit. Interest incurred on any draws under the Line of Credit, as well as the Unused Commitment Fee and Letter of Credit Fee, are included within Interest and other income, net in the Condensed Consolidated Statements of Operations.

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

The Credit Agreement contains certain financial and non-financial restrictive covenants including, among others, the requirement to maintain a minimum level of earnings before interest, income taxes, depreciation and amortization (EBITDA). The Credit Agreement contains a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions, investments and acquisitions, indebtedness and liens, and dividends and other restricted payments. As of March 31, 2022, the Company was in full compliance with the terms and conditions of the Credit Agreement.

During the three and six months ended March 31, 2022, the Company did not make any draws under the Credit Agreement. As of March 31, 2022, the Company had no outstanding borrowings under the Credit Agreement.

During the three and six months ended March 31, 2022, interest expense incurred by the Company under the Credit Agreement was immaterial to the condensed consolidated financial statements.
15
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements - (Continued)


10.    Stockholders’ Equity

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

 Common StockTreasury Stock
(dollars in thousands)SharesAmountAdditional
Paid-in
Capital		SharesAmountAccumulated
Other
Comprehensive
Loss		Accumulated
Deficit		Total
Balance at September 30, 202034,082,406 $34 $247,892 $(547,508)$(3,983)$(9,782)$(122,346)$111,815 
Net income— — — — — — 4,514 4,514 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units151,845 — 197 — — — — 197 
Taxes paid associated with net settlement of stock compensation awards(7,703)— (57)— — — — (57)
Forfeitures of restricted stock awards(13,733)— — — — — — — 
Common stock repurchased— — — (309,496)(4,103)— — (4,103)
Common stock surrendered in the exercise of stock options— — 169 (9,384)(169)— — — 
Stock compensation expense— — 1,801 — — — — 1,801 
Foreign currency translation— — — — — 896 — 896 
Balance at December 31, 202034,212,815 $34 $250,002 $(866,388)$(8,255)$(8,886)$(117,832)$115,063 
Net income— — — — — — 5,260 5,260 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units1,079,955 1 154 — — — — 155 
Taxes paid associated with net settlement of stock compensation awards(177,463)— (3,145)— — — — (3,145)
Common stock repurchased— — — (647,583)(12,040)— — (12,040)
Common stock surrendered in the exercise of stock options— — 1,333 (73,228)(1,333)—