(I.R.S. Employer Incorporation or Organization) Identification No.) 1920 L Street, N.W., 6th Floor, Washington, D.C. 20036 (Address of Principal Executive Offices) (Zip Code) June 30, September 30, 2016 2015 (Unaudited) Assets Current assets: Cash and cash equivalents $ 129,865 $ 95,465 Accounts receivable, net of allowance for doubtful accounts of $696 and $471 at June 30, 2016 and September 30, 2015, respectively 8,965 6,194 Inventory 25,829 25,510 Tax refund receivable 1,409 33,491 Prepaid and deferred taxes 12,070 19,903 Prepaid expenses and other current assets 7,161 7,826 Total current assets 185,299 188,389 Property and equipment, net 14,098 13,356 Intangible assets, net 2,965 4,051 Goodwill 64,114 64,073 Deferred long-term tax assets 14,147 5,871 Other assets 15,334 12,748 Total assets $ 295,957 $ 288,488 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 8,512 $ 9,500 Accrued expenses and other current liabilities 35,354 27,350 Profit-sharing distributions payable 1,514 2,512 Customer payables 29,017 29,802 Total current liabilities 74,397 69,164 Long-term liabilities 3,479 3,322 Total liabilities 77,876 72,486 Stockholders’ equity: Common stock, $0.001 par value; 120,000,000 shares authorized; 30,726,554 shares issued and outstanding at June 30, 2016; 30,026,223 shares issued and outstanding at September 30, 2015 29 29 Additional paid-in capital 218,416 210,712 Accumulated other comprehensive loss (5,080 ) (5,626 ) Retained earnings 4,716 10,887 Total stockholders’ equity 218,081 216,002 Total liabilities and stockholders’ equity $ 295,957 $ 288,488 Three Months Ended June 30, Nine Months Ended June 30, 2016 2015 2016 2015 Revenue $ 62,025 $ 70,060 $ 178,633 $ 251,509 Fee revenue 23,163 19,686 59,308 66,323 Total revenue 85,188 89,746 237,941 317,832 Costs and expenses: Cost of goods sold 39,292 35,838 106,102 132,814 Profit-sharing distributions 2,663 6,355 7,526 23,505 Technology and operations 22,541 24,784 70,026 76,409 Sales and marketing 9,967 10,255 28,575 31,438 General and administrative 9,042 10,476 29,576 31,378 Depreciation and amortization 1,616 2,044 4,948 7,241 Acquisition costs and related fair value adjustments and impairment of goodwill and long-lived assets — — 39 96,238 Total costs and expenses 85,121 89,752 246,792 399,023 Income (loss) from operations 67 (6 ) (8,851 ) (81,191 ) Interest and other (expense) income, net (208 ) (8 ) 242 (85 ) (Loss) before provision for income taxes (141 ) (14 ) (8,609 ) (81,276 ) Benefit for income taxes 17 1,629 2,438 20,156 Net (loss) income $ (124 ) $ 1,615 $ (6,171 ) $ (61,120 ) Basic (loss) earnings per common share $ (0.00 ) $ 0.05 $ (0.20 ) $ (2.04 ) Diluted (loss) earnings per common share $ (0.00 ) $ 0.05 $ (0.20 ) $ (2.04 ) Basic weighted average shares outstanding 30,726,554 30,011,121 30,603,641 29,975,239 Diluted weighted average shares outstanding 30,726,554 30,011,121 30,603,641 29,975,239 Three Months Ended June 30, Nine Months Ended June 30, 2016 2015 2016 2015 Net (loss) income $ (124 ) $ 1,615 $ (6,171 ) $ (61,120 ) Other comprehensive (loss) income: Foreign currency translation (117 ) 272 546 (2,841 ) Other comprehensive (loss) income, net of taxes (117 ) 272 546 (2,841 ) Comprehensive (loss) income $ (241 ) $ 1,887 $ (5,625 ) $ (63,961 ) Additional Accumulated Common Stock Paid-in Comprehensive Retained Shares Amount Capital Loss Earnings Total Balance at September 30, 2015 30,026,223 $ 29 $ 210,712 $ (5,626 ) $ 10,887 $ 216,002 Vesting of restricted stock 700,331 — — — — — Compensation expense and incremental tax loss from grants of common stock options and restricted stock — — 7,704 — — 7,704 Net loss — — — — (6,171 ) (6,171 ) Foreign currency translation — — — 546 — 546 Balance at June 30, 2016 30,726,554 $ 29 $ 218,416 $ (5,080 ) $ 4,716 $ 218,081 Nine Months Ended June 30, 2016 2015 Operating activities Net loss $ (6,171 ) $ (61,120 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,948 7,241 Stock compensation expense 8,228 8,911 Provision (benefit) for inventory allowance 2,052 (4,682 ) Provision for doubtful accounts 226 1,354 Deferred tax benefit (2,438 ) (22,145 ) Impairment of goodwill and long-lived assets — 96,238 Incremental tax loss from exercise of common stock options 138 31 Changes in operating assets and liabilities: Accounts receivable (2,997 ) 10,293 Inventory (2,371 ) 42,488 Prepaid and deferred taxes 33,938 (4,380 ) Prepaid expenses and other assets (1,919 ) (738 ) Accounts payable (988 ) 1,123 Accrued expenses and other 7,907 (20,773 ) Profit-sharing distributions payable (998 ) (2,054 ) Customer payables (785 ) (10,861 ) Other liabilities (134 ) (1,381 ) Net cash provided by operating activities 38,636 39,545 Investing activities Increase in intangibles (46 ) (12 ) Purchases of property and equipment, including capitalized software (4,587 ) (5,371 ) Net cash used in investing activities (4,633 ) (5,383 ) Financing activities Proceeds from exercise of common stock options (net of tax) — 107 Incremental tax loss from exercise of common stock options (138 ) (31 ) Net cash (used) provided by financing activities (138 ) 76 Effect of exchange rate differences on cash and cash equivalents 535 (648 ) Net increase in cash and cash equivalents 34,400 33,590 Cash and cash equivalents at beginning of period 95,465 62,598 Cash and cash equivalents at end of period $ 129,865 $ 96,188 Supplemental disclosure of cash flow information Cash (received) paid for income taxes, net $ (34,001 ) $ 6,369 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, 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 U.S. Government agencies from which the Company derives a significant portion of its inventory to change the way they conduct their surplus disposition or to otherwise not renew their contracts with the Company. anti-dilutive for the three months ended December 31, 2016 and 2015. Three Months Ended June 30, Nine Months Ended June 30, 2016 2015 2016 2015 (unaudited) (dollars in thousands, except per share amounts) Weighted average shares calculation: Basic weighted average shares outstanding 30,726,554 30,011,121 30,603,641 29,975,239 Treasury stock effect of options and restricted stock — — — — Diluted weighted average common shares outstanding 30,726,554 30,011,121 30,603,641 29,975,239 Net (loss) income $ (124 ) $ 1,615 $ (6,171 ) $ (61,120 ) Basic (loss) income per common share $ (0.00 ) $ 0.05 $ (0.20 ) $ (2.04 ) Diluted (loss) income per common share $ (0.00 ) $ 0.05 $ (0.20 ) $ (2.04 ) the DLA. moving from a profit-sharing arrangement to a revenue-sharing arrangement, the Company re-named the balance sheet line item from Profit-sharing distributions payable to Distributions payable as of December 31, 2016. Goodwill Balance at September 30, 2015 $ 64,073 Translation adjustments 41 Balance at June 30, 2016 $ 64,114 June 30, 2016 September 30, 2015 Useful Gross Accumulated Net Gross Accumulated Net (dollars in thousands) Contract intangibles 10 $ 1,500 $ (113 ) $ 1,387 $ 1,500 $ — $ 1,500 Brand and technology 3 - 5 5,749 (4,774 ) 975 5,749 (3,926 ) 1,823 Covenants not to compete 3 - 5 700 (508 ) 192 700 (433 ) 267 Patent and trademarks 3 - 10 806 (395 ) 411 792 (331 ) 461 Total intangible assets, net $ 8,755 $ (5,790 ) $ 2,965 $ 8,741 $ (4,690 ) $ 4,051 2016 are as follows: Future Years ending September 30, (in thousands) 2016 (remaining three months) $ 331 2017 1,071 2018 279 2019 206 2020 and after 1,078 Total $ 2,965 Options Weighted- Options outstanding at September 30, 2014 1,465,907 $ 19.50 Options granted 310,177 9.92 Options exercised (14,869 ) 7.09 Options canceled (288,572 ) 20.26 Options outstanding at September 30, 2015 1,472,643 17.46 Options granted 583,228 6.68 Options exercised — — Options canceled (265,531 ) 17.57 Options outstanding at June 30, 2016 1,790,340 13.96 Options exercisable at June 30, 2016 1,012,706 17.71 Restricted Weighted- Unvested restricted shares at September 30, 2014 1,897,827 $ 24.96 Restricted shares granted 1,298,604 10.04 Restricted shares vested (343,204 ) 27.50 Restricted shares canceled (486,040 ) 26.54 Unvested restricted shares at September 30, 2015 2,367,187 16.08 Restricted shares granted 1,458,367 5.45 Restricted shares vested (700,331 ) 15.93 Restricted shares canceled (423,386 ) 22.25 Unvested restricted shares at June 30, 2016 2,701,837 9.42 As of level of judgment, taking into consideration a combination of internal and external factors. Changes in fair value of the Company's Level 3 assets are recorded in Other operating income in the Consolidated Statements of Operations. Three Months Ended June 30, Nine Months Ended June 30, Qualified Defined Benefit Pension Plan 2016 2015 2016 2015 (dollars in thousands) Service cost $ — $ — $ — $ — Interest cost 205 $ 238 $ 634 $ 731 Expected return on plan assets (271 ) (298 ) (823 ) (895 ) Amortization of prior service cost — — — — Amortization of actuarial (gain)/loss — — — — Amortization of transitional obligation/(asset) — — — — Total net periodic benefit $ (66 ) $ (60 ) $ (189 ) $ (164 ) (in thousands) Liability Balance Business Cash Payments Liability Balance Employee severance and benefit costs for fiscal 2014 accrual $ 356 $ (20 ) $ (335 ) $ 1 Employee severance and benefit costs for fiscal 2015 accrual 489 (80 ) (409 ) 0 Total $ 845 $ (100 ) $ (744 ) $ 1 The Surplus Contract permits either party to terminate the contract for convenience. The initial two-year base period ended in December 2016. On December 6, 2016, the DLA notified the Company that it was exercising the first one-year extension option. The Surplus contract now extends through December 14, 2017. There are three one-year options to extend, exercisable by the DLA. December 31, 2016 and 2015. respectively. Three Months Nine Months 2016 2015 2016 2015 (In thousands) (unaudited) Net (loss) income $ (124 ) $ 1,615 $ (6,171 ) $ (61,120 ) Interest and other expense (income), net 208 8 (242 ) 85 Benefit for income taxes (17 ) (1,629 ) (2,438 ) (20,156 ) Depreciation and amortization 1,616 2,044 4,948 7,241 EBITDA 1,683 2,038 (3,903 ) (73,950 ) Stock compensation expense 3,084 3,499 8,228 8,911 Acquisition costs and related fair value adjustments and impairment of goodwill and long-lived assets — — 39 96,238 Adjusted EBITDA $ 4,767 $ 5,537 $ 4,364 $ 31,199 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 the three months ended December 31, 2016, the Company reduced its net operating loss carryforward by $0.2 million for unrecognized tax benefits related to federal and state exposures. As such, we are capitalizing certain development costs associated with our LiquidityOne platform, and will begin amortizing these costs during fiscal 2017. liabilities. near zero. Three Months Ended Nine Months Ended 2016 2015 2016 2015 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of goods sold 46.1 39.9 44.6 41.8 Profit-sharing distributions 3.1 7.1 3.2 7.4 Technology and operations 26.5 27.6 29.4 24.0 Sales and marketing 11.7 11.4 12.0 9.9 General and administrative 10.6 11.7 12.4 9.8 Depreciation and amortization 1.9 2.3 2.1 2.3 Acquisition costs and related fair value adjustments and impairment of goodwill and long-lived assets — — 0.0 30.3 Total costs and expenses 99.9 100.0 103.7 125.5 Income (loss) from operations 0.1 (0.0 ) (3.7 ) (25.5 ) Interest and other (expense) income, net (0.2 ) (0.0 ) 0.1 (0.0 ) (Loss) before provision for income taxes (0.1 ) (0.0 ) (3.6 ) (25.5 ) Benefit for income taxes 0.0 1.8 1.0 6.3 Net (loss) income (0.1 )% 1.8 % (2.6 )% (19.2 )% increases described above. Company's commercial business. prior year. December 31, 2016 from a benefit of $2.2 million for the three months ended December 31, 2015 due to a valuation allowance charge and the impact of foreign, state, and local taxes and permanent tax adjustments. including non-cash adjustments. 3.2 10.1 10.2 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2 31.3 32.1 32.2 32.3 101 (Registrant) /s/ William P. Angrick, III William P. Angrick, III Chairman of the Board of Directors and Chief Executive Officer /s/ Jorge A. Celaya Jorge A. Celaya Executive Vice President and Chief Financial Officer /s/ Michael Sweeney Michael Sweeney Vice President and Chief Accounting Officerxý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. June 30,December 31, 2016oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Delaware52-2209244Delaware 52-2209244 (State or Other Jurisdiction of xý No oxý No oxýAugust 3, 2016February 7, 2017 was 30,741,411.31,390,549.PagePage Part I. FINANCIAL INFORMATION (UNAUDITED) 21363738396. 394041 December 31, 2016 September 30, 2016 (Unaudited) Assets Current assets: Cash and cash equivalents $ 126,914 $ 134,513 Accounts receivable, net of allowance for doubtful accounts of $802 and $718 at December 31, 2016 and September 30, 2016, respectively 10,711 10,355 Inventory 26,744 27,610 Tax refund receivable 1,217 1,205 Prepaid and deferred taxes 2,507 2,166 Prepaid expenses and other current assets ($2.6 million and $2.2 million measured at fair value as of December 31, 2016 and September 30, 2016, respectively) 9,045 9,063 Total current assets 177,138 184,912 Property and equipment, net 15,591 14,376 Intangible assets, net 2,324 2,650 Goodwill 44,786 45,134 Deferred long-term tax assets 1,021 1,021 Other assets 11,847 12,016 Total assets $ 252,707 $ 260,109 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 9,180 $ 9,732 Accrued expenses and other current liabilities 43,054 45,133 Distributions payable 4,689 1,722 Customer payables 28,890 28,901 Total current liabilities 85,813 85,488 Deferred taxes and other long-term liabilities 11,119 12,010 Total liabilities 96,932 97,498 Commitments and contingencies (Note 12) 0 0 Stockholders’ equity: Common stock, $0.001 par value; 120,000,000 shares authorized; 31,291,341 shares issued and outstanding at December 31, 2016; 30,742,662 shares issued and outstanding at September 30, 2016 29 29 Additional paid-in capital 222,392 220,192 Accumulated other comprehensive loss (9,210 ) (8,571 ) Retained earnings (accumulated deficit) (57,436 ) (49,039 ) Total stockholders’ equity 155,775 162,611 Total liabilities and stockholders’ equity $ 252,707 $ 260,109 Three Months Ended December 31, 2016 2015 Revenue $ 47,980 $ 50,138 Fee revenue 22,816 15,737 Total revenue 70,796 65,875 Costs and expenses: Cost of goods sold (excluding amortization) 32,271 26,883 Client distributions 4,548 2,357 Technology and operations 21,892 22,807 Sales and marketing 9,987 9,460 General and administrative 9,857 10,068 Depreciation and amortization 1,429 1,672 Acquisition costs — 39 Total costs and expenses 79,984 73,286 Other operating income 928 — Loss from operations (8,260 ) (7,411 ) Interest expense (income) and other expense, net 34 (60 ) Loss before provision (benefit) for income taxes (8,294 ) (7,351 ) Provision (benefit) for income taxes 103 (2,154 ) Net loss $ (8,397 ) $ (5,197 ) Basic and diluted loss per common share $ (0.27 ) $ (0.17 ) Basic and diluted weighted average shares outstanding 31,261,603 30,490,670 Income (Loss)
Loss Three Months Ended December 31, 2016 2015 Net loss $ (8,397 ) $ (5,197 ) Other comprehensive loss: Foreign currency translation (639 ) (757 ) Other comprehensive loss, net of taxes (639 ) (757 ) Comprehensive loss $ (9,036 ) $ (5,954 )
Other Common Stock Additional
Paid-in Capital�� Total Shares Amount Balance at September 30, 2016 30,742,662 $ 29 $ 220,192 $ (8,571 ) $ (49,039 ) $ 162,611 Vesting of restricted stock and exercise of stock options 548,679 — 32 — — 32 Compensation expense from grants of common stock options and restricted stock — — 2,168 — — 2,168 Net loss — — — — (8,397 ) (8,397 ) Foreign currency translation — — — (639 ) — (639 ) Balance at December 31, 2016 31,291,341 $ 29 $ 222,392 $ (9,210 ) $ (57,436 ) $ 155,775 Three Months Ended December 31, 2016 2015 Operating activities Net loss $ (8,397 ) $ (5,197 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,429 1,672 Stock compensation expense 2,500 2,420 Provision for inventory allowance 715 1,208 Provision for doubtful accounts 84 78 Incremental tax loss from exercise of common stock options — 48 Change in fair value of financial instruments (928 ) — Changes in operating assets and liabilities: Accounts receivable (440 ) 77 Inventory 151 (3,152 ) Prepaid and deferred taxes (9 ) (2,424 ) Prepaid expenses and other assets 773 (969 ) Accounts payable (552 ) 594 Accrued expenses and other current liabilities (2,922 ) (2,070 ) Distributions payable 2,967 (1,169 ) Customer payables (11 ) 583 Other liabilities (381 ) 3 Net cash used in operating activities (5,021 ) (8,298 ) Investing activities Increase in intangibles (7 ) (29 ) Purchases of property and equipment, including capitalized software (2,321 ) (1,428 ) Net cash used in investing activities (2,328 ) (1,457 ) Financing activities Proceeds from exercise of common stock options (net of tax) 32 — Incremental tax loss from exercise of common stock options — (48 ) Net cash provided (used) by financing activities 32 (48 ) Effect of exchange rate differences on cash and cash equivalents (282 ) (210 ) Net decrease in cash and cash equivalents (7,599 ) (10,013 ) Cash and cash equivalents at beginning of period 134,513 95,465 Cash and cash equivalents at end of period $ 126,914 $ 85,452 Supplemental disclosure of cash flow information Cash paid for income taxes, net $ (209 ) $ (237 ) 1. Organization employs innovative e-commerce marketplace solutions to manage, value, and sell inventory and equipment for business and government clients. The Company operates a network of leading e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. The Company’s marketplaces provide professional buyers access to a global, organized supply of new, surplus, and scrap assets presented with digital images and other relevant product information. Additionally, the Company enables its corporate and government sellers to enhance their financial return on offered assets by providing a liquid marketplace and value-added services that encompass the consultative management, valuation, and sale of surplus assets. OurThe Company's broad range of services include program management, valuation, asset management, reconciliation, RTV &and RMA ("Return to Vendor" and "Returns Management Authorization"), refurbishment &and recycling, fulfillment, marketing &and sales, warehousing &and transportation, buyer customer support, and compliance &and risk mitigation. The Company organizes the products on its marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, fleet and transportation equipment and specialty equipment. The Company’s marketplaces are www.liquidation.com, www.govliquidation.com, www.govdeals.com, www.networkintl.com, www.truckcenter.com, www.secondipity.com, www.unclesamsretailoutlet.com, www.go-dove.com, and www.go-dove.com. We havewww.irondirect.com. The Company has over 8,0009,000 clients, including Fortune 1000 and Global 500 organizations as well as government agencies. The Company has one reportable segment consisting of an aggregation of five operating segments that manage e-commerce marketplaces for sellers and buyers of new, surplus, and scrap assets.2.SummarySignificant Accounting PoliciesSummary of Significant Accounting Policies and nine months ended June 30,December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 20162017 or for any future period. Fee revenue is revenue earned under the consignment model, as well as other fee revenue, and is presented separately as it accounts for more than 10% of total revenue.May 2014,April 2015, the Financial Accounting Standards Board (FASB) issued Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05). The Company has adopted this guidance prospectively during the first quarter ended December 31, 2016. As a result of the adoption there was no impact to the Company's financial statements.(“ASU”("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes most existing revenue recognition guidance under GAAP. The new standard will change the way the Company recognizes revenue and significantly expand the disclosure requirements for revenue arrangements. In July 2015, the FASB delayed the effective date of the new standard such that the new standard will be effective for the Company beginning on October 1, 2018, and may be adopted either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new and existing arrangements with remaining performance obligations as of the effective date,Company’sCompany's consolidated financial statements and related disclosures.April 2015,August 2014, the FASB issued Accounting Standards Update (“ASU”) 2015-05, “IntangiblesASU 2014-15, Presentation of Financial Statements - GoodwillGoing Concern, which requires management to evaluate whether there are conditions and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance regarding whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license,events that raise substantial doubt about the software license element of the arrangement must be accounted for in a manner consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement must be accounted forentity’s ability to continue as a service contract. ASU 2015-05 does not changegoing concern and to provide disclosures in certain circumstances. The new guidance was issued to reduce diversity in the accounting for service contracts. ASU 2015-05timing and content of footnote disclosures. This guidance is effective for fiscal years, includingand interim reporting periods within those fiscal years,therein, beginning after December 15, 2015. Early adoption is permitted.2016. The Company is currently evaluatingdoes not expect the methods of adoption allowed by the new standard and the effect that adoption of thethis standard is expected to have on the Company’sa material effect upon its consolidated financial statements and related disclosures.statements.Accounting Standards Update (“ASU”)ASU 2016-02, Leases. ASU 2016-02 will change the way the Company recognizes its leased assets. ASU 2016-02 will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities representing the rights and obligations created by those leases. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard will be effective for the Company beginning on October 1, 2019. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect that adoption of the standard is expected to have on the Company’s consolidated financial statements and related disclosures.Liquidity Services, Inc. and SubsidiariesNotes to the Unaudited Consolidated Financial Statements — (Continued)Accounting Standards Update (“ASU”)ASU 2016-09, Compensation-Stock Compensation (Topic 718). The new standard will change certain aspects of accounting for share-based payments to employees. Under the new standard, the Company will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, the Company will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement when the awards vest or are settled. The APIC pools will be eliminated. For interim reporting purposes, the Company will account for excess tax benefits and tax deficiencies as discrete items in the period in which they occur. The new standard will also allow the Company to repurchase more of an employee’s shares than it can today for income tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The new guidance will require the Company to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The standard will be effective for the Company beginning on October 1, 2017. The Company does not expect the adoption of this standard to have a material effect upon its consolidated financial statements.2.Summary of Significant Accounting Policies (continued)costCost of goods sold in the period in which they have been determined to occur. As of June 30,December 31, 2016 and September 30, 2015,2016, the Company’s inventory reserve was approximately $2.8$4.2 million and $0.8$3.4 million, respectively. Accounting Standards Codification (“ASC”) Topic 260 Earnings Per Share (“ASC 260”). Under ASC 260, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. The weighted average number of shares of common stock outstanding includes vested restricted stock awards.units. Diluted net income (loss) per share (“EPS”) reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options and unvested restricted stock awards.units. The dilutive effect of unexercised stock options and unvested restricted stock awardsunits was determined using the treasury stock method. Under the treasury stock method, the proceeds received from the exercise of stock options, the amount of compensation cost for future service not yet recognized by the Company and the amount of tax benefits that would be recorded in additional paid-in capital when stock options become deductible for income tax purposes are all assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awardsunits are not included in the computation of diluted net income (loss) per share when they are antidilutive.and nine months ended June 30,December 31, 2016 and 2015, the basic and diluted weighted average common shares were the same because the inclusion of dilutive securities in the computation of diluted net income would have been anti-dilutive. Diluted net income attributable to common stockholders per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. See Note 8 for outstanding stock options and unvested restricted stock, all of which are anti-dilutive.incomeloss per share:Liquidity Services, Inc. and SubsidiariesNotes to the Unaudited Consolidated Financial Statements — (Continued)2.Summary of Significant Accounting Policies (continued) Three Months Ended December 31, 2016 2015 Weighted average shares calculation: Basic weighted average shares outstanding 31,261,603 30,490,670 Treasury stock effect of options and restricted stock — — Diluted weighted average common shares outstanding 31,261,603 30,490,670 Net loss $ (8,397 ) $ (5,197 ) Basic and diluted loss per common share $ (0.27 ) $ (0.17 ) awardsunits is based on the closing price of the Company’s common stock on the date of grant. The determination of the fair value of the Company’s stock option awardsunits and stock appreciation rights is based on a variety of factors including, but not limited to, the Company’s common stock price, expected stock price volatility over the expected life of awards,units, and actual and projected exercise behavior. Additionally, the Company has estimated forfeitures for share-based awards at the dates of grant based on historical experience, adjusted for future expectation. The forfeiture estimate is revised as necessary if actual forfeitures differ from these estimates.awardsunits where restrictions lapse upon either the passage of time (service vesting)vesting conditions), achievement of performance targets (performance vesting conditions), or some combination thereof. For those restricted stock awardsunits with only service vesting conditions, the Company recognizes compensation cost on a straight-line basis over the explicit service period. For awardsunits with both performance and service vesting conditions, the Company starts recognizing compensation cost over the remaining service period, when it is probable the performance condition will be met.awardsunits that contain performance vesting conditions, the Company excludes these awardsunits from diluted earnings per share computations until the contingency is met as of the end of that reporting period.3.Defense Logistics Agency (DLA) Disposition Services ContractsSignificant Contracts DLADefense Logistics Agency Disposition Services under which(DLA). Under this contract the Company is the remarketer of substantially all Department of Defense (DoD) non-rolling stock surplus turned into the DLA, and available for sale within the United States, Puerto Rico, and Guam. The Surplus Contract requires the Company to purchase substantially all usable surplus property offered to the Company by the Department of Defense (DoD)DoD at a fixed percentage of the DoD’sDoD's original acquisition value (OAV). This fixed percentage is 4.35%; prior to the date the current Surplus Contract became effective, this fixed percentage was 1.8%. The Company retains 100% of the profits from the resale of the property and bears all of the costs for the merchandising and sale of the property. Included in accruedAccrued expenses and other current liabilities in the Consolidated Balance Sheet is a liability to the DoD of $10,467,277$15.2 million and $2,026,000$16.1 million for inventory as of June 30,December 31, 2016 and September 30, 2015,2016, respectively. The Surplus Contract contains a provision providing for a mutual termination ofpermits either party to terminate the contract for convenience. The initial two-year base period endsended in December 2016. On December 6, 2016, the DLA notified the Company that it was exercising the first 1-year extension option. The Surplus contract now extends through December 14, 2017. There are fourthree one-year options to extend, exercisable by DLA Disposition Services.3.Defense Logistics Agency (DLA) Disposition Services Contracts (Continued)Disposition Services under which the Company is the remarketer of substantially all DoD non electronicnon-electronic scrap turned into the DLA available for sale within the United States, Puerto Rico, and Guam. Disposition Services initiated an Invitation to Bid for the next Scrap Contract. Bids were solicited in February 2016, and the contract was awarded to the Company in April 2016. The contract is a three yearthree-year contract with two2 one-year options. The Company will pay 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 will bear all of the costs for the sorting, merchandising and sale of the property. The contract will containcontains a provision allowingpermitting the DLA to terminate the contract for convenience upon written notice to the Company from the DLA. The Company expects to commencecommenced operations under this contract in the first fiscal quarter ended December 31, 2016.2017.4.Goodwill4. Goodwill summarizestable presents goodwill activity forbalances and foreign currency translation adjustments to those balances during the periods indicated:
(in thousands)Impairmentthree months ended December 31, 2016: Balance at September 30, 2016 $ 45,134 Translation adjustments (348 ) Balance at December 31, 2016 $ 44,786 GoodwillThe Company performs itsapplying an accounting principle to change the date of the annual goodwill impairment assessment as ofassessment. The date was changed from September 30 to July 1. As a result, the end of the fiscal year and when indicators of impairment are identified. The last impairment assessment was performed as of September 30, 2015July 1, 2016 and the Company identified indicators of impairment, includingand as a declineresult performed step one of the goodwill impairment test. The Company performed the step one test using a discounted cash flow method. The Company concluded that the carrying value exceeded fair value for one of the Company's five reporting units that had goodwill. Accordingly, the Company performed the step two test to derive the fair value of the goodwill, and as a result recorded a $19.0 million impairment charge during the fourth quarter of fiscal 2016. The goodwill impairment was due to updated assumptions used in the Company’s market capitalization. Goodwill impairment losses as of September 30, 2015, were $136.2 million, including $85.1 million recognized infair value calculation. ninethree months ended June 30, 2015. During the nine months ended June 30,December 31, 2016, the Company did not identify any additional indicators of impairment.5.Intangible AssetsAs a result5. Intangible Assets the acquisitionidentifiable intangible assets as of Jacobs Trading Company on October 1, 2011, the Company assumed the rights and obligations of Jacobs Trading Company under the seller’s Master Merchandise Salvage Contract with Wal-Mart Stores, Inc. (the “Wal-Mart Agreement”) dated May 13, 2011. On December 1, 2014, Wal-Mart provided the Company with written notice terminating the Wal-Mart Agreement effective December 8, 2014. As a result of the termination of the Wal-Mart Agreement, the Company concluded that the intangible asset related to the Wal-Mart Agreement was impaired and reduced the remaining unamortized contract intangible asset of $10.3 million to zero during the nine months ended June 30, 2015. This impairment charge is recorded in the Acquisition costs and the related fair value adjustments and impairment of goodwill and long-lived assets line item in the statements of operations. Intangible assets at June 30,31, 2016 and September 30, 2015 consisted of the following:
Life
(in years)
Carrying
Amount
Amortization
Carrying
Amount
Carrying
Amount
Amortization
Carrying
Amount December 31, 2016 September 30, 2016 (dollars in thousands) Contract intangibles 10 $ 1,500 $ (188 ) $ 1,312 $ 1,500 $ (150 ) $ 1,350 Brand and technology 3 - 5 5,749 (5,261 ) 488 5,749 (5,018 ) 731 Covenants not to compete 3 - 5 700 (558 ) 142 700 (533 ) 167 Patent and trademarks 3 - 10 820 (438 ) 382 820 (418 ) 402 Total intangible assets $ 8,769 $ (6,445 ) $ 2,324 $ 8,769 $ (6,119 ) $ 2,650 June 30,December 31, 2016 is as follows:
Amortization Years ending September 30, (in thousands) 2017 Remaining nine months $ 742 2018 281 2019 208 2020 957 2021 and thereafter 136 Total $ 2,324 $0.4$0.3 million and $0.5$0.4 million for the three months ended June 30, 2016 and 2015, respectively. Intangible assets amortization expense was approximately $1.1 million and $2.6 million for the nine months ended June 30,December 31, 2016 and 2015, respectively. In prior years the Company presented amortization of contract intangibles on a separate line item within the consolidated statements of operations. During Q3the third fiscal quarter of fiscal 2016, the Company reclassified amortization of contract intangibles to the depreciation and amortization line item.6.Debt6. Debt September 30, 2015 and the date of termination was $37.5 million. There were no outstanding borrowings under the Facility at the time of its termination.Liquidity Services, Inc. and SubsidiariesNotes to the Unaudited Consolidated Financial Statements — (Continued)nine monthsquarter of fiscal year 20162017 and its corresponding effective tax rate is approximately 28.3%-1.3%.has concluded that there were no uncertainrecords unrecognized tax positions identified duringbenefits as a reduction to its analysis.deferred tax asset for its net operating loss carryforward. During fiscal year 2016, the Company reduced its net operating loss carryforward by $0.7 million for unrecognized tax benefits related to federal and state tax exposures. During the three months ended December 31, 2016, the Company reduced its net operating loss carryforward by $0.2 million for unrecognized tax benefits related to federal and state tax exposures. The Company’s policy isis subject tohas open federal and state income tax examinations for fiscalfiscals 2012 through 2015. The Company anticipates no material tax liability will arise from these examinations. The statute of limitations for U.S. federal income tax returns for years prior to fiscal 2013 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal 2013 may be adjusted upon examination by tax authorities if they are utilized.Since 2008, the Company’s Board of Directors has approved the repurchase of up to $101.9 million in shares under a share repurchase program. Under the program, theourits common stock under a share repurchase program approved by ourthe Company's Board of Directors. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discontinued or suspended at any time, and will be funded using the Company’s available cash. The Company's Board of Directors reviews the share repurchase program periodically, the last such review having occurred in May 2016. The Company did not repurchase shares under this program during the ninethree months ended June 30, 2016.December 31, 2016 or 2015. As of June 30,December 31, 2016, the Company may repurchase an additional $10.1 million in shares under this program. At September 30, 2014, there were 772,227 shares remaining reserved for issuance in connection with awards under the 2006 Plan. In February 2015, at the Company’s annual meeting of stockholders, the stockholders approved an amendment to the 2006 Plan which increased the shares available for issuance under the 2006 Plan by 3,000,000 shares and established a fungible share pool so that awards other than options or stock appreciation rights granted after January 9, 2015, would be counted as 1.5 shares from the shares reserved for issuance under the 2006 Plan. During the ninethree months ended June 30,December 31, 2016, the Company canceled 92,49940,718 options and 214,014112,380 restricted shares with performance vesting conditions because the Compensation Committee, which administers the 2006 Plan, determined the performance goals had become unachievable. At June 30,December 31, 2016, there were 340,851146,474 shares remaining reserved for issuance in connection with awards under the 2006 Plan. 2015, the Company issued 737,972 cash-settled stock appreciation rights at the price of $9.35, and 59,156 cash-settled stock appreciation rights were forfeited. During the nine months ended June 30, 2016, the Company issued 1,062,668 cash-settled stock appreciation rights at athe price of $4.57, and 87,607153,338 cash-settled stock appreciation rights were forfeited. During the three months ended December 31, 2016, no stock appreciation rights were issued and 82,052 cash-settled stock appreciation rights were forfeited. Stock appreciation rights are recorded as liability awards. The maximum number of shares subject to options or stock appreciation rights that can be awarded under the 2006 Plan to any person is 1,000,000 per year. The maximum number of shares that can be awarded under the 2006 Plan to any person, other than pursuant to an option or stock appreciation right, is 700,000 per year. The Company issues stock appreciation rights where restrictionsconditions lapse upon either the passage of time (service vesting), achievement of performance targets, or some combination of these conditions. For those stock appreciation rights with only service vesting conditions, the Company recognizes compensation cost on a straight-line basis over the explicit service period. For awards with both performance and service vesting conditions, the Company starts recognizing compensation cost over the remaining service period, when it is probable the performance vesting condition will be met. The stock appreciation rights that include only service vesting conditions generally vest over a period of one to four years conditioned on continued employment for the incentive period.8.Stockholders’ Equity (Continued) 30, 2015 and the nine months ended June 30, 2016 is as follows:
Average
Exercise Price Options Options outstanding at September 30, 2015 1,472,643 $ 17.46 Options granted 583,228 6.68 Options exercised (1,251 ) 7.48 Options canceled (346,133 ) 16.99 Options outstanding at September 30, 2016 1,708,487 13.91 Options granted — — Options exercised (4,705 ) 6.75 Options canceled (72,375 ) 11.15 Options outstanding at December 31, 2016 1,631,407 14.05 Options exercisable at December 31, 2016 1,050,256 17.14 June 30,December 31, 2016 is approximately $684,975$1,853,745 and 6.666.27 and $24,512$390,643 and 4.71,4.88 respectively, based on a stock price of $7.84$9.75 on June 30,December 31, 2016. Over the last three years, volatility rates have ranged from 50.90% -to 77.92%, the dividend rate has been 0%, risk free interest rates have ranged from 0.12% -to 1.51% and expected forfeiture rates have ranged from 19.70% -22.20% to 23.54%. 30, 2015 and the nine months ended June 30, 2016 is as follows:
Shares
Average
Fair Value Unvested restricted shares at September 30, 2015 2,367,187 $ 16.08 Restricted shares granted 1,504,655 5.54 Restricted shares vested (715,188 ) 16.09 Restricted shares canceled (495,409 ) 20.25 Unvested restricted shares at September 30, 2016 2,661,245 9.34 Restricted shares granted 26,000 9.46 Restricted shares vested (543,974 ) 11.22 Restricted shares canceled (223,207 ) 10.11 Unvested restricted shares at December 31, 2016 1,920,064 8.73 June 30,December 31, 2016 is approximately $21.2$18.72 million and 8.91,8.5 respectively, based on a stock price of $7.84$9.75 on June 30,December 31, 2016.Level 1 Quoted market prices in active markets for identical assets or liabilities; Level 2 Inputs other than Level 1 inputs that are either directly or indirectly observable; and Level 3 Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use. Level 1 Quoted market prices in active markets for identical assets or liabilities;Level 2 Inputs other than Level 1 inputs that are either directly or indirectly observable; andLevel 3 Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.JuneSeptember 30, 2016 and September 30, 2015,December 31, 2016, the Company had no Level 1 or Level 2 assets or liabilities measured at fair value. As of September 30, 2016 and December 31, 2016, the Company had financial assets that are measured at fair value and are classified as Level 3 assets or liabilities that were recordedwithin the fair value hierarchy. The Company has elected to record the financial assets using the fair value option under ASC 825, Financial Instruments. These financial assets represent the value of rights the Company holds from its participation in certain principal transactions in the Company's commercial business, where a third party partner owns the underlying assets to be sold, and the Company has contributed funds to the partner towards purchasing those underlying assets. These assets are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. The changes in financial assets measured at fair value for which the Company has used Level 3 inputs to determine fair value for the quarter ended December 31, 2016 are as follows ($ in thousands): Level 3 Assets Balance at September 30, 2016 $ 2,200 Acquisition of financial assets 2,662 Settlements (3,162 ) Change in fair value of financial assets 928 Balance at December 31, 2016 $ 2,628 recurring basis.the short termtheir short-term maturities.Liquidity Services, Inc. and SubsidiariesNotes to the Unaudited Consolidated Financial Statements — (Continued)GoIndustry (UK)Liquidity Services UK Limited (“GoIndustry”), which the Company acquired in July 2012, are covered by the Henry Butcher Pension Fund and Life Assurance Scheme (the “Scheme”), a qualified defined benefit pension plan.and nine months ended June 30,December 31, 2016 and 2015 included the following components: Three Months Ended December 31, Qualified Defined Benefit Pension Plan 2016 2015 (dollars in thousands) Service cost $ — $ — Interest cost 144 $ 222 Expected return on plan assets (204 ) (283 ) Amortization of prior service cost — — Amortization of actuarial (gain)/loss — — Amortization of transitional obligation/(asset) — — Total net periodic benefit $ (60 ) $ (61 ) 2015,2016, was disclosed in Note 14, Defined Benefit Pension Plan, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015.2016. and Subsidiaries, et al., Civ. No. 14-1183 (D. D. C. 2014).Notes to the Unaudited Consolidated Financial Statements — (Continued)12.Business Realignment ExpensesOn October 1, 2014, the Company announced that it had realigned its workforce in response to the new terms and scope of the current Surplus Contract and to adjust for the efficiencies realized in its commercial business through ongoing integration efforts to support the future vision and growth of the Company. The business realignment included employee reductions across the organization. Business realignment expenses during the fiscal year ended September 30, 2014, included costs of $1.8 million in employee severance and benefit costs. In September 2015, the Company evaluated its business realignment effort. This evaluation resulted in a net increase of $0.3 million in accrued expense primarily due to timing changes in commencement of the current Surplus Contract and the delay in the wind-down of the NESA business.The table below sets forth the significant components and activity in the business realignment initiatives during the nine months ended June 30, 2016.
at September 30,
2015
Realignment
Expenses
at June 30, 2016The business realignment expenses are recorded in costs and expenses from operations in the statement of operations, and in accrued expenses and other current liabilities on the balance sheet as of June 30, 2016 and September 30, 2015.13.Legal Proceedingssharestock price, and seeks unspecified compensatory damages and costs and expenses, including attorneys’ and experts’ fees. On October 14, 2014, the Court appointed Caisse de DépôtDepot et Placement du QuébecQuebec and the Newport News Employees’ Retirement Fund as co-lead plaintiffs. The Plaintiffsplaintiffs filed an amended complaint on December 15, 2014, which alleges substantially similar claims but which does not name the chief accounting officer as a defendant. On March 2, 2015, the Company moved to dismiss the amended complaint for failure to state a claim or plead fraud with the requisite particularity. On March 31, 2016, the Court granted that motion in part and denied it in part. Only the claims related to the Company’s retail division were not dismissed. On May 16, 2016, the Company answered the amended complaint, and on June 7, 2016, the Court entered acomplaint. The scheduling order calling for Plaintiffs to fully brief any motion forin this action requires that: document production be substantially complete by January 13, 2017; plaintiffs’ class certification motion be fully briefed by February 17, 2017, forMay 2, 2017; fact discovery to be completed by June 30, 2017,August 31, 2017; and for expert discovery to be completed by December 22, 2017.February 23, 2018.On June 8, 2016, Harold a putative derivative complaint in the Superior Court for the District of Columbia, purportedly on behalf of the Companyactions against certain individuals who served on the Company’s Board of Directors or as members of its management between February 1, 2012 and May 7, 2014. The2014 (the “Defendants”). These actions sought recovery from those individuals, and not from the Company. Plaintiffs purportedly brought these actions on the Company’s behalf. Specifically, on August 8, 2016, Thomas Billard filed a putative derivative complaint in this action assertsthe District Court, which challenged conduct similar to that among other things,challenged in the defendants breached their fiduciary duties to the Company and its stockholders by causing or allowing the Company to make the same alleged misstatements that are the subject of the putative class actionSlingerland complaint and exposing the Company to potentially significant costs and expenses in connection with defending that action. The complaint seeks monetary damages from the defendants other than Liquidity Services, changes to Liquidity Services’ corporate governance, disgorgement of any profits, benefits, or other compensation obtained by the director defendants, and an award of attorneys’ fees, costs, and expenses for plaintiff’s counsel. There may be additional putative derivative complaints filed in the future asserting similar claims.Liquidity Services, Inc.Superior Court, and SubsidiariesNotes to the Unaudited Consolidated Financial Statements — (Continued)14.Termination of the Wal-Mart AgreementAs a result of the acquisition of Jacobs Trading Company on October 1, 2011, the Company assumed the rights and obligations of Jacobs Trading Company under the seller’s Master Merchandise Salvage Contract with Wal-Mart Stores, Inc. (the “Wal-Mart Agreement”) dated May 13, 2011. On December 1, 2014, Wal-Mart provided the Company written notice (the “Termination Notice”) terminating the Wal-Mart Agreement effective December 8, 2014. The Termination Notice alleged that the Company failed to comply with certain provisions under the Wal-Mart Agreement with respect to service level requirements and restrictions on the disposition of merchandise. The Company disputed these allegations and contested the termination of the Wal-Mart Agreement with Wal-Mart. As a result of negotiations with Wal-Mart, on January 22, 2015, a settlement was finalized whereby, in exchange for both parties waiving all respectivewhich asserted claims against the other, Wal-Mart agreedDefendants. The Billard complaint asserted derivative claims for breach of fiduciary, waste, unjust enrichment, and insider trading. On August 25, 2016, the Slingerland plaintiff filed a putative derivative complaint in the District Court that alleges substantially the same claims as the Billard complaint. pay $7.5 millionconsolidate these two cases and then enter into a schedule for briefing a motion to dismiss. damages.all of the above noted complaints are without merit, and the Company cannot estimate a range of potential liability, if any, at this time.payment was received from Wal-MartCompany expects to recognize most of these pre-tax restructuring charges in February 2015.the quarter ended March 31, 2017 and the quarter ended June 30, 2017.20152016 and subsequent filings with the Securities and Exchange Commission. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. We employ innovative e-commerce marketplace solutions to manage, value, and sell inventory and equipment for business and government clients. We operate a network of leading e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. Our marketplaces provide professional buyers access to a global, organized supply of new, surplus, and scrap assets presented with digital images and other relevant product information. Additionally, we enable our corporate and government sellers to enhance their financial return on offered assets by providing a liquid marketplace and value-added services that encompass the consultative management, valuation, and sale of surplus assets. Our broad range of services include program management, valuation, asset management, reconciliation, RTV &and RMA ("Return to Vendor" and "Returns Management Authorization"), refurbishment &and recycling, fulfillment, marketing &and sales, warehousing &and transportation, buyer customer support, and compliance &and risk mitigation. We organize the products on our marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, fleet and transportation equipment and specialty equipment. Our network of marketplaces areincludes: www.liquidation.com, www.govliquidation.com, www.govdeals.com, www.networkintl.com, www.truckcenter.com, www.secondipity.com, www.unclesamsretailoutlet.com, www.go-dove.com, and www.go-dove.com.www.irondirect.com. We have over 8,0009,000 clients, including Fortune 1000 and Global 500 organizations as well as government agencies. We have one reportable segment consisting of an aggregation of five operating segments that manage e-commerce marketplaces for sellers and buyers of new, surplus, and scrap assets.12twelve months ended June 30,December 31, 2016, the number of registered buyers grew from 2,875,329 to 3,018,013, or approximately 2,805,000 to approximately 2,958,000, or 5.5%5.0%.·Purchase model. Under our purchase model, we offer our sellers a fixed amount or the option to share a portion of the proceeds received from our completed sales in the form of a distribution. Distributions are calculated based on the value we receive from the sale after deducting a required return to us that we have negotiated with the seller. Because we are the primary obligor, and take general and physical inventory risks and credit risk under this transaction model, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. Revenue from our purchase model accounted for approximately 57.8% of our total revenue for the three months ended December 31, 2016. The merchandise sold under our purchase model accounted for approximately 26.0% of our GMV for the three months ended December 31, 2016.20.9% and 20.4%24.7% of our total revenue for the three and nine months ended June 30,December 31, 2016. The merchandise sold under our consignment model accounted for approximately 65.9% and 63.2%69.5% of our GMV for the three and nine months ended June 30,December 31, 2016.·OtherPurchase model. Under our purchase model, we offer our sellers a fixed amount or the option to share a portion of the proceeds received from our completed sales in the form of a distribution. Distributions are calculated based on the value we receive from the sale after deducting a required return to us that we have negotiated with the seller. Because we are the primary obligor, and take general and physical inventory risks and credit risk under this transaction model, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. Revenue from our purchase model accounted for approximately 64.2% and 65.3% of our total revenue for the three and nine months ended June 30, 2016. The merchandise sold under our purchase model accounted for approximately 29.9% and 32.0% of our GMV for the three and nine months ended June 30, 2016.·Other. This revenue category is intended to include revenue from profit-sharingrevenue-sharing and non-consignment fee revenue. Under ourOur Scrap business moved from a profit-sharing model in fiscal 2016 to a revenue-sharing model in fiscal 2017. Under these models, we purchase inventory from our suppliers and share with them a portion of the revenue and profits received from a completed sale in the form of a distribution. Other revenue accounted for14.9% and 14.3%17.5% of our total revenue for the three and nine months ended June 30,December 31, 2016, and approximately 4.2% and 4.8%4.5% of our GMV for the three and nine months ended June 30,December 31, 2016.by both online and offline retailers;in stores as online and omni-channel retail grow as a percentage of overall retail sales; (4) the increase in government regulations and the need for corporations to have sustainability solutions necessitating verifiable recycling and remarketing of surplus assets; (5) the increase in outsourcing by corporate and government organizations of disposition activities for surplus and end-of-life assets as they focus on reducing costs, improving transparency, compliance and working capital flows, and increasingly prefer service providers with a proven track record, innovative scalable solutions and the ability to make a strategic impact in the reverse supply chain, which we expect to increase our seller base; and (6) an increase in buyer demand for surplus merchandise as consumers trade down by purchasing less expensive goods and seek greater value from their purchases, which results in lower per unit prices and margins in our retail goods vertical.·•Surplus Contract. The Surplus Contract is a competitive-bid contract under which we acquire, manage and sell usable DoD surplus personal property turned into the DLA Disposition Services (“DLA”).DLA. Surplus property generally consists of items determined by the DoD to be no longer needed, and not claimed for reuse by any federal agency, such as computers, electronics, office supplies, scientific and medical equipment, aircraft parts, clothing and textiles. The Surplus Contract requires us to purchase substantially all usable surplus property offered by the DoD at 4.35% of the DoD’s original acquisition value (OAV). The current or third, Surplus Contract, which is the third such contract awarded to us since 2001, became effective in December 2014, covers only non-rolling stock and has a base term of two years with four one-year renewal options.options to extend. The prior, or second, Surplus Contract requiresrequired us to purchase substantially all rolling and non-rolling usable surplus property offered by the DoD at 1.8% of the DoD’s OAV; the wind-down period under the second Surplus Contract will remainwas in effect until January 2017 to allow for the continued processing of usable Recycling Control Point (RCP) non-rolling stock surplus property.second and third Surplus Contracts (including buyer premiums)Contract accounted for approximately 30.9%29.9% and 31.0% of our total revenue for the three and nine months ended June 30, 2016.December 31, 2016 and 2015. The property sold under the second and third Surplus ContractsContract accounted for approximately 11.7%9.9% and 13.1%13.0% of our GMV for the three and nine months ended June 30, 2016.·•Scrap Contract. On April 8, 2016, the DLA awarded us the second Scrap Contract. Under the second Scrap Contract, we acquire scrap property from the DLA and pay the DLA a revenue-sharing payment equal to 64.5% of the gross resale proceeds. The Scrap Contract is a competitive-bid contract under which we acquire, manage and sell substantially all scrap property of the DoD turned into the DLA. Scrap property generally consists of items determined by the DoD to have no use beyond their base material content, such as metals, alloys, and building materials. We bear all of the costs for the sorting, merchandising and sale of the property. The second Scrap Contract has a 36-month base term, commencing in the first quarter of fiscal year 2017, with two 12-month extension options exercisable by the DLA.the Company waswe were awarded the original Scrap Contract which was structured as a profit-sharing arrangement with 75.2% of the profits distributed to the DLA, and 1.8% to a third party. The contract was amended in June 2015 to adjust the DLA profit sharing percentage to 65.0%, eliminating the distribution to the third party. The Scrap Contract is a competitive-bid contract under which we acquire, manage and sell substantially all scrap property of the DoD turned into the DLA. Scrap property generally consists of items determined by the DoD to have no use beyond their base material content, such as metals, alloys, and building materials.Under the Scrap Contract, we acquire scrap property at a per pound price and disburse to the DLA a percentage of the profits, currently 65%, realized from the sale of the inventory, after deduction for allowable expenses. We refer to these disbursement payments to the DoD as profit-sharing distributions. We recognize as revenue the gross proceeds from these sales. The DoD reimburses us for certain direct expenses deemed to be payable by the DOD rather than by us. Company’sCompany's customer base met certain small business criteria as defined in the contract, we received an additional incentive payment which was withheld from payments to the DLA. The currentThis Scrap Contract will expireexpired on September 30, 2016. On April 8, 2016, the DLA awarded the nextto the Company. Under the new Scrap Contract, the Company will acquire scrap property from the DLA and pay the DLA a revenue-sharing payment equal to 64.5% of the gross resale proceeds. The Company will bear all of the costs for the sorting, merchandising and sale of the property. The new Scrap Contract has a 36-month base term, commencing in the first quarter of fiscal year 2017, with two 12-month extension options exercisable by the DLA. Revenue from the Scrap contract accounted for approximately 8.6%10.0% and 9.8%13.0% of our total revenue for the three and nine months ended June 30, 2016. The Scrap contract accounted for approximately 4.1%4.5% and 4.8%5.6% of our total GMV for the three and nine months ended June 30, 2016.Our Wal-Mart Contracts. We have various contracts with Wal-Mart Stores, Inc., under which we purchase certain consumer products from Wal-Mart that have been removed from the sales stream of its retail operations. All of these agreements have customary commercial terms, which generally expire within a year and allow both parties to terminate for convenience with reasonable notice. We also had a long-term contract with Wal-Mart that did not provide for termination for convenience (the “Wal-Mart Agreement”). On December 1, 2014, Wal-Mart alleged that we failed to comply with certain provisions under the Wal-Mart Agreement and terminated the agreement effective December 8, 2014. We disputed these allegations and contested the termination of the Wal-Mart Agreement. On January 22, 2015, we finalized a settlement with Wal-Mart whereby, in exchange for both parties waiving all respective claims against the other, Wal-Mart agreed to pay $7.5 million in damages. The amount of the settlement was recorded within accounts receivable and a reduction of inventory on the consolidated balance sheet as of December 31, 2014, as the settlement compensated us for the overpayment of inventory from Wal-Mart. We received the payment in February 2015.On September 30,2016 and 2015, we sold certain assets related to the Jacobs Trading Company to a buyer, Tanager Acquisitions, LLC. In connection with the disposition, the buyer assumed certain liabilities related to the Jacobs Trading Company. The buyer issued to us a promissory note in the amount of $12.3 million. The divestiture of the Jacobs Trading Company resulted in an $8.0 million loss. The sale generated a tax loss that resulted in a $31.5 million cash benefit from prior year income taxes and $2.0 million of additional tax credits available to offset future taxes. In March, 2016, we received $30.1 million of the cash benefit and expect to receive the remaining $1.4 million in fiscal year 2017. We also received $5.0 million for an overpayment of taxes paid in fiscal year 2015 to bring our total tax refund to $35.1 million in June, 2016.and nine months ended June 30,December 31, 2016 and 2015 totaled $178.5$159.7 million and $482.9$151.4 million, and $193.6 million and $628.3 million, respectively.June 30,December 31, 2016 and September 30, 2015,2016, we had approximately 2,958,0003,018,013 and 2,845,0002,986,416 registered buyers, respectively. and nine months ended June 30,December 31, 2016 and 2015, approximately 642,000544,276 and 1,840,000, and 611,000 and 1,882,000,561,245 total auction participants participated in auctions on our marketplaces, respectively.and nine months ended June 30,December 31, 2016 and 2015, we completed approximately 151,000128,710 and 437,000, and 137,000 and 428,000132,640 transactions, respectively. (income) expense, net; provision for income taxes; and depreciation and amortization. Our definition of adjusted EBITDA differs from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisition costs such as transaction expenses and changes in earn out estimates, business realignment expense, disposition expenses, and goodwill and long-lived asset impairment.·contract intangibles related to the amortization and subsequent write-off of the contract related intangible assets associated with the Jacobs Trading acquisition, which closed on October 1, 2011 and the NESA acquisition, which closed on November 1, 2012. Both of theseassets. These expenses are non-cash charges that have fluctuated significantly over the past five years. As a result, we believe that adding back these non-cash charges to net income is useful in evaluating the operating performance of our business on a consistent basis from year-to-year.·business.·business on a consistent basis from year-to-year.stock basedstock-based compensation expense is useful to investors when evaluating the operating performance of our business.·business on a consistent basis from year-to-year.·······
Ended June 30,
Ended June 30, 2016 2015 Net loss $ (8,397 ) $ (5,197 ) Interest expense (income) and other expense, net 34 (60 ) Provision (benefit) for income taxes 103 (2,154 ) Depreciation and amortization 1,429 1,672 EBITDA (6,831 ) (5,739 ) Stock compensation expense 2,500 2,420 Acquisition costs — 39 Adjusted EBITDA $ (4,331 ) $ (3,280 ) ··· being received, utilizing credit cards, wire transfers and PayPal, an Internet based payment system, as methods of payments. As a result, we are not subject to significant collection risk, as goods are generally not shipped before payment is received.modelarrangements and determined it is appropriate to account for these sales on a gross basis. The following factors were most heavily relied upon in our determination:·····price per poundnominal amount under our Scrap Contract.· In addition, as payments made for inventory are excluded from the calculation for the profit-sharing distribution under our DoD contracts, we effectively bear inventory risk for the full amount paid to acquire the property (i.e., there is no sharing of inventory risk).and nine months ended June 30,December 31, 2016 and 2015 was 12.3%13.3% and 12.4%, and 10.4% and 12.8%11.6%, respectively.Combinations.combinations. We recognize all of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred. Generally, 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. All subsequent changes to a valuation allowance or uncertain tax position that relate to the acquired company and existed at the acquisition date that occur both within the measurement period and as a result of facts and circumstances that existed at the acquisition date are recognized as an adjustment to goodwill. All other changes in valuation allowances are recognized as a reduction or increase to income tax expense.twofive reporting units. The first step compares the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is then performed. The second step compares the carrying amount of the reporting unit’s goodwill to the implied fair value of the goodwill. If the fair value of the goodwill is less than the carrying amount, an impairment loss would be recorded in our statements of operations. Intangible assets with definite lives are amortized over their estimated useful lives and are also reviewed for impairment if events or changes in circumstances indicate that their carrying amount may not be realizable.We perform the annual goodwill impairment assessment as of the end of the fiscal year. During the three months ended December 31, 2014, we identified indicators of impairment, including the termination of the Wal-Mart Agreement on December 1, 2014, the significant decline in market capitalization during the quarter, and continued uncertainty in projections for fiscal year 2015 and beyond. As a result, we tested the goodwill for impairment as of December 31, 2014. Based on the goodwill impairment analysis as of the interim testing date, the carrying values of our two reporting units exceeded their fair values. Accordingly, we performed step two of the goodwill impairment test, where we determined the estimated fair values of the assets and liabilities of the reporting units. As a result of step two of the goodwill impairment test, we recorded a goodwill impairment charge of $85.1 million during the first quarter of fiscal 2015. As part of our annual impairment assessment as of September 30, 2015, we identified indicators of impairment, including a decline in our market capitalization. As a result, we tested the goodwill for impairment as of September 30, 2015. Based on the results of step one of our goodwill impairment analysis as of the fiscal year ended September 30, 2015, the carrying values of both of our two reporting units exceeded their fair value. Accordingly, we performed step two of the goodwill impairment test and determined the estimated fair value of the assets and liabilities of the impaired reporting units. As a result of step two of the goodwill impairment test, we recorded a goodwill impairment charge of $51.2 million during the fourth quarter of fiscal 2015. During the nine months ended June 30, 2016, we did not identify any indicators of impairment.In accordance with FASB Accounting Standards Codification Topic 280 (“ASC 280”), which provides that the characteristics of a component require that it (a) constitutes a business, (b) has discrete financial information, and (c) its performance is reviewed by management, the Company has identified its reporting units as LSI-Retail Supply Chain Group (RSCG) and LSI-Capital Assets Group(CAG). As the RSCG operations and the CAG operations represent two distinct components under the guidance of ASC 280, goodwill should be measured for impairment separately for each of these components.$67.147.1 million at June 30,December 31, 2016. Such events may include strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our base of buyers and sellers or material negative changes in our relationships with material customers.A valuation allowance is provided to reduce theWe recognize deferred tax assets to a levelthe extent that we believe willthat these assets are more likely than not to be realized. The resulting netIn making such determination, we consider all available positive and negative evidence to estimate whether future taxable income will be generated to permit use of the existing deferred tax asset. A significant piece of subjective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2016 and projected losses in the near term future. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.reflects management’s estimate of the amount that willis more likely than not to be realized. As of June 30, 2016, the Company had approximately $22.1 million in net deferred tax assets. In the future, it is possible that a valuation allowance to reduce the deferred tax asset will be required, which could materially increase the Company’s expense in the period the allowance is recognized and adversely affect its results of operations and statement of financial condition.We concludedASC states that there were noa benefit from an uncertain tax positions identified during our analysis.Profit-sharingClient distributions. Under the current Scrap Contract, we acquire scrap property from the DLA and pay the DLA a revenue-sharing payment equal to 64.5% of the gross resale proceeds. We bear all of the costs for the sorting, merchandising and sale of the property. Our previous Scrap Contract with the DoD has beenwas structured as a profit-sharing arrangement in which we purchasepurchased and taketook possession of all goods we receivereceived from the DoD at a contractual price per pound. After deducting allowable operating expenses, we disbursedisbursed to the DoD on a monthly basis a percentage of the profits of the aggregate monthly sales. We retainretained the remaining percentage of these profits after the DoD’s disbursement.profit-sharingClient distributions. Depreciation and amortization also consists of the amortization of our contract intangibles associated with the Jacobs Trading acquisition on October 1, 2011, and the NESA transaction on November 1, 2012. The intangible asset created in conjunction with the acquisition of Jacobs Trading was valued at $33.3 million and was being amortized over 55 months on a straight-line basis. The amortization period was correlated to the base term of the Wal-Mart contract from the acquisition date, exclusive of renewal periods. Upon the early termination of the Wal-Mart contract in December 2014, we expensed the remaining amount of unamortized expense of approximately $10.3 million during the three months ended December 2014. The vendor contract intangible asset created in conjunction with the NESA acquisition was valued at $3.9 million and was being amortized over 20 months, on a straight-line basis. The amortization period was correlated to the base term of the contract, from the acquisition date, exclusive of renewal periods. and related fair value adjustments and impairment of goodwill and long-lived assets. Acquisition costs and related fair value adjustments and impairment of goodwill and long-lived assets consist of expenses incurred to complete a business combination, adjustments tocombination.earn-outs,financial assets and impairment of goodwill and long-lived assets. expense and other expense, net. Interest expense (income) expense and other expense, net consists of interest income on the note receivable related to the sale of the Jacobs Trading Company,business, expenses related to our terminated credit facility, and impacts of foreign currency fluctuations.28.3%-1.3% for the ninethree months ended June 30,December 31, 2016. The 20162017 effective tax rate differed from the statutory federal rate of 35.0% primarily as a result of the valuation allowance charge for fiscal 2016 and the impact of foreign, state, and local income taxes and permanent tax adjustments. We expect our future years’ tax rates to be between 30% and 40%.
June 30,
June 30, 2016 2015 Revenue 100.0 % 100.0 % Costs and expenses: Cost of goods sold (excluding amortization) 45.7 % 40.8 % Client distributions 6.4 % 3.6 % Technology and operations 30.9 % 34.6 % Sales and marketing 14.1 % 14.4 % General and administrative 13.9 % 15.3 % Depreciation and amortization 2.0 % 2.5 % Acquisition costs — % 0.1 % Total costs and expenses 113.0 % 111.3 % Other operating income 1.3 % — % Loss from operations (11.7 )% (11.3 )% Interest expense (income) and other expense, net — % (0.1 )% Loss before provision (benefit) for income taxes (11.7 )% (11.2 )% Provision (benefit) for income taxes 0.2 % (3.3 )% Net loss (11.9 )% (7.9 )% June 30,December 31, 2016 Compared to Three Months Ended June 30,December 31, 2015decreased $4.5increased $4.9 million, or 5.1%7.5%, to $85.2$70.8 million for the three months ended June 30,December 31, 2016 from $89.7$65.9 million for the three months ended June 30,December 31, 2015, primarily due to (1) a 7.2% decrease,16.6% increase, or $3.5$5.2 million, in our commercial marketplaces due to the salegrowth of the Jacobs Trading Companycore accounts in fiscal 2015, and the wind down of the NESA refurbishment business in Canada, reduced product flows within our retail vertical, partially offset bymarketplace, as well as stronger capital assets deal flow; and (2) a 5.4%2.6% decrease, or $1.9$0.8 million, in our DoD businesses due to lower commodity pricesvolume related to our Surplus contract, and a shift in property mixlower pricing related to lower valued property provided under our Scrap and Surplus contracts,contract, partly offset by higher service revenue. These revenue decreases were partially offset by a 15.2%revenue; and (3) an 8.0% increase, or $0.8$0.4 million, in our state and local government (GovDeals) marketplace due to an increase in the number of new sellers and additional sales volume from existing clients. The amount of gross merchandise volume decreased 7.8%GMV increased 5.5%, or $15.1$8.3 million to $178.5$159.7 million, for the three months ended June 30,December 31, 2016 from $193.6$151.4 million for the three months ended June 30,December 31, 2015, due to (1) a 16.7%14.9% GMV decrease,increase, or $17.2$10.5 million, in our commercial marketplaces due to the salegrowth of the Jacobs Trading Company, the wind down of the NESA business, reduced product flows withincore accounts in our retail business, offset by stronger capital assetsmarketplace, and an increase in deal flow; andflow within the energy vertical; (2) a 20.5%21.1% GMV decrease, or $7.2$6.1 million, in our DoD contractsbusinesses due to lower commodity pricesvolume related to our Surplus contract, and a shift in property mixlower pricing related to lower valued property provided under our Scrap contract, and Surplus contracts. These GMV decreases were partially offset by(3) a 17.1% GMV7.6% increase, or $9.4$3.9 million, in our state and local government (GovDeals) marketplace due to an increase in the number of new sellers and additional sales volume from existing clients.$3.5$5.4 million, or 9.6%20.0%, to $39.3$32.3 million for the three months ended June 30,December 31, 2016 from $35.8$26.9 million for the three months ended June 30,December 31, 2015. This increase is primarily attributed to the increase in the price we pay for inventory under the current Surplus Contract as well as a greater mix of dealsand growth in the commercial marketplaces where we act as principal, offset by the sale of the Jacobs Trading Company, and the wind down of the NESA refurbishment businesscore accounts in Canada.our retail business. In line with these changes, cost of goods sold increased to 46.1%45.7% of revenue, from 39.9%40.8%.Profit-sharingClient distributions. Profit-sharing Client distributions decreased $3.7increased $2.2 million, or 58.1%93.0%, to $2.7$4.5 million for the three months ended June 30,December 31, 2016 from $6.4$2.4 million for the three months ended June 30, 2015.December 31, 2015 due to the increase in the amount of distributions payable to the DLA under the new terms of the current Scrap Contract. As a percentage of revenue, profit-sharing distributions decreasedincreased to 3.1%6.4% from 7.1%3.6%. This is due to decreases in property flow from the DoD in our scrap business and lower commodity prices.$2.2$0.9 million, or 9.0%4.0%, to $22.5$21.9 million for the three months ended June 30,December 31, 2016 from $24.8$22.8 million for the three months ended June 30,December 31, 2015, due to the sale of the Jacobs Trading Company in fiscal 2015.which is not significant. As a percentage of revenue, technology and operations expenses decreased to 26.5%30.9% from 27.6%34.6%.slightly decreased $0.3increased $0.5 million, or 2.8%5.6%, to $10.0 million for the three months ended June 30,December 31, 2016 from $10.3$9.5 million for the three months ended June 30,December 31, 2015, due to the sale of the Jacobs Trading Companyan increase in fiscal 2015.sales and marketing expense in our commercial marketplaces. As a percentage of revenue, sales and marketing expenses slightly increaseddecreased to 11.7%14.1% from 11.4%14.4% in the prior year, primarily as a result of the decreaseincrease in revenue described above.$1.4$0.2 million, or 13.7%2.1%, to $9.0$9.9 million for the three months ended June 30,December 31, 2016 from $10.5$10.1 million for the three months ended June 30,December 31, 2015, due to the sale of the Jacobs Trading Company, and the wind down of the NESA business.which is not significant. As a percentage of revenue, general and administrative expenses decreased to 10.6%13.9% from 11.7%15.3% in the prior year.$0.4$0.3 million, or 21.0%14.5%, to $1.6$1.4 million for the three months ended June 30,December 31, 2016 from $2.0$1.7 million for the three months ended June 30, 2015, asDecember 31, 2015.resultgain on the value of certain software purchases having reacheda right the end of their amortization period, as well asCompany holds from its participation in a principal transaction in the sale of the Jacobs Trading Company in fiscal 2015 and its related depreciable assets.(expense) income,expense, net. Interest expense (income) and other (expense) income,expense, net, increased $0.2 million,was insignificant, and remained flat when compared to $0.2 million of expense for the three months ended June 30, 2016 from zero for the three months ended June 30, 2015. Interest and other (expense) income, net included impacts of foreign currency fluctuations.BenefitProvision for income taxes.taxes Benefit. Provision for income taxes decreased $1.6increased $2.3 million, to a benefitprovision of zero for the three months ended June 30, 2016 from a benefit of $1.6$0.1 million for the three months ended June 30, 2015.(loss) income.loss. Net loss for the three months ended June 30,December 31, 2016 was ($0.1)$(8.4) million compared to income of $1.6$(5.2) million for the three months ended June 30,December 31, 2015.Nine Months Ended June 30, 2016 Compared to Nine Months Ended June 30, 2015Revenue. Revenue decreased $79.9 million, or 25.1%, to $237.9 million for the nine months ended June 30, 2016 from $317.8 million for the nine months ended June 30, 2015, due to (1) a 29.3% decrease, or $51.3 million, in our commercial marketplaces due to the sale of the Jacobs Trading Company in fiscal 2015, the wind down of the NESA refurbishment business in Canada, reduced product flows within our retail vertical, continued weakness in the energy sector, partially offset by stronger capital assets deal flow; and (2) a 24.0% decrease, or $30.7 million, in our DoD contracts due to lower commodity prices and a shift in property mix to lower valued property provided under our Scrap and Surplus contracts, partly offset by higher service revenue. These decreases were partially offset by a 13.9% increase, or $2.1 million, in our state and local government (GovDeals) marketplace due to an increase in the number of new sellers and additional sales volume from existing clients. The amount of gross merchandise volume decreased 23.1%, or $145.4 million to $482.9 million, for the nine months ended June 30, 2016 from $628.3 million for the nine months ended June 30, 2015, due to (1) a 35.1% GMV decrease, or $124.6 million, in our commercial marketplaces due to the sale of the Jacobs Trading Company, the wind down of the NESA business, reduced product flows within our retail vertical, and continued weakness in the energy sector; and (2) a 32.4% GMV decrease, or $41.4 million, in our DoD contracts due to lower commodity prices and a shift in property mix to lower valued property provided under our Scrap and Surplus contracts. These GMV decreases were partially offset by a 14.1% GMV increase, or $20.5 million, in our state and local government (GovDeals) marketplace due to an increase in the number of new sellers and additional sales volume from existing clients.Cost of goods sold. Cost of goods sold decreased $26.7 million, or 20.1%, to $106.1 million for the nine months ended June 30, 2016 from $132.8 million for the nine months ended June 30, 2015. This decrease is primarily attributed to the sale of the Jacobs Trading Company and reduced product flows within our retail vertical, as well as the wind down of the NESA refurbishment business in Canada. This decrease was partially offset by the increase in the price we pay for inventory under the current Surplus Contract as well as a greater mix of deals in our commercial marketplaces in which we act as principal. In line with these changes, cost of goods sold increased as a percentage of revenue to 44.6%, from 41.8%.Profit-sharing distributions. Profit-sharing distributions decreased $16.0 million, or 68.0%, to $7.5 million for the nine months ended June 30, 2016 from $23.5 million for the nine months ended June 30, 2015. As a percentage of revenue, profit-sharing distributions decreased to 3.2% from 7.4%. This is due to decreases in property flow from the DoD in our scrap business and lower commodity prices.Technology and operations expenses. Technology and operations expenses decreased $6.4 million, or 8.4%, to $70.0 million for the nine months ended June 30, 2016 from $76.4 million for the nine months ended June 30, 2015, due to the sale of the Jacobs Trading Company, and the wind down of the NESA business. As a percentage of revenue, technology and operations expenses increased to 29.4% from 24.0% primarily as a result of the decrease in revenue described above.Sales and marketing expenses. Sales and marketing expenses decreased $2.9 million, or 9.1%, to $28.6 million for the nine months ended June 30, 2016 from $31.4 million for the nine months ended June 30, 2015, primarily due to bad debt expense related to the Jacobs Trading Company in fiscal 2015, as well as staff reductions. As a percentage of revenue, sales and marketing expenses increased to 12.0% from 9.9% primarily as a result of the decrease in revenue described above.General and administrative expenses. General and administrative expenses decreased $1.8 million, or 5.7%, to $29.6 million for the nine months ended June 30, 2016 from $31.4 million for the nine months ended June 30, 2015 due to the wind down of the NESA refurbishment business in Canada and the sale of the Jacobs Trading Company in fiscal 2015. As a percentage of revenue, general and administrative expenses increased to 12.4% from 9.8% primarily as a result of the decrease in revenue described above.Depreciation and amortization expenses. Depreciation and amortization expenses decreased $2.3 million, or 31.7%, to $4.9 million for the nine months ended June 30, 2016 from $7.2 million for the nine months ended June 30, 2015, as a result of reclassifying prior year amortization of $1.2 million for specific contract intangibles to this line item, as well as certain software purchases having reached the end of their amortization period, and the sale of the Jacobs Trading Company in September 2015 and its related depreciable assets.Acquisition costs and related fair value adjustments and impairment of goodwill and long-lived assets. Acquisition costs and related fair value adjustments and impairment of goodwill and long-lived assets decreased $96.2 million, or 100.0% to zero for the nine months ended June 30, 2016 from $96.2 million for the nine months ended June 30, 2015, due to the write-down of impaired goodwill and the remaining unamortized expense related to the Jacobs Trading Company acquisition contract intangible asset due to the early termination of the Wal-Mart contract in December 2014.Interest and other (expense) income, net. Interest and other (expense) income, net increased $0.3 million, to $0.2 million of income for the nine months ended June 30, 2016 from an expense of ($0.1) for the nine months ended June 30, 2015. Interest and other (expense) income, net included impacts of foreign currency fluctuations.Benefit for income taxes. Benefit for income taxes decreased $17.8 million, or 88.0%, to $2.4 million for nine months ended June 30, 2016 from $20.2 million for the nine months ended June 30, 2015, primarily due to a decrease in losses from FY15 generated from the the write-down of impaired goodwill and long-lived assets in the nine months ended June 30, 2015.Net loss. Net loss decreased $55.0 million, or 90.0%, to $6.2 million for the nine months ended June 30, 2016 from $61.1 million for the nine months ended June 30, 2015, primarily as a result of the write-down of impaired goodwill and long-lived assets in the nine months ended June 30, 2015.June 30,December 31, 2016, we had approximately $129.9$126.9 million in cash and cash equivalents. We do not expect the terminationEffective March 25, 2016, we terminated our $75 million senior credit facility. Termination of the Senior Credit Facility has not had, and we do not expect to have a material effect on our liquidity or financial position. WeThroughout the quarter, we have continued to advance the design and development of our LiquidityOne platform, services and analytical tools to empower our clients to maximize bottom-line return, and transform their supply chain into a high-performing business function. We will continue to incur additional costs throughout the duration of this initiative to implement the new platform and educate our employees and clients about the initiative. As part of this process, we have invested in new business ventures, such as our IronDirect marketplace in the construction vertical. We expect that the IronDirect marketplace may generate future synergies with our other marketplaces when IronDirect customers dispose of the construction equipment purchased from this marketplace.$11.1$10.3 million as of June 30,December 31, 2016. As of June 30,December 31, 2016 and September 30, 2015,2016, approximately $21.5$22.0 million and $23.6$21.5 million, respectively, of cash and cash equivalents was held overseas and not available to fund domestic operations without incurring taxes upon repatriation.ninethree months ended June 30, 2016.December 31, 2016 or 2015. As of June 30,December 31, 2016, we may repurchase an additional $10.1 million in shares under this program.NineThree Months Ended June 30,December 31, 2016 Compared to NineThree Months Ended June 30,December 31, 2015provided byused in operating activities was $38.6$5.0 million for the ninethree months ended June 30,December 31, 2016 and $39.5$8.3 million for the ninethree months ended June 30,December 31, 2015. The $0.9$3.3 million decrease in cash provided byused in operations between periods was primarily attributable to an overall decrease of approximately $18.8 million in net income including non-cash adjustments offset by an increase in cash flows from changes in working capital of approximately $17.9 million. For$8.1 million, offset by the nine months ended June 30, 2016,increase of approximately $4.8 million in net cash provided by operating activities primarily consisted of $34.0 million related to the recovery of prior year income taxes, netted with estimated taxes for fiscal 2016. This cash benefit resulted from the tax loss on the recent sale of the Jacobs Trading Company. Another significant change over prior year relates to the $42.5 million decrease in inventory during fiscal 2015 resulting from the loss of the Wal-Mart Agreement and decreased property flows from the DoD under the surplus contract.$4.6$2.3 million for the ninethree months ended June 30,December 31, 2016 and $5.4$1.5 million for the ninethree months ended June 30,December 31, 2015. Net cash used in investing activities for the ninethree months ended June 30,December 31, 2016 consisted primarily of expenditures of $4.6 million for capitalized software, purchases of equipment and leasehold improvements. cash used in investing activities for the nine months ended June 30, 2015 consisted primarily of capital expenditures of $5.4 million for purchases of equipment and leasehold improvements.Net cash used by financing activities was $0.1 million for the nine months ended June 30, 2016 and net cash provided by financing activities was $0.1$0.03 million for the ninethree months ended June 30,December 31, 2016 and net cash used in financing activities was $0.05 million for the three months ended December 31, 2015. Net cash provided by financing activities for the ninethree months ended June 30, 2015December 31, 2016 consisted primarily of proceeds from the exercise of common stock options.ninethree months ended June 30,December 31, 2016 were $4.6$2.3 million. As of June 30,December 31, 2016, we had no outstanding commitments for capital expenditures.the Companywe terminated itsour $75 million a senior credit facility. Borrowings under the Agreement bore interest at an annual rate equal to the 30 day LIBOR rate plus 1.25% (1.608% at December 31, 2015) due monthly. The Company’sOur borrowing availability under the Facility upon termination was $37.5 million. There were no outstanding borrowings under the Facility at the time of its termination.June 30,December 31, 2016, and thus do not have any related interest rate exposure. Our investment policy requires us to invest funds in excess of current operating requirements. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss.12.4%13.3% percent of our sales are denominated in foreign currencies. We have not engaged in any hedging or other derivative transactions to date.June 30,December 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, our Chief Financial Officer, and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that our disclosure controls and procedures were effective and were operating to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure.sharestock price, and seeks unspecified compensatory damages and costs and expenses, including attorneys’ and experts’ fees. On October 14, 2014, the Court appointed Caisse de DépôtDepot et Placement du QuébecQuebec and the Newport News Employees’ Retirement Fund as co-lead plaintiffs. The Plaintiffsplaintiffs filed an amended complaint on December 15, 2014, which alleges substantially similar claims but which does not name the chief accounting officer as a defendant. On March 2, 2015, the Company moved to dismiss the amended complaint for failure to state a claim or plead fraud with the requisite particularity. On March 31, 2016, the Court granted that motion in part and denied it in part. Only the claims related to the Company’s retail division were not dismissed. On May 16, 2016, the Company answered the amended complaint, and on June 7, 2016, the Court entered acomplaint. The scheduling order in this action that calls for Plaintiffs to fully brief any motion forrequires that: document production be substantially complete by January 13, 2017; plaintiffs’ class certification motion be fully briefed by February 17, 2017, forMay 2, 2017; fact discovery to be completed by June 30, 2017,August 31, 2017; and for expert discovery to be completed by December 22, 2017. The Company believesFebruary 23, 2018.On June 8, 2016, Harold a putative derivative complaint in the Superior Court for the District of Columbia, purportedly on behalf of the Companyactions against certain individuals who served on the Company’s Board of Directors or as members of its management between February 1, 2012 and May 7, 2014. The2014 (the “Defendants”). These actions sought recovery from those individuals, and not from the Company. Plaintiffs purportedly brought these actions on the Company’s behalf. Specifically, on August 8, 2016, Thomas Billard filed a putative derivative complaint in this action assertsthe District Court, which challenged conduct similar to that among other things, the defendants breached their fiduciary duties to the Company and its stockholders by supposedly causing or allowing the Company to make the same misstatements that are allegedchallenged in the putative class actionSlingerland complaint and exposing the Company to potentially significant costs and expenses in connection with defending that action. The complaint seeks monetary damages from the defendants other than Liquidity Services, changes to Liquidity Services’ corporate governance, disgorgement of any profits, benefits, or other compensation obtained by the director defendants, and an award of attorneys’ fees, costs, and expenses for plaintiff’s counsel. There may be additional putative derivative complaints filed in the future asserting similar claims.Superior Court, and which asserted claims against the Defendants. The Billard complaint asserted derivative claims for breach of fiduciary, waste, unjust enrichment, and insider trading. On August 25, 2016, the Slingerland plaintiff filed a putative derivative complaint in the District Court that alleges substantially the same claims as the Billard complaint. 2015,2016, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.Item 5. Other InformationOn August 2, 2016, the Board of Directors of Liquidity Services, Inc. (the “Company”) approved an amendment to the Company’s Amended and Restated By-Laws, effective immediately, to include a new Article 7, which provides that, unless the Company, in writing, selects or consents to the selection of an alternative forum, the sole and exclusive forum for certain types of legal action will be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court or a federal court located within the State of Delaware). In addition, the Amended and Restated By-Laws provide that any person bringing any action the subject matter of which is within the scope of the prior sentence in a court other than those specified, will be deemed to have consented to the personal jurisdiction of the courts specified in connection with any action brought to enforce the forum selection clause.The foregoing description of the amendment to the Amended and Restated By-Laws is qualified in its entirety by reference to the text of the Amended and Restated By-Laws, which are filed as Exhibit 3.2 to this Quarterly Report and incorporated herein by reference.Exhibit No.Description3.1Exhibit No. Description 3.1 Fourth Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-129656), filed with the SEC on January 17, 2006. Amended and Restated Bylaws dated August 2, 2016. Executive EmploymentSupplemental Agreement between the Company and William P. Angrick,No. 1 to Surplus Usable Property Sales Contract (Sales Contract Number 14-0091-0002), dated as of June 13,December 6, 2016, incorporated herein by referecereference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on June 17, 2016.#December 8, 2016.AmendmentLiquidity Services, Inc. Second Amended and Restated 2006 Omnibus Long-Term Incentive Plan, incorporated by reference to Executive Employment Agreement between the Company and Leoncio Casusol, dated as of June 13, 2016, incorporated herein by referece to Exhibit 10.1Appendix A to the Company’s Current ReportCompany's Definitive Proxy Statement on Form 8-K,Schedule 14A, filed with the SEC on June 17,January 23, 2016.#10.3Amendment to Executive Employment Agreement between the Company and Gardner H. Dudley, dated as of June 13, 2016, incorporated herein by referece to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on June 17, 2016.#10.4Executive Employment Agreement by and between the Company and Mark A. Shaffer, incorporated herein by referece to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 13, 2016.#31.1Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. Certification of Chief Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015,2016, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.# Designates management or compensation plans.August 4, 2016.February 9, 2017.LIQUIDITY SERVICES, INC. By: By:By: By:By: By: