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


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


For the quarterly period ended March 31, 20192020


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


For the transition period from                 to                


Commission file number 0-51813
 
LIQUIDITY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware52-2209244
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)
6931 Arlington Road, Suite 200, Bethesda, MD


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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an "emergingemerging growth company".company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☒
Non-accelerated filer ☐Smaller reporting company ☒
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company x
Emerging growth company o
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐


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


Securities registered to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.001 par valueLQDTNasdaq

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of May 6, 20194, 2020 was 33,496,398.34,020,716.







INDEX
 
Page
PART I. FINANCIAL INFORMATION
Page
Part I. FINANCIAL INFORMATION
Item 1.
34
34
45
56
67
78
89
Item 2.
2522
Item 3.
3734
Item 4.
3735
PartPART II. OTHER INFORMATION
Item 1.
3936
Item 1A.
3936
3936


Item 6.
4038
4139



3
Table of Contents
PART I—FINANCIAL INFORMATION


Item 1. Financial Statements.
Liquidity Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands, Except Par Value)

March 31, 2019
September 30, 2018March 31, 2020September 30, 2019
(Unaudited)
  (Unaudited)
Assets 

 
Assets  
Current assets: 

 
Current assets:  
Cash and cash equivalents$33,922

$58,448
Cash and cash equivalents$41,816  $36,497  
Short-term investments30,000
 20,000
Short-term investments10,000  30,000  
Accounts receivable, net of allowance for doubtful accounts of $300 and $337 at March 31, 2019 and September 30, 2018, respectively6,175

4,870
Accounts receivable, net of allowance for doubtful accounts of $291 and $291Accounts receivable, net of allowance for doubtful accounts of $291 and $2915,972  6,704  
Inventory, net13,050

10,122
Inventory, net8,491  5,843  
Prepaid taxes and tax refund receivable1,774

1,727
Prepaid taxes and tax refund receivable3,399  2,531  
Prepaid expenses and other current assets8,574

7,816
Prepaid expenses and other current assets6,168  8,350  
Total current assets93,495

102,983
Total current assets75,846  89,925  
Property and equipment, net of accumulated depreciation of $12,447 and $11,078 at March 31, 2019 and September 30, 2018, respectively17,876

16,610
Property and equipment, net of accumulated depreciation of $12,682 and $10,566Property and equipment, net of accumulated depreciation of $12,682 and $10,56618,940  18,846  
Operating lease assetsOperating lease assets10,437  —  
Intangible assets, net6,708

7,366
Intangible assets, net5,417  6,043  
Goodwill59,690

59,819
Goodwill59,530  59,467  
Deferred tax assets889

930
Deferred tax assets836  866  
Other assets14,451

14,124
Other assets11,066  12,136  
Total assets$193,109

$201,832
Total assets$182,072  $187,283  
Liabilities and stockholders’ equity 

 
Liabilities and stockholders’ equity  
Current liabilities: 

 
Current liabilities:  
Accounts payable$11,126

$13,859
Accounts payable$19,166  $15,051  
Accrued expenses and other current liabilities22,839

21,373
Accrued expenses and other current liabilities17,214  28,794  
Current portion of operating lease liabilitiesCurrent portion of operating lease liabilities4,635  —  
Distributions payable1,607

2,128
Distributions payable—  1,675  
Deferred revenue3,098
 2,142
Deferred revenue2,960  3,049  
Payables to sellers25,131

28,969
Payables to sellers21,366  20,253  
Total current liabilities63,801

68,471
Total current liabilities65,341  68,822  
Operating lease liabilitiesOperating lease liabilities6,539  —  
Deferred taxes and other long-term liabilities4,843

3,707
Deferred taxes and other long-term liabilities2,080  2,286  
Total liabilities68,644

72,178
Total liabilities73,960  71,108  
Commitments and contingencies (Note 12)0

0
Commitments and contingencies (Note 11)Commitments and contingencies (Note 11)00
Stockholders’ equity: 

 
Stockholders’ equity:  
Common stock, $0.001 par value; 120,000,000 shares authorized; 33,347,657 shares issued and outstanding at March 31, 2019; 32,774,118 shares issued and outstanding at September 30, 201833

33
Common stock, $0.001 par value; 120,000,000 shares authorized; 33,988,798 shares issued and outstanding at March 31, 2020; 33,687,115 shares issued and outstanding at September 30, 2019Common stock, $0.001 par value; 120,000,000 shares authorized; 33,988,798 shares issued and outstanding at March 31, 2020; 33,687,115 shares issued and outstanding at September 30, 201934  34  
Additional paid-in capital239,806

236,115
Additional paid-in capital244,527  242,686  
Accumulated other comprehensive loss(6,678)
(6,449)Accumulated other comprehensive loss(8,443) (7,973) 
Accumulated deficit(108,696)
(100,045)Accumulated deficit(128,006) (118,572) 
Total stockholders’ equity124,465

129,654
Total stockholders’ equity108,112  116,175  
Total liabilities and stockholders’ equity$193,109

$201,832
Total liabilities and stockholders’ equity$182,072  $187,283  
 
See accompanying notes to the unaudited consolidated financial statements.



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





 Three Months Ended March 31, Six Months Ended March 31,
 2019
2018 2019 2018
 (Unaudited)
Revenue$37,355

$43,104
 $73,090
 $83,384
Fee revenue19,445

16,993
 37,763
 37,856
Total revenue56,800

60,097
 110,853
 121,240
Costs and expenses from operations: 

 
  
  
Cost of goods sold (exclusive of depreciation and amortization)24,807

28,727
 49,763
 56,358
Seller distributions2,775

3,859
 5,399
 7,171
Technology and operations13,429

15,955
 25,953
 34,055
Sales and marketing9,135

8,225
 18,116
 16,535
General and administrative8,624

7,546
 17,258
 15,210
Depreciation and amortization1,165

1,144
 2,369
 2,355
Other operating expenses1,350

311
 1,555
 1,770
Total costs and expenses61,285

65,767
 120,413
 133,454
Loss from operations(4,485)
(5,670) (9,560) (12,214)
Interest and other income, net(451)
(394) (770) (911)
Loss before provision (benefit) for income taxes(4,034)
(5,276) (8,790) (11,303)
Provision (benefit) for income taxes328

379
 594
 (4,436)
Net loss$(4,362)
$(5,655) $(9,384) $(6,867)
Basic and diluted loss per common share$(0.13)
$(0.18) $(0.29) $(0.22)
Basic and diluted weighted average shares outstanding32,987,608

31,972,752
 32,896,890
 31,924,149

 Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
(Unaudited)
Revenue$35,203  $37,355  $65,552  $73,090  
Fee revenue17,621  19,445  36,776  37,763  
Total revenue52,824  56,800  102,328  110,853  
Costs and expenses from operations:   
Cost of goods sold (excludes depreciation and amortization)26,619  24,807  50,795  49,763  
Seller distributions—  2,775  —  5,399  
Technology and operations11,586  13,429  22,827  25,953  
Sales and marketing10,109  9,135  19,714  18,116  
General and administrative7,397  8,624  15,104  17,258  
Depreciation and amortization1,577  1,165  3,149  2,369  
Other operating (income) expenses(12) 1,350  181  1,555  
Total costs and expenses57,276  61,285  111,770  120,413  
Loss from operations(4,452) (4,485) (9,442) (9,560) 
Interest and other income, net(257) (451) (509) (770) 
Loss before provision for income taxes(4,195) (4,034) (8,933) (8,790) 
Provision for income taxes43  328  501  594  
Net loss$(4,238) $(4,362) $(9,434) $(9,384) 
Basic and diluted loss per common share$(0.13) $(0.13) $(0.28) $(0.29) 
Basic and diluted weighted average shares outstanding33,624,889  32,987,608  33,584,844  32,896,890  
 
See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents
Liquidity Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(Dollars in Thousands)





 Three Months Ended March 31, Six Months Ended March 31,
 2019 2018 2019 2018
 (Unaudited)
Net loss$(4,362) $(5,655) $(9,384) $(6,867)
Other comprehensive income (loss): 
  
    
Foreign currency translation198
 35
 (229) (16)
Other comprehensive income (loss)198
 35
 (229) (16)
Comprehensive loss$(4,164) $(5,620) $(9,613) $(6,883)

 Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
(Unaudited)
Net loss$(4,238) $(4,362) $(9,434) $(9,384) 
Other comprehensive income (loss):    
Foreign currency translation(1,303) 198  (470) (229) 
Other comprehensive income (loss)(1,303) 198  (470) (229) 
Comprehensive loss$(5,541) $(4,164) $(9,904) $(9,613) 
 
See accompanying notes to the unaudited consolidated financial statements.




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












 Common Stock
 SharesAmountAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Loss		Accumulated
Deficit		Total
(Unaudited)
Balance at September 30, 201933,687,115  $34  $242,686  $(7,973) $(118,572) $116,175  
Net loss—  —  —  —  (5,196) (5,196) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units            283,164  —  2  —  —  2  
Taxes paid associated with net settlement of stock compensation awards(67,688) —  (498) —  —  (498) 
Forfeitures of restricted stock awards(15,000) —  —  —  —  —  
Stock compensation expense—  —  1,121  —  —  1,121  
Foreign currency translation—  —  —  833  —  833  
Balance at December 31, 201933,887,591  34  243,311  (7,140) (123,768) 112,437  
Net loss—  —  —  —  (4,238) (4,238) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units111,272  —  32  —  —  32  
Taxes paid associated with net settlement of stock compensation awards(10,065) —  (60) —  —  (60) 
Stock compensation expense—  —  1,244  —  —  1,244  
Foreign currency translation(1,303) (1,303) 
Balance at March 31, 202033,988,798  $34  $244,527  $(8,443) $(128,006) $108,112  
 Common Stock        
 Shares Amount 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 Total
 (Unaudited)
Balance at September 30, 201832,774,118
 $33
 $236,115
 $(6,449) $(100,045) $129,654
Cumulative adjustment related to adoption of ASC 606—
 —
 —
 —
 730
 730
Net loss—
 —
 —
 —
 (5,022) (5,022)
Exercise of common stock options and vesting of restricted stock            409,060
 —
 8
 —
 —
 8
Compensation expense from grants of common stock options and restricted stock—
 —
 1,556
 —
 —
 1,556
Foreign currency translation—
 —
 —
 (427) —
 (427)
Balance at December 31, 201833,183,178
 $33
 $237,679
 $(6,876) $(104,337) $126,499
Net loss—
 —
 —
 —
 (4,362) (4,362)
Exercise of common stock options, grants of restricted stock awards, and vesting of restricted stock units           197,642
 —
 116
 —
 —
 116
Compensation expense from grants of common stock options and restricted stock—
 —
 2,011
 —
 —
 2,011
Forfeiture of restricted stock awards(33,163) —
 —
 —
 —
 —
Foreign currency translation and other—
 —
 —
 198
 3
 201
Balance at March 31, 201933,347,657
 $33
 $239,806
 $(6,678) $(108,696) $124,465




See accompanying notes to the unaudited consolidated financial statements.

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Liquidity Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)




Six Months Ended March 31, Six Months Ended March 31,
2019
2018 20202019
(Unaudited)
(Unaudited)

Operating activities 

 
Operating activities  
Net loss$(9,384)
$(6,867)Net loss$(9,434) $(9,384) 
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: 

 
Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization2,369

2,355
Depreciation and amortization3,149  2,369  
Stock compensation expense4,094

2,698
Stock compensation expense2,270  4,094  
Provision for inventory allowance—

1,841
Provision for doubtful accounts126

181
Provision for doubtful accounts66  126  
Deferred tax provision (benefit)81

(4,915)
Deferred tax provisionDeferred tax provision362  81  
Gain on disposal of property and equipment(6) (481)Gain on disposal of property and equipment(25) (6) 
Change in fair value of financial instruments—

90
Change in fair value of earnout liability1,400
 —
Change in fair value of earnout liability200  1,400  
Changes in operating assets and liabilities: 

 
Changes in operating assets and liabilities:  
Accounts receivable(1,425)
5,272
Accounts receivable666  (1,425) 
Inventory(2,937)
8,796
Inventory(2,648) (2,937) 
Prepaid and deferred taxes(46)
(26)Prepaid and deferred taxes(869) (46) 
Prepaid expenses and other assets(352)
3,608
Prepaid expenses and other assets2,337  (352) 
Operating lease assets and liabilitiesOperating lease assets and liabilities(174) —  
Accounts payable(2,733)
5,875
Accounts payable4,116  (2,733) 
Accrued expenses and other current liabilities772

(11,171)Accrued expenses and other current liabilities(10,060) 772  
Distributions payable(521)
(506)Distributions payable(1,675) (521) 
Deferred revenue955
 —
Deferred revenue(88) 955  
Payables to sellers(3,838)
144
Payables to sellers1,113  (3,838) 
Other liabilities(143)
(372)Other liabilities(1,443) (143) 
Net cash (used in) provided by operating activities(11,588)
6,522
Net cash used in operating activitiesNet cash used in operating activities(12,137) (11,588) 
Investing activities 

 
Investing activities  
Increase in intangibles(14)
(19)Increase in intangibles(48) (14) 
Purchases of property and equipment, including capitalized software(2,989)
(1,580)Purchases of property and equipment, including capitalized software(2,834) (2,989) 
Proceeds from sales of property and equipment24
 662
Proceeds from sales of property and equipment36  24  
Proceeds from promissory noteProceeds from promissory note2,554  —  
Purchases of short-term investments(30,000) —
Purchases of short-term investments(25,000) (30,000) 
Maturities of short-term investments20,000
 —
Maturities of short-term investments45,000  20,000  
Net cash used in investing activities(12,979)
(937)
Net cash (used in) provided by investing activitiesNet cash (used in) provided by investing activities19,708  (12,979) 
Financing activities 

 
Financing activities  
Proceeds from exercise of common stock options (net of tax)124

12
Net cash provided by financing activities124

12
Payments of the principal portion of finance lease liabilitiesPayments of the principal portion of finance lease liabilities(17) —  
Taxes paid associated with net settlement of stock compensation awardsTaxes paid associated with net settlement of stock compensation awards(558) —  
Proceeds from exercise of stock optionsProceeds from exercise of stock options34  124  
Payment of earnout liability related to business acquisitionPayment of earnout liability related to business acquisition(1,200) —  
Net cash (used in) provided by financing activitiesNet cash (used in) provided by financing activities(1,741) 124  
Effect of exchange rate differences on cash and cash equivalents(83)
(268)Effect of exchange rate differences on cash and cash equivalents(511) (83) 
Net (decrease) increase in cash and cash equivalents(24,526)
5,329
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents5,319  (24,526) 
Cash and cash equivalents at beginning of period58,448

94,348
Cash and cash equivalents at beginning of period36,497  58,448  
Cash and cash equivalents at end of period$33,922

$99,677
Cash and cash equivalents at end of period$41,816  $33,922  
Supplemental disclosure of cash flow information 

 
Supplemental disclosure of cash flow information  
Cash paid for income taxes, net$558

$505
Cash paid for income taxes, net$177  $558  


See accompanying notes to the unaudited consolidated financial statements.

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Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements



1.Organization

1.Organization

Liquidity Services, Inc. (the “Company”)Company) operates a network of ecommerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment.environment offering over 500 product categories. The Company’s marketplaces provide professional buyers access to a global, organized supply of new, surplus,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. The Company provides fully-managedCompany's services that include program management, valuation, asset management, reconciliation, returns process management, refurbishment and recycling, fulfillment, marketing and sales, warehousing and transportation, buyer support, compliance and risk mitigation, as well as self-directed service offerings.tools for its sellers. The Company organizes the products on its marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, energy equipment, industrial capital assets, fleet and transportation equipment and specialty equipment. TheCurrently, the Company’s marketplaces are: www.liquidation.com, www.direct.liquidation.com, www.govdeals.com, www.networkintl.com, www.secondipity.com, www.go-dove.com, and www.auctiondeals.com.www.go-dove.com. The Company also operates a global search engine for listing used machinery and equipment for sale at www.machinio.com. The Company has four4 reportable segments,segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), GovDeals and Machinio. See Note 1312 in the Notes to the Consolidated Financial Statements for Segment Information.

On July 10, 2018, the Company acquired 100% of Machinio Corp.("Machinio"), a privately-owned company based in Chicago, Illinois, with a second office in Berlin, Germany. Machinio operates a global online platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors. The consideration paid to the sellers was approximately $16.7 million in net cash, equity consideration of approximately $2.0 million, and contingent consideration payable in 2020 in an amount up to $5.0 million.


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


2.
Summary of Significant Accounting Policies

2.Summary of Significant Accounting Policies

Unaudited Interim Financial Information
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal, recurring adjustments considered necessary for a fair presentation, have been included. The information disclosed in the notes to the consolidated financial statements for these periods is unaudited. Operating results for the three and six months ended March 31, 20192020 are not necessarily indicative of the results that may be expected for the year ending September 30, 20192020 or for any future period. 


InUse of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the Consolidated Statements of Operations, revenue fromUnited States requires management to make estimates and assumptions that affect amounts in the resale of inventory thatconsolidated financial statements and accompanying notes. For the three months ended March 31, 2020, these estimates required the Company purchases from sellersto make assumptions about the extent and duration of the COVID-19 pandemic and its impacts on the Company's results of operations. As there is recognized within “Revenue”. Commission fees fromuncertainty associated with the sale of inventory thatCOVID-19 pandemic, the Company sells on a consignment basis and other non-consignment fee revenue, which is made up of subscription fee and service revenuewill continue to update its assumptions as conditions change. Actual results could differ significantly from the Surplus contract in the prior year, is recognized within “Fee Revenue”.those estimates.


Revenue RecognitionLeases


The Company adopted Accounting Standards Codification ("ASC") (ASC) Topic 606, Revenue from Contracts with Customers ("ASC 606") 842, Leases (ASC 842) effective October 1, 2018.2019. As a result of adopting ASC 606,842, there have been significant changes to the Company's revenue recognitionlease accounting policy from the policy disclosed in Note 2-Summary of Significant Accounting Policesdisclosures in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.2019. These changes are described below.



The Company determines if an arrangement is a lease upon inception. A contract is or contains a lease if the contract provides the right to control the use of an identified asset for a period of time.

Lease assets and liabilities are recognized at the lease commencement date at an amount equal to the present value of the lease payments to be made over the lease term. The lease payments represent the combination of lease and nonlease components. The discount rate used to determine the present value is the Company’s incremental borrowing rate for a duration that is
8
9
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





The Company recognizes revenue when orconsistent with the lease term, as performance obligations are satisfied and control is transferred to the customer. Revenue will be recognizedrates implicit in the amount that reflectsCompany’s leases are generally not determinable. The Company’s incremental borrowing rate is estimated using publicly-available information for companies with comparable financial profiles, adjusted for the considerationimpact of collateralization. The lease term includes the impacts of options to whichextend or terminate the Company expects to be entitled.

Revenue is also evaluated to determine whether the Company should report the gross proceeds as revenue (when the Company acts as the principal in the arrangement) or the Company should report its revenue on a net basis (when the Company acts as an agent). Specifically, when other parties are involved in providing goods or services to an entity’s customer, the Company must determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself, or to arrange for another party to provide them. The Company evaluates the following factors to determinelease only if it is acting asreasonably certain that the option will be exercised.

Lease expense related to operating lease assets and liabilities is recognized on a principal: (1) whetherstraight-line basis over the Companylease term. Lease expense related to finance lease assets is primarily responsible for fulfillingrecognized on a straight-line basis over the promise to provideshorter of the asset or assets; (2) whether the Company has inventory riskuseful life of the asset or the lease term, while lease expense related to finance lease liabilities is recognized using the interest method. Lease-related payments not included in the determination of the lease assets before theyand liabilities, such as variable lease payments, are transferredexpensed as incurred.

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

Balances related to the Buyer;Company's finance leases are included with Other assets (finance lease assets), Accrued expenses and (3) whetherother liabilities (current portion of finance lease liabilities), and Deferred taxes and other long-term liabilities (non-current portion of finance lease liabilities).

Lease assets are assessed for impairment in accordance with the Company has discretion in establishing the priceCompany’s accounting policy for the asset orimpairment of long-lived assets.

The Company enters into contracts with Buyers and Sellers. The Company has master agreements with some Sellers pertaining to the sale of a flow of surplus assets over the term of the master agreement, however; a contract for accounting purposes exists when the Company agrees to sell a specific asset or assets. When acting as a principal (a “principal” arrangement), the Company purchases an asset or assets from a Seller and the Company has a performance obligation to sell the asset or assets to a Buyer. For principal arrangements, the Company recognizes as revenue the gross proceeds from the sale, including buyer's premiums, within Revenue. Also, when acting as a principal, the contract with the Seller is not a contract in the scope of the revenue recognition guidance; rather, it is a purchase of inventory. When the Company is acting as an agent (a “consignment” arrangement), its performance obligation is to arrange for the Seller to sell an asset or assets to the Buyer directly. The Company recognizes revenue within Fee Revenue based on the sales commissions that are paid to the Company by the sellers for utilizing the Company's services; in this situation, sales commissions represent a percentage of the gross proceeds from the sale that the seller pays to the Company upon completion of the transaction.

In both principal and consignment contracts, the Company sometimes provides distinct services to the Seller, such as returns management or refurbishment of assets. These services are distinct because the Seller could benefit from the services separately from the asset sale, and as such they are treated as separate performance obligations. Some services provided to Sellers are not distinct, like providing access to the Company’s ecommerce marketplaces or promoting the asset or assets for sale, because they could not benefit the Seller separately from the sale of the asset or assets.

The consideration received from Buyers and Sellers includes (1) buyer’s premiums, (2) seller’s commissions, and (3) fees for services, including reimbursed expenses. Consideration is variable based on units, final auction prices, or other factors, until the Buyer’s purchase of the asset or assets is complete, or the service has been provided. Recognition of variable consideration that is based on the results of auctions or purchases by Buyers is constrained until those transactions have been finalized. The Company estimates and recognizes amounts related to sales returns, discounts or rebates promised to customers, and reimbursed expenses. The total transaction price is allocated to each distinct performance obligation and revenue is recognized when or as the performance obligation is satisfied. Variable consideration is allocated to individual performance obligations when the variable consideration is related to satisfying that performance obligation and consistent with the allocation objective. The Company's revenue is generally recorded subsequent to receipt of payment authorization, utilizing credit cards, wire transfers and PayPal, an Internet based payment system, as methods of payments. Goods are generally not shipped before payment is received. For certain transactions, payment is due upon invoice and the payment terms vary depending on the business segment.

The Company collects and remits sales taxes on merchandise that it purchases and sells and has elected the practical expedient to report such amounts under the net method in its Consolidated Statements of Operations. The Company also provides shipping and handling services in some arrangements and has elected the practical expedient to treat those activities as a fulfillment cost. If the Company is acting as a principal for the combined obligation, amounts received from customers for shipping are recognized as revenue, and amounts paid for shipping are recognized as costs of goods sold. If the Company is acting as an agent for the combined obligation, shipping revenue and costs will be netted and recognized within costs of goods sold.

The Company’s performance obligations are satisfied when control of the asset is transferred to the Buyer or when the service is completed. The Company determines when control has transferred by evaluating the following five indicators: (1) whether the Company has a present right to payment for the asset or assets; (2) whether the Buyer has legal title to the asset; (3) whether the Buyer has physical possession of the asset or assets; (4) whether the Buyer has the significant risks and rewards of ownership; and (5) whether the Buyer has accepted the asset or assets.


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



For the Company's Machinio business segment, the performance obligation is satisfied over time as the Company provides the promotional placement services over the term of the subscription. At March 31, 2019, the Machinio business segment had a remaining performance obligation of $3.1 million that the Company expects the majority of this will be recognized as revenue over the next 12 months.

Cost of Goods Sold

Cost of goods sold includes the costs of purchasing and transporting property for auction, credit card transaction fees and shipping and handling costs. The Company purchases the majority of its inventory at a percentage of the vendor's last retail price under certain commercial contracts within its RSCG segment, and at specifically negotiated prices within its CAG segment. Title for the inventory passes to the Company at the time of purchase and the Company bears the risks and rewards of ownership. The Company does not have title to assets sold on behalf of its commercial or government sellers when it receives only sales commission revenue and, as such, recognizes no inventory or the corresponding cost of goods sold from inventory purchases associated with those sales.


Contract Assets and Liabilities


Contract assets reflect an estimate of expenses that will be reimbursed upon settlement with Seller.a seller. The contract asset balance was $0.7$0.3 million as of March 31, 2020 and $0.3 million as of October 1, 2018 and $0.7 million as of March 31,September 30, 2019 and is included in the line item "PrepaidPrepaid expenses and other current assets"assets on the consolidatedConsolidated Balance Sheets.

Contract liabilities reflect obligations to provide services for which the Company has already received consideration, and generally arise from up-front payments received in connection with Machinio's subscription services. The contract liability balance sheet.was $3.0 million as of March 31, 2020 and $3.0 million as of September 30, 2019, and is included in the line item Deferred revenue on the Consolidated Balance Sheets. Of the September 30, 2019 contract liability balance, $2.3 million was earned as Fee revenue during the six months ended March 31, 2020.

The $3.0 million contract liability balance as of March 31, 2020 also represents the Company's remaining performance obligations related to contracts with customers that are one year or greater in duration. The Company expects to recognize the substantial majority of that amount as Fee revenue over the next 12 months.

Contract Costs


Contract costs relate to sales commissions paid on consignmentsubscription contracts that are capitalized. Contract costs are amortized over the expected life of the customer contract. The contract cost balance was approximately $0.1 million as of October 1, 2018 and $0.3$0.5 million as of March 31, 2020 and $0.5 million as of September 30, 2019 and is included in the line item "PrepaidPrepaid expenses and other current assets"assets and "Other assets"Other assets on the consolidated balance sheet.Consolidated Balance Sheet. Amortization expense was immaterial during the three and six months ended March 31, 2020 and 2019.


Other Assets - Promissory Note


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

On October 10, 2019, the Company entered into a Forbearance Agreement and Amendment to Note, Security Agreement and Guaranty Agreement (the "Forbearance Agreement") with Tanager (now known as Jacobs Trading, LLC) and certain of its affiliates (collectively, "JTC"). In exchange for additional collateral, security, and a higher interest rate, the Company granted JTC a new repayment schedule that requires quarterly payments to be made from August 2020 to August 2023. Upon execution of the Forbearance Agreement, JTC repaid $2.5 million in principal, plus $0.4 million in accrued interest. JTC has the opportunity to prepay the full amount remaining before May 15, 2020 at a $0.5 million discount. Of the $12.3 million $4.0owed to the Company, $6.6 million has been repaid as of March 31, 2019.2020.

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


The Company considered the terms of the Forbearance Agreement and the cash flows expected to be received from JTC under the new repayment schedule in concluding that it remains probable that the Company will collect the amounts due to the Company as of March 31, 2020 and that no impairment loss has been incurred. Of the remaining $8.3$5.7 million $6.3outstanding at March 31, 2020, $4.6 million is recorded on the consolidated balance sheet in Other assets, and $2.0$1.1 million is recorded in Prepaid expenses and other current assets, as of March 31, 2019 based on the scheduled repayment dates.


Risk Associated with Certain Concentrations

The Company does not perform credit evaluations for the majority of its buyers. However, most sales are recorded subsequent to payment authorization being received. As a result, the Company is not subject to significant collection risk, as most goods are not shipped before payment is received.


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


Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash in banks over FDIC limits, certificates of deposit, accounts receivable, and accounts receivable.the promissory note. The Company deposits its cash with financial institutions that the Company considers to be of high credit quality.


The Company's RSCG segment has vendor contracts with Amazon.com, Inc. under which the RSCG segment acquires and sells commercial merchandise. Transactions under these contracts represented 55.3% and 49.4% of consolidated Cost of goods sold for the three months ended March 31, 2020 and 2019, respectively, and 51.9% and 44.9% of consolidated Cost of goods sold for the six months ended March 31, 2020 and 2019, respectively.

During the three and six months ended March 31, 2019, the Company had one1 material vendor contract with the Department of Defense (DoD) under which itits CAG segment acquired, managed and sold government property,property: the Scrap Contract. Revenue from the saleContract, which concluded on September 30, 2019. Sales of property acquired under the Scrap Contract accounted for approximately 7.6% and 10.0%7.6% of the Company's consolidated revenuerevenues for the three months ended March 31, 2019 and 2018, respectively, and for approximately 7.6% and 9.2% of the Company's consolidated revenue for the six months ended March 31, 2019, and 2018, respectively. This contract is included

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



within the Company's CAG segment. See Note 3, Significant Contracts, for information related to the Company's prior significant Surplus contact with the DoD, which was completed in fiscal 2018.

Additionally, the Company has a vendor contract with Amazon.com, Inc. under which the Company acquires and sells commercial merchandise. Transactions under this contract represented approximately 49.4% and 28.7% of cost of goods sold for the three months ended March 31, 2019 and 2018, respectively, and 44.9% and 24.1% of cost of goods sold for the six months ended March 31, 2019 and 2018, respectively. This contract is included within the Company's RSCG segment.


Earnings per Share
The Company calculates net income (loss) per share in accordance with Financial Accounting Standards Board ("FASB") 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 units. Diluted net income (loss) per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options and unvested restricted stock units. The dilutive effect of unexercised stock options and unvested restricted stock units was determined using the treasury stock method. Under the treasury stock method, the proceeds received from the exercise of stock options, and the amount of compensation cost for future service not yet recognized by the Company are assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock units are not included in the computation of diluted net income (loss) per share when they are antidilutive.
 
For the three and six months ended March 31, 20192020 and 2018, the2019, basic and diluted weighted average common shares were the same because the Company operated at a net loss in both periods, causing any inclusion of potentially dilutive securities in the computation of diluted net income would have been(loss) per share to be anti-dilutive. See Note 7 for the amounts of outstanding stock options, restricted stock awards and restricted stock units that could potentially dilute net income (loss) per share in the future.


Recent Accounting Pronouncements
 
Accounting Standards Adopted


On October 1, 2018,2019, the Company adopted ASC 606842 using the modified retrospective transition method. Prior periods have not been restated. To perform the adoption, the Company elected several practical expedients, including the package of practical expedients to not reassess prior conclusions on whether a contract is or contains a lease, lease classification, and initial direct costs. The Company appliedalso elected to combine both the new revenue standardlease and non-lease components as a single component to all contracts that werebe accounted for as a lease, to not completed asrecognize lease assets or liabilities for leases with initial lease terms of October 1, 2018 on a modified retrospective basis12 months or less, and to not use hindsight when determining the lease term.

Upon adoption, the Company recognized the cumulative effect$11.3 million of initially applying the new revenue standard as anoperating lease assets and $12.2 million of operating lease liabilities. The Company does not have significant finance lease assets and liabilities. No cumulative-effect adjustment to opening retained earnings was required. No material impacts were noted on the opening balanceConsolidated Statements of retained earnings. The comparative period information has not been restated and continuesOperations or Consolidated Statements of Cash Flows. Refer to be reported under the accounting standards in effectNote 3 for those periods.

The cumulative effect of the changes made to the consolidated October 1, 2018 balance sheet for the adoption of ASC 606 was as follows (in thousands):
  Balance at September 30, 2018 Adjustment due to adoption of ASC 606 Balance as adjusted at October 1, 2018
Prepaid expenses and other current assets $7,816
 $671
 $8,487
Other assets $14,124
 $59
 $14,183
Retained earnings $(100,045) $730
 $(99,315)

The impact of adopting ASC 606additional details on the Company’s consolidated statementleases.

On October 1, 2019, the Company adopted ASU 2018-02, Reclassification of operationsCertain Tax Effects from Accumulated Other Comprehensive Income. As the Company had no stranded tax effects resulting from the Tax Cuts and the consolidated balance sheet for the period ended March 31, 2019Jobs Act enacted on December 22, 2017, no election to reclassify stranded tax effects from Accumulated other comprehensive to Retained earnings was as follows (in thousands):made.



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





  Three months ended March 31, 2019 Six months ended March 31, 2019
  As reported Balance without adoption of ASC 606 
Effect of change Higher/(lower)
 As reported Balance without adoption of ASC 606 
Effect of change Higher/(lower)
Consolidated statement of operations:            
Fee revenue $19,445
 $19,293
 $152
 $37,763
 $37,757
 $6
Consolidated balance sheet:            
Prepaid expenses and other current assets $8,574
 $7,819
 $755
 $8,574
 $7,819
 $755
Other assets $14,451
 $14,248
 $203
 $14,451
 $14,248
 $203
Accumulated deficit $(108,696) $(107,738) $(958) $(108,696) $(107,738) $(958)


In May 2017,The Company also adopted the FASB issuedfollowing ASU 2017-09, Scope of Modification2018-07, Improvements to Nonemployee Share-based Payment Accounting,. ASU 2017-09 provides guidance about which changes to terms or conditions of share-based payment awards require the application of modification accounting in Topic 718, Compensation - Stock Compensation. The ASU was adopted on October 1, 2018 and the Company will apply the guidance in ASU 2017-09 on a prospective basis to its award modifications. No material impacts have been noted to date.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the cost of the benefits in the income statement. Under this standard, employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. The adoption of ASU 2017-07 on October 1, 2018, using the retrospective method, did not have a material impact on the Company's results of operations. As a result of adopting this standard $90 thousand and $182 thousand for three and six months ended March 31, 2018, respectively, were reclassified in the consolidated statement of operations from "General and administrative", a component of loss from operations, to "Interest and other income, net", which is included below loss from operations.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU was adopted on October 1, 2018 and the Company will apply the guidance in ASU 2017-01 on a prospective basis when entering into acquisitions of assets or businesses. No material impacts have been noted to date.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The new standard requires companies to recognize the income tax effects of intercompany sales or transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period the sale or transfer occurs. The exception to recognizing the income tax effects of intercompany sales or transfers of assets remains in place for intercompany inventory sales and transfers. The adoption of ASU 2016-16 on October 1, 20182020. It did not have ana significant impact on the Company’s consolidated statement of operations.financial statements or the related footnote disclosures.

During 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18, Restricted Cash. These ASUs clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows and requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. These standards were adopted on October 1, 2018 on a retrospective basis and there was no impact on the Company's consolidated statement of cash flows.


Accounting Standards Not Yet Adopted


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

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement with the requirement for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU will become effective for the Company beginning October 1, 2020. The Company is currently evaluating the effect that the adoption of this ASU mightmay have on its consolidated financial statements.



In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 seeks to improve the consistent application of and simplify the guidance for the accounting for income taxes. The ASU removes certain exceptions to the general principals in ASC 740, Income Taxes, and clarifies and amends other existing guidance. The ASU will become effective for the Company beginning October 1, 2021. The Company is currently evaluating the effect that the adoption of this ASU may have on its consolidated financial statements.
12
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)






In August 2018,3. Leases

The Company has operating leases for its corporate offices, warehouses, vehicles and equipment. The operating leases have remaining terms of up to 5.4 years. Some of the FASB issued ASU 2018-14, Disclosure Framework - Changesleases have options to extend or terminate the leases. The exercise of such options is generally at the Company’s discretion. The lease agreements do not contain any significant residual value guarantees or restrictive covenants. The Company also subleases excess corporate office space. The Company's finance leases and related balances are not significant.

The components of lease expense are:
(in thousands)Three months ended March 31, 2020Six months ended March 31, 2020
Finance lease – lease asset amortization$16  $37  
Finance lease – interest on lease liabilities5  12  
Operating lease cost1,344  2,680  
Short-term lease cost23  44  
Variable lease cost (1)
420  751  
Sublease income(20) (139) 
Total net lease cost$1,788  $3,385  
(1)Variable lease costs primarily relate to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 amends the existing accounting standard for defined benefit plans by removing, modifying, and adding certain disclosures. This ASU will become effective for the Company beginning October 1, 2021 with early adoption permitted. The Company is currently evaluating the timing of adoption the new guidance as well as the impact it may have on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements. ASU 2018-13 amends the existing accounting standard for fair value measurement by removing, modifying, and adding certain disclosures. This ASU will become effective for the Company beginning October 1, 2020 with early adoption permitted. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on the consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-based Payment Accounting. ASU 2018-07 amends the existing accounting standards for share-based payments to nonemployees. ASU 2018-07 applies to all share based payment transactions in which a grantor acquires goods or services to be used or consumed in its own operation by issuing share-based payment awards. Additionally, this guidance clarifies that Topic 718 does not apply to share based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted under ASC 606. ASU 2018-07 will become effective for the Company beginning October 1, 2019. The Company is currently evaluating the effect the adoption of the standard is expected to have on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows entities to elect to classify from accumulated other comprehensive income (loss) to retained earnings stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22, 2017. An entity that does not elect to reclassify the income tax effects of the Tax Act shall disclose in the period of adoption a statement that the election was not made. This guidance will become effective for the Company beginning on October 1, 2019. The Company is currently evaluating whether it will make anCompany's election to reclassifycombine non-lease components such as common area maintenance, insurance and taxes related to its real estate leases. To a lesser extent, the income tax effectsCompany's equipment leases have variable costs associated with usage and subsequent changes to costs based upon an index.

Maturities of the Tax Act from accumulated other comprehensive income to retained earnings.lease liabilities are:


In January 2017, the FASB issued ASU 2017-04, Simplifying the Test
March 31, 2020
(in thousands)Operating LeasesFinance Leases
Remainder of 2020$2,736  $28  
20213,932  56  
20222,594  55  
20231,864  56  
2024919  56  
Thereafter348  105  
Total lease payments (1)
$12,393  $356  
Less: imputed interest (2)
(1,219) (72) 
Total lease liabilities$11,174  $284  

(1)The weighted average remaining lease term is 3.1 years for Goodwill Impairment. Under ASU 2017-04 the entityoperating leases and 6.3 years for finance leases.
(2)The weighted average discount rate is required to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity is required to recognize an impairment charge6.4% for the amount by which the carrying amount of a reporting unit exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity is required to consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance will become effectiveoperating leases and 7.5% for the Company beginning on October 1, 2020. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect the adoption of the standard is expected to have on its consolidated financial statements and related disclosures.finance leases.


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), or ASC 842. ASC 842, including all the amendments and guidance, will change the way the Company recognizes its leased assets. It 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. ASC 842 will also requireSupplemental disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance will be effectiveflow information related to leases are:

(in thousands)Six Months Ended
March 31, 2020
Cash paid for amounts included in operating lease liabilities$2,506 
Cash paid for amounts included in finance lease liabilities17 
Non-cash: lease liabilities arising from new operating lease assets obtained (1)
12,188 
Non-cash: lease liabilities arising from new finance lease assets obtained10 
Non-cash: adjustments to lease assets and liabilities1,675 
(1)Amount includes $12.2 million of lease liabilities recognized upon the Company beginning on October 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into, after either the adoption date or the beginning of the earliest comparative period presented in the financial statements. The Company is in the process of aggregating its worldwide lease portfolio and is evaluating the potential to use software solutions in its adoption of ASC 842 and for its subsequent lease accounting requirements. Once completed, the Company will elect a transition method for adoption and conclude on whether to make use of the available practical expedients. The adoption of ASC 842 will result in the recognition of right-of-use assets and lease liabilities on its Consolidated Balance Sheets, and will require that the Company make quantitative and qualitative disclosures about its leases. Additional impacts, which may be material, may be identified as the Company completes its adoption process.October 1, 2019 (see Note 2).


13
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





3.
Significant Contracts
Historically, the Company had two material vendor contracts with the DoD, the Scrap Contract and the Surplus Contract.
Under the Scrap Contract, the Company is the remarketer of all DoD non-electronic scrap turned into the Defense Logistics Agency (DLA) available for sale within the United States, Puerto Rico, and Guam.
The current Scrap Contract was awarded to the Company in April 2016. The Scrap Contract has a 36-month base term that commenced in the first quarter of fiscal year 2017, with two 12-month extension options exercisable by the DLA. The base term of the Scrap Contract will expire on September 30, 2019. The Company pays 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 bears all of the costs for the sorting, merchandising and sale of the property. The contract contains a provision permitting the DLA to terminate the contract for convenience upon written notice to the Company.

Revenue from the Scrap Contract accounted for approximately 7.6% and 10.0% of the Company's consolidated revenue for the three months ended March 31, 2019 and 2018, respectively, and 7.6% and 9.2% of the Company's consolidated revenue for the six months ended March 31, 2019 and 2018, respectively.

The Surplus Contract was a competitive-bid contract under which the Company acquired, managed and sold usable DoD surplus personal property turned into the DLA. Surplus property generally consisted of items determined by the DoD to be no longer needed, and not claimed for reuse by any federal agency, such as electronics, industrial equipment, office supplies, scientific and medical equipment, aircraft parts, clothing and textiles. The Surplus Contract required the Company to purchase all usable surplus property offered to the Company by the DoD at 4.35% of the DoD's original acquisition value.

On October 11, 2017, the DLA published a Request for Technical Proposal (“RFTP”) and draft Invitation for Bid (IFB) for the sale of surplus, useable non-rolling stock property. The RFTP and IFB related to the DLA’s award of two new term surplus contracts. On December 5, 2017, the DLA determined that the Company was not the high bidder for either of the two contracts. The Company made its final inventory purchase under the Surplus Contract during December 2017, and as of June 30, 2018, had completed its wind-down of operations under the Surplus Contract.

Revenue from the Surplus Contract accounted for approximately zero and 19.3% of the Company's consolidated revenue for the three months ended March 31, 2019 and 2018, respectively, and zero and 22.9% of the Company's consolidated revenue for the six months ended March 31, 2019 and 2018, respectively.

4. Goodwill
 
The goodwill of acquired companies is primarily related to the acquisition of an experienced and knowledgeable workforce. The following table presents changes in the carrying amount of goodwill by reportable segment:
Goodwill (in thousands) CAG GovDeals Machinio Total
Balance at September 30, 2017 $21,657
 $23,731
 $—
 $45,388
Business acquisition —
 —
 14,558
 14,558
Translation adjustments (127) —
 —
 (127)
Balance at September 30, 2018 $21,530
 $23,731
 $14,558
 $59,819
Translation adjustments (129) —
 —
 (129)
Balance at March 31, 2019 $21,401
 $23,731
 $14,558
 $59,690
(in thousands)CAGGovDealsMachinioTotal
Balance at September 30, 2018$21,530  $23,731  $14,558  $59,819  
Translation adjustments(352) —  —  (352) 
Balance at September 30, 2019$21,178  $23,731  $14,558  $59,467  
Translation adjustments63  —  —  63  
Balance at March 31, 2020$21,241  $23,731  $14,558  $59,530  


Goodwill is tested for impairment at the beginning of the fourth quarter and during interim periods whenever events or circumstances indicate that the carrying value may not be recoverable. The Company did not identify any indicators of impairment that required performing a step one evaluation during

During the sixthree months ended March 31, 2019.2020, the Company identified factors associated with the COVID-19 pandemic that indicated that an interim goodwill impairment test was necessary. These factors included a deterioration of macroeconomic conditions, near-term declines in the Company's results of operations as a result of "shelter-in-place" orders and other related measures, and a decline in the Company's market capitalization.


For the interim goodwill impairment test, the Company performed a fair-value based test for all reporting units with goodwill balances. The fair value of each reporting unit was determined using a discounted cash flow (DCF) analysis. The DCF analysis relied on significant assumptions and judgments about the forecasted future cash flows over the five-year projection period, including revenues, gross profit margins, operating expenses, income taxes, capital expenditures, working capital, and an estimate of the impact and duration of COVID-19 on those factors. These forecasts of future cash flows represent the Company's best estimate using information that is currently available. However, given the uncertainty associated with the COVID-19 pandemic, including its extent and duration, actual results could differ significantly from those estimates. The DCF analysis also used included significant assumptions and judgments about long-term growth rates and discount rates.

The fair value of the GovDeals reporting unit is substantially in excess of its carrying value. The fair value of the CAG and Machinio reporting units exceeded their carrying values by 21% and 12%, respectively. NaN impairment charge was recorded as a result of the interim goodwill impairment test.

5. Intangible Assets
 

The components of intangible assets are as follows:  
  March 31, 2020September 30, 2019
(dollars in thousands)Useful
Life
(in years)		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Contract intangibles6$3,100  $(904) $2,196  $3,100  $(646) $2,454  
Technology52,700  (945) 1,755  2,700  (675) 2,025  
Patent and trademarks7 - 102,321  (855) 1,466  2,276  (712) 1,564  
Total intangible assets $8,121  $(2,704) $5,417  $8,076  $(2,033) $6,043  
14
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





The components of identifiableremaining intangible assets as ofbalance at March 31, 2019 and September 30, 2018 are2020 is expected to be amortized as follows: 

   March 31, 2019 September 30, 2018
 
Useful
Life
(in years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 (dollars in thousands)
Contract intangibles6 $3,100
 $(388) $2,712
 $3,100
 $(129) $2,971
Technology5 2,700
 (405) 2,295
 2,700
 (135) 2,565
Patent and trademarks3 - 10 2,341
 (640) 1,701
 2,269
 (439) 1,830
Total intangible assets  $8,141
 $(1,433) $6,708
 $8,069
 $(703) $7,366
Future expected amortization of intangible assets at March 31, 2019 is as follows: 
 
Future
Amortization
(in thousands)(in thousands)Expected Amortization Expense
Years ending September 30, (in thousands)Years ending September 30,
2019 Remaining six months $672
2020 1,343
Remainder of 2020Remainder of 2020$670  
2021 1,332
20211,335  
2022 1,320
20221,327  
2023 1,176
20231,183  
2024 and thereafter 865
20242024645  
2025 and thereafter2025 and thereafter257  
Total $6,708
Total$5,417  
 
Intangible assetsasset amortization expense was approximately $0.34$0.3 million and $0.02$0.3 million for the three months ended March 31, 2020 and 2019, respectively and 2018, and $0.67$0.7 million and $0.04$0.7 million for the six months ended March 31, 2020 and 2019, and 2018, respectively.


6.Income Taxes

On December 22, 2017,The factors associated with the Tax ActCOVID-19 pandemic discussed in Note 4 also indicated that an interim long-lived asset impairment test was signed into law. The Tax Act reduces the corporate tax rate from 35% to 21%. During the three months ending December 31, 2017, the Company revised its estimated annual effective tax rate to reflect this change in the statutory rate. The rate change was administratively effective at the beginning of the Company's 2018 fiscal year, using a blended rate of 24.5%. At September 30, 2018, the Company had not yet completed its accounting for the tax effects of the Tax Act; however, the Company recorded a provisional benefit of $10.7 million in 2018 for the remeasurement of its deferred tax balance and recognition of the realizability of the deferred tax assets. Duringnecessary during the three months ended DecemberMarch 31, 2018,2020. For each asset group, the Company completedperformed an undiscounted cash flow analysis that relies on significant assumptions and judgments surrounding the forecasts of future cash flows over each asset group's projection period. These forecasts of future cash flows represent the Company's best estimate using information that is currently available. However, given the significant uncertainty associated with the COVID-19 pandemic, including its accounting forextent and duration, actual results could differ significantly from those estimates.

For each asset group, the tax effectsundiscounted cash flows exceeded the asset group's carrying value. NaN impairment charge was recorded as a result of the Tax Act and determined no change to the amount recorded in fiscal year 2018 was required.interim long-lived asset impairment test.


The international provisions of the Tax Act establish a territorial tax system and subject certain foreign earnings on which U.S. tax is currently deferred to a one-time transition tax. During the three months ended December 31, 2018, the Company completed its analysis of foreign earnings and profits and determined that no one-time transition tax was due. As a result, the Company has not recorded any amount in its financial statements for fiscal year 2018 or the six months ended March 31, 2019 for such transition tax.
6. Income Taxes
The Tax Act subjects a U.S. shareholder to a minimum tax on “global intangible low-taxed income” (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. The Company has elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred.

The Company’s interim effective income tax rate is based on management’s best current estimate of the Company's expected annual effective income tax rate. The Company recorded a pre-tax loss in the first six months of fiscal year 20192020 and its corresponding effective tax rate is approximately -6.8%(5.6%). Tax expense in the current periodsix months ended March 31, 2020 is due to state and foreign taxes paid. The effective tax rate differed from the statutory federal rate of 21% primarily as a result of the valuation allowance charge on current year losses and the impact of foreign, state, and local income taxes and permanent tax adjustments.


15
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)




The Company applies the authoritative guidance related to uncertainty in income taxes. ASC Topic 740, Income Taxes, states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of technical merits. The Company records unrecognized tax benefits as a reduction to its deferred tax asset for its net operating loss carryforward. The Company identified no new uncertain tax positions during the six months ended March 31, 2019. The Company’s policy is to recognize interest and penalties in the period in which they occur in the income tax provision.2020. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the United Kingdom. As of March 31, 2019,2020, none of the Company's federal or state income tax returns are under examination.examination, however, we remain subject to examination for certain of our foreign income tax returns. The statute of limitations for U.S. federal income tax returns for years prior to fiscal 20152016 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal 20152016 may be adjusted upon examination by tax authorities if they are utilized.


On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. Based on our preliminary analysis of the CARES Act, we do not expect a significant impact to our consolidated financial statements.
7.Stockholders’ Equity

15
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)


7. Stockholders’ Equity

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


 Common Stock
(dollars in thousands)SharesAmountAdditional
Paid-in
Capital		Accumulated
Other
Comprehensive
Loss		Accumulated
Deficit		Total
Balance at September 30, 201832,774,118  $33  $236,115  $(6,449) $(100,045) $129,654  
Cumulative adjustment related to the adoption of ASC 606—  —  —  —  730  730  
Net loss—  —  —  —  (5,022) (5,022) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units          409,060  —  8  —  —  8  
Stock compensation expense—  —  1,556  —  —  1,556  
Foreign currency translation—  —  —  (427) —  (427) 
Balance at December 31, 201833,183,178  $33  $237,679  $(6,876) $(104,337) $126,499  
Net loss—  —  —  —  (4,362) (4,362) 
Exercise of stock options, grants of restricted stock awards, and vesting of restricted stock units197,642  —  116  —  —  116  
Stock compensation expense—  —  2,011  —  —  2,011  
Forfeitures of restricted stock awards(33,163) —  —  —  —  —  
Foreign currency translation—  —  —  198  3  201  
Balance at March 31, 201933,347,657  $33  $239,806  $(6,678) $(108,696) $124,465  
 Common Stock        
 Shares Amount 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 Total
Balance at September 30, 201731,503,349
 $29
 $227,264
 $(6,431) $(88,226) $132,636
Cumulative adjustment related to adoption of ASU 2016-09—
 —
 100
 —
 (207) (107)
Net loss—
 —
 —
 —
 (1,212) (1,212)
Exercise of common stock options and vesting of restricted stock            386,330
 —
 —
 —
 —
 —
Compensation expense and incremental tax benefit from grants of common stock options and restricted stock—
 —
 1,262
 —
 —
 1,262
Foreign currency translation—
 —
 —
 (51) (6) (57)
Balance at December 31, 201731,889,679
 $29
 $228,626
 $(6,482) $(89,651) $132,522
Net loss—
 —
 —
 —
 (5,655) (5,655)
Exercise of common stock options and vesting of restricted stock            103,398
 —
 12
 —
 —
 12
Compensation expense and incremental tax benefit from grants of common stock options and restricted stock—
 —
 1,212
 —
 —
 1,212
Foreign currency translation—
 —
 —
 34
 12
 46
Balance at March 31, 201831,993,077
 $29
 $229,850
 $(6,448) $(95,294) $128,137


Stock Compensation Incentive Plans


2006 Omnibus Long-Term Incentive Plan

UnderDuring the quarter ended March 31, 2020, the Company's shareholders approved an amendment and restatement to its Second Amended and Restated 2006 Omnibus Long-Term Incentive Plan as amended (the Third Amended and Restated 2006 Omnibus Long-Term Incentive Plan), 13,000,000 shares of common stock were available for issuance as of September 30, 2016. On February 23, 2017, at the Company's annual meeting of stockholders, the stockholders approved amendments to the 2006 Plan to increase the number of shares availableof common stock reserved for issuance underfrom 16,300,000 to 19,100,000.

Stock Compensation Expense

Stock-based compensation expense was $2.3 million for the 2006 Plan by 3,300,000,six months ended March 31, 2020, which included $2.4 million of expense related to a total of 16,300,000 shares. The 2006 Plan has a fungible share pool so that awards other than options or stock appreciation rights granted would be counted as 1.5 shares from the shares reserved for issuance.

 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 following table presents the number ofequity-classified stock options and shares of restrictedRSUs & RSAs (restricted stock grantedunits and awards) and a $0.1 million benefit related to employees under the Company's 2006 Plan and the grant date fair value of thoseliability-classified SARs (cash-settled stock awards for the periods presented:appreciation rights).



16
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





 Three Months Ended March 31, Six Months Ended March 31,
 2019 2018 2019 2018
Stock options:       
Time-based11,816
 20,826
 492,966
 233,346
Weighted average grant date fair value$4.82
 $4.26
 $2.69
 $2.00
        
Market-based and performance-based—
 —
 481,150
 318,780
Weighted average grant date fair value$—
 $—
 $2.66
 $1.59
        
Restricted stock:       
Time-based66,528
 220,181
 201,728
 251,221
Weighted average grant date fair value$8.50
 $6.95
 $6.75
 $6.65
        
Market-based and performance-based55,000
 199,780
 130,200
 246,340
Weighted average grant date fair value$7.40
 $7.33
 $5.66
 $6.53

Stock Options and RSUs & RSAs

The following table presents stock option and RSUs & RSAs grant activity:

Six Months Ended
March 31, 2020
Stock Options granted:
Options containing only service conditions:415,719 
Weighted average exercise price$6.82 
Weighted average grant date fair value$2.72 
Options containing performance or market conditions:402,800 
Weighted average exercise price$6.82 
Weighted average grant date fair value$2.62 
RSUs & RSAs granted:
RSUs & RSAs containing only service conditions:310,493 
Weighted average grant date fair value$5.92 
RSUs & RSAs containing performance or market conditions:173,600 
Weighted average grant date fair value$4.49 

The stock options and restricted stock generallyRSUs & RSAs containing only service conditions will vest over a four years. year service period. The fiscal year 2019 market-basedstock options and restricted stock unitsRSUs & RSAs containing performance conditions will vest in installments based onupon the total shareholder returnachievement of specified financial targets of the Company's commonCompany or its business units. The stock over a four-year performance period. The performance based restricted stock awardsoptions and RSUs & RSAs containing market conditions will vest in installments based onupon the achievement of certain annual revenue and adjusted EBITDA targets through calendar year 2021,specified increases in the Company’s share price. Vesting is measured the first day of each case, subject to each recipient's continued employmentfiscal quarter over the four-year terms of the awards, starting with the Company.first fiscal quarter after the first anniversary of the grant date, based upon the trailing 20-days average of the Company’s share price.


In determiningThe range of assumptions used to determine the fair value forof stock options volatility rates over the last three years have ranged from 49.71% to 54.93%, the dividend rate has been 0% and the risk free interest rates have ranged from 1.65% to 2.78%.

Cash-Settled Stock Appreciation Rights

The Company issues cash-settled stock appreciation rights to non-executives with restrictions that lapse upon either the passage of time (service vesting), achievement of performance targets (performance vesting), achievement of market conditions (market vesting) or some combination of these conditions. The stock appreciation rights that includecontaining only service vesting conditions generally vest over a period of one to four years conditioned on continued employment forusing the incentive period. For performance vesting, stock appreciation rights generally vest and pay out on the achievement of financial metrics over a four year period conditioned on continued employment for the incentive period. Cash-settled stock appreciation rights are recorded as liability awards.

The Company did not issue any cash-settled stock appreciation rightsBlack-Scholes option-pricing model during the three months ended March 31, 2019. During the six months ended March 31, 2019,2020 include a dividend yield of 0.0%, expected volatility rates of 46.5% to 51.0%, risk-free interest rates of 0.5% to 1.5%, and expected terms of 4.6 to 7.4 years.

The range of assumptions used to determine the Company issued 95,000 cash-settledfair value of stock appreciation rights at an exercise priceoptions and RSUs & RSAs containing market conditions using Monte Carlo simulations during the six months ended March 31, 2020 include a dividend yield of $6.11. 0.0%, expected volatility rates of 46.7% to 51.2%, risk-free interest rates of 1.5% to 1.7%, and expected holding period (% of remaining term for stock options only) of 30.7% to 100%.

SARs

During the three months ended March 31, 2019, 51,614 cash-settled stock appreciation rights2020, the Company did 0t issue any SARs, 225,267 SARs were exercised requiring the Company to make cash payments of $0.6 million, and 21,868 cash-settled stock appreciation rights29,815 SARs were canceled. DuringAs of March 31, 2020, 178,500 SARs were outstanding.

Share Repurchase Program

The Company did 0t repurchase shares during the six months ended March 31, 2019, 101,170 cash-settled stock appreciation rights were exercised and 388,048 cash-settled stock appreciation rights were canceled.2020 or 2019. As of March 31, 2019, 539,987 cash-settled stock appreciation rights were outstanding.

During the comparable period in fiscal year 2018,2020, the Company did not issue any cash-settled stock appreciation rights. During the three months ended March 31, 2018, 33,520 cash-settled stock appreciation rights were exercised and 177,947 cash-settled stock appreciation rights were canceled. During the six months ended March 31, 2018, 83,002 cash-settled stock appreciation rights were exercised and 272,904 cash-settled stock appreciation rights were canceled. Ashas $10.1 million of March 31, 2018, 1,097,727 cash-settled stock appreciation rights were outstanding.

Share Repurchase Program

The Company is authorizedremaining authorization to repurchase issued and outstanding shares ofunder its common stock under a share repurchase program approved by the 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 andprogram.


17
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





8. Fair Value Measurement
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 available cash. The Company's Board of Directors reviews the share repurchase program from time to time, the last such review having occurred in May 2016. The Company did not repurchase shares under this program during the six months ended March 31, 2019 or 2018. As of March 31, 2019, the Company may repurchase an additional $10.1 million in shares under this program.


8.Fair Value Measurement

The Company measures and records in the accompanying consolidated financial statements certain assets and liabilities at fair value on a recurring basis. Authoritative guidance issued by the FASB establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:
 
Level 1Quoted market prices in active markets for identical assets or liabilities;
Level 2Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3Unobservable 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; and
Level 3: Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.
 
During the year ended September 30, 2018, and as a result of the acquisition of Machinio, the Company recorded contingent consideration which iswas measured at fair value (Level 3) at March 31, 2019 and. At September 30, 2018. The2019, the Company estimated the fair value of the contingent consideration using a Monte Carlo simulation. The simulation estimated Machino'sMachinio's adjusted EBITDA over the earn outcalendar year 2019 earn-out period using a market-based volatility factor and market interest rates resulting in an average EBITDA, which then aEBITDA. A present value factor was applied based on the expected settlement date of the contingent consideration. The liability for this consideration is included in Deferred taxes and other long-term liabilities in the Consolidated Balance Sheets. During the six months endedAt March 31, 2018,2020, the Company had financial assets measured at fair value (Level 3) that representedcalendar year 2019 earn-out period was complete and the value of rights the Company held from its participationliability has been paid in certain principal transactions in the Company's commercial business. The Company no longer held these assets at September 30, 2018.full.

The Company has investments of $30 million and $20 million at March 31, 2019 and September 30, 2018, respectively, in certificates of deposit with maturities of six months or less, and interest rates between 2.2% and 2.8%. These assets were measured at fair value at March 31, 2019 and September 30, 2018 and were classified as Level 1 assets within the fair value hierarchy.


The changes in the earn-out liability and financial assets measured at fair value using Level 3 inputs to determine fair value for the six months ended March 31, 2019 and 2018, respectively,2020 are as follows (in thousands):follows:


(in thousands)Contingent Consideration
Balance at September 30, 2019$4,800 
Change in fair value
200 
Settlement(5,000)
Balance at March 31, 2020$— 
 Contingent Consideration
  
Balance at September 30, 2018$1,300
Settlements—
Change in fair value

1,400
Balance at March 31, 2019$2,700


The increase in the fair value of the earn-out liability is primarily due to an increase in Machinio's estimatedfull attainment of its actual adjusted EBITDA over the earn out period, which was the result of realized EBITDAtarget for the three months ended March 31,calendar year 2019 exceeding the previous estimate. Secondary factorsearn-out period. The expense for the increasechange in fair value relate to the present value factor, which was impacted by a shorter period until the earn out payment date, as well as a change in market conditions that reduced interest rates and the weighted average cost of capital.


18
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)



 Financial Instruments
  
Balance at September 30, 2017$491
Settlements(401)
Change in fair value

(90)
Balance at March 31, 2018$—

When valuing its Level 3 liability, management’s estimation of fair value is based on the best information available in the circumstances and may incorporate management's own assumptions around market demand which could involve a level of judgment, taking into consideration a combination of internal and external factors. Changes in the fair value of the Company's Level 3 asset and liability are recordedincluded in Other operating expenses in the Consolidated Statements of Operations. The earn-out liability was paid in full during the three months ended March 31, 2020.


The Company also has short-term investments of $10.0 million and $30.0 million at March 31, 2020 and September 30, 2019, respectively, in certificates of deposit with maturities of six months or less, and interest rates between 1.76% and 2.50%. These assets were measured at fair value at March 31, 2020 and September 30, 2019 and were classified as Level 1 assets within the fair value hierarchy.

The Company’s financial assets and liabilities not measured at fair value are cash and cash equivalents (which includes cash and commercial paper with original maturities of less than 90 days), accounts receivable, a promissory note and accounts payable. The Company believes the carrying values of these instruments approximate fair value.


At March 31, 20192020 and September 30, 2018,2019, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.


9.
Defined Benefit Pension Plan

9.Defined Benefit Pension Plan

Certain employees of Liquidity Services UK Limited (“GoIndustry”)(GoIndustry), which the Company acquired in July 2012, are covered by the Henry Butcher Pension Fund and Life Assurance Scheme (the “HB Pension Fund”)Scheme), a qualified defined benefit pension plan. The Company guarantees GoIndustry's performance on all present and future obligations to make payments to the Scheme for up to a maximum of £10 million British pounds. The Scheme was closed to new members on January 1, 2002.

The net periodic benefit recognized for the three and six months ended March 31, 2019 and 2018 included the following components:


18
 Three Months Ended March 31, Six Months Ended March 31,
Qualified Defined Benefit Pension Plan2019 2018 2019 2018
 (dollars in thousands)
Service cost$—
 $—
 $—
 $—
Interest cost154
 165
 311
 335
Expected return on plan assets(229) (251) (473) (509)
Settlement cost—
 (4) —
 (8)
Total net periodic (benefit)$(75) $(90) $(162) $(182)

As a result of the adoption of ASU 2017-07, the components of net periodic benefit other than the service cost component are recorded in Interest and other income, net in the Consolidated Statements of Operations.


10.    Guarantees

19
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





The net periodic benefit, other than service costs, is recognized within Interest other income, net in the Consolidated Statements of Operations, and for the three and six months ended March 31, 2020 and 2019 included the following components:
During the second quarter
 Three Months Ended March 31,Six Months Ended March 31,
(in thousands)2020201920202019
Service cost$—  $—  $—  $—  
Interest cost109  154  217  $311  
Expected return on plan assets(204) (229) (404) (473) 
Amortization of prior service cost5  —  10  —  
Total net periodic (benefit)$(90) $(75) $(177) $(162) 

10. Business Realignment Expenses
Business realignment expenses are associated with management changes, exiting certain businesses, or other cost saving actions and are recorded as a component of 2015, the Company issued a guarantee to GoIndustry (the "Subsidiary") and the Trustees (the “Trustees”) of the HB Pension Fund. Under the arrangement, the Company irrevocably and unconditionally (a) guarantees to the Trustees punctual performance by the Subsidiary of all its Guaranteed Obligations, defined as all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally in any capacity whatsoever) of the Company to make payments to the HB Pension Fund up to a maximum of 10 million British pounds, (b) undertakes with the Trustees that, whenever the Subsidiary does not pay any amount when due in respect of its Guaranteed Obligations, it must immediately on demand by the Trustees pay that amount as if it were the principal obligor; and (c) indemnifies the Trustees as an independent and primary obligation immediately on demand against any cost, charge, expense, loss or liability suffered or incurred by the Trustees if any payment obligation guaranteed by it is or becomes unenforceable, invalid or illegal; the amount of the cost, charge, expense, loss or liability under this indemnity will be equal to the amount the Trustees would otherwise have been entitled to recoverOther operating expenses on the basisConsolidated Statements of a guarantee. The guarantee is a continuing guarantee that will extend to the ultimate balance of all sums payable by the Company in respect of its Guaranteed Obligations. As of March 31, 2019 and September 30, 2018, the Company's plan was in an overfunded status as the plan's assets exceeded the plan liabilities. The funded status of the HB Pension Fund as of September 30, 2018, was disclosed in Note 13, Defined Benefit Pension Plan, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K forOperations.
For the year ended September 30, 2018.

11. Business Realignment Expenses
During the fourth quarter of fiscal year 2017 the Company began to restructure its CAG2019, business resulting in severance costsrealignment expenses were incurred and the closure of several offices and legal entities in Europe and Asia for total restructuring costs of approximately $1.0 million. The Company continued to implement its CAG cost cutting initiatives during the year ended September 30, 2018. As discussed in Note 3, Significant Contracts, the Company was not the high bidder for the new surplus contracts, and completed winding down its operations under the Surplus Contract during the year ended September 30, 2018. Asrelated to: management changes associated with a result, the Company recognized an additional $1.7 million of restructuring costs in fiscal 2018. During the six months ended March 31, 2018 the Company recorded $1.3 million in restructuring costs, $0.8 million of which related to severance and occupancy costs for the Surplus Contract. The remaining restructuring balance at March 31, 2019 of $0.3 million in occupancy related charges is expected to be paid by fiscal 2020.
During fiscal year 2017, the Company reorganized its IronDirect business. As a result, the Company recorded approximately $1.1 million of restructuring charges in the aggregate through the year ended September 30, 2018 related to this restructuring. The Company continued itsstrategic reorganization of the IronDirect business duringCompany's go-to-market strategy for self-directed and fully-managed market place services, the six months ended March 31, 2019conclusion of the Scrap Contract, and decided to exit the business, resulting in severance costs recorded of approximately $0.2 million. The Company fully exited the IronDirect business and wound down its operations during January 2019. The balance was paid out as of March 31, 2019.
In June 2017, the Company entered into an agreement to sub-lease office space at 6931 Arlington Road, Bethesda, Maryland. On the sub-lease commencement date, the Company relocated its headquarters from 1920 L Street NW, Washington DC, to its current Bethesda location and recognized a $2.0 million cease-use charge in its consolidated statements of operations at September 30, 2017. At September 30, 2018, the remaining cease-use accrual was approximately $0.8 million. During the six months ended March 31, 2019, the Company paid down the cease-use charge by approximately $0.6 million. The remaining balance of approximately $0.2 million is expected to be paid during fiscal 2019. This activity is presented under occupancyother cost in the table below.
During the six months ended March 31, 2018, the Company recognized $0.5 million in severance cost primarily related to the restructuring of its Corporate Information Technology department. This cost is recorded within the Corporate & Other line item below.saving actions.
Business realignment expenses were as follows for the periods presented (in thousands):presented:

Three Months Ended March 31,Six Months Ended March 31,
(in thousands)2020201920202019
Employee severance and benefit costs:
CAG$—  $—  $—  $—  
Corporate & Other—  —  —  170  
Total employee severance and benefit costs—  —  —  170  
Occupancy and other costs:
CAG—  5  —  51  
Corporate & Other—  —  —  134  
Total occupancy and other costs—  5  —  185  
Total business realignment expenses$—  $5  $—  $355  

The table below sets forth the significant components and activity in the liability for business realignment initiatives, on a segment and consolidated basis:
(in thousands)Liability Balance at September 30, 2018Business
Realignment
Expenses		Cash
Payments		Liability Balance at September 30, 2019Adoption of ASC 842Business
Realignment
Expenses		Cash
Payments		Liability Balance at March 31, 2020
Employee severance and benefit costs:
CAG$89  $443  $(118) $414  $—  $—  $(414) $—  
Corporate & Other21  1,537  (1,320) 238  —  —  (238) —  
Total employee severance and benefit costs$110  $1,980  $(1,438) $652  $—  $—  $(652) $—  
Occupancy and other costs:
CAG459  51  (341) 169  (169) —  —  —  
Corporate & Other807  134  (941) —  —  —  —  —  
Total occupancy and other costs$1,266  $185  $(1,282) $169  $(169) $—  $—  $—  
Total business realignment$1,376  $2,165  $(2,720) $821  $(169) $—  $(652) $—  

20
19
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





 Three Months Ended March 31, Six Months Ended March 31,
 2019 2018 2019 2018
        
Employee severance and benefit costs:       
CAG$—
 $130
 $—
 $881
Corporate & Other—
 —
 170
 474
Total employee severance and benefit costs—
 130
 170
 1,355
        
Occupancy and other costs:       
CAG5
 340
 51
 434
Corporate & Other—
 7
 134
 35
Total occupancy and other costs5
 347
 185
 469
Total business realignment expenses$5
 $477
 $355
 $1,824
Business realignment expenses per the table above are recorded in11.Legal Proceedings and Other operating expenses in the Consolidated Statements of Operations.
The table below sets forth the significant components of and activity in the liability for business realignment initiatives during the periods presented, on a segment and consolidated basis:
(in thousands) 
Liability
Balance at
September 30,
2017
 
Business
Realignment
Expenses
 
Cash
Payments
 
Liability
Balance at
September 30,
2018
 
Business
Realignment
Expenses
 
Cash
Payments
 
Liability
Balance at
March 31,
2019
Employee severance and benefit costs:              
CAG $793
 $979
 $(1,683) $89
 $—
 $(89) $—
Corporate & Other 399
 472
 (850) 21
 170
 (191) $—
Total employee severance and benefit costs $1,192
 $1,451
 $(2,533) $110
 $170
 $(280) $—
Occupancy and other costs:              
CAG —
 739
 (280) 459
 51
 (254) $256
Corporate & Other 1,988
 (248) (933) 807
 134
 (747) $194
Total occupancy and other costs $1,988
 $491
 $(1,213) $1,266
 $185
 $(1,001) $450
Total business realignment $3,180
 $1,942
 $(3,746) $1,376
 $355
 $(1,281) $450

12.Legal ProceedingsContingencies
 
The Company reserves for contingent liabilities based on ASC 450, Contingencies, when it determines that a liability is probable and reasonably estimable. From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of the business. There are no claims or actions pending or threatened against the Company that, if adversely determined, would in ourmanagement's judgment have a material adverse effect on the Company.



During the three months ended December 31, 2019, the Company paid its $0.6 million liability resulting from a sales tax audit performed by the State of California.


13.12.Segment Information


The Company provides results in four4 reportable operating segments: GovDeals, Capital Assets Group (CAG), Retail Supply Chain Group (RSCG)RSCG, CAG and Machinio. The GovDeals, CAG, RSCG and Machinio segments constitute approximately 99.6%Descriptions of the Company's revenue during the six months ended March 31, 2019. Each reportable segment offers separately branded marketplaces to enable sellers to achieve their respective channel marketing objectives to reach buyers. Across its segments, the Company offers its sellers two primary transaction models, as well as a suite of services, and its revenues vary depending upon the models employed and the level of service required. A description of theour reportable segments is provided below:are as follows:



21
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)



•The GovDeals reportable segment provides self-directed service offeringssolutions in which sellers list their own assets, and it consists of marketplaces that enable local and state government entities including city, county and state agencies, as well as commercialquasi-governmental businesses located in the United States and Canada to sell surplus and salvage assets. GovDeals also offers a suite of marketing services to sellers. This segmentsellers that includes asset sales and marketing. Through the Company's GovDeals.com and AuctionDeals.com marketplaces.

The CAG reportable segment provides fully-managed offeringsend of fiscal 2019, GovDeals provided self-directed service solutions to sellers and consists of marketplaces that enable federal government agencies, as well as commercial businesses to sell surplus, salvage, and scrap assets. Salesas part of assets procured through our Surplus Contract, which wound down during 2018, and our Scrap Contract, are conducted through the Government Liquidation marketplace included in this segment. CAG also offers a suite of services that includes marketing services, surplus management and asset valuation. Commercial sellers are located in the United States, Europe, Australia and Asia. This segment includes the Company's Network International, GoIndustry DoveBid, and Government Liquidation marketplaces.Auction Deals marketplace.


•The RSCG reportable segment consists of marketplaces that enable corporations located in the United States and Canada to sell surplus and salvage consumer goods and retail capital assets. RSCG also offers a suite of services that includes returns management, asset recovery, and ecommercee-commerce services. This segment includes the Company's Liquidation.com, Liquidation.com DIRECT, and Secondipity marketplaces.


•The CAG reportable segment provides full-service solutions to sellers and it consists of marketplaces that enable commercial businesses to sell surplus, salvage, and scrap assets. CAG also offers a suite of services that includes surplus management, asset valuation, asset sales and marketing. Commercial sellers are located in the United States, Europe, Australia and Asia. This segment includes the Company's Network International and GoIndustry DoveBid marketplaces and, beginning in fiscal 2020, self-directed service solutions for commercial businesses within a unified marketplace previously referred to as Auction Deals. Prior to the conclusion of the Scrap Contract (see Note 2), CAG sold scrap assets from the DoD on its Government Liquidation marketplace.

•The Machinio reportable segment operates a global online platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors. Machinio was acquired by the Company in July 2018.


We also report results of Corporate & Other, primarily consists ofwhich for the Company's IronDirectthree and six months ended March 31, 2019 includes a previously existing operating segment that wasdid not individually significant asmeet the quantitative thresholds to be a reportable operating segment, as well as elimination adjustments. During January 2019, theIronDirect. The Company exited out of the IronDirect business and fully wound down its operations. Iron Direct offered buyers access to construction equipment, parts and services through a single ecommerce marketplace.in January 2019.


Decisions concerning the allocation of the Company’s resources are made by the Company’s Chief Operating Decision Maker ("CODM")(CODM), which is the Company's Chief Executive Officer, with oversight by the Board of Directors.Officer. The Company reports segment information based on the internal performance measures used by the CODM to assess the performance of each operating segment in a given period. In connection with that assessment, the CODM uses segment gross profit to evaluate the performance of each segment. Segment grossGross profit is calculated as total revenue less cost of goods sold (exclusive of depreciation and amortization) and seller distributions.


The amount of our revenue that came from sales outside of the United States for the three months ended March 31, 2019 and 2018 was 14.6% and 11.1%, respectively, and 15.4% and 12.2% for the six months ended March 31, 2019 and 2018, respectively.












22
20
Liquidity Services, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements - (Continued)





The following table sets forth certain financial information for the Company's reportable segments and Corporate & Other (in thousands):segments:


Three Months Ended March 31,Six Months Ended March 31,
(in thousands)2020201920202019
GovDeals:
Revenue$—  $—  $—  $—  
Fee revenue7,822  7,697  15,837  15,355  
Total revenue7,822  7,697  15,837  15,355  
Gross profit$7,278  $7,042  $14,724  $14,103  
RSCG:
Revenue$32,577  $29,823  $60,403  $55,894  
Fee revenue3,680  4,188  7,551  7,595  
Total revenue36,257  34,011  67,954  63,489  
Gross profit$12,394  $12,287  $22,699  $21,836  
CAG:
Revenue$2,626  $7,498  $5,149  $16,727  
Fee revenue4,413  6,186  9,832  12,438  
Total revenue7,039  13,684  14,981  29,165  
Gross profit$4,922  $8,614  $10,736  $17,496  
Machinio:
Revenue$—  $—  $—  $—  
Fee revenue1,706  1,374  3,556  2,366  
Total revenue1,706  1,374  3,556  2,366  
Gross Profit$1,611  $1,265  $3,374  $2,143  
Corporate & Other:
Revenue$—  $34  $—  $469  
Fee revenue—  —  —  9  
Total revenue—  34  —  478  
Gross profit$—  $10  $—  $113  
Consolidated:
Revenue$35,203  $37,355  $65,552  $73,090  
Fee revenue17,621  19,445  36,776  37,763  
Total revenue52,824  56,800  102,328  110,853  
Gross profit$26,205  $29,218  $51,533  $55,691  
  Three Months Ended March 31, Six Months Ended March 31,
  2019 2018 2019 2018
GovDeals:       
 Revenue$—
 $—
 $—
 $—
 Fee revenue7,697
 7,092
 15,355
 14,133
 Total revenue7,697
 7,092
 15,355
 14,133
 Gross profit$7,042
 $6,589
 $14,103
 $13,132
         
CAG:       
 Revenue$7,498
 $19,273
 $16,727
 $40,823
 Fee revenue6,186
 5,884
 12,438
 16,396
 Total revenue13,684
 25,157
 29,165
 57,219
 Gross profit$8,614
 $12,458
 $17,496
 $30,062
         
RSCG:       
 Revenue$29,823
 $22,898
 $55,894
 $40,075
 Fee revenue4,188
 4,016
 7,595
 7,324
 Total revenue34,011
 26,914
 63,489
 47,399
 Gross profit$12,287
 $8,616
 $21,836
 $15,344
         
Machinio:       
 Revenue$—
 $—
 $—
 $—
 Fee revenue1,374
 —
 2,366
 —
 Total revenue1,374
 —
 2,366
 —
 Gross Profit$1,265
 $—
 $2,143
 $—
         
Corporate & Other:       
 Revenue$34
 $933
 $469
 $2,486
 Fee revenue—
 1
 9
 3
 Total revenue34
 934
 478
 2,489
 Gross profit$10
 $(152) $113
 $(827)
         
Consolidated:       
 Revenue$37,355
 $43,104
 $73,090
 $83,384
 Fee revenue19,445
 16,993
 37,763
 37,856
 Total revenue56,800
 60,097
 110,853
 121,240
 Gross profit$29,218
 $27,511
 $55,691
 $57,711


The following table presents a reconciliation betweenof gross profit used in the reportable segments as well as Corporate & Other andto the Company's consolidated results (in thousands):results:

Three Months Ended March 31,Six Months Ended March 31,
(in thousands)2020201920202019
Reconciliation:
Gross profit$26,205  $29,218  $51,533  $55,691  
Operating expenses30,669  32,353  60,794  63,696  
Other operating expenses(12) 1,350  181  1,555  
Interest and other income, net(257) (451) (509) (770) 
Loss before provision for income taxes$(4,195) $(4,034) $(8,933) $(8,790) 
23
Liquidity Services, Inc. and Subsidiaries
Notes toThe percent of our revenues that came from transactions conducted outside of the Unaudited Consolidated Financial Statements - (Continued)



  Three Months Ended March 31, Six Months Ended March 31,
  2019 2018 2019 2018
Reconciliation:       
 Gross profit$29,218
 $27,511
 $55,691
 $57,711
 Operating expenses32,353
 32,870
 63,696
 68,155
 Other operating expenses1,350
 311
 1,555
 1,770
 Interest and other income, net(451) (394) (770) (911)
 Provision (benefit) for income taxes328
 379
 594
 (4,436)
 Net loss$(4,362) $(5,655) $(9,384) $(6,867)


14.Subsequent Events

On April 23, 2019, the Company performed a strategic reorganization that consolidated its go-to-marketUnited States for self-directed and fully-managed market place services to capitalize on growth opportunities. As a result, the Company will incur restructuring costs of approximately $1.1 million for employee termination benefits. The termination costs relate to the GovDeals, CAG, and RSCG segments, as well as Corporate & Other, and will be recorded as Business realignment expenses within Other operating expenses in the Consolidated Statements of Operations during the three months ended June 30, 2019.

March 31, 2020 and 2019 was 10.9% and 14.6%, respectively and the percent of our revenues that came from transactions conducted outside of the United States for the six months ended March 31, 2020 and 2019 was 13.1% and 15.4%, respectively.

21

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS
 
This document contains forward-looking statements. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include but are not limited to the factors set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 20182019 and subsequent filings with the Securities and Exchange Commission.Commission (SEC). 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.
 
All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this document and are expressly qualified in their entirety by the cautionary statements included in this document. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events.
 
The following discussion should be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this document.
 
Overview
About us. We manage, value, and sell inventory and equipment for business and government clients by operating
The Company operates a network of ecommercee-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. OurThe 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, we enablethe 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. Our broad range of fully-managed service offeringsThe Company's services include program management, valuation, asset management, reconciliation, returns process management, refurbishment and recycling, fulfillment, marketing and sales, warehousing and transportation, buyer support, and compliance and risk mitigation, as well as self-directed service offerings. We organizetools for its sellers. The Company organizes the products on ourits 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 ofCurrently, the Company’s marketplaces includes:are: www.liquidation.com, www.direct.liquidation.com, www.govdeals.com, www.networkintl.com, www.secondipity.com, www.go-dove.com, and www.auctiondeals.com.www.go-dove.com. We also operate a global search engine for listing used machinery and equipment for sale at www.machinio.com. We haveThe Company has over 12,00013,000 sellers, including Fortune 1000 and Global 500 organizations as well as federal, state, and local government agencies.

Impacts of the COVID-19 Pandemic

The Company has been closely monitoring the COVID-19 pandemic. By mid-March, the Company began to experience an impact on its operations, resulting from the actions taken by governments and private sector entities to limit the spread of COVID-19. These actions included meaningful restrictions on economic activity, including business closures, limitations on the operations of business activity, or significant prioritization of essential business functions. As direct correlation to these actions, the flow of assets into our network of marketplaces has been hindered as seller facilities have been closed, which has reduced ability of their employees to process assets and for buyers to pick-up or arrange for shipping of assets.

Our RSCG segment expects to continue to support retailer needs, including online retailers, through our Liquidation.com marketplace even if at a lower than average volume in the short-term. As long as we can ensure the safety of our employees, we will maintain our warehouse operations in support of the essential supply-chain needs of our sellers and buyers. As the pandemic restrictions subside, we expect retailers to address their reverse supply chain needs in a more comprehensive way, turning to third-party vendors such as ourselves to address any accumulation of returns or excess inventory during the shelter-in-place and safer-at-home phases of the pandemic.

We expect lower volume from our GovDeals segment until state government re-opening phases take place. As the economy re-opens and the business climate improves, we believe our government sellers will resume their selling activity over time.
22


We also expect our CAG segment to see reduced volumes as many seller facilities are closed and restrict buyer inspection of assets, asset pick-up, and in many cases, employee cataloging of assets for sale. Yet, we believe the need for liquidity from our sellers in the CAG segment and the demand for value-priced equipment from our buyers will create future, positive conditions of supply and demand within our CAG segment. We have a longstanding market-maker reputation for selling high-value equipment globally across numerous industries and will continue to support the needs of our traditional seller base. At the same time, we will offer our new, expanded, and timely solution to sell-in-place with our self-service, low-touch solution on AllSurplus.com, which aligns with our long term strategy.

The likelihood, magnitude and timing of these events across our segments is difficult to predict and we expect to be negatively impacted by a lower number of transactions on our marketplaces in the short-term, and possibly longer, which will have an adverse effect on our results of operations and cash flows. As a result, prior trends in the Company's results of operations may not be applicable throughout the duration of the COVID-19 pandemic.

We are starting to see seller facilities reopen across the globe and anticipate activity will increase steadily as long as governments continue to reduce restrictions related to COVID-19. In the longer term we are highly focused on creating the efficiencies for ourselves, our sellers and our buyers by focusing on the people, processes and technologies that will deliver optimal liquidity in the reverse supply chain and further enable our growth through an asset light, low-touch self-service marketplace solution.

Our Responses to the COVID-19 Pandemic

The following are just a few examples of our commitment to our mission during this unprecedented time:

•We immediately took numerous steps to help customers and employees practice social distancing and other safety measures in keeping with current health-expert recommendations:
◦instituted work-from-home measures for all employees except essential warehouse and call center employees;
◦created safe work environments for those coming into facilities including social distancing enforcement and skeleton crews and regular cleanings;
◦implemented new safety procedures for buyer pickups at our warehouse facilities and reduced shipping fees on parcels to limit person-to-person contact; and
◦enforced travel restrictions on all employees and leveraged video conference technology.

•In mid-March, we acted quickly and aggressively to conserve resources in April by taking the following temporary actions:
◦eliminating CEO salary payments and reducing executive salaries by 50%;
◦implementing material furloughs and salary reductions in line with reduced business activity;
◦eliminating cash compensation for members of the Board of Directors;
◦restricting travel and related expenses;
◦delaying some immediate investments in our technology platform; and
◦addressing more flexible payment terms with vendors and service providers.

Our Marketplace Transactions

We believe our ability to create liquid marketplaces for surplus and salvage assets generates a continuous flow of goods from our corporate and government sellers. This flow of goods in turn attracts an increasing number of professional buyers to our marketplaces. During the twelve months ended March 31, 2019,2020, the approximate number of registered buyers increased from 3,249,0003,580,000 to 3,580,000,3,675,000, or approximately 10.2%2.7%.


On July 10, 2018, we acquired 100% of Machinio, a privately-owned company based in Chicago, Illinois, with a second office in Berlin, Germany. Machinio operates a global online platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors.

Our revenue.  Substantially all of our revenue is earned through the following transaction models.models:
 
Purchase model.  Under our purchase transaction model, we recognize revenue within the Revenue line item on the Consolidated Statements of Operations from the resale of inventory that we purchased from sellers. We consider these sellers to be our vendors. We pay our vendorssellers either a fixed amount or a portion of the net or gross proceeds received from our completed sales based on the value we receive from the sale, in some cases, 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 thisprincipal in purchase transaction model sales, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. The proceeds paid by buyers also include transaction fees, referred to as buyer premiums. Revenue fromFor the three and six months ended March 31, 2020, our purchase transaction model accounted for approximately 65.8%24.7% and 65.9%22.6% of our GMV, and 66.6% and 64.1% of our total revenue forrevenues, respectively. For the three and six months ended March 31, 2019, our purchase transaction model accounted for 24.0%
23

and 22.9% of our GMV, and 65.8% and 65.9% of our total revenues, respectively. These amounts includeincluded sales of commercial merchandise sourced from vendor contracts with Amazon.com, Inc. by our RSCG segment. The commercial merchandise we purchased under these contracts represented 55.3% and 51.9% of consolidated Costs of goods sold for three and six months ended March 31, 2020 and 49.4% and 44.9% of consolidated Costs of goods sold for three and six months ended March 31, 2019. For the three and six months ended March 31, 2019, purchase model revenues also included revenue earned from the sale of property obtained under the Scrap Contract, which concluded on September 30, 2019, and accounted for approximately 7.6% of our total revenue for both the three and six months ended March 31, 2019. The price we paid the DLA for the property purchased under the Scrap Contract is based on a revenue share model. One of our key operating metrics is gross merchandise volume ("GMV") an operating measure which we define as the total sales value of all merchandise sold by us or our sellers through our marketplaces and other channels during a given period of time. The merchandise sold under our purchase transaction model accounted for approximately 24.0% and 22.9% of our GMV for the three and six months ended March 31, 2019, respectively.those periods.


Consignment model — fee revenue.  Under our consignment transaction model, we enable our sellers to sell goods they own in our marketplaces and we charge them a commission fee based on the gross or net proceeds received from such sales. The revenue from our consignment transaction model is recognized within the Fee revenue line item on the Consolidated Statements of Operations. OurBecause we are the agent in consignment model sales, our commission fee revenue, which we refer to as seller commissions, represents a percentage of the sales price the buyer pays upon completion of a transaction. We vary the percentage amount of the seller commission depending on the various value-added services we provide to the seller to facilitate the transaction. For example, we generally increase the percentage amount of the commission if we take possession, handle, ship, or provide enhanced product information for the merchandise. In most cases we collect the seller commission by deducting the appropriate amount from the sales proceeds prior to the distribution to the seller after completion of the transaction. In addition to seller commissions, we also collect buyer premiums. Revenue fromFor the three and six months ended March 31, 2020, our consignment model accounted for approximately 29.4%75.3% and 29.6%77.4% of our GMV, and 27.6% and 29.7% of our total revenue forrevenues, respectively. For the three and six months ended March 31, 2019, respectively. The merchandise sold under our consignment model accounted for approximately 76.0% and 77.1% of our GMV, and 29.4% and 29.6% of our total GMVrevenues, respectively.
Other — fee revenue. We also earn non-consignment fee revenue from Machinio's sales listing subscription service, as well as other services including returns management and refurbishment of assets, as well as asset valuation services. For the three and six months ended March 31, 2020, our other revenues accounted for 5.8% and 6.2% of our total revenues, respectively. For the three and six months ended March 31, 2019, respectively.
our other revenues accounted for 4.9% and 4.5% of our total revenues, respectively

We also earn non-consignment fee revenue, which is made up of subscription fee and other services. In the prior year, the non-consignment fee revenue also included service revenue from the Surplus contract. This revenue is included within the Fee revenue line item on our Consolidated Statements of Operations.
We collect a buyer premium on most of the transactions under both of the transaction modelsIndustry trends.  While we offer to sellers. Buyer premiums are calculated as a percentage of the sale price of the merchandise sold and are paid to usexperiencing challenges presented by the buyer. Buyer premiums are in addition to the price of the merchandise.
Industry trends.  WeCOVID-19 pandemic, we believe there are several industry trends positively impacting the long-term growth of our business including: (1) the ability for businesses to conduct ecommerce via the Internet both in the United States and abroad, which continues to mature; (2) the increase in the volume of returned merchandise handled both online and in stores as online and omni-channel retail grow as a percentage of overall retail sales; (3)(2) the increase in government regulations and the need for corporations to have sustainability solutions necessitating verifiable recycling and remarketing of surplus assets; (4)(3) 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; (4) 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, and (5) in the long-term we expect innovation in the retail supply chain which we expect will increase the pace of product obsolescence in the long-term and, therefore, increase the supply of surplus assets.


Our Vendor Agreements
 
Our DoDcommercial agreements.  Historically, we had two material We have vendor contracts with Amazon.com, Inc. under which we acquire and sell commercial merchandise. The property we purchased under these contracts represented 55.3% and 49.4% of consolidated cost of goods sold for the DoD:three months ended March 31, 2020 and 2019, respectively, and 51.9%, and 44.9% of consolidated cost of goods sold for the six months ended March 31, 2020 and 2019, respectively.

Scrap Contract.  Under the Scrap Contract, which concluded on September 30, 2019, we acquired, managed and the Surplus Contract.
•Scrap Contract.  On April 8, 2016, the DLA awarded us the second Scrap Contract. Under the second Scrap Contract, we acquiresold all non-electronic scrap property fromof the DoD turned into the DLA, and paypaid the DLA a revenue-sharing payment equal to 64.5% of the gross resale proceeds. Scrap property generally consisted of items determined by the DoD to have no use beyond their base material content, such as metals, alloys, and building materials. We bearbore 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. Transactionsresale transactions for scrap property sourced under this contract followfollowed the purchase transaction model described above. The contract contains a provision permittingmodel.

For the DLA to terminatethree and six months ended March 31, 2019, the contract for convenience upon written notice to us.



Resaleresale of scrap property that we purchased under the Scrap Contract accounted for approximately 7.6% and 10.0%2.8% of our revenue for the three months ended March 31, 2019GMV and 2018, respectively, and approximately 7.6% and 9.2% of our revenue for the six months ended March 31, 2019 and 2018, respectively.total revenues. The property sold underresults of the Scrap Contract accounted for approximately 2.8% and 3.9% of our GMV for the three months ended March 31, 2019 and 2018, respectively, and approximately 2.7% and 3.6% of our GMV for the six months ended March 31, 2019 and 2018, respectively. This contract iswere included withinin our CAG segment.


•Surplus Contract.  The Surplus Contract was a competitive-bid contract under which we acquired, managed and sold usable DoD surplus personal property turned into the DLA. Surplus property generally consisted of items determined by the DoD to be no longer needed, and not claimed for reuse by any federal agency, such as electronics, industrial equipment, office supplies, scientific and medical equipment, aircraft parts, clothing and textiles. In October 2017, the DLA put out for bid two new term surplus contracts, and in December 2017, the DLA determined that we were not the high bidder for either of the two contracts. As a result, we made our final inventory purchase under the Surplus Contract during December 2017, and as of June 30, 2018, we had wound down all operations under the Surplus Contract. The Surplus Contract accounted for $27.8 million, or 22.9%, of revenue in the six months ended March 31, 2018. The property sold under the Surplus Contract accounted for approximately 7.6% and 8.3% of our GMV for the three and six months ended March 31, 2018, respectively. Transactions under the Surplus Contract followed the purchase transaction model described above. This contract was included within our CAG segment.
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We recorded approximately $0.8 million of severance and occupancy cost during the six months ended March 31, 2018 as a result of the restructuring and realignment efforts undertaken due to the loss of the Surplus Contract.

Our commercial agreements. We have a vendor contract with Amazon.com, Inc. under which we acquire and sell commercial merchandise. The inventory we purchased under this contract represented approximately 49.4%, and 28.7% of cost of goods sold for the three months ended March 31, 2019 and 2018, respectively, and approximately 44.9% and 24.1% of cost of goods sold for the six months ended March 31, 2019 and 2018, respectively. This contract is included within the Company's RSCG segment.

Key Business Metrics
 
Our management periodically reviews certain key business metrics for operational planning purposes and to evaluate the effectiveness of our operational strategies, allocation of resources and our capacity to fund capital expenditures and expand our business. These key business metrics include:
 
GMV.Gross merchandise volume (GMV). GMV an operating measure, is the total sales value of all merchandise sold by us or our sellers through our marketplaces andor by us through other channels during a given period of time. We review GMV because it provides a measure of the volume of goods being sold in our marketplaces and thus the activity of those marketplaces. GMV also provides a means to evaluate the effectiveness of investments that we have made and continue to make, including in the areas of buyer and seller support, value-added services, product development, sales and marketing, and operations. See Results of Operations for further information on GMV.
 
Total registered buyers.Registered Buyers.  We grow our buyer base through a combination of marketing and promotional efforts. A person becomes a registered buyer by completing an online registration process on one of our marketplaces. As part of this process, we collect business and personal information, including name, title, company name, business address and contact information, and information on how the person intends to use our marketplaces. Each prospective buyer must also accept our terms and conditions of use. Following the completion of the online registration process, we verify each prospective buyer’s e-mail address and confirm that the person is not listed on any banned persons list maintained internally or by the U.S. federal government. After the verification process, which is completed generally within 24 hours, the registration is approved and activated, and the prospective buyer is added to our registered buyer list.
 
Total registered buyers, as of a given date, represent the aggregate number of persons or entities who have registered on one of our marketplaces. We use this metric to evaluate how well our marketing and promotional efforts are performing. Total registered buyers exclude duplicate registrations, buyers who are suspended from utilizing our marketplaces and those buyers who have voluntarily removed themselves from our registration database. In addition, if we become aware of registered buyers that are no longer in business, we remove them from our database. As of March 31, 2019,2020 and September 30, 2018,2019, we had approximatelyapproximately 3,675,000 and 3,580,000 and 3,357,000 registered buyers, respectively.
 
Total auction participants.  For each auction we manage, the number of auction participants represents the total number of registered buyers who have bid one or more times in that auction. As a result, a registered buyer who bids, or participates, in more than one auction is counted as an auction participant in each auction in which he or she participates. Thus,


total auction participants for a given period is the sum of the auction participants in each auction conducted during that period. We use this metric to allow us to compare our online auction marketplaces to our competitors, including other online auction sites and traditional on-site auctioneers. In addition, we measure total auction participants on a periodic basis to evaluate the activity level of our base of registered buyers and to measure the performance of our marketing and promotional efforts. During the three months ended March 31, 2020 and 2019, approximately 490,000 and 2018, approximately 540,000, and 549,000, respectively,respectively, total auction participants participated in auctions on our marketplaces. During the six months ended March 31, 2020 and 2019, approximately 943,000 and 2018, approximately 1,033,200, and 1,068,000, respectively,respectively, total auction participants participated in auctions on our marketplaces. Largely as a result of the wind-down of the Surplus Contract, there was a decrease in auction participants during fiscal 2019.
 
Completed transactions.  Completed transactions represents the number of auctions in a given period from which we have recorded revenue. Similar to GMV, we believe that completed transactions is a key business metric because it provides an additional measurement of the volume of activity flowing through our marketplaces. During the three months ended March 31, 20192020 and 2018,2019, we completed approximatelyapproximately 150,000 and 153,000 and 118,000 transactions,transactions, respectively. During the six months ended March 31, 20192020 and 2018,2019, we completed approximatelyapproximately 286,000 and 297,500 and 240,000 transactions,transactions, respectively.


Non-GAAP Financial Measures
 
EBITDA and Adjusted EBITDA. EBITDA is a supplemental non-GAAP financial measure and is equal to net (loss) income plus interest and other expense, net;net excluding the non-service components of net periodic pension (benefit) expense; provision (benefit) for income taxes; and depreciation and amortization. Interest and other expense, net, can include non-operating gains and losses, such as from foreign currency fluctuations. 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, deferred revenue purchase accounting adjustments, and goodwill and long-lived asset impairment.
 
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We believe EBITDA and Adjusted EBITDA are useful to an investor in evaluating our performance for the following reasons:
 
•Depreciation and amortization expense primarily relates to property and equipment and the amortization of intangible assets. These expenses are non-cash charges that have fluctuated significantly in the past. As a result, we believe that adding back these non-cash charges is useful in evaluating the operating performance of our business on a consistent basis from year-to-year.
•As a result of varying federal and state income tax rates, we believe that presenting a financial measure that adjusts for provision (benefit) for income taxes is useful to investors when evaluating the operating performance of our business on a consistent basis from year to year.
•The authoritative guidance for stock-based compensation requires all share-based payments to employees, including grants of employee stock options, restricted stock and stock appreciation rights to be recognized in the income statement based on their estimated fair values. We believe adjusting for this stock-based compensation expense is useful to investors when evaluating the operating performance of our business on a consistent basis from year to year.
•The authoritative guidance related to business combinations requires the initial recognition of contingent consideration at fair value with subsequent changes in fair value recorded through the statements of operations, and disallows the capitalization of transaction costs. We believe adjusting for these acquisition related expenses is useful to investors when evaluating the operating performance of our business on a consistent basis from year-to-year.
•We believe adjusting for business realignment expense is useful to investors when evaluating the operating performance of our business on a consistent basis from year-to-year, as these expenses are outside our ordinary course of business.
•We believe isolating non-cash charges, such as amortization and depreciation, and other items, such as impairment costs incurred outside our ordinary course of business, provides additional information about our cost structure, and, over time, helps track our performance.
•We believe EBITDA and Adjusted EBITDA are important indicators of our operational strength and the performance of our business because they provide a link between profitability and operating cash flow.
•We also believe that analysts and investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry.
Our management uses EBITDA and Adjusted EBITDA:
•as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis as they remove the impact of items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual operating budget;
•to allocate resources to enhance the financial performance of our business;


•to evaluate the effectiveness of our operational strategies; and
•to evaluate our capacity to fund capital expenditures and expand our business.


EBITDA and Adjusted EBITDA as calculated by us are not necessarily comparable to similarly titled measures used by other companies. In addition, EBITDA and Adjusted EBITDA: (a) do not represent net (loss) income or cash flows from operating activities as defined by GAAP; (b) are not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as alternatives to net (loss) income, income from operations, cash provided by operating activities or our other financial information as determined under GAAP.
 
We prepare Adjusted EBITDA by adjusting EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to all of the limitations applicable to EBITDA. Our presentation of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
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The table below reconciles net loss to EBITDA and Adjusted EBITDA from continuing operations for the periods presented. 
Three Months Ended March 31,Six Months Ended March 31,
 2020201920202019
(in thousands) (Unaudited)
Net loss$(4,238) $(4,362) $(9,434) $(9,384) 
Interest and other income, net1
(167) (376) (332) (608) 
Provision for income taxes43  328  501  594  
Depreciation and amortization1,577  1,165  3,149  2,369  
EBITDA(2,785) (3,245) (6,116) (7,029) 
Stock compensation expense2
1,231  2,581  2,270  4,094  
Acquisition costs and impairment of long-lived assets3
—  38  5  119  
Business realignment expenses3,4
—  5  —  39  
Fair value adjustments to acquisition earn-outs3
—  1,300  200  1,400  
Deferred revenue purchase accounting adjustment—  258  3  690  
Adjusted EBITDA$(1,554) $937  $(3,638) $(687) 
  Three Months Ended March 31, Six Months Ended March 31,
  2019 2018 2019 2018
  (In thousands)
(Unaudited)
Net loss $(4,362) $(5,655) $(9,384) $(6,867)
Interest and other income, net** (376) (304) (608) (729)
Provision (benefit) for income taxes 328
 379
 594
 (4,436)
Depreciation and amortization 1,165
 1,144
 2,369
 2,355
EBITDA (3,245) (4,436) (7,029) (9,677)
Stock compensation expense 2,581
 1,767
 4,094
 2,698
Acquisition costs and impairment of long-lived assets* 38
 —
 119
 —
Business realignment expenses* 5
 475
 39
 1,824
Fair value adjustments to acquisition earn-outs* 1,300
 —
 1,400
 —
Deferred revenue purchase accounting adjustment 258
 —
 690
 —
Adjusted EBITDA $937
 $(2,194) $(687) $(5,155)
1 Represents Interest and other income, net, per the Statement of Operations, excluding the non-service components of net periodic pension (benefit) expense.
*2 Excludes the impact of forfeitures of stock awards by employees terminated by business realignment actions, which is included in the business realignment expenses line. There were no impacts for the three and six months ended March 31, 2020 and 2019.
3 Acquisition costs, and impairment of long-lived assets, business realignment expenses, and fair value adjustments to acquisition earn-outs, whichand business realignment expenses are excluded from Adjusted EBITDA, are included incomponents of Other operating expenses on the Statements of Operations. See
4 Business realignment expense includes the amounts accounted for as exit costs under ASC 420 as described in Note 1110 to Notes tothe Consolidated Financial Statements, for further detail onand the related impacts of business realignment expenses.actions subject to other accounting guidance. There were no related impacts for the three and six months ended March 31, 2020 and 2019.
**Interest and other income, net excludes non-services pension and other postretirement benefit expense.


Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. A “critical accounting estimate” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We continuously evaluate ourCompany's critical accounting estimates. We base ourpolicies and estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended September 30, 2018,2019, and in Note 2-2 — Summary of Significant Accounting Policies to the consolidated financial statements. The same

As discussed in Note 2 — Summary of Significant Accounting Policies, we adopted ASC 842, Leases, as of October 1, 2019, using a modified retrospective approach where our Consolidated Balance Sheet as of September 30, 2019 was not changed. Relative to the most recent annual report on Form 10-K, there have been no other material changes to the Company's accounting policies are used in preparing ourthese interim consolidated financial statements.

As of July 1, 2019, the Company performed its annual impairment testing using a resultfair-value based test for all reporting units, and determined the fair value for each of adopting ASC 606, thereits reporting units with goodwill balances substantially exceeded their carrying values except for the Machinio reporting unit, which exceeded its carrying value by approximately 11%.

As of March 31, 2020, in response change in economic conditions resulting from the COVID-19 pandemic, the Company performed an interim impairment test using a fair-value based test for all reporting units with goodwill balances, and determined that the fair value for each of its reporting units with goodwill balances substantially exceeded their carrying values except for CAG and Machinio, which exceeded their carrying values by approximately 21% and 12%, respectively.

The Company determined the fair value of the CAG and Machinio reporting units using a discounted cash flow (DCF) analysis. The DCF analysis relied on significant assumptions and judgments about the forecasts of future cash flows over the five-year projection period, including revenues, gross profit margins, operating expenses, income taxes, capital expenditures, working capital, and an estimate of the impact and duration of COVID-19 on those factors. A long-term growth rate of 2.5% was applied thereafter. These forecasts of future cash flows represent the Company's best estimate using information that is currently available. However, given the uncertainty associated with the COVID-19 pandemic, including its extent and duration, actual results could differ significantly from those estimates.

The cash flows for CAG and Machinio were significantdiscounted at a weighted average cost of capital (WACC) of 17% and 26%, respectively, and reflected an increase in the equity risk premium caused by the emergence of the COVID-19 pandemic. Given the uncertainty that COVID-19 has introduced into the equity markets, the Company performed a sensitivity analysis that noted
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that the CAG and Machinio WACCs would need to increase by over 180 and 260 basis points, respectively, to impact the recovery of goodwill.

The Company will continue to monitor these reporting units for changes that could impact the recoverability of goodwill, which will depend on changes to our revenue recognition policy from the policy disclosed in the Form 10-K. See Note 1 to the unaudited consolidated financial statements in Item 1 of Part I, "Financial Statements," of this Form 10-Q for a descriptionextent and duration of the revisions to our revenue recognition policy.COVID-19 pandemic, and its impact on the equity markets.



Components of Revenue and Expenses


Revenue. We generate a large portionRefer to the discussion in the Our revenue section above, and to Note 2 — Summary of our revenue from the proceeds of sales of merchandise held in inventory. We also generate fee revenue from commissions on salesSignificant Accounting Policies in our marketplacesAnnual Report on Form 10-K for discussion of merchandise that is owned by others.the Company's related accounting policies.
 
Cost of goods sold. CostRefer to the discussion in Note 2 — Summary of Significant Accounting Policies in our Annual Report on Form 10-K for discussion of the Company's Costs of goods sold includes the costs of purchasing and transporting property for auction, credit card transaction fees and shipping and handling costs.related accounting policies.


Seller distributions. Under the current Scrap Contract, which concluded on September 30, 2019, we acquireacquired scrap property from the DLA for resale and paypaid the DLA a revenue-sharing paymentseller distributions equal to 64.5% of the gross resale proceeds. We bear all of the costs for the sorting, merchandising and sale of the property.
 
Technology and operations.  Technology expenses consist primarily of the cost of technical staff who develop, deploy, and maintain our marketplaces and corporate infrastructure. These personnel also develop and upgrade the software systems that support our operations, such as sales processing. Technology expenses also includes certain costs associated with our LiquidityOnee-commerce platform. We are implementing a new ecommerce marketplace and back-office solution as part of our LiquidityOne Transformation initiative which is designed to deliver an improved online marketplace platform and related software tools to enhance our customer experience, operations and ability to scale to a much larger business.


Because our marketplaces and support systems require frequent upgrades and enhancements to maintain viability, we have determined that the useful life for certain internally developed software is less than one year. As a result, we expense those costs as incurred. However, where we determine that the useful life of the internally developed software will be greater than one year, we capitalize development costs in accordance with ASC Topic 350, Intangibles-Goodwill and Other.350-40, Internal-use software. As such, we are capitalizing certain development costs associated with our LiquidityOne platform. During the first quarter of fiscal 2018, we completede-commerce platform, as well as other software development of our new Return to Vendor module of the LiquidityOne platform and began amortizing the associated capitalized costs during that quarter.activities.
Operations expenses consist primarily of operating costs, including buyer relations, shipping logistics and distribution center operating costs.
Sales and marketing.  Sales and marketing expenses include the cost of our sales and marketing personnel as well as the cost of marketing and promotional activities. These activities include all sales and marketing-related activity, including but not limited to trade shows and online marketing campaigns such as paid search advertising.
 
General and administrative.  General and administrative expenses include all corporate and administrative functions that support our operations and provide an infrastructure to facilitate our future growth. Components of these expenses include executive management and staff salaries, bonuses and related taxes and employee benefits; travel; headquarters rent and related occupancy costs; and legal and accounting fees. The salaries, bonus and employee benefits costs included as general and administrativeThese expenses are generally more fixed in nature than our other operating expenses and do not significantly vary directly within response to the volume of merchandise sold through our marketplaces.
 
Depreciation and amortization.  Depreciation and amortization expenses consist primarily of the depreciation and amortization of amounts recorded in connection with the purchase of furniture, fixturesproperty and equipment, amortization of internally developed software, and amortization of intangible assets from our acquisitions.assets.


Other operating expenses (income). Other operating expenses (income)expense includes the change in fair value of financial instruments and contingent consideration, as well as business realignment expenses, including those associated with restructuring initiatives and the exit of certain business operations.


Interest and other (income) expense, net.  Interest (income) expense and other (income) expense, net consists of interest income on the note receivable related to the sale of the Jacobs Trading business in 2015, interest income on short-term investments and the promissory note issued to JTC, the components of net periodic benefitpension (benefit) other than the services costservice component, and impacts of foreign currency fluctuations.
 
Income taxes.  For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year to dateyear-to-date pre-tax (loss) income. Our effective income tax rate before discrete items was -6.8%(5.6%) for the six months ended March 31, 2019.2020. The effective tax rate differed from the statutory federal rate of 21% primarily as a result of the valuation allowance charge on current year losses and the impact of foreign, state, and local income taxes and permanent tax adjustments.


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Results of Operations



The following table sets forth, for the periods indicated, our operating results (dollars in thousands):results:
Three Months Ended March 31,Six Months Ended March 31,
Three Months Ended March 31,     Six Months Ended March 31,    
2019 2018 $ Change % Change 2019 2018 $ Change % Change
(dollars in thousands)(dollars in thousands)20202019$ Change% Change20202019$ Change% Change
Revenue$37,355
 $43,104
 $(5,749) (13.3)% $73,090
 $83,384
 $(10,294) (12.3)%Revenue$35,203  $37,355  $(2,152) (5.8)%$65,552  $73,090  $(7,538) (10.3)%
Fee revenue19,445
 16,993
 2,452
 14.4
 37,763
 37,856
 (93) (0.2)%Fee revenue17,621  19,445  (1,824) (9.4) 36,776  37,763  (987) (2.6) 
Total revenue56,800
 60,097
 (3,297) (5.5) 110,853
 121,240
 (10,387) (8.6)%Total revenue52,824  56,800  (3,976) (7.0) 102,328  110,853  (8,525) (7.7) 
Costs and expenses from operations: 
  
      
      Costs and expenses from operations:  
Cost of goods sold (exclusive of depreciation and amortization)24,807
 28,727
 (3,920) (13.6) 49,763
 56,358
 (6,595) (11.7)%
Cost of goods sold (excludes depreciation and amortization)Cost of goods sold (excludes depreciation and amortization)26,619  24,807  1,812  7.3  50,795  49,763  1,032  2.1  
Seller distributions2,775
 3,859
 (1,084) (28.1) 5,399
 7,171
 (1,772) (24.7)%Seller distributions—  2,775  (2,775) (100.0) —  5,399  (5,399) (100.0) 
Technology and operations13,429
 15,955
 (2,526) (15.8) 25,953
 34,055
 (8,102) (23.8)%Technology and operations11,586  13,429  (1,843) (13.7) 22,827  25,953  (3,126) (12.0) 
Sales and marketing9,135
 8,225
 910
 11.1
 18,116
 16,535
 1,581
 9.6 %Sales and marketing10,109  9,135  974  10.7  19,714  18,116  1,598  8.8  
General and administrative8,624
 7,546
 1,078
 14.3
 17,258
 15,210
 2,048
 13.5 %General and administrative7,397  8,624  (1,227) (14.2) 15,104  17,258  (2,154) (12.5) 
Depreciation and amortization1,165
 1,144
 21
 1.8
 2,369
 2,355
 14
 0.6 %Depreciation and amortization1,577  1,165  412  35.4  3,149  2,369  780  32.9  
Other operating expenses1,350
 311
 1,039
 334.1
 1,555
 1,770
 (215) (12.1)%
Other operating (income) expensesOther operating (income) expenses(12) 1,350  (1,362) (100.9) 181  1,555  (1,374) (88.4) 
Total costs and expenses61,285
 65,767
 (4,482) (6.8) 120,413
 133,454
 (13,041) (9.8)%Total costs and expenses57,276  61,285  (4,009) (6.5) 111,770  120,413  (8,643) (7.2) 
Loss from operations(4,485) (5,670) 1,185
 20.9
 (9,560) (12,214) 2,654
 21.7 %Loss from operations(4,452) (4,485) 33  0.7  (9,442) (9,560) 118  1.2  
Interest and other income, net(451) (394) (57) (14.5) (770) (911) 141
 15.5 %Interest and other income, net(257) (451) 194  43.0  (509) (770) 261  33.9  
Loss before provision (benefit) for income taxes(4,034) (5,276) 1,242
 23.5
 (8,790) (11,303) 2,513
 22.2 %
Provision (benefit) for income taxes328
 379
 (51) (13.5) 594
 (4,436) 5,030
 113.4 %
Loss before provision for income taxesLoss before provision for income taxes(4,195) (4,034) (161) (4.0) (8,933) (8,790) (143) (1.6) 
Provision for income taxesProvision for income taxes43  328  (285) (86.9) 501  594  (93) (15.7) 
Net loss$(4,362) $(5,655) $1,293
 22.9 % $(9,384) $(6,867) $(2,517) (36.7)%Net loss$(4,238) $(4,362) $124  2.8 %$(9,434) $(9,384) $(50) (0.5)%
 

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The following table presents segment GMV, revenue, gross profit which(which is calculated as total revenue less cost of goods sold (exclusive of depreciation and amortization) and seller distributions,Seller distributions), and gross profit margin for the periods indicated (dollars in thousands):indicated:


Three Months Ended March 31,Six Months Ended March 31,
(dollars in thousands)2020201920202019
GovDeals:
GMV$77,158  $77,390  $156,349  $153,698  
Total revenue7,822  7,697  15,837  15,355  
Gross profit7,278  7,042  14,724  14,103  
Gross profit margin93.0 %91.5 %93.0 %91.8 %
RSCG:
GMV44,320  41,899  84,190  77,343  
Total revenue36,257  34,011  67,954  63,489  
Gross profit12,394  12,287  22,699  21,836  
Gross profit margin34.2 %36.1 %33.4 %34.4 %
CAG:
GMV22,822  36,070  52,355  82,429  
Total revenue7,039  13,684  14,981  29,165  
Gross profit4,922  8,614  10,736  17,496  
Gross profit margin69.9 %62.9 %71.7 %60.0 %
Machinio:
GMV—  —  —  —  
Total revenue1,706  1,374  3,556  2,366  
Gross profit1,611  1,265  3,374  2,143  
Gross profit margin94.4 %92.1 %94.9 %90.6 %
Corporate & Other:
GMV—  34  —  469  
Total revenue—  34  —  478  
Gross profit—  10  —  113  
Gross profit margin— %29.4 %— %23.6 %
Consolidated:
GMV144,300  155,393  292,894  313,939  
Total revenue52,824  56,800  102,328  110,853  
Gross profit26,205  29,218  51,533  55,691  
Gross profit margin49.6 %51.4 %50.4 %50.2 %
   Three Months Ended March 31, Six Months Ended March 31,
   2019 2018 2019 2018
GovDeals:        
 GMV $77,390
 $69,462
 $153,698
 $140,580
 Total revenue 7,697
 7,092
 15,355
 14,133
 Gross profit 7,042
 6,589
 14,103
 13,132
 Gross profit margin 91.5% 92.9 % 91.8% 92.9 %
          
CAG:        
 GMV 36,070
 46,214
 82,429
 100,161
 Total revenue 13,684
 25,157
 29,165
 57,219
 Gross profit 8,614
 12,458
 17,496
 30,062
 Gross profit margin 62.9% 49.5 % 60.0% 52.5 %
          
RSCG:        
 GMV 41,899
 35,570
 77,343
 64,306
 Total revenue 34,011
 26,914
 63,489
 47,399
 Gross profit 12,287
 8,616
 21,836
 15,344
 Gross profit margin 36.1% 32.0 % 34.4% 32.4 %
          
Machinio:        
 GMV —
 —
 —
 —
 Total revenue 1,374
 —
 2,366
 —
 Gross profit 1,265
 —
 2,143
 —
 Gross profit margin 92.1% —
 90.6% —
          
Corporate & Other:        
 GMV 34
 934
 469
 2,486
 Total revenue 34
 934
 478
 2,489
 Gross profit 10
 (152) 113
 (827)
 Gross profit margin 29.4% (16.3)% 23.6% (33.2)%
          
Consolidated:        
 GMV 155,393
 152,180
 313,939
 307,533
 Total revenue 56,800
 60,097
 110,853
 121,240
 Gross profit 29,218
 27,511
 55,691
 57,711
 Gross profit margin 51.4% 45.8 % 50.2% 47.6 %


Three Months Ended March 31, 20192020 Compared to the Three Months Ended March 31, 20182019


Segment Results


GovDeals. Revenue from our GovDeals segment increased 8.5%1.6%, or $0.6$0.1 million, and GMV decreased 0.3%, or $0.2 million. Beginning in mid-March, GovDeals began to experience reduced volumes resulting from government facility closures in response to the COVID-19 pandemic, which also prevented buyer pickups and ability to complete related transactions. As a result of the increase in revenues and an increase in gross profit margin, gross profit increased 3.4%, or $0.2 million. Gross profit margin increased 1.5%, primarily due to a decline in vehicle sales which required transportation costs to arrive at the point of sale.
30


RSCG. Revenue from our RSCG segment increased 6.6%, or $2.2 million, due to additional sales volume froma 5.8%, or $2.4 million, increase in GMV driven by growing volumes within existing sellersseller accounts and launching new programs with mid-sized and large retailers, and an increase in the numbermix of new sellers. GMVtransactions performed under the purchase model. Beginning in mid-March, RSCG began to experience reduced volumes resulting from this segmentretailers prioritizing their attention and resources to meet the demands for essential goods in response to the COVID-19 pandemic. Buyer demand has been mixed, with some buyers increasing their average purchases and some decreasing, depending on varying circumstances. As a result of the increase in revenues, partially offset by a decline in gross profit margin, gross profit increased 11.4%0.9%, or $7.9 million,$0.1 million. Gross profit margin decreased 1.9% primarily due to additional sales volume from existing sellersincreased shipping costs and an increase in mix from lower margin product categories.

CAG. Revenue and GMV from the numberCAG segment decreased 48.6%, or $6.6 million, and 36.7%, or $13.2 million, respectively. The conclusion of new sellers. the Scrap Contract caused revenue and GMV to each decline by $4.3 million. Excluding the impact of the completed Scrap Contract, revenue decreased by 24.9%, or $2.3 million, and GMV decreased by 28.1%, or $8.9 million. The declines were driven by the COVID-19 pandemic, which had a larger effect on CAG, as travel restrictions and facility closures in China early in the quarter interrupted supply from sellers and prevented buyers from inspecting goods already for sale. This trend affected our EMEA and North American regions in March as the pandemic spread. In addition, the North American region experienced softness in its industrial and bio-pharma verticals. Gross profit within thisthe CAG segment decreased 42.9%, or $3.7 million, due to a $1.4 million impact from the completion of the Scrap Contract, and the impacts of the revenue declines. Gross profit margin increased to 69.9% from 62.9% due the completion of the Scrap Contract, which had lower gross profit margins than the remaining business, partially offset by an increase in mix of revenues earned from the purchase model.

Machinio. Revenue from our Machinio segment increased 6.9%24.2%, or $0.5$0.3 million, due to $7.0an increase in subscription activity, and due to revenue earned from deferred revenues no longer containing effects from purchase accounting. As a result of the increase in revenues, gross profit increased 27.4%, or $0.3 million. However, beginning in March, Machinio began to experience a reduction in traffic due to the COVID-19 pandemic.
Corporate & Other. The changes in revenue, GMV, gross profit and gross profit margin are due to the Company's exit from the IronDirect business in January 2019.

Consolidated Results

Revenue - Total consolidated revenue decreased $4.0 million, or 7.0%. Refer to the discussion of Segment Results above for discussion of the decrease in revenue.
Cost of goods sold.  Cost of goods sold increased $1.8 million, or 7.3%, primarily due to revenue increases in RSCG, partially offset by revenue declines in CAG.

Seller distributions.  Seller distributions decreased $2.8 million, or 100.0%, due to the completion of the Scrap Contract.

Technology and operations expenses.  Technology and operations expenses decreased $1.8 million, or 13.7%. The decrease included $1.4 million due to the completion of the Scrap Contract and $1.6 million in reductions in Corporate and CAG (excluding the Scrap Contract) driven by benefits from restructuring and other organizational changes performed in fiscal 2019. These decreases were partially offset by a $1.2 million increase in RSCG and GovDeals driven by increased customer support and operations expenses from the continued growth in those segments. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased technology and operations expenses while they are in effect.

Sales and marketing expenses.  Sales and marketing expenses increased $1.0 million, or 10.7%, due to a $0.4 million increase in sales expenses driven by the increases in revenues at GovDeals, RSCG and Machinio, and a $0.3 million increase in marketing labor and expenses to promote our new e-commerce technology platform and develop our consolidated marketplace. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased sales and marketing expenses while they are in effect.

General and administrative expenses.  General and administrative expenses decreased $1.2 million, or 14.2%, and was impacted by the completion of the Scrap Contract and by benefits from restructuring and other organizational changes performed in fiscal 2019. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased general and administrative expenses while they are in effect.
31


Other operating expenses.  Other operating expense for the three months ended March 31, 2020 was not significant. Other operating expense of $1.4 million for the three months ended March 31, 2019 from $6.6 million forrepresents the three


months ended March 31, 2018, due to additional sales volumes. As a percentage of revenue, gross profit decreased to 91.5% for the three months ended March 31, 2019, from 92.9% for the three months ended March 31, 2018.

CAG. Revenue from our CAG segment decreased 45.6%, or $11.5 million. Approximately $11.6 million of this change was due to the wind-down of the Surplus contract. Additionally, the Scrap Contract experienced a lower volume of goods sold, as well as lower commodity prices, partially offset by a change in mix to higher value commodities. The decrease in revenue due to Surplus and Scrap contracts was partially offset by a slight increase in overall sales volume within our CAG Commercial business. GMV from our CAG segment decreased 21.9%, or $10.1 million. The wind-down of the Surplus contract resulted in a decrease of approximately $11.6 million. Also, contributing to the decrease is the lower volume of goods sold, as well as a change to lower value commodities under the Scrap contract, partially offset by a change in mix to higher value commodities resulting in a net decrease of approximately $1.7 million. These overall reductions were partially offset by an increase in GMV of $3.1 million from our CAG Commercial business. Gross profit within the CAG segment decreased 30.9%, or $3.8 million, to $8.6 million for the three months ended March 31, 2019, from $12.5 million for the three months ended March 31, 2018. This decrease can primarily be attributed to the wind-down of the Surplus Contract and lower sales volumes described above. As a percentage of revenue, gross profit increased to 63.0% for the three months ended March 31, 2019 from 49.5% for the three months ended March 31, 2018. The increase is primarily attributable to the wind-down of the Surplus Contract, which operated at a lower gross profit as a percentage of revenue than our CAG Commercial business.

RSCG. Revenue from our RSCG segment increased 26.4%, or $7.1 million, due to increases in revenue from both the purchase and consignment transaction models. GMV from our RSCG segment increased 17.8%, or $6.3 million, due to approximately $6.2 million increases in GMV in purchase transaction model, and approximately $0.1 million increase in GMV in consignment transaction models. Gross profit within the RSCG segment increased 42.6%, or $3.7 million for the three months ended March 31, 2019, due to the increases in revenue described above. As a percentage of revenue, gross profit increased to 36.1% for the three months ended March 31, 2019 from 32.0% for the three months ended March 31, 2018.

Machinio. Machinio was acquired on July 10, 2018. Machinio earns revenue from subscription fees charged to customers for promotional placements on Machinio's search engine.
Corporate & Other. The decrease in revenue of $0.9 million is attributable to a decrease in revenue from IronDirect, due to the decision to exit the business. Consequently, GMV from our Corporate & Other segment decreased 96.4%, or $0.9 million. Gross profit within Corporate & Other increased $0.2 million, attributable to lower cost of goods sold.

Consolidated Results
Cost of goods sold.  Cost of goods sold decreased $3.9 million, or 13.6%, to $24.8 million for the three months ended March 31, 2019, from $28.7 million for the three months ended March 31, 2018. Cost of goods sold decreased approximately $7.3 million due to the wind-down of the Surplus Contract. In addition, cost of goods sold decreased $1.1 million in our IronDirect business due to a lower volume of heavy equipment sales, partially offset by a $0.8 million increase in our CAG Commercial business, and a $3.4 million increase in our RSCG segment and a $0.2 million increase in our GovDeals segment, primarily due to increased sales.

Seller distributions.  Seller distributions decreased $1.1 million, or 28.1%, to $2.8 million for the three months ended March 31, 2019, from $3.9 million for the three months ended March 31, 2018, due to lower sales under our Scrap Contract during the three months ended March 31, 2019.

Technology and operations expenses.  Technology and operations expenses decreased $2.6 million, or 15.8%, to $13.4 million for the three months ended March 31, 2019, from $16.0 million for the three months ended March 31, 2018, due to the loss of the Surplus Contract of approximately $2.2 million, partially offset by approximately $0.9 million increase, attributable to higher labor costs associated with additional sales volume in our RSCG and GovDeals segments. Also, contributing to the decrease is the $0.7 million lower technology labor costs, external contractors' fees and travel costs as a result of completing a certain phase of development of the new LiquidityOne platform as well as lower license fees and other information technology service costs. During the three months ended March 31, 2019 the Company capitalized $0.9 million of costs related to the LiquidityOne platform. These costs primarily consisted of technology labor costs.

Sales and marketing expenses.  Sales and marketing expenses increased $0.9 million, or 11.1%, to $9.1 million for the three months ended March 31, 2019, from $8.2 million for the three months ended March 31, 2018, due primarily to a $0.5 million increase within our Machinio segment, which was acquired in July 2018, from a full quarter of sales and marketing


expense that did not occur in the prior year quarter. Also, contributing to the increase is the $1.0 million higher costs in marketing labor costs, partially offset by a $0.6 million decrease in marketing and promotion expenditures.

General and administrative expenses.  General and administrative expenses increased $1.1 million, or 14.3%, to $8.6 million for the three months ended March 31, 2019, from $7.5 million for the three months ended March 31, 2018. This is due to an increase in overall staff cost of approximately $0.9 million and corporate overhead expense of $0.2 million. The increase in overall staff cost is attributable to $0.2 million staff cost in our Machinio segment, that did not occur in the prior year comparable quarter. In addition, staff cost increased $0.7 million in the rest of the segments.
Other operating expenses.  Other operating expenses reflected an expense of approximately $1.4 million in the three months ended March 31, 2019, which consisted of a change in the fair value of ourthe Machinio earn-out liability of $1.3 million and approximately $0.05 million primarily due to acquisition and restructuringrelated costs. In the three months ended March 31, 2018, Other operating expense of $0.3 million represented approximately $0.5 million of restructuring cost (for further information, see Note 11 to the Consolidated Financial Statements included in this Report), partially offset by $0.2 million of other miscellaneous items.


On April 23, 2019, the Company performed a strategic reorganization that consolidated its go-to-market for self-directed and fully-managed market place services to capitalize on growth opportunities. As a result, the Company will incur restructuring costs of approximately $1.1 million for employee termination benefits. The termination costs relate to the GovDeals, CAG, and RSCG segments, as well as Corporate & Other, and will be recorded as Business realignment expenses within Other operating expenses in the Consolidated Statements of Operations during the three months ended June 30, 2019.

Interest and other income, net.  Interest and other income, net, reflected income of approximately $0.5decreased by $0.2 million due to a decline in the three months ended March 31, 2019, which consistedholdings of approximately $0.4 million of interest income mainly from our short-term investments and $0.1 million of net periodic pension benefit for the non-service cost components of our UK entity's defined benefit pension plan. In the three months ended March 31, 2018, Interest and other income, net represented an income of $0.4 million, which consisted of approximately $0.1 million ofalso in their interest income, $0.1 million of net periodic pension benefit other than the service cost component, and $0.2 million of other miscellaneous income.rates.
 
Provision (benefit) for income taxes.  Provision (benefit) for income taxes decreased $0.1 million, to a provision of $0.3 million for the three months ended March 31, 2019, from $0.4 million for the three months ended March 31, 2018, due to the impact of foreign, state, and local taxes and permanent tax adjustments.


Six Months Ended March 31, 20192020 Compared to the Six Months Ended March 31, 20182019


Segment Results


GovDeals. Revenue from our GovDeals segment increased 8.6%3.1%, or $0.5 million, due to a 1.7%, or $2.7 million increase in GMV from adding new sellers. However, beginning in mid-March, GovDeals began to experience reduced volumes resulting from government facility closures in response to the COVID-19 pandemic, which also prevented buyer pickups and ability to complete related transactions. As a result of the increase in revenues and an increase in gross profit margin, gross profit increased 4.4%, or $0.6 million. Gross profit margin increased 1.2%, primarily due to a decline in vehicle sales which required transportation costs to arrive at the point of sale.

RSCG. Revenue from our RSCG segment increased 7.0%, or $4.5 million, due to an 8.9%, or $6.8 million, increase in GMV driven by growing volumes within existing seller accounts and launching new programs with mid-sized and large retailers. Beginning in mid-March, RSCG began to experience reduced volumes resulting from retailers prioritizing their attention and resources to meet the demands for essential goods in response to the COVID-19 pandemic. Buyer demand has been mixed, with some buyers increasing their average purchases and some decreasing, depending on varying circumstances. As a result of the increase in revenues, partially offset by a decline in gross profit margin, gross profit increased 4.0%, or $0.9 million. Gross profit margin decreased 1.0% primarily due to increased shipping costs and an increase in mix from lower margin product categories.

CAG. Revenue and GMV from the CAG segment decreased 48.6%, or $14.2 million, and 36.5%, or $30.1 million, respectively. The conclusion of the Scrap Contract caused revenue and GMV to each decline by $8.4 million. Excluding the impact of the completed Scrap Contract, revenue decreased by 28.3%, or $5.9 million, and GMV decreased by 29.4%, or $21.8 million. The declines were driven by the COVID-19 pandemic, which had a larger effect on CAG, as travel restrictions and facility closures in China early in the quarter interrupted supply from sellers and prevented buyers from inspecting goods already for sale. This trend affected our EMEA and North American regions in March as the pandemic spread. The declines were also influenced by a strong prior year performance in the Asia-Pacific region, and associated with softness in the energy, industrial, and bio-pharma verticals in North America. Gross profit within the CAG segment decreased 38.6%, or $6.8 million, due to a $2.9 million impact from the completion of the Scrap Contract, and as a result of reduction in revenues. Gross profit margin increased to 71.7% from 60.0% due the completion of the Scrap Contract, which had lower gross profit margins than the remaining business, and from the increase in mix of revenues earned from the consignment model.

Machinio. Revenue from our Machinio segment increased 50.3%, or $1.2 million, due to additional sales volume from existing sellers and an increase in subscription activity, and due to revenue earned from deferred revenues no longer containing effects from purchase accounting. As a result of the number of new sellers. GMV from this segmentincrease in revenues, gross profit increased 9.3%57.4%, or $13.1$1.2 million.
Corporate & Other. The changes in revenue, GMV, gross profit and gross profit margin are due to the Company's exit from the IronDirect business in January 2019.

Consolidated Results

Revenue - Total consolidated revenue decreased $8.5 million, or 7.7%. Refer to the discussion of Segment Results above for discussion of the decrease in revenue.
Cost of goods sold.  Cost of goods sold increased $1.0 million, or 2.1%, primarily due to revenue increases in RSCG, partially offset by revenue declines in CAG.

Seller distributions.  Seller distributions decreased $5.4 million, or 100.0%, due to the completion of the Scrap Contract.
32


Technology and operations expenses.  Technology and operations expenses decreased $3.1 million, or 12.0%. The decrease included $2.7 million due to additional sales volumethe completion of the Scrap Contract and $2.3 million in reductions in Corporate and CAG (excluding the Scrap Contract) driven by benefits from existing sellersrestructuring and another organizational changes performed in fiscal 2019. These decreases were partially offset by a $2.2 million increase in RSCG and GovDeals driven by increased customer support and operations expenses from the numbercontinued growth in those segments. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this period, but are expected to result in decreased technology and operations expenses while they are in effect.

Sales and marketing expenses.  Sales and marketing expenses increased $1.6 million, or 8.8%, due to a $0.4 million increase in sales expenses driven by the increases in revenues at GovDeals and RSCG, partially offset by the reduced revenues in CAG, and a $1.1 million increase in marketing labor and expenses to promote our new sellers. Gross profit withine-commerce technology platform and develop our consolidated marketplace. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this segment increased 7.4%quarter, but are expected to result in decreased sales and marketing expenses while they are in effect.

General and administrative expenses.  General and administrative expenses decreased $2.2 million, or 12.5%, or $1.0and were impacted by the completion of the Scrap Contract and by benefits from restructuring and other organizational changes performed in fiscal 2019. Due to the timing of implementation, the actions taken to reduce operating expenses in response to the COVID-19 pandemic did not have a significant impact this quarter, but are expected to result in decreased general and administrative expenses while they are in effect.

Other operating expenses.  Other operating expense of $0.2 million to $14.1for the six months ended March 31, 2020 represents the increase in fair value of the Machinio earn-out liability. Other operating expense of $1.6 million for the six months ended March 31, 2019 from $13.1 million forrepresents the six months ended March 31, 2018, due to additional sales volumes. As a percentage of revenue, gross profit decreased to 91.9% for the six months ended March 31, 2019, from 92.9% for the six months ended March 31, 2018.

CAG. Revenue from our CAG segment decreased 49.0%, or $28.1 million. Approximately $27.8 million of this change was due to the wind-down of the Surplus contract. Additionally, the Scrap Contract experienced a lower volume of goods sold, as well as lower commodity prices, partially offset by a change in mix to higher value commodities. The decrease in revenue due to Surplus and Scrap contracts was partially offset by a slight increase in overall sales volume within our CAG Commercial business. GMV from our CAG segment decreased 17.7%, or $17.7 million. The wind-down of the Surplus contract resulted in a decrease of approximately $25.5 million. Also, contributing to the decrease is the lower volume of goods sold, as well as a change to lower value commodities under the Scrap contract, partially offset by a change in mix to higher value commodities resulting in a net decrease of approximately $2.7 million. These overall reductions were partially offset by an increase in GMV of $10.5 million from our CAG Commercial business. Gross profit within the CAG segment decreased 41.8%, or $12.6 million, to $17.5 million for the six months ended March 31, 2019, from $30.1 million for the six months ended March 31, 2018. This decrease can primarily be attributed to the wind-down of the Surplus Contract and lower sales volumes described above. As a percentage of revenue, gross profit increased to 60.0% for the six months ended March 31, 2019 from 52.5% for the six months ended March 31, 2018.



RSCG. Revenue from our RSCG segment increased 33.9%, or $16.1 million, due to increases in revenue from both the purchase and consignment transaction models. GMV from our RSCG segment increased 20.3%, or $13.0 million, due to approximately $14.0 million increases in GMV in purchase transaction model, partially offset by approximately $1.0 million decrease in GMV in consignment transaction models. Gross profit within the RSCG segment increased 42.3%, or $6.5 million for the six months ended March 31, 2019, due to the increases in revenue described above. As a percentage of revenue, gross profit increased to 34.4%, from 32.4%.

Machinio. Machinio was acquired on July 10, 2018. Machinio earns revenue from subscription fees charged to customers for promotional placements on Machinio's search engine.
Corporate & Other. The decrease in revenue of $2.0 million is attributable to a decrease in revenue from IronDirect, due to the decision to exit the business in January 2019. Consequently, GMV from our Corporate & Other segment decreased 81.1%, or $2.0 million, due to lower heavy equipment sales and exit of the business. Gross profit within Corporate & Other increased $0.9 million, attributable to lower cost of goods sold and a $0.6 million inventory reserve recorded in the first quarter of fiscal 2018, which did not occur in the quarter ended March 31, 2019. During the six months ended March 31, 2019, sales were primarily drop ship parts resulting in higher margins and during the six months ended March 31, 2018 sales included equipment and inventory.

Consolidated Results
Cost of goods sold.  Cost of goods sold decreased $6.6 million, or 11.7%, to $49.8 million for the six months ended March 31, 2019, from $56.4 million for the six months ended March 31, 2018. Cost of goods sold decreased approximately $16.1 million due to the wind-down of the Surplus Contract. In addition, cost of goods sold decreased $2.9 million in our IronDirect business due to a lower volume of heavy equipment sales and a decision to exit the business, partially offset by a $2.4 million increase in our CAG Commercial business, and a $9.8 million increase in our RSCG and GovDeals segments, primarily due to increased sales. Also, contributing to the increase is a $0.2 million cost of goods sold attributable to the Machinio segment, which was acquired in July 2018, resulting in a full six months of cost of goods sold that did not occur in the prior year comparable period.

Seller distributions.  Seller distributions decreased $1.8 million, or 25.0%, to $5.4 million for the six months ended March 31, 2019, from $7.2 million for the six months ended March 31, 2018, due to lower sales under our Scrap Contract during the six months ended March 31, 2018.

Technology and operations expenses.  Technology and operations expenses decreased $8.1 million, or 23.8%, to $26.0 million for the six months ended March 31, 2019, from $34.1 million for the six months ended March 31, 2018, due to the loss of the Surplus Contract of approximately $5.4 million, partially offset by approximately $1.1 million increase, attributable to higher labor costs associated with additional sales volume in our RSCG and GovDeals segments. Also, contributing to the decrease is the $2.4 million lower technology labor costs, external contractors' fees and travel costs as a result of completing a certain phase of development of the new LiquidityOne platform as well as lower license fees and other information technology service costs. During the six months ended March 31, 2019 the Company capitalized $1.9 million costs related to the LiquidityOne platform. These costs primarily consisted of technology labor costs.

Sales and marketing expenses.  Sales and marketing expenses increased $1.6 million, or 9.7%, to $18.1 million for the six months ended March 31, 2019, from $16.5 million for the six months ended March 31, 2018, due primarily to a $1.1 million increase within our Machinio segment, which was acquired in July 2018, from a full quarter of sales and marketing expense that did not occur in the prior year quarter. Also contributing to the increase was an increase in marketing labor costs of $1.2 million partially offset by a $0.7 million decrease in marketing and promotion expenditure.

General and administrative expenses.  General and administrative expenses increased $2.1 million, or 13.8%, to $17.3 million for the six months ended March 31, 2019, from $15.2 million for the six months ended March 31, 2018. This is due to an increase in overall staff cost of approximately $1.5 million and corporate overhead expense of $0.6 million. The increase in overall staff cost is attributable to $0.4 million staff cost in our Machinio segment, that did not occur in the prior year comparable six-month period. In addition staff cost increased $1.5 million in our Corporate & Other and RSCG segments, partially offset by a $0.3 million decrease in our CAG and GovDeals segments.
Other operating expenses.  Other operating expenses reflected an expense of approximately $1.6 million in the six months ended March 31, 2019, which consisted of a change in the fair value of ourthe Machinio earn-out liability of $1.4 million and approximately $0.2 million primarily due to acquisition and restructuringrelated costs. In the six months ended March 31, 2018, Other



operating expense of $1.8 million represented approximately $1.8 million of restructuring cost (for further information, see Note 11 to the Consolidated Financial Statements included in this Report), and a $0.1 million loss on the value of a right we held from our participation in certain principal transactions in the CAG segment, partially offset by $0.1 million of other miscellaneous items.

Interest and other income, net.  Interest and other income, net, reflected income of approximately $0.8decreased by $0.3 million due to a decline in the six months ended March 31, 2019, which consistedholdings of approximately $0.8 million of interest income mainly from our short-term investments and $0.2 million of net periodic pension benefit other than the service cost component of our UK entity's defined benefit pension plan, partially offset by approximately $0.2 million of other miscellaneous expenses. In the six months ended March 31, 2018, Interest and other income, net represented an income of $0.9 million, which consisted of approximately $0.2 million ofalso in their interest income, $0.2 million of net periodic pension benefit other than the service cost component of our UK entity's defined benefit pension plan, and $0.5 million of other miscellaneous income.rates.
 
Provision (benefit) for income taxes.  Provision (benefit) for income taxes increased $5.0decreased $0.1 million to a provision of $0.6 million for the six months ended March 31, 2019, from a benefit of $4.4 million for the six months ended March 31, 2018, due to benefits resulting from the new Tax Cut and Jobs Act enacted in fiscal year 2018 and the impact of foreign, state, and local taxes and permanent tax adjustments.


Liquidity and Capital Resources
 
Historically, our primaryOur operational cash needs have beenprimarily relate to working capital, (includingincluding staffing costs, technology expenses and capital used for inventory purchases),purchases, which we have funded through cash generated from operations. From time to time, we may use our capital resources for other activities, such as contract start-up costs, joint ventures and acquisitions. As of March 31, 2019,2020, we had approximately $33.9$41.8 million in cash as well as $30.0$10.0 million in short-term investments.


We expect that the COVID-19 pandemic may cause the Company's GMV, EBITDA and cash position to decline in the short-term although the Company's actions taken to conserve resources and the speed at which business activity may return may mitigate these short-term declines. These mitigation efforts include salary reductions, furloughs, moderation in discretionary spending and non-essential investments, and amendments to vendor payment terms. However, we believe that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for at least the next twelve months.

In fiscal 2019, we deployed our new e-commerce technology platform. We expect to continue to advanceinvest in enhancements to our marketplace capabilities and for the designimplementation of tools for data-driven product recommendations, omni-channel behavioral marketing and developmentpredictive analytics and integrated services for our retail supply chain segment.

During the second quarter of our LiquidityOne platform, services and analytical tools. We will continue to incur additional costs throughoutfiscal 2020 the duration of this initiative to implementCompany paid the new platform and educate our employees and our buyers and sellers about$5.0 million earn-out payment for the initiative. We have also invested in new business ventures, such as Machinio acquisition we made in July 2018 for which operates a global online platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors. The considerationwe paid to the sellers was approximately $16.7 million in net cash, equity consideration of approximately $2.0 million, and contingent consideration payable in 2020 in an amount up to $5.0 million.cash.

We did not record a provision for deferred U.S. tax expense on the undistributed earnings of foreign subsidiaries because we intend to indefinitely reinvest the earnings of these foreign subsidiaries outside the United States. The amount of such undistributed foreign earnings was approximately $8.9$4.0 million as of March 31, 2019.2020. As of March 31, 20192020 and September 30, 2018, approximately $11.72019, $16.9 million and $14.4$21.0 million, respectively, of cash and cash equivalents was held overseas.outside of the U.S.

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We are authorized to repurchase issued and outstanding shares of our common stock under a share repurchase program approved by our Board of Directors. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discontinued or suspended at any time and will be funded using our available cash. We did not repurchase shares under this program during the six months ended March 31, 20192020 or 2018.2019. As of March 31, 2019,2020, we mayare authorized to repurchase up to an additional $10.1 million in shares under this program.
 
Most of our sales are recorded subsequent to receipt of payment authorization, 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.


Changes in Cash Flows: Six Months Ended March 31, 20192020 Compared to the Six Months Ended March 31, 20182019
 
Net cash used in operating activities was $12.1 million and $11.6 million for the six months ended March 31, 2020 and 2019, as compared to net cash provided by operating activities of $6.5 million for the six months ended March 31, 2018.respectively. The $18.1$0.5 million increase in cash used in operations between periods was attributable to changesthe $3.8 million portion of the Machinio earn-out payment associated with its increase in value post-acquisition, partially offset by $2.1 million of lower net income as adjusted for non-cash items, and $1.1 million of final payments of seller distributions associated with the completion of the Scrap Contract. Our working capital primarily from changeaccounts are subject to natural variations depending on the timing of cash receipts and payments, and our variations in accounts receivable, settlement of accounts payable, payablesour transaction volumes are related to sellerssettlements between our buyers and purchase of inventory.sellers.

Net cash used inprovided by investing activities was $13.0$19.7 million for the six months ended March 31, 2019,2020, and $0.9$13.0 million for the six months ended March 31, 2018.  Net cashwas used inby investing activities for the six months ended March 31, 2019 consisted


2019. The $32.7 million increase in cash provided by investing activities was driven by a $30.0 million increase in activity related to short-term investments which are used to manage the Company's excess cash balances, and $2.5 million principal payment on the promissory note issued to JTC. As discussed in Note 2 - Summary of Significant Accounting Policies to the Company's consolidated financial statements, the Company concluded that it remains probable that the Company will collect the amounts related to the promissory note issued to JTC. However, the Company will continue to monitor for changes that could impact the recoverability of the purchase of certificates of deposit inpromissory note, which will depend on JTC's subsequent operating performance and ability to make the amount of $30 million, as well as expenditures for capitalized software, purchases of equipment, and leasehold improvements. payments required by the new repayment schedule.

Net cash used in investing activities for the six months ended March 31, 2018 consisted primarily of expenditures for capitalized software, purchases of equipment, and leasehold improvements.
Net cash provided by financing activities was $0.12$1.7 million for the six months ended March 31, 2019 compared to $0.012020. The $1.9 million increase in cash provided by financing activities for the six months ended March 31, 2018.  Net cash providedused by financing activities consisted primarily of proceeds from$1.2 million the exerciseportion of commonthe Machinio earn-out payment that represented its fair value at the date of acquisition, and $0.6 million taxes paid associated with net settlement of stock options.compensation awards. Net settlement was not used in the prior year comparable period.

Capital Expenditures.  Our capital expenditures consist primarily of capitalized software, computers and purchased software, office equipment, furniture and fixtures, and leasehold improvements. Capitalized software includes costs associated with our LiquidityOne platform. The timing and volume of such capital expenditures in the future will be affected by the addition of new customerssellers or buyers or expansion of existing customer relationships, as well as our development of our LiquidityOne platform.seller or buyer relationships. We intend to fund those expenditures primarily withfrom operating cash on hand.flows. Our capital expenditures for the six months ended March 31, 20192020 were $3.0$2.8 million. As of March 31, 2019,2020, we had no significant outstanding commitments for capital expenditures.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the development and deployment of new marketplaces, the introduction of new value-added services and the costs to establish additional distribution centers. Although we are currently not a party to any definitive agreement with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expense and could result in covenants that would restrict our operations. There is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Off-Balance Sheet Arrangements
 
We do not have any transactions, agreements or other contractual arrangements that could be considered material off-balance sheet arrangements.


Item 3.Quantitative and Qualitative Disclosures About Market Risk.
 
Interest rate sensitivity. We had no debt as of March 31, 2019,2020, but we do hold $10.0 million of short-term investments with interest rates of 1.76% and thus do$10.0 million of cash equivalents in money market funds. Changes in interest rates on these short-term investments are not expected to have any related interest rate exposure.a significant impact to our consolidated results of operations. Our investment policy
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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.


Exchange rate sensitivity. Because of the number of countries and currencies we operate in, movements in currency exchange rates may affect our results. We report our operating results and financial condition in U.S. dollars. Our U.S. operations earn revenues and incur expenses primarily in U.S. dollars. Outside the United States, we predominantly generate revenues and expenses in the local currency. When we translate the results and net assets of these operations into U.S. dollars for reporting purposes, movements in exchange rates will affect reported results and net assets. Volatile market conditions arising from the COVID-19 pandemic may result in significant changes in exchange rates, which would affect our results of operations expressed in U.S. dollars.


Item 4. Controls and Procedures.


We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.


During the sixthree months ended March 31, 2019,2020, no change occurred in our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. While the impact of COVID-19 pandemic and our actions taken in response, including furloughs and employees working remotely, has not materially affected our internal control over financial reporting as of March 31, 2020, we will continue to monitor and assess this ongoing situation for potential material affects.




As of March 31, 2019,2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer (Principal Financial 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, as appropriate to allow timely decisions regarding required disclosure.




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PART II—OTHER INFORMATION
 
Item 1. Legal Proceedings.
From time
Information regarding the Company's legal proceedings may be found in Note 11 of the accompanying Notes to time, we may become involved in litigation relating to claims arising in the ordinary course of our business. There are no claims or actions pending or threatened against us that, if adversely determined, would in our judgment have a material adverse effect on us.Unaudited Consolidated Financial Statements.


Item 1A. Risk Factors.
 
Natural or man-made disasters, including health emergencies related to the COVID-19 (coronavirus) pandemic, could have a material adverse effect on our business operations, results of operations, cash flows and financial position.

COVID-19 has caused volatility in the global financial markets and threatened a slowdown in the global economy. In addition, we cannot predict the impact that COVID-19 will have on our sellers, buyers, vendors, and other business partners, and each of their financial conditions; however, any material effect on these parties could adversely impact us. The COVID-19 pandemic has already begun to disrupt our marketplace operations, including by reducing the supply of surplus assets that might otherwise be sold due to government and commercial business closures. Further, shelter-in-place orders could cause buyers to refrain from bidding or otherwise engaging in transactions, at least in the near term, as they may have reduced demand in their businesses or, alternatively, are unable to engage in inspection and pick-up activities relating to winning auctions or closing sales.

A prolonged quarantine or border closure could result in temporary or longer-term disruptions of surplus disposal patterns, consumption and trade patterns, supply chains, production processes, and operations. A widespread health crisis, such as the COVID-19 pandemic, could negatively affect the economies and financial markets of many countries resulting in a global economic downturn which could negatively impact the volume of assets available for sale, the number of interested buyers or bidders, recovery maximization on marketplace transactions and marketplace GMV.

The COVID-19 pandemic has also heightened the risk that a significant portion of our workforce will suffer illness or otherwise not be permitted or be unable to work and exposing us to cyber and other risks associated with a large number of our employees working remotely. Certain of our RSCG warehouse facilities have experienced cases of COVID-19, and although we have not had temporary workplace disruptions, we cannot predict whether these will occur in the future or if our RSCG warehouse facilities will experience more significant or frequent disruptions in the future.

Pandemics, such as the current global COVID-19 virus, outbreaks of communicable infections or diseases, or other public health concerns in the markets in which our consumers or employees live and/or in which we or our distributors, retailers, and suppliers operate.

Supply disruption may result from restrictions on the ability of employees and others in the reverse supply chain to travel and work, such as caused by quarantine or individual illness, or which may result from border closures imposed by governments to deter the spread of communicable infection or disease, or determinations by us or our sellers or buyers to temporarily suspend operations in affected areas, or other actions which restrict the ability to engage in transactions for surplus assets or which may otherwise negatively impact our ability to facilitate inspection and shipment of surplus assets. Ports or channels of entry may be closed or operate at only a portion of capacity, or transportation of surplus assets within a region or country may be limited, if workers are unable to report to work due to travel restrictions or personal illness. Our operations and the operations of our sellers and buyers may become less efficient or otherwise become negatively impacted if our executive leaders or other personnel critical to our operations are unable to work or if a significant percentage of the workforce is unable to work or is required to work from home. Cost saving measures may not be enough. A prolonged quarantine or border closure could result in temporary or longer-term disruptions of reverse supply chain patterns, consumption and trade patterns. A widespread health crisis, such as the COVID-19 pandemic, could negatively affect the economies and financial markets of many countries resulting in a global economic downturn that could, in turn, negatively impact demand for surplus assets and our ability to facilitate transactions. Any of these events could have a material adverse effect on our business, liquidity, financial condition, or results of operations.

As a result of a decline in transactional activity attributable to the COVID-19 pandemic and our need to conserve cash, we have implemented furloughs and temporary pay cuts, which could adversely impact the morale and performance of employees and our ability to retain them.

Certain employees have been furloughed without pay and most other employees earning more than $50,000 in base salary have received pay cuts. These actions could have unintended impact on our employees, could lead to a decline in employee morale,
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and could lead to a loss of these or other employees. In the event of employee attrition, we may not be able to replace the lost employees on a timely basis, or with individuals having the same level of skills. In either case, our business prospects, results of operations and financial condition could be materially and adversely affected.

In addition to the other information set forth in this report, you should carefully consider the factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018,2019, 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 Information.


The CompanyGiven the continued uncertainty in the current business climate and to respond to changing conditions resulting from the COVID-19 pandemic, Mr. James M. Rallo, former President, RSCGWilliam P. Angrick, III, Chairman and CAG, entered into a Severance Agreement and General Release (the “Rallo Agreement”), which agreement will become irrevocable by Mr. Rallo on May 14, 2019. 

Pursuant to the termsChief Executive Officer of the Rallo Agreement,Company, has agreed to continue his voluntary reduction in his base salary at a level of a 50% reduction. Messrs. Jorge A. Celaya, John Daunt, Michael Lutz, Nicholas Rozdilsky, Mark A. Shaffer, and contingent uponSteven Weiskircher have also voluntarily agreed to continue to reduce their base salaries at a level of a 25% reduction.

In addition, each member of the Rallo Agreement becoming irrevocable, Mr. Rallo will receive a severance packageBoard of Directors has agreed to continue to voluntarily forgo half of all fees paid to such directors for his or her service on the Board, including among other things:
(i)a lump-sum cash payment of $485,118, which represents Mr. Rallo’s full base salary plus an amount equal to the average of the actual annual incentive bonuses paid to him during the previous two fiscal years, which lump-sum payment will be reduced for applicable taxes and withholdings;
(ii)payment of $50,815, representing the aggregate amount of paid time-off accrued through the Termination Date, which payment will be reduced for applicable taxes and withholdings;
(iii)reimbursement for business expenses reasonably incurred prior to the Termination Date;
(iv)future reimbursement of up to $9,792, representing Executive’s cost for COBRA for the period from May 1, 2019 to the earlier of the date that Executive finds employment or December 31, 2019; and    
(v)comprehensive executive outplacement assistance through a third-party provider.

the annual retainer, committee membership and lead and committee chair fees.
Mr. Rallo may exercise his unexercised and vested options to purchase Company common stock issued under the Company’s 2006 Omnibus Long-Term Incentive Plan (the “Plan”)
These measures are effective for the twelve-month period following April 23, 2019, Mr. Rallo’s termination date.  Mr. Rallo’s unvested equity grants terminated asmonths of May and June and will be reviewed based on evolving operating and financial conditions in the termination date. future.


The Rallo Agreement also (i) reaffirms the effectiveness of the Employment Agreement Regarding Confidentiality, Intellectual Property, and Competitive Activities, made by and between Mr. Rallo and the Company, dated as of February 22, 2005 and (ii) includes Mr. Rallo’s agreement to release the Company from all liability in connection with his employment with and separation from the Company.
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Item 6. Exhibits.
 
Exhibit No.Description
2.1
3.1
3.2
10.110.1# 
31.110.2# 
10.3# 

10.4# 
10.5# 
10.6# 
10.7# 
10.8# 
10.9# 
10.10# 
31.1 
31.2
32.1
32.2
101
The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019,2020, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statement of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)



# Indicates management contract or compensatory plan.





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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
LIQUIDITY SERVICES, INC.
(Registrant)
May 7, 2020By:/s/ William P. Angrick, III
William P. Angrick, III
Chairman of the Board of Directors
and Chief Executive Officer
May 7, 2020By:/s/ Jorge A. Celaya
Jorge A. Celaya
Executive Vice President and Chief Financial Officer
May 7, 2020LIQUIDITY SERVICES, INC.
By:(Registrant)
May 8, 2019By:/s/ William P. Angrick, III
William P. Angrick, III
Chairman of the Board of Directors
and Chief Executive Officer
May 8, 2019By:/s/ Jorge A. Celaya
Jorge A. Celaya
Executive Vice President and Chief Financial Officer
May 8, 2019By:/s/ Samuel M. Guzman, Jr.
Samuel M. Guzman, Jr.
Vice President and Chief Accounting Officer



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