Item 1. Business.
Overview
We employ innovative e-commerce marketplace solutions to manage, value, and sell inventory and equipment for business and government clients. We
operate a network of leading e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. The Company's marketplaces
provide professional buyers access to a global, organized supply of new, surplus, and scrap assets presented with digital images and other relevant product information. Additionally, the Company
enables its corporate and government sellers to enhance their financial return on assets offered for sale by providing a liquid marketplace and value-added services that encompass the consultative
management, valuation, and sale of surplus assets. Our broad range of services include program management, valuation, asset management, reconciliation, RTV and RMA ("Return to Vendor" and "Returns
Management Authorization"), refurbishment and recycling, fulfillment, marketing and sales, warehousing and transportation, buyer customer support, and compliance and risk mitigation. We organize the
products on our marketplaces into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology
hardware, energy equipment, industrial capital assets, fleet and transportation equipment and specialty equipment. Our network of marketplaces includes: www.liquidation.com, www.govliquidation.com,
www.govdeals.com, www.networkintl.com, www.truckcenter.com, www.secondipity.com, www.unclesamsretailoutlet.com, www.go-dove.com, and www.irondirect.com. We have over 8,000 clients, including Fortune
1000 and Global 500 organizations as well as government agencies. The Company has one reportable segment consisting of an aggregation of five operating segments that manage e-commerce marketplaces for
sellers and buyers of new, surplus, and scrap assets.
We
believe our ability to create liquid marketplaces for surplus and salvage assets generates a continuing flow of goods from our corporate and government sellers. This valuable and
reliable flow of goods in turn attracts an increasing number of professional buyers to our marketplaces. During fiscal year 2016, the number of registered buyers grew from approximately 2,845,000 to
approximately 2,986,000, or 5.0%.
During
the past three fiscal years, we have conducted over 1,688,000 online transactions generating approximately $2.4 billion in gross merchandise volume or GMV. We believe the
continuing flow of goods in our marketplaces attracts a growing buyer base which creates a self-sustaining cycle for our buyers and sellers.
In
the fiscal year ended September 30, 2016, we generated GMV of $642.1 million and revenue of $316.5 million through multiple sources, including transaction fees
from sellers and buyers, revenue sharing arrangements, value-added service charges and online advertising fees. Our GMV has grown at a compound annual growth rate of approximately 14% since fiscal
year 2006.
We
were incorporated in Delaware in November 1999 as Liquidation.com, Inc. and commenced operations in early 2000.
Industry Overview
While a well-established forward supply chain exists for the procurement of assets, most manufacturers, retailers, corporations and government
agencies have not made significant investments in their reverse supply chain process or systems. The reverse supply chain addresses the redeployment
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and
remarketing of surplus and salvage assets. These assets generally consist of retail customer returns, overstock products and end-of-life goods or capital assets from both the corporate and
government sectors. The market is large, as indicated by a National Retail Federation (NRF) report in November 2015 that $260.5 billion of merchandise is returned on an annual basis. According
to a May 2015 report by the retail analyst firm IHL Group, retailers worldwide lose $1.75 trillion annually due to the cost of overstocks, out-of-stocks and needless returns. Additionally, the
Investment Recovery Association, a professional association for managers of surplus assets, reports on its website that at any given time, almost 20% of a typical organization's capital assets are
surplus to its needs.
The
supply of surplus and salvage assets in the reverse supply chain results from a number of factors, including:
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Supply chain inefficiencies.
Forecasting inaccuracies, manufacturer
overruns, cancelled orders, evolving market preferences, discontinued product lines, merchandise packaging changes and seasonal fluctuations result in the growth of surplus assets.
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Product innovation.
Continuous innovation in technology products, such as
computer and office equipment, consumer electronics, and personal communication and entertainment devices, results in a continuous flow of surplus assets.
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Return policies of large national and online retailers.
The flexible return
practices of many large national retailers and online shopping sites result in a continuous supply of returned merchandise, a significant portion of which must be liquidated. The NRF from November
2015 reports that approximately 8% of all merchandise purchases are returned.
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Compliance with government regulations.
An increasingly stringent
regulatory environment necessitates the verifiable recycling and remarketing of surplus assets that would otherwise be disposed of as waste.
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Increasing focus by corporate and government agencies to seek green solutions for surplus
assets.
Most organizations appreciate the growing need to be environmentally friendly by improving their management of end of life or surplus
goods, including creating the need to repurpose or efficiently redistribute surplus and capital assets to minimize waste and maximize value for themselves and the communities they serve.
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Changing budgetary trends in corporate and governmental entities.
As
corporate and governmental entities increasingly are being pressured to enhance efficiencies, while utilizing less resources, surplus and salvage capital assets become a source of funds once
liquidated.
Organizations
that manufacture, distribute, sell or use finished goods regularly need to dispose of excess inventory or returned merchandise. We believe the management and remarketing of
surplus assets traditionally has been an inefficient process. While many organizations spend considerable resources developing systems and channels supporting the flow of finished goods to their core
customers, we believe that many have not historically dedicated significant resources to the reverse supply chain. Factors contributing to these inefficiencies in the reverse supply chain include the
lack of:
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a centralized and global marketplace to sell bulk products in the reverse supply chain;
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awareness of effective methods and mechanisms for disposal of surplus assets;
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experience in managing the reverse supply chain to seek optimal net returns and improve gross margins; and
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real time market data on surplus assets as they move through the final steps of the product life cycle.
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Traditional
methods of surplus and salvage asset disposition include ad-hoc, negotiated direct sales, utilization of individual brokers or sales agents and live on-site auctions. We
believe these solutions are generally highly fragmented, geographically dispersed and poorly integrated with supply chain operations. The manual, negotiated and geographically dispersed nature of
traditional surplus resale methods results in a lack of pricing transparency for offered goods, multiple brokers/parties ultimately involved in the final disposition and a lower number of potential
buyers and bids, which we believe typically leads to lower recovery for sellers.
A
significant number of professional buyers seek surplus and salvage assets to sustain their operations and meet demands of end-customers. They include online and offline retailers,
convenience and discount stores, value-added resellers such as refurbishers and scrap recyclers, import and export firms, and small businesses. Traditionally, these buyers have had limited access to a
reliable flow of surplus goods and assets, relying instead on their own network of industry contacts and fixed-site auctioneers to locate, evaluate and purchase specific items of interest. Traditional
methods are inefficient for buyers due to the lack of:
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global access to an available continuous supply of desired goods and assets;
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efficient and inexpensive sourcing processes;
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a professionally managed central marketplace with transparent, high quality services;
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detailed information and product description for the offered goods; and
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pricing transparency or ability to compare asset prices.
The
Internet is a global medium enabling millions of people worldwide to share information, communicate and conduct business electronically. Strong growth has occurred in the
business-to-business (B2B) online retail market, which can be attributed to the rapid migration of manufacturers and wholesalers to open, online platforms. This continued evolution toward ubiquitous
B2B platforms that enable sellers and buyers to interact with each other anywhere in the world, totaled $855 billion in total B2B e-commerce sales in the United States in 2016, led by the
industrials sector which is on pace to grow 2016 sales by 8% to $246.5 billion (Source: Forrester Research Inc.). Forrester also anticipates that B2B e-commerce sales will reach $1.1
trillion by 2020, a compound average growth rate of 7.7% since 2014. We believe professional buyers of surplus and salvage assets will increasingly use these B2B platforms to identify and source goods
available for immediate online purchase.
Our Solution
Our solution is comprised of ecommerce marketplaces and value-added services. Our marketplaces and services are designed to provide sellers a
comprehensive solution to quickly bring surplus assets to market and enhance the financial value realized from the sale of their surplus assets while providing buyers with confidence in the reliable
flow of goods they purchase. We provide our sellers access to a network of liquid marketplaces with over 2.9 million professional buyers and a suite of services including consultative surplus
asset management, valuation, sales solutions, and logistics capabilities to efficiently manage our clients' reverse supply chain and maximize total supply chain value. We also seek the optimal methods
to maximize our clients' net recovery using channel strategies and dedicated programs to deliver transparent, sustained value.
Through
our relationships with sellers, we provide buyers convenient access to a substantial and continuous flow of surplus and salvage assets. We provide buyers with products in over
500 categories in lot sizes ranging from full truck loads to pallets, packages and individual items. Our solution combines leading ecommerce marketplaces with a full suite of integrated sales,
marketing, merchandising, fulfillment, payment collection, customer support, dispute mediation and logistics
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services.
We provide buyers a convenient method for sourcing surplus consumer goods and commercial capital assets including, industrial equipment, energy equipment, and transportation assets. For any
given asset, buyers have access to a detailed product description, product manifest, digital images of a product, relevant transaction history regarding the seller, shipping weights, product
dimensions and estimated shipping costs to the buyer's location. This enables our solutions to become the primary source for surplus and salvage assets for many of our professional buyers and
end-users.
We
believe our marketplaces benefit over time from greater scale and adoption by our constituents creating a virtual cycle for our buyers and sellers. As of September 30, 2016, we
had aggregated approximately 2,986,000 registered buyers in our marketplaces and access to millions of end-users through a range of existing consumer marketplaces. Aggregating this level of buyer
demand and market data enables us to generate a continuous flow of goods from corporate and government sellers, which in turn attracts an increasing number of professional buyers. During the fiscal
year ended September 30, 2016 we had over 2,417,000 auction participants in our online auctions from our registered buyers. During fiscal year 2016, we grew our registered buyer base by 5.0% or
approximately 141,000. As buyers continue to discover and use our ecommerce marketplaces as an effective method to source assets, we believe our solutions become an increasingly attractive sales
channel for corporate and government agency sellers. We believe this self-reinforcing cycle results in greater transaction volume and enhances the value of our marketplaces.
Competitive Factors
We have created liquid marketplaces for virtually any type, quantity or condition of surplus or salvage assets. The strengths of our business
model include:
Aggregation of supply and demand for surplus and salvage assets
Our ability to aggregate sellers and buyers through our marketplaces is a fundamental strength of our business model. Sellers benefit from a
liquid, transparent market and the active participation of our large base of professional buyers, which enhances returns. Buyers benefit from our relationships with high-volume, corporate and
government sellers, which provides them with continuous access to a comprehensive selection of surplus and salvage assets. Our solution eliminates the need for sellers and buyers to rely on the highly
fragmented and geographically dispersed group of traditional liquidators. Instead, sellers and buyers conveniently access our ecommerce marketplaces for their entire surplus and salvage asset needs.
Integrated and comprehensive solution
Our marketplaces are designed to provide sellers and buyers with a comprehensive solution for the online sale and purchase of surplus and
salvage assets. We offer a full suite of value-added services to simplify the sales and supply chain processes for sellers and improve the utility of our marketplaces for buyers. For corporate and
government sellers, we provide sales, marketing, logistics and customer support services that are fully integrated with our marketplaces, creating operational and system efficiencies. For many of
these sellers, asset disposition is not a core business function to which they desire to dedicate internal resources. With our solution, we manage each step of the transaction and supply chain for our
sellers reducing complexity while providing the ability to optimize the client's net financial return in the sale of surplus goods and assets. Sellers simply make goods available at their facilities
or deliver them to our distribution centers and we deliver the profits after the sale is completed. Our buyer services include intelligent alerts, search tools, dynamic pricing, shipping and delivery,
secure settlement, live customer support and dispute resolution to enable the most effective methods to source assets for their businesses.
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Flexible and aligned transaction model
We offer three primary transaction models to our sellers: purchase, consignment and profit-sharing. Under these models, our compensation is
derived from either the gross or net proceeds received from the sale of the assets. Our consignment and profit-sharing arrangements are designed to maximize returns by aligning our economic interests
with those of our sellers.
Faster transaction cycle times for our sellers and buyers
We believe our marketplace solutions allow sellers to complete the entire sales process more rapidly than through other liquidation methods by
generally reducing the complexities in the reverse supply chain and utilizing our multi-channel strategies to optimize recovery and velocity. As a result, sellers are able to reduce surplus or less
valuable inventory quickly, generate additional working capital and reduce the cost of carrying unwanted assets. We provide a one stop solution to enable professional buyers of any size throughout the
world to purchase assets in an efficient manner. For these buyers, we provide a broad range of services to give them the information necessary to make an informed bid and ensure they quickly and
efficiently receive the goods purchased.
Solutions that promote sustainability and green solutions for improved corporate/government stewardship
Our solutions provide a range of capabilities that enable corporate and government agencies to directly reduce the amount of waste generated by
redistributing end-of-life products or assets, through our solutions, improving the net financial recovery generated while positively impacting the communities they serve. Some of the world's largest
forward thinking corporations and government agencies have significantly enhanced their stewardship of communities and the environment by partnering with us.
Our Strategy
The focus of our growth strategy is to provide commercial, municipal government, and federal agency clients and buying customers the world's
most transparent, innovative and effective ecommerce marketplaces and integrated services for surplus assets. Our business has already attracted nearly 3.0 million registered buyers and
achieved over $642 million of gross merchandise volume in fiscal year 2016 and is well positioned to serve any seller for virtually any asset type in every industry sector. Our goal is to
develop a multi-billion dollar business through organic growth by expanding our platform to a diversified base of Fortune 1000 corporations, municipal agencies and small and medium size businesses
that can benefit from our global marketplace, buyer liquidity and integrated services.
The
key elements of our growth strategy are to:
Intensify Supply and Demand in our core vertical markets
We intend to increase the active buyer participation within our consumer goods, commercial capital assets (energy, industrial, transportation
and other markets), and municipal government marketplaces, by attracting new buyers and more deeply penetrating our base of existing professional buyers. We intend to attract new buyers by using a
variety of online and traditional marketing programs while improving the services and experience for our valued professional buyers. In addition, we plan to use the comprehensive buyer profiles,
preferences and transactional data we have compiled over the last 17 years to enable us to identify and market highly relevant assets available through our marketplaces to the most likely
buyers. We believe these initiatives will help us to increase the total number of auction participants and increase loyalty among our buyer base. In turn, increased buyer participation within our
marketplaces should enable us to sell higher volumes of surplus assets, expand into new vertical markets, and maintain high recovery values for our selling clients.
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Increase value and services for sellers
We intend to build upon our client base of the world's largest retailers and manufacturers, thousands of municipal clients and our expertise
with the Department of Defense ("DoD") to attract additional corporate and government sellers to our marketplaces. The majority of corporations and government agencies still rely on inefficient,
traditional, and less transparent disposition methods for their surplus assets. To help more organizations address these inefficiencies, we plan to extend our platform to new partners, including
dealers, auctioneers and refurbishers, who would benefit from accessing our marketplaces, leveraging our global buyer base, and relying on our service offerings, including dealers, auctioneers,
refurbishers, and other principals.
We
also intend to partner with our seller base to address inefficient markets and practices in the forward supply chain of select industries, such as construction equipment, through our
IronDirect marketplace, to provide a full lifecycle solution from initial purchase to disposition. By addressing inefficiencies in forward supply chain markets and bundling solutions with our core
reverse supply chain services, we anticipate that we will increase our base of buyers and sellers and handle higher volumes of surplus in the industries we serve.
Develop new relationships and expand our solution to the full supply chain life cycle
We intend to build upon our client base of the world's largest retailers and manufacturers, thousands of municipal clients and our expertise
with the DoD to attract additional corporate and government sellers to our marketplaces. The majority of corporations and government agencies still rely on inefficient, traditional, and less
transparent disposition methods for their surplus assets. To further our reach in helping organizations address these inefficiencies, we will extend our platform to partners who would benefit from
accessing our marketplace, leveraging our global buyer base, and tapping into our service offerings, including dealers, auctioneers, refurbishers, and other principals. We will also partner with our
seller base to address and disrupt inefficient markets and practices in the forward supply chain of select industries, such as construction equipment through our IronDirect marketplace, to provide a
full lifecycle solution from initial purchase to disposition. By addressing inefficiencies in forward supply chain markets and bundling solutions with our core reverse supply chain services, we
anticipate that we would increase our entry points with both buyers and sellers to handle higher volumes of surplus in the industries we serve.
Innovation and technology development
Currently our marketplaces operate on separate platforms. Pursuant to our LiquidityOne Transformation initiative, we are creating a single
integrated platform to support customer management, property management, transaction management, and financial and human capital management across all of our marketplaces. This initiative is designed
to implement a uniform set of best practices across our entire business and to provide a superior customer experience by making more personalized tools and services available to our buyers and
sellers. Upgraded features on our e-commerce platform and enhancements to our multi-channel optimization capabilities made as part of this initiative have already improved our business and we expect
that the efficiencies and operating leverage created by LiquidityOne will drive profitability, including by enabling us to be more competitive in pricing new client programs. The LiquidityOne program
will further automate our global solution and leverage the scalability of our technology investments across all of our marketplaces, including multi-currency and multi-lingual solutions. In addition
to enhancing the features, experience, and services available for our buyers and sellers, we seek to leverage the increasing insight we gain with each transaction to enhance the recovery value clients
realize along with improving the relevancy for our buyers in the reverse supply chain. The LiquidityOne Transformation initiative will also simplify and streamline our operations, improve the
functionality of our systems support, and decrease the cost of our systems infrastructure.
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Our Marketplaces
Our ecommerce marketplaces serve as an efficient and convenient method for the sale of surplus and salvage consumer goods and capital assets.
They are designed to address the particular requirements and needs of buyers and sellers. We operate and enable several marketplaces, including the
following:
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Our
www.liquidation.com
marketplace enables corporations located in the United States to sell
surplus and salvage consumer goods and capital assets. This leading business to business marketplace and our related value-added services are designed to meet the needs of clients by selling their
surplus assets to domestic and international buyers.
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Our
www.govliquidation.com
marketplace enables selected federal government agencies as well as
commercial businesses to sell surplus and scrap assets. In addition to goods sold on behalf of other federal agencies, the surplus and scrap assets we sell as the exclusive contractor of the Defense
Logistics Agency (DLA) Disposition Services of the U.S. Department of Defense are sold in this marketplace. To satisfy the requirements of U.S. federal government agency sellers, this marketplace
incorporates additional terms and conditions of sale, such as U.S. Trade Security Controls clearance for the sale of export-controlled property.
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Our
www.govdeals.com
marketplace enables local and state government entities including city,
county and state agencies as well as school boards and public utilities located in the United States to sell surplus and salvage assets. This marketplace and our related services are designed to meet
the unique needs of public sector clients selling to domestic and international buyers.
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Our
www.networkintl.com
marketplace enables corporations to sell idle, surplus, and scrap
equipment in the oil and gas, petrochemical and power generation industries. This marketplace and our related services are designed to meet the unique needs of energy sector clients.
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Our
www.go-dove.com
marketplace enables corporations located in the United States, Europe, and
Asia to sell manufacturing surplus and salvage capital assets. This marketplace and our related services are designed to meet the specific needs of manufacturing sector clients by selling their
surplus assets to domestic and international buyers.
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Our
www.truckcenter.com
marketplace enables corporations located in the United States to sell
surplus and salvage transportation assets. This marketplace and our related services are designed to meet the specific needs of companies and financial institutions by selling their surplus
transportation assets to domestic and international buyers. During fiscal year 2016, TruckCenter also began selling trucks through its newly created Retail channel, primarily to Owner Operators and
small fleets.
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Our
www.irondirect.com
marketplace enables buyers to purchase value-priced equipment,
attachments, parts and services from proven global manufacturers of construction equipment. IronDirect allows companies to consider the full life cycle of their equipment and the value that accrues
through proper fleet management.
In
addition to these leading business-to-business marketplaces, we recognize the need to reach end users for some of the assets our clients have entrusted to us. Thus, we have developed
the capability to sell products on our client's behalf directly to end-users and/or consumers using a range of existing marketplaces. Our
www.secondipity.com
marketplace provides consumers a trusted
source of value products through a socially conscious online experience designed to provide
"Better Value, Better Life," through donating a portion of the proceeds of every sale to charity. Our Uncle Sam's Retail Outlet website uses a business-to-consumer model to sell surplus military
goods. We also have an established global buyer base that seeks to buy in larger quantities than are offered through our standard auction platform. Thus, we have dedicated sales teams to support their
needs and supply
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chain.
These range from a single truckload to ongoing flows for export anywhere in the world, where we market, handle, and support the full transaction on behalf of our buyers. We expect to continue
to meet the needs of our clients and to access a growing range of products for all our buyers by enabling our multi-channel strategy to ensure we create the greatest value for assets at the end of
their initial product life cycle.
Our Value-Added Services for Buyers and Sellers
We have integrated value-added services to simplify the reverse supply chain processes for our buyers and sellers. We believe these services
create the greatest operational efficiencies within this element of the supply chain enabling the greatest value for sellers and buyers with the highest level of confidence and transparency in the
services we provide. Additionally, we believe these services improve compliance with the various policies, regulations and sale restrictions of our corporate and government sellers while supporting,
or greatly enhancing, many corporate or government environmental initiatives.
Seller services.
We offer value-added services to sellers in three areas: (1) merchandising and channel optimization,
(2) logistics and (3) settlement and customer support, including compliance services.
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Merchandising and Channel Optimization
efforts encompass all of the services necessary to
prepare merchandise for a successful auction and include the following:
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Channel Optimizationwe determine the marketplace and channel sales strategy that creates the greatest value for the
individual asset using our real time transaction systems and proprietary data to support ongoing optimization.
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Marketing and promotionwe use a variety of both online and traditional marketing methods to promote our sellers'
merchandise and generate the greatest interest in each asset.
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Asset lotting and merchandisingwe leverage our industry experience to organize the merchandise we receive into size
and product combinations that meet buyer preferences within each marketplace and channel.
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Product information enhancementwe provide digital images of the merchandise to be sold and combine the images with
relevant information. In order to increase the realized sales value, we also research, collect and use supplemental product information to enhance product descriptions.
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Logistics.
We provide logistics services designed to support the receipt,
handling, transportation and tracking of merchandise offered through our marketplaces, including the following:
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Distribution centerswe provide sellers with the flexibility of either having us manage the sales process at their
location or delivering merchandise to one of our distribution centers.
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Inventory managementsellers benefit from our management and inventory tracking system designed so that merchandise is
received, processed and delivered in a timely manner.
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Cataloguing merchandisewe catalogue all merchandise, which enables us to provide useful product information to buyers
and sellers. In certain circumstances, we will inspect the merchandise and provide condition descriptions to improve quality and the financial recovery to the client.
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Testing, data wiping, de-labeling and refurbishmentwe test products, wipe electronic data, refurbish and remove
labels and product markings from merchandise prior to sale in order to add value to the asset and protect sellers' brand equity and distribution relationships.
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Return to vendor or product disposition to non-sales channelswe will manage the end-to-end processes for our clients
ensuring that returned merchandise is disposed through a variety of disposition requirements including the end-to-end management of returning products to vendors, charities, or channels outside of our
leading marketplace solutions.
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Outbound fulfillmentwe can arrange for domestic or international shipping for all merchandise, whether it's a small
item or container load for export located in one of our distribution centers or at a seller's facility.
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Settlement and customer support.
Settlement and customer support services
are designed for successful and reliable completion of transactions and include:
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Buyer qualificationwe qualify buyers to ensure their compliance with applicable government or seller mandated terms
of sale, as well as to confirm their ability to complete a transaction.
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Collection and settlementwe collect payments on behalf of sellers prior to delivery of any merchandise and disburse
the profits to the seller after the satisfaction of all conditions of a sale.
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Transaction tracking and reportingwe enable sellers and buyers to track and monitor the status of their transactions
throughout the sales process. We support the successful completion of each transaction on behalf of the buyer and seller. We provide a range of comprehensive reporting services to sellers upon the
completion of a transaction. Our invoicing and reporting tools can be integrated with the seller's information system, providing a more efficient flow of data.
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Customer support and dispute resolutionwe provide full customer support throughout the transaction process and
dispute resolution for our customers if needed.
Buyer services.
Many of the services we provide to sellers also benefit buyers by providing them with the information necessary to make a
more informed bid and by delivering the goods they purchased. Our buyer-focused services include the following:
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Intelligent alerts and recommendationswe notify buyers of upcoming auctions based on their registered preferences and prior
transaction history. Registered preferences can be as broad as a product category or as specific as a part number or key word. We use this information to ensure informed recommendations whenever we
identify a product that fits a buyer's preference. We will alert our buyers based on their preferences when auctions are initially launched or nearing conclusion and based on various other parameters
to enable our buyers to see the most relevant products.
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Search and navigation toolsbuyers can search our marketplaces for products based on a variety of criteria and personalized
settings, including product category, keyword, lot size, product condition, product geographic location and auction ending date.
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Dynamic pricing tools, product information, and shipping quoteswe offer multiple dynamic pricing tools including outbid
notification, automated bid agent and automatic auction extension. In addition, we provide buyers the information they need to make informed decisions, including product data, seller performance, and
online shipping quotes to help understand their landed cost.
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Broad and flexible range of shipping/pick-up optionswe can provide packaging and shipping services for each transaction, whether
it is a small item or container loads for export, including buyer pick-up at our premises, for the majority of transactions, or support of buyer arranged transportation. We support the most efficient
solution for each transaction and each buyer.
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Secure settlement and customer supportin addition to qualifying sellers, providing several electronic payment options and serving
as a trusted market intermediary, we verify transaction completion, which in turn enhances buyer confidence. In addition, we provide full reliable customer support throughout the transaction process.
Sales and Marketing
We utilize a direct sales and marketing force to acquire and manage our seller and buyer accounts. As of September 30, 2016, we had 120
sales and marketing personnel. Our sales activities are focused primarily on acquiring new sellers and improving the value of our solutions to existing sellers. Our marketing activities are focused
primarily on acquiring and activating new buyers and increasing existing buyer participation. Our marketing team also manages our Liquidity Services and marketplace brands as well as driving lead
generation efforts that support the sales team.
Sales
Our sales personnel develop seller relationships, establish agreements to provide our services and manage the business accounts on an on-going
basis. Our sales team focuses on building long-term relationships with sellers that we believe will generate recurring transactions. They also leverage our years of experience and market data of
completed transactions to identify which of our various services would be beneficial to each new or existing seller.
Our
sales group is organized to serve three distinct groups of sellers: large corporate accounts, medium to small corporate accounts and government accounts. This approach is based on
our experience in understanding and serving the unique needs of each type of seller:
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Large corporate sellers.
These sellers require a customized approach, using
a combination of our industry-focused sales team and our value-added services to create a comprehensive solution.
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Medium to small corporate sellers.
These sellers are offered a turn-key
solution enabling them to self-serve in our marketplaces by accessing tools and resources to optimize their internal processes and net recovery.
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Government sellers.
These sellers require a customized approach. Sales
efforts are both pro-active and re-active, including responding to already structured contract proposal requests and assisting government agencies in developing the appropriate scope of work to serve
their needs.
Our
sales personnel receive a salary and performance-based commissions.
Marketing
We use a variety of online and traditional marketing strategies to attract and activate professional buyers to maximize the number of bidders
participating in our ecommerce marketplaces as well as to support our sales team:
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Buyer acquisition.
We utilize sophisticated marketing automation and
digital online marketing, including paid search advertising, search engine optimization, affiliate programs and cross promotion on all of our marketplaces to acquire new buyers. We supplement this
online marketing with special event print media, classified advertisements and selected direct mail campaigns. Public relations campaigns, participation in trade shows and speaking engagements also
complement our overall buyer acquisition efforts.
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Buyer participation.
We use a variety of tools to increase buyer
participation, including: targeted opt-in e-mail newsletters that rely on the buyer's stated categories of interest and past bidding or transaction activity; special e-mail alerts highlighting
specific products of interest; personalized
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All
marketing activities are evaluated based on the level of auction participation in our marketplaces, the cost to acquire new sellers, and the cost effectiveness of each action.
Technology and Infrastructure
Our marketplaces are fully web-based and can be accessed from any Internet-enabled device by using a standard web browser. Our technology
systems enable us to automate and streamline many of the manual processes associated with finding, evaluating, bidding on, paying for and shipping surplus and salvage assets. The technology and
content behind our marketplaces and integrated value-added services were developed in-house by full-time employees, providing us with control over the marketplaces and the ability to make rapid
enhancements to better fit the specific needs of our business and customers. Our marketplaces are supported by a common database architecture and a shared system application. This infrastructure
provides:
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an efficient channel to sell online through a variety of pricing mechanisms (standard auction, sealed bid, Dutch auction and fixed price);
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a scalable back office that enables buyers and sellers to efficiently manage transactions among remote business users by utilizing account
management tools, including payment collection, invoicing management, shipping and transaction settlement; and
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an input/output agnostic platform, including Application Programming Interface (APIs) or other conduits that enable us to integrate seamlessly
with partner enterprise applications of sellers and third party service providers.
We
have designed our websites and supporting infrastructure to be highly robust and to support new services and increased traffic. Our servers are fully-managed and hosted by Amazon Web
Services and Microsoft Azure Platforms. Every critical piece of our application is fully redundant, and we maintain off-site back-up systems and can provision a disaster recovery facility. Our network
connectivity offers high performance and scalability to accommodate increases in website traffic. Since January 1, 2003, we have experienced no material service interruptions on our ecommerce
marketplaces.
Our
applications support multiple layers of security, including password-protected log-ins, encryption technology to safeguard information transmitted in web sessions and firewalls to
help prevent unauthorized access to our network and servers. We devote significant efforts to protecting our systems from intrusion.
During
the fourth quarter of fiscal year 2016, we launched our first marketplace, the IronDirect marketplace, on the new LiquidityOne Platform. The launch of IronDirect supports our
strategy of leveraging investments in technology, superior process and integrated services to drive transparency,
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convenience
and win-win value creation for customers in large, global markets. During fiscal year 2017, we will continue to migrate our remaining marketplaces to the LiquidityOne Platform.
Operations
Supporting large organizations that have a recurring need to sell surplus and salvage assets requires systematic processes to enhance the
financial value and convenience received by our customers. We believe we have integrated all of the required operational processes into our solution to efficiently and to effectively support our
buyers and sellers. Our operations group is comprised of three functions: (1) buyer relations, (2) shipping logistics and (3) distribution center and field service operations.
Buyer relations
Our buyer relations group supports the completion of buyer transactions by managing the buyer registration and qualification process, answering
questions and requests from buyers, collecting buyer payments and resolving disputes. Our websites contain extensive information about buying through our ecommerce marketplaces, including an online
tutorial regarding the use of our marketplaces, answers to frequently-asked buyer questions and an indexed help section. Buyers are able to contact a customer service representative by live chat as
well as e-mail or phone if they need additional support.
Shipping logistics
Our shipping logistics group manages and coordinates inbound and outbound shipping of merchandise for sellers and buyers. We offer, as part of
our value-added services, integrated shipping services using our own fleet or multiple vetted and pre-qualified carrier partners. In addition, our shipping coordination group personnel monitor the
performance and service level of our network of carriers to help ensure speed and quality of service.
Distribution center and field service operations
Our distribution center and field service operations group performs selected pre-sale and post-sale value-added services at our distribution
centers and at seller locations globally. These activities include unloading, manifesting and reporting discrepancies for all received assets and sales preparation of offered assets, including
merchandising and organizing offered assets, writing product descriptions, capturing digital images and/or video and providing additional optional value-added services such as returns management (RM)
services, return to vendor (RTV) services and product delabeling, data cleaning/wiping, testing, refurbishment and repackaging. Our distribution center and field service operations group personnel
also arrange the outbound shipping or pick-up of purchased assets with our buyers.
Competition
The online services market for auctioning or liquidating surplus and salvage assets is competitive and growing rapidly. We currently compete
with:
-
-
other e-commerce providers;
-
-
auction websites;
-
-
government agencies that have created websites to sell surplus and salvage assets; and
-
-
traditional liquidators and fixed-site auctioneers.
We
expect our market to become even more competitive as traditional and online liquidators and auctioneers continue to develop online and offline services for disposition, redeployment
and
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remarketing
of surplus and salvage assets. In addition, manufacturers, retailers and additional government agencies may decide to create their own websites to sell their own surplus and salvage assets
and those of third parties. Competitive pressures could harm our business, financial condition and operating results.
In
our IronDirect and retail TruckCenter businesses we compete with local, regional and national sellers and rental companies offering vehicles and construction equipment, respectively,
as well as parts and service suppliers.
Some
of our other current and potential competitors have longer operating histories, larger client bases, greater brand recognition and significantly greater financial, marketing and
other resources than we do. In addition, some of these competitors may be able to devote greater financial resources to marketing and promotional campaigns, secure merchandise from sellers on more
favorable terms, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website and systems development than we are able to do. Increased
competition may result in reduced operating margins and loss of market share. We may not be able to compete successfully against current and future competitors.
Our Contracts with the U.S. Department of Defense
We have two material contracts with the DoD, the Surplus Contract and the Scrap Contract, under which we acquire, manage and sell government
property. This relationship provides a significant supply of goods that we offer to our buyer base through our ecommerce marketplace
www.govliquidation.com
. In support of these contracts, we provide
services in over 2 million square feet of military space at over 150 military
bases throughout the United States and in U.S. territories.
The
Surplus Contract is a competitive-bid contract under which we acquire, manage and sell usable DoD surplus personal property turned into the DLA Disposition Services ("DLA"). Surplus
property generally consists of items determined by the DoD to be no longer needed, and not claimed for reuse by, any federal agency, such as computers, electronics, office supplies, scientific and
medical equipment, aircraft parts, clothing and textiles. The Surplus Contract requires us to purchase all usable surplus property offered by the DoD at 4.35% of the DoD's original acquisition value
(OAV). The current, or third, Surplus Contract became effective December 2014, covers only non-rolling stock and has a base term of two years with four one-year options to extend. The prior, or
second, Surplus Contract required us to purchase all rolling and non-rolling usable surplus property offered by the DoD at 1.8% of the DoD's OAV; the wind-down period under the second Surplus Contract
will remain in effect until January 2017 to allow for the continued processing of usable Recycling Control Point (RCP) non-rolling stock surplus property.
Revenue
from the second and third Surplus Contracts (including buyer premiums) accounted for approximately 26.8%, 24.7%, and 31.0% of our total revenue for the twelve months ended
September 30, 2014, 2015, and 2016. The property sold under the second and third Surplus Contracts accounted for approximately 14.3%, 12.3%, and 12.7% of our GMV for the twelve months ended
September 30, 2014, 2015 and 2016.
The
DoD has broad discretion to determine what property will be made available for sale to us under the Surplus Contract and may retrieve or restrict property previously sold to us for
national security, public safety, or other reasons or if the property is otherwise needed to support the mission of the DoD.
Scrap Contract.
The Scrap Contract is a competitive-bid contract under which we acquire, manage and sell substantially all scrap property
of the DoD turned into the DLA at a per pound price. Scrap property generally consists of items determined by the DoD to have no value beyond their base material content value, such as metals, alloys,
and building materials. Under the current Scrap
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Contract,
which became effective on October 1, 2016, we acquire scrap property from the DLA and pay the DLA a revenue-sharing payment equal to 64.5% of the gross resale proceeds. We bear all of
the costs for the sorting, merchandising and sale of the property. The Scrap Contract has a 36-month base term, with two 12-month extension options exercisable by the DLA.
Under
the prior Scrap Contract that expired September 30, 2016, we paid the DLA 65-75% of the profits realized from the sale of the inventory, after deduction for allowable expenses. We
refer to the disbursement payments to the DoD as profit-sharing distributions, and we recognize as revenue the gross proceeds from the sales.
During
fiscal 2015, if the Company's customer base met certain small business criteria as defined in the contract, we received an additional incentive payment which was withheld from
payments to the DLA.
Revenue
from the Scrap contract accounted for approximately 14.4%, 15.3% and 10.2% of our total revenue for the fiscal years ended September 30, 2014, 2015 and 2016, respectively,
and 7.7%, 7.6%, and 5.0% of our GMV for the twelve months ended September 30, 2014, 2015 and 2016, respectively.
These
Surplus and Scrap contracts require us to satisfy export control and other regulatory requirements in connection with sales. Specifically, for specified categories of property sold
under the contracts that are designated by the DoD as being subject to export controls, we are required to (1) obtain an end-use certificate from the prospective buyer describing the nature of
the buyer's business, describing the expected disposition and specific end-use of the property, and acknowledging the applicability of pertinent export control and economic sanctions laws and
(2) confirm that each buyer has been cleared to purchase export-controlled items. Applicable export controls include the
Export Administration Regulations enforced by the Bureau of Industry and Security ("BIS") of the U.S. Department of Commerce, and the International Traffic In Arms Regulations enforced by the
Directorate of Defense Trade Controls ("DDTC") of the U.S. Department of State. Our collection, settlement tools and procedures are designed so that transactions for these categories of property
cannot be completed until we receive a completed end-use certificate and confirmation of the buyer's trade security controls clearance. In addition, we do not combine export-controlled property into
auction lots with property not subject to export controls.
We
are also prohibited from selling property to persons or entities that appear on lists of restricted or prohibited parties maintained by the United States or other governments,
including the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Assets Control of the U.S. Department of Treasury and the Entity List maintained by BIS, the
Denied Persons List maintained by BIS and the Debarred Parties List maintained by DDTC. In addition, we are prohibited from selling to countries, regimes, or nationals that are the target of
applicable economic sanctions or other embargoes. As part of each sale, we collect information from potential customers that our systems cross reference against a list of restricted or prohibited
parties and countries, regimes, or nationals that are the target of economic sanctions or other embargoes in order to comply with these restrictions. Failure to satisfy any of these export control and
other regulatory requirements could subject us to civil and criminal penalties and administrative sanctions, including termination of the DLA Disposition Services contracts, forfeiture of profits,
suspension of payments, fines and suspension or debarment from doing business with U.S. federal government agencies.
Government Regulation
We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-public information and
regulations prohibiting unfair and deceptive trade practices. Furthermore, the growth and demand for ecommerce has resulted in and may continue to result in more stringent consumer protection laws
that impose additional compliance burdens on ecommerce
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companies.
Many jurisdictions also regulate "auctions" and "auctioneers" and may regulate online auction services. These consumer protection laws and regulations could result in substantial compliance
costs and could interfere with the conduct of our business.
In
many states, there is currently great uncertainty about whether or how existing laws governing issues such as property ownership, sales and other taxes, auctions and auctioneering,
libel and personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. New legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and commercial online services could result in significant
additional taxes or regulatory restrictions on our business. These potential restrictions could have an adverse effect on our cash flows and results of operations. Furthermore, there is a possibility
that we may be subject to significant fines or other payments for any past failures to comply with these requirements.
In
connection with our contracts with the U.S. federal government, the U.S. federal government has the right to audit and review our performance on our government contracts, as well as
our compliance with applicable laws and regulations. In addition, we sell merchandise under our government contracts, such as scientific instruments, information technology equipment and aircraft
parts, that is subject to further government regulations, some of which may require us to obtain an export license in certain circumstances or an end-use certificate from the buyer. In the United
States, the sale of this type of merchandise is further regulated by, among others, the U.S. Export Administration Regulations, International Traffic in Arms Regulations and the economic sanctions and
embargo laws enforced by the Office of Foreign Assets Control Regulations. If a government audit uncovers improper or illegal activities, or if we are alleged to have violated any laws or regulations
governing the products we sell under our government contracts, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, denial of export
privileges, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. federal government agencies. See "Risk FactorsUnfavorable
findings resulting from a government investigation or audit could subject us to a variety of penalties and sanctions, could negatively impact our future operating results and could force us to adjust
previously reported operating results."
Intellectual Property
We regard our intellectual property, particularly domain names, copyrights and trade secrets, as critical to our success. We rely on a
combination of contractual restrictions and common law copyright and trade secret laws to protect our proprietary rights, know-how, information and technology. These contractual restrictions include
confidentiality and non-compete provisions. We generally enter into agreements containing these provisions with our employees, contractors and third parties with whom we have strategic relationships.
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without our authorization. We currently are the registered owners of
several Internet domain names, including
www.liquidation.com
,
www.govliquidation.com
,
www.govdeals.com, www.networkintl.com,
www.truckcenter.com, www.secondipity.com, www.go-dove.com, and www.irondirect.com
. We pursue the registration of
our trademarks in the U.S. and internationally. Effective patent, copyright, trademarks, trade secret and domain name protection is expensive to maintain and may require litigation to enforce our
intellectual property rights. We seek to protect our domain names in an increasing number of jurisdictions and may not be successful in certain jurisdictions.
We
rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. As a result, we may be
required to obtain substitute technology of lower quality or at greater cost, which could materially adversely affect our business, financial condition, results of operations and cash flows.
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We
do not believe that our business, sales policies or technologies infringe the proprietary rights of third parties. However, third parties have in the past and may in the future claim
that our business, sales policies or technologies infringe their rights. We expect that participants in the e-commerce market will be increasingly subject to infringement claims as the number of
services and competitors in the industry grows. Any such claim, with or without merit, could be time consuming, result in costly litigation or an injunction or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us, or at all or may be prohibited by an injunction. As a result, any such claim of
infringement against us could have a material adverse effect upon our business, financial condition, results of operations and cash flows.
Employees
As of September 30, 2016, we had 713 U.S. employees, including 93 in sales and marketing, 92 in technology, 73 in customer service, 369
in operations and 86 in finance and administration. In addition, as of that date, we had 240 international employees, including 88 in sales and marketing, 8 in technology, 3 in
customer service, 103 in operations and 38 in finance and administration.
None
of our U.S. employees are covered by collective bargaining agreements. We believe that we have good relationships with our employees.
Available Information
Our annual, quarterly and current reports, proxy statements, amendments to those reports and other information are also made available free of
charge on our website
www.liquidityservices.com
, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC. We use our
website as a channel of distribution for material company information. Important information, including news releases, analyst presentations and financial information regarding the Company is
routinely posted on and accessible at
www.liquidityservices.com
.
Cautionary Note Regarding 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 those listed in Part I, Item 1A ("Risk Factors") and in our other filings with the Securities and Exchange Commission (SEC) from time to time. 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 apply only as of the date of this Annual Report 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 Annual
Report or to reflect the occurrence of unanticipated events.
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Item 1A. Risk Factors.
You should carefully consider the risks described below, together with all of the other information in this Annual
Report, including the consolidated financial statements and related notes, before making an investment decision with respect to our common stock. If any of the following risks occur, our business,
financial condition or operating results could suffer. As a result, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks
and uncertainties described below are not in any particular order and are not the only significant risks we may face. Other events that we do not currently anticipate or that we currently deem
immaterial also may affect our results of operations and financial condition.
We depend on contracts with the United States Department of Defense for a significant portion of our revenue,
and if our relationship with the United States Department of Defense is disrupted, we would experience a significant decrease in revenue and income.
We have two material contracts with the DLA Disposition Services under which we acquire, manage and sell surplus and scrap property of the DoD.
If our relationship with the DoD is impaired, we are not awarded new DoD contracts when our current contracts expire, any of our DoD contracts are terminated or the supply of assets under the
contracts is significantly decreased, we would experience a significant decrease in revenue and have difficulty generating income. The Surplus Contract accounted for 26.8%, 24.7% and 31.0% of our
revenue and 14.3%, 12.3% and 12.7% of our GMV for the fiscal years ended September 30, 2014, 2015 and 2016, respectively. The Scrap Contract accounted for 14.4%, 15.3% and 10.2% of our revenue
and 7.7%, 7.6% and 5.0% of our GMV for the fiscal years ended September 30, 2014, 2015 and 2016, respectively. We believe that these contracts will continue to be the source of a significant
portion of our revenue and GMV during their respective terms. The current Surplus Contract has an initial two-year term that ends in December 2016. There are four one-year options to extend,
exercisable by DLA Disposition Services. The current Scrap Contract has a three-year base term that will expire in September 2019, subject to the DoD's right to extend for two additional one-year
terms.
The
contracts were awarded by the DoD through a competitive bidding process, and we may be required to go through a new competitive bidding process when our existing contracts expire.
Under the current Surplus Contract, as amended, we are obligated to purchase all DoD surplus property at 4.35% of Disposition Services' original acquisition value ("OAV"). The DoD has broad discretion
to determine what property will be made available for sale to us under the Surplus Contract and may retrieve or restrict property previously sold to us for national security or public safety reasons
or if the property is otherwise needed to support the mission of the DoD. The DoD may also elect to provide for itself certain services that we currently provide under the Surplus Contract. Although
the revenue we earn for these services has increased, if the DoD makes such an election, the revenue we earn under the Surplus Contract will decrease.
Our
Surplus Contract and our Scrap Contract with the DoD allow either party to terminate the contract for convenience. The DoD also has the right, after giving us notice and a 30-day
opportunity to cure, to terminate the contracts and seek other contract remedies in the event of material breaches.
We
expect that there will be significant competition to renew our DoD contracts. We may not win any such competitive solicitation, as one or more providers may offer to provide the same
or similar services at a more favorable price. Even if we win the competitive procurement, we could be required to reduce significantly the prices we charge for our services under the new contracts.
The failure to win the competitive solicitation or a requirement to provide our services at significantly less favorable prices would materially adversely affect our revenues and have a material
adverse effect on our business, prospects, financial condition and results of operations.
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Unfavorable findings resulting from a government audit or investigation could subject us to a variety of
penalties and sanctions, could negatively impact our future operating results and could force us to adjust previously reported operating results.
The federal government has the right to audit our performance under our government contracts. Any adverse findings from audits or reviews of our
performance under our contracts could result in a significant adjustment to our previously reported operating results. The results of an audit by the government could significantly limit the volume
and type of merchandise made available to us under our contracts with the DoD, resulting in lower gross merchandise volume, revenue, and profitability for our company. If such a government audit
uncovers improper or illegal activities, we could be subject to civil and criminal penalties, administrative sanctions and could suffer serious harm to our reputation. Government and law enforcement
agencies may also investigate our other activities under our DoD contracts and our company. If such an investigation alleges that we engaged in improper or illegal activities, we could be subject to
civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business
with U.S. federal government agencies. If, as the result of a government audit or investigation, or for any other reason, we are suspended or debarred from contracting with the federal government
generally, or any specific agency, if our reputation or relationship with government agencies is impaired, or if the government otherwise ceases doing business with us or significantly decreases the
amount of business it does with us, our revenue and profitability would substantially decrease.
The success of our business depends on our ability to successfully obtain a supply of merchandise for our
buyers and to attract and retain active professional buyers to create sufficient demand for our sellers.
Our ability to increase our revenue and maintain profitability depends on whether we can successfully expand the supply of merchandise available
for sale on our ecommerce marketplaces and attract and retain active professional buyers to purchase the merchandise. Our ability to attract sufficient quantities of suitable merchandise and new
buyers will depend on various factors, some of which are out of our control. These factors include our ability to:
-
-
offer sellers liquid marketplaces for their surplus and salvage assets;
-
-
offer buyers a sufficient supply of merchandise;
-
-
develop and implement effective sales and marketing strategies;
-
-
comply with regulatory or corporate seller requirements affecting marketing and disposition of certain categories of merchandise;
-
-
efficiently catalogue, handle, store, ship and track merchandise; and
-
-
achieve high levels of seller and buyer satisfaction with the trading experience.
We face intense competition.
Our businesses are rapidly evolving and intensely competitive, and we have many competitors in different industries, including the online
services market for auctioning or liquidating surplus and salvage assets and retail markets. Competitive pressures could affect our ability to attract and retain customers, which could decrease our
revenue and negatively affect our operating results.
In
our marketplaces for surplus and salvage assets, we currently compete with:
-
-
other e-commerce providers;
-
-
auction websites;
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-
-
government agencies that have created websites to sell surplus and salvage assets; and
-
-
traditional liquidators and fixed-site auctioneers.
We
expect our market to become even more competitive as traditional and online liquidators and auctioneers continue to develop online and offline services for disposition, redeployment
and remarketing of surplus and salvage assets. In addition, manufacturers, retailers and government agencies may decide to create their own websites to sell their own surplus and salvage assets and
those of third parties.
The
identity and composition of our competitors will expand as we increase our activity in our TruckCenter and IronDirect businesses. We will compete in these businesses with local,
regional and national sellers and rental companies offering vehicles and construction equipment, respectively, as well as parts and service suppliers.
Competition
may intensify in each of our businesses as our competitors enter into business combinations or alliances and established companies in other market segments expand to become
competitive with our business. In addition, new and enhanced technologies, including search, web and infrastructure computing services, digital content, and electronic devices, may increase our
competition. The Internet facilitates competitive entry and comparison shopping, and increased competition may reduce our sales and profits.
Some
of our other current and potential competitors have longer operating histories, larger client bases, greater brand recognition and significantly greater financial, marketing and
other resources than we do. They may be able to devote greater financial resources to marketing and promotional campaigns, secure better terms from sellers and vendors, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to technology and infrastructure than we are able to do. Increased competition may result in reduced operating margins and
loss of market share. We may not be able to compete successfully against current and future competitors.
Our operating results depend on our websites, network infrastructure, transaction processing systems, and our
software runs on public clouds. Service interruptions or system failures could negatively affect the demand for our services and our ability to grow our revenue.
Any system interruptions that affect our websites or our transaction systems could impair the services that we provide to our sellers and
buyers. In addition, our systems and data centers may be vulnerable to damage from a variety of other sources, including, for example,
-
-
damage to, or failure of, our computer software or hardware or our connections to, and outsourced service arrangements with, third parties;
-
-
failure of, or defects in, the third-party systems, software or equipment on which we rely to access our data centers and other systems;
-
-
errors in the processing of data by our systems;
-
-
computer viruses, malware or software defects;
-
-
physical or electronic break-ins, sabotage, distributed denial of service, or DDoS, penetration attacks, intentional acts of vandalism and
similar events; and
-
-
telecommunications failures, power outages, pandemics, political unrest, malicious human acts and natural disasters.
Improving
the reliability and redundancy of our systems may be expensive, reduce our margins and may not be successful in preventing system failures. Our services are also substantially
dependent on systems provided by third parties, over whom we have little control. We have occasionally experienced
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interruptions
to our services due to system failures unrelated to our own systems. Any disruption to our data centers, interruptions or failures of our current systems or our ability to communicate
with third party systems could negatively affect the demand for our services and our ability to grow our revenue. Although we carry specific insurance against cybersecurity events, our insurance
coverage may be inadequate to compensate us for any related losses we incur.
We
are implementing a new eCommerce marketplace and back-office solution integrated with an Enterprise Resource Planning ("ERP") system as part of our LiquidityOne Transformation
initiative in order to upgrade and replace with cloud-based solutions, our information technology systems used to operate our business. Upon implementation of the new cloud-based solutions, a large
portion of our information technology systems will be comprised mostly of outsourced, cloud-based infrastructure, platform, and software as a service solutions not under our direct management or
control. Any disruption to either the outsourced systems or the communication links between us and the outsourced supplier, could negatively impact our ability to operate our websites or our
transaction systems and could impair the services that we provide to our sellers and buyers. We may incur additional costs to remedy the damages caused by these disruptions.
In
addition, implementation of the LiquidityOne transformation plan and the new ERP system will require substantial changes to our software and network infrastructure, which could lead
to system interruptions, affect our websites and transaction systems and further expose us to operational disruptions, which could have a material adverse effect on our results of operations.
If we do not respond to rapid technological changes or upgrade our systems, we could fail to grow our
business and our revenue could decrease.
To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce business through initiatives
like the LiquidityOne transformation initiative. Although we currently do not have specific plans for any upgrades that would require significant capital investment beyond the LiquidityOne
Transformation, in the future we will need to improve and upgrade our technology, transaction processing systems and network infrastructure in order to allow our operations to grow in both size and
scope. Without such improvements, our operations might suffer from unanticipated system disruptions, slow transaction processing, unreliable service levels, or impaired quality or delays in reporting
accurate financial information, any of which could negatively affect our reputation and ability to attract and retain sellers and buyers. We may also face material delays in introducing new services,
products and enhancements. The Internet and the e-commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and
practices emerge, our existing websites and our proprietary technology and systems may become obsolete. In addition, the expansion and improvement of our systems and infrastructure may require us to
commit substantial financial, operational and technical resources, with no assurance our business will increase. If we fail to respond to technological change or to adequately maintain, expand,
upgrade and develop our systems and infrastructure in a timely fashion our ability to grow could be limited and our revenue could decrease.
We may not realize all of the anticipated benefits from our LiquidityOne Transformation initiative.
We expect our LiquidityOne Transformation initiative will significantly increase our efficiency and productivity, the functionality of our
marketplaces and our cross-selling opportunities, as well as decrease the cost of our systems infrastructure, all of which will drive scale and growth for our company and have a positive effect on our
business, competitive position and results of operations. This initiative is a major undertaking that will replace many of our existing operating and financial systems over the course of multiple
years. We cannot assure you that the LiquidityOne Transformation program will be beneficial to the extent or within the timeframes expected, or that the estimated efficiency, cost savings and other
improvements will be realized as anticipated or at all. If the LiquidityOne
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Transformation
program is not implemented successfully and within budget, or if the changes, including the new ERP system do not perform in a satisfactory manner, it could disrupt or otherwise
materially adversely affect our business and results of operations. Similarly, if our buyers and sellers fail to accept our new platform or our new unified process for handling the transactions on all
of our marketplaces, it could materially adversely affect our business and results of operations.
Our LiquidityOne Transformation program places a significant strain on our management, operational, financial
and other resources.
As part of the LiquidityOne Transformation program, we are replacing multiple non-scalable legacy IT platforms with a singular, modular
technology platform with key modules for unified management of client/sellers and buyers, property handling, transaction processing and finance functions across our entire company. The new platform is
designed to provide our buyers access to all the property available in all our marketplaces, provide a common account experience for sellers, harmonize, simplify and streamline our operations. This
program is placing significant strain on our management, personnel, operations, systems, technical performance and financial resources and internal financial control and reporting function. The
LiquidityOne Transformation initiative will require management time and resources to educate employees and implement new ways of conducting business. We may not be able to effectively manage this
initiative, including its timing, costs, and adoption by client/sellers and buyers, which could negatively affect our business and our operating results, as well as result in damage to our reputation
and our prospects. In addition, the dedication of resources to the LiquidityOne Transformation program limits the resources we have available to devote to other initiatives or growth opportunities, or
to invest in the maintenance of our internal systems. Further, the timing of completion of various phases of marketplace rollouts on to the new LiquidityOne platform could be delayed, resulting in
higher costs during the implementation and greater strain on management time and resources.
We may need additional financing in the future, which may not be available on favorable terms, if at all.
We may need additional funds to finance our operations, as well as to enhance our services, and acquire inventory for our businesses, fund
initiatives such as the LiquidityOne Transformation program, respond to competitive pressures, acquire complementary businesses or technologies or otherwise support our growth. We may also require
additional funds if vendors and other third parties from whom we purchase inventory, other goods or services extend less favorable credit terms to us. Our business may not generate the cash needed to
finance such requirements. We currently do not have a revolving credit facility with third-party lenders from which we may draw funds. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage
ownership of our existing stockholders would be reduced, and these securities may have rights, preferences or privileges senior to those of our common stock. The general economic and capital market
conditions in the United States and other parts of the world can deteriorate significantly, adversely affecting access to capital and increasing the cost of capital. A large degree of uncertainty
remains both domestically and abroad, which can adversely impact access to capital, and the cost of capital. If adequate funds are not available or are not available on acceptable terms, our ability
to enhance our services, fund strategic initiatives, respond to competitive pressures, take advantage of business opportunities or grow our business would be limited, and we might need to restrict our
operations and initiatives.
Shipment of merchandise sold in our marketplaces could be delayed or disrupted by factors beyond our control
and we could lose buyers and sellers as a result.
We rely upon third-party carriers such as United Parcel Services, or UPS, for timely delivery of our merchandise shipments. As a result, we are
subject to carrier disruptions and increased costs due to
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factors
that are beyond our control, including labor difficulties, inclement weather, terrorist activity and increased fuel costs. In addition, we do not have a long-term agreement with UPS or any
other third party carriers, and we cannot be sure that our relationship with UPS will continue on terms favorable to us, if at all. If our relationship with UPS is terminated or impaired or if UPS is
unable to deliver merchandise for us, we would be required to use alternative carriers for the shipment of products to our buyers. We may be unable to engage alternative carriers on a timely basis or
on terms favorable to us, if at all. Potential adverse consequences include:
-
-
reduced visibility of order status and package tracking;
-
-
delays in merchandise receipt and delivery;
-
-
increased cost of shipment; and
-
-
reduced shipment quality, which may result in damaged merchandise.
Any
failure to receive merchandise at our distribution centers or deliver products to our buyers in a timely and accurate manner could lead to client dissatisfaction and cause us to lose
sellers and buyers.
A significant interruption in the operations of our customer service system or our distribution centers could
harm our business and operating results.
Our business depends, to a large degree, on effective customer service and distribution center operations. We currently staff DoD warehouse
distribution space, for which we do not incur leasing costs, as well as leased commercial warehouse distribution space. These operations could be harmed by several factors, including any material
disruption or slowdown at our distribution centers resulting from labor disputes, changes in the terms of our underlying lease agreements or occupancy arrangements in the case of government provided
facilities, telecommunications failures, power or service outages, human error, terrorist attacks, natural disasters or other events. In addition, space provided to us by the DoD could be
re-configured or reduced in the DoD's discretion.
If we fail to accurately predict our ability to sell merchandise in which we take inventory risk and credit
risk, our margins may decline as a result of lower sale prices from such merchandise.
Under our profit-sharing and purchase model, we purchase merchandise and assume the risk that the merchandise may sell for less than we paid for
it. We assume general and physical inventory and credit risk. These risks are especially significant because some of the goods we sell on our websites are characterized by rapid technological change,
obsolescence and price erosion, and because we sometimes make large purchases of particular types of inventory. In addition, we do not typically receive warranties on the surplus goods we purchase
and, as a result, we have to resell or dispose of any returned goods. Historically, the number of disposed goods (which includes returned goods that we have not resold) has been less than 2% of the
goods we have purchased. To manage our inventory successfully, we need to maintain sufficient buyer demand and sell merchandise for a reasonable financial return. We may overpay for the acquired
merchandise if we miscalculate buyer
demand or the acquired merchandise has defects of which we were unaware. In the event that merchandise is not attractive to our buyer base, we may be required to take significant losses resulting from
lower sale prices, which could reduce our revenue and margins. Currency exchange rates may negatively affect our results if we pay for inventory using a different currency than we receive when we sell
the inventory. Declines in commodity prices may also reduce the profit we are able to realize in our scrap business. For example, we may not be able to sell our inventory for amounts above its cost
and we may incur a loss in products we handle for our commercial clients.
From
time to time, in our capital assets marketplace, we make very significant inventory acquisitions, such as the purchase of semi-conductor equipment and biopharma and metal-working
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machinery,
for subsequent resale on our energy and industrial marketplaces. We plan to continue to opportunistically make such acquisitions. The risks described above are heightened in connection with
these acquisitions due to their size and, at times, the limited market for the assets we acquire. If we obtain financing to fund such acquisitions, such financing will increase our costs, which will
decrease any profits we receive from the sale of the acquired assets.
As
we grow our business, we may choose to increase the amount of merchandise we purchase directly from sellers, thus resulting in increased inventory levels and related risk. Any such
increase would require the use of additional working capital and subject us to the additional risk of incurring losses on the sale of that inventory.
We may be unable to adequately protect or enforce our intellectual property rights, which could harm our
reputation and negatively impact the growth of our business.
We regard our intellectual property, particularly domain names, copyrights and trade secrets, as critical to our success. We rely on a
combination of contractual restrictions and copyright and trade secret laws to protect our proprietary rights, know-how, information and technology. Despite these protections, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property without authorization or independently develop similar intellectual property.
We
currently are the registered owners of several Internet domain names, including
www.liquidation.com
,
www.govliquidation.com
,
www.govdeals.com, www.networkintl.com,
www.truckcenter.com, www.secondipity.com, www.go-dove.com and www.irondirect.com
. We pursue the registration of our domain names in the U.S. and internationally. We currently
do not have any patents or registered copyrights, but we are pursuing patents. Effective patent, copyright, trademark, service mark, trade secret and domain name protection is expensive to maintain
and may require litigation. Our competitors may adopt trade names or domain names similar to ours, thereby impeding our ability to promote our marketplaces and possibly leading to client confusion. In
addition, we could face trade name or trademark or service mark infringement claims brought by owners of other registered or unregistered trademarks or service marks, including trademarks or service
marks that may incorporate variations of our marketplace names. Any claims related to our intellectual property or client confusion related to our marketplaces could damage our reputation and
negatively impact the growth of our business.
If we fail to successfully identify, finance and integrate acquisitions, our future operating results may be
materially adversely affected
.
We
have expanded our business in part through acquisitions and may continue to do so in the future. The success in any future growth strategy involving acquisitions
will depend on our ability to identify, and the availability of, suitable acquisition candidates. We may incur costs in the preliminary stages of an acquisition, but may ultimately be unable or
unwilling to consummate the proposed transaction for various reasons. In addition, acquisitions involve numerous risks, including our ability to successfully integrate the acquired businesses and
operations with our other businesses and fully realize the anticipated benefits of the acquisitions. If we are not able to achieve these objectives in a cost-effective and timely manner, we may not
fully realize the anticipated benefits of the acquisition or it may take us longer to realize the benefits of the acquisition than we expect. Acquired operations outside the U.S. may present unique
challenges or increase our exposure to risks associated with foreign operations, including foreign currency risks and risks associated with local regulatory regimes.
The
integration process could result in the loss of key customers, employees or vendors, increase our operating or other costs, decrease our profit margins or disrupt our other
businesses, each of which could impair our ability to achieve the anticipated benefits of the acquisition. Our efforts to integrate acquired businesses will divert management's attention and resources
from our other businesses. Any
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failure
to timely realize the anticipated benefits of the acquisition could have a material adverse effect on our revenues, expenses and operating results.
Acquisitions
could result in dilutive issuances of equity securities, the incurrence of debt, one-time write-offs of goodwill and substantial amortization expenses of other intangible
assets. We may be unable to obtain financing on favorable terms, or at all, if necessary to finance future acquisitions, making it impossible or more costly to acquire other businesses. If we are able
to obtain financing, the terms may be onerous and restrict our operations. Further, certain acquisitions may be subject to regulatory approval, which can be time-consuming and costly to obtain, and
the terms of such regulatory approvals may impose limitations on our ongoing operations or require us to divest assets or lines of business.
Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause
volatility in our stock price.
Our prior operating results have fluctuated due to changes in our business and the e-commerce industry. Similarly, our future operating results
may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our operating results as an
indication of our future performance. Factors that may affect our quarterly operating results include the following:
-
-
our ability to retain and increase sales to existing buyers, attract new buyers and satisfy buyer demands;
-
-
our ability to retain and expand our base of sellers;
-
-
entry into, or the modification, termination or expiration of, material contracts;
-
-
the volume, size, timing and completion rate of transactions in our marketplaces, including variability due to the timing of large, project
based activities;
-
-
changes in the supply and demand for and the volume, price, mix and quality of our supply of surplus and salvage assets;
-
-
introduction of new or enhanced websites, services or product offerings by us or our competitors, which may impact our margins;
-
-
implementation costs of significant new contracts;
-
-
changes in the volume and type of value-added services we provide to the DoD or other buyers and sellers;
-
-
changes in our pricing policies or the pricing policies of our competitors;
-
-
changes in the conditions and economic prospects of the e-commerce industry or the economy generally, which could alter current or prospective
buyers' and sellers' priorities;
-
-
impairment of goodwill or other intangible assets;
-
-
technical difficulties, including telecommunication system or Internet failures;
-
-
changes in government regulation of the Internet and e-commerce industry;
-
-
the extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft,
computer intrusions, outages and similar events;
-
-
event-driven disruptions such as war, terrorism, armed hostilities, disease and natural disasters;
-
-
changes in energy and commodities prices, including the timing and speed of recovery in energy sector macro conditions;
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-
-
seasonal patterns in selling and purchasing activity;
-
-
costs related to acquisitions of technology or equipment; and
-
-
rising health care insurance costs.
Our
operating results may fall below the expectations of market analysts and investors in some future periods. If this occurs, even temporarily, it could cause volatility in our stock
price.
Our inability to use software licensed from third parties or our use of open source software under license
terms that interfere with our proprietary rights could disrupt our business.
We use software licensed from third parties, including some software, known as open-source software that we use without charge. We currently use
the following open-source software: Linux (an operating system); MySQL (database software); PERL (an interpreter); Apache (a web server); Java; Liferay (content management system); Mule (enterprise
service bus); ActiveMQ (message queue); Tomcat (application container); Chef (infrastructure automation); and Jenkins (code deployment) and we may in the future use additional open-source software. In
the future, these licenses to third party software may not be available on terms that are acceptable to us, or at all.
As
described above, we currently rely on third parties to provide cloud-based services. Upon completion of our LiquidityOne Transformation program, we will rely to a greater degree on
outsourced, cloud-based, platform as a service solutions not under our direct management or control.
Our
inability to use third-party software or to enter into agreements on acceptable terms with providers of cloud-based solutions could result in disruptions to our business, or delays
in the development of future services or enhancements of existing services, which could impair our business. In addition, the terms of certain open source software licenses may require us to provide
modified versions of the open source software, which we develop, if any, or any proprietary software that incorporates all or a portion of the open source software, if any, to others on unfavorable
license terms that are consistent with the open source license term. If we are required to license our proprietary software in accordance with the foregoing, our competitors and other third parties
could obtain access to our intellectual property, which could harm our business.
Assertions that we infringe on intellectual property rights of others could result in significant costs and
substantially harm our business and operating results.
Other parties may assert that we have infringed on their technology or other intellectual property rights. We use internally developed systems
and licensed technology to operate our online auction platform and related websites. Third parties could assert intellectual property infringement claims against us based on our internally developed
systems or use of licensed third party technology. Third parties also could assert intellectual property infringement claims against parties from whom we license technology. If we are forced to defend
against any infringement claims, whether they
are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel and/or delays in completion of sales. Furthermore, the outcome
of a dispute may be that we would need to change technology, develop non-infringing technology or enter into royalty or licensing agreements. A switch to different technology could cause interruptions
in our business. Internal development of a non-infringing technology may be expensive and time-consuming, if we are able to successfully develop such technology at all. Royalty or licensing
agreements, if required, may be unavailable on terms acceptable to us, or at all. Incurrence of any of these costs could negatively impact our operating results.
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If we do not retain our senior management and other key personnel, we may not be able to achieve our business
objectives.
Our future success, including our ability to implement successfully the LiquidityOne transformation program is substantially dependent on the
continued service of our senior management and other key personnel, particularly William P. Angrick, III, our chief executive officer. We do not have key-person insurance on any of our officers or
employees. The loss of any member of our existing senior management team could damage key seller relationships, result in the loss of key information, expertise or know-how, lead to unanticipated
recruitment and training costs and make it more difficult to successfully operate our business and achieve our business goals. Further, the loss of any of our key personnel involved in the
implementation of the LiquidityOne Transformation program may cause delays in, or otherwise impair, the successful implementation of the program.
If we are unable to attract and retain skilled employees, our business may be harmed.
Our future success depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with
sales, marketing, operations and technology expertise. Competition for employees in our industry is intense. We have experienced difficulty from time to time in attracting the personnel necessary to
support the growth of our business, and we may experience similar difficulties in the future. If we are unable to attract, assimilate and retain employees with the necessary skills, we may not be able
to grow our business and revenue as expected and we could experience increased turnover, decreased levels of customer service, low morale, inefficiency or internal control failures.
The seasonality of our business places increased strain on our operations
.
We
have seasonality in each portion of our business. We expect a disproportionate amount of transactions on our marketplaces to occur at certain times during the year.
If we are unable to effectively manage increased demand, or the increased flow of goods that we typically experience during these times, it could significantly affect our revenue and our future
growth. If too many customers access our websites within a short period of time due to increased demand, we may experience system interruptions that make our websites unavailable or prevent us from
providing efficient service, which may reduce our GMV and the attractiveness of our value-added services. In addition, we may be unable to adequately staff our distribution centers during these peak
periods.
Our international operations expose us to a number of risks.
Our international activities are significant to our revenues and profits, and we may continue to expand internationally. It is costly to
establish, develop, and maintain international operations and websites, and promote our brand internationally. Our international operations may not be profitable on a sustained basis. In addition to
risks described elsewhere in this section, our international operations are subject to a number of risks, including:
-
-
local economic and political conditions, or civil unrest that may disrupt economic activity in affected countries;
-
-
government regulation of e-commerce and other services, competition, and restrictive governmental actions (such as trade protection measures,
including export duties and quotas and custom duties and tariffs), nationalization, and restrictions on foreign ownership;
-
-
restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products and services, including
uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the enforcement of intellectual property
rights;
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-
-
business licensing or certification requirements, such as for imports, exports, and web services;
-
-
limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
-
-
shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
-
-
laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or
discounts;
-
-
lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;
-
-
lower levels of credit card usage and increased payment risk;
-
-
different employee/employer relationships and the existence of works councils;
-
-
compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting certain payments to government
officials and other third parties;
-
-
laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and
-
-
geopolitical events, including war and terrorism.
Our operations are subject to extensive anti-corruption laws and regulations.
Due to the international scope of our operations, we are subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar
foreign anti-corruption laws. These laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence foreign government
officials for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Global enforcement of these laws has increased substantially in recent years. Violations of
anti-corruption laws or regulations by our employees or by intermediaries acting on our behalf may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse
effect on our reputation, business and results of operations or financial condition.
The economic effects of "Brexit" may affect relationships with existing and future customers and could have
an adverse impact on our business and operating results.
On June 23, 2016, the United Kingdom (the "U.K.") held a referendum in which voters approved an exit from the European Union ("E.U."),
commonly referred to as "Brexit." The
referendum is non-binding; however, it is expected to be passed into law, after which negotiations will commence to determine the future terms of the U.K.'s relationship with the E.U. The impact on us
from Brexit will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations.
As
a result of the referendum, the global markets and currencies have been adversely impacted, including a sharp decline in the value of the British pound as compared to the U.S. dollar.
A potential devaluation of the local currencies of our international buyers relative to the U.S. dollar may impair the purchasing power of our international buyers and could cause international buyers
to decrease their participation in our marketplaces or use of our services.
Volatility
in exchange rates resulting from Brexit is expected to continue in the short term as the U.K. negotiates its exit from the E.U. We translate sales and other results
denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international sales and earnings could be reduced because foreign
currencies may translate into fewer U.S. dollars.
The
withdrawal of the U.K. from the E.U. may create global economic uncertainty, which may cause our buyers to reduce their participation in our marketplaces or cause our customers
generally to
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reduce
their spending on our products and services. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws
to replace or replicate, and those laws and regulations may be cumbersome, difficult or costly in terms of compliance. Any of these effects of Brexit, among others, could adversely affect our
business, financial condition, operating results and cash flows.
We face legal uncertainties relating to the Internet in general and to the e-commerce industry in particular
and may become subject to costly government regulation.
The laws and regulations related to the Internet and e-commerce are evolving. These laws and regulations relate to issues such as user privacy,
freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights and information security. Laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel and defamation, obscenity and personal privacy could also affect our business. Laws adopted prior to the advent of the Internet may
not contemplate or address the unique issues of
the Internet and related technologies and it is not clear how they will apply. Current and future laws and regulations could increase our cost of doing business and/or decrease the demand for our
services.
Our auction business may be subject to a variety of additional costly government regulations.
Many states and other jurisdictions have regulations governing the conduct of traditional "auctions" and the liability of traditional
"auctioneers" in conducting auctions, as well as the handling of property by "secondhand dealers", which may apply to online auction services. In addition, certain states have laws or regulations that
expressly apply to online auction services. We expect to continue to incur costs in complying with these laws and could be subject to fines or other penalties for any failure to comply with these
laws. We may be required to make changes in our business to comply with these laws, which could increase our costs, reduce our revenue, cause us to prohibit the listing of certain items or restrict
certain listing formats in some locations, or otherwise adversely affect our financial condition or operating results.
In
addition, the law regarding the potential liability of an online auction service for the activities of its users is not clear. Users of our websites may not always comply with our
terms and conditions or with laws and regulations applicable to them and their transactions. It is possible that we may be subject to allegations of civil or criminal liability for any unlawful
activities conducted by sellers or buyers. Any costs we incur as a result of any such allegations, or as a result of actual or alleged unlawful transactions using our marketplaces, or in our efforts
to prevent any such transactions, may harm our opportunities for future revenue growth. In addition, any negative publicity we receive regarding any such transactions or allegations may damage our
reputation, our ability to attract new sellers and buyers and our business.
Certain categories of merchandise sold on our marketplaces are subject to government restrictions.
We sell merchandise, such as scientific instruments, information technology equipment and aircraft parts, that is subject to export control and
economic sanctions laws, among other laws, imposed by the United States and other governments. Such restrictions include the U.S. Export Administration Regulations, the International Traffic in Arms
Regulations, and economic sanctions and embargo laws administered by the Office of the Foreign Assets Control Regulations. These restrictions prohibit us from, among other things, selling property to
(1) persons or entities that appear on lists of restricted or prohibited parties maintained by the United States or other governments or (2) countries, regimes, or nationals that are the
target of applicable economic sanctions or other embargoes. In addition, for specified categories of property sold under our contracts with the DoD, we are required to (1) obtain an end-use
certificate from the prospective buyer describing the nature of the buyer's business, describing the expected disposition and specific end-use of the property, and acknowledging the
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applicability
of pertinent export control and economic sanctions laws and (2) confirm that each buyer has been cleared to purchase export-controlled items.
We
may incur significant costs or be required to modify our business to comply with these requirements. If we are alleged to have violated any of these laws or regulations we may be
subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing
business with U.S. federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety are made against us, whether or not true.
We are exposed to risks related to cybersecurity and protection of confidential information.
We retain highly confidential information on behalf of our clients in our systems and databases. Although we maintain security features in our
systems that are designed to protect customer information and prevent data loss and other security breaches, such measures cannot provide absolute security and our operations may be susceptible to
breaches, including from circumvention of security systems, denial of service attacks or other cyber-attacks, hacking, computer viruses or malware, technical malfunction, employee error, malfeasance,
physical breaches, system disruptions or other disruptions. These disruptions may jeopardize the security of information stored in and transmitted through our systems. An increasing number of
websites, including those owned by several other large Internet and offline companies, have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks
on portions of their websites or infrastructure. The techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems, change frequently, may be difficult to detect for
a long time, and often are not recognized until launched against a target. Certain efforts may be state sponsored and supported by significant financial and technological resources and therefore may
be even more difficult to detect. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. As the Department of Defense is one of our clients, our
systems may be especially targeted by such malicious attackers. We currently expend, and may be required to expend significant additional capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. These issues are likely to become more difficult as we expand our operations. Any breach of our security measures, or even a perceived breach
of our security measures, could cause us to lose clients, suffer material harm to our business, financial condition, operating results and reputation or be subject to regulatory actions, sanctions or
other statutory penalties, litigation, liability for failure to safeguard our clients' information. Further, the loss of confidential client information could also expose us to the risk of liability
and costly litigation. In addition, if there is any perception that we cannot protect our clients' confidential information, we may lose the ability to retain existing clients and attract new clients
and our revenue could decline.
If we fail to comply with increasing levels of regulation relating to privacy, our business could suffer
harm.
We are subject to regulation at the federal, state and international levels relating to privacy and the use of third-party data, including
personal user information and employee data. These statutory and regulatory requirements are evolving, increasing in complexity and number, and may change significantly. How companies collect,
process, use, store, share or transmit personal and employee data is subject to increasing scrutiny by governments as well as the public, which could influence the adoption of legislation or
regulation. New statutory or regulatory developments may restrict our ability to collect and use demographic and personal information from our buyers and our sellers, which could be costly or harm our
marketing efforts. Further, there may be conflicts among the privacy and data protections laws adopted by the various countries in which we operate. Judicial and regulatory application and
interpretation of these statutory and regulatory requirements are often uncertain and
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may
also limit our marketing efforts. Compliance with regulations regarding privacy, security and protection of user and employee data, increased government or private enforcement, and changing public
attitudes about data privacy, may increase the cost of growing our business and require us to expend significant capital and other resources. Our failure to comply with these federal, state and
international laws and regulations could subject us to lawsuits, fines, criminal penalties, statutory damages, adverse publicity and other costs which could decrease our profitability.
We may be subject to product liability claims if people or property are harmed by the products we
sell
.
Some
of the products we sell through our online marketplaces or at our IronDirect and TruckCenter store locations may expose us to product liability claims relating to
personal injury, death, or environmental or property damage, and may be the subject of product recalls or other actions. Our exposure to product liability claims may be increased by the fact that we
sell products manufactured by third parties. For example, if the manufacturers do not have sufficient protection from such claims, we may be subject to claims relating to the products in question.
Defense of any such actions could be costly and involve significant time and attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to
change our business in an adverse manner. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will
continue to be available
to us on economically reasonable terms, or at all. In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability.
If one or more states successfully assert that we should collect sales or other taxes on the sale of our
merchandise or the merchandise of third parties that we offer for sale on our websites, our business could be harmed.
The application of indirect taxes (such as sales and use tax, value-added tax ("VAT"), goods and services tax, business tax and gross receipt
tax) to ecommerce businesses is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the adoption and growth of the Internet
and ecommerce. In many cases, it is not clear how existing statutes apply to the Internet or ecommerce. In addition, governments around the world are increasingly looking for ways to increase
revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through indirect taxes. There are many transactions that occur during the
ordinary course of business for which the ultimate tax determination is uncertain.
We
are currently required to collect and remit sales taxes in all states for shipment of goods from our DoD contracts. We also collect and remit sales or other similar taxes in respect
of shipments of other goods into states in which we have a substantial presence. In addition, as we grow our business, any new operation in states in which we currently do not collect and remit sales
taxes could subject shipments into such states to state sales taxes under current or future laws.
U.S.
Supreme Court decisions restrict the imposition of obligations to collect state and local taxes with respect to sales made over the Internet. However, a number of states have
adopted or are considering laws that levy additional taxes on Internet access and electronic commerce transactions. Congress is also considering legislation allowing states to require out-of-state
sellers to collect sales and use taxes for ecommerce transactions. It is not possible to predict with any degree of certainty the outcome of these initiatives or the impact of these initiatives on our
business and marketing strategies that we are considering or may consider in the future.
An
unfavorable change in U.S. Supreme Court guidance related to sales tax, or a successful assertion by one or more jurisdictions that our sale of merchandise in such jurisdiction is
subject to sales or other taxes may result in material tax liabilities, interest and penalties. A change in state or
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federal
laws, or our business model, business strategy, or marketing initiatives may require us to collect sales tax on transactions in which we do not currently collect such tax. These developments,
should they occur, may result in a decrease in future sales, may decrease our ability to compete, increase our compliance costs or otherwise harm our business.
Similar
issues exist outside of the United States, where the application of VAT or other indirect taxes on ecommerce providers is complex and evolving. On January 1, 2015, changes
to the rules determining the place of supply (and thus the country of taxation) for all European Union based providers of electronically supplied services were implemented that require that we pay VAT
based on the residence or normal place of business of our customers. These changes may result in our paying a higher rate of VAT or VAT on a higher number of transactions. Additionally, we pay input
VAT on applicable taxable purchases within the various countries in which we operate. In most cases, we are entitled to reclaim this input VAT from the various countries. However, the application of
the laws and rules that allow such reclamation is sometimes uncertain. A successful assertion by one or more countries that we are not entitled to reclaim VAT could harm our business. In certain
jurisdictions, we collect and remit indirect taxes on our fees and pay taxes on our purchases of goods and services. However, tax authorities may raise questions about our calculation, reporting and
collection of taxes and may ask us to remit additional taxes, as well as the proper calculation of such taxes. Should any new taxes become applicable or if the taxes we pay are found to be deficient,
our business could be harmed.
Fraudulent activities involving our websites and disputes relating to transactions on our websites may cause
us to lose clients and adversely affect our ability to grow our business.
We are aware that other companies operating online auction or liquidation services have periodically received complaints of fraudulent
activities of buyers or sellers on their websites, including disputes over the quality of goods and services, unauthorized use of credit card and bank account information and identity theft, potential
breaches of system security, and infringement of third-party copyrights, trademarks and trade names or other intellectual property rights. We may receive similar complaints if sellers or buyers
trading in our marketplaces are alleged to have engaged in fraudulent or unlawful activity. In addition, we may suffer losses as a result of purchases paid for with fraudulent credit card data even
though the associated financial institution approved payment. In the case of disputed transactions, we may not be able to require users of our services to fulfill their obligations to make payments or
to deliver goods. We also may receive complaints from buyers about the quality of purchased goods, requests for reimbursement, or communications threatening or commencing legal actions against us.
Negative publicity generated as a result of fraudulent conduct by third parties or the failure to satisfactorily settle disputes related to transactions on our websites could damage our reputation,
cause us to lose clients and adversely affect our ability to grow our business.
False or defamatory statements transmitted through our services could harm our reputation and affect our
ability to attract clients.
The law relating to the liability of online services companies for information carried on or disseminated through their services is currently
unsettled. Claims could be made against online services companies under both the U.S. and foreign law for defamation, libel, invasion of privacy, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated through their services. Our website allows users to make comments regarding the online auction industry in general and
other users and their merchandise in particular. Although all such comments are generated by users and not by us, we are aware that claims of defamation or other injury have been made against other
companies operating auction services in the past and could be made in the future against us for comments made by users. If we are held liable for information provided by our users and carried on our
service, we could be directly harmed and may be forced to implement measures to reduce our liability. This may require us to expend substantial resources or discontinue certain service offerings,
which could negatively affect our operating results. In addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could harm our
reputation and affect our ability to attract clients.
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Failure to maintain effective internal controls over financial reporting could have a material adverse effect
on our business, operating results and stock price
.
Section 404
of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a report containing management's assessment of the effectiveness of
our internal controls over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal controls are effective. Compliance with these requirements has
resulted in, and is likely to continue to result in, significant costs and the commitment of time and operational resources. The LiquidityOne Transformation program, as well as other changes in our
business, including initiatives to invest in information systems or to transition particular functions to third party providers, will necessitate modifications to our internal controls. We cannot be
certain that our current design for internal control over financial reporting, or any changes to be made, will be sufficient to enable management to determine that our internal controls are effective
for any period, or on an ongoing basis. If we are unable to assert that our internal controls over financial reporting are effective, market perception of our financial condition and the trading price
of our stock may be adversely affected, and client perception of our business may suffer.
Our
internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees, agents or third parties with whom we work. Internal
controls may become less effective over time as a result of, among other things, changes in conditions, failures to comply with our policies and procedures or new business that strains our system of
internal controls.
Changes in accounting and reporting policies or practices may affect our financial results, which may affect
our stock price.
Our accounting policies are fundamental to determining and understanding our financial results and condition. Some of these policies require our
management to use estimates and make subjective and complex judgments about matters that are uncertain. Factors may arise over time that lead us to change our estimates and judgments. In some cases,
our management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in us reporting materially
different results than would have been reported under a different alternative. Any changes in accounting policies or methods could reduce our net income, which reductions may be independent of changes
in our operations. These reductions in reported net income could cause our stock price to decline. For example, our operating results for the fourth quarter, and full fiscal year 2016 have been
affected by our recording of a valuation allowance against our deferred tax assets and by our recording of an impairment of goodwill.
The success of our business depends on our ability to market quality products that meet our customers' needs.
Our business relies on continued demand for the products we offer. To compete effectively, we must offer products that appeal to our customers.
This is dependent on a number of factors, including our ability to acquire products that meet the quality, performance and price expectations of our customers and our ability to develop effective
sales, advertising and marketing programs. Failure to continue to offer competitive products to the marketplace, to supply products that meet applicable regulatory requirements, or to predict market
demands for, or gain market acceptance of, such products, could have a negative impact on our business, results of operations and financial condition.
We expect IronDirect's business will be highly sensitive to general economic conditions and economic
conditions in the industries it will serve
.
The
construction equipment industry is cyclical and its revenues are closely tied to general economic conditions and to conditions in the non-residential construction
industry in particular. As a
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result,
we expect demand for IronDirect's products and services will be cyclical and may be significantly reduced in an economic environment characterized by lower levels of government and business
investment, lower levels of business confidence, lower corporate earnings, perceived or actual industry overcapacity, higher unemployment and lower consumer spending. A prolonged period of slow growth
may also reduce demand for IronDirect's products and services. Economic conditions affecting the industries IronDirect will serve may lead to reduced capital expenditures by its customers which may,
in turn, lead to a decrease in the demand for IronDirect's products and services. We expect IronDirect's customers will operate in the non-residential construction and oil and gas end-markets and, to
a lesser extent, in industrial activity and residential construction end-markets. These are cyclical businesses that are sensitive to changes in general economic conditions. Weakness in these
end-markets, such as a decline in non-residential construction, oil and gas end-markets or industrial activity, may lead to a decrease in the demand for IronDirect's equipment or the prices we can
charge. Factors that may cause weakness in these end-markets include:
-
-
weakness in the economy, decreases in the market value of real estate or the onset of a new recession;
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-
slowdowns in residential construction and/or non-residential construction;
-
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continued decline and/or volatility in oil and gas prices as well as slowdowns in the oil and gas industry;
-
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reductions in spending levels by customers;
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unfavorable credit markets affecting end-user access to capital;
-
-
adverse changes in the federal and local government infrastructure spending;
-
-
increases in the cost of construction materials;
-
-
increases in interest rates; and
-
-
terrorism or hostilities involving the United States.
In
addition, the cyclicality of the construction equipment industry may make it more difficult for us to forecast trends. Uncertainty regarding future product demand could cause us to
maintain excess equipment inventory, which will increase our equipment inventory costs. Alternatively, if we are not able to predict periods of increased demand, we may lose customers if we do not
have enough equipment to satisfy demand.
We plan to provide financing and credit support for some of our customers.
We assist customers in their rental, leasing and acquisition of products sold through our IronDirect and TruckCenter business. We intend to
provide financing for some of our customers, primarily in the U.S., to acquire vehicles and equipment through loans, sales-type leases, and operating leases. We may enter into these financing
agreements with the intent either to hold the financing until maturity or to sell the financing to a third party within a short time period. Until such financing obligations are satisfied through
either customer payments or a third-party sale, we retain the risks associated with such customer financing. Our results could be adversely affected if such customers default on their contractual
obligations to us, if the residual values of such equipment on these transactions decline below the original estimated values or we are unable to sell the financing receivable to a third party.
In
addition, we expect our customers, from time to time, may fund the acquisition of equipment or vehicles through third-party finance companies. In certain instances, we may provide
credit guarantees, residual value guarantees or buyback guarantees. With these guarantees, we must assess the probability of losses or non-performance in ways similar to the evaluation of accounts
receivable, including consideration of a customer's payment history, leverage, availability of third party financing, political
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and
currency exchange risks, and other factors. Many of these factors, including the assessment of a customer's ability to pay, are influenced by economic and market factors that cannot be predicted
with certainty. In circumstances where we believe it is probable that a specific customer will have difficulty meeting its financial obligations, we will record a specific reserve to recognize a
liability for a guarantee we expect to pay, taking into account any amounts that we anticipate realizing if we are forced to repossess the equipment that supports the customer's financial obligations
to us. During periods of economic weakness, the collateral underlying our guarantees of indebtedness of customers or receivables can decline sharply, which would increase our exposure to losses. In
the future, we may incur losses in excess of our recorded reserves if the financial condition of our customers were to deteriorate further or the full amount of any anticipated proceeds from the sale
of the collateral supporting our customers' financial obligations is not realized. To date, losses related to guarantees have been negligible; however, there can be no assurance that our historical
experience with respect to guarantees will be indicative of future results.
Our stock price has been volatile, and your investment in our common stock could suffer a decline in value.
The worldwide financial crisis led to an increase in the overall volatility of the stock market. Despite improved stock market performance, the
increased volatility and other broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Other factors that could
cause fluctuation in our stock price may include:
-
-
actual or anticipated variations in quarterly operating results;
-
-
changes in financial estimates by us or by a securities analyst who covers our stock;
-
-
publication of research reports about our company or industry;
-
-
conditions or trends in our industry;
-
-
stock market price and volume fluctuations of other publicly traded companies and, in particular, those whose business involves the Internet
and e-commerce;
-
-
announcements by us or our competitors of significant contracts (or the amendment or loss of such contracts), acquisitions, commercial
relationships, strategic partnerships or divestitures;
-
-
announcements by us or our competitors of technological innovations, new services or service enhancements;
-
-
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
-
-
the passage of legislation or other regulatory developments that adversely affect us, our clients or our industry;
-
-
additions or departures of key personnel;
-
-
sales of our common stock, including sales of our common stock by our directors and officers or specific stockholders; and
-
-
general economic conditions and slow or negative growth of related markets.
Volatility
in the market price of shares may prevent investors from being able to sell their shares of common stock at prices they view as attractive. In the past, securities class
action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our
management's attention and resources.
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Some provisions of our charter, bylaws and Delaware law inhibit potential acquisition bids that you may
consider favorable.
Our corporate documents and Delaware law contain provisions that may enable our board of directors to resist a change in control of our company
even if a change in control were to be considered favorable by you and other stockholders. These provisions include:
-
-
a staggered board of directors;
-
-
a prohibition on actions by our stockholders by written consent;
-
-
limitations on persons authorized to call a special meeting of stockholders;
-
-
the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder
approval;
-
-
advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual
meeting of stockholders; and
-
-
the requirement that board vacancies be filled by a majority of our directors then in office.
These
provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire. In addition, our bylaws provide that the Delaware Court of
Chancery will be the exclusive forum for certain types of legal action (or, if the Court of Chancery does not have jurisdiction, another state court or a federal court within Delaware). This provision
may make it more difficult for you and other stockholders to challenge certain corporate actions we take.