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Mail Stop 4561
December 12, 2005
William P. Angrick, III
Chief Executive Officer
Liquidity Services, Inc.
2131 K Street, N.W. 4th Floor
Washington, D.C. 20037
Re: Liquidity Services, Inc.
Registration Statement on Form S-1
Filed November 14, 2005
File No. 333-129656
Dear Mr. Angrick:
We have reviewed your filing and have the following comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form S-1
General
1. Please provide us support for comparative factual assertions
and
for management`s belief in qualitative statements regarding your
position in the industry. Clearly mark these materials to
highlight
the specific information you believe supports the statement
referenced. We note, for example, "We are the leading online
auction
marketplace for wholesale, surplus and salvage assets" on page 1.
In
addition, revise the filing to disclose the basis for your
characterization of "leading". For example, are you the leader
based
on revenues, products offered, or some other measure?
2. Please provide us copies of market and industry data that you
cite
or rely on in your filing. These materials should be
appropriately
marked, dated, and refer to the page number on which they are
cited.
For example, we note that you cite D.F. Blumberg Associates, Inc.
and
International Data Corporation.
3. Please provide us with copies of any graphics, maps,
photographs,
and related captions or other artwork including logos that you
intend
to use in the prospectus. Such graphics and pictorial
representations should not be included in any preliminary
prospectus
distributed to prospective investors prior to our review.
4. Please monitor the updating requirements of Rule 3-12 of
Regulation S-X.
Prospectus Summary, page 1
5. Please balance this disclosure with a summary of the most
significant risks associated with your company and this offering.
6. Please revise to state the percentage of revenues you receive
from
each of your segments.
Risk Factors, page 11
7. Please avoid using generic conclusions such as "materially
adversely affected" and "negatively affected" when describing the
risks` effects. Replace this, and similar language, with
specific
disclosure of how you, your business, financial condition and
results
of operations would be affected by the facts you describe.
8. Please include a risk factor that discusses your inventory risk
and credit risk under the profit sharing revenue model.
We depend on contracts with..., page 11
9. Please disclose whether you have ever failed to satisfy the
performance benchmarks since the contract was executed.
If we fail to manage our growth effectively, our operating
results..., page 12
10. Please revise to specifically explain how your growth "places
a
significant strain on our management systems and resources."
Because we have a limited operating history in a rapidly evolving
industry..., page 13
11. We note you have presented different risks in this risk
factor,
including the risk of a limited operating history and risks that
are
frequently encountered by early stage companies in rapidly
evolving
industry. Please consider separating these two risks.
Additionally,
some of these risks are repeated in other risk factors. Please
delete all redundancies.
If we do not respond to rapid technology changes or upgrade our
systems..., page 14
12. We note your statement that the expansion and improvement of
your
systems and infrastructure require you to commit substantial
financial, operational and technical resources. Please revise to
quantify the amount of financial resources that is required to
expand
and improve your systems and infrastructure.
A significant interruption in the operations of our customers
service
system..., page 15
13. Please tell us whether you have any reason to believe that
your
DoD warehouse distribution center may be re-configured or reduced
as
a results of DoD`s Base Relocation and Closure initiatives.
Our inability to use software licensed... , page 16
14. Please revise to further explain this risk. Specifically
identify the open software you use for no charge and identify the
purpose of the software.
Unfavorable government audit results could force us to adjust
previously reported operating results..., page 17
15. Please revise to disclose whether you have been subject to an
unfavorable government audit.
Our international operations subject us to additional risks and
challenges..., page 18
16. Please quantify the percentage of your revenues that are
derived
from your foreign operations.
Fraudulent activities involving our website and disputes..., page
21
17. Your current disclosure does not provide enough facts to
convey
the risk. Please revise to make your disclosure relating to this
risk factor more specific. For example, specifically describe the
"fraudulent and unlawful activities" you reference in the second
sentence under this heading.
Purchasers in this offering will experience immediate and
substantial
dilution..., page 23
18. Please revise to quantify the amount investors will be diluted
assuming the exercise of the outstanding options and warrants.
We do not expect to pay any dividends on our common stock for the
foreseeable future, page 24
19. Explain why the fact that you do not intend to pay dividends
makes this offering speculative or risky. Alternatively, you may
delete this risk factor.
Use of Proceeds, page 27
20. You indicate that a portion of the proceeds may be used for
possible future acquisitions that are related to your business.
Please further describe the nature of the businesses sought. See
Instruction 6 to Item 504 of Regulation S-K.
21. We note that you will use a portion of the proceeds from this
offering for debt repayment. Please revise your disclosure to set
forth the interest rate and maturity of such indebtedness. If the
indebtedness to be discharged was incurred within one year,
describe
the use of the proceeds of such indebtedness. Refer to
Instruction 4
to Item 504 of Regulation S-K.
Capitalization, page 28
22. Please remove cash and cash equivalents from your
capitalization
table.
Selected Consolidated Financial Data, page 31
23. Reference is made to your disclosure of gross merchandise
value
as supplemental operating data. As noted in EITF 99-19, voluntary
disclosure of gross transaction volume is permissible, provided
that
the amounts are not characterized as revenues or sales. Currently
your description of this metric indicates it is a measure of total
sales value and its relation to revenue recognized in your
financial
statements. This is more akin to a non-GAAP measure versus an
operating measure under FR-65. Accordingly if you are using gross
merchandise value as an operating metric of your gross merchandise
volume, you should revise accordingly to clarify.
Management`s Discussion and Analysis of Financial Condition and
Results of Operation, page 35
24. We note your plan to do a number of things. For example, you
state in the last paragraph on page 12 that you "plan to expand
our
operations by developing new or complementary services, products,
or
trading formats and enhancing the breadth and depth of our value
added services." Further, we note the discussion of your growth
strategies beginning on page 3. Please revise to disclose the
estimated timing of these events, an estimate of the cost for each
activity and how you plan to finance these activities.
Overview, page 35
25. We note that you use two primary transaction models. Please
revise to indicate the percentage of total revenues that is
derived
from each model. In this regard, we note your disclosure on page
F-
10. Further, revise to quantify all commissions. For example,
please provide the range of commissions you pay to sellers based
on a
consignment transaction model. Finally, please disclose the
percentage of total revenues that is derived from buyer
commissions.
26. Please disclose how the purchase price is determined in the
profit sharing model. In particular, please briefly describe the
extent of the discount, if any, from estimated fair market value.
Please provide similar disclosure in the Business section on page
67.
27. Please expand your overview to discuss industry-wide trends
that
management considers important to the success of your business.
Refer to Item 303 of Regulation S-K and SEC Release 33-8350.
Our Seller Agreements, page 36
28. Please clarify whether the percentage of revenue figures
provided
for the surplus contract include buyer commissions paid in these
transactions.
29. Please revise to disclose that you were required to pay DRMS
$5,693,613 for the right to manage the operations and remarket
scrap
material in connection with the Scrap Contract. In this regard,
we
note your disclosure on page F-14.
Total Registered Buyers, page 38
30. Please briefly describe how a person becomes a registered
buyer.
Non-GAAP Financial Measures, page 6, page 31, page 38
31. We note your presentation of adjusted net income. Please
advise
us how you considered Item 10(e) of Regulation S-K which states
that
non-GAAP measures should not use titles that are confusingly
similar
to GAAP financial measures.
32. In your description of why EBITDA and adjusted EBITDA are
useful
measures to investors, you emphasize the non-cash impact of these
adjustments. To the extent you are also using EBITDA and adjusted
EBITDA as a measure of your liquidity you should clarify this and
include presentation of the three major categories of the
statement
of cash flows. Further, clarify why compensation expense is not
related to the core operating performance of your business. We
are
unclear of the basis for an adjustment solely on the form of
consideration.
Stock-Based Compensation, page 43
33. For equity instruments granted during the 12 months prior to
the
date of the most recent balance sheet included in the registration
statement, tell us what consideration was given to disclosing in
the
notes to the financial statements the following:
* For each grant date, disclose the number of options or shares
granted, the exercise price, the fair value of the common stock,
and
the intrinsic value, if any, per option;
* Disclose whether the valuation used to determine the fair value
of
the equity instruments was contemporaneous or retrospective;
* Indicate whether or not the valuation was performed by an
unrelated
third party.
Liquidity and Capital Resources, page 51
34. We note that you generate substantially revenues from the
"profit
sharing model" which requires that you purchase inventory from
your
sellers. Please revise to quantify the demands on your cash flows
created by these purchases and discuss how you have historically
sourced these funds.
Changes in Cash Flows: 2005 Compared to 2004, page 52
35. Reference is made to your discussion of the $20.2 million
dividend. It does not appear that all amounts represent a portion
of
the Company`s profit. If the amounts disclosed represent
distributions, that is, payments from cash flow, please revise
your
disclosures as appropriate to characterize the amounts as such or
advise us. Also, please include disclosure of the amounts
percentage representing a return of capital as appropriate.
Preferred Stock Financings, page 54
36. Please tell us the mechanics by which the Series C Preferred
Stock will be converted. Please provide an analysis as to why the
issuance of common shares should not be integrated with the public
offering.
Business, page 56
37. Please disclose whether you are able to sell each item in your
inventory through the auction process. If not, please explain how
you dispose of the inventory. In this regard, we note that the
"profit sharing model" requires that you purchase inventory from
your
suppliers and attempt to resell the inventory.
38. You state that you plan to expand your international sales and
operations. Please revise your disclosure to note the locations
where you plan to expand.
39. Please quantify the amount spent on company sponsored research
and development activities and the amount spent on customer
sponsored
research activities relating to the development of new products or
services. See Item 101(c)(1)(xi) of Regulation S-K.
Our Solution, page 58
40. Please revise to define "professional buyer." In this regard,
we
note that you have over 386,000 registered professional buyers.
Competition, page 66
41. Please revise your disclosure to estimate your competitive
position in the industry.
Our contracts with the United States Department of Defense, page
67
42. Please revise to further explain your statement that the
"contracts also require us to export compliance and other
regulatory
requirements in connection with sales." Explain the nature of the
regulations and your procedures for complying with those
regulations.
Further, disclose here and in your risk factor section any
potential
liability associated with sales to prohibited persons.
Board of Directors, page 72
43. Please identify your "independent directors."
Employment Agreements, page 77
44. Please revise to disclose the termination date of your
employment
agreement with Mr. Rallo.
Relationships and Related Transactions, page 82
45. Please disclose the payment of the special dividend to
existing
shareholders, or advise us why you do not believe this is
appropriate.
Principal Shareholders and Selling Stockholder, page 83
46. Please revise to discuss how the securities were acquired by
the
selling shareholders.
Sales Eligible for Future Sales, page 89
Lock-Up Agreements, page 90
47. Please revise your disclosure to quantify the number of shares
subject to the lock-up agreement.
Consolidated Balance Sheets, page F-3
48. You have presented costs of goods sold excluding amortization.
Please clarify the nature of the amortization being excluded and
the
amounts that relate to cost of goods sold.
Note 2 - Summary of Significant Accounting Policies
Revenue Recognition
49. Given the relationship with your suppliers and the significant
distributions made to them under the profit-sharing arrangements,
please provide to us a more detailed analysis of the other
indicators
in EITF 99-19 that were considered in determining you are not an
agent on behalf of your suppliers. Clarify how you evaluated your
limitations in establishing price, supplier selection, etc.
50. Reference is also made to your disclosure within Cost of Goods
Sold where you state that you acquire the majority of your
inventory
at a fixed percentage of the original acquisition cost. Based on
the
minimal amount recorded in cost of goods sold relative to the
amount
recognized as revenue, it appears your arrangement to purchase the
inventory at a fixed percentage may mitigate the company`s
inventory
risk level. While inventory risk is generally a strong indicator
of
gross reporting under EITF 99-19, evaluation of this indicator
should
include arrangements between the company and the supplier that may
reduce your risk level and therefore would possibly make this
indicator less persuasive. Please tell us the significance of the
discount received when purchasing inventory based on this fixed
percentage, and how you considered this as a possible mitigating
factor in evaluating the persuasiveness of this indicator.
Note 4., Acquisition, page F-14
51. To the extent the acquisition of Aldnet Media Group
constituted a
business combination under paragraph 9 of SFAS 141 and EITF 98-3,
advise us why significant portion of the purchase consideration
went
to goodwill. We note you acquired a search portal and no amounts
were allocated to potential technology acquired. Please advise.
Note 9 - Debt
Note Payable - page F-16
52. Please advise us what accounting literature you relied upon in
accounting for your warrants and the related redemption liability
and
where these amounts are disclosed in your financial statements.
Further, we also note that you are discounting the liability and
amortizing these amounts as additional interest expense over the
life
of the debenture. Similarly provide accounting literature that
supports this treatment.
Leases, page F-17
53. Clarify if rent related to leases which have escalation
clauses
is recognized on a straight-line basis.
Directors Agreements, page F-18
54. Tell us the amount of the liability associated with the put
option and where the liability is disclosed in your financial
statements. Advise us where you disclosed your accounting
treatment
for the put option or revise accordingly to include.
Note 13 - Stockholders` Equity
55. Based on the Statements of Changes in Stockholders` Equity, we
note that you repurchased shares of your common stock. Please
advise
us of the terms surrounding the repurchase and consider expanding
your disclosures as appropriate.
Part II
Item 15. Recent Sales of Unregistered Securities, page II-2
56. Please revise your disclosure to more specifically identify
the
exemption relied upon in each transaction and the persons or class
of
persons that purchased the shares in each of the transaction. The
terms "individual" and "certain holders" are not sufficient with
respect to certain exemptions.
Item 16. Exhibits and Financial Statement Schedules, page 5
57. Please file the legal opinion with your next amendment, or
provide a draft opinion for us to review.
* * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Kelly McCusker, Accountant, at (202) 551-3433
or
Cicely Luckey, Accounting Branch Chief, at (202) 551-3413 if you
have
questions regarding comments on the financial statements and
related
matters. Please contact Jeffrey Shady, Attorney-Advisor, at (202)
551-3471 or me at (202) 551-3852 with any other questions.
Sincerely,
Michael McTiernan
Special Counsel
cc: Michael C. Williams, Esq (via facsimile)
Hogan & Hartson L.L.P.
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William P. Angrick, III
Liquidity Services, Inc.
December 12, 2005
Page 12