Item 1.01. Entry into a Material Definitive Agreement.
On July 10, 2018, Liquidity Services, Inc., a Delaware corporation (the “Company”), entered into a definitive agreement to purchase all of the issued and outstanding capital stock of Machinio Corp., a Delaware corporation (“Machinio”), pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”) by and among the Company, Machinio, its stockholders (the “Sellers”), including, among others, Dmitriy Rokhfeld and Dan Pinto (together, the “executives”) and Shareholder Representative Services LLC, a Colorado limited liability company (solely in its capacity as representative, agent and attorney-in-fact for the Sellers). Machinio, headquartered in Chicago, Illinois and with a second office in Berlin, Germany, operates a leading global online platform for listing used equipment for sale in the construction, machine tool, transportation, printing and agriculture sectors.
The consideration paid to the Sellers for the acquisition of Machinio equity was approximately $20 million in cash and Company equity, including the acquisition of Machinio cash of approximately $1.5 million at the closing and the working capital adjustment (for a net cash purchase price of approximately $16.7 million) and shares of restricted stock of the Company issued in a private placement to the executives in exchange for their shares of Machinio stock valued at approximately $2 million (the “Purchase Private Placement”). Such Company restricted stock is subject to a 12-month resale restriction following the closing. All outstanding vested, in-the-money Machinio stock options were converted into the right to receive cash, net of the exercise price, which was paid out of the cash portion of the purchase price. In-the-money unvested Machinio options were converted into non-qualified options to purchase Company common stock. Out-of-the-money Machinio options were canceled. Further, the Sellers are eligible to receive earn-out consideration of up to $5 million in cash, payable based on Machinio’s achievement, on a stand-alone basis, of certain financial targets for the 12-month period ended December 31, 2019.
The purchase price is subject to customary post-closing price adjustments to true-up the at-closing amounts of working capital, debt and Machinio transaction costs. Further, $3 million of the cash consideration otherwise payable to the Sellers at the closing was deposited into escrow as partial security against indemnity claims. The Purchase Agreement contains customary representations, warranties and covenants of the parties. The executives also agreed not to directly or indirectly engage in certain activities that would compete with Machinio, and not to directly or indirectly solicit or otherwise interfere with Machinio’s or Company’s relationships with its employees and customers for five years after closing.
The Purchase Agreement also contains indemnification obligations of each party, subject to the basket and caps set forth in the Purchase Agreement, with respect to breaches of representations, warranties and covenants and certain other specified matters. The Sellers’ indemnification obligations may also be satisfied pursuant to the Company's set-off rights against amounts payable in connection with the earn-out described above.
In connection with the acquisition, the Company also agreed to issue restricted stock units and restricted stock awards valued at approximately $5.0 million in the aggregate to Machinio’s executives and employees. The restricted stock units and restricted stock awards will be subject to performance-based vesting, based upon the achievement of certain annual revenue and adjusted EBITDA targets through calendar year 2021, in each case, subject to each recipient’s continued employment with the Company on such vesting dates and other standard terms and conditions set forth in the respective grant agreements. The value of these grants will be recorded as future equity-related compensation expense. The grants of performance-based restricted units and restricted stock awards relate to 702,003, of which 370,370 shares of Liquidity Services common stock in the aggregate. The restricted stock units and restricted stock awards were issued: (i) in a private placement to the executives (the “Incentive Private Placement”); (ii) under the Machinio equity plan assumed by the Company at closing; and (iii) under the Company’s Second Amended and Restated 2006 Omnibus Long-Term Incentive Plan.