Good day ladies and gentlemen, and welcome to the Fourth Quarter 2014 Liquidity Services Earnings Conference Call. My name is Lisa and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Julie Davis, Senior Director of Investor Relations. Please proceed, ma'am.

Thank you, Lisa. Hello and welcome to our fourth quarter and fiscal year 2014 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer; Jim Rallo, our Chief Financial Officer and Treasurer; and Kathy Domino, our Chief Accounting Officer. We will be available for questions after our prepared remarks. The following discussion or responses to your questions reflect management's views as of today, November 20, 2014 and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's Press Release and in our filings with the SEC, including our most recent Annual Report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. And our press release and our filings with the SEC, each of which is posted on our Web site, you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures. We will also use certain supplemental operating data as a measure of certain components of operating performance which we also believe is useful for management and investors. The supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results. At this time, I'd like to turn the presentation over to our CEO, Bill Angrick.

Thanks Julie. Good morning and welcome to our Q4 earnings call. I'll begin the session by reviewing our Q4 performance and then provide an update on key initiatives heading into our new fiscal year. Next, I'll turn it over to Kathy Domino for more details on the quarter. And finally, Jim Rallo will provide our outlook for fiscal first quarter 2015. Liquidity Services reported Q4 results of $223.9 million of GMV, $9.1 million of adjusted EBIDTA and $0.13 of adjusted EPS. Our Q4 results were in line with our guidance expectations led by a rebound in our energy business which grew 30% year-over-year and continued solid growth in our state and municipal government business. Adjusted EBIDTA and adjusted EPS were at the low-end of our guidance, driven by less favorable property mix within our DoD surplus and selected retail programs. Next I'd like to update you on key business trends and initiatives coming out of Q4. First, the renewal of our DoD surplus contract secures long-term supply and support of our commercial growth strategy. Phasing in our new DoD surplus contract is a significant undertaking, which requires a change in government IP systems and operational procedures as the new surplus contract is being split between rolling stock and non-rolling stock categories. There are still remaining numbers of unresolved operational and contractual details related to phasing in the new contract and we're working together with our agency partner to prioritize and resolve all open issues. We will continue to update shareholders as we conclude this phase of the process. We would note that our DoD surplus business has seen significant changes in the volume and mix of property we handle, which has reduced sales values and increased our costs and we are taking actions in response to these fundamental changes, including…

Thanks, Bill. We finished the fourth quarter of fiscal 2014 at the higher end of our guidance in GMV and at the lower end and adjusted EBIDTA and adjusted EPS. We had steady growth in our state and local government business as we continue to sign new clients and strong performance in our energy vertical with its best quarter of the year. Decreases in product flows around consumer electronics and softness in the buyer market drove retail volumes lower in our consumer goods marketplaces. We continue to move forward with our Liquidity One transformation plan and make the technological and operational enhancements to our marketplaces that will drive an exceptional user experience. Next, I will comment on our fourth quarter and full year results. Total gross merchandise volume or GMV decreased to $223.9 million, down 10.6% for the fourth quarter, and to $931.6 million down 4.3% for the fiscal year. GMV and our GovDeals or state and local government marketplace, increased to $44.7 million up 5.6% for the fourth quarter and to a record $171.4 million up 11.6% for the fiscal year as we continue to add new clients, bringing total clients to over 7000 as the potential 88,000 and thus further penetrating the $3 billion state and local government market. GMV and our DoD scrap marketplace decreased slightly to $16.8 million or 1.3% for the fourth quarter and increased to $71.3 million or 4.6% for the year. As a result of a slight increase in property flow from the DoD. GMV and our DoD surplus marketplace decreased to $30.1 million, or 16.9% for the fourth quarter and to $133 million down 4.7% for the fiscal year. As a result of an increasing flow of lower value property from the DoD. GMV and our commercial marketplaces decreased to $132.4 million…

Thanks Kathy. It is difficult for us to forecast the sales and margins of our business in fiscal 2015. While we are awaiting the final specifications and timing of the work we will be performing under the new DoD surplus contract. In addition, our DoD business has seen significant changes in the volume and mix of property we handle, which has reduced sales values and increased cost. Global economic conditions have improved, however, our overall [alert] [ph] remains cautious regarding our commercial capital asset business due to volatility in capital spending patterns. Our recent supply chain business has seen significant changes in consumer spending habits which have been affected by continued weakness in the consumer goods vertical as a result of increases in payroll taxes and continued unemployment resulting in decreased spending and decreased pricing in the secondary market. In some cases the mix of property received under selected retail final programs is unpredictable resulting in margin pressure and actions on our part to improve the terms under which we do business. Lastly, we plan to further allocate management time and resources to accomplish our Liquidity One transformation program, which may result in reduced productivity and growth during fiscal year 2015 that is difficult to forecast. In light of these factors we've elected to change our guidance practices beginning with fiscal year 2015, we will provide shareholders and the investment community with GMV, adjusted EBIDTA and adjusted diluted EPS guidance on a quarterly basis only. We expect GMV for the first fiscal quarter of 2015 to range from $200 million to $225 million, we expect adjusted EBIDTA for the first fiscal quarter of 2015 to range from $10 million to $30 million. The first fiscal quarter of 2015 we estimate adjusted earnings per diluted share to range from $0.16 to $0.22. This guide assumes we have an average fully diluted number of shares outstanding for the year of 29.8 million and we will not repurchase shares approximately 5.1 million yet to be expended under the share repurchase program. Our guidance adjusted EBIDTA and diluted EPS for one, acquisition costs including transaction costs and changes in earn out estimates, two, amortization of contract intangible assets of $33.3 million from our acquisition of Jacobs Trading and three, for stock-based compensation cost, which we estimate to be approximately $3.5 million to $4 million per quarter for fiscal year 2015. These stock-based compensation costs are consistent with fiscal year 2014. We will now answer any questions.

[Operator Instructions] And your first question comes from the line of Jason Helfstein with Oppenheimer. Please proceed.

Thanks. I got several questions. The first just to clarify what you guys are saying. So on commercial, are you guys basically saying that you are effectively seeing macro weakness so it's just lower than end demand by the consumer which when it trickles through and part of that has to do with the mix of the products you're selling, so just looking for clarity on that comment? Second, obviously, you are going through a significant realignment. When you come out of that, do you think this business can return back to 8.9% GMV margin after you're done with the realignment, call it in 2016 and beyond? Then the next question, we are seeing heightened inventory levels. Can you just talk about the dynamics behind that? And is there risk of an inventory write-off and do you want to talk about where those higher inventories are coming from? And then lastly, just a housekeeping can you give us a breakdown of where the business realignment expense and how you are allocating that between G&A and sales and marketing? Thanks.

Thanks Jason. I think most of these I can take. So when you look at the retail part of our business, we've had a very volatile year as we've discussed on prior calls, what we might add, we had two quarters this year where we had more than 20% growth and we had two quarters this year where we were actually down year-over-year. Now, for the year we were up in the retail segment. So we did get some growth. That growth was single digit it was obviously not acceptable to us. We expect more growth in that business. In that vertical right now what we are seeing is a lot of volatility within our clients. So let me be specific. We have client programs that we've been managing for years. And the volumes in those programs had been coming down in some cases and in some cases they will be high for a month or two. And then down for a few more months and then swap back. And so again, these are programs where we've got all the products with the client regarding those specific programs, so it's not – product isn't going to other people it's simply that the business of some of our clients has been more volatile than you would expect. And a couple of these programs are fairly large. I think when you look at retail in general right now, what you've seen is the retail recovery has not really occurred at what I would say is the lower end of the market, which for the most part is where we're focused on, specifically the higher end of the retail market as we've all seen has recovered. Your [indiscernible] places like that. Our clients have seen either their business is declining or flat for…

Let me take this last question. Relative to the Liquidity One budget expand of $14 million, first point to make is that that's not a linear spend over the two years. We would have a phased approach to requirements development, designing, the better processes we apply across the entire business building the new LSI marketplace platform focused on buyer input, seller input, voice of customer input to make it easier for buyers and sellers to access our services and transact on a platform and then ultimately deploying that that will happen in phases. And so part of the forecasting exercise is such that there's going to be some lumpy episodic spend as we move through each gate of that process. So if we were to broadly estimate the buckets, I'd say half of that spend is in software engineering project management, roughly 30% of that spend in infrastructure enhancements, hardware, security monitoring, really extending our platform to be multicurrency global with the right provisioning for buyers accessing the platform outside the United States and then the remaining 20% other soft costs. I mentioned that we plan to launch our new reseller facing brand to improve awareness in our market – target markets in calendar year 2015. And all of these things overlapping, have profound impacts on our business and relative to forecasting the long-term destination. I think as we move through the year, we're going to be able to better define what that destination is Jason. We want to certainly better understand the uptake of new services, fee-based services such as return to vendor, accessing our platform for asset-management services, valuation services. These are services that are fee-based non-GMV driven that affects your margin. We need to ratify how the pro forma business cost structure will change as we move from legacy IT platforms to a single integrated platform. Certainly, we will have a better handle of the mix of property we are processing and selling under our new DoD surplus contractors that rolls out and there are lots of open questions on physically which locations do we need to staff under that contract. And that is going to be informed by what the government decides, not what we model in our own business. So those are the issues that we will resolve as we move through the year and we will likely have, I think, much more visibility or clarity around that future destination as we move through the year. So we just ask that folks understand that, be patient with us and we will certainly continue to keep an open communication channel with our shareholders.

And then Jason, I believe your last question was specifically on the breakdown of realignment costs. Its $1.8 million that was roughly, I would say, about 40% of that was in the retail supply chain part of our business. The rest was in the capital asset side of our business, mostly on the – associated with the DoD efficiency gains that we're looking to gather with the new contract structure.

Thank you.

And your next question comes from the line of Shawn Milne of Janney Capital Markets. Please proceed.

Thanks. Good morning. Just a quick, Jim, quick housekeeping on the following up on Jason's question. On the $14 million in spend in the next couple of years, I think Bill is saying 30% in infrastructure, is that 30% CapEx or is the $14 million all flowing through the P&L?

So there will be some component of that that's CapEx. Shawn, as you know historically, we only capitalize hardware and completely new products, any enhancements that we make to existing products which we build into our transformation program will be run through the P&L. At this point, I can’t give you an exact amount. If I had a ballpark to that, I would say that at least 60% of that would be CapEx and is already estimated in our CapEx budget for the next two years, which we would expect to be somewhere between $8 million to $9 million per year. That's up about $1 million from where we are this year. So we're not expecting a huge jump in CapEx over the next two years.

Okay. And then just trying to reconcile that with you did $9.1 million in the quarter in EBITDA, but then you are guiding next quarter up in the EBIDTA on – it looks like may be flat to down GMV. But you are talking about higher spending. So what am I missing as we go into the first quarter? Is it really the realignment costs savings? And I guess – I know you are not giving guidance beyond Q1, but is that the new sort of run rate? Or do the Liquidity One spending start to kick in more as we go through fiscal 2015?

I mean a couple of good points in there, Shawn. I think one, we are seeing the benefits of the realignment costs in this quarter and also, going forward. So a lot of those savings are being refunneled back into investments in the business as part of our Liquidity One transformation. So there is – what I would say is some margin improvement, if you would not as much as you would expect and we expect to get full improvement for that, obviously, going into fiscal 2016 or fiscal 2017, actually. When you look at how we expect the rest of the year, I would not annualize the forecast for next quarter and assume that's going to be the full year. And again, there are a significant number of variables that we're still working on around the business that we are really not – that we don't have the information nor we prepared to give guidance on. And so at this point in time, Shawn, I can't really sort of give you any kind of clear data points on where we would expect to be the rest of the year. I do think that the margins on the business are improving on the business that we have. Other than, again, the DoD. So let me be clear on that. But, we're not in a position to forecast out the rest of the year at this time. So I will have to update you on the next quarter.

Okay. And then lastly just on retail. I mean you have been looking more closely at the business, obviously, you know the numbers for years, but talking more with clients. This has always been the overarching message has been online growth is good for Liquidity Services. We should get higher returns, but we continue to hear about lumpiness and obviously, I can assume who the lower end partner is may be seeing some volatility and the larger partner, that makes sense. But as you talk to some of these clients day-to-day, what is really the resistance of getting more programs that have more sustainable inventory levels or more consistency versus sort of the old liquidation model of backing up the truck and buying whatever you can at the end of the quarter. Just trying to understand, that's always been this governor on that business and curious what you're hearing real-time from clients? Thanks.

So I mean, I think a couple of things, Shawn. When you look at – I know you are familiar with a lot of our clients. When you look at a lot of our clients, unfortunately they themselves are not really seeing a lot of growth. I would say there is one glaring exception to that. And you can imagine who that is. And we are growing significantly with that client. The rest of our clients, we are obviously trying to further penetrate them and take more programs. And that is happening. So we are seeing a further penetration of our clients, some of our clients though what we have almost all of their products, and we have seen a decline in that product. We need to backfill that with new clients and further penetrating existing clients. So in fact, if I looked at a client by client basis, what we really got going on the business right now, Shawn, is very strong growth with 10 or so clients and then we've got a decline in another five or six clients. And so that growth is muted. So you've seen sort of a transition in the business or the mix a little bit. I think one of your counterparts noted the growth of liquidation.com recently where you've seen a lot of the newer programs are bring online for clients is moving through liquidation.com platform at a very nice clip. And we would expect to grow that significantly over the next year.

There is another phenomenon that you would see in certain verticals, were a smaller player is willing to “buy” the business to try to take a run at a product category or specific location. And our attitude has always been, we want comprehensive large-scale relationships that are sustainable, mutually successful. And we have taken an attitude over the last I would say 12 to 18 months as we are not interested in “buying” the business to just push GMV levels up. We're really focused on thoughtful underwriting of programs, investing in these for the long-term. As an example, we took about 8 months to discuss the new program up in Canada with a major Fortune 500 retailer. We've been very disciplined about piloting it, setting up terms that are aligned and we are now in lift-up and ramping that up in Canada. And it's going to be one that we would have a multiyear runway for growth. But we are not chasing GMV for GMV sake. I think that's important to understand. That just goes to our philosophy of got to have profitable growth and return on effort of investment in each of these areas. That's not always the case. I do think the industry is consolidating. Comparing the landscape today versus two years ago, there's very few players that can do national, significant size programs for clients, a few people have invested in the logistic support, the refurbishing, the handling, the reporting, the account management, we will have balance sheet strength to give a client comfort that they'll be able to have uninterrupted service over time. It's not unusual for you to see some proprietors literally go out of business after a couple quarters of trying something that was just not well thought out. So that some of the…

Thank you very much.

And your next question comes from the line of Dan Kurnos with Benchmark. Please proceed.

Great. Good morning. Thanks for taking my questions. Three for me, please. Just – on digging a little bit more onto the retail aspect here in the programs and thinking about trying to maybe renegotiate terms with some of your partners there, is there any thoughts that possibly going through some intentional program churn, kind of the way we saw with co-industry if some of those segments aren't becoming profitable? Is their way to get – maybe to dictate inventory a bit better, just given that product mix has been a headwinds for you guys in the past? Is there a way for you to get maybe more modernized product mix?

Sure, Dan. So I think I'm not sure I understand what you mean by more modernized product mix. If you are talking about like consumer electronics a large portion of our business is consumer electronics today that is what I would say is probably the hardest hit vertical that we are dealing in. I mean our general merchandise; our home goods and apparel verticals continue to be fairly consistent. That being said, today, a large part of our inventory is on the general merchandise side of our business as we have had a significant growth in those programs from some existing clients. So when you look at that inventory balance today, a lot of that is general merchandise. That general merchandise is lower margin business for us than, again, say apparel or consumer electronics or other verticals. So did I understand your question properly Dan?

Let me also add. When you are in the technology industry, there are winners and losers, right? And so certain clients have focus on certain product categories and their core business has to withstand the shocks and peaks and valleys of very disruptive landscape for consumer electronics, devices, theater systems, gaming systems, mobile smartphone devices. So we are very well-positioned to serve those manufacturers, but those manufacturers will over time have successes and resets of their own product category. And so that's what affects the volume in our business many of those client programs are revenue-sharing consignment programs. So we're driving great service excellence for them. They are mutually beneficial programs, but the disruptive landscape of consumer electronics means that people will go through the S-curve of their own product introductions and that ripples through the secondary marketplace.

Yes. That's kind of more where I was going, Bill just in terms of I don't want to put it – I won't say I don't want to put this way, but maybe being leveraged more to the losers and the consumer electronic market and trying to penetrate some of the more popular platforms. Is there a thought to potentially, intentionally churning some of those programs as you switch or you just keep the mutually beneficial relationship and just add from there as long as the relationships remain profitable?

Sure. Yes. I mean a good question. But, we certainly are not going to walk away from long-term relationships. That's part of our commitment and partnership that we created with our clients over the years. I think when you look at consumer electronics as Bill indicated we do get a fair amount from manufacturers. We also get a fair amount from retailers. And what I would say right now, as you when you at the electronics market, and by the way, we don't do a lot in phones, so I think for those who know our business, to understand the phone market in the U.S. is a little unique given the fact that it's highly subsidized, obviously, by the carriers. So the secondary market in phones in the U.S. is not as what I would say developed, is it actually is in the rest of the world. But, when you just looking at tablets and laptops, game systems, all that, obviously, we play a lot in that area. Game systems have been stronger for us this year with the release of the version four for many of the platforms. Notebooks or laptops have been frankly nascent. And you've seen that because you've seen a change in consumer habits moving to tablets. That being said, the tablet market has been fairly saturated. I mean, I think again, Apple being a prime example of that. They have seen a significant decrease in iPad sales, not that that was obviously that product is extremely successful but when you look at the velocity of that product, it has slowed down dramatically, Dan. So I think that's where we are in the cycle right now, as Bill indicated. That being said, we're continuing to work with both our retailers and our manufacturers in all those categories. You're just seeing a product growth decrease either from the market or specific variables related to the manufacturers, themselves.

One of the things, I'd also like to add to that is, we understand there is this network effect of manufacturers and retailers trying to reconcile who is responsible for returns allowances over time. And depending upon the individual retailers different balances of power and who's responsible for returns. One of the things we've invested in 2015 was the capability to help partners track and manage return product which goes through the return to vendor reconciliation process. And that leverages a lot of our key strength, which is logistics support we have a national distribution center of 2 million square feet. So all this product leaving retail, if it goes back to vendor has to be physically transported, manifested and then it may go back to manufacturer for a credit, or we may be able to inform them using our data that it would be better off for you to liquidate that item and obviate additional handling and transportation costs and just converted into cash and recover that working capital. And so we're continuing to invest in the return to vendor service offering to allow clients to both leverage our online liquidation platform as well as our logistics platform and the data analytics that we continue to work on providing through our investment activities. That's another way that we can play, if you will, with all of the players in the electronics industry, whether they are being the winner or loser, they all have this complex process to manage all of the flow of returns, some of which they don't want on the secondary marketplace but still you have to do some record keeping, financial reconciliation for that. We look to expand our platform in that area over the next two fiscal years.

Got it. That's really helpful. Just to ask that the two other follow-ups I guess since you brought it up here. Do you think that the secondary market is shrinking in general? I mean we've seen eBay have a lot of company specific problems, but it doesn't really explain the way the slowing marketplaces growth and that the highly promotional environment along with technological advancement is lowering pricing cost of new items. And secondarily to that, you talked about further allocating your time and resources to accomplish this transitional liquidity. One, thinking they're to not go after new business, maybe as aggressively until we have a new platform? Is it more of a manpower issue? What would be sort of driving, stopping you from or impairment growth there? Thanks.

So on the secondary market area, Dan, I think it's – the secondary market, itself, is not – I wouldn't say shrinking – I think what you've got is a change in mix in the secondary market as I talked about earlier. So you also have what I would say is some demand issues in the secondary market. I mean when we look at the secondary market, we are a global player. So globally, we don't really see a change in that. As Bill indicated in his remarks, we we're highly focused on growing our buyers internationally and have been very successful with that, with that this year. I will say in the U.S., we've seen a slowdown in what I would say is larger buyer base network within the U.S. and that's why it's very important in our space to have really the multichannel approach, which we do. As you know, Dan, we sell a lot of our product of liquidation.com. We're the only player that's got that I call power level buyer marketplace. We also move a lot of truckloads both on that marketplace and on our liquidation direct site. So we've got the larger buyer base that I discussed earlier. And then we move a tremendous amount of product B to C for our clients when it's customer A grade. And that multichannel approach is what is creating the winning strategy for our clients and also really our growth for the future. I think what I have been though is I have seen competitors in our space that really only have a single channel, whether it's just B2C or whether it's a full truckload, they are struggling. And so there's really a dynamic or a change going on in the secondary market right now on the demand…

And I would say to think of the framework of what to expect at 2015, growth would be expected to be slower than the market as we fund the product development activities and also maintain assets business. I think as we move to fiscal 2016, as we make progress on the transition to the new go-to-market strategy, we will see growth move more in line with market growth. And then, I think 2017 unencumbered with this 1 foot in the legacy systems processes and 1 foot in building the new, I think unencumbered from that, we would expect to have growth better than market growth and we've have company productivity focused on what's exclusively on growing the business, leveraging the benefits of what we've developed. So that's the way we think about it.

Got it. Great. That's really helpful. Thanks for all the color, guys.

And your next question comes from the line of Rohit Kulkarni with RBC Capital Markets. Please proceed.

Great. Thank you guys. A lot of big picture questions. But, few quick September quarter trend questions, your registered buyers increased both sequentially as well as year-on-year. Option participants decreased both sequentially and year-on-year. Why is that? Can you help us reconcile that? And on the gross margin, I agree that you are investing a lot in the business. But, as the business mix shifts and the gross margin is somewhat a structural thing in the business, if I look at until the September gross margin trends sequentially, does that fully capture how we think – how we should think about gross margin going forward? If you cannot answer that, just may be call out what are the puts and takes in the gross margin from June quarter to September quarter I know we are at the end of the call, but just two quick questions.

Sure. I would think one thing on the buyer, Rohit, we have seen a – what I would say is a steady increase in buyers throughout the year on a macro level. We've seen higher growth in certain areas like I mentioned earlier, our international buyer base is probably growing more quickly than domestic. But, we would expect continue invested sales and marketing and would expect to see decent growth in that buyer base as we have historically, going forward into the next year. Auction participants as you know is somewhat a variable or an output I guess based on different variables, one of which is completed transactions. So when you look at completed transactions up slightly, you look at auction participants up slightly for the fiscal year, a lot of that is driving, there is more options for people to bid in. As you know, we count in auction participants if somebody that bids in an auction one time. So if we've people that are bidding in multiple options if there is more of them, then they will get counted one time in each of those auctions. In the fourth quarter, we had a 2% decrease in auction participants. Frankly, that's a somewhat negligible so I wouldn't have any concern over that. In general, we're still running about 4.5 on an aggregate basis, 4.5 folks per auction bidding in every single option, which is quite healthy. As you know, our goal is certainly to be over 3.5 and you really don't want to get much over five because what happens Rohit is those buyers, if they are not winning enough options, they will go elsewhere to find their products. So our job is to manage the marketplaces we have to continue to move supply into the marketplace to meet the demand, but obviously, not overload the marketplace where the auction participation drops so low that we're not getting the returns for our buyers, I feel like the team has done a great job, actually, of managing that this year as we move to get more product through the liquidation.com marketplace.

I think those are your two questions, right, buyers and option participants, do you have another one?

Yes. The gross margin sequential, any more color on whether it has the full effect of the mix in the business going forward?

So yes, I'm sorry I didn't hear the third question. I apologize. So on the gross margin, so again, as Bill indicated earlier, we've seen improvement in gross margin as we have focused on programs that had fully higher margins. That being said, a lot of that is driven by mix shift, Rohit, so in aggregate, let me explain what's going on, right? We've got the rolling stock is being lost, obviously, with the new CV4 or surplus 4 contract. The rolling stock obviously is higher-margin business that we've talked about that for years. We're getting an influx of still good margin, but lower value, or lower margin product from the DoD. So that's going to put some pressure on that margin moving forward. We also have a fair amount of general merchandise at her inventory earlier. You heard my comment earlier. I think it was Dan, I mean, Dan or Jason has talked about the inventory level. So that, as we pull down that general merchandise into the market that is slightly where our margin as well then our traditional consumer electronics or apparel or household effects or home goods. So I do see the possibility of some margin pressure on the gross profit line as we move throughout the year.

Okay. Thanks a lot guys. Good luck with next year.

And your next question comes from the line of Jason Mitchell with Bank of America. Please proceed.

Hi. This is Jason here for Nat Schindler. I was just wondering if you guys could just kind of remind us for modeling purposes the timing of the DoD contract transition, as far as when the new pricing will take affect and when you expect the rolling stock transition to switch to new provider. Does your guidance this quarter assume that you're still having 100% of the rolling stock that you were able to sell? Or, is there some transition amount, also you mentioned that you kind of need to retool some your IT systems for the rolling stock servicing. Is this just kind of an incremental enhancement or is it a more involved upgrade? Thanks.

Sure. The first question on timing that is one of the inherent uncertainties of where we are with the rollout of the contract. The rollout of the contract timing has not been solidified. There is contingency of extensions, one-month extensions that the DoD has at their discretion to bump that out. But absent any extensions, we would normally be looking at a January timeframe to phase in the new contract. The IT and operational requirements facing the contract largely was reside with the government because is the government that issues the delivery orders for property and had to make the systems changes to segregate property in the two new contract. There are other integration requirements such as integration of our business into the Federal asset sales portal govsales.gov which both requiring work on our side as well as the Federal government side. Those are just a few examples. There are longer list of detail. So as we get visibility on that, we can come back and give you more clarity on the timing of the rollout. The rolling stock transition is under way. There is testing and piloting going on with the government and the new vendor under the rolling stock. So there is rolling stock that is no longer in our flow. We do have some rolling stock, but that flow then turned on in anticipation of the standard up of the new rolling stock contract with the other vendor.

Okay, great. Thanks, guys. End of Q&A

I would now like to turn the presentation over to Ms. Julie Davis for closing remarks.

Thank you. These are time for today's call we will be available to take additional follow-up questions. Thank you for your participation and have a good day.