Heritage Global Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of Heritage Global Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three and nine month periods ended September 30, 2020 and 2019, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2020 (the “Form 10-K”). Forward Looking Information This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may,” "will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These statements are subject to certain risks, uncertainties, and assumptions, including the important factors noted under Item 1A “Risk Factors” in our Form 10-K, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Overview, History and Recent Developments Heritage Global Inc. (“HGI”) was incorporated in the State of Florida in 1983 under the name “MedCross, Inc.” The Company’s name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, to “Counsel RB Capital Inc.” in 2011, and to “Heritage Global Inc.” effective in 2013. The most recent name change more closely identifies the Company with its core auction business, Heritage Global Partners, Inc. (“HGP”). In 2014, HGI acquired all of the issued and outstanding capital stock in National Loan Exchange, Inc. (“NLEX”), a broker of charged-off receivables in the United States and Canada. As a result of this acquisition, NLEX operates as one of our wholly-owned divisions. In 2019, the Company formed Heritage Global Capital LLC (“HGC”), a wholly owned subsidiary of HGI, in order to provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. 19 The organization chart below outl ines our basic domestic corp orate structure as of September 30 , 2020 . (1) Registrant. (2) Full service, global auction, appraisal and asset advisory company. (3) Asset liquidation company which acquires and monetizes distressed and surplus assets. (4) Mergers and acquisitions (M&A) advisory firm specializing in financially distressed businesses and properties. (5) Broker of charged-off receivables. (6) Specialty financing solutions for charged-off and nonperforming asset portfolios. COVID-19 The spread of the novel coronavirus (“COVID-19”) had a minor negative impact on our performance through September 30, 2020 resulting from evolving travel and work restrictions as well as a delay in the sale of certain assets. Going forward, we do not believe COVID-19 and the recent developments surrounding the global pandemic will have material negative impacts on our financial performance as our asset liquidation business is highly concentrated in distressed and surplus assets and we expect that there will be an increased supply of distressed and surplus assets as a result of the COVID-19 pandemic and any downward trends in the overall economy, resulting in more potential for principal deals. We believe that the continuing disruptions to the global supply chain, particularly those involving industrial assets, will further increase demand for U.S.-based surplus assets. Further, we expect that the COVID-19 pandemic will have the following positive impacts on our business: • ongoing social distancing requirements in connection with the COVID-19 pandemic will result in increased demand for HGP’s online auctions; • rising charged-off consumer loan sales will result in expanding volumes for NLEX and HGC; • tightening underwriting standards at conventional lenders will result in more funding opportunities for HGC; and • greater focus on collateral on bank balance sheets will result in incremental valuation opportunities for our valuation business. However, positive expected impacts of the COVID-19 pandemic on our business could be offset, at least in part, by negative impacts on certain of our business units relying on travel and field work. Any continuation of travel and work restrictions may result in decreased revenues depending on the scope and duration of such restrictions. 20 Asset liquidation We are a value-driven, innovative leader in financial and capital asset liquidation transactions, valuations and advisory services. We specialize both in acting as an adviser, as well as in acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, real estate, accounts receivable portfolios, intellectual property, and entire business enterprises. Our asset liquidation business began operations in 2009 with the establishment of Heritage Global LLC (“HG LLC”). In addition to acquiring turnkey manufacturing facilities and used industrial machinery and equipment, HG LLC arranges traditional asset disposition sales, including liquidation and auction sales. In 2011, HG LLC acquired 100% of the business of EP USA, LLC (“Equity Partners”), thereby expanding our operations. In 2012, we increased our in-house asset liquidation expertise with our acquisition of 100% of the outstanding equity of HGP, a global full-service auction, appraisal and asset advisory firm. In 2014, we again expanded our asset liquidation operations with the acquisition of 100% of the outstanding equity of NLEX. NLEX is the largest volume broker of charged-off receivables in the United States and Canada, and its offerings include national, state and regional portfolios on behalf of many of the world’s top financial institutions. The NLEX acquisition is consistent with our strategy to expand and diversify the services provided by our asset liquidation business. In 2019, the Company formed Heritage Global Capital LLC (“HGC”), a wholly owned subsidiary of HGI, in order to provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. As a result of the events and acquisitions outlined above, management believes that our expanded platform will allow us to achieve our long term industry leadership goals. Industry and Competition Our asset liquidation business consists primarily of the auction, appraisal and asset advisory services provided by our Industrial Assets division and the accounts receivable brokerage services provided by our Financials Assets division, each of which is further described below. Our asset liquidation business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. The market for these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, we compete with other liquidators, auction companies, dealers and brokers. We also compete with them for potential purchasers, as well as with equipment manufacturers, distributors, dealers and equipment rental companies. Some competitors have significantly greater financial and marketing resources and name recognition. Our business is positioned to grow in all economic cycles. As the economy encounters situations of recession, flattening yield curves and rising credit costs, the asset liquidation business may experience wider margins on principal asset sales, a favorable lending cycle for charged-off and nonperforming asset portfolios, higher volumes of nonperforming assets and building surplus inventories and bankruptcies. In times of economic growth, our asset liquidation business has demonstrated its ability to experience growth based on our competitive advantages in the industry, including our domain expertise related to deal sourcing and execution capabilities, our diversification of integrated service platforms and our experience across underserved markets. We will continue to leverage our competitive advantages to grow within each service line and across platforms through increasing synergies, maintaining high incremental margins, improving earnings predictability, strengthening the balance sheet and managing expenses. Our business strategy includes the option of partnering with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). These Joint Ventures give us access to more opportunities, helping to mitigate some of the competition from the market’s larger participants and contribute to our objective to be the leading resource for clients requiring financial and capital asset solutions . Our Competitive Strengths We believe we have attributes that differentiate us from our competitors and provide us with significant competitive advantages. Our key competitive strengths are described below. 21 Differentiated Business Model . We believe we have diversified business lines serving the financial and industrial asset liquidation market. We have multiple revenue streams in our brokerage and principal based auction services, advisory services and secured lending services. Further, our business is event-driven and we have repeat, forward-flow contracts in place with industry leading customers. We expect to drive growth in our reve nue streams by taking different roles, and using partners as needed. Compelling Macro Growth Drivers . Historically, recessions drive an increased supply of surplus assets and increased demand for liquidation services, which we believe we are well-positioned to provide. Further, we believe the trend of growth in the marketplace of lending platforms is driving an increased supply of non-performing consumer loans. Additionally, we believe an active market for mergers and acquisitions in manufacturing industries drives demand for industrial asset liquidations and our services. The market in which we operate is highly fragmented, presenting a continued opportunity for the Company to increase market share and drive consolidation. High Return on Invested Capital . We believe we have an opportunity, upon securing additional working capital, to drive improved auction economics by serving more frequently in the role of principal rather than the lower margin role of broker. Further, we believe we have a strong growth opportunity in providing secured loans to our financial asset debt buyers, a service we are providing through HGC. Strong Management Team . We have built an experienced executive-level management team with deep domain expertise. Our President and Chief Executive Officer, Ross Dove, is a third-generation auctioneer and a pioneering innovator in applying technology to the asset liquidation industry. Mr. Dove began his career in the auction business over thirty years ago, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008. In addition, our senior management team has deep domain expertise in both industrial asset and financial asset transactions. On September 17, 2020 (the “Effective Date”), we entered into an Employment Agreement (the “New Employment Agreement”) with Kirk Dove, the President and Chief Operating Officer of the Company. Upon the Effective Date, Kirk Dove resigned from his position as President and Chief Operating Officer of the Company and terminated the existing Employment Agreement, dated February 29, 2012, between us and Kirk Dove (the “Prior Employment Agreement”) and replaced it with the New Employment Agreement. Pursuant to the terms of the New Employment Agreement, Kirk Dove will continue his employment with us in an advisory capacity until December 31, 2024, after which time the New Employment Agreement will terminate and Kirk Dove’s employment with the Company will cease. Our Financial Assets Division Our Financial Assets division provides liquidity to issuers of consumer credit that are looking to monetize charged-off loans — loans that creditors have written off as uncollectable. Charged-off loans typically originate from banks that issue unsecured consumer credit. Through NLEX, we act as an advisor for sales of charged-off and nonperforming asset portfolios via an electronic auction exchange platform for banks, the U.S. government, and other debt holders throughout the United States and Canada. Since the 1980s, NLEX has sold over $150 billion face value of performing, nonperforming and charged-off assets. NLEX sales are concentrated in online, automotive, consumer credit card, student loan and real estate charge-offs. The typical credit we broker sells at a deep discount to face value, and we typically receive a commission for these services from both buyers and sellers. We have existing relationships with high quality, top-tier and mid-tier debt buyers. NLEX is in the process of expanding into the FinTech, student loans and peer-to-peer lending sectors, where we believe NLEX has opportunity for significant growth. In addition, we plan to add post-sale initiatives, making our services more attractive to our customers as compared to our competitors. We believe that the less onerous regulatory environment of the current presidential administration has allowed banks to bring more volume to the market in comparison to prior years. We expect that our income from secured lending will consist of upfront fees, interest income, monthly monitoring fees and backend profit share. Our management has decades of domain expertise and we believe the ability to leverage extensive funding activity and widespread industry relationships. We believe we have the opportunity for growth through increased penetration of the underserved market of mid-tier buyers of charged-off receivables, providing more economic financing options and a greater variety of funding solutions to our customers. Our Industrial Assets Division Our Industrial Assets division advises enterprise and financial customers on the sale of industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale. The fees for our services typically 22 ra nge from 15–50%, depending on our role and the transaction. This division predominantly targets surplus or distressed sellers of “inside the building” assets. Our buyers consist of both end-users and dealers. Our management has decades of domain expertise and experience and we believe the ability to leverage extensive industry relationships and has access to a real-time database of actual sales data across 28 industrial sectors. We believe we have the opportunity for growth in our auction services through shifting toward higher-contribution principal deals and, assuming the acceleration of mergers and acquisitions in manufacturing industries, increased auction services for sales of surplus equipment. Further, we intend to increasingly leverage our Capital Asset Redeployment Enterprise (CARE) software package, which provides an internal asset redeployment management system for corporations. We believe we have the opportunity for growth in our valuation services through the addition of incremental bank-approved vendor lists, geographic expansion and through deeper penetration with our existing bank relationships. Government Regulation We are subject to federal, state and local consumer protection laws, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices. 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 . Legislation in the United States has increased public companies’ regulatory and compliance costs as well as the scope and cost of work provided by independent registered public accountants and legal advisors. As regulatory and compliance guidelines continue to evolve, we expect to continue to incur costs, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies . Critical Accounting Policies Management’s Discussion and Analysis of Financial Condition and Results of Operations references our unaudited condensed consolidated interim financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are considered to be reasonable under the circumstances. Actual results could differ from those estimates. Significant estimates required in the preparation of the unaudited condensed consolidated interim financial statements included in this Report include the assessment of collectability of revenue recognized, and the valuation of accounts receivable, inventory, other assets, right-of-use assets, goodwill, intangible assets, liabilities, contingent consideration, deferred income tax assets and liabilities and stock-based compensation. These estimates are considered significant either because of the significance of the financial statement items to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature. We have no off-balance sheet arrangements. We have not paid any dividends, and do not expect to pay any dividends in the future. The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Form 10-K. There have been no changes to these policies in the nine months ended September 30, 2020. Management’s Discussion of Financial Condition Liquidity and Capital Resources Liquidity At September 30, 2020 we had working capital of $0.9 million and at December 31, 2019 we had a working capital deficit of $2.3 million. Our current assets at September 30, 2020 increased to $11.0 million compared to $6.8 million at December 31, 2019 primarily due to increased cash as a result of our cash flow from operations during the nine months ended September 30, 2020. Our current liabilities at September 30, 2020 increased to $10.1 million compared to $9.1 million at December 31, 2019. 23 During the nine months ended September 30 , 2020 , our primary source of cash was the cash provided by our asset liquidation business includ ing cash received on transfer of notes receivable to partners in connection with our new specialty finance unit of HGC . Cash disbursements during the nine months ended September 30 , 2020 consisted pri marily of lending activity of $4 . 5 million under HGC , payment of operating expenses , settlement of auction liabilities and investments in equity method investments . We believe we can fund our operations and our debt service obligations during 2020 and beyond through a combination of cash flows from our on-going asset liquidation operations, proceeds from the sale of shares of common stock completed in October 2020, and accessing financing from our existing line of credit. Our indebtedness consists of a promissory note dated January 30, 2018 (the “Note”) issued in the amount of $1.3 million, as well as any amounts borrowed under our Credit Facility. We are required to pay off the Note in 36 equal installments of $35,000, and any remaining outstanding balance thereunder shall be due and payable in full on January 30, 2021. On February 10, 2020, we entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit. The Credit Facility matures on February 5, 2021 and replaces a secured promissory note, as amended, totaling $3.0 million. We are permitted to use the proceeds of the loan solely for our business operations. As of September 30, 2020, we had an outstanding balance of zero on the Credit Facility. 24 Ownership Structure and Capital Resources • At September 30, 2020 the Company had stockholders’ equity of $16.0 million, as compared to $11.8 million at December 31, 2019. • In February 2020 we amended our revolving line of credit with our bank to provide for aggregate loans of up to $5.0 million. Refer to Note 10 to the condensed consolidated financial statements for further information. • On August 31, 2020, our common stock had been approved for uplisting and began trading on the Nasdaq Stock Market LLC under our previous ticker symbol “HGBL. • On October 6, 2020, the Company completed the Offering of an aggregate of 5,462,500 shares of the Company’s common stock, which included 712,500 shares of common stock sold pursuant to the full exercise of the underwriter’s option to purchase additional shares, resulting in net proceeds to the Company from the Offering, after deducting the underwriting discounts and commissions, of approximately $9.1 million. At September 30, 2020 the Company had incurred approximately $1.2 million in prepaid costs directly associated with the public offering, of which approximately $0.6 million was associated with a non-cash common stock issuance for consulting services rendered. These costs temporarily increased our other current assets balance by $1.2 million at September 30, 2020 and will subsequently offset proceeds from the public offering within additional paid-in capital on the closing date of October 6, 2020. • We determine our future capital and operating requirements based upon our current and projected operating performance and the extent of our contractual commitments. We expect to be able to finance our future operations through cash flows from our asset liquidation business, proceeds from the sale of shares of common stock completed in October 2020, and draws on the line of credit, as needed. Capital requirements are generally limited to repayment of our debt obligations, investments in notes receivables, purchases of surplus and distressed assets and payment on lease obligations. We believe that our current capital resources are sufficient for these requirements. In the event additional capital is needed, we will draw on the line of credit. Cash Position and Cash Flows Cash and cash equivalents at September 30, 2020 were $5.8 million as compared to $2.7 million at December 31, 2019, an increase of approximately $3.1 million. Cash provided by operating activities. Cash provided by operating activities was $2.8 million during the nine months ended September 30, 2020 as compared to $1.0 million cash provided during the same period in 2019. The approximate $1.8 million increase was primarily attributable to a net favorable change of $1.7 million in the operating assets and liabilities in the nine months September 30, 2020 compared to the same period in 2019, and a favorable change in the net income adjusted for noncash items, which was $0.1 million higher during the nine months ended September 30, 2020 as compared to the same period in 2019. The significant changes in operating assets and liabilities during the nine months ended September 30, 2020 as compared to 2019 are primarily due to the nature of our operations. We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination of these. The operating assets and liabilities associated with these deals are, therefore, subject to the same variability and can be quite different at the end of any given period. Cash provided by (used in) investing activities. Cash provided by investing activities during the nine months ended September 30, 2020 was $0.6 million compared to cash used of $0.4 million in the same period in 2019 . The approximate $1.0 million favorable change was primarily attributable to net cash received from the transfer of and payments on notes receivable in excess of investments in notes receivable offset by increased investment in joint ventures. Cash used in financing activities. Cash used in financing activities was $0.4 million during the nine months ended September 30, 2020 and $1.0 million used during the same period in 2019. The activity during the nine months ended September 30, 2020 consisted of draws on the Credit Facility of $5.6 million and repayments to unrelated third parties of $5.9 million (including $5.6 million on the Credit Facility). The activity during the same period in 2019 consisted of draws on the Credit Facility of $0.5 million and repayments to unrelated third parties of $1.5 million (including $1.3 million on the Credit Facility). 25 Contractual Obligations Our significant contractual obligations are our third party loans, client and partner asset liquidation settlement payments and lease obligations. The loan and lease obligations are fully described in the notes to the financial statements included in our Form 10-K. On October 27, 2020, Heritage Global Partners, Inc. (“ HGP ”), a wholly-owned subsidiary of the Company, entered into an agreement (the “ Lease ”) with Hayward FGHK Industrial, LLC (“ Landlord ”) pursuant to which HGP will lease 30,321 square feet of industrial space in Hayward, California from Landlord. The Lease has an initial term of ninety (90) months, unless terminated earlier by either party pursuant to the terms of the Lease. The Lease provides for an initial monthly base rent of $27,289, which increases on an annual basis to $33,562 per month in the final year. In addition, HGP is obligated to pay its share of maintenance costs of common areas. The Company is a guarantor of HGP’s obligations under the Lease including the payment of rent. There is no material relationship between the Company, or any of its affiliates, and the landlord, or any of its affiliates, other than the contractual relationship under the Lease. Management’s Discussion of Results of Operations The following table sets out the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands). Three Months Ended September 30, Change Nine Months Ended September 30, Change 2020 2019 Dollars Percent 2020 2019 Dollars Percent Revenues: Services revenue $ 6,060 $ 5,207 $ 853 16 % $ 15,713 $ 14,950 $ 763 5 % Asset sales 1,506 1,415 91 6 % 2,214 5,647 (3,433 ) (61 )% Total revenues 7,566 6,622 944 14 % 17,927 20,597 (2,670 ) (13 )% Operating costs and expenses: Cost of services revenue 1,605 435 1,170 269 % 3,344 2,649 695 26 % Cost of asset sales 990 926 64 7 % 1,358 3,952 (2,594 ) (66 )% Selling, general and administrative 3,378 3,928 (550 ) (14 )% 10,516 11,551 (1,035 ) (9 )% Depreciation and amortization 92 74 18 24 % 272 226 46 20 % Total operating costs and expenses 6,065 5,363 702 13 % 15,490 18,378 (2,888 ) (16 )% Earnings of equity method investments 111 8 103 1288 % 293 1,277 (984 ) (77 )% Operating income 1,612 1,267 345 27 % 2,730 3,496 (766 ) (22 )% Interest and other expense, net (3 ) (12 ) 9 75 % (38 ) (57 ) 19 33 % Income before income tax expense (benefit) 1,609 1,255 354 28 % 2,692 3,439 (747 ) (22 )% Income tax expense (benefit) 345 39 306 785 % (649 ) 117 (766 ) (655 )% Net income $ 1,264 $ 1,216 $ 48 4 % $ 3,341 $ 3,322 $ 19 1 % Our asset liquidation business model has several components: (1) traditional fee-based asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment and real estate, and (3) fees earned for appraisal, management advisory services and specialty finance services. Three-Month Period Ended September 30, 2020 Compared to Three-Month Period Ended September 30, 2019 Revenues and cost of revenues – Revenues were $7.6 million during the three months ended September 30, 2020 compared to $6.6 million during the same period in 2019. Costs of services revenue and asset sales were $2.6 million during the three months ended September 30, 2020 compared to $1.4 million during the same period in 2019. The gross profit of these items was therefore $5.0 million during the three months ended September 30, 2020 compared to $5.3 million during the same period in 2019, a decrease of approximately $0.3 million, or approximately 6%. The decreased gross profit in the current year reflects the vagaries of the timing and magnitude of asset liquidation transactions. 26 Selling, general and administrative expense – Selling, general and administrative expense was $3.4 million during the three months ended September 30 , 2020 and $3.9 million d uring the same period in 2019 . Significant components of selling, general and administrative expense were as shown below (dollars in thousands): Three Months Ended September 30, 2020 2019 % change Compensation HGP $ 1,277 $ 1,003 27 % Equity Partners — 320 (100 )% NLEX 908 1,302 (30 )% HGI 252 129 95 % HGC 108 31 248 % Stock-based compensation 97 63 54 % Consulting — 55 (100 )% Board of Directors fees 64 64 0 % Accounting, tax and legal professional fees 123 200 (39 )% Insurance 114 91 25 % Occupancy 225 209 8 % Travel and entertainment 36 216 (83 )% Advertising and promotion 85 164 (48 )% Other 89 81 10 % Total selling, general & administrative expense $ 3,378 $ 3,928 (14 )% There was a decrease in selling, general and administrative expense from the elimination of the Equity Partners compensation costs as the Equity Partners team separated from the Company at December 31, 2019 as more fully described in our Form 10-K, decreased compensation expense within our NLEX division as a result of declined financial performance, and decreased travel expense as a result of COVID-19. This decrease was offset by increased compensation expense within our HGP division as a result of improved financial performance and within our HGC division as a result of additional headcount as compared to the prior year. Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended September 30, 2020 and the same period in 2019, and consisted primarily of amortization expense related to intangible assets. Nine-Month Period Ended September 30, 2020 Compared to Nine-Month Period Ended September 30, 2019 Revenues and cost of revenues – Revenues were $17.9 million during the nine months ended September 30, 2020 compared to $20.6 million during the same period in 2019. Costs of services revenue and asset sales were $4.7 million during the nine months ended September 30, 2020 compared to $6.6 million during the same period in 2019. The gross profit of these items was therefore $13.2 million during the nine months ended September 30, 2020 compared to $14.0 million during the same period in 2019, a decrease of approximately $0.8 million, or approximately 6%. The decreased gross profit in the current year reflects the vagaries of the timing and magnitude of asset liquidation transactions. Selling, general and administrative expense – Selling, general and administrative expense was $10.5 million during the nine months ended September 30, 2020 compared to $11.6 million during the same period in 2019. 27 Nine Months Ended September 30, 2020 2019 % change Compensation HGP $ 3,758 $ 3,468 8 % Equity Partners — 1,160 (100 )% NLEX 2,818 3,082 (9 )% HGI 654 387 69 % HGC 339 31 994 % Stock-based compensation 258 210 23 % Consulting 91 173 (47 )% Board of Directors fees 185 194 (5 )% Accounting, tax and legal professional fees 520 558 (7 )% Insurance 337 265 27 % Occupancy 664 630 5 % Travel and entertainment 234 588 (60 )% Advertising and promotion 332 442 (25 )% Other 326 363 (10 )% Total selling, general & administrative expense $ 10,516 $ 11,551 (9 )% The decrease in total selling, general and administrative expenses was largely attributable to the elimination of the Equity Partners compensation costs as the Equity Partners team separated from the Company at December 31, 2019 as more fully described in our Form 10-K. Depreciation and amortization expense – Depreciation and amortization expense was $0.3 million during the nine months ended September 30, 2020 and $0.2 million the same period in 2019, and consisted almost entirely of amortization expense related to intangible assets. Key Performance Indicators We monitor a number of financial and non-financial measures on a regular basis in order to track our underlying operational performance and trends. Other than the operating income of our liquidation business ( a GAAP financial measure as shown in our consolidated income statements ) which we believe is the most important measure of our operational performance and trends, w e believe that EBITDA and Adjusted EBITDA (non-GAAP financial measures) are key performance indicators (KPIs) for our business. These KPIs may not be defined or calculated in the same way as similar KPIs used by other companies. 28 We prepared our unaudited condensed consolidated financial statements in accordance wi th GAAP. We define EBITDA as net income plus depreciation and amortization, interest and other expense, and provision for income taxes. Adjusted EBITDA reflects EBITDA adjusted further to eliminate the effects of stock-based compensation. Management uses E BITDA and Adjusted EBITDA in assessing the Company’s results, evaluating the Company’s performance and in reaching operating and strategic decisions. Management believes that the presentation of EBITDA and Adjusted EBITDA, when considered together with our GAAP financial statements and the reconciliation to the most directly comparable GAAP financial measure, is useful in providing investors a more complete understanding of the factors and trends affecting the underlying performance of the Company on a hist orical and ongoing basis. Our use of EBITDA and Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the financial information, belo w, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net income $ 1,264 $ 1,216 $ 3,341 $ 3,322 Add back: Depreciation and amortization 92 74 272 226 Interest and other expense, net 3 12 38 57 Income tax expense (benefit) 345 39 (649 ) 117 EBITDA 1,704 1,341 3,002 3,722 Management add back: Stock based compensation 97 63 258 210 Adjusted EBITDA $ 1,801 $ 1,404 $ 3,260 $ 3,932 Item 3. Quantitative and Qualitative Disclosures about Market Risk. As a Smaller Reporting Company, we are not required to provide the information required by this item.