What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-08 compared with 2020-03-09 · 94 added, 106 removed, 192 unchanged (51% of the section changed)

2 unchanged sentences

Exhibits and Financial Statement Schedules” of this Report.

Our accounting policies have the potential to have a significant impact on our financial statements, either because of the significance of the financial statement item 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.

Our accounting policies have the potential to significantly impact our financial statements, either because of the significance of the financial statement item 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.

Business Overview, Recent Developments and Outlook

4 unchanged sentences

Equity Partners Separation

On September 13, 2019, we entered into an Amendment (the “Mann Amendment”) to the Employment Agreement (the “Mann Employment Agreement”) for Kenneth Mann, a named executive officer of the Company and the Senior Managing Director of Equity Partners.

In September 2019, we entered into an Amendment (the “Mann Amendment”) to the Employment Agreement (the “Mann Employment Agreement”) for Kenneth Mann, a named executive officer of the Company and the Senior Managing Director of Equity Partners.

Pursuant to the terms of the Mann Amendment, Mr.

12 unchanged sentences

Other than the Transferred Assets, Equity Partners retained all of the assets and rights held by Equity Partners.

Following September 13, 2019, Mr.

In accordance with the agreement, Mr.

Mann agreed to pay, or to cause a buyer to pay, to Equity Partners a percentage of all revenue received with respect to each engagement for which we were engaged or retained as of December 31, 2019 but that was closed or completed following December 31, 2019, subject to certain exclusions.

5 unchanged sentences

Liquidity and Capital Resources

At December 31, 2019, we had a working capital deficit of $2.3 million, as compared to a working capital deficit of $2.5 million at December 31, 2018, a decrease of $0.2 million.

Our current assets decreased to $6.8 million at December 31, 2019 compared to $7.7 million at December 31, 2018.

Within current assets, the most significant change was an approximate $2.3 million decrease in equipment inventory, primarily as a result of asset sales in 2019 related to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the

fourth quarter of 2018.

The decrease was offset by an increase in the curre nt portion of notes receivable of approximately $1.3 million due to lending activity within our n ew specialty financing division.

Our current liabilities decreased to $9.1 million at December 31, 2019 as compared to $10.2 million at December 31, 2018.

The most significant change was a decrease of $0.8 million in third party debt, primarily due to repayments made on the credit facility we entered into with a third party bank on September 27, 2018 (the “Credit Facility”) and a decrease of deferred revenue related to the timing of cash receipts on asset sales recorded in 2019, offset by an increase in lease liabilities due to the application of newly adopted accounting guidance as outlined in ASC Topic 840, “Leases.”

We believe we can fund our operations, our working capital deficit, and our debt service obligations during 2020 and beyond through a combination of cash flows from our on-going asset liquidation operations 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 $1,260,000, 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 hereunder shall be due and payable in full on January 30, 2021.

On September 27, 2018 we entered into the Credit Facility with First Choice Bank, for a $1.5 million revolving line of credit.

On March 29, 2019 we amended our Credit Facility with First Choice Bank, for a $3.0 million revolving line of credit.

As of December 31, 2019, we had no outstanding balance on the line of credit.

On February 10, 2020, we entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “C3bank Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit.

The C3bank Credit Facility matures on February 5, 2021 and replaces a secured promissory note, as amended, totaling $3.0 million.

At December 31, 2020, we had working capital of $13.0 million, as compared to a working capital deficit of $2.4 million at December 31, 2019, an increase of $15.4 million.

On October 6, 2020, we completed a public offering (the “2020 Public Offering”) of 5,462,500 shares of our common stock, at a public offering price of $1.75 per share, which included a full exercise of the underwriters’ option to purchase 712,500 additional shares of common stock from us.

We received approximately $8.7 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

We intend to use the net proceeds to provide additional funds for general corporate purposes, which may include, without limitation, the expansion of the businesses of HGC and HGP, working capital and growth capital.

Our current assets increased to $27.0 million at December 31, 2020 compared to $6.8 million at December 31, 2019.

Within current assets, the most significant change was an approximate $20.7 million increase in cash, primarily as a result of proceeds from the sale of shares of common stock completed in October of 2020, cash distributions from equity method investments, and the result of timing of certain auctions held in the fourth quarter of 2020 that will be settled in the first quarter of 2021.

Our current liabilities increased to $14.0 million at December 31, 2020 as compared to $9.1 million at December 31, 2019.

The most significant change was an increase of $5.5 million in accounts payable and accrued liabilities, primarily the result of timing of certain auction settlement liabilities, offset by a decrease of $0.4 million in third party debt.

We believe we can fund our operations and our debt service obligations during 2021 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 any amounts borrowed under our Credit Facility.

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, which was subsequently amended on March 3, 2021.

The Credit Facility matures on April 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.

During 2019, our primary sources of cash were the operations of our asset liquidation business.

Cash disbursements during 2019 consisted primarily of lending activity of $2.7 million under our new specialty finance unit of HGC, debt repayment including interest of $2.4 million, purchases of inventory and payment of operating expenses.

As of December 31, 2020, we had an outstanding balance of zero on the Credit Facility.

During 2020, our primary sources of cash were the operations of our asset liquidation business and proceeds from the sale of shares of common stock completed in October 2020 .

Cash disbursements during 2020 consisted primarily of settlement of auction proceeds, lending activity under our new specialty finance unit of HGC, debt repayment, purchases of inventory and payment of operating expenses.

We expect that our asset liquidation business will continue to be the primary source of cash required for ongoing operations for the foreseeable future.

1 unchanged sentence

At December 31, 2020 and 2019, we had stockholders’ equity of $29.9 million and $11.8 million, respectively.

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 a combination of our asset liquidation business, our C3bank Credit Facility with an available line of credit of $5.0 million and securing additional debt financing if needed.

We determine our future capital and operating requirements based upon our current and projected operating performance and contractual commitments.

We expect to be able to finance our future operations through a combination of our asset liquidation business, our Credit Facility and securing additional debt financing if needed.

Our contractual requirements are limited to the outstanding debt and lease commitments with related and unrelated parties.

Additionally, in connection with an acquisition with partners of a pharmaceutical campus in Huntsville, Alabama, we have a remaining contractual obligation as of December 31, 2019 to make minimum guaranteed distribution payments to a partner totaling approximately $0.9 million by no later than May 26, 2020.

Capital requirements are generally limited to our purchases of surplus and distressed assets.

Capital requirements are generally limited to our purchases of surplus and distressed assets and our lending activity under our specialty finance unit of HGC.

We believe that our current capital resources, including available borrowing capacity from our Credit Facility, are sufficient for these requirements.

4 unchanged sentences

Cash provided by operating activities was $9.1 million during 2020 as compared to cash provided by operating activities of $0.8 million during 2019.

The approximate $6.7 million change was primarily attributable to a $0.8 million unfavorable change in the net income adjusted for noncash items plus a net unfavorable change of $4.9 million in the operating assets and liabilities in 2019 compared to 2018.

The net unfavorable change of $4.9 million in the operating assets and liabilities in 2019 compared to 2018 was due primarily to the effects of a purchase with partners of a pharmaceutical campus in Huntsville, Alabama in 2018, which included approximately $2.9 million in guaranteed minimum payments by us to a partner to reduce the liability established in 2018, our recognition of approximately $0.8 million of deferred revenue related to sales proceeds collected in 2018, and our recognition of revenue for a sales-type lease of approximately $1.2 million for which we expect to receive cash distributions in 2020.

The significant changes in operating assets and liabilities during 201 9 as compa red to 2018 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 com bination of all.

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 used in investing activities.

Cash used in investing activities during 2019 was $1.2 million, as compared to cash used in investing activities of $2.9 million during 2018.

The approximate $1.7 million change was primarily attributable to our $2.8 million investment in notes receivable related to our newly formed specialty financing division, offset by an equity method real estate investment related to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018 and subsequently paid cash distributions in the amount of $2.2 million during 2019.

Cash used in financing activities.

Cash used in financing activities was $1.2 million during 2019, as compared to $2.5 million during 2018.

The approximate $8.3 million increase was primarily attributable to a net favorable change of $7.7 million in the operating assets and liabilities in 2020 compared to 2019, largely due to an increase in auction activity towards the end of 2020, plus a $0.6 million favorable change in the net income adjusted for noncash items.

The significant changes in operating assets and liabilities during 2020 as compared to 2019 are primarily due to the nature of our operations.

The operating assets and liabilities associated with such transactions are therefore subject to the same variability and can be different at the end of any given period.

Cash provided by (used in) investing activities.

Cash provided by investing activities during 2020 was $4.5 million, as compared to cash used in investing activities of $1.2 million during 2019.

The approximate $5.7 million change was primarily attributable to an increase in cash distributions from our equity method investments of $3.0 million, as compared to distributions in 2019, and cash received on transfer of notes receivable to partners of $5.0 million related to our specialty financing division.

The increase was offset by an increase of lending activity in our specialty financing division in 2020 of approximately $2.5 million.

Cash provided by (used in) financing activities.

Cash provided by financing activities was $7.0 million during 2020, as compared to cash used in financing activities of $1.2 million during 2019.

The 2020 activity consisted primarily of a $5.6 million draw and repayment on our Credit Facility, $0.4 million of repayments on third party debt, and $7.5 million in net proceeds from the sale of shares of common stock completed in October 2020.

The 2019 activity consisted primarily of a $1.3 million draw offset by $2.1 million of repayments on our 2018 Credit Facility, and $0.3 million of repayments on third party debt.

The 2018 activity consisted primarily of a $1.3 million draw on our Credit Facility, offset by $1.2 million of repayments on other debt and $2.6 million of contingent consideration paid to the former owner (and current president) of NLEX.

Management’s Discussion of Results of Operations

2 unchanged sentences

Services revenue

Total revenue

Total revenues

Operating costs and expenses:

2 unchanged sentences

Selling, general and administrative

Impairment of goodwill

Depreciation and amortization

Impairment of goodwill

Total operating costs and expenses

1 unchanged sentence

Operating income

Fair value adjustment of contingent consideration

Interest and other expense, net

Income before income tax (benefit) expense

Income tax (benefit) expense

Income before income tax benefit

Income tax benefit

Our asset liquidation revenue 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 financing services.

The Company reports segment information based on the “management” approach.

The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.

The Company manages its business primarily on differentiated revenue streams for services offered.

The Company’s reportable segments consist of the Industrial Asset Division and Financial 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.

Our Financial Assets division provides liquidity to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable.

Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit.

The Company evaluates the performance of its reportable segments based primarily on net operating income.

Further, the Company does not utilize segmented asset information to evaluate the performance of its reportable segments and does not include intercompany transfers between segments for management reporting purposes.

The following table sets forth certain financial information for the Company's reportable segments (in thousands):

Year Ended December 31,

Industrial Assets Division:

Net operating income

Financial Assets Division:

Net operating income

Corporate and Other:

Net operating income

Consolidated:

Net operating income

2020 Compared to 2019

Revenues and cost of revenues – Revenues were $26.2 million in 2019 compared to $23.7 million in 2018 and costs of services revenue and asset sales were $7.7 million in 2019 compared to $4.0 million in 2018.

Revenues and cost of revenues – Revenues were $26.2 million in both 2020 and 2019 and costs of services revenue and asset sales were $9.1 million in 2020 compared to $7.7 million in 2019.

The gross profits were therefore $17.1 million in 2020 compared to $18.4 million in 2019, a decrease of approximately $1.3 million or approximately 7%.

The cost of services revenue increased during 2019 as compared to 2018, and services revenue decreased during 2019 as compared to 2018, based on a higher volume of deals for the HGP division, which has higher direct costs as compared to deals for NLEX.

Because we conduct our asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period and the mix of services revenue and asset sales will vary from period to period, the operations should be considered as a

whole rather than on a line-by-line basis.

The gross profit is a function of the volume, size and timing of asset liquidation transactions conducted during the year.

Selling, general and administrative expense – Selling, general and administrative expense was $15.9 million in 2019 as compared to $15.2 million in 2018, an increase of $0.7 million or 5%.

Expenses increased overall primarily due to the following:

an increase in the annual performance bonus for the NLEX division based on changes to the incentive compensation plan and an increase in compensation for new employees within our HGC division.

Impairment of goodwill – We recorded an impairment charge of $0.6 million to reduce the carrying value of goodwill in connection with the Equity Partners separation transaction at the end of 2019.

Refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Partners Separation” for more information.

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 $14.4 million in 2020 as compared to $15.9 million in 2019, a decrease of $1.4 million or 9%.

Expenses decreased overall primarily due to the elimination of Equity Partners compensation costs as the Equity Partners team separated from the Company at December 31, 2019.

Significant components of selling, general and administrative expense were as shown below (dollars in thousands):

6 unchanged sentences

Advertising and promotion

Information technology support

Total selling, general and administrative expense

Depreciation and amortization expense – Depreciation and amortization expense was $0.3 million in 2019 and 2018, and consisted almost entirely of amortization expense related to intangible assets.

Depreciation and amortization expense – Depreciation and amortization expense was $0.4 million in 2020 and $0.3 million in 2019, and consisted almost entirely of amortization expense related to intangible assets.

In both years the depreciation of property and equipment was not material.

Impairment of goodwill – We recorded an impairment charge of $0.6 million to reduce the carrying value of goodwill in connection with the Equity Partners separation transaction at the end of 2019.

Refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Partners Separation” for more information.

Off-Balance Sheet Arrangements – We had no off-balance sheet arrangements during the years ended December 31, 2020 and 2019.

Non-GAAP Financial Measure – Adjusted Earnings before Interest, Taxes, Depreciation and Amortizat ion (“Adjusted EBITDA”)

We prepared our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”).

We use the non-GAAP financial measure “Adjusted EBITDA” in assessing our results.

Adjusted EBITDA reflects the standard definition of EBITDA (net income plus depreciation and amortization, interest and other expense, and provision for income taxes), adjusted further to reflect the effects of goodwill impairment, plus or minus fair value adjustments of contingent consideration and plus stock-based compensation.

We believe that Adjusted EBITDA is relevant and useful supplemental information for our investors.

Management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete understanding of the factors and trends affecting us than could be obtained absent these disclosures.

Management uses Adjusted EBITDA to make operating and strategic decisions and to evaluate our performance.

We have disclosed this non-GAAP financial measure so that our investors have the same financial data that management uses, with the intention of assisting investors to make comparisons to our historical operating results and analyze our underlying performance.

Management believes that Adjusted EBITDA is a useful supplemental tool to evaluate our underlying operating performance on an ongoing basis.

Our use of 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, below, which reconciles our GAAP reported net income to Adjusted EBITDA for the periods presented (in thousands).

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.

We prepared our audited consolidated financial statements in accordance with 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 and impairment of goodwill.

Management uses EBITDA 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 historical 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 below, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands).

Year ended December 31,

1 unchanged sentence

Interest and other expense, net

Income tax (benefit) expense

Income tax benefit

Management add back:

1 unchanged sentence

Impairment of goodwill

Fair value adjustment of contingent consideration

Adjusted EBITDA

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”).

ASU 2016-02 changes the accounting for leases previously classified as operating leases under GAAP by, among other things, requiring a company to recognize the lease on the balance sheet with a right-of-use asset and a lease liability.

Effective January 1, 2019, we adopted ASU 2016-02.

This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations.

We adopted the ASU using a modified retrospective adoption method at January 1, 2019.

Under this method of adoption, there is no impact to the comparative condensed consolidated income statement and consolidated balance sheet.

We determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet.

The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in ASC Topic 840, “Leases.” In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

In 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (“ASU 2017-04”), which simplifies the test for goodwill impairment.

The main provisions of ASU 2017-04 eliminate the second step of the goodwill impairment test which previously was performed to determine the goodwill impairment loss for an entity by calculating the difference between the implied fair value of the entity’s goodwill and its carrying value.

Under ASU 2017-04, if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference.

The impairment charge will be limited to the amount of goodwill which is allocated to that reporting unit.

ASU 2017-04 applies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

ASU 2017-04 became effective January 1, 2020 and did not have a material impact on our consolidated financial statements.

In 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (“ASU 2018-07”), which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees.

4 unchanged sentences

The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

We are currently evaluating the impact of the new guidance on our consolidated financial statements.

In 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (“ASU 2017-04”), which simplifies the test for goodwill impairment.

Under ASU 2017-04, if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference.

The impairment charge will be limited to the amount of goodwill which is allocated to that reporting unit.

ASU 2017-04 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

We anticipate that the impact will not be material to our consolidated financial statements.

12 unchanged sentences

Revenue recognition

On January 1, 2018, we adopted the new accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method.

Based on our analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of our accumulated deficit as a result of the adoption of this new standard.

We expect the impact of the adoption of the new standard to be immaterial to our consolidated financial statements on an ongoing basis.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions and providing merger and acquisition advisory services.

In 2018, we adopted the accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions, secured lending and providing merger and acquisition advisory services.

Asset sales revenue generally consists of proceeds obtained through sales of purchased assets.

Revenue is recognized for both services revenue and asset sales revenue based on the ASC 606 standard recognition model, which consists of the following:

(4) the transaction price has been properly allocated to each performance obligation, and (5) the entity sat isfies a performance obligation by transferring a promised good or service to a customer for each of the entities.

All services and asset sales revenue from contracts with customers is considered to be one reporting segment — the asset liquidation business.

Although we provide various services within the asset liquidation business, it does not disaggregate revenue streams further than as reported in its income statement, services revenue and asset sales.

(1) an agreement exists between two or more parties that creates enforceable rights and obligations, (2) the performance obligations are clearly identified, (3) the transaction price has been determined, (4) the transaction price has been properly allocated to each performance obligation, and (5) the entity satisfies a performance obligation by transferring a promised good or service to a customer for each of the entities.

All services and asset sales revenue from contracts with customers is considered to be within the asset liquidation business, which consists of two reportable segments, the Industrial Assets Division and the Financial Assets Division.

Generally, revenue is recognized in the asset liquidation business at the point in time in which the performance obligation has been satisfied and full consideration is received.

The exception to recognition at this point in time occurs when certain contracts provide for advance payments recognized over a period of time.

Services revenue recognized over a period of time is not material in comparison to total revenues (2% of total revenues for the year ended December 31, 2019), and therefore not reported on a disaggregated basis.

Services revenue recognized over a period of time is not material in comparison to total revenues (less than 1% of total revenues for the year ended December 31, 2020), and therefore not reported on a disaggregated basis.

Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and our “contract liability”.

16 unchanged sentences

The backend profit share is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned.

The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized, and the lack of historical precedence as this is a new business for us.

The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized, and the lack of historical precedence as we started in this business in 2019.

During 2020 and 2019, the Company generated revenues specific to one customer representing 10% and 14% of total revenues for the respective periods.

Cost of services revenue and asset sales

23 unchanged sentences

Historically, the assets’ selling prices have generally been in excess of their cost.

See Note 4 to our consolidated financial statements for further detail.

Equity Method Investments

1 unchanged sentence

Transactions in which our ownership share meets the criteria for the equity method investments under ASC 323 are accounted for using the equity method of accounting whereby our proportionate share of the Joint Venture’s net income (loss) is reported in the consolidated income statement as earnings of equity method investments.

At the balance sheet date, our investments in these Joint Ventures are reported in the consolidated balance sheet as other assets.

At the balance sheet date, our investments in these Joint Ventures are reported in the consolidated balance sheet as equity method investments.

We monitor the value of each Joint Ventures’ underlying assets and liabilities, and record a write down of our investments should we conclude that there has been a decline in the value of the net assets.

14 unchanged sentences

We perform our annual impairment test on October 1.

Testing goodwill is a two-step process, in which the carrying amount of the reporting unit associated with the goodwill is first compared to the reporting unit’s estimated fair value.

If the carrying amount of the reporting unit exceeds its estimated fair value, the fair values of the reporting unit’s assets and liabilities are analyzed to determine whether the goodwill of the reporting unit has been impaired.

An impairment loss is recognized to the extent that our recorded goodwill exceeds its implied fair value as determined by this two-step process.

ASU 2011-08, Testing Goodwill for Impairment, provides the option to perform a qualitative assessment prior to performing the two-step process, which may eliminate the need for further testing.

Goodwill, in addition to being tested for impairment annually, is tested for impairment at interim periods if an event occurs or circumstances change such that it is more likely than not that the carrying amount of goodwill may be impaired.

In testing goodwill, we initially use a qualitative approach and analyze relevant factors to determine if events and circumstances have affected the value of the goodwill.

1 unchanged sentence

An impairment loss is recognized to the extent that the recorded value exceeds its fair value.

All of our goodwill relates to our acquisitions of Equity Partners in 2011, HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 10 to our consolidated financial statements.

All of our goodwill relates to our acquisitions of HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 9 to our consolidated financial statements.

As a result of the Equity Partners separation transaction at the end of 2019, we recorded an impairment charge of $0.6 million to reduce the carrying value of goodwill related to the acquisition of Equity Partners in 2011.

8 unchanged sentences

We evaluate which portion of the deferred tax assets, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on our use of our net operating and net capital loss carryforwards.

In 2019 we recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million as we believe that it is more likely than not that some of its net operating loss carryforwards will be utilized.

In 2019 and 2020 we recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million and $4.4 million, respectively, as we believe that it is more likely than not that some of our net operating loss carryforwards will be utilized.

For further discussion of our income taxes, see Note 13 to our consolidated financial statements.

Contingent consideration

As of December 31, 2018 we had fully satisfied the previously recorded contingent consideration balance.

We previously recorded contingent consideration related to an earn-out provision payable to the former owner and current president of NLEX David Ludwig that was part of the consideration for the acquisition of NLEX in 2014.

The estimated fair value assigned to the contingent consideration at the acquisition date was determined using a discounted cash flow analysis.

Its fair value was assessed quarterly, and any adjustments, together with the accretion of the present value discount, were reported as a fair value adjustment on our consolidated income statement.

We adjusted its contingent consideration liability to the fair value of the remaining earn-out payment to David Ludwig, and subsequently made the final payment, resulting in a contingent consideration balance of zero during 2018.

See Note 13 to our consolidated financial statements for more discussion of the contingent consideration.

Liabilities and contingencies

11 unchanged sentences

See Note 16 to our consolidated financial statements for further discussion of our stock-based compensation.

Quan titative and Qualitative Disclosures about Market Risk.

Quantitative and Qualitative Disclosures about Market Risk.

As a Smaller Reporting Company, we are electing scaled reporting obligations and therefore are not required to provide the information requested by this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis