What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-13 compared with 2020-11-09 · 124 added, 109 removed, 145 unchanged (62% of the section changed)

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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”).

(together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three month periods ended March 31, 2021 and 2020, 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, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2020 (the “Form 10-K”).

Forward Looking Information

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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.

The organization chart below outl ines our basic domestic corp orate structure as of September 30 , 2020 .

The organization chart below outlines our basic domestic corp orate structure as of March 31, 2021 .

Full service, global auction, appraisal and asset advisory company.

Asset liquidation company which acquires and monetizes distressed and surplus assets.

Asset liquidation company that acquires and monetizes distressed and surplus assets.

Mergers and acquisitions (M&A) advisory firm specializing in financially distressed businesses and properties.

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Specialty financing solutions for charged-off and nonperforming asset portfolios.

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.

The spread of the novel coronavirus (“COVID-19”) had a minor negative impact on our performance during the first quarter of 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales, and a delay in the sale of certain assets.

Going forward, we do not believe the COVID-19 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;

• 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.

• continued increase in demand for HGP’s online auctions as a result of ongoing social distancing requirements in connection with the COVID-19 pandemic;

• increased activity for NLEX and HGC due to expanding volumes of nonperforming and charged-off consumer loans;

• increased funding opportunities for HGC due to tightening underwriting standards at conventional lenders;

• incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets.

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 nonperforming and charged-off consumer loans.

Any continuation of stimulus payments and additional credit policies impacting debt sales may result in delayed revenues depending on the scope and magnitude of such policies.

Asset liquidation

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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.

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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 consists primarily of the auction, appraisal and asset advisory services provided by our Industrial Assets division and the accounts receivable brokerage specialty financing 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.

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Some competitors have significantly greater financial and marketing resources and name recognition.

Our business is positioned to grow in all economic cycles.

We believe that 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.

We intend to 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 financial metrics reflected on our 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

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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.

We expect to drive growth in our revenue streams by taking different roles, and using partners as needed.

Compelling Macro Growth Drivers .

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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.

On September 17, 2020, we entered into an Employment Agreement with Kirk Dove, the former President and Chief Operating Officer of the Company.

Upon his resignation, Kirk Dove will continue his employment with us in an advisory capacity until December 31, 2024.

Also during 2020, Nick Dove was appointed as President, Industrial Assets Division, and David Ludwig was appointed as President, Financial Assets Division.

Nick Dove previously served as Executive Vice President of Sales of Heritage Global Partners since August 2017.

David Ludwig previously served as President of NLEX, a wholly-owned subsidiary of the Company, and has served in such capacity since the Company acquired NLEX in 2014.

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.

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.

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.

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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.

NLEX is in the process of expanding into the FinTech 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.

Our management team has decades of domain expertise with 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.

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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

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.

The fees for our services typically range from 15–50%, depending on our role and the transaction.

This division predominantly targets sellers of surplus or distressed “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.

Our management team has decades of domain expertise with 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 continues, increased auction services for sales of surplus equipment.

Further, we intend to 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.

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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.

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, 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.

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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.

There have been no changes to these policies in the three months ended March 31, 2021.

Management’s Discussion of Financial Condition

Liquidity and Capital Resources

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.

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.

We had working capital of $13.2 million and $13.0 million at March 31, 2021 and December 31, 2020, respectively.

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 and continue 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 a s of March 31, 2021 de creased to $20.7 million compared to $27.0 million a s of December 31, 20 20 primarily due to de creased cash as a result of cash used in operating activities during the three months ended March 31, 2021 .

Our current liabilities a s of March 31, 2021 de creased to $7.5 million compared to $14.0 million a s of D ecember 31, 20 20 primarily due to the settlement of auction liabilities for certain auctions held in the fourth quarter of 2020 .

During the three months ended March 31, 2021, our primary source of cash was the cash on hand plus the cash provided by our asset liquidation business.

Cash disbursements during the three months ended March 31, 2021 consisted primarily of lending activity of $2.5 million under HGC, payment of operating expenses, and settlement of auction liabilities.

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 2020 Public Offering, and proceeds from our Credit Facility.

Our indebtedness consists of any amounts borrowed under our Credit Facility.

The Credit Facility had an initial maturity date of February 5, 2021, which was extended to April 5, 2021 on February 5, 2021.

We are permitted to use the proceeds from the Credit Facility solely for our business operations.

As of March 31, 2021, we had an outstanding balance of zero on the Credit Facility.

As described more fully in Part II, Item 5.

“ Other Information ,” the Company entered into a New Credit Facility (as defined herein) for a $10.0 million revolving line of credit, which terminated the Credit Facility.

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.

As of March 31, 2021, the Company had stockholders’ equity of $30.9 million, as compared to $29.9 million as of December 31, 2020.

On February 10, 2020, the Company entered into our Credit Facility with C3bank, National Association for a $5.0 million revolving line of credit, which replaced the 2018 Credit Facility.

The Credit Facility had an initial maturity date of February 5, 2021, which was extended to April 5, 2021 on February 5, 2021.

We had no outstanding borrowings under the Credit Facility as of March 31, 2021.

As described more fully in Note 14 to the condensed consolidated financial statements, on May 11, 2021, the Company entered into a New Credit Facility for a $10.0 million revolving line of credit, which terminated the Credit Facility.

On October 6, 2020, the Company completed the 2020 Public 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.

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

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.

We expect to be able to finance our future operations through cash flows from our asset liquidation business, proceeds from the 2020 Public Offering, and draws on the Credit Facility, 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.

In the event additional capital is needed, we will draw on the Credit Facility.

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.

Cash and cash equivalents as of March 31, 2021 were $15.9 million as compared to $23.4 million as of December 31, 2020, a decrease of approximately $7.5 million.

Cash used in operating activities.

Cash used in operations was $5.8 million during the three months ended March 31, 2021 as compared to $0.1 million during the same period in 2020.

The approximate $5.7 million increase in cash used in operations was primarily attributable to a change of $6.7 million in operating assets and liabilities during the three months ended March 31, 2021 as compared to the same period in 2020.

The amount was partially offset by a decrease in cash used in operations due to a change in net income adjusted for noncash items, which was $1.0 million higher during the three months ended March 31, 2021 as compared to the same period in 2020.

The significant changes in operating assets and liabilities during the three months ended March 31, 2021 as compared to the same period in 2020 are primarily due to the nature of our operations.

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) provided by investing activities.

Cash used in investing activities during the three months ended March 31, 2021 was $1.6 million compared to cash provided by investing activities of $0.6 million during the same period in 2020 .

The approximate $2.2 million change was primarily attributable to approximately $4.0 million cash received on transfer of notes receivable to partners in the three months ended March 31, 2020, which was not recurring in the same period in 2021.

The amount was partially offset by a decrease in the net cash used in investments in notes receivable in excess of payments received on notes receivable of approximately $1.6 million.

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).

Cash used in financing activities was $0.1 million during the three months ended March 31, 2021 and 2020.

Financing activities during the three months ended March 31, 2021 consisted primarily of payments of tax withholdings related to cashless exercises of stock option awards, in excess of proceeds from issuance of common stock related to standard exercises of stock option awards.

Financing activities during the same period in 2020 consisted of draws on the Credit Facility of $4.4 million and repayments of third party loans of $4.5 million (including $4.4 million on the Credit Facility).

Contractual Obligations

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(“ 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 has a commencement date of April 1, 2021 and 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.

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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.

On March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”).

Under the terms of the Separation Agreement, Mr.

West’s separation from the Company was effective on March 31, 2021.

West will receive a payment of $200,000 (payable in equal installments over six months) and monthly payments of $775 for up to a year to offset health coverage costs.

West received 25,000 shares of the Company’s common stock, which will be forfeited to the Company during the two years following the effective date of the Separation Agreement in the event Mr.

West breaches the terms of the Separation Agreement.

In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr.

West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations.

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,

Nine Months Ended September 30,

The following table sets out the Company’s condensed consolidated results of operations for the three months ended March 31, 2021 and 2020 (dollars in thousands).

Three Months Ended March 31,

Services revenue

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Interest and other expense, net

Income before income tax expense (benefit)

Income tax expense (benefit)

Income before income tax expense

Income tax expense

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.

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,

Equity Partners

Stock-based compensation

Board of Directors fees

Accounting, tax and legal professional fees

Travel and entertainment

Advertising and promotion

Total selling, general & administrative expense

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.

Nine Months Ended September 30,

Equity Partners

We report 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 our reportable segments.

We manage our business primarily on differentiated revenue streams for services offered.

Our 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 D ivision 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.

We evaluate the performance of its reportable segments based primarily on net operating income.

Further, we do not utilize segmented asset information to evaluate the performance of its reportable segments and we do 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):

Three Months Ended March 31,

Industrial Assets Division:

Net operating income

Financial Assets Division:

Net operating income

Corporate and Other:

Net operating loss

Consolidated:

Net operating income

Three-Month Period Ended March 31, 2021 Compared to Three-Month Period Ended March 31, 2020

Revenues and cost of revenues – Revenues were $7.1 million during the three months ended March 31, 2021 compared to $4.2 million during the same period in 2020.

Costs of services revenue and asset sales were $2.0 million during the three months ended March 31, 2021 compared to $0.6 million during the same period in 2020.

The gross profit of these items was $5.1 million during the three months ended March 31, 2021 compared to $3.7 million during the same period in 2020, an increase of approximately $1.4 million, or approximately 38%.

The increased gross profit in the first quarter of 2021 reflects the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $4.0 million during the three months ended March 31, 2021 and $3.5 million during the same period in 2020.

Significant components of selling, general and administrative expense for the three months ended March 31, 2021 and March 31, 2020 are shown below (dollars in thousands):

Three Months Ended March 31,

Stock-based compensation

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Advertising and promotion

Information technology support

Total selling, general & administrative expense

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.

As compared to the first quarter of 2020, there was an increase in selling, general and administrative expense during the first quarter of 2021 due to increased compensation expense within our HGI and HGP divisions as a result of improved financial performance and a one-time expense related to the Separation Agreement.

This increase was offset by decreased compensation expense within our NLEX division as a result of declined financial performance, and decreased travel expense as a result of travel restrictions related to the COVID-19 pandemic.

Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended March 31, 2021 and the same period in 2020, which consisted primarily 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.

Other than the operating income of our liquidation business ( a GAAP financial measure as shown in our condensed 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 unaudited condensed consolidated financial statements in accordance wi th GAAP.

We prepared our unaudited condensed 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.

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.

Management uses EBITDA and Adjusted EBITDA in assessing the Company’s results, evaluating the Company’s performance and in reaching operating and strategic decisions.

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,

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).

Three Months Ended March 31,

Depreciation and amortization

Interest and other expense, net

Income tax expense (benefit)

Income tax expense

Management add back:

Stock based compensation

Separation Agreement

Adjusted EBITDA

2 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis