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 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 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 outlines our basic domestic corp orate structure as of March 31, 2021 . (1) Registrant. (2) Full service, global auction, appraisal and asset advisory company. (3) Asset liquidation company that 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 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: • 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; and • 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. 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 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 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. 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. 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 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 industrial 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 revenue 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, 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 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. 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 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 expect that our income from secured lending will consist of upfront fees, interest income, monthly monitoring fees and backend profit share. 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. 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 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. 22 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. 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, 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 three months ended March 31, 2021. Management’s Discussion of Financial Condition Liquidity and Capital Resources Liquidity 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. 23 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. 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 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. 24 Ownership Structure and Capital Resources • 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 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 Credit Facility. Cash Position and Cash Flows 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. 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 thereof. 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) 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 $0.1 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). 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 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. 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. 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. Mr. 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. Further, Mr. 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 months ended March 31, 2021 and 2020 (dollars in thousands). Three Months Ended March 31, Change 2021 2020 Dollars Percent Revenues: Services revenue $ 5,030 $ 4,088 $ 942 23 % Asset sales 2,071 156 1,915 1228 % Total revenues 7,101 4,244 2,857 67 % Operating costs and expenses: Cost of services revenue 1,175 551 624 113 % Cost of asset sales 820 38 782 2058 % Selling, general and administrative 3,969 3,472 497 14 % Depreciation and amortization 91 90 1 1 % Total operating costs and expenses 6,055 4,151 1,904 46 % Earnings of equity method investments — 1 (1 ) (100 )% Operating income 1,046 94 952 1013 % Interest and other expense, net 3 (27 ) 30 111 % Income before income tax expense 1,049 67 982 1466 % Income tax expense 17 29 (12 ) (41 )% Net income $ 1,032 $ 38 $ 994 2616 % 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. 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 26 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, 2021 2020 Industrial Assets Division: Net operating income $ 1,340 $ 47 Financial Assets Division: Net operating income $ 461 $ 552 Corporate and Other: Net operating loss $ (755 ) $ (505 ) Consolidated: Net operating income $ 1,046 $ 94 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. 27 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, 2021 2020 % change Compensation HGP $ 1,613 $ 1,045 54 % NLEX 873 945 (8 )% HGI 288 201 43 % HGC 130 117 11 % Stock-based compensation 143 75 91 % Consulting 13 48 (73 )% Board of Directors fees 67 64 5 % Accounting, tax and legal professional fees 255 227 12 % Insurance 121 99 22 % Occupancy 222 220 1 % Travel and entertainment 39 176 (78 )% Advertising and promotion 87 152 (43 )% Information technology support 68 63 8 % Other 50 40 25 % Total selling, general & administrative expense $ 3,969 $ 3,472 14 % 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 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. 28 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 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). Three Months Ended March 31, 2021 2020 Net income $ 1,032 $ 38 Add back: Depreciation and amortization 91 90 Interest and other expense, net (3 ) 27 Income tax expense 17 29 EBITDA 1,137 184 Management add back: Stock based compensation 143 75 Separation Agreement 200 — Adjusted EBITDA $ 1,480 $ 259 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.