HERITAGE GLOBAL INC. The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements ofHeritage 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 endedSeptember 30, 2022 and 2021, 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 endedDecember 31, 2021 , filed with theSecurities and Exchange Commission ("SEC") onMarch 17, 2022 (the "Form 10-K").
Forward Looking Information
This Quarterly Report on Form 10-Q 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 theState 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 "C2Global 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 inNational Loan Exchange, Inc. ("NLEX"), a broker of charged-off receivables inthe United States andCanada . As a result of this acquisition,NLEX operates as one of our wholly-owned divisions.
In 2019, the Company formed
In 2021, HGI acquired certain assets and liabilities ofAmerican Laboratory Trading, one of the largest suppliers of premium refurbished lab equipment inNorth America and a key provider of surplus asset services for the life sciences. As a result of this acquisition, American Laboratory Trading operates as one of our wholly-owned divisions, ALT. 18 -------------------------------------------------------------------------------- The organization chart below outlines our basic domestic corporate structure as ofSeptember 30, 2022 . Heritage Global Inc. (Florida) (1) 100% 100% 100% 100% Heritage Global Heritage Global National Loan Heritage Global Partners, Inc. LLC Exchange, Inc. Capital LLC (California) (2) (Delaware) (3) (Illinois) (5) (Delaware)(6) 100% Heritage ALT LLC (Delaware) (4) (1) Registrant. (2) Full service global auction, appraisal and asset advisory company that also acquires and monetizes distressed and surplus assets. (3) Holding Company. (4) Supplier of refurbished lab equipment. (5) Broker of charged-off and nonperforming receivables. (6) Specialty financing solutions for charged-off and nonperforming asset portfolios.
COVID-19
The novel coronavirus ("COVID-19") pandemic had a negative impact on our
performance during 2021 due to evolving travel and work restrictions, stimulus
payments and credit policies impacting debt sales by financial institutions, and
a delay in the typical process for the sale of certain industrial assets by
manufacturing companies.
Going forward, and subject to the caveat below, we do not believe the COVID-19
pandemic will have material negative impacts on our financial performance, as we
expect that the supply of surplus industrial assets will return to pre-pandemic
levels and the continuing disruptions to the global supply chain, particularly
those involving industrial assets, will further increase demand for U.S. -based
surplus assets. Further, as stimulus payments conclude, we expect that the
COVID-19 pandemic will have the following positive impacts:
•
increased activity forNLEX and HGC due to the resurgence of consumer spending, rising delinquency and charge-off rates, and expanding volumes of nonperforming and charged-off consumer loans; and
•
incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets.
Further surges in COVID-19 infection rates could result in the continuation of stimulus payments and the implementation of additional credit policies impacting debt sales that may result in delayed revenues depending on the scope and magnitude of such policies.
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 and specialty financing services provided by our
Financial 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. Some competitors
have significantly greater financial and marketing resources and name
recognition.
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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").
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.
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. Consumer lending and resulting charge-offs are expected to continue their upward trend to meet, and possibly exceed, pre-pandemic level which we believe will drive 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
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. OnSeptember 17, 2020 , we entered into an Employment Agreement withKirk Dove , the former President and Chief Operating Officer of the Company. Upon his resignation,Kirk Dove continued his employment with us in an advisory capacity and is expected to do so untilDecember 31, 2024 . Also, during 2020,Nick Dove was appointed as President, Industrial Assets Division, andDavid Ludwig was appointed as President, Financial Assets Division.Nick Dove previously served as Executive Vice President of Sales ofHeritage Global Partners sinceAugust 2017 .David Ludwig previously served as President ofNLEX , a wholly owned subsidiary of the Company, and has served in such capacity since the Company acquiredNLEX in 2014. 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. ThroughNLEX , we act as an advisor for sales of charged-off and nonperforming asset portfolios via an electronic auction exchange platform for banks, theU.S. government, and other debt holders throughoutthe United States andCanada . 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 lenders, peer-to-peer 20 -------------------------------------------------------------------------------- lending and Buy Now Pay Later sectors, where we believeNLEX 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. Through HGC, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. Since the inception of HGC in 2019, we have issued$63.2 million in total loans to investors by both self-funded loans and in partnership with senior lenders. Our portion of the total loans funded since inception is$21.5 million . Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share. In general, we expect to earn an annual rate of return on our share of notes receivable outstanding of approximately 20% or more based on established terms of the loans funded and performance of collections. 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.
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. The acquisition of ALT further strengthens our service offering in the biotech and pharma sectors, which have been key verticals over the past decade. Our management team has decades of domain expertise with the ability to leverage extensive industry relationships, real time access to databases of buyers and sales, as well as a deep understanding of the underlying asset value across the more than 25 industrial sectors in which we operate. We believe we have the opportunity for growth in our auction services through our ability to secure ongoing contracts with large multinational sellers, to be a first mover in emerging sectors, and to gain market share in sectors in which we are currently less active. Our extensive network and ability to find and source new opportunities are key factors for expansion. 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 inthe 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 may incur additional costs in the future, 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 and Estimates
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 accounting principles generally accepted inthe 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 quarterly 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 21 -------------------------------------------------------------------------------- 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 were no
changes to these policies during the three months ended
Management's Discussion of Financial Condition
Liquidity and Capital Resources
Liquidity
We had working capital of
OnOctober 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. During 2021 and the nine months endedSeptember 30, 2022 , we deployed proceeds to fund the ALT acquisition, as well as various principal transactions in both our Financial Assets and Industrial Assets Divisions. Our current assets as ofSeptember 30, 2022 increased to$26.5 million compared to$23.3 million as ofDecember 31, 2021 primarily due to an increase in cash as a result of cash provided by operating activities during the nine months endedSeptember 30, 2022 . Our current liabilities were$13.5 million as ofSeptember 30, 2022 and$14.2 million atDecember 31, 2021 . Changes for the nine months endedSeptember 30, 2022 consisted of a decrease in payables to sellers of$0.6 million and a decrease in the current portion of third party debt of$1.9 million offset by an increase in accounts payable of$1.5 million and current portion of lease liabilities of$0.2 million . During the nine months endedSeptember 30, 2022 , our primary source of cash was the cash on hand plus the cash provided by our asset liquidation business. Cash disbursements during the nine months endedSeptember 30, 2022 consisted primarily of investments in equity method investments of$8.1 million , repayment on our 2021 Credit Facility of$1.9 million , repayment on our ALT Note of$0.4 million , payment of operating expenses, and settlement of auction liabilities. We believe we can fund our operations and our debt service obligations for at least 12 months from the date of filing this quarterly report through a combination of cash flows from our on-going asset liquidation operations, proceeds from the 2020 Public Offering, and draws on our 2021 Credit Facility, as needed. Our indebtedness consists of a promissory note datedAugust 23, 2021 (the "ALT Note") issued in the amount of$2.0 million as part of the aggregate purchase price paid to acquire certain assets and liabilities ofAmerican Laboratory Trading, as well as any amounts borrowed under our Credit Facility. We are required to pay off the ALT Note in 48 equal installments of approximately$44,000 with an interest rate of 3% per annum and a maturity date ofAugust 23, 2025 . OnMay 5, 2021 , we entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the "Credit Facility") with C3bank, for a$10.0 million revolving line of credit. The Credit Facility matures onMay 7, 2023 and replaces our previous credit facility with C3bank of$5.0 million , which matured onApril 5, 2021 . We are permitted to use the proceeds of the loan solely for our business operations. As ofSeptember 30, 2022 , we had no outstanding balance on the Credit Facility.
Ownership Structure and Capital Resources
•
As of
•
On
•
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
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from our asset liquidation business, proceeds from the 2020 Public Offering, and
draws on the 2021 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
2021 Credit Facility.
Cash Position and Cash Flows
Cash and cash equivalents as of
Cash provided by (used in) operating activities. Cash provided by operations was$2.6 million during the nine months endedSeptember 30, 2022 as compared to cash used in operating activities of$4.1 million during the same period in 2021. The approximate$6.7 million change was primarily attributable to a change of$7.3 million in operating assets and liabilities during the nine months endedSeptember 30, 2022 as compared to the same period in 2021. The amount was further attributable to a change in net income adjusted for noncash items, which was$0.6 million lower during the nine months endedSeptember 30, 2022 as compared to the same period in 2021. The significant changes in operating assets and liabilities during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 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 provided by (used in) investing activities. Cash provided by investing
activities during the nine months ended
Cash provided by investing activities during the nine months endedSeptember 30, 2022 consisted primarily of payments received on notes receivable of$2.4 million as well as return of investment and cash distributions received from equity method investments of$10.2 million in the aggregate, which included$1.7 million related to specialty lending activity within our Financial Assets Division,$5.9 million from the sale of the remaining real estate assets ofCPFH LLC , the joint venture, located inHuntsville, Alabama , and$2.6 million from the sales of real estate and machinery and equipment assets ofKNFH LLC . Cash provided by investing activities during the nine months endedSeptember 30, 2022 was offset by cash used in investment in equity method investments of$8.1 million , of which$6.6 million related to specialty lending activity within our Financial Assets Division and$1.5 million cash used in our Industrial Assets Division directly related to the acquisition of two pharmaceutical plants, formerly ofNesher Pharmaceuticals . Cash used in investing activities during the nine months endedSeptember 30, 2021 of$7.3 million was primarily attributable to the acquisition of certain assets and liabilities of American Laboratory Trading for$4.3 million and the acquisition of real estate used inAmerican Laboratory Trading's business for$1.3 million , investment in notes receivable of$5.9 million and investment in equity method investments of$1.1 million , offset by payments received on notes receivables of$3.4 million and cash received on transfer of notes receivable to partners of$2.0 million . Cash (used in) provided by financing activities. Cash used in financing activities was approximately$2.6 million during the nine months endedSeptember 30, 2022 as compared to cash provided by financing activities of$1.2 million for the same period endedSeptember 30, 2021 . Financing activities during the nine months endedSeptember 30, 2022 consisted primarily of a$1.9 million repayment to our 2021 Credit Facility,$0.4 million in repayments to our ALT Note and$0.3 million repurchase of our common stock. Cash provided by financing activities during the nine months endedSeptember 30, 2021 consisted primarily of$2.0 million in proceeds from the issuance of the ALT Note as part of the acquisition of certain assets and liabilities of American Laboratory Trading offset by 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.
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 condensed
consolidated financial statements included in our Form 10-K.
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On August 23, 2021 , a wholly-owned subsidiary ("ALT Purchaser") of HGI acquired
(the "Transaction") certain assets and liabilities of American Laboratory
Trading, pursuant to the terms and conditions of an Asset Purchase Agreement
(the "Asset Purchase Agreement"), dated August 18, 2021 , among the Company,
American Laboratory Trading and certain individuals named therein. The aggregate
purchase price paid to American Laboratory Trading was approximately $4.3
million , consisting of $2.3 million in cash and a $2.0 million subordinated
promissory note with an interest rate of 3% per annum and a maturity date of
August 23, 2025 (the "ALT Note"). The Asset Purchase Agreement contains
customary representations and warranties and covenants by each party. American
Laboratory Trading and ALT Purchaser are obligated, subject to certain
limitations, to indemnify the other under the Asset Purchase Agreement for
losses arising from certain breaches of the Asset Purchase Agreement and for
certain other liabilities, subject to applicable limitations set forth in the
Asset Purchase Agreement. HGI has guaranteed the obligations of ALT Purchaser
under the terms of the Asset Purchase Agreement and the ALT Note.
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
Three Months Ended September Nine Months Ended
30, Change September 30, Change
2022 2021 Dollars Percent 2022 2021 Dollars Percent
Revenues:
Services revenue $ 7,349 $ 4,822 $ 2,527 52 % $ 16,112 $ 14,020 $ 2,092 15 %
Asset sales 5,312 1,169 4,143 354 % 16,971 4,248 12,723 300 %
Total revenues 12,661 5,991 6,670 111 % 33,083 18,268 14,815 81 %
Operating costs and
expenses:
Cost of services revenue 2,051 1,100 951 86 % 3,715 3,235 480 15 %
Cost of asset sales 3,015 675 2,340 347 % 12,048 1,870 10,178 544 %
Selling, general and
administrative 5,693 3,494 2,199 63 % 14,907 11,134 3,773 34 %
Depreciation and
amortization 134 105 29 28 % 400 294 106 36 %
Total operating costs and
expenses 10,893 5,374 5,519 103 % 31,070 16,533 14,537 88 %
Earnings of equity method
investments 1,706 (84 ) 1,790 2131 % 5,960 (83 ) 6,043 7281 %
Operating income 3,474 533 2,941 552 % 7,973 1,652 6,321 383 %
Interest and other expense,
net (21 ) (6 ) (15 ) 250 % (96 ) 6 (102 ) 1700 %
Income before income tax
expense (benefit) 3,453 527 2,926 555 % 7,877 1,658 6,219 375 %
Income tax expense (benefit) 1,153 53 1,100 2075 % 2,354 (435 ) 2,789 641 %
Net income $ 2,300 $ 474 $ 1,826 385 % $ 5,523 $ 2,093 $ 3,430 164 %
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 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.
We evaluate the performance of reportable segments based primarily on net operating income. Further, we do not utilize segmented asset information to evaluate the performance of reportable segments and we do not include intercompany transfers between segments for management reporting purposes.
24
--------------------------------------------------------------------------------The following table sets forth certain financial information for the Company's reportable segments (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021Industrial Assets Division: Net operating income $ 3,058 $ 765 $ 7,247 $ 2,538 Financial Assets Division: Net operating income $ 1,566 $ 449 $ 3,480 $ 1,372 Corporate and Other: Net operating loss $ (1,150 ) $ (681 )$ (2,754 ) $ (2,258 ) Consolidated: Net operating income $ 3,474 $ 533 $ 7,973 $ 1,652
Three-Month Period Ended
Revenues and cost of revenues - Revenues were$12.7 million during the three months endedSeptember 30, 2022 compared to$6.0 million during the same period in 2021. Costs of services revenue and asset sales were$5.1 million during the three months endedSeptember 30, 2022 compared to$1.8 million during the same period in 2021. The gross profit of these items was$7.6 million during the three months endedSeptember 30, 2022 compared to$4.2 million during the same period in 2021, an increase of approximately$3.4 million , or approximately 80%. The increased gross profit in the third quarter of 2022 reflects the vagaries of the timing and magnitude of asset liquidation transactions.
Selling, general and administrative expense - Selling, general and
administrative expense was
Significant components of selling, general and administrative expense for the three months endedSeptember 30, 2022 andSeptember 30, 2021 are shown below (dollars in thousands): Three Months Ended September 30, 2022 2021 % change Compensation HGP $ 1,765 $ 1,141 55 % ALT 389 118 230 % NLEX 1,255 764 64 % HGI 664 228 191 % HGC 138 94 47 % Stock-based compensation 170 102 67 % Consulting 32 13 146 % Board of Directors fees 89 62 44 % Accounting, tax and legal professional fees 296 293 1 % Insurance 119 112 6 % Occupancy 291 241 21 % Travel and entertainment 156 121 29 % Advertising and promotion 89 66 35 % Information technology support 103 86 20 % Other 137 53 158 %
Total selling, general & administrative expense $ 5,693 $ 3,494
63 %
As compared to the third quarter of 2021, there was an increase in selling,
general and administrative expense during the third quarter of 2022 primarily
due to increased compensation and operation expenses related to the acquisition
of ALT in the third quarter
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--------------------------------------------------------------------------------of 2021 and increased compensation as a result of our improved financial performances in our other divisions. The increased travel and entertainment expenses were due to the lift in travel restrictions related to the COVID-19 pandemic.
Depreciation and amortization expense - Depreciation and amortization expense was$0.1 million during the three months endedSeptember 30, 2022 and the same period in 2021, which consisted primarily of amortization expense related to intangible assets.
Nine-Month Period Ended
Revenues and cost of revenues - Revenues were$33.1 million during the nine months endedSeptember 30, 2022 compared to$18.3 million during the same period in 2021. Costs of services revenue and asset sales were$15.8 million during the nine months endedSeptember 30, 2022 compared to$5.1 million during the same period in 2021. The gross profit of these items was$17.3 million during the nine months endedSeptember 30, 2022 compared to$13.2 million during the same period in 2021, an increase of approximately$4.2 million , or approximately 32%. The increased 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
Significant components of selling, general and administrative expense for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 are shown below (dollars in thousands): Nine Months Ended September 30, 2022 2021 % change Compensation HGP $ 4,618 $ 4,039 14 % ALT 1,154 118 878 % NLEX 3,129 2,519 24 % HGI 1,405 783 79 % HGC 425 328 30 % Stock-based compensation 384 313 23 % Consulting 72 37 95 % Board of Directors fees 235 187 26 % Accounting, tax and legal professional fees 895 930 (4 )% Insurance 342 292 17 % Occupancy 797 725 10 % Travel and entertainment 521 241 116 % Advertising and promotion 310 239 30 % Information technology support 290 241 20 % Other 330 142 132 %
Total selling, general & administrative expense
11,134 34 %
As compared to the nine months ended September 30, 2021 , there was an increase
in selling, general and administrative expense during the nine months ended
September 30, 2022 primarily due to increased compensation and operation
expenses related to the acquisition of ALT in the third quarter of 2021 and
increased compensation expense as a result of our improved financial
performances in our other divisions. The increased travel and entertainment
expenses were due to the lift in travel restrictions related to the COVID-19
pandemic.
Depreciation and amortization expense - Depreciation and amortization expense
was
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--------------------------------------------------------------------------------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, we 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 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 2,300 $ 474 $ 5,523 $ 2,093
Add back:
Depreciation and amortization 134 105 400 294
Interest and other expense, net 21 6 96 (6 )
Income tax expense 1,153 53 2,354 (435 )
EBITDA 3,608 638 8,373 1,946
Management add back:
Stock based compensation 170 102 384 313
Separation Agreement - - - 200
Adjusted EBITDA $ 3,778 $ 740 $ 8,757 $ 2,459© Edgar Online, source
