# Heritage Global Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Heritage Global Inc.](/companies/hgbl.md) (CIK 849145)
- Form: 10-Q
- Filed: 2023-05-11
- Accepted by EDGAR: May 11, 2023, 20:02 ET
- Period: 2023-03-31
- Accession: 0000950170-23-021190
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/849145/000095017023021190/hgbl-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/849145/000095017023021190/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $16.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $6.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $3.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $997.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $2.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.08 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 37,334,459 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $8.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $89.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $15.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $30.2m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $75.5m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $21.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $24.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $51.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,502 characters.

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 three month periods ended March 31, 2023 and 2022, 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, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 24, 2023 (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. was incorporated in Florida in 1983 under the name “MedCross, Inc.” Our 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. in 2013. The most recent name change more closely identifies HG with its auction and specialty lending business lines.

Our corporate headquarters are located at 12625 High Bluff Drive, Suite 305, San Diego, CA 92130. Our telephone number is (858) 847-0659 and our corporate website is *www.hginc.com*. Information contained on our website is not incorporated by reference into this Form 10-Q.

The organization chart below outlines our basic domestic corporate structure as of March 31, 2023.

|  | Heritage Global Inc. (1) |  |  |
| ---: | ---: | ---: | ---: |
| 100% | 100% | 100% | 100% |
| Heritage Global Partners, Inc. (2) (California) | Heritage Global LLC (3) (Delaware) | National Loan Exchange, Inc. (5) (Illinois) | Heritage Global Capital LLC (6) (Delaware) |
|  | 100% |  |  |
|  | Heritage ALT LLC (4) (Delaware) |  |  |

(1) Registrant.

(2) Auction and Liquidation.

(3) Holding Company.

(4) Refurbishment and Resale.

(5) Brokerage.

(6) Specialty Lending.

### COVID-19

The novel coronavirus (“COVID-19”) pandemic had no material negative impact on our Industrial Assets Division during 2022 or the three months ended March 31, 2023, as the supply of surplus industrial assets largely returned to pre-pandemic levels and the continuing disruptions to the global supply chain, particularly those involving industrial assets, increased demand for U.S. based surplus assets. Going forward, we do not believe the COVID-19 pandemic will have material negative impacts on our financial performance, as we expect that supply and demand will remain robust in our Industrial Assets Division. Additionally, increasing consumer spending and rising delinquency and charge-off rates have a positive impact on volumes of nonperforming and charged-off consumer loans, which will benefit our Financial Assets Division.

### Industry and Competition

Our business consists primarily of the auction, appraisal, refurbishment and asset advisory services provided by our Industrial Assets Division and the charged-off receivable brokerage and specialty financing services provided by our Financial Assets Division, each of which is further described below. Our business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, charged-off receivable and distressed debt. The market for all of 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 and lenders. 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, our 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 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 segment 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 in the Specialty Lending and Auction and Liquidation segments includes the option of partnering with one or more additional purchasers or lenders, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). These Joint Ventures give us access to more opportunities, by helping to mitigate some of the competition from the market’s larger participants and by contributing 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 that 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 by using partners as needed.

**Compelling macro growth drivers -** Historically, recessions drive an increased supply of surplus assets and an increased demand for liquidation services, which we believe we are well-positioned to provide. Further, consumer lending and resulting charge-offs are expected to continue their upward trend to meet, and possibly exceed, pre- pandemic levels, 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 invested capital -** We believe we have an opportunity 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 continued his employment with us in an advisory capacity, and is expected to do so 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.

### Financial Assets Division

Our Financial Assets division provides services 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.

### Brokerage Segment

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 lenders, peer-to-peer lending and Buy Now Pay Later 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.

### Specialty Lending Segment

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 $107.9 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 $43.3 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. As of March 31, 2023, our total balance related to investments in loans to buyers of charged-off and nonperforming receivable portfolios was $28.4 million, of which $16.0 million is classified as Notes Receivable and $12.4 million is classified as Equity Method Investments.

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.

### Auction and Liquidation Segment

Through HGP, we offer a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. 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.

### Refurbishment & Resale Segment

Through ALT, we have specialized our offering in the biotech and pharma sectors, which have been key verticals over the past decade. ALT focuses on refurbishing and reselling laboratory equipment.

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 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 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 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 revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Significant estimates include the assessment of collectability of revenue recognized and the valuation of accounts receivable and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our consolidated financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

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. We adopted a change in accounting policy effective January 1, 2023, as fully described in *Note 2 – Summary of Significant Accounting Policies* of the financial statements attached to this Form 10-Q. This change, referred to as “ASC 326,” was required by the Financial Accounting Standards Board. Prior periods were not restated, and the cumulative effect to periods prior to January 1, 2023 were recorded to our condensed consolidated balance sheets as of that date. Prospectively, the change will not have a material effect on our results of operations. Other than this required change, there were no changes to our accounting policies during the three months ended March 31, 2023.

### Management’s Discussion of Financial Condition

### Liquidity and Capital Resources

### Liquidity

We had working capital of $8.6 million and $7.7 million as of March 31, 2023 and December 31, 2022, respectively.

Our current assets as of March 31, 2023 increased to $30.2 million compared to $23.9 million as of December 31, 2022 primarily due to an increase in cash as a result of cash provided by operating activities during the three months ended March 31, 2023. Our current liabilities as of March 31, 2023 increased to $21.5 million compared to $16.2 million as of December 31, 2022. The most significant change was an increase of $5.1 million in our payables to sellers due to the timing of certain asset liquidation settlements, further supplemented by an increase in the current portion of third party debt of $1.1 million, and offset by a decrease in various payables totaling $0.9 million.

During the three months ended March 31, 2023, our primary source of cash was the cash on hand plus the cash provided by operating activities. Cash disbursements during the three months ended March 31, 2023 consisted primarily of investments in notes receivable and equity method investments of $13.7 million, repayment on our 2021 Credit Facility of $2.3 million, repayment on our ALT Note of $0.1 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 working capital, cash flows from our on-going operations and accessing financing from our existing line of credit.

Our indebtedness consists of a promissory note dated August 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 of American Laboratory Trading, as well as any amounts borrowed under our modified 2021 Credit Facility. Terms require us 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 of August 23, 2025. As of March 31, 2023, we had an outstanding balance of $1.3 million on the ALT Note.

### Capital Resources

As of March 31, 2023 and December 31, 2022, we had stockholders’ equity of $51.2 million and $48.3 million, respectively.

We determine our future capital and operating requirements based upon our current and projected operating performance and contractual commitments. We expect to be able to finance our future operations through a combination of working capital, future net cash flows from operating activities, our 2021 Credit Facility and securing additional debt financing if needed. Our contractual requirements are limited to the outstanding debt and lease commitments with related and unrelated parties. Capital requirements are generally limited to our purchases of surplus and distressed assets and our investment activity under our Specialty Lending segment. We believe that our current capital resources, including available borrowing capacity from our 2021 Credit Facility, are sufficient for these requirements. In the event additional capital is needed, we believe we can obtain additional debt financing through either capital partners or a new credit facility.

### Cash Position and Cash Flows

Cash and cash equivalents as of March 31, 2023 were $15.7 million as compared to $12.7 million as of December 31, 2022, an increase of approximately $3.0 million.

### Cash Provided By Operating Activities

Cash provided by operations was $8.9 million during the three months ended March 31, 2023 as compared to $3.1 million during the same period in 2022. The approximate $5.8 million change was primarily attributable to a change of $3.1 million in operating assets and liabilities during the three months ended March 31, 2023 as compared to the same period in 2022. The amount was further attributable to a change in net income adjusted for noncash items, which was $2.8 million higher during the three months ended March 31, 2023 as compared to the same period in 2022.

The significant changes in operating assets and liabilities during the three months ended March 31, 2023 as compared to the same period in 2022 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 Investing Activities

Cash used in investing activities during the three months ended March 31, 2023 was $6.8 million compared to cash used in investing activities of $1.0 million during the same period in 2022.

Cash used in investing activities during the three months ended March 31, 2023 consisted primarily in investment in notes receivable of $13.2 million and equity method investments of $0.5 million, related entirely to specialty lending activity within our Financial Assets Division. Cash used in investing activities during the three months ended March 31, 2023 was offset by cash provided by investing activities primarily of cash received on transfer of notes receivable to partners of $4.6 million, payments received on notes receivable of $1.1 million as well as return of investment and cash distributions received from equity method investments of $1.4 million.

Cash used in investing activities during the three months ended March 31, 2022 consisted primarily in investment in equity method investments of $2.1 million, offset by cash distributions from equity method investments and payments received on notes receivable in aggregate of $1.2 million, and related entirely to our specialty lending segment.

### Cash Provided By (Used In) Financing Activities

Cash provided by financing activities was approximately $0.9 million during the three months ended March 31, 2023 compared to cash used in financing activities of $0.6 million during the three months ended March 31, 2022. Financing activities during the three months ended March 31, 2023 consisted primarily of $3.4 million in proceeds from draws on our 2021 Credit Facility, offset by $2.3 million repayment to our 2021 Credit Facility and $0.1 million in repayments to our ALT Note. Financing activities during the three months ended March 31, 2022 consisted primarily of a $0.5 million repayment to our 2021 Credit Facility and $0.1 million in repayments to our ALT Note.

### 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.

### 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, 2023 and 2022 (in thousands).

| Revenues: | Three Months Ended March 31, 2023 | 2022 | Change Dollars | Percent |
| --- | ---: | ---: | ---: | ---: |
| Services revenue | $10,245 | $4,168 | 6,077 | 146% |
| Asset sales | 6,367 | 5,189 | 1,178 | 23% |
| Total revenues | 16,612 | 9,357 | 7,255 | 78% |
| **Operating costs and expenses:** |  |  |  |  |
| Cost of services revenue | 2,340 | 754 | 1,586 | 210% |
| Cost of asset sales | 4,335 | 3,402 | 933 | 27% |
| Selling, general and administrative | 6,300 | 4,275 | 2,025 | 47% |
| Depreciation and amortization | 120 | 133 | (13) | (10)% |
| Total operating costs and expenses | 13,095 | 8,564 | 4,531 | 53% |
| Earnings of equity method investments | 377 | 82 | 295 | (360)% |
| Operating income | 3,894 | 875 | 3,019 | 345% |
| Interest expense, net | (68) | (38) | (30) | 79% |
| Income before income tax expense | 3,826 | 837 | 2,989 | 357% |
| Income tax expense | 997 | 192 | 805 | 419% |
| **Net income** | $2,829 | $645 | 2,184 | 339% |

Our revenue has several components: (1) traditional fee based asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment and real estate, and (3) fees and interest earned for appraisal, management advisory services and specialty lending 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 Auction and Liquidation segment, Refurbishment & Resale segment, Brokerage segment, and Specialty Lending segment. Our Auction and Liquidation segment, through HGP, operates as a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. Our Refurbishment & Resale segment, through ALT, acquires, refurbishes and supplies specialized laboratory equipment. Our Brokerage segment, through NLEX, brokers charged-off receivables in the U.S. and Canada on behalf of financial institutions. Our Specialty Lending segment, through HGC, provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

We evaluate the performance of our reportable segments based primarily on operating income. Notwithstanding the foregoing, the reported segment operating income for ALT and HGC represents incremental costs for managing these segments as part of their sister segments (HGP for ALT and NLEX for HGC). As such, the reported operating income for ALT and HGC does not represent their true standalone contribution, as we do not attempt to allocate existing fixed divisional overhead costs of the sister divisions to the newer segments. Similarly, corporate overhead cost is not allocated to the operating divisions for management reporting purposes. Further, we do not utilize segmented asset information to evaluate the performance of our reportable segments and 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):

| Industrial Assets Division: | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Auction and Liquidation | $1,468 | $649 |
| Refurbishment & Resale | 1,101 | 197 |
| Total divisional operating income | 2,569 | 846 |
| **Financial Assets Division:** |  |  |
| Brokerage | 2,045 | 495 |
| Specialty Lending | 533 | 236 |
| Total divisional operating income | 2,578 | 731 |
| **Corporate operating expense & other income** | (1,253) | (702) |
| **Consolidated operating income** | $3,894 | $875 |

### Three-Month Period Ended March 31, 2023 Compared to Three-Month Period Ended March 31, 2022

**Revenues and cost of revenues –** Revenues were $16.6 million during the three months ended March 31, 2023 compared to $9.4 million during the same period in 2022. Costs of services revenue and asset sales were $6.7 million during the three months ended March 31, 2023 compared to $4.2 million during the same period in 2022. The gross profit of these items was $9.9 million during the three months ended March 31, 2023 compared to $5.2 million during the same period in 2022, an increase of approximately $4.7 million, or approximately 90%. The increased gross profit in the first quarter of 2023 reflects the substantial increase in sales as well as the normal changes in the timing and magnitude of asset liquidation transactions.

**Selling, general and administrative expense –** Selling, general and administrative expense was $6.3 million during the three months ended March 31, 2023 compared to $4.3 million during the same period in 2021.

Significant components of selling, general and administrative expense for the three months ended March 31, 2023 and March 31, 2022 are shown below (in thousands):

| Compensation | Three Months Ended March 31, 2023 | 2022 | % change |
| --- | ---: | ---: | ---: |
| Auction and liquidation | $1,443 | $1,249 | 16% |
| Refurbishment and resale | 505 | 380 | 33% |
| Brokerage | 1,770 | 867 | 104% |
| Specialty lending | 210 | 145 | 45% |
| Corporate and other | 623 | 261 | 139% |
| Stock-based compensation | 179 | 106 | 69% |
| Consulting | 19 | 16 | 19% |
| Board of Directors fees | 72 | 73 | (1)% |
| Accounting, tax and legal professional fees | 339 | 311 | 9% |
| Insurance | 131 | 117 | 12% |
| Occupancy | 318 | 263 | 21% |
| Travel and entertainment | 278 | 212 | 31% |
| Advertising and promotion | 115 | 113 | 2% |
| Information technology support | 93 | 86 | 8% |
| Other | 205 | 76 | 170% |
| **Total selling, general & administrative expense** | $6,300 | $4,275 | 47% |

25

As compared to the first quarter of 2022, there was an increase in selling, general and administrative expense during the first quarter of 2023 primarily due to increased compensation expense as a result of our improved financial performance in each of our operating segments.

**Depreciation and amortization expense –** Depreciation and amortization expense was $0.1 million during the three months ended March 31, 2023 and the same period in 2022, which consisted primarily of amortization expense related to intangible assets.

**Off-Balance Sheet Arrangements –** We had no off-balance sheet arrangements as of March 31, 2023 and December 31, 2022.

### 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 operating income (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, 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 March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net income | $2,829 | $645 |
| Add back: |  |  |
| Depreciation and amortization | 120 | 133 |
| Interest expense, net | 68 | 38 |
| Income tax expense | 997 | 192 |
| **EBITDA** | 4,014 | 1,008 |
| Management add back: |  |  |
| Stock based compensation | 179 | 106 |
| **Adjusted EBITDA** | $4,193 | $1,114 |

## Controls and procedures

As filed, 1,450 characters.

As of the end of the period covered by this Report, our Chief Executive Officer and Principal Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective as of March 31, 2023.

Further, there were no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed May 11, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-021190. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.