Heritage Global Inc. - Quarter Report: 2015 September (Form 10-Q)

The Company’s goodwill is related to its asset liquidation business, and is comprised of goodwill from three acquisitions, as shown in the table below (in thousands). There were no impairment losses or other charges to the carrying amount of goodwill during the nine months ended September 30, 2015 and 2014.

Note 8 – Equity Method Investments

Summarized financial information – Equity method accounted asset liquidation investments

The summarized results of operations attributable to HGI’s equity method accounted asset liquidation investments are detailed in the table below (in thousands):

Note 9 – Debt

Outstanding debt at September 30, 2015 and December 31, 2014 is summarized as follows (in thousands):

The Company entered into a loan with an unrelated party (the “Third Party Debt”) during the second quarter of 2014 for a principal amount of $2.5 million. The loan bears interest at 6% and had an original maturity date of January 15, 2015. In December 2014, the maturity date was extended to January 15, 2016 at the same interest rate. The loan is not subject to any covenants or conditions.

The Company’s Related Party Debt (the “Counsel Loan”), which is due on demand, was originally entered into in 2003 and accrued interest at 10% per annum compounded quarterly from the date funds were advanced. The Counsel Loan is secured by the assets of the Company.

In the second quarter of 2014, following Street Capital Group Inc.’s (formerly Counsel Corporation, herein referred to as “Counsel”) distribution of its ownership interest in HGI to Counsel shareholders as a dividend in kind, the unpaid balance of the Counsel Loan began accruing interest at a rate per annum equal to the lesser of the Wall St. Journal (“WSJ”) prime rate + 2.0%, or the maximum rate allowable by law. As of September 30, 2015 and December 31, 2014, the interest rate on the loan was 5.25% . Please see Note 11 for further discussion of transactions with Counsel.

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The Credit Facility in existence at December 31, 2014, which is included within third party debt on the condensed consolidated balance sheet, was provided to HG LLC by a U.S. bank. The Credit Facility was repaid in full and terminated in March 2015.

Note 10 – Income Taxes

At September 30, 2015 the Company has aggregate tax net operating loss carry forwards of approximately $87.9 million ($59.1 million of unrestricted net operating tax losses and approximately $28.8 million of restricted net operating tax losses) and unused minimum tax credit carry forwards of $0.5 million. Substantially all of the net operating loss carry forwards and unused minimum tax credit carry forwards expire between 2025 and 2035. The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code.

The reported tax expense (benefit) varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the loss from continuing operations before taxes primarily as a result of the change in the deferred tax asset valuation allowance.

The Company records net deferred tax assets to the extent that it believes such assets will more likely than not be realized. As a result of our cumulative losses and uncertainty with respect to future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of December 31, 2014 and September 30, 2015.

Note 11 – Related Party Transactions

Debt with Counsel

Until the second quarter of 2014, as discussed below, Counsel was the Company’s majority shareholder. Counsel remained a related party following the distribution of its investment in HGI to Counsel shareholders as a result of the Services Agreement discussed below. The Services Agreement terminated on August 31, 2015, however subsequent to its termination Counsel remained a related party because Allan Silber, an affiliate of Counsel, is the Company’s chairman of the board, and a significant shareholder of the Company. At September 30, 2015 and December 31, 2014, the Company reported amounts owed to Counsel of $1.7 million and $3.0 million, respectively, as related party debt (see Note 9). Total interest of $0.4 million has been accrued on the debt through September 30, 2015, and remains unpaid.

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Counsel Services Provided to the Company

Beginning in December 2004, HGI and Counsel entered into successive annual management services agreements (collectively, the “Agreement”). Under the terms of the Agreement, HGI agreed to pay Counsel for ongoing services provided to HGI by Counsel personnel. These services included preparation of the Company’s financial statements and regulatory filings, taxation matters, stock-based compensation administration, Board administration, patent portfolio administration and litigation matters. The Counsel employees providing the services were: 1) its Executive Vice President, Secretary and Chief Financial Officer, 2) its Tax Manager, 3) an Accounting Manager, and 4) its Accounts Payable Clerk. These employees have the same or similar positions with HGI, but none of them received compensation from HGI. Rather, Counsel allocated to HGI a percentage, based on time incurred, of the employees’ base compensation paid by Counsel. Beginning in the first quarter of 2011, additional amounts were charged to HGI for Counsel services specifically relating to the ongoing operations of HGI’s asset liquidation business. The amounts due under the Agreement were payable within 30 days following the respective year end, subject to applicable restrictions. Any unpaid amounts bore interest at 10% per annum commencing on the day after such year end.

In the first quarter of 2013, Counsel announced its plan to dispose of its interest in HGI, and on March 20, 2014, Counsel declared a dividend in kind, consisting of Counsel’s distribution of its majority interest in HGI to Counsel shareholders. The dividend was paid on April 30, 2014 to shareholders of record as of April 1, 2014.

Following this disposition, the Company and Counsel entered into a replacement management services agreement (the “Services Agreement”). Under the terms of the Services Agreement, Counsel remained as external manager and continued to provide the same services, at similar rates, until the Services Agreement was terminated effective August 31, 2015, as described more fully in the Current Report on Form 8-K filed with the SEC on September 1, 2015.

The amounts charged by Counsel, which have been accrued and added to the Counsel Loan balance, are detailed below (in thousands):

Transactions with Other Related Parties

The Company leases office space in Foster City, CA as part of the operations of HGP. The premises are owned by an entity that is jointly controlled by senior officers of HGI. It also leases office space in Edwardsville, IL, as part of the operations of NLEX, which is owned by senior officers of NLEX. The lease amounts paid by the Company to the related parties, which are included in selling, general and administrative expenses during the nine months ended September 30, 2015 and 2014, are detailed below (in thousands):

Note 12 – Subsequent Events

The Company has evaluated events subsequent to September 30, 2015 for disclosure. There have been no material subsequent events requiring disclosure in this Report except for the event already disclosed in Note 4 to the unaudited condensed consolidated financial statements.

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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 the Company and the related notes thereto for the three-month and nine-month periods ended September 30, 2015, 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, 2014, filed with the Securities and Exchange Commission (“SEC”).

Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” 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. These statements reflect our current view of future events and are subject to certain risks and uncertainties, as noted in the Company’s Annual Report on Form 10-K, filed with the SEC, 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,” “we” or the “Company”) 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 August 22, 2013. The most recent name change more closely identifies the Company with its core auction business, Heritage Global Partners, Inc. (“HGP”).

On March 20, 2014, the Company’s former majority shareholder, Street Capital Group Inc. (formerly Counsel Corporation, herein referred to as “Counsel”), declared a dividend of all of its shares of the Company. This dividend was paid on April 30, 2014 to Counsel’s common shareholders of record as of April 1, 2014.

On June 2, 2014, effective as of May 31, 2014, the Company acquired all of the outstanding equity of National Loan Exchange, Inc. (“NLEX”), a broker of charged-off receivables in the United States and Canada. As a result of this acquisition, NLEX now operates as a wholly owned division of the Company. The acquisition is discussed in Note 3 of the unaudited condensed consolidated interim financial statements.

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The organization chart below outlines the basic corporate structure of the Company as of September 30, 2015.

Asset liquidation

The Company’s asset liquidation business is its sole operating segment, and the Company’s objective is to build a sustainable, long-term global capital asset solutions business that is the leading resource for clients requiring capital asset solutions.

The 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 the second quarter of 2011, HG LLC acquired 100% of the business of EP USA, LLC (d/b/a Equity Partners) (“Equity Partners”), thereby expanding the Company’s operations. Equity Partners is a boutique investment banking firm and provider of financial solutions for distressed businesses and properties.

In February 2012 the Company increased its in-house asset liquidation expertise via its acquisition of 100% of the outstanding equity of Heritage Global Partners, Inc. (“HGP”), a global full-service auction, appraisal and asset advisory firm, and in the fourth quarter of 2012, the Company launched Heritage Global Partners Europe (“HGP Europe”). Through its wholly-owned subsidiary Heritage Global Partners UK Limited, the Company opened three European-based offices, one each in the United Kingdom, Germany and Spain.

As described above, effective May 31, 2014, the Company again expanded its asset liquidation operations with the acquisition 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 HGI’s strategy to expand and diversify the services provided by its asset liquidation business.

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As a result of the events and acquisitions outlined above, HGI is positioned to be a value-driven, innovative leader in corporate and financial asset liquidation transactions, valuations and advisory services. HGI focuses on identifying, valuing, acquiring and monetizing underlying tangible and intangible assets in global industrial and financial sectors. HGI specializes in both acting as an adviser and acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, accounts receivable portfolios, related intellectual property, and entire business enterprises. Management believes that HGI’s expanded global platform will allow the Company to achieve its long term industry leadership goals.

Intellectual property licensing

The Company holds several patents, including two that relate to Voice over Internet Protocol (“VoIP”). U.S. Patent No. 6,438,124 was developed by the Company, and encompasses the technology that allows two parties to converse phone-to-phone, regardless of the distance, by transmitting voice/sound via the Internet. U.S. Patent No. 6,243,373 (the “VoIP Patent”) was purchased from a third party (the “Vendor”). These patents, together with related international patents and patent applications, form the Company’s international VoIP Patent Portfolio (the “Portfolio”) that covers the basic process and technology that enable VoIP communication as used in the market today. As part of the consideration for the acquisition of the VoIP Patent, the Vendor is entitled to receive 35% of the net earnings from the Portfolio. To date the Company has recognized aggregate revenue of $17.8 million from settlement and licensing agreements and paid $2.6 million to the Vendor. At this time, although the Company expects to continue to incur costs relating to maintaining ownership of these patents, it is not expected that either these costs or related revenue will be material.

Industry and Competition

Asset Liquidation

The asset liquidation business consists primarily of the auction, appraisal and asset advisory services provided by HGP and Equity Partners, and, since the second quarter of 2014, the accounts receivable brokerage services provided by NLEX. It 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, HGI competes with other liquidators, auction companies, dealers and brokers. It also competes 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.

HGI’s 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 the Company access to more opportunities, enabling it to compete more effectively with the market’s larger participants and contribute to the Company’s objective to be the leading resource for clients requiring capital asset solutions.

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, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, 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. The mandatory adoption of XBRL reporting in 2011 has also increased the Company’s costs paid to third party service providers. 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.

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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, investments, goodwill, intangible assets, liabilities, contingent consideration, 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.

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no changes to these policies in the first nine months of 2015.

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Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

At September 30, 2015 the Company had a working capital deficit of $7.8 million, as compared to a working capital deficit of $4.0 million at December 31, 2014, an increase of approximately $3.8 million.

The Company’s current assets decreased to $4.4 million compared to $7.6 million at December 31, 2014. The most significant change was a decrease of $2.3 million in accounts receivable. This was primarily due to the receipt of $2.0 million of proceeds related to the Company’s exit from its investment in Polaroid during the fourth quarter of 2014. The cash proceeds received in 2015 were subsequently used to repay third party and related party debt.

The Company’s current liabilities increased to $12.3 million compared to $11.5 million at December 31, 2014. The current portion of third party debt increased by $2.0 million and the current portion of contingent consideration increased by $0.6 million. This was offset slightly by accounts payable and accrued liabilities which decreased $0.5 million, and the Counsel Loan which decreased $1.3 million. Although during the first quarter of 2015 the Company repaid the $0.5 million credit facility balance that was outstanding at December 31, 2014, the portion of its third party debt (the “Third Party Loan”) considered current increased by $2.5 million from December 31, 2014. The Third Party Loan matures on January 15, 2016.

During the first nine months of 2015, the Company’s primary sources of cash were the operations of its asset liquidation business, cash receipts of $3.2 million related to its equity method investments, and advances of $0.8 million under the Counsel Loan. Cash disbursements, other than those related to debt repayment of $2.9 million ($0.5 million to third parties and $2.4 million under the Counsel Loan), were primarily related to operating expenses.

The Company has historically classified both real estate inventory and asset liquidation related equity method investments as non-current, although they are expected to be converted to cash within a year. At September 30, 2015 and December 31, 2014, these assets totaled approximately $4.0 million and $7.5 million, respectively.

The Company expects that its asset liquidation business will continue to be the primary source of cash required for ongoing operations for the foreseeable future.

Ownership Structure and Capital Resources

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Cash Position and Cash Flows

Cash and cash equivalents at September 30, 2015 were $2.7 million as compared to $3.6 million at December 31, 2014, a decrease of approximately $0.9 million.

Cash used in or provided by operating activities Cash used in operating activities was $0.9 million during the nine months ended September 30, 2015 as compared to $1.3 million cash provided during the same period in 2014. During the first nine months of 2015 the Company had a pre-tax loss of $4.9 million, as compared to a pre-tax loss of $1.6 million for the same period in 2014, an increase of $3.3 million. The Company recorded a non-cash real estate inventory write-down charge during the nine months ended September 30, 2015, which contributed to $2.7 million of the increase in the pre-tax loss. The operations of NLEX, which was acquired during the second quarter of 2014, generated $1.3 million of operating profit for the nine months ended September 30, 2015, excluding the NLEX related amortization of intangible assets, compared to $0.3 million for the nine months ended September 30, 2014 (which included only four months of NLEX operations).

With respect to operations, the Company’s operating loss for the nine month period ended September 30, 2015 was $4.6 million as compared to $1.4 million for the same period in 2014. The increase in the loss was primarily attributable to the real estate inventory write-down charge recorded in 2015. This was offset partially by gross profit from asset liquidation operations, including earnings of equity accounted asset liquidation investments, which increased by $1.2 million. This change in gross profit was largely due to the inclusion of NLEX gross profit of $3.1 million in 2015. Selling, general and administrative expenses increased by approximately $1.5 million, almost all of which related to the 2015 inclusion of NLEX operations for the entire nine month period.

Cash provided by or used in investing activities Cash provided by investing activities during the nine months ended September 30, 2015 was $2.6 million, as compared to $1.5 million cash used during the same period in 2014. The 2015 activity consisted primarily of the following cash receipts related to the Company’s equity method investments: $2.0 million of proceeds from the Company’s December 2014 exit from Polaroid (received in 2015), and $0.7 million of distributions from the Company’s other equity method investments. In 2014 the most significant items were the net $1.4 million cash paid to acquire NLEX and $0.6 million of investments in equity method investments. This was offset partially by $0.5 million of cash distributions from the Company’s equity method investments.

Cash used in or provided by financing activities Cash used in financing activities was $2.7 million during the nine months ended September 30, 2015, as compared to $1.4 million cash provided during the same period in 2014. The 2015 activity consisted of net $1.6 million of debt repaid to Counsel, $0.5 million of debt repaid to third parties, and $0.5 million of contingent consideration paid. In 2014, the Company received $1.5 million (net of repayments) as loans from third parties, primarily used for the purchase of NLEX.

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Management’s Discussion of Results of Operations

The following table sets out the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands).

Quarterly and Year to Date Statement of Operations

The Company’s asset liquidation revenue has several components: (1) traditional 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, real estate, inventories, accounts receivable and distressed debt, and (3) fees earned for management advisory services. The Company also earns income from its asset liquidation business through its earnings from equity accounted asset liquidation investments.

Three-Month Period Ended September 30, 2015 Compared to Three-Month Period Ended September 30, 2014

Asset liquidation revenues were $3.0 million in 2015 compared to $6.1 million in 2014, asset liquidation expense was $0.5 million in 2015 compared to $3.4 million in 2014, and losses of equity method asset liquidation investments were $34,000 in 2015 compared to $41,000 in 2014. The asset liquidation gross profit was therefore $2.5 million in 2015 compared to $2.7 million in 2014, a decrease of $0.2 million or 7%. Because the Company conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period, the operations must be considered as a whole rather than on a line-by-line basis. The decreased gross profit in the current quarter reflects the vagaries of the timing of asset liquidation transactions.

The Company recorded a $2.7 million real estate inventory write-down charge during the three months ended September 30, 2015. No charge was taken in the comparable 2014 period. The write-down represented a net realizable value adjustment to the carrying value of the Company’s real estate inventory.

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Selling, general and administrative expense, including expenses paid to related parties, was $3.0 million during the three months ended September 30, 2015, compared to $2.7 million during the same period in 2014, an increase of approximately $0.3 million or 11%.

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

The increases in insurance, occupancy, travel and entertainment, and advertising and promotion expense are primarily due to the general growth of operations for HGP, Equity Partners and NLEX. The increase in legal expense results from work performed related to the Company’s real estate inventory. The decrease in accounting expense is primarily due to independent contractors included in 2014 which have been replaced with full time employees in 2015. The decrease in stock-based compensation is primarily the result of awards becoming fully vested during 2015 and not incurring any related expense in the third quarter.

Depreciation and amortization expense was $166,000 in 2015 compared to $119,000 in 2014, and consisted almost entirely of amortization expense related to intangible assets. The increase in 2015 was due to the inclusion of amortization of the NLEX intangible assets acquired in the second quarter of 2014. In both years the depreciation of property and equipment was not material.

Nine-Month Period Ended September 30, 2015 Compared to Nine-Month Period Ended September 30, 2014

Asset liquidation revenues were $9.6 million in 2015 compared to $10.9 million in 2014, asset liquidation expense was $2.1 million in 2015 compared to $4.4 million in 2014, and earnings of equity method asset liquidation investments were $0.1 million in 2015 compared to a loss of $53,000 in 2014. The asset liquidation gross profit was therefore $7.6 million in 2015 compared to $6.4 million in 2014, an increase of approximately $1.2 million or 19%. Because the Company conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period, the operations must be considered as a whole rather than on a line-by-line basis. The increased gross profit in the current year reflects the vagaries of the timing of asset liquidation transactions. It also reflects the acquisition of NLEX, which was responsible for $3.1 million of the year to date asset liquidation gross profit in 2015 compared to $1.1 million for the period from acquisition (May 31, 2014) through September 30, 2014.

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The Company recorded a $2.7 million real estate inventory write-down charge during the nine months ended September 30, 2015. No charge was taken in the comparable 2014 period. The write-down represented a net realizable value adjustment to the carrying value of the Company’s real estate inventory.

Selling, general and administrative expense, including expenses paid to related parties, was $9.0 million during the nine months ended September 30, 2015, compared to $7.5 million during the same period in 2014, an increase of approximately $1.5 million or 20%. Selling, general and administrative expenses increased overall primarily due to the inclusion of NLEX expenses of $1.9 million in 2015 compared to $0.8 million in the comparative period in 2014.

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

The increases in insurance, occupancy, travel and entertainment, and advertising and promotion expense are primarily due to the inclusion of NLEX expenses for the entire nine months in 2015, as compared to only four months in 2014. The decreases in legal and accounting expense are primarily due to the inclusion, in 2014 only, of expenses related to the acquisition of NLEX. The decrease in stock-based compensation is primarily the result of awards becoming fully vested during the 2015.

Depreciation and amortization expense was $0.5 million in 2015 compared to $0.4 million in 2014, and consisted almost entirely of amortization expense related to intangible assets. The increase in 2015 was due to the inclusion of amortization of the NLEX intangible assets acquired in the second quarter of 2014. In both years the depreciation of property and equipment was not material.

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Non-GAAP Financial Measure - Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

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

We use the non-GAAP financial measure “EBITDA” in assessing the Company’s results. Additionally, we use an alternative measure, “Adjusted EBITDA,” to further reconcile from the standard definition to an amount management believes is a more appropriate metric for the Company. We define Adjusted EBITDA as net loss plus interest expense, provision for income taxes, stock-based compensation, inventory write-downs, depreciation and amortization. We believe that Adjusted EBITDA is relevant and useful supplemental information for our investors. Management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete understanding of the factors and trends affecting the Company than could be obtained absent these disclosures. Management uses Adjusted EBITDA to make operating and strategic decisions and to evaluate the Company’s performance. We have disclosed this non-GAAP financial measure so that our investors have the same financial data that management uses, with the intention of assisting investors to make comparisons to our historical operating results and analyze our underlying performance. Management believes that Adjusted EBITDA is a useful supplemental tool to evaluate the underlying operating performance of the Company on an ongoing basis. Our use of Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the quarterly financial information, below, which reconciles our GAAP reported net loss to Adjusted EBITDA for the periods presented (in thousands).

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary exposure to market risk is limited to interest rate and foreign exchange rate sensitivity, which is affected by changes in the general level of interest rates and foreign exchange rates. Due to the fact that our cash is deposited with major financial institutions in non-interest bearing accounts, we believe that we are not subject to any material interest rate risk as it relates to interest income. As to interest expense, we have one debt instrument that has a variable interest rate. The Counsel Loan bears interest at a rate per annum equal to the lesser of the WSJ prime rate + 2.0%, or the maximum rate allowable by law. Assuming that the Counsel Loan amount at September 30, 2015 was constant during the next twelve-month period, the impact of a one percent increase in the interest rate would be an increase in interest expense of approximately $17,000 for that twelve-month period. We do not believe that, in the near term, we are subject to material interest rate risk on our debt. There have been no material changes to the interest rate risks since December 31, 2014.

We did not have any foreign currency hedges or other derivative financial instruments as of September 30, 2015. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Although our operations are conducted primarily in the United States we do conduct some asset liquidation services in foreign countries and sometimes use foreign currencies to conduct those services. Thus we are occasionally subject to foreign currency exchange rate risk. Management monitors operations and will act as required to minimize this risk. There have been no material changes to the foreign currency risks since December 31, 2014.

Item 4. Controls and Procedures.

As of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief 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 Commission’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.

Further, there were no changes in our internal control over financial reporting during the third fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 31, 2015.

Item 1A. Risk Factors

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits. (a) Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

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