What changed in this filing

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Item 1. Financial Statements

2020-11-09 compared with 2020-08-10 · 104 added, 78 removed, 323 unchanged (36% of the section changed)

3 unchanged sentences

(In thousands of US dollars, except share and per share amounts)

June 30, 2020

September 30, 2020

December 31, 2019

24 unchanged sentences

Preferred stock, $10.00 par value, authorized 10,000,000 shares;

outstanding 568 shares of Series N at June 30, 2020 and December 31, 2019

outstanding 568 shares of Series N at September 30, 2020 and December 31, 2019

Common stock, $0.01 par value, authorized 300,000,000 shares;

and outstanding 29,421,456 shares at June 30, 2020 and 29,339,101 at

and outstanding 29,724,037 shares at September 30, 2020 and 29,339,101 at

December 31, 2019

8 unchanged sentences

(In thousands of US dollars, except share and per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Services revenue

9 unchanged sentences

Interest and other expense, net

Income before income tax (benefit) expense

Income tax (benefit) expense

Income before income tax expense (benefit)

Income tax expense (benefit)

Weighted average common shares outstanding – basic

15 unchanged sentences

Balance at June 30, 2020

Issuance of common stock from stock option awards

Issuance of common stock

Stock-based compensation expense

Balance at September 30, 2020

Preferred stock

5 unchanged sentences

Balance at June 30, 2019

Stock-based compensation expense

Balance at September 30, 2019

The accompanying notes are an integral part of these condensed consolidated financial statements.

2 unchanged sentences

(In thousands of US dollars)

Six Months Ended June 30,

Cash flows (used in) provided by operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating

Nine Months Ended September 30,

Cash flows provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating

Amortization of deferred issuance costs and fees

9 unchanged sentences

Other liabilities

Net cash (used in) provided by operating activities

Net cash provided by operating activities

Cash flows provided by (used in) investing activities:

8 unchanged sentences

Proceeds from issuance of common stock from stock option awards

Payments of tax withholdings related to cashless exercises of stock option awards

Proceeds from debt payable to third party

1 unchanged sentence

Net cash used in financing activities

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

3 unchanged sentences

Cash paid for interest

Issuance of common stock for services rendered

The accompanying notes are an integral part of these condensed consolidated financial statements.

17 unchanged sentences

These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 9, 2020 (the “Form 10-K”).

The results of operations for the six month period ended June 30, 2020 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2020.

The results of operations for the nine month period ended September 30, 2020 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2020.

The accompanying condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated balance sheet at December 31, 2019, contained in the Company’s Form 10-K.

The spread of the novel coronavirus (“COVID-19”) had a minor negative impact on the Company’s first and second quarter performance resulting from evolving travel and work restrictions as well as a delay in the sale of certain assets.

Going forward, the Company does not believe COVID-19 and the recent developments surrounding the global pandemic will have material negative impacts on the Company’s financial performance as its asset liquidation business is highly concentrated in distressed and surplus assets and the Company expects that there will be an increased supply of distressed and surplus assets as a result of COVID-19 and any downward trends in the overall economy.

The Company believes that the continuing disruptions to the global supply chain, particularly those involving manufacturing and other capital assets, will further increase demand for U.S.-based surplus assets.

However, the Company cautions that for certain of its business units that rely on travel and field work, the continuation of travel and work restrictions may result in decreased revenues depending on the scope and duration of such restrictions.

The spread of the novel coronavirus (“COVID-19”) had a minor negative impact on the Company’s performance through September 30, 2020 resulting from evolving travel and work restrictions as well as a delay in the sale of certain assets.

Going forward, the Company does not believe COVID-19 and the recent developments surrounding the global pandemic will have material negative impacts on the Company’s financial performance as its asset liquidation business is highly concentrated in distressed and surplus assets and the Company expects that there will be an increased supply of distressed and surplus assets as a result of the COVID-19 pandemic and any downward trends in the overall economy, resulting in more potential for principal deals.

The Company believes that the continuing disruptions to the global supply chain, particularly those involving industrial assets, will further increase demand for U.S.-based surplus assets.

Further, the Company expects that the COVID-19 pandemic will have the following positive impacts:

• ongoing social distancing requirements in connection with the COVID-19 pandemic will result in increased demand for HGP’s online auct ions;

• rising charged-off consumer loan sales will result in expanding volumes for the Company’s Financial Assets division;

• tightening underwriting standards at conventional lenders will result in more funding opportunities for HGC;

• greater focus on collateral on bank balance sheets will result in incremental valuation opportunities for the Company’s valuation business.

However, positive expected impacts of the COVID-19 pandemic on the Company’s business could be offset, at least in part, by negative impacts on certain business units relying on travel and field work.

Any continuation of travel and work restrictions may result in decreased revenues depending on the scope and duration of such restrictions.

Note 2 – Summary of Significant Accounting Policies

3 unchanged sentences

Actual results could differ from those estimates.

Significant estimates include the assessment of collectability of revenue recognized, and the valuation of accounts receivable, inventory, other assets, right-of-use assets, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities, and stock-based compensation.

These estimates have the potential to significantly impact the Company’s 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.

10 unchanged sentences

The exception to recognition at a point in time occurs when certain contracts provide for advance payments recognized over a period of time.

Services revenue recognized over a period of time is not material in comparison to total revenues (0% of total revenues for the six month period ended June 30, 2020) and, therefore, not reported on a disaggregated basis.

Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and the Company’s “contract liability.” As of June 30, 2020, the deferred revenue balance was $5,500.

Services revenue recognized over a period of time is not material in comparison to total revenues (0% of total revenues for the nine month period ended September 30, 2020) and, therefore, not reported on a disaggregated basis.

Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and the Company’s “contract liability.” As of September 30, 2020, the deferred revenue balance was zero.

The Company records receivables related to asset liquidation in certain situations based on timing of payments for asset liquidation transactions held at the end of the reporting period;

8 unchanged sentences

In 2019, the Company began providing specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

Fees collected in relation to the issuance of loans, which are included within services revenue, includes loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

Fees collected i n relation to the issuance of loans , which are included within services revenue, includes loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

The loan origination fees are offset with any direct origination costs and are deferred upon issuance of the loan and amortized over the lives of the related loans, as an adjustment to interest income.

4 unchanged sentences

The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized, and the lack of historical precedence as this is a new business for the Company.

During the six months ended June 30, 2020 and 2019, the Company had generated revenues specific to one customer representing 15% and 12% of total revenues for the respective periods.

During the three months ended June 30, 2020 and 2019, the Company generated revenues specific to the same customer representing 12% and 11% of total revenues for the respective periods.

During the nine months ended September 30, 2020 and 2019, the Company generated revenues specific to one customer representing 12% of total revenues for each period.

During the three months ended September 30, 2020 and 2019, the Company generated revenues specific to the same customer representing 8% and 11% of total revenues for the respective periods.

The Company is obligated to make future payments under existing lease agreements which (1) specifically identify the asset, and (2) convey the right to control the use of the identified asset in exchange for consideration for a period of time.

4 unchanged sentences

The critical accounting policies used in the preparation of the Company’s audited consolidated financial statements are discussed in the Company’s Form 10-K.

There have been no changes to these policies in the six months ended June 30, 2020.

There have been no changes to these policies in the nine months ended September 30, 2020.

Recent Accounting Pronouncements

2 unchanged sentences

The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

We are currently evaluating the impact of the new guidance on our consolidated financial statements.

We anticipate that the impact will not be material to our consolidated financial statements.

In 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (“ASU 2017-04”), which simplifies the test for goodwill impairment.

9 unchanged sentences

We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Note 3 – Notes Rece ivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios which resulted in a total outstanding principal balance at June 30, 2020 of approximately $1.4 million, net of unamortized deferred fees and costs on originated loans.

At December 31, 2019 the Company’s notes receivable balance was $2.7 million.

The activity during the six months ended June 30, 2020 includes the issuance of additional notes of approximately $4.5 million, principal payments made by borrowers of approximately $0.7 million, adjustments to our deferred fees and costs balance of approximately $0.1 million, and the transfer of notes to partners as detailed below.

Note 3 – Notes Receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios which resulted in a total outstanding principal balance at September 30, 2020 of approximately $1.1 million, net of unamortized deferred fees and costs on originated loans.

At December 31, 2019 the Company’s notes receivable balance was $2.7 million, net of unamortized deferred fees and costs on originated loans.

The activity during the nine months ended September 30, 2020 includes the issuance of additional notes of approximately $4.5 million, principal payments made by borrowers of approximately $1.0 million, adjustments to our deferred fees and costs balance of approximately $0.1 million, and the transfer of notes to partners as detailed below.

In March 2020, the Company closed a $6.0 million receivables purchasing agreement with a partner, an alternative asset manager focused on asset-based lending transactions, for the purpose of funding a portion of loans to debt purchasing clients.

4 unchanged sentences

Refer to Note 6 for further information.

As of June 30, 2020, the Company has not recorded an allowance for credit losses related to notes receivable outstanding.

As of September 30, 2020, the Company has not recorded an allowance for credit losses related to notes receivable outstanding.

Note 4 – Stock-based Compensation

At June 30, 2020 the Company had four stock-based compensation plans, which are described more fully in Note 18 to the audited consolidated financial statements for the year ended December 31, 2019, contained in the Company’s Form 10-K.

During the six months ended June 30, 2020, the Company issued options to purchase 314,750 shares of common stock to certain of the Company’s employees, options to purchase 15,000 shares of common stock to an outside consultant, and options to purchase 60,000 shares of common stock to the Company’s non-employee directors as part of their annual compensation.

At September 30, 2020 the Company had four stock-based compensation plans, which are described more fully in Note 18 to the audited consolidated financial statements for the year ended December 31, 2019, contained in the Company’s Form 10-K.

During the nine months ended September 30, 2020, the Company issued options to purchase 344,750 shares of common stock to certain of the Company’s employees, options to purchase 15,000 shares of common stock to an outside consultant, and options to purchase 85,000 shares of common stock to the Company’s non-employee directors as part of their annual compensation.

During the same period, the Company cancelled options to purchase 187,025 shares of common stock as a result of employee resignations and natural expiration.

The following summarizes the changes in common stock options for the six months ended June 30, 2020:

The following summarizes the changes in common stock options for the nine months ended September 30, 2020:

Outstanding at December 31, 2019

Outstanding at June 30, 2020

Options exercisable at June 30, 2020

The Company recognized stock-based compensation expense related to stock options of $0.2 million for the six months ended June 30, 2020.

As of June 30, 2020, there is approximately $0.4 million of unrecognized stock-based compensation expense related to unvested option awards outstanding, which is expected to be recognized over a weighted average period of 3.0 years.

Outstanding at September 30, 2020

Options exercisable at September 30, 2020

The Company recognized stock-based compensation expense related to stock options of $0.3 million for the nine months ended September 30, 2020.

As of September 30, 2020, there is approximately $0.5 million of unrecognized stock-based compensation expense related to unvested option awards outstanding, which is expected to be recognized over a weighted average period of 3.1 years.

Restricted Stock

5 unchanged sentences

The shares are subject to certain restrictions on transfer and a right of repurchase over five years, ending May 31, 2023, and require a continued term of service to the Company.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $0.43 per share, was $25,800 for the six months ended June 30, 2020.

The unrecognized stock-based compensation expense as of June 30, 2020 was approximately $0.2 million.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $0.43 per share, was $38,700 for the nine months ended September 30, 2020.

The unrecognized stock-based compensation expense as of September 30, 2020 was approximately $0.1 million.

On March 19, 2019, the Company entered into a Warrant Agreement (the “Warrant Agreement”) with Napier Park Industrial Asset Acquisition LP, a Delaware limited partnership (“Napier Park”).

Pursuant to the Warrant Agreement, Napier Park is entitled to receive warrants to acquire shares of Company common stock with a fair market value of $71,368 for each $500,000 increment in excess of $2.5 million of Cumulative Gross Profit (as defined in the Warrant Agreement) to which the Company may become entitled in connection with its equity joint venture with Napier Park, achieved prior to December 19, 2022.

During 2019 and the six months ended June 30, 2020, Napier Park did not receive any warrants.

During 2019 and the nine months ended September 30, 2020, Napier Park did not receive any warrants.

Note 5 – Lessor Arrangement

19 unchanged sentences

In March 2020, the HGC Funding I LLC joint venture was formed with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients.

The table below details the Company’s joint venture revenues and net income during the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30,

The table below details the Company’s joint venture revenues and net income during the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

Oak Grove Asset Acquisitions LP

4 unchanged sentences

Total net income

The table below details the summarized components of assets and liabilities, as of June 30, 2020 and December 31, 2019, of the Company’s joint ventures at those dates (in thousands):

The table below details the summarized components of assets and liabilities, as of September 30, 2020 and December 31, 2019, of the Company’s joint ventures at those dates (in thousands):

September 30,

Oak Grove Asset Acquisitions LP

12 unchanged sentences

The table below shows the calculation of the shares used in computing diluted EPS.

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted Average Shares Calculation:

2 unchanged sentences

Diluted weighted average common shares outstanding

For the six months ended June 30, 2020 and 2019 there were potential common shares totaling approximately 0.2 million and 0.7 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

For the three months ended June 30, 2020 and 2019 there were potential common shares totaling approximately 0.2 million and 0.6 million, respectively, that were excluded.

For the nine months ended September 30, 2020 and 2019 there were potential common shares totaling approximately 0.1 million and 0.4 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

For the three months ended September 30, 2020 and 2019 there were potential common shares totaling approximately 0.1 million and 20,000, respectively, that were excluded.

Note 8 – Leases

4 unchanged sentences

The right-of-use assets and lease liabilities for each location are as follows (in thousands):

September 30,

Right-of-use assets:

1 unchanged sentence

Edwardsville, IL

September 30,

Lease liabilities:

6 unchanged sentences

Lease expense for these leases is recognized on a straight-line basis over the lease term.

For both six month periods ended June 30, 2020 and 2019, lease expense was approximately $0.3 million.

Undiscounted future minimum lease payments as of June 30, 2020 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2020 (remainder of year from July 1, 2020 to December 31, 2020)

For both nine month periods ended September 30, 2020 and 2019, lease expense was approximately $0.4 million.

Undiscounted future minimum lease payments as of September 30, 2020 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2020 (remainder of year from October 1, 2020 to December 31, 2020)

Total undiscounted future minimum lease payments

7 unchanged sentences

Carrying Value

September 30,

Amortized Intangible Assets

4 unchanged sentences

Trade Name (NLEX)

Amortization expense during each of the six months ended June 30, 2020 and 2019 was $0.1 million.

The estimated amortization expense as of June 30, 2020 during the remainder of the current fiscal year and the next four fiscal years is shown below (in thousands):

2020 (remainder of year from July 1, 2020 to December 31, 2020)

Amortization expense during each of the nine months ended September 30, 2020 and 2019 was $0.2 million.

The estimated amortization expense as of September 30, 2020 during the remainder of the current fiscal year and the next four fiscal years is shown below (in thousands):

2020 (remainder of year from October 1, 2020 to December 31, 2020)

The Company’s goodwill is related to its asset liquidation business and is comprised of goodwill from two acquisitions, as shown in the table below (in thousands).

There were no additions to goodwill and no impairment losses to the carrying amount of goodwill during the six months ended June 30, 2020.

June 30, 2020

There were no additions to goodwill and no impairment losses to the carrying amount of goodwill during the nine months ended September 30, 2020.

September 30, 2020

December 31, 2019

1 unchanged sentence

Note 10 – Debt

Outstanding debt at June 30, 2020 and December 31, 2019 is summarized as follows (in thousands):

June 30, 2020

Outstanding debt at September 30, 2020 and December 31, 2019 is summarized as follows (in thousands):

September 30, 2020

December 31, 2019

21 unchanged sentences

The Credit Facility contains certain customary financial covenants and negative covenants that, among other things, include restrictions on the Company’s ability to create, incur or assume indebtedness for borrowed money, including capital leases or to sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Company’s assets.

During the six months ended June 30, 2020, the Company drew on the line of credit for a total of $5.6 million and made repayments of principal totaling $5.6 million resulting in a zero balance as of June 30, 2020.

In January 2018, HG LLC , a wholly- owned subsidiary of HGI, settled a long-standing litigation matter that was commenced against the predecessor in interest of HG LLC.

The settlement, which also involved several other co-defendant parties, included a complete release of HG LLC’s predecessor in interest and its successors and affiliates by the plaintiffs from all claims arising from or relating to the facts and circu mstan ces underlying the litigation.

The portion of the settlement attributable to HG LLC’s predecessor in interest was paid on behalf of HG LLC by 54 Finance, LLC (“54 Finance”) (an affiliate of a co-defendant in the litigation) in consideration of a promi ssory n ote dated January 30, 2018 (the “Note”) from HG LLC in the amount of $1,260,000 .

Pursuant to a g uaranty dated January 30, 2018, HGI has guaranteed the obli gations of HG LLC under the Note, which are required to be paid in 36 equal installments of $3 5,000, with any remaining outstanding balance due and payable in full on January 30, 2021.

During the nine months ended September 30, 2020, the Company drew on the line of credit for a total of $5.6 million and made repayments of principal totaling $5.6 million resulting in a zero balance as of September 30, 2020.

In January 2018, HG LLC , a wholly- owned subsidiary of HGI, settled a long-standing litigation m atter that was commenced against the predecessor in interest of HG LLC.

The settlement, which also involved several other co-defendant parties, included a complete release of HG LLC’s predecessor in interest and its successors and affiliates by the plainti ffs from all claims arising from or relating to the facts and circumstan ces underlying the litigation.

The portion of the settlement attributable to HG LLC’s predecessor in interest was paid on behalf of HG LLC by 54 Finance, LLC (“54 Finance”) (an affiliate of a co-defendant in the litigation) in consideration of a promissory n ote dated January 30, 2018 (the “Note”) from HG LLC in the amount of $1,260,000 .

Pursuant to a g uaranty dated January 30, 2018, HGI h as guaranteed the obli gations of HG LLC under the Note, which are required to be paid in 36 equal installments of $35,000, with any remaining outstanding balance due and payable in full on January 30, 2021.

As of December 31, 2017, the Company accrued the present value of the Note based on the payment terms noted above and at an interest rate of 6.5%.

Upon the occurrenc e of any Event of Default , as defined below , in the sole discretion of 54 Finance, the outstanding principal balance of the Note will bear interest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 12%.

An “Event o f Default” means:

(a) any failure of HG LLC to pay when due any amount thereunder, when and as due, (b) any failure on the part of HG LLC to pay upon 54 Finance’s demand any fees, costs, expenses or other charges hereunder or otherwise due to HG LLC under the Note or the Guaranty, (c) any breach, failure or default under the Guaranty, (d) HG LLC or the Company repudiates or revokes, or purports to repudiate or revoke, any obligation under the Note or the Guaranty, or the obligation of the Company under the Guaranty is limited or terminated by operation of law or by the Company, or (e) HG LLC or the Company shall be or become insolvent, however defined, or admit in writing its inability to pay debts as they mature, or make a general assignment for the benefit of its creditors, or shall institute any bankruptcy, insolvency or similar proceeding under the laws of any jurisdiction, or shall take any action to authorize such proceeding.

D uring the six months ended June 30 , 2020 , th e Company made the scheduled paym ents on the Note totaling $ 210 ,000.

The outstanding balance on the Note as of June 30 , 2020 was $ 2 40 ,000 .

Upon the occurrence of any Event of Default , as defined below , in the sole discretion of 54 Finance, the outstanding principal balance of the Note will bear i nterest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 12%.

An “Event of Default” means:

(a) any failure of HG LLC to pay when due any amount thereunder, when and as due, (b) any failure on the part of HG LLC to pay upon 54 Finance’s demand any fees, costs, expenses or other charges hereunder or otherwise due to HG LLC under the Note or the Guaranty, (c) any breach, failure or default under the Guaranty, (d) HG LLC or the Company repudiates or revokes, or purport s to repudiate or revoke, any obligation under the Note or the Guaranty, or the obligation of the Company under the Guaranty is limited or terminated by operation of law or by the Company, or (e) HG LLC or the Company shall be or become insolvent, however defined, or admit in writing its inability to pay debts as they mature, or make a general assignment for the benefit of its creditors, or shall institute any bankruptcy, insolvency or similar proceeding under the laws of any jurisdiction, or shall take any action to authorize such proceeding.

D uring the nine months ended September 30 , 2020 , th e Company made the scheduled payments on the Note totaling $ 315 ,000.

The outstanding balance on the Note as of September 30 , 2020 was $ 138 ,000 .

Note 11 – Income Taxes

At June 30, 2020 the Company has aggregate tax net operating loss carry forwards of approximately $82.1 million ($61.6 million of unrestricted net operating tax losses and approximately $20.5 million of restricted net operating tax losses).

At September 30, 2020 the Company has aggregate tax net operating loss carry forwards of approximately $82.4 million ($61.6 million of unrestricted net operating tax losses and approximately $20.8 million of restricted net operating tax losses).

Substantially all of the net operating loss carry forwards expire between 2024 and 2037.

1 unchanged sentence

The reported tax expense varies from the amount that would be provided by applying the statutory U.S.

Federal income tax rate to the income from operations before taxes primarily as a result of the change in the deferred tax asset valuation allowance, offset by an increase in state tax expense of approximately $0.1 million due to California’s three-year net operating loss carryforward suspension effective June 29, 2020.

Federal income tax rate to the income from operations before taxes primarily as a result of the change in the deferred tax asset valuation allowance, excess tax benefits from stock option exercises, offset by an increase in state tax expense of approximately $0.1 million due to California’s three-year net operating loss carryforward suspension effective June 29, 2020.

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 cumulative losses and uncertainty with respect to future taxable income, the Company has provided a partial valuation allowance against its net deferred tax assets as of June 30, 2020 and December 31, 2019.

As of June 30, 2020, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred taxes of $1.3 million are realizable.

As a result the valuation allowance was reduced accordingly.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic.

3 unchanged sentences

As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig.

The total amount paid to the related party was approximately $55,000 for both six month periods ended June 30, 2020 and 2019, respectively, and is included in selling, general and administrative expenses in the condensed consolidated income statements.

The total amount paid to the related party was approximately $82,000 for both nine month periods ended September 30, 2020 and 2019, respectively, and is included in selling, general and administrative expenses in the condensed consolidated income statements.

All of the payments in both 2020 and 2019 were made to David Ludwig.

1 unchanged sentence

Pursuant to an agreement reached between Mr.

Dove and former board member Mr.

Ross Dove and former board member Mr.

Emmett DeMoss, and further approved by the remaining board members, one-half of Mr.

1 unchanged sentence

Dove and the other half was paid directly to Mr.

Emmett DeMoss from the Company in consideration of Mr.

DeMoss from the Company in consideration of Mr.

DeMoss’ ongoing strategic consulting services.

Note 13 – Subsequent Events

The Company has evaluated events subsequent to June 30, 2020 for potential recognition or disclosure in its condensed consolidated financial statements.

There have been no material subsequent events requiring recognition or disclosure in this Quarterly Report on Form 10-Q.

Not e 13 – Subsequent Events

The Company has evaluated events subsequent to September 30, 2020 for potential recognition or disclosure in its condensed consolidated financial statements.

There have been no material subsequent events requiring recognition or disclosure in this Quarterly Report on Form 10-Q, other than noted below.

On October 6, 2020, the Company completed an underwritten public offering (the “Offering”) of an aggregate of 5,462,500 shares of the Company’s common stock, $0.01 par value per share, which included 712,500 shares of common stock sold pursuant to the full exercise of the underwriter’s option to purchase additional shares resulting in net proceeds to the Company from the Offering, after deducting the underwriting discounts and commissions, of approximately $9.1 million.

At September 30, 2020 the Company had incurred approximately $1.2 million in prepaid costs directly associated with the public offering, of which approximately $0.6 million was associated with a non-cash common stock issuance for consulting services provided.

These costs temporarily increased our other current assets balance by $1.2 million at September 30, 2020 and will subsequently offset proceeds from the public offering within additional paid-in capital on the closing date of October 6, 2020.

On October 27, 2020, Heritage Global Partners, Inc.

(“ HGP ”), a wholly-owned subsidiary of the Company, entered into an agreement (the “ Lease ”) with Hayward FGHK Industrial, LLC (“ Landlord ”) pursuant to which HGP will lease 30,321 square feet of industrial space in Hayward, California from Landlord.

The Lease has an initial term of ninety (90) months, unless terminated earlier by either party pursuant to the terms of the Lease.

The Lease provides for an initial monthly base rent of $27,289, which increases on an annual basis to $33,562 per month in the final year.

In addition, HGP is obligated to pay its share of maintenance costs of common areas.

The Company is a guarantor of HGP’s obligations under the Lease including the payment of rent.

There is no material relationship between the Company, or any of its affiliates, and the landlord, or any of its affiliates, other than the contractual relationship under the Lease.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements