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What changed 10-Q

Item 1. Financial Statements

2021-05-13 compared with 2020-11-09 · 173 added, 194 removed, 233 unchanged (61% of the section changed)

3 unchanged sentences

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

September 30, 2020

March 31, 2021

December 31, 2020

6 unchanged sentences

Total current assets

Property and equipment, net

Non-current portion of notes receivable, net

1 unchanged sentence

Right-of-use assets

Identifiable intangible assets, net

Property and equipment, net

Intangible assets, net

Deferred tax assets

2 unchanged sentences

Accounts payable and accrued liabilities

Current portion of debt

Current portion of lease liabilities

Total current liabilities

Non-current portion of debt

Non-current portion of lease liabilities

Other long-term liabilities

Total liabilities

1 unchanged sentence

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

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

outstanding 568 shares of Series N as of March 31, 2021 and December 31, 2020

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

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

and outstanding 35,647,477 shares as of March 31, 2021 and 35,281,183 as of

December 31, 2020

1 unchanged sentence

Accumulated deficit

Accumulated other comprehensive loss

Total stockholders’ equity

4 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Services revenue

9 unchanged sentences

Interest and other expense, net

Income before income tax expense (benefit)

Income tax expense (benefit)

Income before income tax expense

Income tax expense

Weighted average common shares outstanding – basic

8 unchanged sentences

comprehensive

Balance at December 31, 2019

Issuance of common stock from stock option awards

Stock-based compensation expense

Balance at March 31, 2020

Issuance of common stock from stock option awards

Stock-based compensation expense

Balance at June 30, 2020

Balance as of December 31, 2020

Issuance of common stock from stock option awards

Issuance of common stock

Stock-based compensation expense

Balance at September 30, 2020

Balance as of March 31, 2021

Preferred stock

comprehensive

Balance at December 31, 2018

Stock-based compensation expense

Balance at March 31, 2019

Stock-based compensation expense

Balance at June 30, 2019

Balance as of December 31, 2019

Issuance of common stock from stock option awards

Stock-based compensation expense

Balance at September 30, 2019

Balance as of March 31, 2020

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

2 unchanged sentences

(In thousands of US dollars)

Nine Months Ended September 30,

Cash flows provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating

Cash flows used in operating activities:

Adjustments to reconcile net income to net cash used in operating

Amortization of deferred issuance costs and fees

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Accounts receivable

Lease liabilities

Inventory – equipment

Accounts payable and accrued liabilities

Other liabilities

Net cash provided by operating activities

Cash flows provided by (used in) investing activities:

Purchase of property and equipment

Investment in equity method investments

Cash distributions from equity method investments

Lease liabilities

Net cash used in operating activities

Cash flows (used in) provided by investing activities:

Investment in notes receivable

1 unchanged sentence

Cash received on transfer of notes receivable to partners

Net cash provided by (used in) investing activities

Investment in equity method investments

Cash distributions from equity method investments

Purchase of property and equipment

Net cash (used in) provided by investing activities

Cash flows used in financing activities:

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

Repayment of debt payable to third party

Proceeds from issuance of common stock from stock option awards

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

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents as of beginning of period

Cash and cash equivalents as of end of period

Supplemental cash flow information:

1 unchanged sentence

Cash paid for interest

Issuance of common stock for services rendered

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

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All significant intercompany accounts and transactions have been eliminated upon consolidation.

The Company’s sole operating segment is its asset liquidation business.

The Company provides an array of value-added financial and capital asset solutions:

The Company began its asset liquidation operations in 2009 with the establishment of HG LLC.

The business was subsequently expanded by the acquisitions of Equity Partners, HGP and NLEX in 2011, 2012 and 2014, respectively, and the creation of HGC in 2019.

As a result, HGI is positioned to provide an array of value-added capital and financial asset solutions:

auction and appraisal services, traditional asset disposition sales, and specialty financing solutions.

The Company’s reportable segments consist of the Industrial Assets Division and Financial Assets Division.

The Company has prepared the condensed consolidated interim financial statements included herein pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).

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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, 2020, filed with the SEC on March 8, 2021 (the “Form 10-K”).

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 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 results of operations for the three month period ended March 31, 2021 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2021.

The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated balance sheet as of December 31, 2020, 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 performance during the first quarter of 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales, and a delay in the sale of certain assets.

Going forward, the Company does not believe the COVID-19 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 and fee based 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.

• continued increase in demand for HGP’s online auctions as a result of ongoing social distancing requirements in connection with the COVID-19 pandemic;

• increased activity for NLEX and HGC due to expanding volumes of nonperforming and charged-off consumer loans;

• increased funding opportunities for HGC due to tightening underwriting standards at conventional lenders;

• incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets.

However, positive expected impacts of the COVID-19 pandemic on the Company could be offset, at least in part, by negative impacts on certain of its business units relying on nonperforming and charged-off consumer loans.

Any continuation of stimulus

payments and additional credit policies impacting debt sales may result in de layed revenues depending on the scope and magnitude of such policies.

Note 2 – Summary of Significant Accounting Policies

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(1) an agreement exists between two or more parties that creates enforceable rights and obligations, (2) the performance obligations are clearly identified, (3) the transaction price has been determined, (4) the transaction price has been properly allocated to each performance obligation, and (5) the entity satisfies a performance obligation by transferring a promised good or service to a customer for each of the entities.

All services and asset sales revenue from contracts with customers are considered to be one reporting segment — the asset liquidation business.

Although the Company provides various services within the asset liquidation business, it does not disaggregate revenue streams further than that in its statement of income, services revenue and asset sales.

All services and asset sales revenue from contracts with customers is considered to be within the asset liquidation business, which consists of two reportable segments, the Industrial Assets Division and the Financial Assets Division.

Generally, revenue is recognized in the asset liquidation business at the point in time in which the performance obligation has been satisfied and full consideration is received.

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 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;

however, revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected.

Services revenue recognized over a period of time is not material in comparison to the Company’s total revenues (less than 1% of total revenues for the three month period ended March 31, 2021) 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 March 31, 2021, the deferred revenue balance was approximately $21,000.

Revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected;

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

The Company does not record a “contract asset” for partially satisfied performance obligations.

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For these transactions, in which the Company’s ownership share meets the criteria for the equity method investments under ASC 323, the Company does not record asset liquidation revenue or expense.

Instead, the Company’s proportionate share of the net income (loss) is reported as earnings of equity method investments.

Instead, the Company’s

proportionate share of the net income (loss) is reported as earnings of equity method investments.

In general, the Joint Ventures apply the same revenue recognition and other accounting policies as the Company.

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

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.

Fees collected in relation to the issuance of loans, which are included within services revenue, include 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.

The interest method is used to arrive at a periodic interest cost (including amortization) that will represent a level effective rate on the sum of the face amount of the debt and (plus or minus) the unamortized premium or discount and expense at the beginning of each period.

The monitoring fees and the backend profit share are considered a separate earnings process as compared to the origination fees and interest income.

Monitoring fees are recorded at the agreed upon rate, and at the moment in which payments are made by the borrower.

The backend profit share is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned.

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 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.

The portfolio monitoring fees and the backend profit share percentage are considered a separate earnings process as compared to the origination fees and interest income.

Portfolio monitoring fees are recorded at the agreed upon rate at the time in which payments are made by the borrower.

The backend profit share percentage is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned.

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

During the three months ended March 31, 2021 and 2020, the Company generated revenues specific to one customer representing 10% and 19% of total revenues, respectively.

The Company is obligated to make future payments under existing lease agreements that (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.

The Company determines whether a contract is a lease at the inception of the arrangement.

3 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 nine months ended September 30, 2020.

There have been no changes to these policies in the three months ended March 31, 2021.

Recent Accounting Pronouncements

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

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.

The main provisions of ASU 2017-04 eliminate the second step of the goodwill impairment test which previously was performed to determine the goodwill impairment loss for an entity by calculating the difference between the implied fair value of the entity’s goodwill and its carrying value.

Under ASU 2017-04, if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference.

The impairment charge will be limited to the amount of goodwill which is allocated to that reporting unit.

ASU 2017-04 applies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

ASU 2019-12 became effective January 1, 2021 and did not have a material impact on our consolidated financial statements.

5 unchanged sentences

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.

In March 2020, approximately $1.0 million of the notes receivable balance for certain loans was transferred to the partner.

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

In March 2020, approximately $3.0 million of the notes receivable balance for certain loans was transferred into the joint venture.

In May 2020, an additional $1.0 million of the notes receivable balance for certain loans was transferred into the joint venture.

Refer to Note 6 for further information.

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

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios which resulted in a total outstanding principal balance as of March 31, 2021 of approximately $3.6 million, net of unamortized deferred fees and costs on originated loans.

As of December 31, 2020, the Company’s notes receivable balance was $2.1 million, net of unamortized deferred fees and costs on originated loans.

The activity during the three months ended March 31, 2021 includes the issuance of additional notes of approximately $2.5 million, principal payments made by borrowers of approximately $0.9 million, and adjustments to our deferred fees and costs balance of approximately $0.1 million.

As of March 31, 2021, the Company has not recorded an allowance for credit losses related to notes receivable outstanding.

Note 4 – Stock-based 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 nine months ended September 30, 2020:

Outstanding at December 31, 2019

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.

As of March 31, 2021, the Company had four stock-based compensation plans, which are described more fully in Note 16 to the audited consolidated financial statements for the year ended December 31, 2020, contained in the Company’s Form 10-K.

During the three months ended March 31, 2021, the Company issued options to purchase 30,000 shares of common stock to certain of the Company’s employees and options to purchase 50,000 shares of common stock to the Company’s non-employee directors as part of their annual compensation.

The following summarizes the changes in common stock options for the three months ended March 31, 2021:

Outstanding as of December 31, 2020

Outstanding as of March 31, 2021

Options exercisable as of March 31, 2021

The Company recognized stock-based compensation expense related to common stock options of $0.1 million for the three months ended March 31, 2021.

As of March 31, 2021, there was approximately $0.7 million of unrecognized stock-based compensation expense related to unvested common stock options outstanding, which is expected to be recognized over a weighted average period of 3.2 years.

Restricted Stock

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There is no exercise price and no monetary payment required for receipt of restricted stock awards or the shares issued in settlement of the award.

Instead, consideration is furnished in the form of the participant’s services to the

Compensation cost for these awards is based on the fair value on the date of grant and recognized as compensatio n expense on a straight-line basis over the requisite service period.

Instead, consideration is furnished in the form of the participant’s services to the Company.

Compensation cost for these awards is based on the fair value of the shares of common stock on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period.

On June 1, 2018, the Company granted 600,000 shares of Company restricted common stock in connection with the Addenda to the Employment Agreements of David Ludwig and Tom Ludwig.

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 $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.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $0.43 per share, was $12,900 for the three months ended March 31, 2021.

The unrecognized stock-based compensation expense as of March 31, 2021 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 nine months ended September 30, 2020, Napier Park did not receive any warrants.

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) achieved prior to December 19, 2022 to which the Company may become entitled in connection with its equity joint venture with Napier Park.

During the fiscal year ended December 31, 2020 and the three months ended March 31, 2021, Napier Park did not receive any warrants.

Note 5 – Lessor Arrangement

On June 27, 2019, the Company, with certain partners, entered into agreements to lease, with a purchase option, a fully functional manufacturing building, including all machinery and equipment held within.

The assets under lease relate to the Company’s purchase, with certain partners, of a pharmaceutical campus in Huntsville, Alabama, which was finalized in 2018, as disclosed in the Company’s Form 10-K.

The assets under lease relate to the Company’s purchase, with certain partners, of a pharmaceutical campus in Huntsville, Alabama, as disclosed in the Company’s Form 10-K.

The lessee is obligated to make monthly lease payments over a ten-year period, totaling approximately $13.2 million for the real estate portion, and monthly lease payments over a six year period totaling approximately $9.7 million for the machinery and equipment.

The purchase option for both the real estate and machinery and equipment can be exercised at any time on or after December 1, 2019 and before May 31, 2021 for a total purchase price of $20.0 million;

of which $12.0 million and $8.0 million are allocated to the real estate and machinery and equipment, respectively.

The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments has been recognized as revenue and a lease receivable as of the effective date.

The real estate portion of the arrangement is held by CPFH LLC, the joint venture, and is accounted for under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the income statement.

The purchase option for both the real estate and machinery and equipment can be exercised at any time on or after December 1, 2019 and before May 31, 2021 for a total purchase price of $20.0 million, of which $12.0 million and $8.0 million are allocated to the real estate and machinery and equipment, respectively.

The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments was recognized as revenue and a lease receivable as of the effective date of the lease agreement.

The real estate portion of the lease arrangement is owned by CPFH LLC, the joint venture, and is accounted for under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the condensed consolidated income statement.

Refer to Note 6 for further information.

The machinery and equipment portion of the arrangement is jointly owned by all the partners of CPFH LLC, apart from the joint venture entity.

Therefore, the Company has derecognized the leased asset of approximately $0.9 million and recognized as revenue approximately $1.2 million, which represents the present value of future lease payments and a lease receivable included in the accounts receivable line item on the balance sheet, consistent and reflective of its business model for asset sales.

Therefore, the Company has derecognized the leased asset of approximately $0.9 million and recognized as revenue approximately $1.2 million, which represents the present value of future lease payments and a lease receivable included in the accounts receivable line item on the condensed consolidated balance sheet, consistent and reflective of its business model for asset sales.

The Company expects to recognize approximately $0.5 million in interest income prior to the exercise of the purchase option, which is the difference between the present value (at a 5.50% discount rate) and the undiscounted lease payments.

In November 2019, the partnership entered into agreements to lease a second building of the pharmaceutical campus in Huntsville, Alabama.

The lessee is obligated to make monthly lease payments over a ten year period commencing on March 1, 2020.

The Company has determined the lease to be classified as an operating lease held by CPFH LLC, the joint venture, and is accounted for under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the income statement.

Refer to Note 6 for further information.

Note 6 – Equity Method Investments

In November 2018, CPFH LLC was formed to purchase certain real estate assets among partners in a joint venture.

The Company’s share of the Joint Venture is 25%.

During 2019, the Company held a 50% share in the Oak Grove Asset Acquisitions LP, an entity formed for the execution of auction deals with Napier Park.

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 nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

In November 2018, CPFH LLC, of which the Company holds a 25% share, was formed to purchase certain real estate assets among partners in a joint venture.

In March 2019, Oak Grove Asset Acquisitions LP, of which the Company holds a 50% share, was formed for the execution of auction deals with Napier Park.

In March 2020, HGC Origination I LLC and HGC Funding I LLC were formed as joint ventures 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 earnings during the three months ended March 31, 2021 and 2020 (in thousands):

Oak Grove Asset Acquisitions LP

HGC Funding I LLC

HGC Funding I LLC and Origination I LLC

Total revenues

Operating income:

Oak Grove Asset Acquisitions LP

HGC Funding I LLC

Total net income

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,

HGC Funding I LLC and Origination I LLC

Total operating income

The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of March 31, 2021 and December 31, 2020 (in thousands):

Oak Grove Asset Acquisitions LP

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Weighted Average Shares Calculation:

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Diluted weighted average common shares outstanding

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.

For the three months ended March 31, 2021 and 2020, there were potential common shares of 30,000 and approximately 0.1 million, respectively, that were excluded from the computation of diluted EPS, as the inclusion of such common shares would have been anti-dilutive.

Note 8 – Leases

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

September 30,

Right-of-use assets:

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Edwardsville, IL

September 30,

Lease liabilities:

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

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)

For both three month periods ended March 31, 2021 and 2020, lease expense was approximately $0.1 million.

Undiscounted future minimum lease payments as of March 31, 2021 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2021 (remainder of year from April 1, 2021 to December 31, 2021)

Total undiscounted future minimum lease payments

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Identifiable intangible assets

The Company’s identifiable intangible assets are associated with its acquisitions of HGP in 2012 and NLEX in 2014, as shown in the table below (in thousands), and are amortized using the straight-line method over their remaining estimated useful lives of three to five years.

The Company’s tradename acquired as part of the acquisition of NLEX in 2014 has an indefinite life and therefore is not amortized.

The Company’s identifiable intangible assets are associated with its acquisitions of HGP in 2012 and NLEX in 2014, as shown in the table below (in thousands), and are amortized using the straight-line method over their remaining estimated useful lives of one to four years.

The Company’s tradename that was acquired as part of the acquisition of NLEX in 2014 has an indefinite life and therefore is not amortized.

Carrying Value

Carrying Value

September 30,

Amortized Intangible Assets

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Trade Name (NLEX)

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 nine months ended September 30, 2020.

September 30, 2020

Amortization expense during the three months ended March 31, 2021 and 2020 was $0.1 million.

As of March 31, 2021, the estimated amortization expense for the remainder of the current fiscal year and the next three fiscal years is shown below (in thousands):

2021 (remainder of year from April 1, 2021 to December 31, 2021)

The Company’s goodwill is related to its asset liquidation business and is comprised of goodwill from the acquisitions of HGP in 2012 and NLEX in 2014 , 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 three months ended March 31, 2021.

March 31, 2021

December 31, 2020

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Note 10 – Debt

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

September 30, 2020

December 31, 2019

Third party debt

Third party debt

The Company had no outstanding debt as of March 31, 2021 and December 31, 2020.

In September 2018, Heritage Global Inc.

entered into a secured promissory note and business loan agreement (the “2018 Credit Facility”) with First Choice Bank, for a $1.5 million revolving line of credit.

The 2018 Credit Facility had an initial maturity date of October 5, 2019 and replaced the Company’s prior related party secured promissory note, totaling $1.5 million.

Under the 2018 Credit Facility, the Company was permitted to use the proceeds of the loan solely for its business operations.

The 2018 Credit Facility accrued at a variable interest rate, which was equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.25% per annum, with a minimum interest charge of $100.00 per month.

The Company began paying interest on the 2018 Credit Facility in regular monthly payments in November 2018.

On March 29, 2019, Heritage Global Inc.

The 2018 Credit Facility had an initial maturity date of October 5, 2019 and replaced the Line of Credit.

The Company is permitted to use the proceeds of the loan solely for its business operations.

The 2018 Credit Facility accrues interest at a variable rate, which is equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.25% per annum, with a minimum interest charge of $100.00 per month.

In March 2019, Heritage Global Inc.

entered into the Change in Terms Agreement and the First Amendment to Business Loan Agreement (collectively, the “Amendments”), which amended the Company’s 2018 Credit Facility.

The Amendments, among other things, (i) increased the principal amount of the revolving line of credit to $3.0 million, (ii) extended the maturity date of the 2018 Credit Facility to April 5, 2020, and (iii) raised the floor interest rate under the 2018 Credit Facility from 5.25% to 5.50%.

On February 10, 2020, the Company entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit.

The Credit Facility matures on February 5, 2021 and replaced the 2018 Credit facility, as amended.

On February 10, 2020, the Company entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit, which replaced the 2018 Credit Facility.

The Credit Facility had an initial maturity date of February 5, 2021, which was extended to April 5, 2021 on February 5, 2021.

The Company is permitted to use the proceeds of the loan solely for its business operations.

The Credit Facility accrues at a variable interest rate, which is equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.50% per annum.

The Company will pay interest on the Credit Facility in regular monthly payments, beginning on March 5, 2020.

The Company may prepay the Credit Facility without penalty.

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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 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.

During the year ended December 31, 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 December 31, 2020.

During the three months ended March 31, 2021, the Company made no additional draws or repayments on the line of credit.

As described more fully in Note 14 — Subsequent Events, the Company entered into a New Credit Facility (as defined herein) for a $ 10.0 million revolving line of credit, which terminated the Credit Facility.

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 circumstances 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 note dated January 30, 2018 (the “Note”) from HG LLC in the amount of $1,260,000.

Pursuant to a guaranty dated January 30, 2018, HGI has guaranteed the obligations 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 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%.

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 interest 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 .

(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.

During 2020, the Company made the remaining scheduled payments on the Note totaling $455,000 resulting in a zero balance on the Note as of December 31, 2020.

Note 11 – Income Taxes

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).

As of March 31, 2021, the Company had aggregate tax net operating loss carry forwards of approximately $77.6 million ($61.6 million of unrestricted net operating tax losses and approximately $16.0 million of restricted net operating tax losses).

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

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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, 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.

Federal income tax rate to the income from operations before taxes primarily as a result of excess tax benefits from stock option exercises, offset by an increase in state tax expense of approximately $0.6 million due to California’s three-year net operating loss carryforward suspension that became effective on 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 September 30, 2020 and December 31, 2019.

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

The CARES Act contains numerous income tax provisions, including changes which may enable a greater potential for utilizing net operating loss carry forwards.

While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company's consolidated financial statements or related disclosures.

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 March 31, 2021 and December 31, 2020.

Note 12 – Related Party Transactions

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 $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.

On June 1, 2018, the Company amended its lease agreement with David Ludwig, whereby the term of the agreement extends to May 31, 2023 and the rent amounts were agreed upon for the new term.

Pursuant to an agreement reached between Mr.

Ross Dove and former board member Mr.

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

Dove’s 2019 bonus was paid to Mr.

Dove and the other half was paid directly to Mr.

DeMoss from the Company in consideration of Mr.

DeMoss’ ongoing strategic consulting services.

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.

As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by David Ludwig, the Company’s President of its Financial Assets Division and a member of its board of directors.

The total amount paid to the related party for the three month periods ended March 31, 2021 and 2020 was approximately $28,000 and $27,000, respectively, and is included in selling, general and administrative expenses in the condensed consolidated income statements.

All lease payments during the three months ended March 31, 2021 and the fiscal year ended December 31, 2020 were made to Mr.

On June 1, 2018, the Company amended its lease agreement with David Ludwig to extend the term of the lease to May 31, 2023 and to set the rent amounts for the new term.

On March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”).

Under the terms of the Separation Agreement, Mr.

West’s separation from the Company was effective on March 31, 2021.

West will receive a payment of $200,000 (payable in equal installments over six months) and monthly payments of $775 for up to a year to offset health coverage costs.

West received 25,000 shares of the Company’s common stock, which will be forfeited to the Company during the two years following the effective date of the Separation Agreement in the event Mr.

breaches the terms of the Separation A greement.

In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr.

West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations.

Note 13 – Segment Information

The Company reports 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 the Company’s reportable segments.

The Company manages its business primarily on differentiated revenue streams for services offered.

The Company’s reportable segments consist of the Industrial Asset Division and Financial Assets Division.

Our Industrial Assets Division advises enterprise and financial customers on the sale of industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale.

Our Financial Assets Division provides liquidity to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable.

Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit.

The Company evaluates the performance of its reportable segments based primarily on net operating income.

Further, the Company does not utilize segmented asset information to evaluate the performance of its reportable segments and does not include intercompany transfers between segments for management reporting purposes.

The following table sets forth certain financial information for the Company's reportable segments (in thousands):

Three Months Ended March 31,

Industrial Assets Division:

Net operating income

Financial Assets Division:

Net operating income

Corporate and Other:

Net operating loss

Consolidated:

Net operating income

Note 14 – Subsequent Events

The Company has evaluated events subsequent to March 31, 2021 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.

On May 11, 2021, the Company entered into a promissory note, business loan agreement, commercial security agreement and pledge agreement (the “ New Credit Facility ”) with C3bank, National Association for a $10.0 million revolving line of credit.

The New Credit Facility matures on May 11, 2023 and replaces the Credit Facility.

The Company is permitted to use the proceeds of the loan solely for its business operations.

The New Credit Facility accrues at a variable interest rate, which is based on the rate of interest last quoted by The Wall Street Journal as the “prime rate,” plus a margin of 1.70% (such rate not to be less than 4.950% per annum).

The Company will pay interest on the New Credit Facility in regular monthly payments, beginning on June 11, 2021.

The New Credit Facility also provides for a minimum fee, which is offset by interest payments.

The Company may prepay the New Credit Facility without penalty and may convert up to $5.0 million of revolving debt into term debt.

The Company is the borrower under the New Credit Facility.

The New Credit Facility is secured by a security interest in certain of the Company’s and its certain subsidiaries’ current and future tangible and intangible assets, inventory, chattel paper, accounts, equipment and general intangibles and a pledge of the equity of the direct and indirect subsidiaries of the Company.

The availability of additional draws under the New Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including default, insolvency or bankruptcy, material adverse change in financial

condition and any guarantor’s attempt to revise its guarantee.

The agreement governing the New Credit Facility also contains customary affirmative covenants regarding, among other things, the maintenance of records, maintenance of certain insurance coverage, compliance with governmental requirements and maintenance of several financial covenants.

The New 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.

On May 11, 2021, the Company terminated the Credit Facility as a result of entry into the New Credit Facility.

See Note 10—Debt for a description of the material terms and conditions of the Credit Facility.

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