What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-12 compared with 2021-05-13 · 82 added, 70 removed, 199 unchanged (43% of the section changed)

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The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of Heritage Global Inc.

(together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three month periods ended March 31, 2021 and 2020, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2020 (the “Form 10-K”).

(together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three and six month periods ended June 30, 2021 and 2020, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2021 (the “Form 10-K”).

Forward Looking Information

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In 2019, the Company formed Heritage Global Capital LLC (“HGC”), a wholly-owned subsidiary of HGI, in order to provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

The organization chart below outlines our basic domestic corp orate structure as of March 31, 2021 .

The organization chart below outlines our basic domestic corp orate structure as of June 30 , 2021 .

Full service, global auction, appraisal and asset advisory company.

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Specialty financing solutions for charged-off and nonperforming asset portfolios.

The spread of the novel coronavirus (“COVID-19”) had a minor negative impact on our 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, we do not believe the COVID-19 pandemic will have material negative impacts on our financial performance as our asset liquidation business is highly concentrated in distressed and surplus assets and we expect 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 novel coronavirus (“COVID-19”) pandemic had a negative impact on our performance during the first and second 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, and subject to the caveat below, we do not believe the COVID-19 pandemic will have material negative impacts on our financial performance, as our asset liquidation business is highly concentrated in distressed and surplus assets and we 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.

We believe 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, we expect that the COVID-19 pandemic will have the following positive impacts on our business:

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

Further, when stimulus payments conclude, we expect that the COVID-19 pandemic will have the following positive impacts:

• 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;

• increased funding opportunities for HGC as lenders begin to increase loan volume while loosening underwriting standards, which will subsequently increase loans available to debt buyers of charged-off accounts;

• 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 our business could be offset, at least in part, by negative impacts on certain of our 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 delayed revenues depending on the scope and magnitude of such policies.

A new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread in the United States and across the globe.

Further surges in COVID-19 infection rates could result in the continuation of stimulus payments and the implementation of additional credit policies impacting debt sales that may result in delayed revenues depending on the scope and magnitude of such policies.

Asset liquidation

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Our asset liquidation business consists primarily of the auction, appraisal and asset advisory services provided by our Industrial Assets division and the accounts receivable brokerage specialty financing services provided by our Financials Assets division, each of which is further described below.

Our asset liquidation business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt.

Our asset liquidation business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, and distressed debt.

The market for these services and assets is highly fragmented.

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We believe we have diversified business lines serving the financial and industrial asset liquidation market.

We have multiple revenue streams in our brokerage and principal based auction services, advisory services and secured lending services.

We have multiple revenue streams in our brokerage and principal based auction services, advisory services and

secured lending services.

Further, our business is event-driven and we have repeat, forward-flow contracts in place with industry leading customers.

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Our President and Chief Executive Officer, Ross Dove, is a third-generation auctioneer and a pioneering innovator in applying technology to the asset liquidation industry.

Dove began his career in the auction business over thirty years ago, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008.

Dove has many decades of experience in the auction business, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008.

In addition, our senior management team has deep domain expertise in both industrial asset and financial asset transactions.

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In addition, we plan to add post-sale initiatives, making our services more attractive to our customers as compared to our competitors.

We expect that our income from secured lending will consist of upfront fees, interest income, monthly monitoring fees and backend profit share.

Through HGC, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

Since the inception of HGC in 2019, we have funded $23.6 million in total loans to investors by both self-funded loans and in partnership with our senior lenders.

Our portion of the total loans funded since inception was $8.7 million.

Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share.

In general, we expect to earn an annual rate of return on our share of notes receivable outstanding of approximately 20% or more based on established terms of the loans funded and performance of collections.

Our management team has decades of domain expertise with the ability to leverage extensive funding activity and widespread industry relationships.

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

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

There have been no changes to these policies in the six months ended June 30, 2021.

Management’s Discussion of Financial Condition

Liquidity and Capital Resources

We had working capital of $13.2 million and $13.0 million at March 31, 2021 and December 31, 2020, respectively.

We had working capital of $12.5 million and $13.0 million at June 30, 2021 and December 31, 2020, respectively.

On October 6, 2020, we completed a public offering (the “2020 Public Offering”) of 5,462,500 shares of our common stock, at a public offering price of $1.75 per share, which included a full exercise of the underwriters’ option to purchase 712,500 additional shares of common stock from us.

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We intend and continue to use the net proceeds to provide additional funds for general corporate purposes, which may include, without limitation, the expansion of the businesses of HGC and HGP, working capital and growth capital.

Our current assets a s of March 31, 2021 de creased to $20.7 million compared to $27.0 million a s of December 31, 20 20 primarily due to de creased cash as a result of cash used in operating activities during the three months ended March 31, 2021 .

Our current liabilities a s of March 31, 2021 de creased to $7.5 million compared to $14.0 million a s of D ecember 31, 20 20 primarily due to the settlement of auction liabilities for certain auctions held in the fourth quarter of 2020 .

During the three months ended March 31, 2021, our primary source of cash was the cash on hand plus the cash provided by our asset liquidation business.

Cash disbursements during the three months ended March 31, 2021 consisted primarily of lending activity of $2.5 million under HGC, payment of operating expenses, and settlement of auction liabilities.

We believe we can fund our operations and our debt service obligations during 2021 and beyond through a combination of cash flows from our on-going asset liquidation operations, proceeds from the 2020 Public Offering, and proceeds from our Credit Facility.

Our current assets as of June 30, 2021 decreased to $22.0 million compared to $27.0 million as of December 31, 2020 primarily due to decreased cash as a result of cash used in operating activities during the six months ended June 30, 2021.

Our current liabilities as of June 30, 2021 decreased to $9.4 million compared to $14.0 million as of December 31, 2020 primarily due to the settlement of auction liabilities for certain auctions held in the fourth quarter of 2020.

During the six months ended June 30, 2021, our primary source of cash was the cash on hand plus the cash provided by our asset liquidation business.

Cash disbursements during the six months ended June 30, 2021 consisted primarily of lending activity of $4.8 million under HGC, payment of operating expenses, settlement of auction liabilities and investments in equity method investments.

We believe we can fund our operations and our debt service obligations for at least 12 months from the date of filing this quarterly report through a combination of cash flows from our on-going asset liquidation operations, proceeds from the 2020 Public Offering, and draws on our 2021 Credit Facility, as needed.

Our indebtedness consists of any amounts borrowed under our 2021 Credit Facility.

On February 10, 2020, we 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 was subsequently amended on March 3, 2021.

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

On May 11, 2021, the Company entered into a promissory note, business loan agreement, commercial security agreement and pledge agreement with C3bank, National Association (the “2021 Credit Facility”) for a $10.0 million revolving line of credit , which replaced the 2020 Credit Facility.

The 2021 Credit Facility has a maturity date of May 11, 2023.

We are permitted to use the proceeds from the 2021 Credit Facility solely for our business operations.

As of March 31, 2021, we had an outstanding balance of zero on the Credit Facility.

As described more fully in Part II, Item 5.

“ Other Information ,” 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.

We had no outstanding borrowings under the 2021 Credit Facility as of June 30, 2021 .

Ownership Structure and Capital Resources

As of March 31, 2021, the Company had stockholders’ equity of $30.9 million, as compared to $29.9 million as of December 31, 2020.

On February 10, 2020, the Company entered into our 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.

We had no outstanding borrowings under the Credit Facility as of March 31, 2021.

As described more fully in Note 14 to the condensed consolidated financial statements, on May 11, 2021, the Company entered into a New Credit Facility for a $10.0 million revolving line of credit, which terminated the Credit Facility.

As of June 30, 2021, the Company had stockholders’ equity of $30.4 million, as compared to $29.9 million as of December 31, 2020.

On May 11, 2021, the Company entered into a promissory note, business loan agreement, commercial security agreement and pledge agreement with C3bank, National Association for a $10.0 million revolving line of credit , which replaced the 2020 Credit Facility.

The 2021 Credit Facility has a maturity date of May 11, 2023.

We had no outstanding borrowings under the 2021 Credit Facility as of June 30, 2021.

On October 6, 2020, the Company completed the 2020 Public Offering of an aggregate of 5,462,500 shares of the Company’s common stock, which included 712,500 shares of common stock sold pursuant to the full exercise of the underwriter’s option to purchase additional shares.

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Cash Position and Cash Flows

Cash and cash equivalents as of March 31, 2021 were $15.9 million as compared to $23.4 million as of December 31, 2020, a decrease of approximately $7.5 million.

Cash and cash equivalents as of June 30, 2021 were $17.5 million as compared to $23.4 million as of December 31, 2020, a decrease of approximately $5.9 million.

Cash used in operating activities.

Cash used in operations was $5.8 million during the three months ended March 31, 2021 as compared to $0.1 million during the same period in 2020.

The approximate $5.7 million increase in cash used in operations was primarily attributable to a change of $6.7 million in operating assets and liabilities during the three months ended March 31, 2021 as compared to the same period in 2020.

The amount was partially offset by a decrease in cash used in operations due to a change in net income adjusted for noncash items, which was $1.0 million higher during the three months ended March 31, 2021 as compared to the same period in 2020.

The significant changes in operating assets and liabilities during the three months ended March 31, 2021 as compared to the same period in 2020 are primarily due to the nature of our operations.

Cash used in operations was $4.3 million during the six months ended June 30, 2021 as compared to $0.8 million during the same period in 2020.

The approximate $3.5 million increase in cash used in operations was attributable to a change of $3.8 million in operating assets and liabilities during the six months ended June 30, 2021 as compared to the same period in 2020.

The amount was offset due to a change in net income adjusted for noncash items, which was $0.3 million higher during the six months ended June 30, 2021 as compared to the same period in 2020.

The significant changes in operating assets and liabilities during the six months ended June 30, 2021 as compared to the same period in 2020 are primarily due to the nature of our operations.

We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination thereof.

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Cash (used in) provided by investing activities.

Cash used in investing activities during the three months ended March 31, 2021 was $1.6 million compared to cash provided by investing activities of $0.6 million during the same period in 2020 .

The approximate $2.2 million change was primarily attributable to approximately $4.0 million cash received on transfer of notes receivable to partners in the three months ended March 31, 2020, which was not recurring in the same period in 2021.

The amount was partially offset by a decrease in the net cash used in investments in notes receivable in excess of payments received on notes receivable of approximately $1.6 million.

Cash used in investing activities during the six months ended June 30, 2021 was $0.8 million compared to cash provided by investing activities of $0.5 million during the same period in 2020 .

The approximate $1.3 million change was primarily attributable to approximately $5.7 million cash received on transfer of notes receivable to partners and payments received on notes receivable in the six months ended June 30, 2020 compared to $4.5 million in the same period in 2021.

Cash used in financing activities.

Cash used in financing activities was $0.1 million during the three months ended March 31, 2021 and 2020.

Financing activities during the three months ended March 31, 2021 consisted primarily of payments of tax withholdings related to cashless exercises of stock option awards, in excess of proceeds from issuance of common stock related to standard exercises of stock option awards.

Cash used in financing activities was $0.8 million during the six months ended June 30, 2021 compared to cash used in financing activities of $0.2 million during the six months ended June 30, 2020.

Financing activities during the six months ended June 30, 2021 consisted primarily of payments of tax withholdings related to cashless exercises of stock option awards, in excess of proceeds from issuance of common stock related to standard exercises of stock option awards.

Financing activities during the same period in 2020 consisted of draws on the 2020 Credit Facility of $5.6 million and repayments of third party loans of $5.8 million (including $5.6 million on the 2020 Credit Facility).

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The loan and lease obligations are fully described in the notes to the financial statements included in our Form 10-K.

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 a commencement date of April 1, 2021 and 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 March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”).

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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.

West received 25,000 shares of the Company’s restricted 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.

West breaches the terms of the Separation Agreement.

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Management’s Discussion of Results of Operations

The following table sets out the Company’s condensed consolidated results of operations for the three months ended March 31, 2021 and 2020 (dollars in thousands).

Three Months Ended March 31,

The following table sets out the Company’s condensed consolidated results of operations for the three and six months ended June 30, 2021 and 2020 (dollars in thousands).

Three Months Ended June 30,

Six Months Ended June 30,

Services revenue

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Interest and other expense, net

Income before income tax expense

Income tax expense

Income before income tax benefit

Income tax benefit

Our asset liquidation business model has several components:

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Our reportable segments consist of the Industrial Asset Division and Financial Assets Division.

Our Industrial Assets Division advises enterprise and financial customers on the sale of

industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale.

Our Financial Assets D ivision 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.

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.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Industrial Assets Division:

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Net operating income

Three-Month Period Ended March 31, 2021 Compared to Three-Month Period Ended March 31, 2020

Revenues and cost of revenues – Revenues were $7.1 million during the three months ended March 31, 2021 compared to $4.2 million during the same period in 2020.

Costs of services revenue and asset sales were $2.0 million during the three months ended March 31, 2021 compared to $0.6 million during the same period in 2020.

The gross profit of these items was $5.1 million during the three months ended March 31, 2021 compared to $3.7 million during the same period in 2020, an increase of approximately $1.4 million, or approximately 38%.

The increased gross profit in the first quarter of 2021 reflects the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $4.0 million during the three months ended March 31, 2021 and $3.5 million during the same period in 2020.

Significant components of selling, general and administrative expense for the three months ended March 31, 2021 and March 31, 2020 are shown below (dollars in thousands):

Three Months Ended March 31,

Three-Month Period Ended June 30, 2021 Compared to Three-Month Period Ended June 30, 2020

Revenues and cost of revenues – Revenues were $5.2 million during the three months ended June 30, 2021 compared to $6.1 million during the same period in 2020.

Costs of services revenue and asset sales were $1.3 million during the three months ended June 30, 2021 compared to $1.5 million during the same period in 2020.

The gross profit of these items was $3.8 million during the three months ended June 30, 2021 compared to $4.6 million during the same period in 2020, a decrease of approximately $0.8 million, or approximately 17%.

The decreased gross profit in the second quarter of 2021 reflects the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $3.7 million during the three months ended June 30, 2021 and June 30, 2020.

Significant components of selling, general and administrative expense for the three months ended June 30, 2021 and June 30, 2020 are shown below (dollars in thousands):

Three Months Ended June 30,

Stock-based compensation

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Total selling, general & administrative expense

As compared to the first quarter of 2020, there was an increase in selling, general and administrative expense during the first quarter of 2021 due to increased compensation expense within our HGI and HGP divisions as a result of improved financial performance and a one-time expense related to the Separation Agreement.

This increase was offset by decreased compensation expense within our NLEX division as a result of declined financial performance, and decreased travel expense as a result of travel restrictions related to the COVID-19 pandemic.

Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended March 31, 2021 and the same period in 2020, which consisted primarily of amortization expense related to intangible assets.

Although our total selling, general and administrative expense remained consistent during the three months ended June 30, 2021 compared to the same period in 2020, the Company incurred increased legal expense due to our annual shareholder meeting, offset by decreased compensation expense based on declined performance in our NLEX and HGP divisions.

Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended June 30, 2021 and the same period in 2020, which consisted primarily of amortization expense related to intangible assets.

Six -Month Period Ended June 30, 2021 Compared to Six -Month Period Ended June 30, 2020

Revenues and cost of revenues – Revenues were $12.3 million during the six months ended June 30, 2021 compared to $10.4 million during the same period in 2020.

Costs of services revenue and asset sales were $3.3 million during the six months ended June 30, 2021 compared to $2.1 million during the same period in 2020.

The gross profit of these items was $9.0 million during the six months ended June 30, 2021 compared to $8.3 million during the same period in 2020, an increase of approximately $0.7 million, or approximately 8%.

The increased gross profit in the current year reflects the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $7.6 million during the six months ended June 30, 2021 and $7.1 million during the same period in 2020.

Six Months Ended June 30,

Stock-based compensation

Board of Directors fees

Accounting, tax and legal professional fees

Travel and entertainment

Advertising and promotion

Information technology support

Total selling, general & administrative expense

As compared to the six months ended June 30, 2020, there was an increase in selling, general and administrative expense during the six months ended June 30, 2021 due to increased compensation expense within our HGI and HGP divisions as a result of improved financial performance and a one-time expense related to the Separation Agreement.

This increase was partially offset by decreased compensation expense within our NLEX division as a result of declined financial performance, and decreased travel expense as a result of travel restrictions related to the COVID-19 pandemic.

Depreciation and amortization expense – Depreciation and amortization expense was $0.2 million during the six months ended June 30, 2021 and the same period in 2020, which consisted primarily of amortization expense related to intangible assets.

Key Performance Indicators

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Management believes that the presentation of EBITDA and Adjusted EBITDA, when considered together with our GAAP financial statements and the reconciliation to the most directly comparable GAAP financial measure, is useful in providing investors a more complete understanding of the factors and trends affecting the underlying performance of the Company on a historical and ongoing basis.

Our use of EBITDA and Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure.

Our use of EBITDA and Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for,

or superior to, any GAAP financial measure.

You should carefully evaluate the financial information below, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands).

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Depreciation and amortization

Interest and other expense, net

Income tax expense

Income tax benefit

Management add back:

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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 2. Management’s Discussion and Analysis