Item 1. Financial Statements
Item 1 – Financial Statements.
HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except share and per share amounts)
June 30, 2021
December 31, 2020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
17,525
$
23,385
Accounts receivable
2,514
1,496
Current portion of notes receivable, net
1,086
1,338
Inventory – equipment
161
235
Other current assets
676
498
Total current assets
21,962
26,952
Non-current portion of notes receivable, net
1,225
748
Equity method investments
2,893
2,402
Right-of-use assets
2,940
963
Property and equipment, net
108
130
Intangible assets, net
2,989
3,123
Goodwill
5,585
5,585
Deferred tax assets
4,933
4,402
Other assets
161
250
Total assets
$
42,796
$
44,555
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
$
8,834
$
13,609
Current portion of lease liabilities
494
380
Total current liabilities
9,328
13,989
Non-current portion of lease liabilities
2,485
623
Total liabilities
11,813
14,612
Stockholders’ equity:
Preferred stock, $ 10.00 par value, authorized 10,000,000 shares; issued and
outstanding 568 shares of Series N as of June 30, 2021 and December 31, 2020
6
6
Common stock, $ 0.01 par value, authorized 300,000,000 shares; issued
and outstanding 36,284,382 shares as of June 30, 2021 and 35,281,183 as of
December 31, 2020
363
353
Additional paid-in capital
292,811
293,400
Accumulated deficit
( 262,197
)
( 263,816
)
Total stockholders’ equity
30,983
29,943
Total liabilities and stockholders’ equity
$
42,796
$
44,555
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of US dollars, except share and per share amounts)
(unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
Revenues:
Services revenue
$
4,168
$
5,565
$
9,198
$
9,653
Asset sales
1,008
552
3,079
708
Total revenues
5,176
6,117
12,277
10,361
Operating costs and expenses:
Cost of services revenue
960
1,188
2,135
1,739
Cost of asset sales
375
330
1,195
368
Selling, general and administrative
3,671
3,666
7,640
7,138
Depreciation and amortization
98
90
189
180
Total operating costs and expenses
5,104
5,274
11,159
9,425
Earnings of equity method investments
1
181
1
182
Operating income
73
1,024
1,119
1,118
Interest and other expense, net
9
( 8
)
12
( 35
)
Income before income tax benefit
82
1,016
1,131
1,083
Income tax benefit
( 505
)
( 1,023
)
( 488
)
( 994
)
Net income
$
587
$
2,039
$
1,619
$
2,077
Weighted average common shares outstanding – basic
35,250,964
28,751,689
35,020,768
28,760,893
Weighted average common shares outstanding – diluted
36,972,415
30,961,261
36,611,234
30,630,713
Net income per share – basic
$
0.02
$
0.07
$
0.05
$
0.07
Net income per share – diluted
$
0.02
$
0.07
$
0.04
$
0.07
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands of US dollars, except share amounts)
(unaudited)
Additional
Accumulated
other
Preferred stock
Common stock
paid-in
Accumulated
comprehensive
Shares
Amount
Shares
Amount
capital
deficit
loss
Total
Balance as of December 31, 2020
568
$
6
35,281,183
$
353
$
293,400
$
( 263,816
)
$
—
$
29,943
Issuance of common stock from stock option awards
—
—
366,294
4
( 124
)
—
—
( 120
)
Stock-based compensation expense
—
—
—
—
67
—
—
67
Net income
—
—
—
—
—
1,032
—
1,032
Balance as of March 31, 2021
568
6
35,647,477
357
293,343
( 262,784
)
—
30,922
Issuance of common stock from stock option awards
—
—
611,905
6
( 676
)
—
—
( 670
)
Issuance of restricted common stock
—
—
25,000
—
76
—
—
76
Stock-based compensation expense
—
—
—
—
68
—
—
68
Net income
—
—
—
—
—
587
—
587
Balance at June 30, 2021
568
$
6
36,284,382
$
363
$
292,811
$
( 262,197
)
$
—
$
30,983
Additional
Accumulated
other
Preferred stock
Common stock
paid-in
Accumulated
comprehensive
Shares
Amount
Shares
Amount
capital
deficit
loss
Total
Balance as of December 31, 2019
568
$
6
29,339,101
$
293
$
285,099
$
( 273,474
)
$
( 77
)
$
11,847
Issuance of common stock from stock option awards
—
—
19,805
1
( 3
)
—
—
( 2
)
Stock-based compensation expense
—
—
—
—
75
—
—
75
Net income
—
—
—
—
—
38
—
38
Balance as of March 31, 2020
568
6
29,358,906
294
285,171
( 273,436
)
( 77
)
11,958
Issuance of common stock from stock option awards
—
—
62,550
1
29
—
—
30
Stock-based compensation expense
—
—
—
—
86
—
—
86
Net income
—
—
—
—
—
2,039
—
2,039
Balance at June 30, 2020
568
$
6
29,421,456
$
295
$
285,286
$
( 271,397
)
$
( 77
)
$
14,113
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars)
(unaudited)
Six Months Ended June 30,
2021
2020
Cash flows used in operating activities:
Net income
$
1,619
$
2,077
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization of deferred issuance costs and fees
31
48
Earnings of equity method investments
( 1
)
( 182
)
Noncash lease expense
286
258
Depreciation and amortization
189
180
Deferred taxes
( 531
)
( 1,229
)
Stock-based compensation expense
211
161
Changes in operating assets and liabilities:
Accounts receivable
( 1,018
)
( 43
)
Inventory – equipment
74
( 505
)
Other assets
( 89
)
( 1,032
)
Accounts payable and accrued liabilities
( 4,774
)
( 319
)
Lease liabilities
( 287
)
( 241
)
Net cash used in operating activities
( 4,290
)
( 827
)
Cash flows (used in) provided by investing activities:
Investment in notes receivable
( 4,765
)
( 4,490
)
Payments received on notes receivable
2,548
662
Cash received on transfer of notes receivable to partners
1,961
4,997
Investment in equity method investments
( 491
)
( 831
)
Cash distributions from equity method investments
—
169
Purchase of property and equipment
( 33
)
( 5
)
Net cash (used in) provided by investing activities
( 780
)
502
Cash flows used in financing activities:
Proceeds from debt payable to third party
—
5,625
Repayment of debt payable to third party
—
( 5,823
)
Proceeds from issuance of common stock from stock option awards
131
28
Payments of tax withholdings related to cashless exercises of stock option awards
( 921
)
—
Net cash used in financing activities
( 790
)
( 170
)
Net decrease in cash and cash equivalents
( 5,860
)
( 495
)
Cash and cash equivalents as of beginning of period
23,385
2,728
Cash and cash equivalents as of end of period
$
17,525
$
2,233
Supplemental cash flow information:
Cash paid for taxes
$
97
$
2
Cash paid for interest
—
29
Noncash change in Right-of-use assets
2,263
—
Noncash change in Lease liabilities
2,263
—
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
HERITAGE GLOBAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 –Basis of Presentation
These unaudited condensed consolidated interim financial statements include the accounts of Heritage Global Inc. (“HGI”) together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), Heritage Global LLC (“HG LLC”), Equity Partners HG LLC (“Equity Partners”), National Loan Exchange, Inc. (“NLEX”) and Heritage Global Capital LLC (“HGC”). These entities, collectively, are referred to as the “Company” in these financial statements. The Company’s unaudited condensed consolidated interim financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and include the assets, liabilities, revenues, and expenses of all subsidiaries over which HGI exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation. 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”). In the opinion of management, these financial statements reflect all adjustments that are necessary to present fairly the results for the interim periods included herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are appropriate. 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 six month period ended June 30, 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.
COVID-19
The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s 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, 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, when stimulus payments conclude, the Company expects 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 as lenders begin to increase loan volume while loosening underwriting standards, which will subsequently increase loans available to debt buyers of charged-off accounts; and
• incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets.
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
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implementation of additional credit policies impacting debt sales that may result in delayed revenues for the Company's Financial Asset Division depending on the scope and magnitude of such policies.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Significant estimates include the assessment of collectability of revenue recognized, and the valuation of accounts receivable, inventory, other assets, right-of-use assets, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities including future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact the Company’s consolidated financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.
Reclassifications
Certain prior year balances within the condensed consolidated financial statements have been reclassified to conform to the current year presentation.
Revenue Recognition
Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions and providing merger and acquisition advisory services. Asset sales revenue generally consists of proceeds obtained through sales of purchased assets. Revenue is recognized for both services revenue and asset sales revenue based on the ASC 606 standard recognition model, which consists of the following: (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 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 the Company’s total revenues (less than 1 % of total revenues for the six month period ended June 30, 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 June 30, 2021, the deferred revenue balance was approximately $ 15,000 . 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.
The Company evaluates revenue from asset liquidation transactions in accordance with the accounting guidance to determine whether to report such revenue on a gross or net basis. The Company has determined that it acts as an agent for the Company’s fee based asset liquidation transactions, and, therefore, the Company reports the revenue from transactions in which it acts as an agent on a net basis.
The Company also earns asset liquidation income through asset liquidation transactions that involve the Company acting jointly with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company (“LLC”) agreement (collectively, “Joint Ventures”). 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
9
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 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 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 six months ended June 30, 2021 and 2020, the Company generated revenues specific to one customer representing 10 % and 15 % of total revenues, respectively. During the three months ended June 30, 2021 and 2020, the Company generated revenues specific to the same customer representing 11 % and 12 % of total revenues for the respective periods.
Leases
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. We evaluate leasing arrangements in accordance with the accounting guidance to determine whether the contract is operating or financing in nature. Leases with an initial term of 12 months or less, or under predefined thresholds, are not recorded on the condensed consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
The critical accounting policies used in the preparation of the Company’s audited consolidated financial statements are discussed in the Company’s Form 10-K. There have been no changes to these policies in the six months ended June 30, 2021.
Recent Accounting Pronouncements
In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. ASU 2019-12 became effective January 1, 2021 and did not have a material impact on our consolidated financial statements.
In 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which applies a current expected credit loss model which is a new impairment model based on expected losses rather than incurred losses. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from, or added to, the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC 310-30, which provides authoritative guidance for the accounting of the Company’s notes receivable. With respect to smaller reporting companies, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
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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 as of June 30, 2021 of approximately $ 2.3 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 six months ended June 30, 2021 includes the issuance of additional notes of approximately $ 4.8 million offset by principal payments made by borrowers of approximately $ 2.5 million, the transfer of notes to partners of approximately $ 2.0 million, and adjustments to our deferred fees and costs balance of approximately $ 0.1 million.
As of June 30, 2021, the Company has no t recorded an allowance for credit losses related to notes receivable outstanding.
Note 4 – Stock-based Compensation
Options
As of June 30, 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 six months ended June 30, 2021, the Company issued options to purchase 272,500 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. During the same period, the Company cancelled options to purchase 67,500 shares of common stock as a result of employee resignations.
The following summarizes the changes in common stock options for the six months ended June 30, 2021:
Options
Weighted
Average
Exercise
Price
Outstanding as of December 31, 2020
3,516,225
$
0.63
Granted
322,500
$
2.88
Exercised
( 1,521,937
)
$
0.48
Forfeited
( 67,500
)
$
0.85
Outstanding as of June 30, 2021
2,249,288
$
1.04
Options exercisable as of June 30, 2021
1,288,225
$
0.52
The Company recognized stock-based compensation expense related to common stock options of $ 0.1 million for the six months ended June 30, 2021. As of June 30, 2021, there was approximately $ 1.2 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 3.3 years.
Restricted Stock
Restricted stock awards represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. 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 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 $ 12,900 for the six months ended June 30, 2021. The unrecognized stock-based compensation expense as of June 30, 2021 was approximately $ 0.1 million.
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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. On April 8, 2021 , the Company granted 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. 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. The full amount of the restricted common stock was expensed as of March 31, 2021 and there was no remaining unrecognized stock-based compensation expense as of June 30, 2021 .
Warrants
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) 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 six months ended June 30, 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, 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. On May 31, 2021, the lessee delivered written notice to exercise the purchase option. 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 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.
Note 6 – Equity Method Investments
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 six months ended June 30, 2021 and 2020 (in thousands):
12
Six Months Ended June 30,
2021
2020
Revenues:
Oak Grove Asset Acquisitions LP
$
—
$
1,098
CPFH LLC
215
801
HGC Funding I LLC and Origination I LLC
17
140
Total revenues
$
232
$
2,039
Operating income:
Oak Grove Asset Acquisitions LP
$
—
$
219
CPFH LLC
—
42
HGC Funding I LLC and Origination I LLC
( 4
)
133
Total operating income
$
( 4
)
$
394
The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of June 30, 2021 and December 31, 2020 (in thousands):
June 30,
December 31,
2021
2020
Assets:
Oak Grove Asset Acquisitions LP
$
—
$
—
CPFH LLC
10,860
10,791
HGC Funding I LLC
1,983
—
Total assets
$
12,843
$
10,791
Liabilities:
Oak Grove Asset Acquisitions LP
$
1
$
1
CPFH LLC
5,162
5,374
HGC Funding I LLC
22
—
Total liabilities
$
5,185
$
5,375
Note 7 – Earnings Per Share
The Company is required in periods in which it has net income to calculate basic earnings per share (“basic EPS”) using the two-class method. The two-class method is required because the Company’s shares of Series N preferred shares, each of which is convertible to 40 common shares, have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock. Under the two-class method, earnings for the period are allocated on a pro-rata basis to the common and preferred stockholders. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares.
In periods in which the Company has a net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The two-class method is not used in periods in which the Company has a net loss because the preferred stock does not participate in losses.
Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”), since they are assumed to be exercised or converted, except when their effect would be anti-dilutive. The table below shows the calculation of the shares used in computing diluted EPS.
13
Three Months Ended June 30,
Six Months Ended June 30,
Weighted Average Shares Calculation:
2021
2020
2021
2020
Basic weighted average shares outstanding
35,250,964
28,751,689
35,020,768
28,760,893
Treasury stock effect of common stock options and restricted stock awards
1,721,451
2,209,572
1,590,466
1,869,820
Diluted weighted average common shares outstanding
36,972,415
30,961,261
36,611,234
30,630,713
For the six months ended June 30, 2021 and 2020, there were potential common shares of 0.4 million and approximately 0.2 million, respectively, that were excluded from the computation of diluted EPS, as the inclusion of such common shares would have been anti-dilutive. For the three months ended June 30, 2021 and 2020 there were potential common shares totaling approximately 0.1 million and 0.2 million, respectively, that were excluded.
Note 8 – Leases
The Company leases office and warehouse space primarily in three locations: Del Mar, CA; Hayward, CA; and Edwardsville, IL. As each contract does not meet any of the four criteria of ASC 842 for financing lease classification, the Company has determined that each lease arrangement should be classified as an operating lease.
On October 27, 2020, the Company entered into an agreement (the “ Lease ”) with Hayward FGHK Industrial, LLC (“ Landlord ”) pursuant to which the Company leases 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, the Company is obligated to pay its share of maintenance costs of common areas. The Burlingame, CA warehouse lease was terminated on April 30, 2021 .
The right-of-use assets and lease liabilities for each location are as follows (in thousands):
June 30,
December 31,
Right-of-use assets:
2021
2020
Del Mar, CA
$
546
$
613
Hayward, CA
2,191
99
Edwardsville, IL
203
251
$
2,940
$
963
June 30,
December 31,
Lease liabilities:
2021
2020
Del Mar, CA
$
575
$
641
Hayward, CA
2,199
109
Edwardsville, IL
205
253
$
2,979
$
1,003
The Company’s leases generally do not provide an implicit rate, and, therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company uses its incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. As of January 1, 2019, the Company’s incremental borrowing rate was 5.25 %. For leases commencing after January 1, 2019, the Company uses its incremental borrowing rate at time of commencement. As of April 1, 2021, the Company’s incremental borrowing rate was 4.95 %.
Lease expense for these leases is recognized on a straight-line basis over the lease term. For both six month periods ended June 30, 2021 and 2020, lease expense was approximately $ 0.3 million. Undiscounted future minimum lease payments as of June 30, 2021 that have initial or remaining lease terms in excess of one year are as follows (in thousands):
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2021 (remainder of year from July 1, 2021 to December 31, 2021)
$
300
2022
612
2023
563
2024
532
2025
396
Thereafter
1,064
Total undiscounted future minimum lease payments
3,467
Less imputed interest
( 488
)
Present value of lease liabilities
$
2,979
Note 9 – Intangible Assets and Goodwill
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 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
December 31,
June 30,
Amortized Intangible Assets
2020
Amortization
2021
Customer Network (HGP)
$
62
$
( 15
)
$
47
Trade Name (HGP)
513
( 64
)
449
Customer Relationships (NLEX)
111
( 55
)
56
Total
686
( 134
)
552
Unamortized Intangible Assets
Trade Name (NLEX)
2,437
—
2,437
Total
$
3,123
$
( 134
)
$
2,989
Amortization expense during the six months ended June 30, 2021 and 2020 was $ 0.1 million.
As of June 30, 2021, the estimated amortization expense for the remainder of the current fiscal year and the next three fiscal years is shown below (in thousands):
Year
Amount
2021 (remainder of year from July 1, 2021 to December 31, 2021)
$
136
2022
158
2023
129
2024
129
Total
$
552
Goodwill
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 six months ended June 30, 2021.
Acquisition
June 30, 2021
December 31, 2020
HGP
$
2,040
$
2,040
NLEX
3,545
3,545
Total goodwill
$
5,585
$
5,585
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Note 10 – Debt
The Company had no outstanding debt as of June 30, 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 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 “2020 Credit Facility”) with C3bank, National Association for a $ 5.0 million revolving line of credit, which replaced the 2018 Credit Facility. The 2020 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 2020 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 may prepay the 2020 Credit Facility without penalty. The Company is the borrower under the 2020 Credit Facility. The 2020 Credit Facility is secured by a first priority 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. The availability of additional draws under the 2020 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 2020 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 a debt to equity ratio. The 2020 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 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.
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 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 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.
On May 11, 2021, the Company entered into a promissory note, business loan agreement, commercial security agreement and pledge agreement (the “ 2021 Credit Facility ”) with C3bank, National Association for a $ 10.0 million revolving line of credit. The
16
2021 Credit Facility matures on May 11, 2023 and replaces the 2020 Credit Facility. The Company is permitted to use the proceeds of the loan solely for its business operations. The 2021 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 Comp any will pay interest on the 2021 Credit Facility in regular monthly payments, beg inning on June 11, 2021. The 2021 Credit Facility also provides for a minimum fee, which is offset by interest payments. The Company may prepay the 2021 Credit Facility without penalty and may convert up to $ 5.0 million of revolving debt into term debt. The Compa ny is the borrower under the 2021 Credit Facility. The 2021 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 o f additional draws under the 2021 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 2021 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 2021 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 2020 Credit Facility a s a result of entry into the 2021 Credit Facility. During the six months ended June 30, 2021, the Company made no draws or repayments on the line of credit.
Note 11 – Income Taxes
As of June 30, 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. The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code.
The reported tax expense 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 excess tax benefits from stock option exercises, offset by an increase in state tax expense of approximately $ 0.3 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 June 30, 2021 and December 31, 2020.
17
Note 12 – Related Party Transactions
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 six month periods ended June 30, 2021 and 2020 was approximately $ 55,000 and $ 54,000 , respectively, and is included in selling, general and administrative expenses in the condensed consolidated income statements. All lease payments during the six months ended June 30, 2021 and the fiscal year ended December 31, 2020 were made to Mr. Ludwig. 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. Mr. 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. Further, 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. 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 June 30,
Six Months Ended June 30,
2021
2020
2021
2020
Industrial Assets Division:
Net operating income
$
433
$
811
$
1,773
$
857
Financial Assets Division:
Net operating income
$
462
$
628
$
923
$
1,180
Corporate and Other:
Net operating loss
$
( 822
)
$
( 415
)
$
( 1,577
)
$
( 919
)
Consolidated:
Net operating income
$
73
$
1,024
$
1,119
$
1,118
Note 14 – Subsequent Events
The Company has evaluated events subsequent to June 30, 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.
18