What changed in this filing

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Item 1. Financial Statements

2021-11-10 compared with 2021-08-12 · 172 added, 99 removed, 332 unchanged (45% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

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

June 30, 2021

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

September 30, 2021

December 31, 2020

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Accounts payable and accrued liabilities

Current portion of third party debt

Current portion of lease liabilities

Total current liabilities

Non-current portion of third party debt

Non-current portion of lease liabilities

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

outstanding 568 shares of Series N as of June 30, 2021 and December 31, 2020

outstanding 565 shares of Series N as of September 30, 2021 and 568 as of December 31, 2020

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

and outstanding 36,284,382 shares as of June 30, 2021 and 35,281,183 as of

December 31, 2020

and outstanding 36,574,702 shares as of September 30, 2021 and 35,281,183 as of December 31, 2020

Additional paid-in capital

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Services revenue

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Interest and other expense, net

Income before income tax benefit

Income tax benefit

Income before income tax expense (benefit)

Income tax expense (benefit)

Weighted average common shares outstanding – basic

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Balance at June 30, 2021

Issuance of common stock from stock option awards

Issuance of common stock due to conversion of Series N Preferred stock

Stock-based compensation expense

Balance at September 30, 2021

Preferred stock

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Balance at June 30, 2020

Issuance of common stock from stock option awards

Issuance of common stock

Stock-based compensation expense

Balance at September 30, 2020

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

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(In thousands of US dollars)

Six Months Ended June 30,

Cash flows used in operating activities:

Adjustments to reconcile net income to net cash used in operating

Nine Months Ended September 30,

Cash flows (used in) provided by operating activities:

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

Amortization of deferred issuance costs and fees

9 unchanged sentences

Lease liabilities

Net cash used in operating activities

Net cash (used in) provided by operating activities

Cash flows (used in) provided by investing activities:

1 unchanged sentence

Payments received on notes receivable

Acquisition, net of cash acquired

Cash received on transfer of notes receivable to partners

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Net cash (used in) provided by investing activities

Cash flows used in financing activities:

Proceeds from debt payable to third party

Repayment of debt payable to third party

Cash flows provided by (used in) financing activities:

Proceeds from debt payable to third parties

Repayment of debt payable to third parties

Proceeds from issuance of notes payable to third parties

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 decrease in cash and cash equivalents

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents as of beginning of period

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Cash paid for interest

Issuance of common stock for services rendered

Noncash change in Right-of-use assets

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(“HGP”), Heritage Global LLC (“HG LLC”), Equity Partners HG LLC (“Equity Partners”), National Loan Exchange, Inc.

(“NLEX”) and Heritage Global Capital LLC (“HGC”).

(“NLEX”), Heritage Global Capital LLC (“HGC”) and Heritage ALT LLC (“ALT”).

These entities, collectively, are referred to as the “Company” in these financial statements.

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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.

The business was subsequently expanded by the acquisitions of Equity Partners, HGP, NLEX, and ALT in 2011, 2012, 2014, and 2021, 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:

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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 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 results of operations for the nine month period ended September 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.

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.

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s performance during the first three quarters of 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales by financial institutions, and a delay in the typical process for the sale of certain industrial assets by manufacturing companies.

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:

Further, as 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;

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• 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

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.

A new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has 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 for the Company's Financial Asset Division 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 is considered to be within the asset liquidation business, which consists of two reportable segments, the Industrial Assets Division and the Financial Assets Division.

All services and asset sales revenue from contracts with customers is considered to be derived from the two reportable segments of the asset liquidation business, 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 .

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 nine month period ended September 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 September 30, 2021, the deferred revenue balance was approximately $ 104,000 .

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

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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.

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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.

During the nine months ended September 30, 2021 and 2020, the Company generated revenues specific to one customer representing 9 % and 12 % of total revenues, respectively.

During the three months ended September 30, 2021 and 2020, the Company generated revenues specific to the same customer representing 6 % and 8 % of total revenues for the respective periods.

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.

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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.

There were no changes to these policies during the nine months ended September 30, 2021.

Recent Accounting Pronouncements

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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.

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios.

As of September 30, 2021 and December 31, 2020, the Company’s outstanding notes receivables, net of unamortized deferred fees and costs on originated loans, were $ 2.6 million and $ 2.1 million, respectively.

During the nine months ended September 30, 2021, the Company issued notes receivable of approximately $ 5.9 million, which was offset by principal payments made by borrowers of approximately $ 3.4 million and the transfer of notes to partners of approximately $ 2.0 million.

As of September 30, 2021, the Company did no t record an allowance for credit losses related to notes receivable outstanding.

Note 4 – Stock-based Compensation

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.

As of September 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 nine months ended September 30, 2021, the Company issued options to purchase 622,500 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 90,000 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:

The following summarizes the changes in common stock options for the nine months ended September 30, 2021:

Remaining Contractual Term (Years)

Aggregate Intrinsic Value (In thousands)

Outstanding as of December 31, 2020

Outstanding as of June 30, 2021

Options exercisable as of June 30, 2021

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.

Outstanding as of September 30, 2021

Options exercisable as of September 30, 2021

The Company recognized stock-based compensation expense related to common stock options of $ 0.2 million for the nine months ended September 30, 2021.

As of September 30, 2021, there was approximately $ 1.4 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

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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.

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, 2021.

The unrecognized stock-based compensation expense as of September 30, 2021 was approximately $ 0.1 million.

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, 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 .

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 September 30, 2021 .

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.

During the year ended December 31, 2020 and the nine months ended September 30, 2021, Napier Park did not receive any warrants.

Note 5 – Lessor Arrangement

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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):

Six Months Ended June 30,

The table below details the Company’s joint venture revenues and earnings during the nine months ended September 30, 2021 and 2020 (in thousands):

Nine Months Ended September 30,

Oak Grove Asset Acquisitions LP

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Total revenues

Operating income:

Operating (loss) income:

Oak Grove Asset Acquisitions LP

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 June 30, 2021 and December 31, 2020 (in thousands):

Total operating (loss) income

The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of September 30, 2021 and December 31, 2020 (in thousands):

September 30,

Oak Grove Asset Acquisitions LP

HGC Funding I LLC

HGC Funding I LLC and Origination I LLC

Oak Grove Asset Acquisitions LP

HGC Funding I LLC

HGC Funding I LLC and Origination I LLC

Total liabilities

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted Average Shares Calculation:

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Diluted weighted average common shares outstanding

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.

For the nine months ended September 30, 2021 and 2020, there were potential common shares of 0.4 million 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.

For the three months ended September 30, 2021 and 2020 there were potential common shares totaling approximately 0.4 million and 0.1 million, respectively, that were excluded.

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:

Burlingame, CA

Edwardsville, IL

September 30,

Lease liabilities:

Burlingame, CA

Edwardsville, IL

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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):

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

Lease expense for leases determined to be operating leases is recognized on a straight-line basis over the lease term.

For the nine month periods ended September 30, 2021 and 2020, lease expense was approximately $ 0.5 and $ 0.4 million, respectively.

As of September 30, 2021, undiscounted future minimum lease payments related to leases that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2021 (remainder of year from October 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 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.

The Company’s identifiable intangible assets are associated with its acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, 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 tradenames that were acquired as part of the acquisition of NLEX in 2014 and ALT in 2021 have an indefinite life and therefore are not amortized.

See Note 14 for further information.

Carrying Value

September 30,

Amortized Intangible Assets

Customer Network (HGP)

Trade Name (HGP)

Customer Relationships (HGP)

Customer Relationships (ALT)

Customer Relationships (NLEX)

Trade Name (HGP)

Unamortized Intangible Assets

Trade Name (NLEX)

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):

2021 (remainder of year from July 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 six months ended June 30, 2021.

June 30, 2021

Trade Name (ALT)

Amortization expense during the nine months ended September 30, 2021 and 2020 was $ 0.2 million.

As of September 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):

2021 (remainder of year from October 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, NLEX in 2014 and ALT in 2021, as shown in the table below (in thousands).

During the nine months ended September 30, 2021, ALT was the only addition to goodwill and there were no impairment losses to the carrying amount of goodwill.

See Note 14 for further information.

September 30, 2021

December 31, 2020

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Note 10 – Debt

The Company had no outstanding debt as of June 30, 2021 and December 31, 2020.

Outstanding debt as of September 30, 2021 and December 31, 2020 is summarized as follows (in thousands):

September 30, 2021

December 31, 2020

Third party debt

In September 2018, Heritage Global Inc.

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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 %.

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 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.

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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.

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 %.

An “Event of Default” means:

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.

2021 Credit Facility matures on May 11, 2023 and replaces the 2020 Credit Facility.

The 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 Company pays interest on the 2021 Credit Facility in regular monthly payments, which began 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 Company 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 availability of 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.

On May 11, 2021, the Company terminated the 2020 Credit Facility as a result of entry into the 2021 Credit Facility.

During the quarter ended September 30, 2021, the Company drew on the line of credit for a total of $ 1.3 million and made repayments of principal totaling $ 1.3 million resulting in a zero balance as of September 30, 2021.

On August 23, 2021, the Company entered into a $ 2.0 million subordinated promissory note with an interest rate of 3 % per annum and a maturity date of August 23, 2025 (the “ALT Note”) as part of the aggregate purchase price paid to acquire certain assets and liabilities of American Laboratory Trading.

The ALT Note requires 48 equal installments of approximately $ 44,000 on the first day of each month , beginning the next month succeeding the closing date of August 23, 2021 with the final payment due on August 23, 2025.

The outstanding balance of the ALT Note as of September 30, 2021, was $ 2.0 million.

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).

As of September 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.

1 unchanged sentence

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

Federal income tax rate to the income from operations before taxes primarily as a result of 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.

Federal income tax rate to the income from operations before taxes primarily as a result of excess tax benefits from stock option exercises.

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.

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.

The total amount paid to the related party for both nine month periods ended September 30, 2021 and 2020 was approximately $ 82,000 , and is included in selling, general and administrative expenses in the condensed consolidated income statements.

All lease payments during the nine months ended September 30, 2021 and the 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”).

On March 30, 2021, the Company and Scott West entered into the Separation Agreement.

Under the terms of the Separation Agreement, Mr.

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West breaches the terms of the Separation Agreement.

The total cost related to the separation payment and the issuance of shares of the Company’s restricted common stock was expensed in the first quarter of 2021.

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

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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,

Three Months Ended September 30,

Nine Months Ended September 30,

Industrial Assets Division:

6 unchanged sentences

Net operating income

Note 14 – Acquisitions

The Company has determined that the acquisition of certain assets and liabilities of American Laboratory Trading constitutes a business acquisition as defined by ASC 805, Business Combinations .

Accordingly, the assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805.

The Company’s purchase price allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data.

Fair values are determined based on the requirements of ASC 820, Fair Value Measurement (“ASC 820”).

On August 23, 2021, the Company acquired (the “Transaction”) certain assets and liabilities of American Laboratory Trading pursuant to the terms and conditions of an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated August 18, 2021, among the Company, American Laboratory Trading and certain individuals named therein.

The aggregate purchase price paid to American Laboratory Trading was approximately $ 4.3 million, consisting of $ 2.3 million in cash, as adjusted for American Laboratory Trading 's working capital, and the $ 2.0 million ALT Note.

The Asset Purchase Agreement contains customary representations and warranties and covenants by each party.

American Laboratory Trading and ALT are obligated, subject to certain limitations, to indemnify the other under the Asset Purchase Agreement for losses arising from certain breaches of the Asset Purchase Agreement and for certain other liabilities, subject to applicable limitations set forth in the Asset Purchase Agreement.

HGI has guaranteed the obligations of ALT under the terms of the Asset Purchase Agreement and the ALT Note.

On August 23, 2021, in connection with the Transaction, a wholly-owned subsidiary of HGI (“RE Purchaser”), acquired the real property used in ALT’s business (the “Property”) pursuant to a Purchase and Sale Agreement (the “Real Estate Purchase Agreement” and together with the Purchase Agreement, the “Agreements”), dated August 18, 2021, between 12 Colton Road, LLC and RE Purchaser.

The purchase price for the Property was $ 1.3 million.

The Real Estate Purchase Agreement contains customary representations and warranties and covenants by each party.

The parties to the Real Estate Purchase Agreement are obligated, subject to certain limitations, to indemnify the other under the Real Estate Purchase Agreement for losses arising from certain breaches of the Real Estate Purchase Agreement and other liabilities, subject to applicable limitations set forth in the Real Estate Purchase Agreement.

ALT is a supplier of refurbished lab equipment and a provider of surplus asset services for the life sciences.

The acquisition enhances the Company’s position in the biotech sector.

Acquisition-related costs consisted of external fees for advisory, legal, and other professional services and totaled approximately $ 0.1 million and $ 0.2 million for the three and nine months ended September 30, 2021, respectively.

The fair value estimates for the assets acquired and liabilities assumed were based upon valuations using information known and knowable as of the date of this filing.

Changes to these assumptions and estimates could cause an impact to the valuation of assets acquired, including intangible assets, goodwill and the related tax impacts of the acquisition, as well as legal and other contingencies.

The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows (in thousands):

Accounts receivable

Inventory – equipment

Intangible assets

Accounts payable and accrued liabilities

Purchase price

The $ 1.4 million of intangible assets are attributable to $ 1.0 million of customer relationships that will be amortized over a period of five years and $ 0.4 million for the American Laboratory Trading trade name, which has an indefinite life.

The excess of the consideration transferred over the fair values of assets acquired and liabilities assumed was recorded as goodwill, which was primarily attributed to increased synergies that are expected to be achieved from the acquisition.

Goodwill is expected to be deductible for income tax purposes.

The financial results of ALT have been included in our condensed consolidated financial statements since the date of the acquisition and contributed an immaterial amount of revenue and net income from the date of acquisition through September 30, 2021 .

ALT is reported as part of our Industrial Assets segment.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below is provided for illustrative purposes only and summarizes the combined results of operations of the Company and ALT.

For purposes of this pro forma presentation, the acquisition of ALT is assumed to have occurred on January 1, 2020.

The pro forma financial information for all periods presented also includes the estimated business combination accounting effects resulting from this acquisition, notably amortization expense from the acquired intangible assets, interest expense from the ALT Note, and certain other integration related impacts.

This unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on January 1, 2020, nor of the results of operations that may be obtained in the future.

The amounts presented below (in thousands) are preliminary based on management’s best estimate and will be finalized as the information necessary to complete the analysis is obtained.

Three Months Ended September 30,

Nine Months Ended September 30,

Pro forma revenues

Pro forma net income

Pro forma net income per share - basic

Pro forma net income per share - diluted

Note 15 – Subsequent Events

The Company has evaluated events subsequent to June 30, 2021 for potential recognition or disclosure in its condensed consolidated financial statements.

The Company has evaluated events subsequent to September 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.

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

What changed 10-Q

Item 1. Financial Statements