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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices)
(
(Registrant’s Telephone Number)
N/A
(Registrant’s Former Name)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer |
☐ |
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Accelerated Filer |
☐ |
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☒ |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of November 1, 2023, there were
TABLE OF CONTENTS
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Part I. |
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Item 1. |
3 |
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Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 |
3 |
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4 |
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5 |
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7 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
33 |
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Item 4. |
Controls and Procedures |
33 |
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Part II. |
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Item 1. |
34 |
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Item 1A. |
34 |
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Item 2. |
34 |
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Item 3. |
34 |
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Item 4. |
34 |
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Item 5. |
34 |
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Item 6. |
35 |
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36 |
2
PART I – FINANC I AL INFORMATION
Item 1 – Financ ial Statements.
HERITAGE GLOBAL INC.
CONDENSED CONSOLIDA TED BALANCE SHEETS
(In thousands of US dollars, except share and per share amounts)
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September 30, 2023 |
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December 31, 2022 |
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ASSETS |
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(unaudited) |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Current portion of notes receivable, net |
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Inventory – equipment |
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Other current assets |
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Total current assets |
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Non-current portion of notes receivable, net |
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Equity method investments |
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Right-of-use assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
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$ |
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Payables to sellers |
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Current portion of third party debt |
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Current portion of lease liabilities |
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Total current liabilities |
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Non-current portion of third party debt |
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Non-current portion of lease liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $
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Common stock, $
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Additional paid-in capital |
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Accumulated deficit |
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(
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(
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Treasury stock at cost,
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(
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(
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED S TATEMENTS OF INCOME
(In thousands of US dollars, except share and per share amounts)
(unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenues: |
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Services revenue |
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$ |
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$ |
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$ |
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$ |
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Asset sales |
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Total revenues |
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Operating costs and expenses: |
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Cost of services revenue |
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Cost of asset sales |
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Selling, general and administrative |
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Depreciation and amortization |
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Total operating costs and expenses |
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Earnings of equity method investments |
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(
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Operating income |
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Interest expense, net |
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(
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(
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(
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(
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Income before income tax expense |
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Income tax expense |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Weighted average common shares outstanding – basic |
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Weighted average common shares outstanding – diluted |
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Net income per share – basic |
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$ |
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$ |
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$ |
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$ |
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Net income per share – diluted |
|
$ |
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$ |
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$ |
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$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEM ENTS OF STOCKHOLDERS’ EQUITY
(In thousands of US dollars, except share amounts)
(unaudited)
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Additional |
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Preferred stock |
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Common stock |
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paid-in |
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Accumulated |
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Treasury stock |
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Shares |
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Amount |
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Shares |
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Amount |
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capital |
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deficit |
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Shares |
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Amount |
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Total |
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|||||||||
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Balance as of December 31, 2022 |
|
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$ |
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$ |
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$ |
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$ |
(
|
) |
|
$ |
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$ |
(
|
) |
|
$ |
|
|
|
Cumulative change in accounting principle (Note 2) |
|
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— |
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— |
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— |
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— |
|
|
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— |
|
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(
|
) |
|
|
— |
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|
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— |
|
|
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(
|
) |
|
Balance as of January 1, 2023 (as adjusted
|
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|
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|
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|
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(
|
) |
|
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(
|
) |
|
|
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|
Issuance of common stock from stock option awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
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|
Issuance of restricted common stock |
|
|
— |
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|
— |
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|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance as of March 31, 2023 |
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Issuance of common stock from stock option awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of common stock due to conversion of Series N Preferred stock |
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance as of June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Issuance of common stock from stock option awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance as of September 30, 2023 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
|
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|||||||||
|
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Additional |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
Preferred stock |
|
|
Common stock |
|
|
paid-in |
|
|
Accumulated |
|
|
Treasury stock |
|
|
|
|
||||||||||||||||||
|
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|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
deficit |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|||||||||
|
Balance as of December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Issuance of common stock from stock option awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance as of March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Issuance of common stock from stock option awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Repurchase of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance as of June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Issuance of common stock from stock option awards |
|
|
— |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
— |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
- |
|
|
|
— |
|
|
|
— |
|
|
|
- |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Repurchase of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
- |
|
|
|
— |
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance as of September 30, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
|
|
|
|
$ |
(
|
) |
|
$ |
|
|
5
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED S TATEMENTS OF CASH FLOWS
(In thousands of US dollars)
(unaudited)
|
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
2023 |
|
|
2022 |
|
||
|
Cash flows provided by operating activities: |
|
|
|
|
|
|
||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash provided by operating
|
|
|
|
|
|
|
||
|
Amortization of deferred issuance costs and fees |
|
|
|
|
|
|
|
|
|
Earnings of equity method investments |
|
|
(
|
) |
|
|
(
|
) |
|
Noncash credit loss expense |
|
|
|
|
|
|
|
|
|
Noncash lease expense |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Deferred taxes |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
|
Accounts receivable |
|
|
(
|
) |
|
|
|
|
|
Inventory – equipment |
|
|
|
|
|
|
(
|
) |
|
Other current assets |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(
|
) |
|
|
|
|
|
Payables to sellers |
|
|
|
|
|
|
(
|
) |
|
Lease liabilities |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash flows (used in) provided by investing activities: |
|
|
|
|
|
|
||
|
Investment in notes receivable |
|
|
(
|
) |
|
|
(
|
) |
|
Payments received on notes receivable |
|
|
|
|
|
|
|
|
|
Cash received on transfer of notes receivable to partners |
|
|
|
|
|
|
|
|
|
Investment in equity method investments |
|
|
(
|
) |
|
|
(
|
) |
|
Return of investment in equity method investments |
|
|
|
|
|
|
|
|
|
Cash distributions from equity method investments |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash (used in) provided by investing activities |
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
||
|
Proceeds from debt payable to third parties |
|
|
|
|
|
|
|
|
|
Repayment of debt payable to third parties |
|
|
(
|
) |
|
|
(
|
) |
|
Proceeds from issuance of common stock from stock option awards |
|
|
|
|
|
|
|
|
|
Payments of tax withholdings related to issuance of restricted common stock and stock option awards |
|
|
(
|
) |
|
|
(
|
) |
|
Repurchase of common stock |
|
|
|
|
|
|
(
|
) |
|
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
(
|
) |
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Supplemental cash flow information: |
|
|
|
|
|
|
||
|
Cash paid for taxes |
|
$ |
|
|
|
$ |
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
|
Noncash change in Right-of-use assets |
|
$ |
|
|
|
$ |
|
|
|
Noncash change in Lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
HERITAGE GLOBAL INC.
NOTES TO CONDENSED CO NSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 –Basis of Presentation
These unaudited condensed consolidated interim financial statements include the accounts of Heritage Global Inc. together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), National Loan Exchange Inc. (“NLEX”), Heritage Global LLC (“HG LLC”), Heritage Global Capital LLC (“HGC”), and Heritage ALT LLC (“ALT”). These entities, collectively, are referred to as “HG,” the “Company,” “we” or “our” in these consolidated financial statements. These consolidated 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 HG exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation.
The Company began its operations in 2009 with the establishment of HG LLC. The business was subsequently expanded by the acquisitions of HGP, NLEX, and ALT in 2012, 2014, and 2021 respectively, and the creation of HGC in 2019. As a result, HG 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 Auction and Liquidation, through HGP, Refurbishment & Resale, through ALT, Brokerage, through NLEX and Specialty Lending, through HGC.
The Company prepared the unaudited 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 condensed 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 condensed consolidated 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, 2022, filed with the SEC on March 24, 2023 (the “Form 10-K”).
The results of operations for the three and nine-month periods ended September 30, 2023 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2023. The accompanying condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated balance sheet as of December 31, 2022, contained in the Company’s Form 10-K.
Repurchase Program
The Company’s Board of Directors authorized a share repurchase program on May 5, 2022 (“2022 Repurchase Program”), which permits the Company to purchase up to an aggregate of $
8
Note 2 – Summary of Significant Accounting Policies
Use of estimates
The preparation of the Company’s unaudited condensed consolidated interim 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 and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities, including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our condensed consolidated interim 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
Reven ue recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) and ASC Topic 310, Receivables (“ASC 310”).
Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions, and secured lending. Asset sales revenue generally consists of proceeds obtained through sales of purchased assets. With the exception of revenue generated within our Specialty Lending segment, 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 consists of
For auction services and brokerage sale transactions, funds are typically collected from buyers and are held by the Company on the seller's behalf. The funds are included in cash and cash equivalents in the condensed consolidated balance sheets. The Company releases the funds to the seller, less the Company's commission and other fees due, after the buyer has accepted the goods. The amount of cash held on behalf of the sellers is recorded as payables to sellers in the accompanying condensed consolidated balance sheets.
The Company evaluates revenue from Auction and Liquidation and Brokerage segment 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 its fee based transactions and therefore reports the revenue from transactions in which the Company acts as an agent on a net basis.
9
The Company also earns income through transactions that involve the Company acting jointly with one or more additional purchasers or lenders, 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 Topic 323, Equity Method and Joint Ventures , the Company does not record revenue or expense. 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.
Through our Specialty Lending segment, the Company provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios. The Company recognizes revenue generated by lending activity in accordance with ASC 310. Fees collected in relation to the issuance of loans include loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.
The loan origination fees are offset with any direct origination costs and are deferred upon issuance of the loan and amortized over the lives of the related loans, as an adjustment to interest income. The interest method is used to arrive at a periodic interest cost (including amortization) that will represent a level effective rate on the sum of the face amount of the debt and (plus or minus) the unamortized premium or discount and expense at the beginning of each period.
The monitoring fees and the backend profit share are considered a separate earnings process as compared to the origination fees and interest income. Monitoring fees are recorded at the agreed upon rate, and at the moment in which payments are made by the borrower. The backend profit share is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned. The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized.
Specialty Lending - Concentration and credit risk
As of September 30, 2023, the Company held a gross balance of investments in notes receivable of $
The Company does not evaluate concentration risk solely based on balance due from specific borrowers, but also considers the number of portfolio purchases, type of charged off accounts within the portfolio, and the seller of the portfolio when determining the overall risk. Of the balance due from one borrower of $
The Company mitigates this concentration risk as follows. The Company requires, and monitors, security from each borrower consisting of their charged off and nonperforming receivable portfolios. The Company engages in a due diligence process that leverages its valuation expertise. In the event of default, the Company is entitled to call the unpaid interest and principal balances and receive all collections directly. The Company may also recover its investment by engaging a third party to collect on the underlying charged off or nonperforming receivable portfolio or the underlying portfolio can be sold through the Company's Brokerage segment. In certain cases, the Company’s recovery options may be subject to concurrence of the originator or other prior holder of the assets.
Currently, declining collections are being experienced industry-wide and are expected to continue in the short-term. While most of the Company's borrowers are still tracking to their collection forecasts, the Company's largest borrower has requested extended repayment terms due to declining collections. The Company is working with the borrower and its partners to finalize amended loan agreements. An amended loan agreement would allow the borrower to meet their minimum required payments over a longer repayment period with a higher interest rate. In the event that the borrower defaults on a loan, the Company expects to recoup the majority of principal and interest owed, albeit over a longer period and with more uncertainty than an amended loan agreement. Due to the inherent risks and uncertainty of this situation, the Company has increased its reserve for credit losses by $
From inception of the specialty lending program through September 30, 2023, the Company has incurred no actual credit losses.
Recently adopted accounting pronouncement
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASC 326 requires the application of a credit loss model based prospectively on current expected credit losses (CECL), and replaces the previous model based retrospectively on past incurred losses.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, of which the Company reported only accounts receivable and notes receivable as of December 31, 2022. Results for reporting periods
10
beginning January 1, 2023 are presented under ASC 326, whereas prior periods continue to be reported under previously acceptable GAAP.
Accounts receivable are expected to be collected in less than one year and are therefore classified as current assets. Notes receivable are reported within current and non-current assets based upon the timing of expected collection. Management’s intent is to hold notes receivable for the foreseeable future or until maturity or payoff.
The reserve for credit losses required by the adoption of ASC 326 is a valuation account that is deducted from (or added to) the accounts receivables and to the notes receivable’s amortized cost basis in order to present on the condensed consolidated balance sheets the net amount expected to be collected. The credit loss expense, and subsequent adjustments to such losses, are recorded as a provision for (or reversal of) credit loss expense in the condensed consolidated statements of income.
Estimating future credit losses requires significant judgment by management. Significant judgments include, but are not limited to, assessing the debtors’ current financial condition, assessing current economic conditions and the extent to which they are relevant to the existing characteristics of the Company’s accounts and notes receivables, assessing the relevance of the estimated life of notes receivable, and determining the level of reliance on historical experience in light of economic conditions. The Company will continually review and update, when necessary, all such relevant judgments and assessments in determining the reserves for credit losses.
The Company previously estimated that the adoption of ASC 326 would result in an adjustment to accumulated deficit on January 1, 2023 of between $
Reserve for Credit Losses - Accounts Receivable
The Company carries accounts receivable at the face amounts le
ss a reserve for estimated credit losses. As of December 31, 2022, an allowance for doubtful accounts of $
The Company only extends credit to entities and institutions of significance, such as well-known academic institutions and US government agencies. Consequently, historical accounts receivable credit losses are nearly zero, which provides the starting point for management’s assessment of the reserve for credit losses for its accounts receivable.
The Company elected to base its estimation of expected credit losses for accounts receivable on historical credit loss experience. However, in assessing relevant information including its assessment of current conditions, management determined that a credit loss allowance slightly higher than its historical data would indicate is appropriate for certain of its revenue generating activities.
As of December 31, 2022 and under previously acceptable GAAP, the Company recorded a $
11
Reserve for Credit Losses - Notes Receivable
Notes receivable are reported at amortized cost, net of a reserve for credit losses. Amortized cost is the principal balance outstanding, net of deferred fees and costs on originated loans. Non-performing notes receivable are charged off against the reserve when management has confirmed the note to be uncollectable. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. No amounts were recorded as a reserve for credit losses to notes receivable as of December 31, 2022.
Under ASC 326, the Company elected to evaluate notes receivable as a single pool, for individual notes receivable and borrowers with similar risk characteristics. Notes receivable and borrowers that do not share risk characteristics are evaluated on an individual basis. Management estimates the reserve balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience typically provides the basis for an estimation of expected credit losses; however, the Company lacks sufficient data upon which to base a historical estimation. Additionally, since the Company began recording notes receivable on the condensed consolidated balance sheets, the Company has recorded no actual credit losses to notes receivable.
Lacking historical internal data upon which to base a reserve for credit losses to notes receivable, the Company, under ASC 326, elected to base its reserve on external credit loss experience data. Management observes that the Company's notes receivable are similar in character to transactions undertaken by smaller banking institutions. The Company elected to base its estimation of expected credit losses on the Scaled Current Expected Credit Loss (CECL) Allowance Loss Estimator ("SCALE rate") available from the Federal Reserve, which was
As of December 31, 2022 and under previously acceptable GAAP, the Company recorded no reserve for credit losses to notes receivable. Using a revised basis for estimation under ASC 326, management determined the cumulative reserve for credit losses of $
Note 3 – Accounts Receivable, net
The Company’s accounts receivable, net consists of accounts receivables recorded in the ordinary course of business associated with the recognition of revenue from contracts with customers. As of December 31, 2022, accounts receivable, net recorded on the consolidated balance sheet was $
The following presents the adjustment to accounts receivable, net as a result of the implementation of ASC 326 on January 1, 2023 (in thousands):
|
Accounts receivable as of December 31, 2022 |
|
$ |
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts as of December 31, 2022 |
|
|
(
|
) |
|
Cumulative effect of the implementation of ASC 326 |
|
|
(
|
) |
|
Beginning balance of reserve for credit losses as of January 1, 2023 |
|
|
(
|
) |
|
Accounts receivable, net of reserve for credit losses as of January 1, 2023 |
|
$ |
|
|
In accordance with ASC 326, the Company performs a review of accounts receivables on a quarterly basis. During the nine months ended September 30, 2023, the Company recorded no material adjustments for credit losses in selling, general and administrative expense on the condensed consolidated statement of income related to accounts receivable. As of September 30, 2023, the reserve for credit losses was approximately $
12
Note 4 – Notes Receivable, net
The Company’s notes receivable, net consists of investments in loans to buyers of charged-off and nonperforming receivable portfolios. As of September 30, 2023 and December 31, 2022, the Company’s outstanding notes receivables, net of unamortized deferred fees and costs on originated loans, and adjusted for the reserve for credit losses was $
On January 1, 2023, the Company recorded an allowance for credit losses for notes receivable in accordance with ASC 326, as described in
Note 2 – Summary of Significant Accounting Policies, Recently Adopted Accounting Pronouncement
. The cumulative effects as of December 31, 2022 of the modified retrospective method of adoption of ASC 326 required the Company to record on the condensed consolidated balance sheets as of January 1, 2023 a reserve for credit losses to notes receivable of $
The following presents the adjustment to notes receivable, net as a result of the implementation of ASC 326 on January 1, 2023 (in thousands):
|
Notes receivable, net as of December 31, 2022 |
|
$ |
|
|
|
|
|
|
|
|
|
Reserve for credit losses of December 31, 2022 |
|
|
|
|
|
Cumulative effect of the implementation of ASC 326 |
|
|
(
|
) |
|
Beginning balance of reserve for credit losses as of January 1, 2023 |
|
|
(
|
) |
|
Notes receivable, net of reserve for credit losses as of January 1, 2023 |
|
$ |
|
|
|
|
|
|
|
|
13
Note 5 – Stock-based Compensation
As of September 30, 2023, the Company had four stock-based compensation plans, which are described more fully in Note 17 – Stockholders' Equity - Stock-Based Compensation Plans of the Company's audited consolidated financial statements for the year ended December 31, 2022 contained in the Company’s Form 10-K.
At the Company's 2022 Annual Meeting of Shareholders, the Company's shareholders approved the 2022 Heritage Global Inc. Equity Incentive Plan, which replaces the Heritage Global Inc. 2016 Plan, and authorized the issuance of an aggregate of
Stock Options
During the nine months ended September 30, 2023, the Company issued options to purch
ase
The following summarizes the changes in common stock options for the nine months ended September 30, 2023:
|
|
|
Options |
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate Intrinsic Value (In thousands) |
|
||||
|
Outstanding as of December 31, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
||
|
Exercised |
|
|
(
|
) |
|
$ |
|
|
|
|
|
|
|
|
||
|
Forfeited |
|
|
(
|
) |
|
$ |
|
|
|
|
|
|
|
|
||
|
Outstanding as of September 30, 2023 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Options exercisable as of September 30, 2023 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
The Company recognized stock-based compensation expense related to common stock optio
ns of $
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
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
On August 3, 2022, the Company granted
14
On March 1, 2023, the Company granted
On March 31, 2023, the Company granted
On April 1, 2023, the Company granted
The Company determined the fair value of the shares awarded by using the closing price of our common stock as of the grant date. Stock-based compensation expense related to the restricted stock awards was approximately $
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 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. In April 2022, KNFH LLC, of which the Company holds a 25% share, was formed to purchase certain real estate assets and machinery and equipment among partners in a joint venture. In December 2022, DHC8 LLC, of which the Company holds a 13.33% share, was formed to provide funding and receive principal and interest payments as a result of the initial investment. In May 2023, HGC MPG Funding LLC, of which the Company holds a 25% share, was formed as a joint venture with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. CPFH LLC, KNFH LLC and DHC8 LLC are joint ventures formed in connection with the Company’s Industrial Assets Division, whereas HGC Origination I LLC, HGC Funding I LLC, and HGC MPG Funding LLC were formed in connection with the Financial Assets Division. The Company has significant influence over the operations and financial policies of each of its equity method investments.
In accordance with ASC 326, the Company performs a review of notes receivable on a quarterly basis for each of its specialty lending investments. During the nine months ended September 30, 2023, the Company’s share of the joint venture’s provision for credit losses was approximately $
The table below details the Company’s joint venture revenues and earnings during the nine months ended September 30, 2023 and 2022 (in thousands):
|
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
2023 |
|
|
2022 |
|
||
|
Revenues: |
|
|
|
|
|
|
||
|
CPFH LLC |
|
$ |
|
|
|
$ |
|
|
|
KNFH LLC |
|
|
|
|
|
|
|
|
|
DHC8 LLC |
|
|
|
|
|
|
|
|
|
HGC Origination I LLC and HGC Funding I LLC |
|
|
|
|
|
|
|
|
|
HGC MPG Funding LLC |
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Operating income (loss): |
|
|
|
|
|
|
||
|
CPFH LLC |
|
$ |
|
|
|
$ |
|
|
|
KNFH LLC |
|
|
(
|
) |
|
|
|
|
|
DHC8 LLC |
|
|
|
|
|
|
|
|
|
HGC Origination I LLC and HGC Funding I LLC |
|
|
|
|
|
|
|
|
|
HGC MPG Funding LLC |
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
|
|
|
$ |
|
|
15
The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of September 30, 2023 and December 31, 2022 (in thousands):
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
|
2023 |
|
|
2022 |
|
||
|
Assets: |
|
|
|
|
|
|
||
|
KNFH LLC |
|
$ |
|
|
|
$ |
|
|
|
DHC8 LLC |
|
|
|
|
|
|
|
|
|
HGC Origination I LLC and HGC Funding I LLC |
|
|
|
|
|
|
|
|
|
HGC MPG Funding LLC |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Liabilities: |
|
|
|
|
|
|
||
|
KNFH LLC |
|
$ |
|
|
|
$ |
|
|
|
DHC8 LLC |
|
|
|
|
|
|
|
|
|
HGC Origination I LLC and HGC Funding I LLC |
|
|
|
|
|
|
|
|
|
HGC MPG Funding LLC |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
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
In periods in which the Company records 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. As the preferred stock does not participate in losses, the two-class method is not used in periods in which the Company records a net loss.
Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”). In calculating diluted EPS, such shares are assumed to be exercised or converted, except when their effect would be anti-dilutive.
The table below shows the calculation of the number of shares used in computing diluted EPS:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Basic weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock effect of common stock options and restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2023 and 2022, there were potential common share
s of
16
Note 8 – Leases
The Company leases office and warehouse space in
On August 12, 2022, the Company entered into an agreement with Liberty Industrial Park, LLC pursuant to which the Company leases
On June 1, 2023, the Company amended its Edwardsville office building lease with David Ludwig, extending the term of the agreement to May 31, 2027 and setting rent amounts for the new term. It provides for an initial monthly base rent of $
The right-of-use assets and lease liabilities for each lease location are as follows (in thousands):
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
|
2023 |
|
|
2022 |
|
||
|
Right-of-use assets: |
|
|
|
|
|
|
||
|
Del Mar, CA |
|
$ |
|
|
|
$ |
|
|
|
Hayward, CA |
|
|
|
|
|
|
|
|
|
San Diego, CA |
|
|
|
|
|
|
|
|
|
Edwardsville, IL |
|
|
|
|
|
|
|
|
|
Total right-of-use assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Lease liabilities |
|
|
|
|
|
|
||
|
Del Mar, CA |
|
$ |
|
|
|
$ |
|
|
|
Hayward, CA |
|
|
|
|
|
|
|
|
|
San Diego, CA |
|
|
|
|
|
|
|
|
|
Edwardsville, IL |
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
$ |
|
|
|
$ |
|
|
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 used 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
Lease expense is recognized on a straight-line basis over the lease term. For the nine months ended September 30, 2023 and 2022, lease expense was approximately $
|
2023 (remainder of year from October 1, 2023 to December 31, 2023) |
|
$ |
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total undiscounted future minimum lease payments |
|
|
|
|
|
Less: imputed interest |
|
|
(
|
) |
|
Present value of lease liabilities |
|
$ |
|
|
17
Note 9 – Intangible Assets and Goodwill
Intangible assets
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 except for lives), and are amortized using the straight-line method over their remaining estimated useful lives. 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.
|
|
|
Remaining |
|
|
Carrying Value |
|
|
|
|
|
Carrying Value |
|
||||
|
|
|
Life |
|
|
December 31, |
|
|
|
|
|
September 30, |
|
||||
|
|
|
(years) |
|
|
2022 |
|
|
Amortization |
|
|
2023 |
|
||||
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Trade Name (HGP) |
|
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Trade Name (ALT) |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Vendor Relationship (ALT) |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Total amortizable intangible assets |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Trade Name (NLEX) |
|
N/A |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Amortization expense during the nine months ended September 30, 2023 and 2022 was $
As of September 30, 2023, the estimated amortization expense for the remainder of the current fiscal year and the next five fiscal years and thereafter is shown below (in thousands):
|
Year |
|
Amount |
|
|
|
2023 (remainder of year from October 1, 2023 to December 31, 2023) |
|
$ |
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total estimated amortization expense |
|
$ |
|
|
Goodwill
The Company’s goodwill relates to its acquisition of various entities. Goodwill consists of the following at September 30, 2023 and December 31, 2022 (in thousands):
|
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
|
ALT |
|
$ |
|
|
|
$ |
|
|
|
HGP |
|
|
|
|
|
|
|
|
|
NLEX |
|
|
|
|
|
|
|
|
|
Total goodwill |
|
$ |
|
|
|
$ |
|
|
There were
18
Note 10 – Debt
Outstanding debt as of September 30, 2023 and December 31, 2022 is summarized as follows (in thousands):
|
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
|
Third party debt, current |
|
$ |
|
|
|
$ |
|
|
|
Third party debt, non-current |
|
|
|
|
|
|
|
|
|
Total third party debt |
|
$ |
|
|
|
$ |
|
|
2021 Credit Facility
On May 5, 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 ("Lender") for a $
On August 23, 2022, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “2022 Modification Agreement”), effective as of April 1, 2022, by and between the Company and Lender. The 2022 Modification Agreement modified and reaffirmed the 2021 Credit Facility to provide for, among other things, the arrangement of financial covenants, which remained unchanged, into two categories: (i) financial covenants used to resize the maximum principal amount available to the Company as of the date of determination (as determined by Lender in its sole discretion), and (ii) financial covenants to be maintained by the Company.
On May 26, 2023, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Modification Agreement”), effective as of May 26, 2023, by and between the Company and Lender. The Modification Agreement modifies and reaffirms the 2021 Credit Facility to, among other things, extend the maturity date, modify the applicable interest rate, and further modify the loan covenants. The maturity date was modified to October 27, 2024. The applicable interest rate spread and floor was modified to be the Wall Street Journal Prime rate plus
ALT Note
On August 23, 2021, the Company entered into a $
19
2023 Credit Facility
On May 26, 2023, the Company entered into a promissory note, a business loan agreement and commercial security agreement (collectively, the “2023 Credit Facility”) with C3 Bank. The 2023 Credit Facility provides for a new $
Note 11 – Income Taxes
As of September 30, 2023, the Company had a
ggregate tax net operating loss carry forwards of approximately $
The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income from operations before taxes primarily as a result of the impact of state income taxes.
The Company records net deferred tax assets to the extent that it believes such assets will more likely than not be realized. As a result of cumulative losses and uncertainty with respect to future taxable income, the Company has provided a partial valuation allowance against its net deferred tax assets as of September 30, 2023 and December 31, 2022.
Note 12 – Related Party Transactions
As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by the President of NLEX and a member of the board of directors of the Company, David Ludwig. The total amount paid to the related party for both nine month periods ended September 30, 2023 and 2022 was approximately $
20
Note 13 – Segment Information
The following table sets forth certain financial information for the Company's reportable segments (in thousands):
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Industrial Assets Division: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Auction and Liquidation |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Refurbishment & Resale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total divisional operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Financial Assets Division: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Brokerage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Lending |
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total divisional operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Corporate operating expense & other income |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Consolidated operating income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of Heritage Global Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three and nine month periods ended September 30, 2023 and 2022, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 24, 2023 (the “Form 10-K”).
Forward Looking Information
This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may,” "will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These statements are subject to certain risks, uncertainties, and assumptions, including the important factors noted under Item 1A “Risk Factors” in our Form 10-K, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.
Overview, History and Recent Developments
Heritage Global Inc. was incorporated in Florida in 1983 under the name “MedCross, Inc.” Our name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, to “Counsel RB Capital Inc.” in 2011, and to Heritage Global Inc. in 2013. The most recent name change more closely identifies HG with its auction and specialty lending business lines.
Our corporate headquarters are located at 12625 High Bluff Drive, Suite 305, San Diego, CA 92130. Our telephone number is (858) 847-0659 and our corporate website is www.hginc.com . Information contained on our website is not incorporated by reference into this Form 10-Q.
22
The organization chart below outlines our basic domestic corporate structure as of September 30, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heritage Global Inc. (1) |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100% |
|
100% |
|
|
100% |
|
100% |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heritage Global
|
|
Heritage Global LLC
(3)
|
|
|
National Loan
|
|
Heritage Global Capital LLC
(6)
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heritage ALT LLC
(4)
|
|
|
|
|
|
|
|
|
|
____________________
(1) Registrant.
(2) Auction and Liquidation.
(3) Holding Company.
(4) Refurbishment and Resale.
(5) Brokerage.
(6) Specialty Lending.
Specialty Lending - Concentration and credit risk
As of September 30, 2023, we held a gross balance of investments in notes receivable of $37.6 million, recorded in both notes receivable and equity method investments, and consisting of one borrower’s note balance of approximately $21.8 million, or 58% as of September 30, 2023, down from 73% as of June 30, 2023. We do not intend to hold highly concentrated balances due from one borrower as part of its long-term strategy but may, in the short term, have concentration risk on our path to an established and diversified portfolio.
We do not evaluate concentration risk solely based on balance due from specific borrowers, but also consider the number of portfolio purchases, type of charged off accounts within the portfolio, and the seller of the portfolio when determining the overall risk. Of the balance due from one borrower of $21.8 million, there are 31 distinct loan agreements, the underlying portfolio of accounts are diversified throughout FinTech, installment loans and credit card accounts, and further diversified amongst six separate sellers of these charged off portfolios.
We mitigate this concentration risk as follows. We require, and monitor, security from each borrower consisting of their charged off and nonperforming receivable portfolios. We engage in a due diligence process that leverages our valuation expertise. In the event of default, we are entitled to call the unpaid interest and principal balances and receive all collections directly. We may also recover our investment by engaging a third party to collect on the underlying charged off or nonperforming receivable portfolio or the underlying portfolio can be sold through our Brokerage segment. In certain cases, our recovery options may be subject to concurrence of the originator or other prior holder of the assets.
Currently, declining collections are being experienced industry-wide and are expected to continue in the short-term. While most of our borrowers are still tracking to their collection forecasts, our largest borrower has requested extended repayment terms due to declining collections. We are working with the borrower and our partners to finalize amended loan agreements. An amended loan agreement would allow the borrower to meet their minimum required payments over a longer repayment period with a higher interest rate. In the event that the borrower defaults on a loan, we expect to recoup the majority of principal and interest owed, albeit over a longer period and with more uncertainty than an amended loan agreement. Due to the inherent risks and uncertainty of this situation, we have increased our reserve for credit losses by $0.9 million to $1.4 million, or 3.8%. From inception of the specialty lending program through September 30, 2023, the Company has incurred no actual credit losses.
Industry and Competition
23
Our business consists primarily of the auction, appraisal, refurbishment and asset advisory services provided by our Industrial Assets Division and the charged-off receivable brokerage and specialty financing services provided by our Financial Assets Division, each of which is further described below. Our business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, charged-off receivable and distressed debt. The market for all of these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, we compete with other liquidators, auction companies, dealers and brokers. We also compete with them for potential purchasers and lenders. Some competitors have significantly greater financial and marketing resources and name recognition.
We believe that our business is positioned to grow in all economic cycles. As the economy encounters situations of recession and rising credit costs, our business may experience wider margins on principal asset sales, a favorable lending cycle for charged-off and nonperforming asset portfolios, higher volumes of nonperforming assets and building surplus inventories and bankruptcies. In times of economic growth, our business has demonstrated its ability to experience growth based on our competitive advantages in the industry, including our domain expertise related to deal sourcing and execution capabilities, our diversification of integrated service platforms and our experience across underserved markets. We intend to continue to leverage our competitive advantages to grow within each segment and across platforms through increasing synergies, maintaining high incremental margins, improving earnings predictability, strengthening financial metrics reflected on our balance sheet and managing expenses.
Our business strategy in the Specialty Lending and Auction and Liquidation segments includes the option of partnering with one or more additional purchasers or lenders, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). These Joint Ventures give us access to more opportunities, by helping to mitigate some of the competition from the market’s larger participants and by contributing to our objective to be the leading resource for clients requiring financial and industrial asset solutions.
Our Competitive Strengths
We believe we have attributes that differentiate us from our competitors and that provide us with significant competitive advantages. Our key competitive strengths are described below.
Differentiated business model - We believe we have diversified business lines serving the financial and industrial asset liquidation market. We have multiple revenue streams in our brokerage and principal based auction services, advisory services and secured lending services. Further, our business is event-driven and we have repeat, forward-flow contracts in place with industry leading customers. We expect to drive growth in our revenue streams by taking different roles, and by using partners as needed.
Compelling macro growth drivers - Historically, recessions drive an increased supply of surplus assets and an increased demand for liquidation services, which we believe we are well-positioned to provide. Further, consumer lending and resulting charge-offs are expected to continue their upward trend to meet, and possibly exceed, pre-pandemic levels, which we believe will drive an increased supply of non-performing consumer loans. Additionally, we believe an active market for mergers and acquisitions in manufacturing industries drives demand for industrial asset liquidations and our services. The market in which we operate is highly fragmented, presenting a continued opportunity for the Company to increase market share and drive consolidation.
High return on invested capital - We believe we have an opportunity to drive improved auction economics by serving more frequently in the role of principal rather than the lower margin role of broker. Further, we believe we have a strong growth opportunity in providing secured loans to our financial asset debt buyers, a service we are providing through HGC.
Strong management team - We have built an experienced executive-level management team with deep domain expertise. Our President and Chief Executive Officer, Ross Dove, is a third-generation auctioneer and a pioneering innovator in applying technology to the asset liquidation industry. Mr. Dove began his career in the auction business over thirty years ago, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008. In addition, our senior management team has deep domain expertise in both industrial asset and financial asset transactions. On September 17, 2020, we entered into an Employment Agreement with Kirk Dove, the former President and Chief Operating Officer of the Company. Upon his resignation, Kirk Dove continued his employment with us in an advisory capacity, and is expected to do so until December 31, 2024. Also, during 2020, Nick Dove was appointed as President, Industrial Assets Division, and David Ludwig was appointed as President, Financial Assets Division. Nick Dove previously served as Executive Vice President of Sales of Heritage Global Partners since August 2017. David Ludwig previously served as President of NLEX, a wholly owned subsidiary of the Company, and has served in such capacity since the Company acquired NLEX in 2014.
Financial Assets Division
Our Financial Assets Division provides services 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.
24
Brokerage Segment
Through NLEX, we act as an advisor for sales of charged-off and nonperforming asset portfolios via an electronic auction exchange platform for banks, the U.S. government, and other debt holders throughout the United States and Canada. Since the 1980s, NLEX has sold over $150 billion face value of performing, nonperforming and charged-off assets. NLEX sales are concentrated in online, automotive, consumer credit card, student loan and real estate charge-offs. The typical credit we broker sells at a deep discount to face value, and we typically receive a commission for these services from both buyers and sellers. We have existing relationships with high quality, top- tier and mid-tier debt buyers. NLEX is in the process of expanding into the FinTech lenders, peer-to-peer lending and Buy Now Pay Later sectors, where we believe NLEX has opportunity for significant growth. In addition, we plan to add post-sale initiatives, making our services more attractive to our customers as compared to our competitors.
Specialty Lending Segment
Through HGC, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. Since the inception of HGC in 2019, we have issued $142 million in total loans to investors by both self- funded loans and in partnership with senior lenders. Our portion of the total loans funded since inception is $59.5 million. Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share. In general, we expect to earn an annual rate of return on our share of notes receivable outstanding of approximately 20% or more based on established terms of the loans funded and performance of collections. As of September 30, 2023, our total balance related to investments in loans to buyers of charged-off and nonperforming receivable portfolios was $35.9 million, of which $20.6 million is classified as Notes Receivable and $15.3 million is classified as Equity Method Investments.
Our management team has decades of domain expertise with the ability to leverage extensive funding activity and widespread industry relationships. We believe we have the opportunity for growth through increased penetration of the underserved market of mid-tier buyers of charged-off receivables, providing more economic financing options and a greater variety of funding solutions to our customers.
25
Industrial 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.
Auction and Liquidation Segment
Through HGP, we offer a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. The fees for our services typically range from 15%–50%, depending on our role and the transaction. This division predominantly targets sellers of surplus or distressed “inside the building” assets. Our buyers consist of both end-users and dealers.
Refurbishment & Resale Segment
Through ALT, we have specialized our offering in the biotech and pharma sectors, which have been key verticals over the past decade. ALT focuses on refurbishing and reselling laboratory equipment.
Our management team has decades of domain expertise with the ability to leverage extensive industry relationships, real time access to databases of buyers and sales, as well as a deep understanding of the underlying asset value across the more than 25 industrial sectors in which we operate. We believe we have the opportunity for growth in our auction services through our ability to secure ongoing contracts with large multinational sellers, to be a first mover in emerging sectors, and to gain market share in sectors in which we are currently less active. Our extensive network and ability to find and source new opportunities are key factors for expansion. We believe we have the opportunity for growth in our valuation services through the addition of incremental bank-approved vendor lists, geographic expansion and through deeper penetration with our existing bank relationships.
Government Regulation
We are subject to federal, state and local consumer protection laws, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices. Many jurisdictions also regulate “auctions” and “auctioneers” and may regulate online auction services. These consumer protection laws and regulations could result in substantial compliance costs and could interfere with the conduct of our business.
Legislation in the United States has increased public companies’ regulatory and compliance costs as well as the scope and cost of work provided by independent registered public accountants and legal advisors. As regulatory and compliance guidelines continue to evolve, we may incur additional costs in the future, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations references our unaudited condensed consolidated interim financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). This 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 and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our 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.
We have no off-balance sheet arrangements.
We have not paid any dividends, and do not expect to pay any dividends in the future.
The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Form 10-K. We adopted a change in accounting policy effective January 1, 2023, as fully described in Note 2 – Summary of Significant Accounting Policies, Recently Adopted Accounting Pronouncement, of the financial statements attached to this Form 10-Q. This change, referred to as “ASC 326,” was required by the Financial Accounting Standards Board. Prior periods were not restated, and the cumulative effect to periods prior to January 1, 2023 were recorded to our condensed consolidated balance sheets as of that date. Prospectively, the change will not have a material effect on our results of operations. Other than this required change, there were no changes to our accounting policies during the nine months ended September 30, 2023.
26
Management’s Discussion of Financial Condition
Liquidity and Capital Resources
Liquidity
We had working capital of $13.8 million and $7.7 million as of September 30, 2023 and December 31, 2022, respectively.
Our current assets as of September 30, 2023 increased to $33.9 million compared to $23.9 million as of December 31, 2022. This change was primarily due to an increase in the current portion of notes receivable of $5.8 million, an increase in cash of $2.9 million, and an increase in accounts receivable of $1.9 million. Our current liabilities as of September 30, 2023 increased to $20.1 million compared to $16.2 million as of December 31, 2022. The most significant change was an increase of $7.0 million in our payables to sellers due to the timing of certain asset liquidation settlements, offset by a decrease in accounts payable and accrued liabilities of $3.1 million.
During the nine months ended September 30, 2023, our primary source of cash was cash on hand, proceeds from the Term Loan and cash provided by operating activities. Cash disbursements during the nine months ended September 30, 2023 consisted primarily of investments in notes receivable net of cash received on transfer of notes to partners of $18.8 million, equity method investments of $6.5 million, repayment on our 2021 Credit Facility of $7.3 million, repayment on our ALT Note of $0.4 million, repayment on our Term Loan of $0.4 million, payment of operating expenses, and settlement of auction liabilities.
We believe we can fund our operations and our debt service obligations for at least 12 months from the date of filing this quarterly report through a combination of working capital, cash flows from our on-going operations and accessing financing from our existing line of credit.
Our indebtedness consists of a promissory note dated August 23, 2021 (the “ALT Note”) issued in the amount of $2.0 million as part of the aggregate purchase price paid to acquire certain assets and liabilities of American Laboratory Trading, any amounts borrowed under our 2021 Credit Facility, and the Term Loan. The terms of the ALT Note require us to pay off the Note in 48 equal installments of approximately $44,000 with an interest rate of 3% per annum and a maturity date of August 23, 2025. As of September 30, 2023, we had an outstanding balance of $1.0 million on the ALT Note. On May 26, 2023, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Modification Agreement”), by and between the Company and C3 Bank. The Modification Agreement modifies and reaffirms the 2021 Credit Facility to, among other things, extend the maturity date, modify the applicable interest rate, and further modify the loan covenants. The maturity date was modified to October 27, 2024. We are permitted to use the proceeds of the loan solely for our business operations. As of September 30, 2023, we had an outstanding balance of $1.6 million on the 2021 Credit Facility. The Term Loan requires we pay monthly installments over a 5-year term with adjustments for changes in the variable interest rate. As of September 30, 2023, we had an outstanding balance of $6.6 million on the Term Loan.
Capital Resources
As of September 30, 2023 and December 31, 2022, we had stockholders’ equity of $56.4 million and $48.3 million, respectively.
We determine our future capital and operating requirements based upon our current and projected operating performance and contractual commitments. We expect to be able to finance our future operations through a combination of working capital, future net cash flows from operating activities, our 2021 Credit Facility and Term Loan. Our contractual requirements are limited to the outstanding debt and lease commitments with related and unrelated parties. Capital requirements are generally limited to our purchases of surplus and distressed assets and our investment activity under our Specialty Lending segment. We believe that our current capital resources, including available borrowing capacity from our 2021 Credit Facility and Term Loan, are sufficient for these requirements. In the event additional capital is needed, we believe we can obtain additional debt financing through capital partners.
27
Cash Position and Cash Flows
Cash and cash equivalents as of September 30, 2023 were $15.6 million as compared to $12.7 million as of December 31, 2022, an increase of approximately $2.9 million.
Cash Provided By Operating Activities
Cash provided by operations was $12.6 million during the nine months ended September 30, 2023 as compared to $2.6 million during the same period in 2022. The approximate $10.0 million change was primarily attributable to a change of $8.0 million in net income adjusted for noncash items during the nine months ended September 30, 2023 as compared to the same period in 2022. The amount was offset by changes in operating assets and liabilities of $2.0 million during the nine months ended September 30, 2023 as compared to the same period in 2022.
The changes in operating assets and liabilities during the nine months ended September 30, 2023 as compared to the same period in 2022 are primarily due to the nature of our operations. We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination thereof. The operating assets and liabilities associated with these deals are, therefore, subject to the same variability and can be quite different at the end of any given period.
Cash (Used In) Provided by Investing Activities
Cash used in investing activities during the nine months ended September 30, 2023 was $14.5 million compared to cash provided by investing activities of $3.9 million during the same period in 2022.
Cash used in investing activities during the nine months ended September 30, 2023 consisted primarily in investment in notes receivable of $27.6 million and equity method investments of $6.5 million, related entirely to specialty lending activity within our Financial Assets Division. Cash used in investing activities during the nine months ended September 30, 2023 was offset by cash provided by investing activities primarily of cash received on transfer of notes receivable to partners of $8.9 million, payments received on notes receivable of $6.1 million as well as return of investment and cash distributions received from equity method investments of $4.8 million.
Cash provided by investing activities during the nine months ended September 30, 2022 consisted primarily of payments received on notes receivable of $2.4 million as well as return of investment and cash distributions received from equity method investments of $10.2 million in the aggregate, which included $1.7 million related to specialty lending activity within our Financial Assets Division, $5.9 million from the sale of the remaining real estate assets of CPFH LLC, the joint venture, located in Huntsville, Alabama, and $2.6 million from the sales of real estate and machinery and equipment assets of KNFH LLC. Cash provided by investing activities during the nine months ended September 30, 2022 was offset by cash used in investment in equity method investments of $8.1 million, of which $6.6 million related to specialty lending activity within our Financial Assets Division and $1.5 million cash used in our Industrial Assets Division directly related to the acquisition of two pharmaceutical plants, formerly of Nesher Pharmaceuticals.
Cash Provided By (Used In) Financing Activities
Cash provided by financing activities was approximately $4.9 million during the nine months ended September 30, 2023 compared to cash used in financing activities of $2.6 million during the nine months ended September 30, 2022. Financing activities during the nine months ended September 30, 2023 consisted primarily of $13.0 million in proceeds from draws on our 2021 Credit Facility and our Term Loan, offset by $7.3 million in repayments to our 2021 Credit Facility, $0.4 million in repayments to our Term Loan and $0.4 million in repayments to our ALT Note. Financing activities during the nine months ended September 30, 2022 consisted primarily of a $1.9 million repayment to our 2021 Credit Facility and $0.4 million in repayments to our ALT Note.
28
Contractual Obligations
Our significant contractual obligations are our third party loans, client and partner asset liquidation settlement payments and lease obligations. The loan and lease obligations are fully described in the notes to the consolidated financial statements included in our Form 10-K.
Management’s Discussion of Results of Operations
The following table sets out the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands).
|
|
|
Three Months Ended September 30, |
|
|
Change |
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
Dollars |
|
|
Percent |
|
|
2023 |
|
|
2022 |
|
|
Dollars |
|
|
Percent |
|
||||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Services revenue |
|
$ |
9,985 |
|
|
$ |
7,349 |
|
|
|
2,636 |
|
|
|
36 |
% |
|
$ |
30,040 |
|
|
$ |
16,112 |
|
|
$ |
13,928 |
|
|
|
86 |
% |
|
Asset sales |
|
|
5,566 |
|
|
|
5,312 |
|
|
|
254 |
|
|
|
5 |
% |
|
|
15,221 |
|
|
|
16,971 |
|
|
|
(1,750 |
) |
|
|
(10 |
)% |
|
Total revenues |
|
|
15,551 |
|
|
|
12,661 |
|
|
|
2,890 |
|
|
|
23 |
% |
|
|
45,261 |
|
|
|
33,083 |
|
|
|
12,178 |
|
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services revenue |
|
|
2,423 |
|
|
|
2,051 |
|
|
|
372 |
|
|
|
18 |
% |
|
|
6,570 |
|
|
|
3,715 |
|
|
|
2,855 |
|
|
|
77 |
% |
|
Cost of asset sales |
|
|
3,413 |
|
|
|
3,015 |
|
|
|
398 |
|
|
|
13 |
% |
|
|
9,683 |
|
|
|
12,048 |
|
|
|
(2,365 |
) |
|
|
(20 |
)% |
|
Selling, general and administrative |
|
|
6,806 |
|
|
|
5,693 |
|
|
|
1,113 |
|
|
|
20 |
% |
|
|
19,546 |
|
|
|
14,907 |
|
|
|
4,639 |
|
|
|
31 |
% |
|
Depreciation and amortization |
|
|
132 |
|
|
|
134 |
|
|
|
(2 |
) |
|
|
(1 |
)% |
|
|
373 |
|
|
|
400 |
|
|
|
(27 |
) |
|
|
(7 |
)% |
|
Total operating costs and expenses |
|
|
12,774 |
|
|
|
10,893 |
|
|
|
1,881 |
|
|
|
17 |
% |
|
|
36,172 |
|
|
|
31,070 |
|
|
|
5,102 |
|
|
|
16 |
% |
|
Earnings of equity method investments |
|
|
(8 |
) |
|
|
1,706 |
|
|
|
(1,714 |
) |
|
|
(100 |
)% |
|
|
675 |
|
|
|
5,960 |
|
|
|
(5,285 |
) |
|
|
(89 |
)% |
|
Operating income |
|
|
2,769 |
|
|
|
3,474 |
|
|
|
(705 |
) |
|
|
(20 |
)% |
|
|
9,764 |
|
|
|
7,973 |
|
|
|
1,791 |
|
|
|
22 |
% |
|
Interest expense, net |
|
|
(56 |
) |
|
|
(21 |
) |
|
|
(35 |
) |
|
|
167 |
% |
|
|
(225 |
) |
|
|
(96 |
) |
|
|
(129 |
) |
|
|
134 |
% |
|
Income before income tax expense |
|
|
2,713 |
|
|
|
3,453 |
|
|
|
(740 |
) |
|
|
(21 |
)% |
|
|
9,539 |
|
|
|
7,877 |
|
|
|
1,662 |
|
|
|
21 |
% |
|
Income tax expense |
|
|
736 |
|
|
|
1,153 |
|
|
|
(417 |
) |
|
|
(36 |
)% |
|
|
1,954 |
|
|
|
2,354 |
|
|
|
(400 |
) |
|
|
17 |
% |
|
Net income |
|
$ |
1,977 |
|
|
$ |
2,300 |
|
|
$ |
(323 |
) |
|
|
(14 |
)% |
|
$ |
7,585 |
|
|
$ |
5,523 |
|
|
$ |
2,062 |
|
|
|
37 |
% |
Our revenue has several components: (1) traditional fee based asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment and real estate, and (3) fees and interest earned for appraisal, management advisory services and specialty lending services.
We report 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 our reportable segments. We manage our business primarily on differentiated revenue streams for services offered. Our reportable segments consist of the Auction and Liquidation segment, Refurbishment & Resale segment, Brokerage segment, and Specialty Lending segment. Our Auction and Liquidation segment, through HGP, operates as a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. Our Refurbishment & Resale segment, through ALT, acquires, refurbishes and supplies specialized laboratory equipment. Our Brokerage segment, through NLEX, brokers charged-off receivables in the U.S. and Canada on behalf of financial institutions. Our Specialty Lending segment, through HGC, provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.
29
We evaluate the performance of our reportable segments based primarily on operating income. Notwithstanding the foregoing, the reported segment operating income for ALT and HGC represents incremental costs for managing these segments as part of their sister segments (HGP for ALT and NLEX for HGC). As such, the reported operating income for ALT and HGC does not represent their true standalone contribution, as we do not attempt to allocate existing fixed divisional overhead costs of the sister divisions to the newer segments. Similarly, corporate overhead cost is not allocated to the operating divisions for management reporting purposes. Further, we do not utilize segmented asset information to evaluate the performance of our reportable segments and do not include intercompany transfers between segments for management reporting purposes.
The following table sets forth operating income for the Company's reportable segments (in thousands):
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Industrial Assets Division: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Auction and Liquidation |
|
$ |
1,099 |
|
|
$ |
2,393 |
|
|
$ |
3,282 |
|
|
$ |
6,241 |
|
|
Refurbishment & Resale |
|
|
1,001 |
|
|
|
665 |
|
|
|
2,838 |
|
|
|
1,006 |
|
|
Total divisional operating income |
|
|
2,100 |
|
|
|
3,058 |
|
|
|
6,120 |
|
|
|
7,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Financial Assets Division: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Brokerage |
|
|
2,055 |
|
|
|
1,246 |
|
|
|
6,217 |
|
|
|
2,582 |
|
|
Specialty Lending |
|
|
(206 |
) |
|
|
320 |
|
|
|
1,093 |
|
|
|
898 |
|
|
Total divisional operating income |
|
|
1,849 |
|
|
|
1,566 |
|
|
|
7,310 |
|
|
|
3,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Corporate operating expense & other income |
|
|
(1,180 |
) |
|
|
(1,150 |
) |
|
|
(3,666 |
) |
|
|
(2,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Consolidated operating income |
|
$ |
2,769 |
|
|
$ |
3,474 |
|
|
$ |
9,764 |
|
|
$ |
7,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Three-Month Period Ended September 30, 2023 Compared to Three-Month Period Ended September 30, 2022
Revenues and cost of revenues – Revenues were $15.6 million during the three months ended September 30, 2023 compared to $12.7 million during the same period in 2022. Costs of services revenue and asset sales were $5.8 million during the three months ended September 30, 2023 compared to $5.1 million during the same period in 2022. The gross profit of these items was $9.7 million during the three months ended September 30, 2023 compared to $7.6 million during the same period in 2022, an increase of approximately $2.1 million, or approximately 28%. The increased gross profit in the third quarter of 2023 reflects the substantial increase in service revenue due to strong performance in the Financial Assets Division, as well as the normal changes in the timing and magnitude of asset liquidation transactions.
30
Selling, general and administrative expense – Selling, general and administrative expense was $6.8 million during the three months ended September 30, 2023 compared to $5.7 million during the same period in 2022.
Significant components of selling, general and administrative expense for the three months ended September 30, 2023 and September 30, 2022 are shown below (in thousands):
|
|
|
Three Months Ended September 30, |
|
|
|
|
||||||
|
|
|
2023 |
|
|
2022 |
|
|
% change |
|
|||
|
Compensation |
|
|
|
|
|
|
|
|
|
|||
|
Auction and liquidation |
|
$ |
1,754 |
|
|
$ |
1,765 |
|
|
|
(1 |
)% |
|
Refurbishment and resale |
|
|
592 |
|
|
|
389 |
|
|
|
52 |
% |
|
Brokerage |
|
|
1,193 |
|
|
|
1,255 |
|
|
|
(5 |
)% |
|
Specialty lending |
|
|
282 |
|
|
|
138 |
|
|
|
104 |
% |
|
Corporate and other |
|
|
627 |
|
|
|
664 |
|
|
|
(6 |
)% |
|
Stock-based compensation |
|
|
175 |
|
|
|
170 |
|
|
|
3 |
% |
|
Consulting |
|
|
64 |
|
|
|
32 |
|
|
|
100 |
% |
|
Board of Directors fees |
|
|
90 |
|
|
|
89 |
|
|
|
1 |
% |
|
Accounting, tax and legal professional fees |
|
|
442 |
|
|
|
296 |
|
|
|
49 |
% |
|
Insurance |
|
|
133 |
|
|
|
119 |
|
|
|
12 |
% |
|
Occupancy |
|
|
313 |
|
|
|
291 |
|
|
|
8 |
% |
|
Travel and entertainment |
|
|
182 |
|
|
|
156 |
|
|
|
17 |
% |
|
Advertising and promotion |
|
|
150 |
|
|
|
89 |
|
|
|
69 |
% |
|
Information technology support |
|
|
96 |
|
|
|
103 |
|
|
|
(7 |
)% |
|
Provision for credit losses |
|
|
545 |
|
|
|
— |
|
|
|
100 |
% |
|
Other |
|
|
168 |
|
|
|
137 |
|
|
|
23 |
% |
|
Total selling, general & administrative expense |
|
$ |
6,806 |
|
|
$ |
5,693 |
|
|
|
20 |
% |
As compared to the third quarter of 2022, there was an increase in selling, general and administrative expense during the third quarter of 2023 primarily due to increased compensation expense as a result increased headcount and our provision for credit losses.
Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended September 30, 2023 and the same period in 2022, which consisted primarily of amortization expense related to intangible assets.
Nine-Month Period Ended September 30, 2023 Compared to Nine-Month Period Ended September 30, 2022
Revenues and cost of revenues – Revenues were $45.3 million during the nine months ended September 30, 2023 compared to $33.1 million during the same period in 2022. Costs of services revenue and asset sales were $16.3 million during the nine months ended September 30, 2023 compared to $15.8 million during the same period in 2022. The gross profit of these items was $29.0 million during the nine months ended September 30, 2023 compared to $17.3 million during the same period in 2022, an increase of approximately $11.7 million, or approximately 68%. The increased gross profit in 2023 reflects the substantial increase in service revenue due to strong performance in the Financial Assets Division, as well as the normal changes in the timing and magnitude of asset liquidation transactions.
Selling, general and administrative expense – Selling, general and administrative expense was $19.5 million during the nine months ended September 30, 2023 compared to $14.9 million during the same period in 2022.
Significant components of selling, general and administrative expense for the nine months ended September 30, 2023 and September 30, 2022 are shown below (in thousands):
31
|
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||
|
|
|
2023 |
|
|
2022 |
|
|
% change |
|
|||
|
Compensation |
|
|
|
|
|
|
|
|
|
|||
|
Auction and liquidation |
|
$ |
4,740 |
|
|
$ |
4,618 |
|
|
|
3 |
% |
|
Refurbishment and resale |
|
|
1,638 |
|
|
|
1,154 |
|
|
|
42 |
% |
|
Brokerage |
|
|
4,725 |
|
|
|
3,129 |
|
|
|
51 |
% |
|
Specialty lending |
|
|
773 |
|
|
|
425 |
|
|
|
82 |
% |
|
Corporate and other |
|
|
1,780 |
|
|
|
1,405 |
|
|
|
27 |
% |
|
Stock-based compensation |
|
|
582 |
|
|
|
384 |
|
|
|
52 |
% |
|
Consulting |
|
|
92 |
|
|
|
72 |
|
|
|
28 |
% |
|
Board of Directors fees |
|
|
244 |
|
|
|
235 |
|
|
|
4 |
% |
|
Accounting, tax and legal professional fees |
|
|
1,296 |
|
|
|
895 |
|
|
|
45 |
% |
|
Insurance |
|
|
400 |
|
|
|
342 |
|
|
|
17 |
% |
|
Occupancy |
|
|
950 |
|
|
|
797 |
|
|
|
19 |
% |
|
Travel and entertainment |
|
|
627 |
|
|
|
521 |
|
|
|
20 |
% |
|
Advertising and promotion |
|
|
404 |
|
|
|
310 |
|
|
|
30 |
% |
|
Information technology support |
|
|
299 |
|
|
|
290 |
|
|
|
3 |
% |
|
Provision for credit losses |
|
|
632 |
|
|
|
— |
|
|
|
100 |
% |
|
Other |
|
|
364 |
|
|
|
330 |
|
|
|
10 |
% |
|
Total selling, general & administrative expense |
|
$ |
19,546 |
|
|
$ |
14,907 |
|
|
|
31 |
% |
As compared to the nine months ended September 30, 2022, there was an increase in selling, general and administrative expense during the nine months ended September 30, 2023 primarily due to increased compensation expense as a result of our improved financial performance across our operating segments and increased headcount, as well as our provision for credit losses.
Depreciation and amortization expense – Depreciation and amortization expense was $0.4 million and $0.4 million during the nine months ended September 30, 2023 and September 30, 2022, respectively, which consisted primarily of amortization expense related to intangible assets.
32
Key Performance Indicators
We monitor a number of financial and non-financial measures on a regular basis in order to track our underlying operational performance and trends. Other than operating income (a GAAP financial measure as shown in our consolidated statements of income), which we believe is the most important measure of our operational performance and trends, we believe that EBITDA and Adjusted EBITDA (non-GAAP financial measures) are key performance indicators (“KPIs”) for our business. These KPIs may not be defined or calculated in the same way as similar KPIs used by other companies.
We prepared our unaudited condensed consolidated financial statements in accordance with GAAP. We define EBITDA as net income plus depreciation and amortization, interest expense, and provision for income taxes. Adjusted EBITDA reflects EBITDA adjusted further to eliminate the effects of stock-based compensation. Management uses EBITDA and Adjusted EBITDA in assessing the Company’s results, evaluating the Company’s performance and in reaching operating and strategic decisions. Management believes that the presentation of EBITDA and Adjusted EBITDA, when considered together with our GAAP financial statements and the reconciliation to the most directly comparable GAAP financial measure, is useful in providing investors a more complete understanding of the factors and trends affecting the underlying performance of the Company on a historical and ongoing basis. Our use of EBITDA and Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the financial information below, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands).
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
Net income |
|
$ |
1,977 |
|
|
$ |
2,300 |
|
|
$ |
7,585 |
|
|
$ |
5,523 |
|
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Depreciation and amortization |
|
|
132 |
|
|
|
134 |
|
|
|
373 |
|
|
|
400 |
|
|
Interest expense, net |
|
|
56 |
|
|
|
21 |
|
|
|
225 |
|
|
|
96 |
|
|
Income tax expense |
|
|
736 |
|
|
|
1,153 |
|
|
|
1,954 |
|
|
|
2,354 |
|
|
EBITDA |
|
|
2,901 |
|
|
|
3,608 |
|
|
|
10,137 |
|
|
|
8,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Management add back: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stock based compensation |
|
|
175 |
|
|
|
170 |
|
|
582 |
|
|
384 |
|
||
|
Adjusted EBITDA |
|
$ |
3,076 |
|
|
$ |
3,778 |
|
|
$ |
10,719 |
|
|
$ |
8,757 |
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a Smaller Reporting Company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures.
As of the end of the period covered by this Report, our Chief Executive Officer and Principal Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required t o be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective as of September 30, 2023.
Further, there were no changes in our internal control over financial reporting during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
PART II – OTHE R INFORMATION
Item 1. Legal Proceedings
There have been no material changes to the legal proceedings discussed in our Form 10-K.
Item 1A. R isk Factors
As a Smaller Reporting Company, we are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equi ty Securities and Use of Proceeds.
None.
Item 3. Defaults Upo n Senior Securities.
None.
Item 4. Mine Saf ety Disclosures.
Not applicable.
Item 5. Other Information.
None.
34
Item 6. Exhibits.
(a) Exhibits
|
Exhibit No. |
|
Identification of Exhibit |
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
35
SIGNAT URES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.
|
|
|
Heritage Global Inc. |
||
|
|
|
|
|
|
|
Date: November 9, 2023 |
|
By: |
|
/s/ Ross Dove |
|
|
|
|
|
Ross Dove |
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Brian J. Cobb |
|
|
|
|
|
Brian J. Cobb |
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
(Principal Financial Officer and Principal Accounting Officer) |
36