UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
or
For the transition period from ___________ to ___________
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
The |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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, a 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.
Large accelerated filer |
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Accelerated filer |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements
of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of Common Stock held by non-affiliates as of June 30, 2022, was approximately $
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2023 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
Explanatory Note
This Amendment No. 1 includes: Item 8 of Part II, “Financial Statements and Supplementary Data” in its entirety and without change from the Original Filing other than the correction of the signing date of the Report of Independent Registered Public Accounting Firm of Baker Tilly US, LLP; and Item 15 of Part IV, including Exhibit 23.2, which includes the correct date of the Report of Independent Registered Public Accounting Firm within the Consent of Baker Tilly US, LLP.
Except as otherwise expressly noted above, this Amendment No. 1 does not amend, update or change any other disclosures in the Original Filing. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and our other filings with the SEC.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements required by this Item are included herein, commencing on page F-1.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Report of UHY LLP, Independent Registered Public Accounting Firm (PCAOB ID:
Report of Baker Tilly US, LLP, Independent Registered Public Accounting Firm (PCAOB ID:
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Income for the years ended December 31, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
These schedules are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
Exhibit Number |
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Title of Exhibit |
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3.1 |
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3.2 |
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4.1 |
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4.2 |
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10.1* |
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10.2* |
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10.3* |
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10.4* |
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10.5* |
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10.6* |
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10.7* |
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10.8 |
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10.9 |
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10.10 |
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10.11 |
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10.12* |
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10.13* |
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10.14* |
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10.15* |
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10.16 |
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10.17* |
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10.18* |
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10.19* |
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10.20 |
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10.21 |
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10.22 |
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10.23 |
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10.24 |
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10.25 |
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10.26 |
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10.27 |
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10.28 |
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10.29* |
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10.30* |
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10.31* |
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10.32 |
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10.33 |
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10.34 |
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10.35 |
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10.36 |
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10.37 |
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10.38 |
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10.39 |
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10.40 |
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10.41 |
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10.42 |
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10.43 |
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16.1 |
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21 |
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23.1 |
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23.2 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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Inline XBRL Instance Document |
101.SCH |
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Inline XBRL Taxonomy Extension Schema |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Indicates a management contract or compensatory plan required to be filed as an exhibit.
The following Schedules are included in our Financial Statements:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
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HERITAGE GLOBAL INC. |
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(Registrant) |
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Dated: February 7, 2024 |
By: |
/s/ Ross Dove |
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Ross Dove, Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
/s/ Brian J. Cobb |
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Brian J. Cobb, Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
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Title |
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Date |
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/s/ Ross Dove |
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Chief Executive Officer and Director (Principal Executive Officer) |
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February 7, 2024 |
Ross Dove |
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/s/ David Ludwig |
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Director |
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February 7, 2024 |
David Ludwig |
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/s/ Michael Hexner |
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Director |
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February 7, 2024 |
Michael Hexner |
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/s/ William Burnham |
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Director |
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February 7, 2024 |
William Burnham |
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/s/ Barbara Sinsley |
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Director |
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February 7, 2024 |
Barbara Sinsley |
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/s/ Kelly Sharpe |
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Director |
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February 7, 2024 |
Kelly Sharpe |
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/s/ Samuel L. Shimer |
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Chairman of the Board of Directors |
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February 7, 2024 |
Samuel L. Shimer |
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7
INDEX OF FINANCIAL STATEMENTS
Title of Document
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
of Heritage Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Heritage Global Inc. and its subsidiaries (the Company) as of December 31, 2022, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation Allowance for Deferred Tax Assets
As described in Notes 2 and 14 to the financial statements, the Company recognizes deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. We identified the valuation allowance on deferred tax assets as a critical audit matter due to the high degree of judgment in projecting the realization of net operating losses.
The primary procedures we performed to address this critical audit matter include the following:
F-1
/s/
We have served as the Company's auditor since 2022.
March 24, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
of Heritage Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Heritage Global, Inc. and its subsidiaries (the "Company") as of December 31, 2021, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
F-2
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
DEFERRED TAX ASSETS
Critical Audit Matter Description
As described in Notes 2 and 14 to the consolidated financial statements, the Company recognizes deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. We identified the deferred tax assets as a critical audit matter due to the valuation allowance assessment which represents a significant estimate with a high degree of subjectivity.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
BUSINESS COMBINATION – FAIR VALUE OF INTANGIBLE ASSETS
Critical Audit Matter Description
As described in Note 3 to the consolidated financial statements, the Company accounted for the American Laboratory Trading acquisition as a business combination and allocated the purchase price amongst the tangible and intangible assets acquired and liabilities assumed. Auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified intangible assets and liabilities.
We identified the valuation of intangible assets recorded in connection with the acquisition as a critical audit matter. The fair value estimates were based on underlying assumptions about future performance of the acquired business which involves significant estimation uncertainty.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
F-3
/s/
We have served as the Company's auditor since 2014.
March 17, 2022
F-4
HERITAGE GLOBAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except share and per share amounts)
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December 31, |
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2022 |
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2021 |
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ASSETS |
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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 of allowance for doubtful accounts of $ |
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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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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 consolidated financial statements.
F-5
HERITAGE GLOBAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of US dollars, except share and per share amounts)
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Year Ended December 31, |
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2022 |
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2021 |
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Revenues: |
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Services revenue |
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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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Income before income tax benefit |
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Income tax benefit |
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( |
) |
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( |
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Net income |
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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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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 consolidated financial statements.
F-6
HERITAGE GLOBAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands of US dollars, except share amounts)
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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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Balance as of December 31, 2020 |
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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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Issuance of common stock from stock option awards |
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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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Issuance of restricted common stock |
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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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Issuance of common stock due to conversion of Series N Preferred stock |
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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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Stock-based compensation expense |
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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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Net income |
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|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance as of December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
||||||
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 December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
|
|
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|
|||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
HERITAGE GLOBAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars)
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by (used in) operating |
|
|
|
|
|
|
||
Amortization of deferred issuance costs and fees |
|
|
|
|
|
|
||
Earnings of equity method investments |
|
|
( |
) |
|
|
|
|
Noncash lease expense |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Deferred taxes |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation expense |
|
|
|
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
( |
) |
|
Inventory – equipment |
|
|
( |
) |
|
|
( |
) |
Other assets |
|
|
|
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
|
|
|
|
( |
) |
|
Payables to sellers |
|
|
( |
) |
|
|
( |
) |
Lease liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) operating activities |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Cash flows used in investing activities: |
|
|
|
|
|
|
||
Investment in notes receivable |
|
|
( |
) |
|
|
( |
) |
Payments received on notes receivable |
|
|
|
|
|
|
||
Investment in equity method investments |
|
|
( |
) |
|
|
( |
) |
Return of investment in equity method investments |
|
|
|
|
|
|
||
Cash distributions from equity method investments |
|
|
|
|
|
|
||
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
Acquisition, net of cash acquired |
|
|
|
|
|
( |
) |
|
Cash received on transfer of notes receivable to partners |
|
|
|
|
|
|
||
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Cash flows provided by 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 cashless exercises of stock option awards |
|
|
( |
) |
|
|
( |
) |
Repurchase of common stock |
|
|
( |
) |
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
||
Net decrease 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 consolidated financial statements.
F-8
HERITAGE GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Description of Business and Principles of Consolidation
These consolidated 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 HPG, Refurbishment & Resale, through ALT, Brokerage, through NLEX and Specialty Lending, through HGC.
COVID-19
While the novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company's performance during 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales by financial institutions, and a delay in the typical process for the sale of certain industrial assets by manufacturing companies, it did not have a material negative impact on the Industrial Assets Division during 2022, as the supply of surplus industrial assets largely returned to pre-pandemic levels and the continuing disruptions to the global supply chain, particularly those involving industrial assets, increased demand for U.S. based surplus assets. COVID-19’s potentially negative impact on the Financial Assets Division in 2022 from reduced charged-off receivable portfolio volumes was offset by an increase in business volume and an influx of new clients for the NLEX brokerage business as a result of adaptive changes made during 2021. Going forward, the Company does not believe the COVID-19 pandemic will have material negative impacts on its financial performance, as it expects that supply and demand will remain robust in the Industrial Assets Division and increasing consumer spending and rising delinquency and charge-off rates will result in expanding volumes of nonperforming and charged-off consumer loans, which will benefit the Financial Assets Division.
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 $4.0 million in common shares over a three year period ending in June of 2025. As of December 31, 2022, the Company had approximately $3.6 million in remaining aggregate dollar value of shares that may be purchased under the program. There were 243,468 shares repurchased in the open market for approximately $0.4 million during 2022.
Note 2 – Summary of Significant Accounting Policies
Use of estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
F-9
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.
Reclassifications
Nature of Business
The Company earns revenue both from commission or fee-based services, and from the sale of distressed or surplus assets. With respect to the former, revenue is recognized as the services are provided. With respect to the latter, the majority of the asset sale transactions are conducted directly by the Company and the revenue is recognized in the period in which the asset is sold. Fee based revenue is reported as services revenue, and the associated direct costs are reported as cost of services revenue. At the balance sheet date, any unsold assets which the Company owns are reported as inventory, any outstanding accounts receivable are included in the Company’s accounts receivable, and any associated liabilities are included in the Company’s accrued liabilities. Equipment inventory is expected to be sold within a year and is therefore classified as a current asset.
The remaining asset sale transactions involve the Company acting jointly with one or more additional purchasers or lenders, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). 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 (“ASC 323”), are accounted for as equity method investments, and, accordingly, the Company’s proportionate share of the net income (loss) is reported as earnings of equity method investments. At each balance sheet date, the Company’s investments in these Joint Ventures are reported in the consolidated balance sheet as equity method investments. These investments are classified on the balance sheet as non-current assets due to the uncertainties relating to the timing of resale of the underlying assets as a result of the Joint Venture relationship. The Company monitors the value of the Joint Ventures’ underlying assets and liabilities and records a write down of its investments if the Company concludes that there has been a decline in the value of the net assets. As the activity of the Joint Ventures involves asset purchase/resale transactions, which is similar in nature to the Company’s other activities, the earnings (losses) of the Joint Ventures are included in the operating income in the accompanying consolidated income statements.
Through HGC, a wholly owned subsidiary of HG, the Company provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents with financial institutions in the United States. These accounts may from time to time exceed federally insured limits. The Company has not experienced any losses on such accounts.
Accounts receivable, net
The Company’s accounts receivable primarily relate to the operations of its asset liquidation business. They generally consist of three major categories: (1) fees, commissions and retainers relating to appraisals and auctions, (2) receivables from asset sales, and (3) receivables from Joint Venture partners. The initial value of an account receivable corresponds to the fair value of the underlying goods or services. To date, a majority of the receivables have been classified as current and, due to their short-term nature, any decline in fair value would be due to issues involving collectability. At each financial statement date the collectability of each outstanding account receivable is evaluated, and an allowance is recorded if the book value exceeds the amount that is deemed collectable. See Note 11 for more detail regarding the Company’s accounts receivable.
F-10
Notes receivable, net
The Company’s notes receivable balance consists of loans to buyers of charged-off and nonperforming receivable portfolios, which is considered the only loan category or segment to be reported under the applicable accounting guidance. These loans are measured at historical costs and reported at their outstanding principal balances net of any unamortized deferred fees and costs on originated loans. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans.
As of December 31, 2022, the Company has
Inventory - Equipment
The Company’s inventory consists of assets acquired for resale, which are normally expected to be sold within a one-year operating cycle. All inventory is recorded at the lower of cost or net realizable value.
Employee Retention Credit
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including the Employee Retention Credit ("ERC"), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
As an employer that carried on a trade or business during calendar year 2020 and whose gross receipts were less than
As the Company has incurred certain employment taxes during 2021 and have yet to receive the refundable ERC, the Company has accounted for the credit as a loss recovery under ASC Topic 410, Asset Retirement and Environmental Obligations (by analogy), which indicates that a claim for recovery should be recognized only when the claim is probable as it is defined in ASC Topic 450, Contingencies. The Company has determined that the claim is in alignment with applicable regulatory criteria, the amounts are known and realizable, and refundable ERC is probable. As of both December 31, 2022 and 2021, the Company recorded a $
Equity Method Investments
Fair value of financial instruments
The fair value of financial instruments is the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. At December 31, 2022 and 2021, the carrying values of the Company’s cash and cash equivalents, accounts receivable, other assets, and accounts payable approximate fair value given the short term nature of these instruments. The Company’s notes receivable and debt obligations approximate fair value as a result of the interest rate on the receivable or debt obligation approximating prevailing market rates.
F-11
There are three levels within the fair value hierarchy: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – significant other observable inputs; and Level 3 – significant unobservable inputs. At December 31, 2022 and 2021, the Company had no material financial instruments requiring fair value measurement on a recurring basis.
Business combinations
Acquisitions are accounted for under ASC Topic 805, Business Combinations (“ASC 805”), which requires that assets acquired and liabilities assumed that are deemed to be a business are recorded based on their respective acquisition date fair values. ASC 805 further requires that separately identifiable intangible assets be recorded at their acquisition date fair values and that the excess of consideration paid over the fair value of assets acquired and liabilities assumed (including identifiable intangible assets) should be recorded as goodwill. In August 2021 the Company acquired American Laboratory Trading for approximately $
Intangible assets
Goodwill
Goodwill, which results from the difference between the purchase price and the fair value of net identifiable tangible and intangible assets acquired in a business combination, is not amortized but, in accordance with GAAP, is tested at least annually for impairment. The Company performs its annual impairment test as of October 1. In testing goodwill, the Company initially uses a qualitative approach and analyzes relevant factors to determine if events and circumstances have affected the value of the goodwill. If the result of this qualitative analysis indicates it is more likely than not that the value has been impaired, the Company then applies a quantitative approach to calculate the difference between the goodwill’s recorded value and its fair value. An impairment loss is recognized to the extent that the recorded value exceeds its fair value. Goodwill, in addition to being tested for impairment annually, is tested for impairment at interim periods if an event occurs or circumstances change such that it is more likely than not that the carrying amount of goodwill may be impaired.
All of the Company’s goodwill relates to its acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, and is discussed in more detail in Note 10.
Deferred income taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. In 2014, as a result of incurring losses in previous years, the Company recorded a valuation allowance against all of its net deferred tax assets. In the fourth quarter of 2022, the Company recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $
F-12
Liabilities and contingencies
The Company is involved from time to time in various legal matters arising out of its operations in the normal course of business. On a case by case basis, the Company evaluates the likelihood of possible outcomes for this litigation. Based on this evaluation, the Company determines whether a loss accrual is appropriate. If the likelihood of a negative outcome is probable, and the amount can be reasonably estimated, the Company accounts for the estimated loss in the current period. See Note 13 for further discussion.
Revenue 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 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 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.
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 (“ASC 323”), 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 includes loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.
F-13
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.
Cost of services revenue and asset sales
Cost of services revenue generally includes the direct costs associated with generating commissions and fees from the Company’s auction and appraisal services, merger and acquisition advisory services, and brokering of charged-off receivable portfolios. The Company recognizes these expenses in the period in which the revenue they relate to is recorded. Cost of asset sales generally includes the cost of purchased inventory and the related direct costs of selling inventory. The Company recognizes these expenses in the period in which title to the inventory passes to the buyer, and the buyer assumes the risk and reward of the inventory.
Stock-based compensation
The Company’s stock-based compensation is primarily in the form of options to purchase common shares. The grant date fair value of stock options is calculated using the Black-Scholes option pricing model. The determination of the fair value of the Company’s stock options is based on a variety of factors including, but not limited to, the price of the Company’s common stock, the expected volatility of the stock price over the expected life of the award, and expected exercise behavior. The grant date fair value of the awards is subsequently expensed over the vesting period, net of estimated forfeitures. The provisions of the Company’s stock-based compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore the Company classifies the option awards as equity. See Note 17 for further discussion of the Company’s stock-based compensation.
Advertising
The Company expenses advertising costs in the period in which they are incurred. Advertising and promotion expense included in selling, general and administrative expense for both years ended December 31, 2022 and 2021, was $
F-14
Future accounting pronouncements
In 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which applies a current expected credit loss model which is a new impairment model based on expected losses rather than incurred losses. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from, or added to, the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC Topic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, which provides authoritative guidance for the accounting of the Company’s notes receivable. With respect to smaller reporting companies, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company currently expects the adoption of ASU 2016-13 will result in an adjustment to retained earnings on January 1, 2023 between $
Note 3 – Business Combinations
The Company has determined that the acquisition of certain assets and liabilities of American Laboratory Trading, ("ALT") constitutes a business acquisition as defined by ASC Topic 805, Business Combinations ("ASC 805"). Accordingly, the assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s purchase price allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data. Fair values are determined based on the requirements of ASC Topic 820, Fair Value Measurement (“ASC 820”).
On August 23, 2021, the Company acquired (the “Transaction”) certain assets and liabilities of American Laboratory Trading pursuant to the terms and conditions of an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated August 18, 2021, among the Company, American Laboratory Trading and certain individuals named therein. The aggregate purchase price paid to American Laboratory Trading was approximately $
On August 23, 2021, in connection with the Transaction, a wholly-owned subsidiary of HG (“RE Purchaser”), acquired the real property used in ALT’s business (the “Property”) pursuant to a Purchase and Sale Agreement (the “Real Estate Purchase Agreement” and together with the Purchase Agreement, the “Agreements”), dated August 18, 2021, between 12 Colton Road, LLC and RE Purchaser. The purchase price for the Property was $
ALT is a supplier of refurbished lab equipment and a provider of surplus asset services for the life sciences industry. The acquisition enhances the Company’s position in the biotech sector. Acquisition-related costs consisted of external fees for advisory, legal, and other professional services and totaled approximately $
F-15
The major classes of assets and liabilities to which the Company has allocated the purchase price were as follows (in thousands):
Accounts receivable |
$ |
|
|
Inventory – equipment |
|
|
|
Property, plant and equipment |
|
|
|
Intangible assets |
|
|
|
Goodwill |
|
|
|
Other assets |
|
|
|
Accounts payable and accrued liabilities |
|
( |
) |
Purchase price |
$ |
|
The $
The excess of the consideration transferred over the fair values of assets acquired and liabilities assumed was recorded as goodwill, which was primarily attributed to increased synergies that are expected to be achieved from the acquisition. Goodwill is expected to be deductible for income tax purposes.
The financial results of ALT have been included in the Company's consolidated financial statements since the date of the acquisition and have been reported as part of the Company's Industrial Assets Division under Refurbishment & Resale.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information presented in the table below (in thousands) is provided for illustrative purposes only and summarizes the combined results of operations of the Company and ALT. For purposes of this pro forma presentation, the acquisition of ALT is assumed to have occurred on January 1, 2021. The pro forma financial information for all periods presented also includes the estimated business combination accounting effects resulting from this acquisition, notably amortization expense from the acquired intangible assets, interest expense from the ALT Note, and certain other integration related impacts.
This unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on January 1, 2021, nor of the results of operations that may be obtained in the future.
|
|
Year Ended December 31, |
|
|
|
|
2021 |
|
|
Pro forma revenues |
|
$ |
|
|
Pro forma net income |
|
$ |
|
|
|
|
|
|
|
Pro forma net income per share - basic |
|
$ |
|
|
Pro forma net income per share - diluted |
|
$ |
|
|
Note 4 – Notes Receivable, net
The Company’s notes receivable balance consists its investments in loans to buyers of charged-off and nonperforming receivable portfolios, which resulted in a total balance of approximately $
F-16
The table below shows the Company’s lending activity:
|
|
2022 |
|
|
2021 |
|
||
Notes receivable, beginning of year |
|
$ |
|
|
$ |
|
||
Investment in notes receivable |
|
|
|
|
|
|
||
Transfer of notes |
|
|
— |
|
|
|
( |
) |
Principal repayments |
|
|
( |
) |
|
|
( |
) |
Notes receivable, end of year |
|
|
|
|
|
|
||
Deferred financing fees and costs, net |
|
|
( |
) |
|
|
( |
) |
Notes receivable, net, end of year |
|
$ |
|
|
$ |
|
||
As of December 31, 2022 and 2021, the Company has
Note 5 – Lessor Arrangement
In June 2019, the Company, with certain partners, entered into agreements to lease, with a purchase option, a fully functional manufacturing building, including all machinery and equipment held within. The assets under lease relate to the Company’s purchase, with certain partners, of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018. The lessee is obligated to make monthly lease payments over a
The real estate portion of the arrangement is held by CPFH LLC, the joint venture, and is accounted for under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the income statement. Refer to Note 6 for further information.
The machinery and equipment portion of the arrangement is jointly owned by all the partners of CPFH LLC, apart from the joint venture entity. Therefore, the Company has derecognized the leased asset of approximately $
Note 6 – Equity Method Investments
In November 2018, CPFH LLC, of which the Company holds a
F-17
The table below details the Company’s joint venture revenues and earnings (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenues: |
|
|
|
|
|
|
||
CPFH LLC |
|
$ |
|
|
$ |
|
||
KNFH LLC |
|
|
|
|
|
|
||
DHC8 LLC |
|
|
|
|
|
|
||
HGC Funding I LLC and Origination I LLC |
|
|
|
|
|
|
||
Total revenues |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Operating (loss) income: |
|
|
|
|
|
|
||
CPFH LLC |
|
$ |
|
|
$ |
( |
) |
|
KNFH LLC |
|
|
|
|
|
|
||
DHC8 LLC |
|
|
|
|
|
|
||
HGC Funding I LLC and Origination I LLC |
|
|
|
|
|
|
||
Total operating (loss) income |
|
$ |
|
|
$ |
( |
) |
|
The table below details the summarized components of assets and liabilities of the Company’s joint ventures (in thousands):
|
|
December 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Assets: |
|
|
|
|
|
|
||
CPFH LLC |
|
|
|
|
|
|
||
KNFH LLC |
|
|
|
|
|
|
||
DHC8 LLC |
|
|
|
|
|
|
||
HGC Funding I LLC and Origination I LLC |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
|
||
CPFH LLC |
|
|
|
|
|
|
||
KNFH LLC |
|
|
|
|
|
|
||
DHC8 LLC |
|
|
|
|
|
|
||
HGC Funding I LLC and Origination I 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 has a net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The two-class method is not used in periods in which the Company has a net loss because the preferred stock does not participate in losses.
Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”), since they are assumed to be exercised or converted, except when their effect would be anti-dilutive.
F-18
The table below shows the calculation of the shares used in computing diluted EPS:
|
|
Year Ended December 31, |
|
|||||
Weighted Average Shares Calculation: |
|
2022 |
|
|
2021 |
|
||
Basic weighted average shares outstanding |
|
|
|
|
|
|
||
Treasury stock effect of common stock options and restricted stock awards |
|
|
|
|
|
|
||
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
||
For 2022 and 2021 there were potential common shares totaling approximately
Note 8 – Leases
The Company leases office and warehouse space primarily in
On August 12, 2022, the Company entered into an agreement (the “Lease”) with Liberty Industrial Park, LLC (“Landlord”) pursuant to which the Company leases
The right-of-use assets and lease liabilities for each location are as follows (in thousands):
|
|
December 31, |
|
|
December 31, |
|
||
Right-of-use assets: |
|
2022 |
|
|
2021 |
|
||
Del Mar, CA |
|
$ |
|
|
$ |
|
||
Hayward, CA |
|
|
|
|
|
|
||
San Diego, CA |
|
|
|
|
|
— |
|
|
Edwardsville, IL |
|
|
|
|
|
|
||
Total right-of-use assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
December 31, |
|
|
December 31, |
|
||
Lease liabilities: |
|
2022 |
|
|
2021 |
|
||
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 for leases determined to be operating leases is recognized on a straight-line basis over the lease term. For 2022 and 2021, lease expense was approximately $
F-19
The lease expense for each location are as follows (in thousands):
|
|
|
|
|
|
|
||
|
|
December 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Del Mar, CA |
|
$ |
|
|
$ |
|
||
Hayward, CA |
|
|
|
|
|
|
||
San Diego, CA |
|
|
|
|
|
— |
|
|
Edwardsville, IL |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
As of December 31, 2022, undiscounted future minimum lease payments related to leases that have initial or remaining lease terms in excess of one year are as follows (in thousands):
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total undiscounted future minimum lease payments |
|
|
|
|
Less imputed interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
Note 9 – Property and Equipment, net
Property and equipment are recorded at historical cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. The life of the building acquired in connection of the ALT purchase transaction was determined to be
The following summarizes the components of the Company’s property and equipment (in thousands):
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Building |
|
$ |
|
|
$ |
|
||
Land |
|
|
|
|
|
|
||
Furniture, fixtures and office equipment |
|
|
|
|
|
|
||
Software and technology assets |
|
|
|
|
|
|
||
Vehicles |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense related to property and equipment was $
F-20
Note 10 – Intangible Assets and Goodwill
Intangible assets
The details of identifiable intangible assets as of December 31, 2022 and 2021 are shown below (in thousands except for lives):
|
|
Original |
|
Remaining |
|
|
Carrying Value |
|
|
|
|
|
|
|
|
Carrying Value |
|
|||||
|
|
Life |
|
Life |
|
|
December 31, |
|
|
Intangible Assets |
|
|
|
|
|
December 31, |
|
|||||
Amortized Intangible Assets |
|
(years) |
|
(years) |
|
|
2021 |
|
|
Acquired |
|
|
Amortization |
|
|
2022 |
|
|||||
Customer Relationships (HGP) |
|
|
|
— |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Trade Name (HGP) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Trade Name (ALT) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Vendor Relationship (ALT) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unamortized Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Trade Name (NLEX) |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Original |
|
Remaining |
|
|
Carrying Value |
|
|
|
|
|
|
|
|
Carrying Value |
|
|||||
|
|
Life |
|
Life |
|
|
December 31, |
|
|
Intangible Assets |
|
|
|
|
|
December 31, |
|
|||||
Amortized Intangible Assets |
|
(years) |
|
(years) |
|
|
2020 |
|
|
Acquired |
|
|
Amortization |
|
|
2021 |
|
|||||
Customer Relationships (HGP) |
|
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||||
Trade Name (HGP) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||||
Customer Relationships (NLEX) |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||
Trade Name (ALT) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Vendor Relationship (ALT) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unamortized Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Trade Name (NLEX) |
|
N/A |
|
N/A |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Total |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Amortization expense during each of 2022 and 2021 was $
The estimated amortization expense during future years is shown below (in thousands):
Year |
|
Amount |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
F-21
Goodwill
Goodwill consisted of the following at December 31, 2022 and 2021 (in thousands):
Acquisition |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
ALT |
|
$ |
|
|
$ |
|
||
HGP |
|
|
|
|
|
|
||
NLEX |
|
|
|
|
|
|
||
Total goodwill |
|
$ |
|
|
$ |
|
||
The Company performed its annual impairment test for the year ended December 31, 2022 and 2021, and determined that
Note 11 – Accounts Receivable and Accounts Payable
Accounts receivable, net
As described in Note 2, the Company’s accounts receivable are primarily related to the operations of its business. With respect to auction proceeds and asset dispositions, including NLEX’s brokerage transactions, the assets are not released to the buyer until payment has been received. The Company, therefore, is not exposed to significant collectability risk relating to these receivables. Given this experience, together with the ongoing business relationships between the Company and its joint venture partners, the Company has not historically required a formal credit quality assessment in connection with these activities. The Company has not experienced any significant collectability issues with its accounts receivable. As the Company’s business expands, more comprehensive credit assessments may be required.
The Company's allowance for doubtful accounts was approximately $
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consisted of the following, (in thousands):
|
|
2022 |
|
|
2021 |
|
||
Remuneration and benefits |
|
|
|
|
|
|
||
Accrued auction and liquidation expenses |
|
|
|
|
|
|
||
Due to Joint Venture partners |
|
|
|
|
|
|
||
Deferred Revenue |
|
|
|
|
|
|
||
Sales and other taxes |
|
|
|
|
|
|
||
Accounting, auditing and tax consulting |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total accounts payable and accrued liabilities |
|
$ |
|
|
$ |
|
||
Note 12 – Debt
Outstanding debt is summarized as follows (in thousands):
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Current: |
|
|
|
|
|
|
||
Third party debt |
|
$ |
|
|
$ |
|
||
Non-current: |
|
|
|
|
|
|
||
Third party debt |
|
|
|
|
|
|
||
Total third party debt |
|
$ |
|
|
$ |
|
||
F-22
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 for a $
On August 23, 2022, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Modification Agreement”), effective as of April 1, 2022, by and between the Company and C3bank, National Association (the “Lender”). The Modification Agreement modifies and reaffirms that certain promissory note, business loan agreement, commercial security agreement and pledge agreement, dated as of May 5, 2021, by and between the Company and Lender (collectively, the “Loan Agreement”), whereby Lender agreed to make a revolving line of credit to Borrower in the maximum principal amount of $
On August 23, 2021, the Company entered into a $
Note 13 – Commitments and Contingencies
At December 31, 2022 HG does not expect any potential contingent liabilities, individually or in the aggregate, to have a material adverse effect on its assets or results of operations.
F-23
Note 14 – Income Taxes
In 2014 the Company recorded a valuation allowance against its deferred tax assets, reducing the carrying value of those assets to
Balance as of December 31, 2020 |
|
$ |
|
|
Change during 2021 |
|
|
( |
) |
Balance as of December 31, 2021 |
|
|
|
|
Change during 2022 |
|
|
( |
) |
Balance as of December 31, 2022 |
|
$ |
|
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. At December 31, 2021, no additional reduction of the valuation allowance was determined necessary related to the potential utilization of net operating loss carryforwards in future periods, however a reduction of the valuation allowance was made related to the potential realization of certain state net operating loss carryforwards. At December 31, 2022, and due primarily to the performance of the Company, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred taxes of $
At December 31, 2022, the Company has aggregate federal net operating loss carry forwards of $
The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code. These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years.
Restrictions in net operating loss carry forwards occurred in 2001 as a result of the acquisition of the Company by Street Capital. Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carry forwards was limited to approximately $2.5 million per annum until 2008 and $1.7 million per annum thereafter. There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time. In addition, further restrictions, reductions in, or expiration of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities. Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carry forwards.
All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carry forwards against income for tax purposes in the later year. The
The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carry forwards available to shield income attributable to a particular state from being subject to tax in that particular state.
F-24
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 before income tax expense for the following reasons in each of the years ended December 31, (in thousands):
|
|
2022 |
|
|
2021 |
|
||
Expected federal statutory tax expense |
|
$ |
|
|
$ |
|
||
Increase (reduction) in taxes resulting from: |
|
|
|
|
|
|
||
State income taxes |
|
|
|
|
|
|
||
Non-deductible expenses (permanent differences) |
|
|
( |
) |
|
|
( |
) |
Change in valuation allowance |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
|
|
|
|
||
Income tax benefit |
|
$ |
( |
) |
|
$ |
( |
) |
The components of the net deferred tax assets as of December 31, 2022 and 2021 are as follows in (thousands):
|
|
2022 |
|
|
2021 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Net operating loss carry forwards |
|
$ |
|
|
$ |
|
||
Stock based compensation |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total gross deferred tax assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
|
||
Trade names |
|
|
( |
) |
|
|
( |
) |
Customer relationships |
|
|
( |
) |
|
|
( |
) |
Equity method investments |
|
|
|
|
|
( |
) |
|
Operating lease right-of-use assets |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
( |
) |
|
|
( |
) |
Total gross deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
Total deferred tax assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: valuation allowance |
|
|
( |
) |
|
|
( |
) |
Deferred tax assets, net of valuation allowance |
|
$ |
|
|
$ |
|
||
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The company does not expect the IRA will have a material impact to the Company’s financial statements when it becomes effective for the tax years after December 31, 2022.
Uncertain Tax Positions
The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Upon adoption of this principle in 2007, the Company derecognized certain tax positions that, upon examination, more likely than not would not have been sustained as a recognized tax benefit. As a result of derecognizing uncertain tax positions, the Company has recorded a cumulative reduction in its deferred tax assets of approximately $
Due to the Company’s historic policy of applying a valuation allowance against its deferred tax assets, the effect of the above was an offsetting reduction in the Company’s valuation allowance. Accordingly, the above reduction had no net impact on the Company’s financial position, operations or cash flow. As of December 31, 2022, the total unrecognized tax benefit has been determined to be $
F-25
In the unlikely event that these tax benefits are recognized in the future, the amount recognized at that time should result in a reduction in the Company’s effective tax rate.
The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Because the Company has tax loss carry forwards in excess of the unrecognized tax benefits, the Company did not accrue for interest and penalties related to unrecognized tax benefits either upon the initial derecognition of uncertain tax positions or in the current period.
Note 15 – Related Party Transactions
As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig. The total amount paid to the related party was approximately $
Note 16 – Legal Proceedings
The Company is involved in various legal matters arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on the Company.
Note 17 – Stockholders’ Equity
Capital Stock
The Company’s authorized capital stock consists of
During 2022 and 2021 the Company issued
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
F-26
Stock-Based Compensation Plans
At December 31, 2022, the Company had
2010 Non-Qualified Stock Option Plan
In 2010, the Company’s Board approved the 2010 Non-Qualified Stock Option Plan (the “2010 Plan”) to induce certain key employees of the Company or any of its subsidiaries who are in a position to contribute materially to the Company’s prosperity to remain with the Company, to offer such persons incentives and rewards in recognition of their contributions to the Company’s progress, and to encourage such persons to continue to promote the best interests of the Company. The Company reserved
2010 Plan |
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2022 |
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2021 |
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Options outstanding, beginning of year |
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Options granted |
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Options exercised |
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Options forfeited |
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Options outstanding, end of year |
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The outstanding options vest over
Other Options Issued
In 2021, the Company’s Board approved the issuance of options to purchase
Other Options |
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2022 |
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2021 |
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Options outstanding, beginning of year |
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Options issued |
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Options exercised |
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Options forfeited |
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Options outstanding, end of year |
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The outstanding options vest over four years at exercise prices ranging from $0.70 to $1.78 per share.
F-27
Heritage Global Inc. 2016 Stock Option Plan
In 2016, the Company adopted the Heritage Global Inc. 2016 Stock Option Plan (the “2016 Plan”) which provided for the issuance of incentive stock options and non-qualified stock options up to an aggregate of
2016 Plan |
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2022 |
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2021 |
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Options outstanding, beginning of year |
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Options granted |
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Options exercised |
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Options forfeited |
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Options outstanding, end of year |
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The outstanding options under the 2016 Plan vest over
2022 Heritage Global Inc. Equity Incentive Plan
In 2022, 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
2022 Plan |
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2022 |
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Options outstanding, beginning of year |
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Options granted |
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Options outstanding, end of year |
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The outstanding options under the 2022 Plan vest over
Stock-Based Compensation Expense
Total compensation cost related to stock options in both 2022 and 2021 was $
In connection with the stock option grants during 2022 and 2021, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:
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2021 |
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The risk-free interest rates are those for U.S. Treasury constant maturities for terms matching the expected term of the option. The expected life of the options is calculated according to the simplified method for estimating the expected term of the options, based on the vesting period and contractual term of each option grant. Expected volatility is based on the Company’s historical volatility. The Company has never paid a dividend on its common stock and therefore the expected dividend yield is zero.
F-28
The following summarizes the changes in common stock options:
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Weighted |
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Granted |
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Exercised |
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Forfeited |
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Options exercisable at year end |
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Weighted-average fair value of options granted |
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As of December 31, 2022, the Company had unvested options for the purchase of
As of December 31, 2022, the total unrecognized stock-based compensation expense related to unvested stock options was $
The total fair value of options vesting during both 2022 and 2021 was $
The following table summarizes information about all stock options outstanding as of December 31, 2022:
Exercise price |
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Options |
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Weighted |
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Weighted |
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$ 0.40 to $ 0.53 |
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$ 0.70 to $ 0.95 |
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$ 1.37 to $ 1.90 |
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$ 2.77 to $ 3.33 |
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At December 31, 2022 and 2021, the aggregate intrinsic value of exercisable options was $
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.
F-29
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
Note 18 – Segment Information
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company manages its business primarily on differentiated revenue streams for services offered. The Company’s reportable segments consist of the Auction and Liquidation segment, Refurbishment & Resale segment, Brokerage segment, and Specialty Lending segment. The 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. The Refurbishment & Resale segment, through ALT, acquires, refurbishes and supplies specialized laboratory equipment. The Brokerage segment, through NLEX, brokers charged-off receivables in the U.S. and Canada on behalf of financial institutions. The Specialty Lending segment, through HGC, provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.
The Company evaluates the performance of its 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 the Company does 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, the Company does not utilize segmented asset information to evaluate the performance of its reportable segments and does not include intercompany transfers between segments for management reporting purposes.
F-30
The following table sets forth operating income information for the Company's reportable segments (in thousands):
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Year Ended December 31, |
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2022 |
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2021 |
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Industrial Assets Division: |
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Auction and Liquidation |
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$ |
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$ |
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Refurbishment & Resale |
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Total divisional operating income |
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Financial Assets Division: |
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Brokerage |
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Specialty Lending |
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Corporate & other operating loss |
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Consolidated operating income |
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$ |
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$ |
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F-31