Acquisition of National Loan Exchange, Inc.

9 Months Ended

Sep. 30, 2015

Acquisition of National Loan Exchange, Inc. [Text Block]

Note 3 – Acquisition of National Loan Exchange, Inc.

On June 2, 2014, and effective May 31, 2014, the Company acquired all of the issued and outstanding capital stock in National Loan Exchange, Inc. (“NLEX”), a broker of charged-off receivables in the United States and Canada. NLEX operates as a wholly owned division of the Company. The acquisition of NLEX is consistent with HGI’s strategy to expand the services provided by its asset liquidation business. In connection with the acquisition, HGI entered into employment agreements with the previous owner and key employees of NLEX.

The consideration for the acquisition consisted of $2.0 million cash and an earn-out provision (“contingent consideration”). Under the terms of the NLEX purchase agreement, the Company will pay, to the former owner of NLEX, 50% of the Net Profits (as defined in the NLEX stock purchase agreement) of NLEX for each of the four years following the closing. The payments are due on or about July 30 of each year, beginning in 2015. In July 2015 the Company made its first payment to the former owner of NLEX in the amount of $0.5 million. The contingent consideration is capped at an aggregate of $5.0 million, and at September 30, 2015, subject to the application of a 9% discount rate, is estimated to have a present value of approximately $3.9 million. Key assumptions in determining this present value include projected earnings through May 2018 and a weighted average cost of capital of 31.6% . At September 30, 2015, the Company has recorded a current liability of $1.4 million for the estimated second earn-out payment, and estimated that the non-current portion of the contingent consideration is $2.5 million.

In connection with the contingent consideration, during the period January 1, 2015 through September 30, 2015, the Company recognized a total of $0.1 million of interest expense which represents the accretion of the present value discount during the period.

See Note 7 for discussion of the intangible assets and goodwill recorded in connection with the acquisition of NLEX.