Acquisition of National Loan Exchange, Inc.

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

Acquisition of National Loan Exchange, Inc.

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 December 31, 2015, subject to the application of a 9% discount rate, was estimated to have a present value of approximately $3.5 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 December 31, 2015, the Company has recorded a current liability of $0.9 million for the estimated second earn-out payment due in 2016, and estimated that the non-current portion of the contingent consideration is $2.6 million.

In connection with the contingent consideration, the Company recognized a total of $0.2 million of other income which represents the mark-to-market of the present value during the year ended December 31, 2015.

The following table summarizes the consideration paid for NLEX and the amounts of the assets acquired and liabilities assumed, with the excess purchase price recognized as goodwill (in thousands).

Consideration
Cash paid on closing	$	2,000
Contingent consideration		3,989
Total purchase price	$	5,989
Acquisition related costs (included in selling, general, and    administrative expenses in HGI’s consolidated statement of    operations and comprehensive loss for the year ended    December 31, 2014)	$	198
Recognized amounts of identifiable assets acquired and    liabilities assumed
Cash	$	639
Other current assets		17
Fixed assets		14
Identifiable intangible assets		3,390
Accounts payable and accrued liabilities		(656	)
Deferred tax liability		(960	)
Total identifiable net assets assumed		2,444
Goodwill		3,545
	$	5,989

The intangible assets and goodwill are discussed in more detail in Note 8.

The goodwill of $3.5 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and NLEX. None of the goodwill recognized is expected to be deductible for income tax purposes.

The amounts of NLEX revenue and net income for the period June 1, 2014 through December 31, 2014, and January 1, 2015 through December 31, 2015 included in HGI’s consolidated statement of operations for the years then ended, are shown below. Also shown are HGI’s pro-forma consolidated revenue and net loss as if the acquisition of NLEX had occurred on January 1, 2014 (in thousands):

	Revenue		Net income (loss)
NLEX revenue and net income included for the year ended    December 31, 2015	$	4,503	$	1,640
NLEX revenue and net income included for the period June 1, 2014 through    December 31, 2014	$	2,076	$	526
Supplemental pro-forma consolidated revenue and net    loss (unaudited):
HGI revenue and net income for the year ended December 31, 2014	$	15,609	$	(26,506	)