10-Q 1 hgbl-20240331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission file number: 001-39471

img162489445_0.jpg 

HERITAGE GLOBAL INC.

(Exact name of registrant as specified in its charter)

 

Florida

59-2291344

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer Identification No.)

12625 High Bluff Drive, Suite 305, San Diego, CA 92130

(Address of Principal Executive Offices)

(858) 847-0659
(Registrant’s Telephone Number)

N/A

(Registrant’s Former Name)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common stock, $0.01 par value HGBL The Nasdaq Stock Market LLC

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. Yes ☒ No ☐

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). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of May 1, 2024, there were 37,341,185 shares of common stock outstanding, $0.01 par value.

 

 


 

TABLE OF CONTENTS

 

Part I.

Financial Information

 

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

3

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2024 and 2023 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2024 and 2023 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (unaudited)

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

Item 4.

Controls and Procedures

28

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosures

29

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

 

 

Signature Page

31

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 2024

 

 

December 31, 2023

 

ASSETS

 

(unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,577

 

 

$

12,279

 

Accounts receivable (net of allowance for credit losses of $126 in 2024 and $132 in 2023)

 

 

1,558

 

 

 

1,910

 

Current portion of notes receivable (net of allowance for credit losses of $643 in 2024 and $650 in 2023)

 

 

6,514

 

 

 

6,581

 

Inventory – equipment

 

 

4,735

 

 

 

5,074

 

Other current assets

 

 

490

 

 

 

448

 

Total current assets

 

 

28,874

 

 

 

26,292

 

Non-current portion of notes receivable, net

 

 

10,698

 

 

 

10,890

 

Equity method investments

 

 

20,271

 

 

 

21,361

 

Right-of-use assets

 

 

2,377

 

 

 

2,539

 

Property and equipment, net

 

 

1,684

 

 

 

1,705

 

Intangible assets, net

 

 

3,655

 

 

 

3,753

 

Goodwill

 

 

7,446

 

 

 

7,446

 

Deferred tax assets

 

 

8,637

 

 

 

9,115

 

Other assets

 

 

64

 

 

 

67

 

Total assets

 

$

83,706

 

 

$

83,168

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

4,564

 

 

$

7,237

 

Payables to sellers

 

 

6,816

 

 

 

4,975

 

Current portion of third party debt

 

 

1,765

 

 

 

1,733

 

Current portion of lease liabilities

 

 

779

 

 

 

789

 

Total current liabilities

 

 

13,924

 

 

 

14,734

 

Non-current portion of third party debt

 

 

5,040

 

 

 

5,495

 

Non-current portion of lease liabilities

 

 

1,710

 

 

 

1,859

 

Total liabilities

 

 

20,674

 

 

 

22,088

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 563 of Series N as of March 31, 2024 and December 31, 2023; with liquidation preference over common stockholders equivalent to $1,000 per share

 

 

6

 

 

 

6

 

Common stock, $0.01 par value, authorized 300,000,000 shares; issued 37,336,392 and 37,157,616 shares as of March 31, 2024 and December 31, 2023, respectively; and outstanding 36,940,217 and 36,761,441 shares as of March 31, 2024 and December 31, 2023, respectively

 

 

373

 

 

 

372

 

Additional paid-in capital

 

 

294,674

 

 

 

294,522

 

Accumulated deficit

 

 

(231,227

)

 

 

(233,026

)

Treasury stock at cost, 396,175 shares as of March 31, 2024 and December 31, 2023

 

 

(794

)

 

 

(794

)

Total stockholders’ equity

 

 

63,032

 

 

 

61,080

 

Total liabilities and stockholders’ equity

 

$

83,706

 

 

$

83,168

 

 

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

 

3


 

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Revenues:

 

 

 

 

 

 

Services revenue

 

$

8,983

 

 

$

10,245

 

Asset sales

 

 

3,178

 

 

 

6,367

 

Total revenues

 

 

12,161

 

 

 

16,612

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

Cost of services revenue

 

 

1,480

 

 

 

2,340

 

Cost of asset sales

 

 

2,411

 

 

 

4,335

 

Selling, general and administrative

 

 

6,358

 

 

 

6,300

 

Depreciation and amortization

 

 

141

 

 

 

120

 

Total operating costs and expenses

 

 

10,390

 

 

 

13,095

 

Earnings of equity method investments

 

 

787

 

 

 

377

 

Operating income

 

 

2,558

 

 

 

3,894

 

Interest expense, net

 

 

(92

)

 

 

(68

)

Income before income tax expense

 

 

2,466

 

 

 

3,826

 

Income tax expense

 

 

667

 

 

 

997

 

Net income

 

$

1,799

 

 

$

2,829

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

 

36,592,801

 

 

 

36,005,150

 

Weighted average common shares outstanding – diluted

 

 

37,367,268

 

 

 

37,334,459

 

Net income per share – basic

 

$

0.05

 

 

$

0.08

 

Net income per share – diluted

 

$

0.05

 

 

$

0.08

 

 

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

 

 

4


 

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

Common stock

 

 

paid-in

 

 

Accumulated

 

 

Treasury stock

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2023

 

 

563

 

 

$

6

 

 

 

37,157,616

 

 

$

372

 

 

$

294,522

 

 

$

(233,026

)

 

 

396,175

 

 

$

(794

)

 

$

61,080

 

Issuance of common stock from stock option awards

 

 

 

 

 

 

 

 

1,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

228

 

 

 

 

 

 

 

 

 

 

 

 

228

 

Issuance of restricted common stock

 

 

 

 

 

 

 

 

177,576

 

 

 

1

 

 

 

(76

)

 

 

 

 

 

 

 

 

 

 

 

(75

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,799

 

 

 

 

 

 

 

 

 

1,799

 

Balance as of March 31, 2024

 

 

563

 

 

$

6

 

 

 

37,336,392

 

 

$

373

 

 

$

294,674

 

 

$

(231,227

)

 

 

396,175

 

 

$

(794

)

 

$

63,032

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

Common stock

 

 

paid-in

 

 

Accumulated

 

 

Treasury stock

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2022

 

 

565

 

 

$

6

 

 

 

36,932,177

 

 

$

369

 

 

$

293,589

 

 

$

(245,270

)

 

 

243,468

 

 

$

(395

)

 

$

48,299

 

Cumulative change in accounting principle (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(231

)

 

 

 

 

 

 

 

 

(231

)

Balance as of January 1, 2023 (as adjusted
for change in accounting principle)

 

 

565

 

 

 

6

 

 

 

36,932,177

 

 

 

369

 

 

 

293,589

 

 

 

(245,501

)

 

 

243,468

 

 

 

(395

)

 

 

48,068

 

Issuance of common stock from stock option awards

 

 

 

 

 

 

 

 

31,191

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Issuance of restricted common stock

 

 

 

 

 

 

 

 

134,592

 

 

 

2

 

 

 

150

 

 

 

 

 

 

 

 

 

 

 

 

152

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179

 

 

 

 

 

 

 

 

 

 

 

 

179

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,829

 

 

 

 

 

 

 

 

 

2,829

 

Balance as of March 31, 2023

 

 

565

 

 

$

6

 

 

 

37,097,960

 

 

$

371

 

 

$

293,923

 

 

$

(242,672

)

 

 

243,468

 

 

$

(395

)

 

$

51,233

 

 

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

 

5


 

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of US dollars)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

1,799

 

 

$

2,829

 

Adjustments to reconcile net income to net cash provided by operating
   activities:

 

 

 

 

 

 

Amortization of deferred issuance costs and fees

 

 

3

 

 

 

34

 

Earnings of equity method investments

 

 

(787

)

 

 

(377

)

Noncash credit loss expense

 

 

(2

)

 

 

102

 

Noncash lease expense

 

 

162

 

 

 

159

 

Depreciation and amortization

 

 

141

 

 

 

120

 

Deferred taxes

 

 

478

 

 

 

816

 

Stock-based compensation expense

 

 

228

 

 

 

179

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

347

 

 

 

(322

)

Inventory – equipment

 

 

339

 

 

 

1,127

 

Other current assets

 

 

(39

)

 

 

(26

)

Accounts payable and accrued liabilities

 

 

(2,674

)

 

 

(687

)

Payables to sellers

 

 

1,841

 

 

 

5,145

 

Lease liabilities

 

 

(160

)

 

 

(154

)

Net cash provided by operating activities

 

 

1,676

 

 

 

8,945

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Investment in notes receivable

 

 

(2,256

)

 

 

(13,221

)

Payments received on notes receivable

 

 

2,520

 

 

 

1,071

 

Cash received on transfer of notes receivable to partners

 

 

 

 

 

4,613

 

Investment in equity method investments

 

 

(193

)

 

 

(512

)

Return of investment in equity method investments

 

 

1,283

 

 

 

975

 

Cash distributions from equity method investments

 

 

787

 

 

 

377

 

Purchase of property and equipment

 

 

(22

)

 

 

(89

)

Net cash provided by (used in) investing activities

 

 

2,119

 

 

 

(6,786

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from debt payable to third parties

 

 

 

 

 

3,400

 

Repayment of debt payable to third parties

 

 

(422

)

 

 

(2,403

)

Proceeds from issuance of common stock from stock option awards

 

 

 

 

 

5

 

Payments of tax withholdings related to issuance of restricted common stock and stock option awards

 

 

(75

)

 

 

(95

)

Net cash (used in) provided by financing activities

 

 

(497

)

 

 

907

 

Net increase in cash and cash equivalents

 

 

3,298

 

 

 

3,066

 

Cash and cash equivalents as of beginning of period

 

 

12,279

 

 

 

12,667

 

Cash and cash equivalents as of end of period

 

$

15,577

 

 

$

15,733

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for taxes

 

$

(1

)

 

$

 

Cash paid for interest

 

$

92

 

 

$

49

 

 

 

 

 

 

 

 

 

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

 

 

6


 

HERITAGE GLOBAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1 –Basis of Presentation

These unaudited condensed consolidated interim financial statements include the accounts of Heritage Global Inc. ("HG") 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 "the Company,” "us" “we” or “our” in these consolidated financial statements. These consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and include the assets, liabilities, revenues, and expenses of all subsidiaries over which HG exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation.

The Company began its operations in 2009 with the establishment of HG LLC. The business was subsequently expanded by the acquisitions of HGP, NLEX, and ALT in 2012, 2014, and 2021 respectively, and the creation of HGC in 2019. As a result, HG is positioned to provide an array of value-added capital and financial asset solutions: auction and appraisal services, traditional asset disposition sales, and specialty financing solutions. The Company’s reportable segments consist of Auction and Liquidation, through HGP, Refurbishment & Resale, through ALT, Brokerage, through NLEX and Specialty Lending, through HGC.

The Company prepared the unaudited condensed consolidated interim financial statements included herein pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management, these condensed financial statements reflect all adjustments that are necessary to present fairly the results for the interim periods included herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are appropriate. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 14, 2024 (the “Form 10-K”).

The results of operations for the three-month period ended March 31, 2024 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2024. The accompanying condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated balance sheet as of December 31, 2023, contained in the Company’s Form 10-K.

Repurchase Program

The Company’s Board of Directors authorized a share repurchase program on May 5, 2022 (“2022 Repurchase Program”), which permits the Company to purchase up to an aggregate of $4.0 million in common shares over a three year period ending in June of 2025. As of March 31, 2024, the Company had approximately $3.2 million in remaining aggregate dollar value of shares that may be purchased under the program. There were no shares repurchased in the open market for the three months ended March 31, 2024.

 

7


 

Note 2 – Summary of Significant Accounting Policies

 

Use of estimates

The preparation of the Company’s unaudited condensed consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Significant estimates include the assessment of collectability of revenue recognized and the valuation of accounts receivable and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities, including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our condensed consolidated interim financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

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 three reportable segments: Auction and Liquidation, Refurbishment & Resale, and Brokerage. Generally, revenue is recognized at the point in time in which the performance obligation has been satisfied and full consideration is received. The exception to recognition at a point in time occurs when certain contracts provide for advance payments recognized over a period of time. Services revenue recognized over a period of time is not material in comparison to total revenues (less than 1% of total revenues for the three months ended March 31, 2024 and 2023), and therefore not reported on a disaggregated basis. Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and the Company’s “contract liability”. The deferred revenue balance was approximately $0.3 million as of March 31, 2024 and $0.5 million as of December 31, 2023 and is reflected in accounts payable and accrued liabilities on the condensed consolidated balance sheets. The deferred revenue balance is primarily related to customer deposits on asset sales within the Refurbishment & Resale segment. The Company records receivables in certain situations based on timing of payments for Auction and Liquidation transactions held at the end of the reporting period; however, revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected. The Company does not record a “contract asset” for partially satisfied performance obligations.

For auction services and brokerage sale transactions, funds are typically collected from buyers and are held by the Company on the seller's behalf. The funds are included in cash and cash equivalents in the condensed consolidated balance sheets. The Company releases the funds to the seller, less the Company's commission and other fees due, after the buyer has accepted the goods. The amount of cash held on behalf of the sellers is recorded as payables to sellers in the accompanying condensed consolidated balance sheets.

The Company evaluates revenue from Auction and Liquidation and Brokerage segment transactions in accordance with the accounting guidance to determine whether to report such revenue on a gross or net basis. The Company has determined that it acts as an agent for its fee based transactions and therefore reports the revenue from transactions in which the Company acts as an agent on a net basis.

The Company also earns income through transactions that involve the Company acting jointly with one or more additional purchasers or lenders, pursuant to a partnership, joint venture or limited liability company (“LLC”) agreement (collectively, “Joint Ventures”). For these transactions, in which the Company’s ownership share meets the criteria for the equity method investments under ASC Topic 323, Equity Method and Joint Ventures, the Company does not record revenue or expense. Instead, the Company’s proportionate share of the net income (loss) is reported as earnings of equity method investments. In general, the Joint Ventures apply the same revenue recognition and other accounting policies as the Company.

 

8


 

Through our Specialty Lending segment, the Company provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios. The Company recognizes revenue generated by lending activity in accordance with ASC 310. Fees collected in relation to the issuance of loans include loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

The loan origination fees are offset with any direct origination costs and are deferred upon issuance of the loan and amortized over the lives of the related loans, as an adjustment to interest income. The interest method is used to arrive at a periodic interest cost (including amortization) that will represent a level effective rate on the sum of the face amount of the debt and (plus or minus) the unamortized premium or discount and expense at the beginning of each period.

The monitoring fees and the backend profit share are considered a separate earnings process as compared to the origination fees and interest income. Monitoring fees are recorded at the agreed upon rate, and at the moment in which payments are made by the borrower. The backend profit share is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned. The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized.

Specialty Lending - Concentration and credit risk

As of March 31, 2024, the Company held a gross balance of investments in notes receivable of $37.3 million, recorded in both notes receivable and equity method investments, and consisting of one borrower’s note balance of approximately $23.4 million, or 63% as of March 31, 2024, as compared to 62% as of December 31, 2023. The Company does not intend to hold highly concentrated balances due from one borrower as part of its long-term strategy but may, in the short term, have concentration risk on its path to an established and diversified portfolio.

The Company does not evaluate concentration risk solely based on balance due from specific borrowers, but also considers the number of portfolio purchases, type of charged off accounts within the portfolio, and the seller of the portfolio when determining the overall risk. Of the balance due from one borrower of $23.4 million, there are 11 distinct loan agreements. The underlying portfolio of accounts are diversified throughout FinTech loans, installment loans and credit card accounts, and further diversified amongst six separate sellers of these charged off portfolios.

The Company mitigates this concentration risk by requiring, and monitoring, security from each borrower consisting of their charged off and nonperforming receivable portfolios. The Company engages in a due diligence process that leverages its valuation expertise and knowledge in the underlying nonperforming receivable portfolios marketplace. In the event of default, the Company is entitled to call the unpaid interest and principal balances and receive all net collections directly. The Company may also recover its investment by engaging a third party to collect on the underlying charged off or nonperforming receivable portfolio or the underlying portfolio can be sold through the Company's Brokerage segment. In certain cases, the Company’s recovery options may be subject to concurrence of the originator or other prior holder of the assets.

From inception of the specialty lending program through March 31, 2024, the Company has incurred no actual credit losses.

Accounts receivable

The Company carries accounts receivable at the face amounts less an allowance for estimated credit losses. The Company estimates its reserve for credit losses using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

The Company only extends credit to entities and institutions of significance, such as well-known academic and financial institutions and U.S. government agencies. Consequently, historical accounts receivable credit losses are nearly zero, which provides the starting point for management’s assessment of the reserve for credit losses for its accounts receivable. The Company estimates its expected credit losses for accounts receivable based on historical credit loss experience, its assessment of current conditions, and other relevant available information from internal and external sources on a quarterly basis.

As of March 31, 2024 and December 31, 2023, the reserve for credit losses related to accounts receivable was approximately $0.1 million.

Notes receivable

Under ASC 326, the Company evaluates notes receivable as a single pool, for individual notes receivable and borrowers with similar risk characteristics. Notes receivable and borrowers that do not share risk characteristics are evaluated on an individual basis. Management estimates the reserve balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience typically provides the basis for an estimation of expected credit losses; however, the Company lacks sufficient data upon which to base a historical estimation.

 

9


 

Additionally, since the Company began recording notes receivable on the condensed consolidated balance sheets, the Company has recorded no actual credit losses to notes receivable.

Lacking historical internal data upon which to base a reserve for credit losses to notes receivable, the Company, under ASC 326, estimates its reserve using external credit loss experience data. Management observes that the Company's notes receivable are similar in character to transactions undertaken by smaller banking institutions. The Company estimates its expected credit losses based on the Scaled Current Expected Credit Loss (CECL) Allowance Loss Estimator ("SCALE rate") available from the Federal Reserve. The SCALE rate methodology is endorsed by the FASB and the Conference of State Bank Supervisors. Management determined under ASC 326 that the SCALE rate, a generally applicable rate, may be appropriately adjusted by its assessment of observable facts and relevant circumstances indicating that the factors analyzed in the determination of the SCALE rate may not conform to the Company's operations and borrower assessments.

As of March 31, 2024, the SCALE rate was 1.3861% and the Company's credit loss allowance rate specific to notes receivable was 3.6%. The increase over the SCALE rate was due to both the above mentioned risks presented by a concentrated balance with a single borrower and declining collections industry-wide. As of March 31, 2024 and December 31, 2023, the Company's allowance for credit losses related to notes receivable outstanding was $0.6 million and $0.7 million, respectively. In order to evaluate the need for an adjustment to the receivable balance related to credit losses, or impairment, the Company performs a review of all outstanding loan receivables on a quarterly basis to determine if any indicators exist that suggest the loan will not be fully recoverable and assess the credit quality of the loan receivables. This review includes monthly and cumulative key performance indicators for each loan and borrower, as well as evaluation of borrower's financial condition.

Equity method investments

Similar to notes receivable, the loans held by the joint ventures are evaluated on a quarterly basis to determine if an adjustment to the allowance for credit losses is needed.

As of March 31, 2024, the SCALE rate was 1.3861% and the credit loss allowance rate specific to equity method investments was 4.4%. The increase over the SCALE rate was due to both the above mentioned risks presented by a concentrated balance with a single borrower and declining collections industry-wide. As of March 31, 2024 and December 31, 2023, the Company's allowance for credit losses related to its equity method investments was $0.9 million.

Future accounting pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which, among other updates, requires enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker, as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. Early adoption is permitted. The Company is evaluating the impact of ASU 2023-07 on its consolidated financial statements and the related disclosures.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"), which requires enhanced annual disclosures with respect to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Early adoption is permitted. The Company is evaluating the impact of ASU 2023-07 on its consolidated financial statements and the related disclosures.

 

 

10


 

Note 3 – Accounts Receivable, net

The Company’s accounts receivable, net consists of accounts receivables recorded in the ordinary course of business associated with the recognition of revenue from contracts with customers.

In accordance with ASC 326, the Company performs a review of accounts receivables on a quarterly basis. During the three months ended March 31, 2024, the Company recorded no material adjustments for credit losses in selling, general and administrative expense on the consolidated statement of income related to accounts receivable. As of March 31, 2024 and December 31, 2023, the reserve for credit losses was approximately $0.1 million.

Note 4 – Notes Receivable, net

The Company’s notes receivable, net consists of investments in loans to buyers of charged-off and nonperforming receivable portfolios. As of March 31, 2024 and December 31, 2023, the Company’s outstanding notes receivables, net of unamortized deferred fees and costs on originated loans, and adjusted for the reserve for credit losses was $17.2 million and $17.5 million, respectively. The activity during the three months ended March 31, 2024 includes the additional investment in notes receivable of approximately $2.3 million, which was offset by principal payments made by borrowers of approximately $2.5 million.

The table below shows the Company’s lending activity as of March 31, 2024 (in thousands):

 

 

 

 

 

 

March 31, 2024

 

Notes receivable as of December 31, 2023

 

$

18,262

 

Investment in notes receivable

 

 

2,256

 

Transfer of notes

 

 

 

Principal repayments

 

 

(2,520

)

Notes receivable, as of March 31, 2024

 

 

17,998

 

Deferred financing fees and costs, net

 

 

(143

)

Allowance for credit loss

 

 

(643

)

Notes receivable, net, March 31, 2024

 

$

17,212

 

In accordance with ASC 326, the Company performs a review of notes receivable on a quarterly basis. During the three months ended March 31, 2024, the Company recorded no material adjustments to the provision for credit losses in selling, general and administrative expense on the consolidated statement of income. As of March 31, 2024 and December 31, 2023, the allowance for credit losses was approximately $0.6 million and $0.7 million, respectively.

Note 5 – Stock-based Compensation

As of March 31, 2024, the Company had four stock-based compensation plans, which are described more fully in Note 16 – Stockholders' Equity - Stock-Based Compensation Plans of the Company's audited consolidated financial statements for the year ended December 31, 2023 contained in the Company’s Form 10-K.

At the Company's 2022 Annual Meeting of Shareholders, the Company's shareholders approved the 2022 Heritage Global Inc. Equity Incentive Plan, which replaced the Heritage Global Inc. 2016 Plan, and authorized the issuance of an aggregate of 3.5 million shares of common stock for awards made after June 8, 2022.

Stock Options

During the three months ended March 31, 2024, the Company issued options to purchase 20,000 shares of common stock to certain of the Company’s employees. During the same period, the Company canceled 12,750 options to purchase common stock as a result of employee resignations.

The following summarizes the changes in common stock options for the three months ended March 31, 2024:

 

 

11


 




 

 

Options

 

 

Weighted
Average
Exercise
Price

 

 

Weighted
Average
Remaining Contractual Term (Years)

 

 

Aggregate Intrinsic Value (In thousands)

 

Outstanding as of December 31, 2023

 

 

2,265,350

 

 

$

1.71

 

 

 

6.8

 

 

$

3,059

 

Granted

 

 

20,000

 

 

$

2.93

 

 

 

 

 

 

 

Exercised

 

 

(3,750

)

 

$

1.87

 

 

 

 

 

 

 

Forfeited

 

 

(12,750

)

 

$

1.87

 

 

 

 

 

 

 

Outstanding as of March 31, 2024

 

 

2,268,850

 

 

$

1.72

 

 

 

6.5

 

 

$

2,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable as of March 31, 2024

 

 

1,363,975

 

 

$

1.25

 

 

 

5.4

 

 

$

1,936

 

The Company recognized stock-based compensation expense related to common stock options of $0.1 million for both the three months ended March 31, 2024 and 2023. As of March 31, 2024, there was approximately $1.3 million of unrecognized stock-based compensation expense related to unvested common stock options outstanding, which is expected to be recognized over a weighted average period of 2.3 years.

Restricted Stock

Restricted stock awards represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. There is no exercise price and no monetary payment required for receipt of restricted stock awards or the shares issued in settlement of the award. Instead, consideration is furnished in the form of the participant’s services to the Company. Compensation cost for these awards is based on the fair value of the shares of common stock on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period.

On June 1, 2018, the Company granted 600,000 shares of Company restricted common stock in connection with the Addendum to the Employment Agreements of David Ludwig and Tom Ludwig. The shares were subject to certain restrictions on transfer and a right of repurchase over five years. The shares vested in full on May 31, 2023.

On August 3, 2022, the Company granted 115,000 shares of Company restricted common stock to non-executive directors under the 2022 Heritage Global Inc. Equity Incentive Plan. Of these restricted stock shares granted during 2022, 40,000 shares were granted with a vesting term that was completed prior to the grant date due to a delay in the Company’s ability to grant such shares, and the remaining 75,000 shares vested in full on March 31, 2023.

On March 1, 2023, the Company granted 97,290 shares of Company restricted common stock to employees under the 2022 Heritage Global Inc. Equity Incentive Plan. The restricted stock shares vested in full on March 1, 2024.

On March 31, 2023, the Company granted 75,000 shares of Company restricted common stock to non-executive directors under the 2022 Heritage Global Inc. Equity Incentive Plan. The restricted stock shares vested in full on March 31, 2024. During the quarter ended March 31, 2024, the Company canceled 15,000 restricted stock awards in connection with the resignation of a member of the Company's Board of Directors.

On April 1, 2023, the Company granted 15,000 shares of Company restricted common stock to one non-executive director under the 2022 Heritage Global Inc. Equity Incentive Plan. The restricted stock shares vested in full on April 1, 2024.

On March 7, 2024, the Company granted 128,044 shares of Company restricted common stock to employees under the 2022 Heritage Global Inc. Equity Incentive Plan. The restricted stock shares vest on March 7, 2025.

On March 7, 2024, the Company granted 75,000 shares of Company restricted common stock to non-executive directors under the 2022 Heritage Global Inc. Equity Incentive Plan. The restricted stock shares vest on March 7, 2025.

The Company determined the fair value of the shares awarded by using the closing price of our common stock as of the grant date. Stock-based compensation expense related to the restricted stock awards was approximately $0.1 million for both the three months ended March 31, 2024 and 2023. The unrecognized stock-based compensation expense as of March 31, 2024 was approximately $0.5 million.

 

12


 

Note 6 – Equity Method Investments

In November 2018, CPFH LLC, of which the Company holds a 25% share, was formed to purchase certain real estate assets among partners in a joint venture. In March 2020, HGC Origination I LLC and HGC Funding I LLC were formed as joint ventures with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. In April 2022, KNFH LLC, of which the Company holds a 25% share, was formed to purchase certain real estate assets and machinery and equipment among partners in a joint venture. In December 2022, DHC8 LLC, of which the Company holds a 13.33% share was formed to provide funding and receive principal and interest payments as a result of the initial investment. In May 2023, HGC MPG Funding LLC, of which the Company holds a 25% share, was formed as a joint venture with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. In December 2023, KNFH II LLC, of which the Company holds a 25% share, was formed to purchase certain real estate assets and machinery and equipment among partners in a joint venture. CPFH LLC, KNFH LLC, DHC8 LLC and KNFH II LLC are joint ventures formed in connection with the Company’s Industrial Assets division, whereas HGC Origination I LLC, HGC Funding I LLC, and HGC MPG Funding LLC were formed in connection with the Financial Assets division. The Company has significant influence over the operations and financial policies of each of its equity method investments.

In accordance with ASC 326, the Company performs a review of notes receivable on a quarterly basis for each of its specialty lending investments. During the three months ended March 31, 2024, the Company recorded no material adjustments for its share of the joint venture’s reduction to the provision for credit losses. As of March 31, 2024, the Company's share of the allowance for credit losses was approximately $0.9 million, which was primarily related to HGC Origination I LLC and HGC MPG Funding LLC. As of March 31, 2024, the Company has incurred no actual credit losses through its equity method investments.

Based on the nature of our equity method investments, the joint venture entities' revenues and gross profit are not materially different and furthermore, operating income and net income have no material differences. The table below details the Company’s joint venture revenues and earnings during the three months ended March 31, 2024 and 2023 (in thousands):

 

 

March 31,

 

 

 

2024

 

 

2023

 

Revenues and gross profit:

 

 

 

 

 

 

KNFH LLC

 

$

 

 

$

440

 

DHC8 LLC

 

 

321

 

 

 

445

 

KNFH II LLC

 

 

 

 

 

 

HGC Origination I LLC and HGC Funding I LLC

 

 

1,140

 

 

 

1,297

 

HGC MPG Funding LLC

 

 

1,241

 

 

 

 

Total revenues and gross profit

 

$

2,702

 

 

$

2,182

 

 

 

 

 

 

 

Operating income (loss) and net income (loss):

 

 

 

 

 

 

KNFH LLC

 

 

 

 

 

(10

)

DHC8 LLC

 

 

268

 

 

 

378

 

KNFH II LLC

 

 

(44

)

 

 

 

HGC Origination I LLC and HGC Funding I LLC

 

 

1,134

 

 

 

1,304

 

HGC MPG Funding LLC

 

 

1,241

 

 

 

 

Total operating income and net income

 

$

2,599

 

 

$

1,672

 

 

13


 

The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of March 31, 2024 and December 31, 2023 (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Assets:

 

 

 

 

 

 

KNFH LLC

 

$

 

 

$

292

 

DHC8 LLC

 

 

4,700

 

 

 

7,061

 

KNFH II LLC

 

 

8,306

 

 

 

8,150

 

HGC Origination I LLC and HGC Funding I LLC

 

 

27,174

 

 

 

28,389

 

HGC MPG Funding LLC

 

 

36,413

 

 

 

38,081

 

Total assets

 

$

76,593

 

 

$

81,973

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

KNFH LLC

 

$

 

 

$

289

 

DHC8 LLC

 

 

1,080

 

 

 

1,102

 

KNFH II LLC

 

 

4,000

 

 

 

4,000

 

HGC Origination I LLC and HGC Funding I LLC

 

 

1,244

 

 

 

10

 

HGC MPG Funding LLC

 

 

 

 

 

 

Total liabilities

 

$

6,324

 

 

$

5,401

 

 

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 the Company’s shares of Series N preferred stock, each of which is convertible to 40 common shares, have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock. Under the two-class method, earnings for the period are allocated on a pro-rata basis to the common and preferred stockholders. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares. For the three months ended March 31, 2024 and 2023, the earnings allocated to the outstanding preferred shares were not material.

In periods in which the Company records a net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. As the preferred stock does not participate in losses, the two-class method is not used in periods in which the Company records a net loss.

Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”). In calculating diluted EPS, such shares are assumed to be exercised or converted, except when their effect would be anti-dilutive.

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

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Basic weighted average shares outstanding

 

 

36,592,801

 

 

 

36,005,150

 

Treasury stock effect of common stock options and restricted stock awards

 

 

774,467

 

 

 

1,329,309

 

Diluted weighted average common shares outstanding

 

 

37,367,268

 

 

 

37,334,459

 

 

For the three months ended March 31, 2024 and 2023, there were potential common shares of 0.2 million and 0.3 million, respectively, that were excluded from the computation of diluted EPS, as the inclusion of such common shares would have been anti-dilutive.

 

14


 

Note 8 – Leases

The Company leases office and warehouse space in four locations: Del Mar, California, Hayward, California, San Diego, California and Edwardsville, Illinois. The Company determined that all of its lease arrangements are classified as operating leases.

On August 12, 2022, the Company entered into an agreement with Liberty Industrial Park, LLC pursuant to which the Company leases 6,627 square feet of industrial space in San Diego, California. The commencement date of the lease was September 1, 2022. It provides for an initial monthly base rent of $11,266, which increases on an annual basis to $13,180 per month in the final year. In addition, the Company is obligated to pay its share of maintenance costs of common areas.

On June 1, 2023, the Company amended its Edwardsville office building lease with David Ludwig, extending the term of the agreement to May 31, 2027 and setting rent amounts for the new term. It provides for an initial monthly base rent of $9,412, which increases on an annual basis to $9,914 per month in the final year.

The right-of-use assets and lease liabilities for each lease location are as follows (in thousands):


 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Right-of-use assets:

 

 

 

 

 

 

Del Mar, CA

 

$

147

 

 

$

186

 

Hayward, CA

 

 

1,455

 

 

 

1,525

 

San Diego, CA

 

 

447

 

 

 

477

 

Edwardsville, IL

 

 

328

 

 

 

351

 

Total right-of-use assets

 

$

2,377

 

 

$

2,539

 

 

 

 

 

 

 

 

Lease liabilities

 

 

 

 

 

 

Del Mar, CA

 

$

161

 

 

$

203

 

Hayward, CA

 

 

1,527

 

 

 

1,594

 

San Diego, CA

 

 

470

 

 

 

498

 

Edwardsville, IL

 

 

331

 

 

 

353

 

Total lease liabilities

 

$

2,489

 

 

$

2,648

 

 

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 5.25%. For leases commencing after January 1, 2019 the Company uses its incremental borrowing rate at time of commencement. On September 1, 2022 and June 1, 2023, the Company’s incremental borrowing rate was 5.50% and 7.25%, respectively. The weighted average remaining lease term for operating leases is 3.9 years and the weighted average discount rate is 5.35% as of March 31, 2024.

Lease expense is recognized on a straight-line basis over the lease term. For the three months ended March 31, 2024 and March 31, 2023, lease expense was approximately $0.2 million. As of March 31, 2024, 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):

2024 (remainder of year from April 1, 2024 to December 31, 2024)

 

$

594

 

2025

 

 

661

 

2026

 

 

649

 

2027

 

 

543

 

2028

 

 

299

 

Total undiscounted future minimum lease payments

 

 

2,746

 

Less: imputed interest

 

 

(257

)

Present value of lease liabilities

 

$

2,489

 

 

 

15


 

Note 9 – Intangible Assets and Goodwill

Intangible assets

The Company’s identifiable intangible assets are associated with its acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, as shown in the table below (in thousands except for lives), and are amortized using the straight-line method over their remaining estimated useful lives. The Company’s tradename that was acquired as part of the acquisition of NLEX in 2014 has an indefinite life and therefore is not amortized.

 

 

Remaining

 

 

Carrying Value

 

 

 

 

 

Carrying Value

 

 

 

Life

 

 

December 31,

 

 

 

 

 

March 31,

 

 

 

(years)

 

 

2023

 

 

Amortization

 

 

2024

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trade Name (HGP)

 

 

0.8

 

 

$

128

 

 

$

(32

)

 

$

96

 

Trade Name (ALT)

 

 

17.4

 

 

 

575

 

 

 

(8

)

 

 

567

 

Vendor Relationship (ALT)

 

 

2.4

 

 

 

613

 

 

 

(58

)

 

 

556

 

Total amortizable intangible assets

 

 

 

 

 

1,316

 

 

 

(98

)

 

 

1,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trade Name (NLEX)

 

N/A

 

 

 

2,437

 

 

 

 

 

 

2,437

 

Total intangible assets

 

 

 

 

$

3,753

 

 

$

(98

)

 

$

3,655

 

Amortization expense during the three months ended March 31, 2024 and 2023 was $0.1 million. The Company estimates that the residual value for intangible assets is not significant.

As of March 31, 2024, the estimated amortization expense for the remainder of the current fiscal year and the next five fiscal years and thereafter is shown below (in thousands):

 

Year

 

Amount

 

2024 (remainder of year from April 1, 2024 to December 31, 2024)

 

$

293

 

2025

 

 

263

 

2026

 

 

186

 

2027

 

 

32

 

2028

 

 

32

 

Thereafter

 

 

412

 

Total estimated amortization expense<