Company Quick10K Filing
Heritage Global
Price0.81 EPS0
Shares29 P/E7
MCap24 P/FCF23
Net Debt-4 EBIT3
TEV20 TEV/EBIT6
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-03-09
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8-K 2018-01-30

HGBL 10Q Quarterly Report

Part I - Financial Information
Item 1 - Financial Statements.
Note 1 - Basis of Presentation
Note 2 - Summary of Significant Accounting Policies
Note 3 - Notes Receivable, Net
Note 4 - Stock - Based Compensation
Note 5 - Lessor Arrangement
Note 6 - Equity Method Investments
Note 7 - Earnings per Share
Note 8 - Leases
Note 9 - Intangible Assets and Goodwill
Note 10 - Debt
Note 11 - Income Taxes
Note 12 - Related Party Transactions
Note 13 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 hgbl-ex311_7.htm
EX-31.2 hgbl-ex312_6.htm
EX-32.1 hgbl-ex321_8.htm
EX-32.2 hgbl-ex322_10.htm

Heritage Global Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.10.10.10.00.00.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

10-Q 1 hgbl-10q_20200331.htm 10-Q hgbl-10q_20200331.htm

 

 

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, 2020

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: 0-17973

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) 847-0656
(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

Otcqb

 

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  

As of May 1, 2020, there were 29,358,906 shares of common stock, $0.01 par value, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

Part I.

Financial Information

4

 

 

 

Item 1.

Financial Statements

4

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

4

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2020 and 2019 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

Part II.

Other Information

26

 

 

 

Item 1.

Legal Proceedings

26

 

 

 

Item 1A.

Risk Factors

26

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

Item 4.

Mine Safety Disclosures

26

 

 

 

Item 5.

Other Information

26

 

 

 

Item 6.

Exhibits

27

 

 

3


 

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, 2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,093

 

 

$

2,728

 

Accounts receivable

 

 

1,699

 

 

 

1,859

 

Current portion of notes receivable, net

 

 

816

 

 

 

1,295

 

Inventory – equipment

 

 

218

 

 

 

104

 

Other current assets

 

 

1,058

 

 

 

784

 

Total current assets

 

 

6,884

 

 

 

6,770

 

Property and equipment, net

 

 

203

 

 

 

221

 

Non-current portion of notes receivable, net

 

 

950

 

 

 

1,366

 

Equity method investments

 

 

2,766

 

 

 

2,516

 

Right-of-use assets

 

 

1,353

 

 

 

1,483

 

Identifiable intangible assets, net

 

 

3,325

 

 

 

3,392

 

Goodwill

 

 

5,585

 

 

 

5,585

 

Deferred tax assets

 

 

329

 

 

 

372

 

Other assets

 

 

271

 

 

 

212

 

Total assets

 

$

21,666

 

 

$

21,917

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

7,980

 

 

$

8,110

 

Current portion of debt

 

 

340

 

 

 

403

 

Current portion of lease liabilities

 

 

580

 

 

 

577

 

Other current liabilities

 

 

3

 

 

 

3

 

Total current liabilities

 

 

8,903

 

 

 

9,093

 

Non-current portion of debt

 

 

 

 

 

35

 

Non-current portion of lease liabilities

 

 

805

 

 

 

942

 

Total liabilities

 

 

9,708

 

 

 

10,070

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and

   outstanding 568 shares of Series N at March 31, 2020 and December 31, 2019

 

 

6

 

 

 

6

 

Common stock, $0.01 par value, authorized 300,000,000 shares; issued

   and outstanding 29,358,906 shares at March 31, 2020 and 29,339,101 at

   December 31, 2019

 

 

294

 

 

 

293

 

Additional paid-in capital

 

 

285,171

 

 

 

285,099

 

Accumulated deficit

 

 

(273,436

)

 

 

(273,474

)

Accumulated other comprehensive loss

 

 

(77

)

 

 

(77

)

Total stockholders’ equity

 

 

11,958

 

 

 

11,847

 

Total liabilities and stockholders’ equity

 

$

21,666

 

 

$

21,917

 

 

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

 

 

 

4


 

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,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Services revenue

 

$

4,088

 

 

$

4,408

 

Asset sales

 

 

156

 

 

 

2,143

 

Total revenues

 

 

4,244

 

 

 

6,551

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of services revenue

 

 

551

 

 

 

731

 

Cost of asset sales

 

 

38

 

 

 

1,160

 

Selling, general and administrative

 

 

3,472

 

 

 

3,925

 

Depreciation and amortization

 

 

90

 

 

 

76

 

Total operating costs and expenses

 

 

4,151

 

 

 

5,892

 

Earnings of equity method investments

 

 

1

 

 

 

 

Operating income

 

 

94

 

 

 

659

 

Interest and other expense, net

 

 

(27

)

 

 

(23

)

Income before income tax expense

 

 

67

 

 

 

636

 

Income tax expense

 

 

29

 

 

 

24

 

Net income

 

$

38

 

 

$

612

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

 

28,751,689

 

 

 

28,653,278

 

Weighted average common shares outstanding – diluted

 

 

30,200,114

 

 

 

28,814,149

 

Net income per share – basic

 

$

0.00

 

 

$

0.02

 

Net income per share – diluted

 

$

0.00

 

 

$

0.02

 

 

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

 

 

 

5


 

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Preferred stock

 

 

Common stock

 

 

paid-in

 

 

Accumulated

 

 

comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

loss

 

 

Total

 

Balance at December 31, 2019

 

 

568

 

 

$

6

 

 

 

29,339,101

 

 

$

293

 

 

$

285,099

 

 

$

(273,474

)

 

$

(77

)

 

$

11,847

 

Issuance of common stock from stock option awards

 

 

 

 

 

 

 

 

19,805

 

 

 

1

 

 

 

(3

)

 

 

 

 

 

 

 

 

(2

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

 

 

 

 

75

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

 

 

 

 

 

38

 

Balance at March 31, 2020

 

 

568

 

 

$

6

 

 

 

29,358,906

 

 

$

294

 

 

$

285,171

 

 

$

(273,436

)

 

$

(77

)

 

$

11,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Preferred stock

 

 

Common stock

 

 

paid-in

 

 

Accumulated

 

 

comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

loss

 

 

Total

 

Balance at December 31, 2018

 

 

569

 

 

$

6

 

 

 

29,253,278

 

 

$

293

 

 

$

284,751

 

 

$

(277,373

)

 

$

(77

)

 

$

7,600

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

 

 

 

 

 

 

71

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

612

 

 

 

 

 

 

612

 

Balance at March 31, 2019

 

 

569

 

 

$

6

 

 

 

29,253,278

 

 

$

293

 

 

$

284,822

 

 

$

(276,761

)

 

$

(77

)

 

$

8,283

 

 

 

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

 

 

 

6


 

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of US dollars)

(unaudited)

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows used in operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

38

 

 

$

612

 

Adjustments to reconcile net income to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Amortization of deferred issuance costs and fees

 

 

59

 

 

 

 

Earnings of equity method investments

 

 

(1

)

 

 

 

Noncash lease expense

 

 

131

 

 

 

117

 

Depreciation and amortization

 

 

90

 

 

 

76

 

Deferred taxes

 

 

43

 

 

 

 

Stock-based compensation expense

 

 

75

 

 

 

71

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

160

 

 

 

(926

)

Inventory

 

 

(114

)

 

 

879

 

Other assets

 

 

(333

)

 

 

(63

)

Lease liabilities

 

 

(134

)

 

 

(122

)

Accounts payable and accrued liabilities

 

 

(132

)

 

 

(2,524

)

Other liabilities

 

 

 

 

 

(455

)

Net cash used in operating activities

 

 

(118

)

 

 

(2,335

)

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(5

)

 

 

(5

)

Investment in equity method investments

 

 

(385

)

 

 

 

Cash distributions from equity method investments

 

 

136

 

 

 

 

Investment in notes receivable

 

 

(3,580

)

 

 

 

Payments received on notes receivable

 

 

421

 

 

 

 

Cash received on transfer of notes receivable to partners

 

 

3,994

 

 

 

 

Net cash provided by (used in) investing activities

 

 

581

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt payable to third party

 

 

4,425

 

 

 

 

Repayment of debt payable to third party

 

 

(4,523

)

 

 

(92

)

Net cash used in financing activities

 

 

(98

)

 

 

(92

)

Net increase (decrease) in cash and cash equivalents

 

 

365

 

 

 

(2,432

)

Cash and cash equivalents at beginning of period

 

 

2,728

 

 

 

4,268

 

Cash and cash equivalents at end of period

 

$

3,093

 

 

$

1,836

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

2

 

 

$

1

 

Cash paid for interest

 

 

29

 

 

 

16

 

 

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

 

 

7


 

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. (“HGI”) together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), Heritage Global LLC (“HG LLC”), Equity Partners HG LLC (“Equity Partners”), National Loan Exchange, Inc. (“NLEX”) and Heritage Global Capital LLC (“HGC”). These entities, collectively, are referred to as the “Company” in these financial statements. The Company’s unaudited condensed consolidated interim 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 HGI exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation. The Company’s sole operating segment is its asset liquidation business. The Company provides an array of value-added capital and financial asset solutions:  auction and appraisal services, traditional asset disposition sales, and specialty financing solutions.  

The Company has prepared the 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 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 unaudited 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, 2019, filed with the SEC on March 9, 2020 (the “Form 10-K”).

The results of operations for the three month period ended March 31, 2020 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2020. The accompanying condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated balance sheet at December 31, 2019, contained in the Company’s Form 10-K.  

COVID-19

The spread of the novel coronavirus (“COVID-19”) had a minor negative impact on the Company’s first quarter performance resulting from new and expanding travel and work restrictions as well as a delay in the sale of certain assets.  Going forward, the Company does not believe COVID-19 and the recent developments surrounding the global pandemic will have any ongoing material negative impacts on the Company’s financial performance as its asset liquidation business is highly concentrated in distressed and surplus assets and the Company expects that there will be an increased supply of distressed and surplus assets as a result of COVID-19 and any downward trends in the overall economy.  The Company believes that the continuing disruptions to the global supply chain, particularly those involving manufacturing and other capital assets, will further increase demand for U.S.-based surplus assets. However, the Company cautions that for certain of its business units that rely on travel and field work, the continuation of travel and work restrictions may result in decreased revenues depending on the scope and duration of such restrictions.  

 

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.

Significant estimates include the assessment of collectability of revenue recognized, and the valuation of accounts receivable, inventory, other assets, right-of-use assets, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities, and stock-based compensation. These estimates have the potential to significantly impact the Company’s 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.

 

8


 

Reclassifications

Certain prior year balances within the condensed consolidated financial statements have been reclassified to conform to the current year presentation.

Revenue Recognition

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions and providing merger and acquisition advisory services. Asset sales revenue generally consists of proceeds obtained through sales of purchased assets. 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 is considered to be one reporting segment — the asset liquidation business. Although the Company provides various services within the asset liquidation business, it does not disaggregate revenue streams further than that in its statement of income, services revenue and asset sales. Generally, revenue is recognized in the asset liquidation business 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 (0% of total revenues for the three month period ended March 31, 2020) 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.” As of March 31, 2020, the deferred revenue balance was $2,500. The Company records receivables related to asset liquidation in certain situations based on timing of payments for asset 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.

The Company evaluates revenue from asset liquidation 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 the Company’s fee based asset liquidation transactions, and, therefore, the Company reports the revenue from transactions in which it acts as an agent on a net basis.  

The Company also earns asset liquidation income through asset liquidation transactions that involve the Company acting jointly with one or more additional purchasers, 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 323, the Company does not record asset liquidation 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.

In 2019, the Company began providing specialty financing solutions to investors in charged-off and nonperforming asset portfolios. 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.

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, and the lack of historical precedence as this is a new business for the Company.

During the three months ended March 31, 2020 and 2019, the Company had generated revenues specific to one customer representing 19% and 14% of total revenues for the respective periods.

 

9


 

Leases

The Company is obligated to make future payments under existing lease agreements which (1) specifically identify the asset, and (2) convey the right to control the use of the identified asset in exchange for consideration for a period of time. The Company determines whether a contract is a lease at the inception of the arrangement. We evaluate leasing arrangements in accordance with the accounting guidance to determine whether the contract is operating or financing in nature. Leases with an initial term of 12 months or less, or under predefined thresholds, are not recorded on the condensed consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.

The critical accounting policies used in the preparation of the Company’s audited consolidated financial statements are discussed in the Form 10-K. There have been no changes to these policies in the three months ended March 31, 2020.

Recent Accounting Pronouncements

In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

In 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (“ASU 2017-04”), which simplifies the test for goodwill impairment.  The main provisions of ASU 2017-04 eliminate the second step of the goodwill impairment test which previously was performed to determine the goodwill impairment loss for an entity by calculating the difference between the implied fair value of the entity’s goodwill and its carrying value.  Under ASU 2017-04, if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference.  The impairment charge will be limited to the amount of goodwill which is allocated to that reporting unit.  ASU 2017-04 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.  ASU 2017-04 became effective January 1, 2020 and did not have a material impact on our consolidated financial statements.

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 310-30, 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. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

 

 

10


 

Note 3 – Notes Receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios which resulted in a total outstanding principal balance at March 31, 2020 of approximately $1.8 million, net of unamortized deferred fees and costs on originated loans. At December 31, 2019 the Company’s notes receivable balance was $2.7 million. The activity during the three months ended March 31, 2020 includes the issuance of additional notes of approximately $3.6 million, principal payments made by borrowers of approximately $0.4 million, adjustments to our deferred fees and costs balance of approximately $0.1 million, and the transfer of notes to partners as detailed below.

In March 2020, the Company closed a $6.0 million revolving credit facility with a partner, an alternative asset manager focused on asset-based lending transactions, for the purpose of funding a portion of loans to debt purchasing clients. Prior to March 31, 2020, approximately $1.0 million of the notes receivable balance for certain loans was transferred to the partner.

Also in March 2020, HGC Funding I LLC 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. Prior to March 31, 2020, approximately $3.0 million of the note receivable balance for certain loans was transferred into the joint venture. Refer to Note 6 for further information.

As of March 31, 2020, the Company has not recorded an allowance for credit losses related to notes receivable outstanding.

 

Note 4 – Stock-based Compensation

Options

At March 31, 2020 the Company had four stock-based compensation plans, which are described more fully in Note 18 to the audited consolidated financial statements for the year ended December 31, 2019, contained in the Company’s Form 10-K.

During the three months ended March 31, 2020, the Company issued options to purchase 54,750 shares of common stock to the Company’s employees and options to purchase 60,000 shares of common stock to the Company’s non-employee directors as part of their annual compensation. During the same period, the Company cancelled options to purchase 102,025 shares of common stock as a result of employee resignations.

The following summarizes the changes in common stock options for the three months ended March 31, 2020:

 

 

 

Options

 

 

Weighted

Average

Exercise

Price

 

Outstanding at December 31, 2019

 

 

3,611,850

 

 

$

0.46

 

Granted

 

 

114,750

 

 

$

0.89

 

Exercised

 

 

(43,875

)

 

$

0.45

 

Forfeited

 

 

(102,025

)

 

$

0.56

 

Outstanding at March 31, 2020

 

 

3,580,700

 

 

$

0.52

 

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2020

 

 

2,156,961

 

 

$

0.46

 

The Company recognized stock-based compensation expense related to stock options of $0.1 million for the three months ended March 31, 2020. As of March 31, 2020, there is approximately $0.4 million of unrecognized stock-based compensation expense related to unvested option awards outstanding, which is expected to be recognized over a weighted average period of 2.6 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 on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period.

 

11


 

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 are subject to certain restrictions on transfer and a right of repurchase over five years, ending May 31, 2023, and require a continued term of service to the Company. Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $0.43 per share, was $12,900 for the three months ended March 31, 2020. The unrecognized stock-based compensation expense as of March 31, 2020 was approximately $0.2 million.

Warrants

On March 19, 2019, the Company entered into a Warrant Agreement (the “Warrant Agreement”) with Napier Park Industrial Asset Acquisition LP, a Delaware limited partnership (“Napier Park”). Pursuant to the Warrant Agreement, Napier Park is entitled to receive warrants to acquire shares of Company common stock with a fair market value of $71,368 for each $500,000 increment in excess of $2.5 million of Cumulative Gross Profit (as defined in the Warrant Agreement) to which the Company may become entitled in connection with its equity joint venture with Napier Park, achieved prior to December 19, 2022. During 2019 and the three months ended March 31, 2020, Napier Park did not receive any warrants.

 

Note 5 – Lessor Arrangement

On June 27, 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 2018, as disclosed in the Company’s Form 10-K. The lessee is obligated to make monthly lease payments over a ten year period, totaling approximately $13.2 million for the real estate portion, and monthly lease payments over a six year period totaling approximately $9.7 million for the machinery and equipment. The purchase option for both the real estate and machinery and equipment can be exercised at any time on or after December 1, 2019 and before May 31, 2021 for a total purchase price of $20.0 million; of which $12.0 million and $8.0 million are allocated to the real estate and machinery and equipment, respectively. The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments has been recognized as revenue and a lease receivable as of the effective date.  

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 $0.9 million and recognized as revenue approximately $1.2 million, which represents the present value of future lease payments and a lease receivable included in the accounts receivable line item on the balance sheet, consistent and reflective of its business model for asset sales. The Company expects to recognize approximately $0.5 million in interest income prior to the exercise of the purchase option, which is the difference between the present value (at a 5.50% discount rate) and the undiscounted lease payments.

In November 2019, the partnership entered into agreements to lease a second building of the pharmaceutical campus in Huntsville, Alabama. The lessee is obligated to make monthly lease payments over a ten year period commencing on March 1, 2020. The Company has determined the lease to be classified as an operating lease 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.

 

Note 6 – Equity Method Investments

In November 2018, CPFH LLC was formed to purchase certain real estate assets among partners in a joint venture. The Company’s share of the Joint Venture is 25%. During 2019, the Company held a 50% share in the Oak Grove Asset Acquisitions LP, an entity formed for the execution of auction deals with Napier Park. In March 2020, the HGC Funding I LLC joint venture was formed with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. The table below details the Company’s joint venture revenues and net income during the periods ended March 31, 2020 and 2019 (in thousands):

 

 

12


 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Oak Grove Asset Acquisitions LP

 

$

 

 

$

 

CPFH LLC

 

 

319

 

 

 

 

HGC Funding I LLC

 

 

8

 

 

 

 

Total Revenues

 

$

327

 

 

$

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

Oak Grove Asset Acquisitions LP

 

$

 

 

$

 

CPFH LLC

 

 

 

 

 

 

HGC Funding I LLC

 

 

8

 

 

 

 

Total operating income

 

$

8

 

 

$

 

 

The table below details the summarized components of assets and liabilities, as of March 31, 2020 and December 31, 2019, of the Company’s joint ventures at those dates (in thousands):

 

 

 

2020

 

 

2019

 

Assets:

 

 

 

 

 

 

 

 

Oak Grove Asset Acquisitions LP

 

$

410

 

 

$

1,602

 

CPFH LLC

 

 

21,573

 

 

 

20,016

 

HGC Funding I LLC

 

 

3,038

 

 

 

 

Total assets

 

$

25,021

 

 

$

21,618

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Oak Grove Asset Acquisitions LP

 

$

26

 

 

$

797

 

CPFH LLC

 

 

11,105

 

 

 

10,245

 

HGC Funding I LLC

 

 

 

 

 

 

Total liabilities

 

$

11,131

 

 

$

11,042

 

 

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 shares, 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.

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

 

 

 

Three Months Ended March 31,

 

Weighted Average Shares Calculation:

 

2020

 

 

2019

 

Basic weighted average shares outstanding

 

 

28,751,689

 

 

 

28,653,278

 

Treasury stock effect of common stock options and restricted stock awards

 

 

1,448,425

 

 

 

160,871

 

Diluted weighted average common shares outstanding

 

 

30,200,114

 

 

 

28,814,149

 

 

13


 

For the three months ended March 31, 2020 and 2019 there were potential common shares totaling approximately 0.1 million and 0.3 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

 

Note 8 – Leases

The Company leases office and warehouse space primarily in three locations: Del Mar, CA; Burlingame, CA; and Edwardsville, IL. As each contract does not meet any of the four criteria of ASC 842 for financing lease classification, the Company has determined that each lease arrangement should be classified as an operating lease. The right-of-use assets and lease liabilities for each location are as follows (in thousands):

 

 

 

March 31,

 

Right-of-use assets:

 

2020

 

Del Mar, CA

 

$

710

 

Burlingame, CA

 

 

321

 

Edwardsville, IL

 

 

322

 

 

 

$

1,353

 

 

 

 

 

 

 

 

March 31,

 

Lease liabilities:

 

2020

 

Del Mar, CA

 

$

711

 

Burlingame, CA

 

 

352

 

Edwardsville, IL

 

 

322

 

 

 

$

1,385

 

 

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%.

Lease expense for these leases is recognized on a straight-line basis over the lease term. For both quarters ended March 31, 2020 and 2019, lease expense was approximately $0.1 million. Undiscounted future minimum lease payments as of March 31, 2020 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

 

2020 (remainder of year from April 1, 2020 to December 31, 2020)

 

$

428

 

2021

 

 

385

 

2022

 

 

278

 

2023

 

 

218

 

2024

 

 

176

 

Thereafter

 

 

30

 

Total undiscounted future minimum lease payments

 

 

1,515

 

Less imputed interest

 

 

130

 

Present value of lease liabilities

 

$

1,385

 

 

 

Note 9 – Intangible Assets and Goodwill

Identifiable intangible assets

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

 

14


 

 

 

 

Carrying Value

 

 

 

 

 

 

Carrying Value

 

 

 

December 31,

 

 

 

 

 

 

March 31,

 

Amortized Intangible Assets

 

2019

 

 

Amortization

 

 

2020

 

Customer Network (HGP)

 

$

92

 

 

$

(9

)

 

$

83

 

Trade Name (HGP)

 

 

642

 

 

 

(31

)

 

 

611

 

Customer Relationships (NLEX)

 

 

221

 

 

 

(27

)

 

 

194

 

Total

 

 

955

 

 

 

(67

)

 

 

888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

Trade Name (NLEX)

 

 

2,437

 

 

 

 

 

 

2,437

 

Total

 

$

3,392

 

 

$

(67

)

 

$

3,325

 

Amortization expense during each of the three months ended March 31, 2020 and 2019 was $0.1 million.

The estimated amortization expense as of March 31, 2020 during the next five fiscal years and thereafter is shown below (in thousands):

 

Year

 

Amount

 

2020 (remainder of year from April 1, 2020 to December 31, 2020)

 

$

201

 

2021

 

 

270

 

2022

 

 

159

 

2023

 

 

129

 

2024

 

 

129

 

Total

 

$

888

 

 

Goodwill

The Company’s goodwill is related to its asset liquidation business and is comprised of goodwill from two acquisitions, as shown in the table below (in thousands). There were no additions to goodwill and no impairment losses to the carrying amount of goodwill during the three months ended March 31, 2020.

 

Acquisition

 

March 31, 2020

 

 

December 31, 2019

 

HGP

 

$

2,040

 

 

$

2,040

 

NLEX

 

 

3,545

 

 

 

3,545

 

Total goodwill

 

$

5,585

 

 

$

5,585

 

 

 

Note 10 – Debt

Outstanding debt at March 31, 2020 and December 31, 2019 is summarized as follows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Current: