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
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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 - Acquisition of National Loan Exchange, Inc.
Note 4 - Stock-Based Compensation
Note 5 - Earnings per Share
Note 6 - Intangible Assets and Goodwill
Note 7 - Equity Method Investments
Note 8 - Debt
Note 9 - Income Taxes
Note 10 - Related Party Transactions
Note 11 - 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 exhibit31-1.htm
EX-31.2 exhibit31-2.htm
EX-32.1 exhibit32-1.htm
EX-32.2 exhibit32-2.htm

Heritage Global Earnings 2015-06-30

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 form10q.htm FORM 10-Q Heritage Global Inc. - Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

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 91230
(Address of Principal Executive Offices)

     (858) 847-0656
(Registrant’s Telephone Number)

N/A
(Registrant’s Former Name)

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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter time 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 [X]       No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]       No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer [  ] Accelerated Filer [  ]
Non-Accelerated Filer [  ] Smaller reporting company [X]

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

As of August 7, 2015, there were 28,467,648 shares of common stock, $0.01 par value, outstanding.


TABLE OF CONTENTS

Part I. Financial Information  
     
Item 1. Financial Statements (Unaudited)  
     
  Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 3
     
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and 2014 4
     
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2015 5
     
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 6
     
  Notes to Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
     
Item 4. Controls and Procedures 25
     
Part II. Other Information  
     
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

2


PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share amounts)
(unaudited)

    June 30,     December 31,  
    2015     2014  
             
ASSETS            

Current assets:

           

 Cash and cash equivalents

$  2,707   $  3,633  

 Accounts receivable (net of allowance for doubtful accounts of $31; 2014 - $31)

  612     3,043  

 Deposits

  140     173  

 Inventory – equipment

  115     139  

 Other current assets

  492     587  

         Total current assets

  4,066     7,575  

Non-current assets:

           

 Inventory – real estate

  6,508     6,508  

 Equity method investments

  442     1,134  

 Property and equipment, net

  129     150  

 Identifiable intangible assets, net

  7,354     7,657  

 Goodwill

  8,846     8,846  

         Total assets

$  27,345   $  31,870  

 

           

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Current liabilities:

           

 Accounts payable and accrued liabilities

$  5,587   $  7,225  

 Debt payable to third parties

  2,500     525  

 Debt payable to related party

  1,604     2,985  

 Contingent consideration

  513     803  

         Total current liabilities

  10,204     11,538  

Non-current liabilities:

           

 Debt payable to third parties

      2,500  

 Contingent consideration

  3,737     3,395  

 Deferred tax liabilities

  960     960  

         Total liabilities

  14,901     18,393  

 

           

 

           

Commitments and contingencies

           

 

           

Stockholders’ equity:

           

Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding
  569 Class N shares at June 30, 2015 and 575 Class N shares at December 31, 2014

  6     6  

Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding
  28,467,648 shares at June 30, 2015 and 28,167,408 shares at December 31, 2014

  285     282  

 Additional paid-in capital

  283,964     283,691  

 Accumulated deficit

  (271,748 )   (270,468 )

 Accumulated other comprehensive loss

  (63 )   (34 )

         Total stockholders’ equity

  12,444     13,477  

         Total liabilities and stockholders’ equity

$  27,345   $  31,870  

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

3



HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands of US dollars, except per share amounts)
(unaudited)

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2015     2014     2015     2014  
                         

Revenue:

                       

   Asset liquidation

                       

       Commissions and other

$  2,379   $  2,312   $  5,191   $  3,322  

       Asset sales

  579     499     1,412     1,474  

       Total revenue

  2,958     2,811     6,603     4,796  

 

                       

Operating costs and expenses:

                       

   Asset liquidation

  582     569     1,612     1,034  

   Selling, general and administrative, including expenses paid to related parties

  2,985     2,609     5,908     4,758  

   Depreciation and amortization

  165     120     324     238  

       Total operating costs and expenses

  3,732     3,298     7,844     6,030  

Earnings (loss) of equity accounted asset liquidation investments

  105     18     139     (12 )

Operating loss

  (669 )   (469 )   (1,102 )   (1,246 )

Other income (expenses):

                       

   Earnings of other equity method investments

      24     5     35  

   Interest expense – third party

  (1 )   (100 )   (135 )   (171 )

   Interest expense – related party

  (23 )   (39 )   (45 )   (106 )

       Total other expense

  (24 )   (115 )   (175 )   (242 )

Loss before income tax expense

  (693 )   (584 )   (1,277 )   (1,488 )

Income tax expense

          3     24,667  

Net loss

  (693 )   (584 )   (1,280 )   (26,155 )

Other comprehensive income (loss):

                       

     Foreign currency translation adjustments

  1     22     (29 )   16  

Comprehensive loss

$ (692 ) $ (562 ) $ (1,309 ) $ (26,139 )

 

                       

Weighted average common shares outstanding – basic and diluted (in thousands)

  28,240     28,167     28,204     28,167  

 

                       

Net loss per share – basic and diluted

$  (0.02 ) $  (0.02 ) $  (0.05 ) $  (0.93 )

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

4



HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the six months ended June 30, 2015
(in thousands of US dollars, except share amounts)
(unaudited)

                                      Accumulated        
                            Additional           other        
    Preferred stock     Common stock     paid-in     Accumulated      comprehensive         
    Shares     Amount     Shares     Amount     capital     deficit     loss     Total  
                                                 
                                                 

Balance at December 31, 2014

  575   $  6     28,167,408   $  282   $  283,691   $  (270,468 ) $  (34 ) $  13,477  

Stock-based compensation expense

                  276             276  

Issuance of common stock from restricted stock awards

          300,000     3     (3 )            

Conversion of Series N preferred stock into common stock

  (6 )       240                      

Net loss

                      (1,280 )       (1,280 )

Foreign currency translation adjustments

                          (29 )   (29 )

Balance at June 30, 2015

  569   $  6     28,467,648   $  285   $  283,964   $  (271,748 ) $  (63 ) $  12,444  

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)

    Six months ended  
    June 30,  
    2015     2014  

Cash flows used in operating activities:

           

 Net loss

$  (1,280 ) $  (26,155 )

 Adjustments to reconcile net loss to net cash used in operating activities:

           
     Accrued management fees and other charges added to principal of related party debt   218     276  

     Accrued interest added to principal of related party debt

  45     106  

     Accretion of contingent consideration discount

  52      

     Stock-based compensation expense

  276     245  

     Earnings of equity method investments

  (144 )   (23 )

     Depreciation and amortization

  324     238  

     Return on investment in equity accounted asset liquidation investments

  242     366  

 Changes in operating assets and liabilities:

           

     Accounts receivable

  439     557  

     Deposits

  33     16  

     Inventory

  24     62  

     Other current assets

  95     (104 )

     Deferred income tax assets

      24,667  

     Accounts payable and accrued liabilities

  (1,667 )   (1,209 )

     Net cash used in operating activities

  (1,343 )   (958 )

 

           

Cash flows provided by (used in) investing activities:

           

     Cash paid to acquire NLEX, net of cash acquired

      (1,361 )

     Cash distributions from equity method investments

  737     471  

     Proceeds from sale of equity method investments

  1,992      

     Investment in equity method investments

  (143 )   (30 )

     Purchase of property and equipment

      (11 )

     Net cash provided by (used in) investing activities

  2,586     (931 )

 

           

Cash flows (used in) provided by financing activities:

           

     Proceeds from debt payable to third parties

      2,500  

     Repayment of debt payable to third parties

  (525 )   (1,190 )

     Proceeds from debt payable to related party

  775     828  

     Repayment of debt payable to related party

  (2,419 )   (1,105 )

     Net cash (used in) provided by financing activities

  (2,169 )   1,033  

Net decrease in cash and cash equivalents

  (926 )   (856 )

Cash and cash equivalents at beginning of period

  3,633     3,213  

Cash and cash equivalents at end of period

$  2,707   $  2,357  

 

           

 

           

Supplemental cash flow information:

           

 Cash paid for taxes

$  62   $  29  

 Cash paid for interest

$  23   $  132  

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

6



HERITAGE GLOBAL INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

Note 1 –Basis of Presentation

These unaudited condensed consolidated interim financial statements include the accounts of Heritage Global Inc. 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”), C2 Communications Technologies Inc., and C2 Investments Inc. These entities, collectively, are referred to as “HGI”, the “Company,” “we” or “our” in these financial statements. Our unaudited condensed consolidated interim financial statements were prepared in conformity with accounting principles generally accepted 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.

We have 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 management’s opinion, 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, we believe 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, 2014, filed with the SEC on March 31, 2015.

 The results of operations for the three and six month periods ended June 30, 2015 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2015. The accompanying condensed consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated balance sheet at December 31, 2014, contained in the above referenced Form 10-K. Certain prior year balances within the condensed consolidated financial statements have been reclassified to conform to the current year presentation.

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, investments, goodwill and intangible assets, liabilities, contingent consideration, deferred income tax assets and liabilities, and stock-based compensation. These estimates have the potential to significantly impact our consolidated financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

7


The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no changes to these policies in the first six months of 2015.

Recently Adopted Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. It also expands the scope of ASC 205-20 to disposals of equity method investments and acquired businesses held for sale. With respect to disclosures, ASU 2014-08 both 1) expands disclosure requirements for transactions that meet the definition of a discontinued operation, and 2) requires entities to disclose information about individually significant components that are disposed of or held for sale and do not qualify as discontinued operations. ASU 2014-08 also requires specific presentation of various items on the face of the financial statements. ASU 2014-08 is effective for interim and annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company therefore adopted ASU 2014-08 in the first quarter of 2015. However, since the Company does not currently have either discontinued operations or any planned disposals that would require the expanded reporting required by ASU 2014-08, its adoption had no impact on its consolidated financial statements.

Future Accounting Pronouncements

In January 2015, the FASB issued Accounting Standards update 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates the requirement for entities to consider whether an underlying event or transaction is extraordinary, and, if so, to separately present the item in the income statement net of tax, after income from continuing operations. Instead, items that are both unusual and infrequent should be separately presented as a component of income from continuing operations, or be disclosed in the notes to the financial statements. ASU 2015-01 will be effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted provided that the new standard is applied from the beginning of the fiscal year of adoption. The Company has not historically reported extraordinary items in its consolidated financial statements, and is not aware of any pending transactions or events that might have required reporting as extraordinary items, and therefore does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

In March 2015, the FASB issued Accounting Standards update 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 eliminates entity specific consolidation guidance for limited partnerships, and revises other aspects of the consolidation analysis, but does not change the existing consolidation guidance for corporations that are not variable interest entities (“VIEs”). For public business entities, ASU 2015-02 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company has not yet adopted ASU 2015-02 nor assessed its potential impact on its consolidated financial statements.

In April 2015, the FASB issued Accounting Standards update 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 changes the presentation of debt issuance costs in financial statements, by requiring them to be presented in the balance sheet as a direct deduction from the related debt liability, rather than as an asset. Amortization of the costs is reported as interest expense. There is no change to the current guidance on the recognition and measurement of debt issuance costs. For public business entities, ASU 2015-03 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company has not yet adopted ASU 2015-03 nor assessed its potential impact on its consolidated financial statements.

8


Note 3 – Acquisition of National Loan Exchange, Inc.

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

The consideration for the acquisition consisted of $2.0 million cash, and an earn-out provision (“contingent consideration”). Under the terms of the NLEX purchase agreement, the Company will pay, to the former owner of NLEX, 50% of the Net Profits (as defined in the NLEX stock purchase agreement) of NLEX for each of the four years following the closing. The payments are due on or about July 30 of each year, beginning in 2015. The contingent consideration is capped at an aggregate of $5.0 million, and at June 30, 2015, subject to the application of a 9% discount rate, is estimated to have a present value of approximately $4.2 million. Key assumptions in determining this present value include projected earnings through May 2018 and a weighted average cost of capital of 31.6% . At June 30, 2015, the Company has recorded a current liability of $0.5 million for the first earn-out payment, and estimated that the non-current portion of the contingent consideration is $3.7 million.

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

See Note 6 for discussion of the intangible assets and goodwill recorded in connection with the acquisition of NLEX.

Note 4 – Stock-based Compensation

Options

At June 30, 2015 the Company had three stock-based compensation plans, which are described more fully in Note 15 to the audited consolidated financial statements for the year ended December 31, 2014, contained in the Company’s most recently filed Annual Report on Form 10-K.

During the first six months of both 2015 and 2014, the Company issued a total of 50,000 options to the Company’s independent directors as part of their annual compensation. During the same period in 2015, 40,000 options expired and no options were exercised or forfeited.

The following summarizes the changes in common stock options for the six months ended June 30, 2015:

          Weighted  
          Average  
          Exercise  
    Options     Price  
Outstanding at December 31, 2014   2,165,000   $  1.71  
Granted   50,000   $  0.42  
Expired   (40,000 ) $  0.90  
Outstanding at June 30, 2015   2,175,000   $  1.70  
             
Options exercisable at June 30, 2015   1,743,750   $  1.78  

The Company recognized stock-based compensation expense related to stock options of $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively. As of June 30, 2015 there is approximately $0.2 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 1.8 years.

9


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.

The following summarizes the changes in restricted stock awards for the six months ended June 30, 2015:

          Weighted  
    Restricted     Average Grant  
    Stock     Date Fair Value  
    Awards     Per Share  
Awards at December 31, 2014   300,000   $  0.38  
Granted        
Vested   (150,000 ) $  0.38  
Unvested awards at June 30, 2015   150,000   $  0.38  
             
Vested awards at June 30, 2015   150,000   $  0.38  

The Company recognized stock-based compensation expense related to restricted stock awards of $0.1 million for both the three and six months ended June 30, 2015, respectively. As of June 30, 2015 there is approximately $0.1 million of unrecognized stock-based compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 1.8 years.

Note 5 – 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 Class 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. For the six months ended June 30, 2015 and 2014, the Company recorded a net loss and therefore in both years excluded the outstanding options as of June 30 from its calculation of diluted EPS, since they would be anti-dilutive.

Note 6 – 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 (dollars in thousands):

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    Original     Remaining     Acquisition     Accumulated     Carrying Value  
Amortized Intangible Assets   Life (years)     Life (years)     Cost     Amortization     June 30, 2015  
Customer/Broker Network (HGP)   12     8.7   $  4,180   $  (1,161 ) $  3,019  
Trade Name (HGP)   14     10.7     1,460     (348 )   1,112  
Customer Relationships (NLEX)   7.6     6.6     834     (119 )   715  
Non-Compete Agreement (NLEX)   2     0.9     71     (38 )   33  
Website (NLEX)   5     3.9     48     (10 )   38  
Total               6,593     (1,676 )   4,917  
                               
Unamortized Intangible Assets                              
Trade Name (NLEX)   N/A     N/A     2,437         2,437  
Total             $  9,030   $  (1,676 ) $  7,354  

Amortization expense during the first six months of 2015 and 2014 was $0.3 million and $0.2 million, respectively.

The estimated amortization expense as of June 30, 2015 during the next five fiscal years is shown below (in thousands):

Year   Amount  
2015 (remainder of year from July 1, 2015 to
December 31, 2015)
  $303  
2016   $587  
2017   $572  
2018   $572  
2019   $566  

Goodwill

The Company’s goodwill is related to its asset liquidation business, and is comprised of goodwill from three acquisitions, as shown in the table below (in thousands). There were no impairment losses or other charges to the carrying amount of goodwill during the six months ended June 30, 2015 and 2014.

Entity acquired   Acquisition date     Goodwill  
Equity Partners   June 2011   $ 573  
HGP   February 2012     4,728  
NLEX   June 2014     3,545  
Total goodwill       $ 8,846  

Note 7 – Equity Method Investments

Summarized financial information – Equity method accounted asset liquidation investments

The summarized results of operations attributable to HGI’s equity method accounted asset liquidation investments are detailed in the table below (in thousands):

    Six months ended June 30,  
    2015     2014  
             
Revenues $  646   $  10  
Operating income (loss) $  139   $  (12 )

Other investments

At June 30, 2015 and December 31, 2014, the Company’s sole other equity method investment consisted of a one-third interest in Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”), a private company. The investment was acquired in December 2007 for a purchase price of $20,000. Knight’s Bridge GP is the general partner of Knight’s Bridge Capital Partners Internet Fund No. 1 LP (the “Fund”). The Fund holds investments in several non-public Internet-based e-commerce businesses. The Company accounts for its investment under the equity method.

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At December 31, 2014 the Company’s net investment was $0.2 million, which included approximately $0.1 million representing the Company’s proportionate share of profits related to the Fund’s fair value increase and projected exit from one of its investments. The Company received the profit distribution of $0.1 million in March 2015.

Note 8 – Debt

Outstanding debt at June 30, 2015 and December 31, 2014 is summarized as follows (in thousands):

    June 30,     December 31,  
    2015     2014  
             
Current:            
Third Party Loan $  2,500   $  —  
Counsel Loan   1,604     2,985  
Credit Facility       525  
    4,104     3,510  
Non-current:            
Third Party Loan       2,500  
             
Total debt $  4,104   $  6,010  

The Company entered into a loan with an unrelated party (the “Third Party Loan”) during the second quarter of 2014 for a principal amount of $2.5 million. The loan bears interest at 6% and had an original maturity date of January 15, 2015. In December 2014, the maturity date was extended to January 15, 2016 at the same interest rate. The loan is not subject to any covenants or conditions.

The Counsel Loan, which is due on demand, was originally entered into during the fourth quarter of 2003 and accrued interest at 10% per annum compounded quarterly from the date funds were advanced. The Counsel Loan is secured by the assets of the Company.

In the second quarter of 2014, following Street Capital Group Inc.’s (formerly Counsel Corporation, herein referred to as “Counsel”) distribution of its ownership interest in HGI to Counsel shareholders as a dividend in kind, the unpaid balance began accruing interest at a rate per annum equal to the lesser of the Wall St. Journal (“WSJ”) prime rate + 2.0%, or the maximum rate allowable by law. As of June 30, 2015 and December 31, 2014, the interest rate on the loan was 5.25% . Please see Note 10 for further discussion of transactions with Counsel.

The Credit Facility in existence at December 31, 2014 was provided to HG LLC by a U.S. bank. The Credit Facility was repaid in full in March 2015.

Note 9 – Income Taxes

At June 30, 2015 the Company has aggregate tax net operating loss carry forwards of approximately $87.2 million ($58.4 million of unrestricted net operating tax losses and approximately $28.8 million of restricted net operating tax losses) and unused minimum tax credit carry forwards of $0.5 million. Substantially all of the net operating loss carry forwards and unused minimum tax credit carry forwards expire between 2025 and 2035. The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code.

12


The reported tax expense (benefit) varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the loss from continuing operations before taxes for the following reasons (in thousands):

    Six months ended June 30,  
    2015     2014  
             
Expected federal statutory tax benefit $  (490 ) $  (580 )
Increase (reduction) in taxes resulting from:            
     Change in valuation allowance   1,396     25,178  
     Rate changes   34     55  
     Basis difference in NLEX trade name   (960 )    
     Other   23     14  
Income tax expense $  3   $ 24,667  

The Company records net deferred tax assets to the extent that it believes such assets will more likely than not be realized. As a result of our cumulative losses and uncertainty with respect to future taxable income, we have provided a full valuation allowance against our net deferred tax assets as of December 31, 2014 and June 30, 2015.

Note 10 – Related Party Transactions

Debt with Counsel

Until the second quarter of 2014, as discussed below, Counsel was the Company’s majority shareholder. Counsel remains a related party, following the distribution of its investment in HGI to Counsel shareholders, as a result of the Services Agreement discussed below. Therefore, at June 30, 2015 and December 31, 2014, the Company reported amounts owed to Counsel of $1.6 million and $3.0 million, respectively, as related party debt (see Note 8). Total interest of $0.4 million has been accrued on the debt through June 30, 2015.

Counsel Services Provided to the Company

Beginning in December 2004, HGI and Counsel entered into successive annual management services agreements (collectively, the “Agreement”). Under the terms of the Agreement, HGI agreed to pay Counsel for ongoing services provided to HGI by Counsel personnel. These services included preparation of the Company’s financial statements and regulatory filings, taxation matters, stock-based compensation administration, Board administration, patent portfolio administration and litigation matters. The Counsel employees providing the services were: 1) its Executive Vice President, Secretary and Chief Financial Officer, 2) its Tax Manager, 3) an Accounting Manager, and 4) its Accounts Payable Clerk. These employees have the same or similar positions with HGI, but none of them received compensation from HGI. Rather, Counsel allocated to HGI a percentage, based on time incurred, of the employees’ base compensation paid by Counsel. Beginning in the first quarter of 2011, additional amounts were charged to HGI for Counsel services specifically relating to the ongoing operations of HGI’s asset liquidation business. The amounts due under the Agreement were payable within 30 days following the respective year end, subject to applicable restrictions. Any unpaid amounts bore interest at 10% per annum commencing on the day after such year end.

In the first quarter of 2013, Counsel announced its plan to dispose of its interest in HGI, and on March 20, 2014, Counsel declared a dividend in kind, consisting of Counsel’s distribution of its majority interest in HGI to Counsel shareholders. The dividend was paid on April 30, 2014 to shareholders of record as of April 1, 2014.

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Following this disposition, the Company and Counsel entered into a replacement management services agreement (the “Services Agreement”). Under the terms of the Services Agreement, Counsel remains as external manager and continues to provide the same services, at similar rates. The Services Agreement had an initial term of one year, with a provision for automatic renewal for successive one-year terms unless notice by either party is given within ninety days before the expiration. The Services Agreement may be terminated at any time upon mutual agreement of the Company and Counsel. Following the changes to the Company’s executive officers and directors that were effective on May 5, 2015, as described in the Current Report on Form 8-K filed with the SEC on May 7, 2015, the Company and Counsel intend to terminate the Services Agreement in the third quarter of 2015.

The amounts charged by Counsel, which have been accrued and added to the Counsel Loan balance, are detailed below (in thousands):

    Six months ended June 30,  
    2015     2014  
Management fees $ 180   $ 180  
Other charges   38     96  
Total $ 218   $ 276  

Transactions with Other Related Parties

The Company leases office space in Foster City, CA as part of the operations of HGP. The premises are owned by an entity that is jointly controlled by senior officers of HGI. It also leases office space in Edwardsville, IL, as part of the operations of NLEX, which is owned by senior officers of NLEX. The lease amounts paid by the Company to the related parties, which are included in selling, general and administrative expenses during the six months ended June 30, 2015 and 2014, are detailed below (in thousands):

    Six months ended June 30,  
Leased premises location   2015     2014  
Foster City, CA $  114   $  114  
Edwardsville, IL   49     8  
Total $  163   $  122  

Note 11 – Subsequent Events

The Company has evaluated events subsequent to June 30, 2015 for disclosure. There have been no material subsequent events requiring disclosure in this Report.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of the Company and the related notes thereto for the three-month and six-month periods ended June 30, 2015, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (“SEC”).

Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may,” "will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties, as noted in the Company’s Annual Report on Form 10-K, filed with the SEC, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

Overview, History and Recent Developments

Heritage Global Inc. (“HGI”, “we” or the “Company”) was incorporated in the State of Florida in 1983 under the name “MedCross, Inc.” The Company’s name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, to “Counsel RB Capital Inc.” in 2011, and to Heritage Global Inc. effective August 22, 2013. The most recent name change more closely identifies the Company with its core auction business, Heritage Global Partners, Inc. (“HGP”).

On March 20, 2014, the Company’s former majority shareholder, Street Capital Group Inc. (formerly Counsel Corporation, herein referred to as “Counsel”), declared a dividend of all of its shares of the Company. This dividend was paid on April 30, 2014 to Counsel’s common shareholders of record as of April 1, 2014.

On June 2, 2014, effective as of May 31, 2014, the Company acquired all of the outstanding equity of National Loan Exchange, Inc. (“NLEX”), a broker of charged-off receivables in the United States and Canada. As a result of this acquisition, NLEX now operates as a wholly owned division of the Company. Prior to and following the acquisition, NLEX’s role was limited to being a broker or agent, but that role may expand in the future to include NLEX acting as a principal. The acquisition is discussed in Note 3 of the unaudited condensed consolidated interim financial statements.

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The organization chart below outlines the basic corporate structure of the Company as of June 30, 2015.


(1)

Registrant.

(2)

Full service, global auction, appraisal and asset advisory company.

(3)

Asset liquidation company which acquires and monetizes distressed and surplus assets.

(4)

Investment banking firm specializing in financially distressed companies and properties.

(5)

Broker of charged-off receivables.

(6)

Owns and licenses telecommunications patents.

Asset liquidation

The Company’s asset liquidation business is its sole operating segment, and the Company’s objective is to build a sustainable, long-term global capital asset solutions business that is the leading resource for clients requiring capital asset solutions.

The asset liquidation business began operations in 2009 with the establishment of Heritage Global LLC (“HG LLC”). In addition to acquiring turnkey manufacturing facilities and used industrial machinery and equipment, HG LLC arranges traditional asset disposition sales, including liquidation and auction sales. In the second quarter of 2011, HG LLC acquired 100% of the business of EP USA, LLC (d/b/a Equity Partners) (“Equity Partners”), thereby expanding the Company’s operations. Equity Partners is a boutique investment banking firm and provider of financial solutions for distressed businesses and properties.

In February 2012 the Company increased its in-house asset liquidation expertise via its acquisition of 100% of the outstanding equity of Heritage Global Partners, Inc. (“HGP”), a global full-service auction, appraisal and asset advisory firm, and in the fourth quarter of 2012, the Company launched Heritage Global Partners Europe (“HGP Europe”). Through its wholly-owned subsidiary Heritage Global Partners UK Limited, the Company opened three European-based offices, one each in the United Kingdom, Germany and Spain.

As described above, effective May 31, 2014, the Company again expanded its asset liquidation operations with the acquisition of NLEX. NLEX is the largest volume broker of charged-off receivables in the United States and Canada, and its offerings include national, state and regional portfolios on behalf of many of the world’s top financial institutions. The NLEX acquisition is consistent with HGI’s strategy to expand and diversify the services provided by its asset liquidation business.

As a result of the events and acquisitions outlined above, HGI is positioned to be a value-driven, innovative leader in corporate and financial asset liquidation transactions, valuations and advisory services.

16


HGI focuses on identifying, valuing, acquiring and monetizing underlying tangible and intangible assets in global industrial and financial sectors. HGI specializes in both acting as an adviser and acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, accounts receivable portfolios, related intellectual property, and entire business enterprises. Management believes that HGI’s expanded global platform will allow the Company to achieve its long term industry leadership goals.

Intellectual property licensing

The Company holds several patents, including two that relate to Voice over Internet Protocol (“VoIP”). U.S. Patent No. 6,438,124 was developed by the Company, and encompasses the technology that allows two parties to converse phone-to-phone, regardless of the distance, by transmitting voice/sound via the Internet. U.S. Patent No. 6,243,373 (the “VoIP Patent”) was purchased from a third party (the “Vendor”). These patents, together with related international patents and patent applications, form the Company’s international VoIP Patent Portfolio (the “Portfolio”) that covers the basic process and technology that enable VoIP communication as used in the market today. As part of the consideration for the acquisition of the VoIP Patent, the Vendor is entitled to receive 35% of the net earnings from the Portfolio. To date the Company has recognized aggregate revenue of $17.8 million from settlement and licensing agreements and paid $2.6 million to the Vendor. At this time, although the Company expects to continue to incur costs relating to maintaining ownership of these patents, it is not expected that either these costs or related revenue will be material.

Industry and Competition

Asset Liquidation

The asset liquidation business consists primarily of the auction, appraisal and asset advisory services provided by HGP and Equity Partners, and, since the second quarter of 2014, the accounts receivable brokerage services provided by NLEX. It also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. The market for these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, HGI competes with other liquidators, auction companies, dealers and brokers. It also competes with them for potential purchasers, as well as with equipment manufacturers, distributors, dealers and equipment rental companies. Some competitors have significantly greater financial and marketing resources and name recognition.

HGI’s business strategy includes the option of partnering with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). These Joint Ventures give the Company access to more opportunities, enabling it to compete more effectively with the market’s larger participants and contribute to the Company’s objective to be the leading resource for clients requiring capital asset solutions.

Government Regulation

We are subject to federal, state and local consumer protection laws, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices. Many jurisdictions also regulate "auctions" and "auctioneers" and may regulate online auction services. These consumer protection laws and regulations could result in substantial compliance costs and could interfere with the conduct of our business.

Legislation in the United States, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, has increased public companies’ regulatory and compliance costs as well as the scope and cost of work provided by independent registered public accountants and legal advisors. The mandatory adoption of XBRL reporting in 2011 has also increased the Company’s costs paid to third party service providers. As regulatory and compliance guidelines continue to evolve, we expect to continue to incur costs, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies.

17


Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations references our unaudited condensed consolidated interim financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). This 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 revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are considered to be reasonable under the circumstances. Actual results could differ from those estimates.

Significant estimates required in the preparation of the unaudited condensed consolidated interim financial statements included in this Report include the assessment of collectability of revenue recognized, and the valuation of accounts receivable, inventory, investments, goodwill, intangible assets, liabilities, contingent consideration, deferred income tax assets and liabilities and stock-based compensation. These estimates are considered significant either because of the significance of the financial statement items 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.

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no changes to these policies in the first six months of 2015.

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Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

At June 30, 2015 the Company had a working capital deficit of $6.1 million, as compared to a working capital deficit of $4.0 million at December 31, 2014, an increase of approximately $2.1 million.

The Company’s current assets decreased to $4.1 million compared to $7.6 million at December 31, 2014. The most significant change was a decrease of $2.4 million in accounts receivable. This was primarily due to the receipt of $2.0 million of proceeds related to the Company’s exit from its investment in Polaroid during the fourth quarter of 2014. The cash received was subsequently used to repay third party and related party debt.

The Company’s current liabilities decreased to $10.2 million compared to $11.5 million at December 31, 2014. Accounts payable and accrued liabilities decreased by $1.6 million, the Counsel Loan decreased by $1.4 million, and the current portion of contingent consideration decreased by $0.3 million, for a total decrease of $3.3 million. This was offset by a net increase of $2.0 million in the Company’s current third party debt. Although during the first quarter of 2015 the Company repaid the $0.5 million credit facility balance that was outstanding at December 31, 2014, the portion of its third party debt (the “Third Party Loan”) considered current increased by $2.5 from December 31, 2014. The Third Party Loan matures on January 15, 2016.

During the first six months of 2015, the Company’s primary sources of cash were the operations of its asset liquidation business, cash receipts of $3.0 million related to its equity method investments, and advances of $0.8 million under the Counsel Loan. Cash disbursements, other than those related to debt repayment of $2.9 million ($0.5 million to third parties and $2.4 million under the Counsel Loan), were primarily related to operating expenses.

The Company has historically classified both real estate inventory and asset liquidation related equity method investments as non-current, although they are expected to be converted to cash within a year. At June 30, 2015 and December 31, 2014, these assets totaled approximately $6.9 million and $7.5 million, respectively.

The Company is continuing to pursue licensing and royalty agreements with respect to its patents. However, the Company expects that its asset liquidation business will continue to be the primary source of cash required for ongoing operations for the foreseeable future.

Ownership Structure and Capital Resources

  • At June 30, 2015 the Company had stockholders’ equity of $12.4 million, as compared to $13.5 million at December 31, 2014.

  • On April 1, 2013, Counsel announced that its Board of Directors had approved a plan to focus Counsel’s operations on its core business, mortgage lending, and therefore to dispose of its other operating segments, including its interest in HGI. On March 20, 2014, Counsel declared a dividend of all of its shares of the Company. This dividend was paid on April 30, 2014 to Counsel’s common shareholders of record as of April 1, 2014. On May 1, 2014, HGI and Counsel entered into a management services agreement (the “Services Agreement”) under which Counsel has continued to provide management and other services to HGI. For more detail regarding the Services Agreement, see Note 10 in the unaudited condensed consolidated financial statements.

  • The Company determines its future capital and operating requirements based upon its current and projected operating performance and the extent of its contractual commitments. The Company expects to be able to finance its future operations through a combination of its asset liquidation business and securing additional debt financing. The Company’s contractual requirements are limited to the outstanding loans and lease commitments with related and unrelated parties. The Company intends to repay its outstanding loans at maturity, however in the event it cannot do so it expects to be able to refinance without adverse effects. Capital requirements are generally limited to the Company’s purchases of surplus and distressed assets. The Company believes that its current capital resources are sufficient for these requirements. In the event additional capital is needed, the Company believes it can obtain additional debt financing through either related party loans or through a new credit facility.

19


Cash Position and Cash Flows

Cash and cash equivalents at June 30, 2015 were $2.7 million as compared to $3.6 million at December 31, 2014, a decrease of $0.9 million.

Cash used in operating activities Cash used in operating activities was $1.3 million during the six months ended June 30, 2015 as compared to $1.0 million during the same period in 2014. During the first six months of 2015 the Company had a pre-tax loss of $1.3 million, as compared to a pre-tax loss of $1.5 million for the same period in 2014, a decrease of $0.2 million. The operations of NLEX, which was acquired during the second quarter of 2014, generated $0.9 million of operating profit for the six months ended June 30, 2015, excluding the NLEX related amortization of intangible assets, compared to $0.1 for the six months ended June 30, 2014 (which included only one month of NLEX operations).

With respect to operations, the Company’s operating loss for the six month period ended June 30, 2015 remained substantially unchanged at $1.1 million as compared to $1.2 million for the same period in 2014. Gross profit from asset liquidation operations, including earnings of equity accounted asset liquidation investments, increased by $1.4 million. This change was largely due to the inclusion of NLEX gross profit of $2.2 million in 2015. Selling general and administrative expenses increased by approximately $1.1 million, almost all of which related to the 2015 inclusion of NLEX operations for the entire six month period.

Cash provided by or used in investing activities Cash provided by investing activities during the six months ended June 30, 2015 was $2.6 million, as compared to $0.9 million cash used during the same period in 2014. The 2015 activity consisted primarily of the following cash receipts related to the Company’s equity method investments: $2.0 million of proceeds from the Company’s December 2014 exit from Polaroid (received in 2015), and $0.7 million of distributions from the Company’s other equity method investments. In 2014 the most significant item was the net $1.4 million cash paid to acquire NLEX. This was offset partially by $0.5 million of cash distributions from the Company’s equity method investments.

Cash used in or provided by financing activities Cash used in financing activities was $2.2 million during the six months ended June 30, 2015, as compared to $1.0 million cash provided during the same period in 2014. The 2015 activity consisted of $0.5 million of debt repaid to third parties, and net $1.6 million of debt repaid to Counsel. In 2014, the Company received $1.3 million (net of repayments) as loans from third parties, primarily used for the purchase of NLEX.

20


Management’s Discussion of Results of Operations

The following table sets out the Company’s condensed consolidated results of operations for the three and six months ended June 30, 2015 and 2014 (dollars in thousands).

Quarterly and Year to Date Statement of Operations

    Three months ended     Change     Six months ended     Change  
    June 30, 2015 June 30, 2014      Dollars     Percent     June 30, 2015  June 30, 2014      Dollars     Percent  

Revenue

                                               

Asset liquidation:

                                               

Commissions and other

$  2,379   $  2,312   $  67     3%   $  5,191   $  3,322   $  1,869     56%  

Asset sales

  579     499     80     16%     1,412     1,474     (62 )   -4%  

Total revenue

  2,958     2,811     147     5%     6,603     4,796     1,807     38%  

 

                                               

Operating costs and expenses:

                                               

Asset liquidation

  582     569     13     2%     1,612     1,034     578     56%  

Selling, general and administrative

  2,985     2,609     376     14%     5,908     4,758     1,150     24%  

Depreciation and amortization

  165     120     45     38%     324     238     86     36%  

Total operating costs and expenses

  3,732     3,298     434     13%     7,844     6,030     1,814     30%  

 

                                               

Earnings (loss) of equity accounted asset
liquidation investments

105 18 87 483% 139 (12

)

151 1258%

Operating Loss

  (669 )   (469 )   (200 )   43%     (1,102 )   (1,246 )   144     12%  

 

                                               

Other income (expenses):

                                               

Earnings of other equity method
investments

- 24 (24 ) -100% 5 35 (30 ) -86%

Interest expense - third party

  (1 )   (100 )   99     -99%     (135 )   (171 )   36     -21%  

Interest expense - related party

  (23 )   (39 )   16     -41%     (45 )   (106 )   61     -58%  

Total other expense

  (24 )   (115 )   91     -79%     (175 )   (242 )   67     -28%  

Loss before income tax expense

  (693 )   (584 )   (109 )   19%     (1,277 )   (1,488 )   211     -14%  

Income tax expense

  -     -     -     -     3     24,667     (24,664 )   -100%  

Net loss

$  (693 ) $  (584 ) $  (109 )   19%   $  (1,280 ) $  (26,155 ) $ 24,875     -95%  

The Company’s asset liquidation revenue has several components: (1) traditional asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt, and (3) fees earned for management advisory services. The Company also earns income from its asset liquidation business through its earnings from equity accounted asset liquidation investments.

Three-Month Period Ended June 30, 2015 Compared to Three-Month Period Ended June 30, 2014

Asset liquidation revenues were $3.0 million in 2015 compared to $2.8 million in 2014, asset liquidation expense was $0.6 million in both 2015 and 2014, and earnings of equity method asset liquidation investments were $0.1 million in 2015 compared to $18,000 in 2014. The asset liquidation gross profit was therefore $2.5 million in 2015 compared to $2.3 million in 2014, an increase of $0.2 million or 10%. Because the Company conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period, the operations must be considered as a whole rather than on a line-by-line basis. The increased gross profit in the current quarter reflects the vagaries of the timing of asset liquidation transactions. It also reflects the acquisition of NLEX, which was responsible for $1.2 million of the quarter’s asset liquidation gross profit.

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Selling, general and administrative expense, including expenses paid to related parties, was $3.0 million during the three months ended June 30, 2015, compared to $2.6 million during the same period in 2014, an increase of approximately $0.4 million or 14%. Selling, general and administrative expenses increased overall primarily due to the inclusion of NLEX expenses of $0.6 million in 2015.

Significant components of selling, general and administrative expense were as shown below (dollars in thousands):

    Three months ended        
    June 30,        
    2015     2014     % change  
Compensation                  
   HGP $  1,050   $  1,001     5%  
   Equity Partners   360     284     27%  
   NLEX   445     161     176%  
   Former President's salary   34     34     -  
   Stock-based compensation   155     122     27%  
                   
Legal   3     138     -98%  
Consulting   124     109     14%  
Counsel management fees   90     90     -  
Accounting and tax consulting   27     116     -77%  
Insurance, including Directors and Officers liability   40     36     11%  
Occupancy   151     127     19%  
Travel and entertainment   240     167     44%  
Advertising and promotion   80     74     8%  

The increases in insurance, occupancy, travel and entertainment, and advertising and promotion expense are primarily due to the inclusion of NLEX expenses for the entire quarter in 2015, as compared to only one month in 2014. The decreases in legal and accounting expense are primarily due to the inclusion, in 2014 only, of expenses related to the acquisition of NLEX.

Depreciation and amortization expense was $0.2 million in 2015 compared to $0.1 million in 2014, and consisted almost entirely of amortization expense related to intangible assets. The increase in 2015 was due to the inclusion of amortization of the NLEX intangible assets acquired in the second quarter of 2014. In both years the depreciation of property and equipment was not material.

Six-Month Period Ended June 30, 2015 Compared to Six-Month Period Ended June 30, 2014

Asset liquidation revenues were $6.6 million in 2015 compared to $4.8 million in 2014, asset liquidation expense was $1.6 million in 2015 compared to $1.0 million in 2014, and earnings of equity method asset liquidation investments were $0.1 million in 2015 compared to a loss of $12,000 in 2014. The asset liquidation gross profit was therefore $5.1 million in 2015 compared to $3.8 million in 2014, an increase of approximately $1.3 million or 37%. Because the Company conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period, the operations must be considered as a whole rather than on a line-by-line basis. The increased gross profit in the current year reflects the vagaries of the timing of asset liquidation transactions. It also reflects the acquisition of NLEX, which was responsible for $2.2 million of the year to date asset liquidation gross profit.

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Selling, general and administrative expense, including expenses paid to related parties, was $5.9 million during the six months ended June 30, 2015, compared to $4.8 million during the same period in 2014, an increase of approximately $1.1 million or 24%. Selling, general and administrative expenses increased overall primarily due to the inclusion of NLEX expenses of $1.2 million in 2015.

Significant components of selling, general and administrative expense were as shown below (dollars in thousands):

    Six months ended        
    June 30,        
    2015     2014     % change  
Compensation                  
   HGP $  1,993   $  1,951     2%  
   Equity Partners   670     534     25%  
   NLEX   899     161     458%  
   Former President's salary   68     68     -  
   Stock-based compensation   276     245     13%  
                   
Legal   114     167     -32%  
Consulting   227     228     -  
Counsel management fees   180     180     -  
Accounting and tax consulting   103     188     -45%  
Insurance, including Directors and Officers liability   85     76     12%  
Occupancy   293     239     23%  
Travel and entertainment   467     328     42%  
Advertising and promotion   182     154     18%  

The increases in insurance, occupancy, travel and entertainment, and advertising and promotion expense are primarily due to the inclusion of NLEX expenses for the entire six months in 2015, as compared to only one month in 2014. The decreases in legal and accounting expense are primarily due to the inclusion, in 2014 only, of expenses related to the acquisition of NLEX. The increase in stock-based compensation is primarily the result of expense recognized during the six month period ended June 30, 2015 for restricted stock awards.

Depreciation and amortization expense was $0.3 million in 2015 compared to $0.2 million in 2014, and consisted almost entirely of amortization expense related to intangible assets. The increase in 2015 was due to the inclusion of amortization of the NLEX intangible assets acquired in the second quarter of 2014. In both years the depreciation of property and equipment was not material.

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Non-GAAP Financial Measure - Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

We prepared our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).

We use the non-GAAP financial measure “EBITDA” in assessing the Company’s results. We define EBITDA as net loss less interest expense, provision for income taxes, stock-based compensation, depreciation and amortization. We believe that EBITDA is relevant and useful supplemental information for our investors. Management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete understanding of the factors and trends affecting the Company than could be obtained absent these disclosures. Management uses EBITDA to make operating and strategic decisions and to evaluate the Company’s performance. We have disclosed this non-GAAP financial measure so that our investors have the same financial data that management uses, with the intention of assisting investors to make comparisons to our historical operating results and analyze our underlying performance. Management believes that EBITDA is a useful supplemental tool to evaluate the underlying operating performance of the Company on an ongoing basis. Our use of EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the quarterly financial information, below, which reconciles our GAAP reported net loss to EBITDA for the periods presented (in thousands).

                                        Six months ended  
    Q2/15     Q1/15     Q4/14     Q3/14     Q2/14     Q1/14     June 30, 2015     June 30, 2014    
                                                 
Net loss $  (693 ) $ (587 ) $ (171 ) $  (188 ) $  (584 $ (25,571 ) $  (1,280 ) $   (26,155 )
Add back:                                                
Depreciation and amortization   165     159     209     119     120     118     324     238  
Stock based compensation   156     120     121     118     122     123     276     245  
Interest expense   24     156     305     122     139     138     180     277  
Income tax expense   -     3     -     55     -     24,667     3     24,667  
EBITDA $  (348 ) $ (149 ) $ 464   $  226   $  (203 $ (525 ) $  (497 ) $ (728 )

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary exposure to market risk is limited to interest rate and foreign exchange rate sensitivity, which is affected by changes in the general level of interest rates and foreign exchange rates. Due to the fact that our cash is deposited with major financial institutions in non-interest bearing accounts, we believe that we are not subject to any material interest rate risk as it relates to interest income. As to interest expense, we have one debt instrument that has a variable interest rate. The Counsel Loan bears interest at a rate per annum equal to the lesser of the WSJ prime rate + 2.0%, or the maximum rate allowable by law. Assuming that the Counsel Loan amount at June 30, 2015 was constant during the next twelve-month period, the impact of a one percent increase in the interest rate would be an increase in interest expense of approximately $16,000 for that twelve-month period. We do not believe that, in the near term, we are subject to material interest rate risk on our debt. There have been no material changes to the interest rate risks since December 31, 2014.

We did not have any foreign currency hedges or other derivative financial instruments as of June 30, 2015. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Although our operations are conducted primarily in the United States we do conduct some asset liquidation services in foreign countries and sometimes use foreign currencies to conduct those services. Thus, we are occasionally subject to foreign currency exchange rate risk. Management monitors operations and will act as required to minimize this risk. There have been no material changes to the foreign currency risks since December 31, 2014.

Item 4. Controls and Procedures.

As of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective.

Further, there were no changes in our internal control over financial reporting during the second fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 31, 2015.

Item 1A. Risk Factors

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

(a) Exhibits

Exhibit No. Identification of Exhibit
   
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

 Heritage Global Inc.
     
     
Date: August 13, 2015 By: /s/ Ross Dove
    Ross Dove
    Chief Executive Officer
    (Principal Executive Officer)
     
     
  By: /s/ Scott A. West
    Scott A. West
    Chief Financial Officer
    (Principal Financial Officer and Principal Accounting
    Officer)

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