Heritage Global Inc. - Quarter Report: 2021 September (Form 10-Q)

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 September 30, 2021

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

For the transition period from to

Commission file number: 001-39471

Heritage Global Inc.

(Exact name of registrant as specified in its charter)


Florida	59-2291344
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

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

(Address of Principal Executive Offices)

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

N/A

(Registrant’s Former Name)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	HGBL	Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

As of November 1, 2021, there were 36,574,702 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 September 30, 2021 (unaudited) and December 31, 2020	4

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 (unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

Part II.	Other Information	32

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

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) (unaudited)

	September 30, 2021			December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	13,234		$	23,385
Accounts receivable		3,388			1,496
Current portion of notes receivable, net		1,142			1,338
Inventory – equipment		1,383			235
Other current assets		675			498
Total current assets		19,822			26,952
Non-current portion of notes receivable, net		1,413			748
Equity method investments		3,327			2,402
Right-of-use assets		2,818			963
Property and equipment, net		1,477			130
Intangible assets, net		4,265			3,123
Goodwill		7,262			5,585
Deferred tax assets		4,807			4,402
Other assets		161			250
Total assets	$	45,352		$	44,555

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	8,902		$	13,609
Current portion of third party debt		531			—
Current portion of lease liabilities		498			380
Total current liabilities		9,931			13,989
Non-current portion of third party debt		1,469			—
Non-current portion of lease liabilities		2,368			623
Total liabilities		13,768			14,612

Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 565 shares of Series N as of September 30, 2021 and 568 as of December 31, 2020		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 36,574,702 shares as of September 30, 2021 and 35,281,183 as of December 31, 2020		366			353
Additional paid-in capital		292,935			293,400
Accumulated deficit		(261,723	)		(263,816	)
Total stockholders’ equity		31,584			29,943
Total liabilities and stockholders’ equity	$	45,352		$	44,555

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

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenues:
Services revenue	$	4,822		$	6,060		$	14,020		$	15,713
Asset sales		1,169			1,506			4,248			2,214
Total revenues		5,991			7,566			18,268			17,927

Operating costs and expenses:
Cost of services revenue		1,100			1,605			3,235			3,344
Cost of asset sales		675			990			1,870			1,358
Selling, general and administrative		3,494			3,378			11,134			10,516
Depreciation and amortization		105			92			294			272
Total operating costs and expenses		5,374			6,065			16,533			15,490
Earnings of equity method investments		(84	)		111			(83	)		293
Operating income		533			1,612			1,652			2,730
Interest and other expense, net		(6	)		(3	)		6			(38	)
Income before income tax expense (benefit)		527			1,609			1,658			2,692
Income tax expense (benefit)		53			345			(435	)		(649	)
Net income	$	474		$	1,264		$	2,093		$	3,341

Weighted average common shares outstanding – basic		35,805,227			28,751,689			35,285,128			28,817,344
Weighted average common shares outstanding – diluted		37,090,294			31,890,115			36,567,713			31,288,151
Net income per share – basic	$	0.01		$	0.04		$	0.06		$	0.12
Net income per share – diluted	$	0.01		$	0.04		$	0.06		$	0.11

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

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 as of December 31, 2020		568		$	6		35,281,183	$	353	$	293,400		$	(263,816	)	$	—	$	29,943
Issuance of common stock from stock option awards		—			—		366,294		4		(124	)		—			—		(120	)
Stock-based compensation expense		—			—		—		—		67			—			—		67
Net income		—			—		—		—		—			1,032			—		1,032
Balance as of March 31, 2021		568			6		35,647,477		357		293,343			(262,784	)		—		30,922
Issuance of common stock from stock option awards		—			—		611,905		6		(676	)		—			—		(670	)
Issuance of restricted common stock		—			—		25,000		—		76			—			—		76
Stock-based compensation expense		—			—		—		—		68			—			—		68
Net income		—			—		—		—		—			587			—		587
Balance at June 30, 2021		568			6		36,284,382		363		292,811			(262,197	)		—		30,983
Issuance of common stock from stock option awards		—			—		290,200		3		22			—			—		25
Issuance of common stock due to conversion of Series N Preferred stock		(3	)		—		120		—		—			—			—		—
Stock-based compensation expense		—			—		—		—		102			—			—		102
Net income		—			—		—		—		—			474			—		474
Balance at September 30, 2021		565		$	6		36,574,702	$	366	$	292,935		$	(261,723	)	$	—	$	31,584

									Additional						Accumulated other
	Preferred stock				Common stock				paid-in			Accumulated			comprehensive
	Shares		Amount		Shares		Amount		capital			deficit			loss			Total
Balance as of 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 as of March 31, 2020		568		6		29,358,906		294		285,171			(273,436	)		(77	)		11,958
Issuance of common stock from stock option awards		—		—		62,550		1		29			—			—			30
Stock-based compensation expense		—		—		—		—		86			—			—			86
Net income		—		—		—		—		—			2,039			—			2,039
Balance at June 30, 2020		568		6		29,421,456		295		285,286			(271,397	)		(77	)		14,113
Issuance of common stock from stock option awards		—		—		97,581		1		(88	)		—			—			(87	)
Issuance of common stock		—		—		205,000		2		568			—			—			570
Stock-based compensation expense		—		—		—		—		97			—			—			97
Net income		—		—		—		—		—			1,264			—			1,264
Balance at September 30, 2020		568	$	6		29,724,037	$	298	$	285,863		$	(270,133	)	$	(77	)	$	15,957

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

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of US dollars)

(unaudited)

	Nine Months Ended September 30,
	2021			2020
Cash flows (used in) provided by operating activities:
Net income	$	2,093		$	3,341
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of deferred issuance costs and fees		39			60
Earnings of equity method investments		83			(293	)
Noncash lease expense		408			388
Depreciation and amortization		294			272
Deferred taxes		(405	)		(1,092	)
Stock-based compensation expense		313			258
Changes in operating assets and liabilities:
Accounts receivable		(1,555	)		(97	)
Inventory – equipment		(26	)		(704	)
Other assets		(80	)		(367	)
Accounts payable and accrued liabilities		(4,890	)		1,418
Lease liabilities		(400	)		(378	)
Net cash (used in) provided by operating activities		(4,126	)		2,806

Cash flows (used in) provided by investing activities:
Investment in notes receivable		(5,856	)		(4,490	)
Payments received on notes receivable		3,388			1,002
Acquisition, net of cash acquired		(4,318	)		—
Cash received on transfer of notes receivable to partners		1,961			4,997
Investment in equity method investments		(1,092	)		(1,197	)
Cash distributions from equity method investments		82			314
Purchase of property and equipment		(1,423	)		(6	)
Net cash (used in) provided by investing activities		(7,258	)		620

Cash flows provided by (used in) financing activities:
Proceeds from debt payable to third parties		1,300			5,625
Repayment of debt payable to third parties		(1,300	)		(5,925	)
Proceeds from issuance of notes payable to third parties		2,000			—
Proceeds from issuance of common stock from stock option awards		221			46
Payments of tax withholdings related to cashless exercises of stock option awards		(988	)		(105	)
Net cash provided by (used in) financing activities		1,233			(359	)
Net (decrease) increase in cash and cash equivalents		(10,151	)		3,067
Cash and cash equivalents as of beginning of period		23,385			2,728
Cash and cash equivalents as of end of period	$	13,234		$	5,795

Supplemental cash flow information:
Cash paid for taxes	$	118		$	139
Cash paid for interest		6			41
Issuance of common stock for services rendered		—			570
Noncash change in Right-of-use assets		2,263			—
Noncash change in Lease liabilities		2,263			—

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

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”), Heritage Global Capital LLC (“HGC”) and Heritage ALT LLC (“ALT”). 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 began its asset liquidation operations in 2009 with the establishment of HG LLC. The business was subsequently expanded by the acquisitions of Equity Partners, HGP, NLEX, and ALT in 2011, 2012, 2014, and 2021, respectively, and the creation of HGC in 2019. As a result, HGI is positioned to provide an array of value-added capital and financial asset solutions: auction and appraisal services, traditional asset disposition sales, and specialty financing solutions. The Company’s reportable segments consist of the Industrial Assets Division and Financial Assets Division.

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, 2020, filed with the SEC on March 8, 2021 (the “Form 10-K”).

The results of operations for the nine month period ended September 30, 2021 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2021. The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated balance sheet as of December 31, 2020, contained in the Company’s Form 10-K.

COVID-19

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s performance during the first three quarters of 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales by financial institutions, and a delay in the typical process for the sale of certain industrial assets by manufacturing companies.

Going forward, and subject to the caveat below, the Company does not believe the COVID-19 pandemic will have 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 the COVID-19 pandemic and any downward trends in the overall economy, resulting in more potential for principal and fee based deals. The Company believes that the continuing disruptions to the global supply chain, particularly those involving industrial assets, will further increase demand for U.S.-based surplus assets. Further, as stimulus payments conclude, the Company expects that the COVID-19 pandemic will have the following positive impacts:

•increased activity for NLEX and HGC due to expanding volumes of nonperforming and charged-off consumer loans;

•increased funding opportunities for HGC as lenders begin to increase loan volume while loosening underwriting standards, which will subsequently increase loans available to debt buyers of charged-off accounts; and

•incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets.

A new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has spread in the United States and across the globe. Further surges in COVID-19 infection rates could result in the continuation of stimulus payments and the implementation of additional credit policies impacting debt sales that may result in delayed revenues for the Company's Financial Asset Division depending on the scope and magnitude of such policies.

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 including future years’ taxable income, 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.

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 derived from the two reportable segments of the asset liquidation business, the Industrial Assets Division and the Financial Assets Division. 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 the Company’s total revenues (less than 1% of total revenues for the nine month period ended September 30, 2021) 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 September 30, 2021, the deferred revenue balance was approximately $104,000. Revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected; however, in certain situations, the Company records receivables related to asset liquidation based on timing of payments for asset liquidation transactions held at the end of the reporting period. 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, which are included within services revenue, include loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

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

The portfolio monitoring fees and the backend profit share percentage are considered a separate earnings process as compared to the origination fees and interest income. Portfolio monitoring fees are recorded at the agreed upon rate at the time in which payments are made by the borrower. The backend profit share percentage is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned. The revenue recognition policy was established due to the uncertainty of timing of the amount of backend profit share percentage that will be realized, and the lack of historical precedent as this is a new business for the Company.

During the nine months ended September 30, 2021 and 2020, the Company generated revenues specific to one customer representing 9% and 12% of total revenues, respectively. During the three months ended September 30, 2021 and 2020, the Company generated revenues specific to the same customer representing 6% and 8% of total revenues for the respective periods.

Leases

The Company is obligated to make future payments under existing lease agreements that (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 Company’s Form 10-K. There were no changes to these policies during the nine months ended September 30, 2021.

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. ASU 2019-12 became effective January 1, 2021 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.

Note 3 – Notes Receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios. As of September 30, 2021 and December 31, 2020, the Company’s outstanding notes receivables, net of unamortized deferred fees and costs on originated loans, were $2.6 million and $2.1 million, respectively. During the nine months ended September 30, 2021, the Company issued notes receivable of approximately $5.9 million, which was offset by principal payments made by borrowers of approximately $3.4 million and the transfer of notes to partners of approximately $2.0 million.

As of September 30, 2021, the Company did not record an allowance for credit losses related to notes receivable outstanding.

Note 4 – Stock-based Compensation

Options

As of September 30, 2021, the Company had four stock-based compensation plans, which are described more fully in Note 16 to the audited consolidated financial statements for the year ended December 31, 2020, contained in the Company’s Form 10-K.

During the nine months ended September 30, 2021, the Company issued options to purchase 622,500 shares of common stock to certain of the Company’s employees and options to purchase 50,000 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 90,000 shares of common stock as a result of employee resignations.

The following summarizes the changes in common stock options for the nine months ended September 30, 2021:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (In thousands)
Outstanding as of December 31, 2020		3,516,225		$	0.63
Granted		672,500		$	2.31
Exercised		(1,895,437	)	$	0.48
Forfeited		(90,000	)	$	1.11
Outstanding as of September 30, 2021		2,203,288		$	1.25		7.67	$	1,912

Options exercisable as of September 30, 2021		932,225		$	0.58		5.86	$	1,298

The Company recognized stock-based compensation expense related to common stock options of $0.2 million for the nine months ended September 30, 2021. As of September 30, 2021, there was approximately $1.4 million of unrecognized stock-based compensation expense related to unvested common stock options outstanding, which is expected to be recognized over a weighted average period of 3.3 years.

Restricted Stock

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

On June 1, 2018, the Company granted 600,000 shares of Company restricted common stock in connection with the Addenda 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 $38,700 for the nine months ended September 30, 2021. The unrecognized stock-based compensation expense as of September 30, 2021 was approximately $0.1 million.

On March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”). Under the terms of the Separation Agreement, Mr. West’s separation from the Company was effective on March 31, 2021. On April 8, 2021, the Company granted 25,000 shares of the Company’s restricted common stock, which will be forfeited to the Company during the two years following the effective date of the Separation Agreement in the event Mr. West breaches the terms of the Separation Agreement. In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr. West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations. The full amount of the restricted common stock was expensed as of March 31, 2021 and there was no remaining unrecognized stock-based compensation expense as of September 30, 2021.

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) achieved prior to December 19, 2022 to which the Company may become entitled in connection with its equity joint venture with Napier Park. During the year ended December 31, 2020 and the nine months ended September 30, 2021, 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, 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. On May 31, 2021, the lessee delivered written notice to exercise the purchase option. The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments was recognized as revenue and a lease receivable as of the effective date of the lease agreement.

The real estate portion of the lease arrangement is owned 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 condensed consolidated 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 condensed consolidated 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.

Note 6 – Equity Method Investments

In November 2018, CPFH LLC, of which the Company holds a 25% share, was formed to purchase certain real estate assets among partners in a joint venture. In March 2019, Oak Grove Asset Acquisitions LP, of which the Company holds a 50% share, was formed for the execution of auction deals with Napier Park. In March 2020, HGC Origination I LLC and HGC Funding I LLC were formed as joint ventures with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. The table below details the Company’s joint venture revenues and earnings during the nine months ended September 30, 2021 and 2020 (in thousands):

	Nine Months Ended September 30,
	2021			2020
Revenues:
Oak Grove Asset Acquisitions LP	$	5		$	1,129
CPFH LLC		350			1,254
HGC Funding I LLC and Origination I LLC		73			324
Total revenues	$	428		$	2,707

Operating (loss) income:
Oak Grove Asset Acquisitions LP	$	4		$	249
CPFH LLC		(402	)		243
HGC Funding I LLC and Origination I LLC		51			308
Total operating (loss) income	$	(347	)	$	800

The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30,		December 31,
	2021		2020
Assets:
Oak Grove Asset Acquisitions LP	$	—	$	—
CPFH LLC		11,653		10,791
HGC Funding I LLC and Origination I LLC		4,110		—
Total assets	$	15,763	$	10,791

Liabilities:
Oak Grove Asset Acquisitions LP	$	—	$	1
CPFH LLC		5,852		5,374
HGC Funding I LLC and Origination I LLC		11		—
Total liabilities	$	5,863	$	5,375

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 September 30,				Nine Months Ended September 30,
Weighted Average Shares Calculation:	2021		2020		2021		2020
Basic weighted average shares outstanding		35,805,227		28,751,689		35,285,128		28,817,344
Treasury stock effect of common stock options and restricted stock awards		1,285,067		3,138,426		1,282,585		2,470,807
Diluted weighted average common shares outstanding		37,090,294		31,890,115		36,567,713		31,288,151

For the nine months ended September 30, 2021 and 2020, there were potential common shares of 0.4 million and approximately 0.1 million, respectively, that were excluded from the computation of diluted EPS, as the inclusion of such common shares would have been anti-dilutive. For the three months ended September 30, 2021 and 2020 there were potential common shares totaling approximately 0.4 million and 0.1 million, respectively, that were excluded.

Note 8 – Leases

The Company leases office and warehouse space primarily in three locations: Del Mar, CA; Hayward, 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.

On October 27, 2020, the Company entered into an agreement (the “Lease”) with Hayward FGHK Industrial, LLC (“Landlord”) pursuant to which the Company leases 30,321 square feet of industrial space in Hayward, California from Landlord. The Lease has a commencement date of April 1, 2021 and an initial term of ninety (90) months, unless terminated earlier by either party pursuant to the terms of the Lease. The Lease provides for an initial monthly base rent of $27,289, which increases on an annual basis to $33,562 per month in the final year. In addition, the Company is obligated to pay its share of maintenance costs of common areas. The Burlingame, CA warehouse lease was terminated on April 30, 2021.

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

	September 30,		December 31,
Right-of-use assets:	2021		2020
Del Mar, CA	$	512	$	613
Hayward, CA		2,128		—
Burlingame, CA		—		99
Edwardsville, IL		178		251
	$	2,818	$	963

	September 30,		December 31,
Lease liabilities:	2021		2020
Del Mar, CA	$	541	$	641
Hayward, CA		2,145		—
Burlingame, CA		—		109
Edwardsville, IL		180		253
	$	2,866	$	1,003

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 uses its incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. As of January 1, 2019, the Company’s incremental borrowing rate was 5.25%. For leases commencing after January 1, 2019, the Company uses its incremental borrowing rate at time of commencement. As of April 1, 2021, the Company’s incremental borrowing rate was 4.95%.

Lease expense for leases determined to be operating leases is recognized on a straight-line basis over the lease term. For the nine month periods ended September 30, 2021 and 2020, lease expense was approximately $0.5 and $0.4 million, respectively. As of September 30, 2021, undiscounted future minimum lease payments related to leases that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2021 (remainder of year from October 1, 2021 to December 31, 2021)	$	150
2022		612
2023		563
2024		532
2025		396
Thereafter		1,064
Total undiscounted future minimum lease payments		3,317
Less imputed interest		(451	)
Present value of lease liabilities	$	2,866

Note 9 – Intangible Assets and Goodwill

Identifiable intangible assets

The Company’s identifiable intangible assets are associated with its acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, as shown in the table below (in thousands), and are amortized using the straight-line method over their remaining estimated useful lives of one to four years. The Company’s tradenames that were acquired as part of the acquisition of NLEX in 2014 and ALT in 2021 have an indefinite life and therefore are not amortized. See Note 14 for further information.

	Carrying Value		Intangible					Carrying Value
	December 31,		Assets					September 30,
Amortized Intangible Assets	2020		Acquired		Amortization			2021
Customer Relationships (HGP)	$	62	$	—	$	(24	)	$	38
Customer Relationships (ALT)		—		1,020		(17	)		1,003
Customer Relationships (NLEX)		111		—		(82	)		29
Trade Name (HGP)		513		—		(95	)		418
Total		686		1,020		(218	)		1,488

Unamortized Intangible Assets
Trade Name (NLEX)		2,437		—		—			2,437
Trade Name (ALT)		—		340		—			340
Total		2,437		340		—			2,777

Total	$	3,123	$	1,020	$	(218	)	$	4,265

Amortization expense during the nine months ended September 30, 2021 and 2020 was $0.2 million.

As of September 30, 2021, the estimated amortization expense for the remainder of the current fiscal year and the next three fiscal years is shown below (in thousands):

Year	Amount
2021 (remainder of year from October 1, 2021 to December 31, 2021)	$	119
2022		363
2023		333
2024		333
Thereafter		340
Total	$	1,488

Goodwill

The Company’s goodwill is related to its asset liquidation business and is comprised of goodwill from the acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, as shown in the table below (in thousands). During the nine months ended September 30, 2021, ALT was the only addition to goodwill and there were no impairment losses to the carrying amount of goodwill. See Note 14 for further information.

Acquisition	September 30, 2021		December 31, 2020
ALT	$	1,677	$	—
HGP		2,040		2,040
NLEX		3,545		3,545
Total goodwill	$	7,262	$	5,585

Note 10 – Debt

Outstanding debt as of September 30, 2021 and December 31, 2020 is summarized as follows (in thousands):

	September 30, 2021		December 31, 2020
Current:
Third party debt	$	531	$	—
Non-current:
Third party debt		1,469		—
Total debt	$	2,000	$	—

In September 2018, Heritage Global Inc. entered into a secured promissory note and business loan agreement (the “2018 Credit Facility”) with First Choice Bank, for a $1.5 million revolving line of credit. The 2018 Credit Facility had an initial maturity date of October 5, 2019 and replaced the Line of Credit. The Company is permitted to use the proceeds of the loan solely for its business operations. The 2018 Credit Facility accrues interest at a variable rate, which is equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.25% per annum, with a minimum interest charge of $100.00 per month.

In March 2019, Heritage Global Inc. entered into the Change in Terms Agreement and the First Amendment to Business Loan Agreement (collectively, the “Amendments”), which amended the Company’s 2018 Credit Facility. The Amendments, among other things, (i) increased the principal amount of the revolving line of credit to $3.0 million, (ii) extended the maturity date of the 2018 Credit Facility to April 5, 2020, and (iii) raised the floor interest rate under the 2018 Credit Facility from 5.25% to 5.50%.

In January 2018, HG LLC, a wholly-owned subsidiary of HGI, settled a long-standing litigation matter that was commenced against the predecessor in interest of HG LLC. The settlement, which also involved several other co-defendant parties, included a complete release of HG LLC’s predecessor in interest and its successors and affiliates by the plaintiffs from all claims arising from or relating to the facts and circumstances underlying the litigation. The portion of the settlement attributable to HG LLC’s predecessor in interest was paid on behalf of HG LLC by 54 Finance, LLC (“54 Finance”) (an affiliate of a co-defendant in the litigation) in consideration of a promissory note dated January 30, 2018 (the “Note”) from HG LLC in the amount of $1,260,000. Pursuant to a guaranty dated January 30, 2018, HGI has guaranteed the obligations of HG LLC under the Note, which are required to be paid in 36 equal installments of $35,000, with any remaining outstanding balance due and payable in full on January 30, 2021. As of December 31, 2017, the Company accrued the present value of the Note based on the payment terms noted above and at an interest rate of 6.5%. Upon the occurrence of any Event of Default, as defined below, in the sole discretion of 54 Finance, the outstanding principal balance of the Note will bear interest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 12%. An “Event of Default” means: (a) any failure of HG LLC to pay when due any amount thereunder, when and as due, (b) any failure on the part of HG LLC to pay upon 54 Finance’s demand any fees, costs, expenses or other charges hereunder or otherwise due to HG LLC under the Note or the Guaranty, (c) any breach, failure or default under the Guaranty, (d) HG LLC or the Company repudiates or revokes, or purports to repudiate or revoke, any obligation under the Note or the Guaranty, or the obligation of the Company under the Guaranty is limited or terminated by operation of law or by the Company, or (e) HG LLC or the Company shall be or become insolvent, however defined, or admit in writing its inability to pay debts as they mature, or make a general assignment for the benefit of its creditors, or shall institute any bankruptcy, insolvency or similar proceeding under the laws of any jurisdiction, or shall take any action to authorize such proceeding. During 2020, the Company made the remaining scheduled payments on the Note totaling $455,000 resulting in a zero balance on the Note as of December 31, 2020.

On February 10, 2020, the Company entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “2020 Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit, which replaced the 2018 Credit Facility. The 2020 Credit Facility had an initial maturity date of February 5, 2021, which was extended to April 5, 2021 on February 5, 2021. The Company is permitted to use the proceeds of the loan solely for its business operations. The 2020 Credit Facility accrues at a variable interest rate, which is equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.50% per annum. The Company may prepay the 2020 Credit Facility without penalty. The Company is the borrower under the 2020 Credit Facility. The 2020 Credit Facility is secured by a first priority security interest in certain of the Company’s and its certain subsidiaries’ current and future tangible and intangible assets, inventory, chattel paper, accounts, equipment and general intangibles. The availability of additional draws under the 2020 Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including default, insolvency or bankruptcy, material adverse change in financial condition and any guarantor’s attempt to revise its guarantee. The agreement governing the 2020 Credit Facility also contains customary affirmative covenants regarding, among other things, the maintenance of records, maintenance of certain insurance coverage, compliance with governmental requirements and maintenance of a debt to equity ratio. The 2020 Credit Facility contains certain customary financial covenants and negative covenants that, among other things, include restrictions on the Company’s ability to create, incur or assume indebtedness for borrowed money, including capital leases or to sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Company’s assets. During the year ended December 31, 2020, the Company drew on the line of credit for a total of $5.6 million and made repayments of principal totaling $5.6 million resulting in a zero balance as of December 31, 2020.

On May 11, 2021, the Company entered into a promissory note, business loan agreement, commercial security agreement and pledge agreement (the “2021 Credit Facility”) with C3bank, National Association for a $10.0 million revolving line of credit. The 2021 Credit Facility matures on May 11, 2023 and replaces the 2020 Credit Facility. The Company is permitted to use the proceeds of the loan solely for its business operations. The 2021 Credit Facility accrues at a variable interest rate, which is based on the rate of interest last quoted by The Wall Street Journal as the “prime rate,” plus a margin of 1.70% (such rate not to be less than 4.950% per annum). The Company pays interest on the 2021 Credit Facility in regular monthly payments, which began on June 11, 2021. The 2021 Credit Facility also provides for a minimum fee, which is offset by interest payments. The Company may prepay the 2021 Credit Facility without penalty and may convert up to $5.0 million of revolving debt into term debt. The Company is the borrower under the 2021 Credit Facility. The 2021 Credit Facility is secured by a security interest in certain of the Company’s and its certain subsidiaries’ current and future tangible and intangible assets, inventory, chattel paper, accounts, equipment and general intangibles and a pledge of the equity of the direct and indirect subsidiaries of the Company. The availability of additional draws under the 2021 Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including default, insolvency or bankruptcy, material adverse change in financial condition and any guarantor’s attempt to revise its guarantee. The agreement governing the 2021 Credit Facility also contains customary affirmative covenants regarding, among other things, the maintenance of records, maintenance of certain insurance coverage, compliance with governmental requirements and maintenance of several financial covenants. The 2021 Credit Facility contains certain customary financial covenants and negative covenants that, among other things, include restrictions on the Company’s ability to create, incur or assume indebtedness for borrowed money, including capital leases or to sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Company’s assets. On May 11, 2021, the Company terminated the 2020 Credit Facility as a result of entry into the 2021 Credit Facility. During the quarter ended September 30, 2021, the Company drew on the line of credit for a total of $1.3 million and made repayments of principal totaling $1.3 million resulting in a zero balance as of September 30, 2021.

On August 23, 2021, the Company entered into a $2.0 million subordinated promissory note with an interest rate of 3% per annum and a maturity date of August 23, 2025 (the “ALT Note”) as part of the aggregate purchase price paid to acquire certain assets and liabilities of American Laboratory Trading. The ALT Note requires 48 equal installments of approximately $44,000 on the first day of each month, beginning the next month succeeding the closing date of August 23, 2021 with the final payment due on August 23, 2025. The outstanding balance of the ALT Note as of September 30, 2021, was $2.0 million.

Note 11 – Income Taxes

As of September 30, 2021, the Company had aggregate tax net operating loss carry forwards of approximately $77.6 million ($61.6 million of unrestricted net operating tax losses and approximately $16.0 million of restricted net operating tax losses). Substantially all of the net operating loss carry forwards expire between 2024 and 2037. 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.

The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income from operations before taxes primarily as a result of excess tax benefits from stock option exercises.

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 cumulative losses and uncertainty with respect to future taxable income, the Company has provided a partial valuation allowance against its net deferred tax assets as of September 30, 2021 and December 31, 2020.

Note 12 – Related Party Transactions

As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by David Ludwig, the Company’s President of its Financial Assets Division and a member of its board of directors. The total amount paid to the related party for both nine month periods ended September 30, 2021 and 2020 was approximately $82,000, and is included in selling, general and administrative expenses in the condensed consolidated income statements. All lease payments during the nine months ended September 30, 2021 and the year ended December 31, 2020 were made to Mr. Ludwig. On June 1, 2018, the Company amended its lease agreement with David Ludwig to extend the term of the lease to May 31, 2023 and to set the rent amounts for the new term.

On March 30, 2021, the Company and Scott West entered into the Separation Agreement. Under the terms of the Separation Agreement, Mr. West’s separation from the Company was effective on March 31, 2021. Mr. West will receive a payment of $200,000 (payable in equal installments over six months) and monthly payments of $775 for up to a year to offset health coverage costs. Further, Mr. West received 25,000 shares of the Company’s restricted common stock, which will be forfeited to the Company during the two years following the effective date of the Separation Agreement in the event Mr. West breaches the terms of the Separation Agreement. The total cost related to the separation payment and the issuance of shares of the Company’s restricted common stock was expensed in the first quarter of 2021. In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr. West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations.

Note 13 – Segment Information

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company manages its business primarily on differentiated revenue streams for services offered. The Company’s reportable segments consist of the Industrial Asset Division and Financial Assets Division. Our Industrial Assets Division advises enterprise and financial customers on the sale of industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale. Our Financial Assets Division provides liquidity to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable. Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit.

The Company evaluates the performance of its reportable segments based primarily on net operating income. Further, the Company does not utilize segmented asset information to evaluate the performance of its reportable segments and does not include intercompany transfers between segments for management reporting purposes.

The following table sets forth certain financial information for the Company's reportable segments (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Industrial Assets Division:
Net operating income	$	765		$	1,489		$	2,538		$	2,346

Financial Assets Division:
Net operating income	$	449		$	609		$	1,372		$	1,789

Corporate and Other:
Net operating loss	$	(681	)	$	(486	)	$	(2,258	)	$	(1,405	)

Consolidated:
Net operating income	$	533		$	1,612		$	1,652		$	2,730

Note 14 – Acquisitions

The Company has determined that the acquisition of certain assets and liabilities of American Laboratory Trading constitutes a business acquisition as defined by ASC 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. The Company’s purchase price allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data. Fair values are determined based on the requirements of ASC 820, Fair Value Measurement (“ASC 820”).

On August 23, 2021, the Company acquired (the “Transaction”) certain assets and liabilities of American Laboratory Trading pursuant to the terms and conditions of an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated August 18, 2021, among the Company, American Laboratory Trading and certain individuals named therein. The aggregate purchase price paid to American Laboratory Trading was approximately $4.3 million, consisting of $2.3 million in cash, as adjusted for American Laboratory Trading's working capital, and the $2.0 million ALT Note. The Asset Purchase Agreement contains customary representations and warranties and covenants by each party. American Laboratory Trading and ALT are obligated, subject to certain limitations, to indemnify the other under the Asset Purchase Agreement for losses arising from certain breaches of the Asset Purchase Agreement and for certain other liabilities, subject to applicable limitations set forth in the Asset Purchase Agreement. HGI has guaranteed the obligations of ALT under the terms of the Asset Purchase Agreement and the ALT Note.

On August 23, 2021, in connection with the Transaction, a wholly-owned subsidiary of HGI (“RE Purchaser”), acquired the real property used in ALT’s business (the “Property”) pursuant to a Purchase and Sale Agreement (the “Real Estate Purchase Agreement” and together with the Purchase Agreement, the “Agreements”), dated August 18, 2021, between 12 Colton Road, LLC and RE Purchaser. The purchase price for the Property was $1.3 million. The Real Estate Purchase Agreement contains customary representations and warranties and covenants by each party. The parties to the Real Estate Purchase Agreement are obligated, subject to certain limitations, to indemnify the other under the Real Estate Purchase Agreement for losses arising from certain breaches of the Real Estate Purchase Agreement and other liabilities, subject to applicable limitations set forth in the Real Estate Purchase Agreement.

ALT is a supplier of refurbished lab equipment and a provider of surplus asset services for the life sciences. The acquisition enhances the Company’s position in the biotech sector. Acquisition-related costs consisted of external fees for advisory, legal, and other professional services and totaled approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively.

The fair value estimates for the assets acquired and liabilities assumed were based upon valuations using information known and knowable as of the date of this filing. Changes to these assumptions and estimates could cause an impact to the valuation of assets acquired, including intangible assets, goodwill and the related tax impacts of the acquisition, as well as legal and other contingencies. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows (in thousands):

Accounts receivable	$	337
Inventory – equipment		1,122
Intangible assets		1,360
Goodwill		1,677
Other assets		7
Accounts payable and accrued liabilities		(185	)
Purchase price	$	4,318

The $1.4 million of intangible assets are attributable to $1.0 million of customer relationships that will be amortized over a period of five years and $0.4 million for the American Laboratory Trading trade name, which has an indefinite life.

The excess of the consideration transferred over the fair values of assets acquired and liabilities assumed was recorded as goodwill, which was primarily attributed to increased synergies that are expected to be achieved from the acquisition. Goodwill is expected to be deductible for income tax purposes.

The financial results of ALT have been included in our condensed consolidated financial statements since the date of the acquisition and contributed an immaterial amount of revenue and net income from the date of acquisition through September 30, 2021. ALT is reported as part of our Industrial Assets segment.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below is provided for illustrative purposes only and summarizes the combined results of operations of the Company and ALT. For purposes of this pro forma presentation, the acquisition of ALT is assumed to have occurred on January 1, 2020. The pro forma financial information for all periods presented also includes the estimated business combination accounting effects resulting from this acquisition, notably amortization expense from the acquired intangible assets, interest expense from the ALT Note, and certain other integration related impacts.

This unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on January 1, 2020, nor of the results of operations that may be obtained in the future. The amounts presented below (in thousands) are preliminary based on management’s best estimate and will be finalized as the information necessary to complete the analysis is obtained.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Pro forma revenues	$	7,037	$	8,817	$	22,264	$	21,985
Pro forma net income	$	456	$	1,491	$	2,325	$	4,288

Pro forma net income per share - basic	$	0.01	$	0.05	$	0.07	$	0.15
Pro forma net income per share - diluted	$	0.01	$	0.05	$	0.06	$	0.14

Note 15 – Subsequent Events

The Company has evaluated events subsequent to September 30, 2021 for potential recognition or disclosure in its condensed consolidated financial statements. There have been no material subsequent events requiring recognition or disclosure in this Quarterly Report on Form 10-Q.

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 Heritage Global Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three and nine month periods ended September 30, 2021 and 2020, 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, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2021 (the “Form 10-K”).

Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 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. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These statements are subject to certain risks, uncertainties, and assumptions, including the important factors noted under Item 1A “Risk Factors” in our Form 10-K, 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”) 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 in 2013. The most recent name change more closely identifies the Company with its core auction business, Heritage Global Partners, Inc. (“HGP”).

In 2014, HGI 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. As a result of this acquisition, NLEX operates as one of our wholly-owned divisions.

In 2019, the Company formed Heritage Global Capital LLC (“HGC”), a wholly-owned subsidiary of HGI, in order to provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

In 2021, HGI acquired certain assets and liabilities of American Laboratory Trading, one of the largest suppliers of premium refurbished lab equipment in North America and a key provider of surplus asset services for the life sciences. As a result of this acquisition, American Laboratory Trading operates as one of our wholly-owned divisions, ALT.

The organization chart below outlines our basic domestic corporate structure as of September 30, 2021.

(1)	Registrant.

(2)	Full service, global auction, appraisal and asset advisory company.

(3)	Asset liquidation company that acquires and monetizes distressed and surplus assets.

(4)	Supplier of refurbished lab equipment.

(5)	Broker of charged-off receivables.

(6)	Specialty financing solutions for charged-off and nonperforming asset portfolios.

COVID-19

The novel coronavirus (“COVID-19”) pandemic had a negative impact on our performance during the first three quarters of 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales by financial institutions, and a delay in the typical process for the sale of certain industrial assets by manufacturing companies.

Going forward, and subject to the caveat below, we do not believe the COVID-19 pandemic will have material negative impacts on our financial performance, as our asset liquidation business is highly concentrated in distressed and surplus assets and we expect that there will be an increased supply of distressed and surplus assets as a result of the COVID-19 pandemic and any downward trends in the overall economy, resulting in more potential for principal and fee based deals. We believe that the continuing disruptions to the global supply chain, particularly those involving industrial assets, will further increase demand for U.S.-based surplus assets. Further, as stimulus payments conclude, we expect that the COVID-19 pandemic will have the following positive impacts:

•increased activity for NLEX and HGC due to expanding volumes of nonperforming and charged-off consumer loans;

•incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets.

A new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has spread in the United States and across the globe. Further surges in COVID-19 infection rates could result in the continuation of stimulus payments and the implementation of additional credit policies impacting debt sales that may result in delayed revenues depending on the scope and magnitude of such policies.

Asset liquidation

We are a value-driven, innovative leader in financial and capital asset liquidation transactions, valuations and advisory services. We specialize both in acting as an adviser, as well as in acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, real estate, accounts receivable portfolios, intellectual property, and entire business enterprises.

Our 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 2012, we increased our in-house asset liquidation expertise with our acquisition of 100% of the outstanding equity of HGP, a global full-service auction, appraisal and asset advisory firm.

In 2014, we again expanded our asset liquidation operations with the acquisition of 100% of the outstanding equity 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 our strategy to expand and diversify the services provided by our asset liquidation business.

In 2021, we increased our asset liquidation operations with our acquisition of certain assets and liabilities of American Laboratory Trading, a retailer of refurbished lab equipment and a key provider of surplus asset services for the life sciences.

As a result of the events and acquisitions outlined above, management believes that our expanded platform will allow us to achieve our long term industry leadership goals.

Industry and Competition

Our asset liquidation business consists primarily of the auction, appraisal and asset advisory services provided by our Industrial Assets division and the accounts receivable brokerage specialty financing services provided by our Financials Assets division, each of which is further described below. Our asset liquidation business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, and distressed debt. The market for these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, we compete with other liquidators, auction companies, dealers and brokers. We also compete 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.

We believe that our business is positioned to grow in all economic cycles. As the economy encounters situations of recession, flattening yield curves and rising credit costs, the asset liquidation business may experience wider margins on principal asset sales, a favorable lending cycle for charged-off and nonperforming asset portfolios, higher volumes of nonperforming assets and building surplus inventories and bankruptcies. In times of economic growth, our asset liquidation business has demonstrated its ability to experience growth based on our competitive advantages in the industry, including our domain expertise related to deal sourcing and execution capabilities, our diversification of integrated service platforms and our experience across underserved markets. We intend to continue to leverage our competitive advantages to grow within each service line and across platforms through increasing synergies, maintaining high incremental margins, improving earnings predictability, strengthening financial metrics reflected on our balance sheet and managing expenses.

Our 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 us access to more opportunities, helping to mitigate some of the competition from the market’s larger participants and contribute to our objective to be the leading resource for clients requiring financial and industrial asset solutions.

Our Competitive Strengths

We believe we have attributes that differentiate us from our competitors and provide us with significant competitive advantages. Our key competitive strengths are described below.

Differentiated Business Model. We believe we have diversified business lines serving the financial and industrial asset liquidation market. We have multiple revenue streams in our brokerage and principal-based auction services, advisory services and secured lending services. Further, our business is event-driven and we have repeat, forward-flow contracts in place with industry leading customers. We expect to drive growth in our revenue streams by taking different roles, and using partners as needed.

Compelling Macro Growth Drivers. Historically, recessions drive an increased supply of surplus assets and increased demand for liquidation services, which we believe we are well positioned to provide. Further, we believe the trend of growth in the marketplace of lending platforms is driving an increased supply of non-performing consumer loans. Additionally, we believe an active market for mergers and acquisitions in manufacturing industries drives demand for industrial asset liquidations and our services. The market in which we operate is highly fragmented, presenting a continued opportunity for the Company to increase market share and drive consolidation.

High Return on Invested Capital. We believe we have an opportunity, upon securing additional working capital, to drive improved auction economics by serving more frequently in the role of principal rather than the lower margin role of broker. Further, we believe we have a strong growth opportunity in providing secured loans to our financial asset debt buyers, a service we are providing through HGC.

Strong Management Team. We have built an experienced executive-level management team with deep domain expertise. Our President and Chief Executive Officer, Ross Dove, is a third-generation auctioneer and a pioneering innovator in applying technology to the asset liquidation industry. Mr. Dove has many decades of experience in the auction business, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008. In addition, our senior management team has deep domain expertise in both industrial asset and financial asset transactions. On September 17, 2020, we entered into an Employment Agreement with Kirk Dove, the former President and Chief Operating Officer of the Company. Upon his resignation, Kirk Dove continued his employment with us in an advisory capacity under an agreement that runs through December 31, 2024. Also during 2020, Nick Dove was appointed as President, Industrial Assets Division, and David Ludwig was appointed as President, Financial Assets Division. Nick Dove previously served as Executive Vice President of Sales of Heritage Global Partners since August 2017. David Ludwig previously served as President of NLEX and has served in such capacity since the Company acquired NLEX in 2014.

Our Financial Assets Division

Our Financial Assets division provides liquidity to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable. Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit.

Through NLEX, we act as an advisor for sales of charged-off and nonperforming asset portfolios via an electronic auction exchange platform for banks, the U.S. government, and other debt holders throughout the United States and Canada. Since the 1980s, NLEX has sold over $150 billion face value of performing, nonperforming and charged-off assets. NLEX sales are concentrated in online, automotive, consumer credit card, student loan and real estate charge-offs. The typical credit we broker sells at a deep discount to face value, and we typically receive a commission for these services from both buyers and sellers. We have existing relationships with high quality, top-tier and mid-tier debt buyers. NLEX is in the process of expanding into the FinTech and peer-to-peer lending sectors, where we believe NLEX has opportunity for significant growth. In addition, we plan to add post-sale initiatives, making our services more attractive to our customers as compared to our competitors.

Through HGC, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. Since the inception of HGC in 2019, we have funded $27.0 million in total loans to investors by both self-funded loans and in partnership with senior lenders. Our portion of the total loans funded since inception is $10.3 million. Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share. In general, we expect to earn an annual rate of return on our share of notes receivable outstanding of approximately 20% or more based on established terms of the loans funded and performance of collections.

Our management team has decades of domain expertise with the ability to leverage extensive funding activity and widespread industry relationships. We believe we have the opportunity for growth through increased penetration of the underserved market of mid-tier buyers of charged-off receivables, providing more economic financing options and a greater variety of funding solutions to our customers.

Our Industrial Assets Division

Our Industrial Assets division advises enterprise and financial customers on the sale of industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale. The fees for our services typically range from 15–50%, depending on our role and the transaction. This division predominantly targets sellers of surplus or distressed “inside the building” assets. Our buyers consist of both end-users and dealers. The acquisition of ALT further strengthens our service offering in the biotech and pharma sectors, which have been key verticals over the past decade.

Our management team has decades of domain expertise with the ability to leverage extensive industry relationships and has access to a real-time database of actual sales data across 28 industrial sectors. We believe we have the opportunity for growth in our auction services through shifting toward higher-contribution principal deals and, assuming the acceleration of mergers and acquisitions in manufacturing industries continues, increased auction services for sales of surplus equipment. Further, we intend to leverage our Capital Asset Redeployment Enterprise (CARE) software package, which provides an internal asset redeployment management system for corporations. We believe we have the opportunity for growth in our valuation services through the addition of incremental bank-approved vendor lists, geographic expansion and through deeper penetration with our existing bank relationships.

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 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. 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.

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, other assets, right-of-use assets, goodwill, intangible assets, liabilities, 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.

We have no off-balance sheet arrangements.

We have not paid any dividends, and do not expect to pay any dividends in the future.

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Form 10-K. There were no changes to these policies during the nine months ended September 30, 2021.

Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

We had working capital of $9.9 million and $13.0 million as of September 30, 2021 and December 31, 2020, respectively.

On October 6, 2020, we completed a public offering (the “2020 Public Offering”) of 5,462,500 shares of our common stock, at a public offering price of $1.75 per share, which included a full exercise of the underwriters’ option to purchase 712,500 additional shares of common stock from us. We received approximately $8.7 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We intend and continue to use the net proceeds to provide additional funds for general corporate purposes, which may include, without limitation, the expansion of the businesses of HGC and HGP, working capital and growth capital.

Our current assets as of September 30, 2021 decreased to $19.8 million compared to $27.0 million as of December 31, 2020 primarily due to decreased cash as a result of cash used in operating activities during the nine months ended September 30, 2021 and the acquisition of certain assets and liabilities of American Laboratory Trading completed in the third quarter of 2021. Our current liabilities as of September 30, 2021 decreased to $10.0 million compared to $14.0 million as of December 31, 2020 primarily due to the settlement of auction liabilities for certain auctions held in the fourth quarter of 2020.

During the nine months ended September 30, 2021, our primary source of cash was the cash on hand plus the cash provided by our asset liquidation business. Cash disbursements during the nine months ended September 30, 2021 consisted primarily of lending activity of $5.9 million under HGC, the acquisition of certain assets and liabilities of American Laboratory Trading for $4.3 million, the acquisition of real estate used in American Laboratory Trading’s business for $1.3 million, payment of operating expenses, settlement of auction liabilities and investments in equity method investments.

We believe we can fund our operations and our debt service obligations for at least 12 months from the date of filing this quarterly report through a combination of cash flows from our on-going asset liquidation operations, proceeds from the 2020 Public Offering, and draws on our 2021 Credit Facility, as needed.

Our indebtedness consists of any amounts borrowed under our 2021 Credit Facility as well as the ALT Note, which was issued as part of the acquisition of certain assets and liabilities of American Laboratory Trading. On May 11, 2021, the Company entered into a promissory note, business loan agreement, commercial security agreement and pledge agreement with C3bank, National Association (the “2021 Credit Facility”) for a $10.0 million revolving line of credit, which replaced the 2020 Credit Facility. The 2021 Credit Facility has a maturity date of May 11, 2023. We are permitted to use the proceeds from the 2021 Credit Facility solely for our business operations. We had no outstanding borrowings under the 2021 Credit Facility as of September 30, 2021. We owed $2.0 million on the ALT Note as of September 30, 2021.

Ownership Structure and Capital Resources

•

As of September 30, 2021, the Company had stockholders’ equity of $31.6 million, as compared to $29.9 million as of December 31, 2020.

•

On May 11, 2021, the Company entered into the 2021 Credit Facility, which replaced the 2020 Credit Facility. The 2021 Credit Facility has a maturity date of May 11, 2023. We had no outstanding borrowings under the 2021 Credit Facility as of September 30, 2021.

•

On October 6, 2020, the Company completed the 2020 Public Offering of an aggregate of 5,462,500 shares of the Company’s common stock, which included 712,500 shares of common stock sold pursuant to the full exercise of the underwriter’s option to purchase additional shares. We received approximately $8.7 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

•

We determine our future capital and operating requirements based upon our current and projected operating performance and the extent of our contractual commitments. We expect to be able to finance our future operations through cash flows from our asset liquidation business, proceeds from the 2020 Public Offering, and draws on the 2021 Credit Facility, as needed. Capital requirements are generally limited to repayment of our debt obligations, investments in notes receivables, purchases of surplus and distressed assets and payment on lease obligations. We believe that our current capital resources are sufficient for these requirements. In the event additional capital is needed, we will draw on the 2021 Credit Facility.

Cash Position and Cash Flows

Cash and cash equivalents as of September 30, 2021 were $13.2 million as compared to $23.4 million as of December 31, 2020, a decrease of approximately $10.2 million.

Cash (used in) provided by operating activities. Cash used in operations was $4.1 million during the nine months ended September 30, 2021 as compared to cash provided by operating activities of $2.8 million during the same period in 2020. The approximate $6.9 million change was primarily attributable to a change of $6.7 million in operating assets and liabilities during the nine months ended September 30, 2021 as compared to the same period in 2020. The amount was further attributable to a change in net income adjusted for noncash items, which was $0.2 million lower during the nine months ended September 30, 2021 as compared to the same period in 2020.

The significant changes in operating assets and liabilities during the nine months ended September 30, 2021 as compared to the same period in 2020 are primarily due to the nature of our operations. We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination thereof. The operating assets and liabilities associated with these deals are, therefore, subject to the same variability and can be quite different at the end of any given period.

Cash (used in) provided by investing activities. Cash used in investing activities during the nine months ended September 30, 2021 was $7.3 million compared to cash provided by investing activities of $0.6 million during the same period in 2020. The approximate $7.9 million change was primarily attributable to the acquisition of certain assets and liabilities of American Laboratory Trading for $4.3 million and the acquisition of real estate used in American Laboratory Trading’s business for $1.3 million in the third quarter of 2021. The remaining $2.3 million change is primarily attributable to $0.7 million in additional transfers of notes receivable to partners and payments received on notes receivable in the prior period compared to the current period, and additional investments in notes receivable of $1.4 million in the current period compared to the prior period.

Cash provided by (used in) financing activities. Cash provided by financing activities was $1.2 million during the nine months ended September 30, 2021 compared to cash used in financing activities of $0.4 million during the nine months ended September 30, 2020. Financing activities during the nine months ended September 30, 2021 consisted primarily of $2.0 million in proceeds from the issuance of the ALT Note as part of the acquisition of certain assets and liabilities of American Laboratory Trading and payments of tax withholdings related to cashless exercises of stock option awards, in excess of proceeds from issuance of common stock related to standard exercises of stock option awards. Financing activities during the same period in 2020 consisted of draws on the 2020 Credit Facility of $5.6 million and repayments of third party loans of $5.9 million (including $5.6 million on the 2020 Credit Facility).

Contractual Obligations

Our significant contractual obligations are our third party loans, client and partner asset liquidation settlement payments and lease obligations. The loan and lease obligations are fully described in the notes to the condensed consolidated financial statements included in our Form 10-K.

On March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”). Under the terms of the Separation Agreement, Mr. West’s separation from the Company was effective on March 31, 2021. Mr. West will receive a payment of $200,000 (payable in equal installments over six months) and monthly payments of $775 for up to a year to offset health coverage costs. Further, Mr. West received 25,000 shares of the Company’s restricted common stock, which will be forfeited to the Company during the two years following the effective date of the Separation Agreement in the event Mr. West breaches the terms of the Separation Agreement. In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr. West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations.

On August 23, 2021, a wholly-owned subsidiary (“ALT Purchaser”) of HGI acquired (the “Transaction”) certain assets and liabilities of American Laboratory Trading, pursuant to the terms and conditions of an Asset Purchase Agreement (the “Asset Purchase Agreement”), dated August 18, 2021, among the Company, American Laboratory Trading and certain individuals named therein. The aggregate purchase price paid to American Laboratory Trading was approximately $4.3 million, consisting of $2.3 million in cash, as adjusted for American Laboratory Trading 's working capital, and a $2.0 million subordinated promissory note with an interest rate of 3% per annum and a maturity date of August 23, 2025 (the “ALT Note”). The Asset Purchase Agreement contains customary representations and warranties and covenants by each party. American Laboratory Trading and ALT Purchaser are obligated, subject to certain limitations, to indemnify the other under the Asset Purchase Agreement for losses arising from certain breaches of the Asset Purchase Agreement and for certain other liabilities, subject to applicable limitations set forth in the Asset

Purchase Agreement. HGI has guaranteed the obligations of ALT Purchaser under the terms of the Asset Purchase Agreement and the ALT Note.

On August 23, 2021, in connection with the Transaction, a wholly-owned subsidiary of HGI (“RE Purchaser”), acquired the real property used in American Laboratory Trading’s business (the “Property”) pursuant to a Purchase and Sale Agreement (the “Real Estate Purchase Agreement” and together with the Purchase Agreement, the “Agreements”), dated August 18, 2021, between 12 Colton Road, LLC and RE Purchaser. The purchase price for the Property was $1.3 million. The Real Estate Purchase Agreement contains customary representations and warranties and covenants by each party. The parties to the Real Estate Purchase Agreement are obligated, subject to certain limitations, to indemnify the other under the Real Estate Purchase Agreement for losses arising from certain breaches of the Real Estate Purchase Agreement and other liabilities, subject to applicable limitations set forth in the Real Estate Purchase Agreement.

Management’s Discussion of Results of Operations

The following table sets out the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands).

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2021			2020			Dollars			Percent			2021			2020			Dollars			Percent
Revenues:
Services revenue	$	4,822		$	6,060		$	(1,238	)		(20	)%	$	14,020		$	15,713		$	(1,693	)		(11	)%
Asset sales		1,169			1,506			(337	)		(22	)%		4,248			2,214			2,034			92	%
Total revenues		5,991			7,566			(1,575	)		(21	)%		18,268			17,927			341			2	%

Operating costs and expenses:
Cost of services revenue		1,100			1,605			(505	)		(31	)%		3,235			3,344			(109	)		(3	)%
Cost of asset sales		675			990			(315	)		(32	)%		1,870			1,358			512			38	%
Selling, general and administrative		3,494			3,378			116			3	%		11,134			10,516			618			6	%
Depreciation and amortization		105			92			13			14	%		294			272			22			8	%
Total operating costs and expenses		5,374			6,065			(691	)		(11	)%		16,533			15,490			1,043			7	%
Earnings of equity method investments		(84	)		111			(195	)		(176	)%		(83	)		293			(376	)		(128	)%
Operating income		533			1,612			(1,079	)		(67	)%		1,652			2,730			(1,078	)		(39	)%
Interest and other expense, net		(6	)		(3	)		(3	)		(100	)%		6			(38	)		44			116	%
Income before income tax expense (benefit)		527			1,609			(1,082	)		(67	)%		1,658			2,692			(1,034	)		(38	)%
Income tax expense (benefit)		53			345			(292	)		(85	)%		(435	)		(649	)		214			(33	)%
Net income	$	474		$	1,264		$	(790	)		(63	)%	$	2,093		$	3,341		$	(1,248	)		(37	)%

Our asset liquidation business model has several components: (1) traditional fee-based 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 and real estate, and (3) fees earned for appraisal, management advisory services and specialty finance services.

We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments. We manage our business primarily on differentiated revenue streams for services offered. Our reportable segments consist of the Industrial Asset Division and Financial Assets Division. Our Industrial Assets Division advises enterprise and financial customers on the sale of industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale. Our Financial Assets Division provides liquidity to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable. Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit.

We evaluate the performance of its reportable segments based primarily on net operating income. Further, we do not utilize segmented asset information to evaluate the performance of its reportable segments and we do not include intercompany transfers between segments for management reporting purposes.

The following table sets forth certain financial information for the Company's reportable segments (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Industrial Assets Division:
Net operating income	$	765		$	1,489		$	2,538		$	2,346

Financial Assets Division:
Net operating income	$	449		$	609		$	1,372		$	1,789

Corporate and Other:
Net operating loss	$	(681	)	$	(486	)	$	(2,258	)	$	(1,405	)

Consolidated:
Net operating income	$	533		$	1,612		$	1,652		$	2,730

Three-Month Period Ended September 30, 2021 Compared to Three-Month Period Ended September 30, 2020

Revenues and cost of revenues – Revenues were $6.0 million during the three months ended September 30, 2021 compared to $7.6 million during the same period in 2020. Costs of services revenue and asset sales were $1.8 million during the three months ended September 30, 2021 compared to $2.6 million during the same period in 2020. The gross profit of these items was $4.2 million during the three months ended September 30, 2021 compared to $5.0 million during the same period in 2020, a decrease of approximately $0.8 million, or approximately 15%. The decreased gross profit in the second quarter of 2021 reflects the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $3.5 million during the three months ended September 30, 2021 compared to $3.4 million during the same period in 2020.

Significant components of selling, general and administrative expense for the three months ended September 30, 2021 and September 30, 2020 are shown below (dollars in thousands):

	Three Months Ended September 30,
	2021		2020		% change
Compensation
HGP	$	1,141	$	1,277		(11	)%
ALT		118		—		100	%
NLEX		730		908		(20	)%
HGI		228		252		(10	)%
HGC		94		108		(13	)%
Stock-based compensation		102		97		5	%

Consulting		13		—		100	%
Board of Directors fees		62		64		(3	)%
Accounting, tax and legal professional fees		293		123		138	%
Insurance		146		114		28	%
Occupancy		241		225		7	%
Travel and entertainment		121		36		236	%
Advertising and promotion		66		85		(22	)%
Information technology support		86		76		13	%
Other		53		13		308	%
Total selling, general & administrative expense	$	3,494	$	3,378		3	%

Although our total selling, general and administrative expense remained relatively consistent during the three months ended September 30, 2021 compared to the same period in 2020, the Company incurred increased compensation, accounting and legal fees due to the acquisition of ALT’s business, offset by decreased compensation expense based on declined performance in our NLEX divisions.

Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended September 30, 2021 and the same period in 2020, which consisted primarily of amortization expense related to intangible assets.

Nine-Month Period Ended September 30, 2021 Compared to Nine-Month Period Ended September 30, 2020

Revenues and cost of revenues – Revenues were $18.3 million during the nine months ended September 30, 2021 compared to $17.9 million during the same period in 2020. Costs of services revenue and asset sales were $5.1 million during the nine months ended September 30, 2021 compared to $4.7 million during the same period in 2020. The gross profit of these items was $13.2 million during the nine months ended September 30, 2021 and the same period in 2020. Although consistent this quarter, changes can result due to the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $11.1 million during the nine months ended September 30, 2021 and $10.5 million during the same period in 2020.

	Nine Months Ended September 30,
	2021		2020		% change
Compensation
HGP	$	4,039	$	3,758		7	%
ALT		118		—		100	%
NLEX		2,418		2,818		(14	)%
HGI		783		654		20	%
HGC		328		339		(3	)%
Stock-based compensation		313		258		21	%

Consulting		37		91		(59	)%
Board of Directors fees		187		185		1	%
Accounting, tax and legal professional fees		930		520		79	%
Insurance		393		337		17	%
Occupancy		725		664		9	%
Travel and entertainment		241		234		3	%
Advertising and promotion		239		332		(28	)%
Information technology support		241		201		20	%
Other		142		125		14	%
Total selling, general & administrative expense	$	11,134	$	10,516		6	%

As compared to the nine months ended September 30, 2020, there was an increase in selling, general and administrative expense during the nine months ended September 30, 2021 due to increased compensation expense within our HGI and HGP divisions as a result of improved financial performance, increased compensation, accounting and legal fees due to the acquisition of ALT’s business, and a one-time expense related to the Separation Agreement. This increase was partially offset by decreased compensation expense within our NLEX division as a result of declined financial performance.

Depreciation and amortization expense – Depreciation and amortization expense was $0.3 million during the nine months ended September 30, 2021 and the same period in 2020, which consisted primarily of amortization expense related to intangible assets.

Key Performance Indicators

We monitor a number of financial and non-financial measures on a regular basis in order to track our underlying operational performance and trends. Other than the operating income of our liquidation business (a GAAP financial measure as shown in our condensed consolidated income statements), which we believe is the most important measure of our operational performance and trends, we believe that EBITDA and Adjusted EBITDA (non-GAAP financial measures) are key performance indicators (KPIs) for our business. These KPIs may not be defined or calculated in the same way as similar KPIs used by other companies.

We prepared our unaudited condensed consolidated financial statements in accordance with GAAP. We define EBITDA as net income plus depreciation and amortization, interest and other expense, and provision for income taxes. Adjusted EBITDA reflects EBITDA adjusted further to eliminate the effects of stock-based compensation. Management uses EBITDA and Adjusted EBITDA in assessing the Company’s results, evaluating the Company’s performance and in reaching operating and strategic decisions. Management believes that the presentation of EBITDA and Adjusted EBITDA, when considered together with our GAAP financial statements and the reconciliation to the most directly comparable GAAP financial measure, is useful in providing investors a more complete understanding of the factors and trends affecting the underlying performance of the Company on a historical and ongoing basis. Our use of EBITDA and Adjusted 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 financial information below, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands).

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021			2020
Net income	$	474	$	1,264	$	2,093		$	3,341
Add back:
Depreciation and amortization		105		92		294			272
Interest and other expense, net		6		3		(6	)		38
Income tax expense (benefit)		53		345		(435	)		(649	)
EBITDA		638		1,704		1,946			3,002

Management add back:
Stock based compensation		102		97		313			258
Separation Agreement		—		—		200			—
Adjusted EBITDA	$	740	$	1,801	$	2,459		$	3,260

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As a Smaller Reporting Company, we are not required to provide the information required by this item.

Item 4. Controls and Procedures.

As of the end of the period covered by this Report, our Chief Executive Officer and Principal 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 SEC’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 nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings discussed in our Form 10-K.

Item 1A. Risk Factors

As a Smaller Reporting Company, we are not required to provide the information required by this item.

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.

Item 6. Exhibits.

(a) Exhibits

Exhibit No.		Identification of Exhibit
3.1		Amended and Restated Articles of Incorporation (restated for filing purposes only) (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 9, 2020 (File No. 000-17973), and incorporated herein by reference).
3.2		Restated Bylaws, as amended (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 30, 2020 (File No. 001-39471), and incorporated herein by reference).

4.1		Warrant Agreement by and between Heritage Global Inc. and Napier Park Industrial Asset Acquisition, LP, effective as of March 19, 2019 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 25, 2019 (File No. 000-17973), and incorporated herein by reference).
10.1		Asset Purchase Agreement, dated August 18, 2021, by and among Heritage ALT LLC, American Laboratory Trading, Inc., Dante LaTerra and Heritage Global Inc.* (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 24, 2021 (File No. 001-39471), and incorporated herein by reference).

10.2		Purchase and Sale Agreement, dated August 18, 2021, between 12 Colton Road, LLC and HG ALT LLC* (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 24, 2021 (File No. 001-39471), and incorporated herein by reference).

10.3		Subordinated Promissory Note, dated August 23, 2021, by and among Heritage ALT LLC, American Laboratory Trading, Inc., and Heritage Global Inc. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 24, 2021 (File No. 001-39471), and incorporated herein by reference).

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		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the SEC.

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: November 10, 2021	By:	/s/ Ross Dove
		Ross Dove
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Brian J. Cobb
		Brian J. Cobb
		Vice President of Finance and Controller
		(Principal Financial Officer)