Heritage Global Inc. - Quarter Report: 2022 March (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 March 31, 2022


☐	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	The Nasdaq Stock Market LLC

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

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

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


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

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

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

As of May 1, 2022, there were 36,677,837 shares of common stock, $0.01 par value, outstanding.

TABLE OF CONTENTS


Part I.	Financial Information	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	3

	Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

Part II.	Other Information	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

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)


	March 31, 2022			December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	15,097		$	13,622
Accounts receivable (net of allowance for doubtful accounts of $122 in 2022 and 2021)		2,882			2,732
Current portion of notes receivable, net		2,088			2,254
Inventory – equipment		2,857			3,220
Other current assets		1,224			1,456
Total current assets		24,148			23,284
Non-current portion of notes receivable, net		1,078			1,784
Equity method investments		6,544			4,683
Right-of-use assets		2,569			2,694
Property and equipment, net		1,456			1,471
Intangible assets, net		4,460			4,565
Goodwill		7,446			7,446
Deferred tax assets		4,358			4,488
Other assets		49			49
Total assets	$	52,108		$	50,464

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	3,123		$	4,793
Payables to sellers		9,774			6,451
Current portion of third party debt		1,979			2,479
Current portion of lease liabilities		505			501
Total current liabilities		15,381			14,224
Non-current portion of third party debt		1,233			1,352
Non-current portion of lease liabilities		2,127			2,249
Total liabilities		18,741			17,825

Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 565 shares of Series N as of March 31, 2022 and December 31, 2021		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 36,677,837 shares as of March 31, 2022 and 36,574,702 as of December 31, 2021		367			366
Additional paid-in capital		293,112			293,030
Accumulated deficit		(260,118	)		(260,763	)
Total stockholders’ equity		33,367			32,639
Total liabilities and stockholders’ equity	$	52,108		$	50,464

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 March 31,
	2022			2021
Revenues:
Services revenue	$	4,168		$	5,030
Asset sales		5,189			2,071
Total revenues		9,357			7,101

Operating costs and expenses:
Cost of services revenue		754			1,175
Cost of asset sales		3,402			820
Selling, general and administrative		4,275			3,969
Depreciation and amortization		133			91
Total operating costs and expenses		8,564			6,055
Earnings of equity method investments		82			—
Operating income		875			1,046
Interest and other expense, net		(38	)		3
Income before income tax expense		837			1,049
Income tax expense		192			17
Net income	$	645		$	1,032

Weighted average common shares outstanding – basic		36,003,709			34,788,016
Weighted average common shares outstanding – diluted		36,749,198			37,533,065
Net income per share – basic	$	0.02		$	0.03
Net income per share – diluted	$	0.02		$	0.03

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
	Preferred stock				Common stock				paid-in			Accumulated
	Shares		Amount		Shares		Amount		capital			deficit			Total
Balance as of December 31, 2021		565	$	6		36,574,702	$	366	$	293,030		$	(260,763	)	$	32,639
Issuance of common stock from stock option awards		—		—		103,135		1		(24	)		—			(23	)
Stock-based compensation expense		—		—		—		—		106			—			106
Net income		—		—		—		—		—			645			645
Balance at March 31, 2022		565	$	6		36,677,837	$	367	$	293,112		$	(260,118	)	$	33,367


									Additional
	Preferred stock				Common stock				paid-in			Accumulated
	Shares		Amount		Shares		Amount		capital			deficit			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

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)


	Three Months Ended March 31,
	2022			2021
Cash flows provided by (used in) operating activities:
Net income	$	645		$	1,032
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of deferred issuance costs and fees		58			49
Earnings of equity method investments		(82	)		—
Noncash lease expense		125			133
Depreciation and amortization		133			91
Deferred taxes		130			(48	)
Stock-based compensation expense		106			143
Changes in operating assets and liabilities:
Accounts receivable		(150	)		(801	)
Inventory – equipment		363			144
Other assets		232			55
Accounts payable and accrued liabilities		(1,672	)		(1,802	)
Payables to sellers		3,323			(4,683	)
Lease liabilities		(118	)		(140	)
Net cash provided by (used in) operating activities		3,093			(5,827	)

Cash flows used in investing activities:
Investment in notes receivable		—			(2,494	)
Payments received on notes receivable		814			929
Investment in equity method investments		(2,118	)		—
Cash distributions from equity method investments		338			—
Purchase of property and equipment		(12	)		(23	)
Net cash used in investing activities		(978	)		(1,588	)

Cash flows used in financing activities:
Repayment of debt payable to third parties		(617	)		—
Proceeds from issuance of common stock from stock option awards		9			85
Payments of tax withholdings related to cashless exercises of stock option awards		(32	)		(203	)
Net cash used in financing activities		(640	)		(118	)
Net increase (decrease) in cash and cash equivalents		1,475			(7,533	)
Cash and cash equivalents as of beginning of period		13,622			23,385
Cash and cash equivalents as of end of period	$	15,097		$	15,852

Supplemental cash flow information:
Cash paid for taxes	$	7		$	—
Cash paid for interest		32			—

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 consolidated financial statements include the accounts of Heritage Global Inc. together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), National Loan Exchange Inc. (“NLEX”), Heritage Global LLC (“HG LLC”), Heritage Global Capital LLC (“HGC”), and Heritage ALT LLC (“ALT”). These entities, collectively, are referred to as “HGI,” the “Company,” “we” or “our” in these consolidated financial statements. These consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and include the assets, liabilities, revenues, and expenses of all subsidiaries over which 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 HGP, NLEX, and ALT in 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 both its Financial Assets Division and Industrial 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, 2021, filed with the SEC on March 17, 2022 (the “Form 10-K”).

The results of operations for the three month period ended March 31, 2022 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2022. The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of December 31, 2021, 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 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 its financial performance, as the Company expects that the supply of surplus industrial assets will return to pre-pandemic levels and 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 the Company's valuation business as a result of greater focus on collateral on bank balance sheets.

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.

Public Offering

On October 6, 2020, the Company completed a public offering (the “2020 Public Offering”) of 5,462,500 shares of its 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 the Company. The Company received approximately $8.7 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. During 2021 and the first quarter of 2022, the Company deployed proceeds to fund the ALT acquisition, as well as various principal transactions in both its Financial Assets and Industrial Assets Divisions.

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 and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our 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 consolidated financial statements have been reclassified to conform to current year presentation.

Revenue recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions, secured lending 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 within the asset liquidation business, which consists of two reportable segments, 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 total revenues (less than 1% of total revenues for the three months ended March 31, 2022), and therefore not reported on a disaggregated basis. Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and the Company’s “contract liability”. As of March 31, 2022, the deferred revenue balance was approximately $0.4 million. The deferred revenue balance is primarily related to customer deposits on ALT asset sales. The Company records receivables related to asset liquidation in certain situations based on timing of payments for asset liquidation transactions held at the end of the reporting period; however, revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected. The Company does not record a “contract asset” for partially satisfied performance obligations.

For auction services and brokerage sale transactions, funds are typically collected from buyers and are held by the Company on the seller's behalf. The funds are included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets. The Company

releases the funds to the seller, less the Company's commission and other fees due, after the buyer has accepted the goods. The amount of cash held on behalf of the sellers is recorded as payables to sellers in the accompanying Condensed Consolidated Balance Sheets.

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

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

In 2019, the Company began providing specialty financing solutions to investors in charged-off and nonperforming asset portfolios. Fees collected in relation to the issuance of loans includes loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

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

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

During the three months ended March 31, 2022 the Company generated revenues specific to one customer representing 7% of total revenues. In the three months ended March 31, 2021 the Company generated revenues specific to one customer representing 10% of total revenues.

Future accounting pronouncements

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 Topic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, 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. The Company is currently evaluating the impact of the new guidance on its 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 March 31, 2022 and December 31, 2021, the Company’s outstanding notes receivables, net of unamortized deferred fees and costs on originated loans, were $3.2 million and $4.0 million, respectively. During the three months ended March 31, 2022, the Company received principal payments made by borrowers of approximately $0.8 million and adjustments to the deferred fees and costs balance of approximately $0.1 million.

As of March 31, 2021, the Company did not record an allowance for credit losses related to notes receivable outstanding.

Note 4 – Stock-based Compensation

Options

As of March 31, 2022, the Company had four stock-based compensation plans, which are described more fully in Note 17 to the audited consolidated financial statements for the year ended December 31, 2021, contained in the Company’s Form 10-K.

During the three months ended March 31, 2022, the Company issued options to purchase 135,000 shares of common stock to certain of the Company’s employees. During the same period, the Company cancelled options to purchase 12,500 shares of common stock as a result of employee resignations.

The following summarizes the changes in common stock options for the three months ended March 31, 2022:


	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (In thousands)
Outstanding as of December 31, 2021		2,193,288		$	1.23
Granted		135,000		$	1.41
Exercised		(179,125	)	$	0.49
Forfeited		(12,500	)	$	1.13
Outstanding as of March 31, 2022		2,136,663		$	1.31		7.56	$	807

Options exercisable as of March 31, 2022		887,038		$	0.67		5.78	$	661

The Company recognized stock-based compensation expense related to common stock options of $106,000 for the three months ended March 31, 2022. As of March 31, 2022, there was approximately $1.3 million of unrecognized stock-based compensation expense related to unvested common stock options outstanding, which is expected to be recognized over a weighted average period of 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 $12,900 for the three months ended March 31, 2022. The unrecognized stock-based compensation expense as of March 31, 2022 was approximately $60,000.

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, 2022.

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, 2021 and the three months ended March 31, 2022, Napier Park did not receive any warrants.

Note 5 – Lessor Arrangement

In June 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 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.

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 purchase option for both the real estate and machinery and equipment could 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 lessee confirmed that its intention was to exercise the option, however, was unable to complete the transaction as of March 31, 2022. As the classification of the lease remains a sales-type lease, CPFH LLC has not recorded a gain or loss as a result of the modification.

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 three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022		2021
Revenues:
CPFH LLC		229		108
HGC Funding I LLC and Origination I LLC		327		—
Total revenues	$	556	$	108

Operating (loss) income:
CPFH LLC		13		—
HGC Funding I LLC and Origination I LLC		327		—
Total operating (loss) income	$	340	$	—

The table below details the summarized components of assets and liabilities of the Company’s joint ventures, as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31,		December 31,
	2022		2021
Assets:
CPFH LLC		12,089		11,789
HGC Funding I LLC and Origination I LLC		17,922		10,476
Total assets	$	30,011	$	22,265

Liabilities:
CPFH LLC		6,105		6,099
HGC Funding I LLC and Origination I LLC		—		—
Total liabilities	$	6,105	$	6,099

Note 7 – Earnings Per Share

The Company is required in periods in which it has net income to calculate basic earnings per share (“basic EPS”) using the two-class method. The two-class method is required because the Company’s shares of Series N preferred shares, each of which is convertible to 40 common shares, have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock. Under the two-class method, earnings for the period are allocated on a pro-rata basis to the common and preferred stockholders. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares.

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

Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”), since they are assumed to be exercised or converted, except when their effect would be anti-dilutive. The table below shows the calculation of the shares used in computing diluted EPS.


	Three Months Ended March 31,
Weighted Average Shares Calculation:	2022		2021
Basic weighted average shares outstanding		36,003,709		34,788,016
Treasury stock effect of common stock options and restricted stock awards		745,489		2,745,049
Diluted weighted average common shares outstanding		36,749,198		37,533,065

For the three months ended March 31, 2022 and 2021, there were potential common shares of 0.8 million and approximately 30,000, respectively, that were excluded from the computation of diluted EPS, as the inclusion of such common shares would have been anti-dilutive.

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


	March 31,		December 31,
Right-of-use assets:	2022		2021
Del Mar, CA	$	442	$	477
Hayward, CA		1,999		2,064
Edwardsville, IL		128		153
	$	2,569	$	2,694

	March 31,		December 31,
Lease liabilities:	2022		2021
Del Mar, CA	$	471	$	506
Hayward, CA		2,032		2,089
Edwardsville, IL		129		155
	$	2,632	$	2,750

The Company’s leases generally do not provide an implicit rate, and, therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used its incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. As of January 1, 2019, the Company’s incremental borrowing rate was 5.25%. For leases commencing after January 1, 2019, the Company uses its incremental borrowing rate at time of commencement. 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 three month periods ended March 31, 2022 and 2021, lease expense was approximately $0.2 and $0.1 million, respectively. As of March 31, 2022, 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):


2022 (remainder of year from April 1, 2022 to December 31, 2022)	$	461
2023		568
2024		532
2025		398
2026		377
Thereafter		700
Total undiscounted future minimum lease payments		3,036
Less imputed interest		(404	)
Present value of lease liabilities	$	2,632

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 except for lives), and are amortized using the straight-line method over their remaining estimated useful lives. The Company’s tradename that was acquired as part of the acquisition of NLEX in 2014 has an indefinite life and therefore is not amortized.


	Remaining		Carrying Value					Carrying Value
	Life		December 31,					March 31,
Amortized Intangible Assets	(years)		2021		Amortization			2022
Customer Relationships (HGP)		0.8	$	30	$	(8	)	$	22
Trade Name (HGP)		2.8		386		(32	)		354
Trade Name (ALT)		19.4		639		(8	)		631
Vendor Relationship (ALT)		4.4		1,073		(57	)		1,016
Total				2,128		(105	)		2,023

Unamortized Intangible Assets
Trade Name (NLEX)	NA			2,437		—			2,437
Total				2,437		—			2,437

Total			$	4,565	$	(105	)	$	4,460

Amortization expense during the three months ended March 31, 2022 and 2021 was $0.1 million.

As of March 31, 2022, the estimated amortization expense for the remainder of the current fiscal year and the next five fiscal years and thereafter is shown below (in thousands):


Year	Amount
2022 (remainder of year from April 1, 2022 to December 31, 2022)	$	316
2023		391
2024		391
2025		262
2026		186
Thereafter		477
Total	$	2,023

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). There were no additions to goodwill and no impairment losses to the carrying amount of goodwill during the three months ended March 31, 2022.


Acquisition	March 31, 2022		December 31, 2021
ALT	$	1,861	$	1,861
HGP		2,040		2,040
NLEX		3,545		3,545
Total goodwill	$	7,446	$	7,446

Note 10 – Debt

Outstanding debt as of March 31, 2022 and December 31, 2021 is summarized as follows (in thousands):


	March 31, 2022		December 31, 2021
Current:
Third party debt	$	1,979	$	2,479
Non-current:
Third party debt		1,233		1,352
Total debt	$	3,212	$	3,831

On May 5, 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 7, 2023. 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. During the first quarter, the Company made repayments of principal totaling $0.5 million resulting in a balance of $1.4 million as of March 31, 2022.

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 March 31, 2022 was $1.8 million.

Note 11 – Income Taxes

As of March 31, 2022, the Company had aggregate tax net operating loss carry forwards of approximately $77.8 million ($62.2 million of unrestricted net operating tax losses and approximately $15.6 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 March 31, 2022 and December 31, 2021.

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 three month periods ended March 31, 2022 and 2021 was approximately $28,000 and is included in selling, general and administrative expenses in the condensed consolidated income statements. All lease payments during the three months ended March 31, 2022 and the year ended December 31, 2021 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.

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 Assets 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 March 31,
	2022			2021
Industrial Assets Division:
Net operating income	$	846		$	1,340

Financial Assets Division:
Net operating income	$	731		$	461

Corporate and Other:
Net operating loss	$	(702	)	$	(755	)

Consolidated:
Net operating income	$	875		$	1,046

Note 14 – Subsequent Events

The Company has evaluated events subsequent to March 31, 2022 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, other than noted below.

On April 6, 2022, we announced that we are part of a partnership that has acquired two pharmaceutical plants in St. Louis, Missouri.

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 three month periods ended March 31, 2022 and 2021, 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 17, 2022 (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 March 31, 2022.



		Heritage Global Inc.
		(Florida) (1)

	100%		100%		100%		100%
Heritage Global Partners, Inc. (California) (2)		Heritage Global LLC (Delaware) (3)		National Loan Exchange, Inc. (Illinois) (5)		Heritage Global Capital LLC (Delaware)(6)

			100%
		Heritage ALT LLC (Delaware) (4)

(1) Registrant.

(2) Full service global auction, appraisal and asset advisory company that also acquires and monetizes distressed and surplus assets.

(3) Holding Company.

(4) Supplier of refurbished lab equipment.

(5) Broker of charged-off and nonperforming 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 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 we expect that the supply of surplus industrial assets will return to pre-pandemic levels and 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.

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 and 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, accounts receivable and distressed debt. The market for these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, we compete with other liquidators, auction companies, dealers and brokers. We also compete with them for potential purchasers. 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. Consumer lending and resulting charge-offs are expected to continue their upward trend to meet, and possibly exceed, pre-pandemic levels which we believe will drive 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 to drive improved auction economics by serving more frequently in the role of principal in industrial asset transactions, rather than the lower margin role of broker.

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 began his career in the auction business over thirty years ago, 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, and is expected to do so until 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, a wholly owned subsidiary of the Company, and has served in such capacity since the Company acquired NLEX in 2014.

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 lenders, peer-to-peer lending and Buy Now Pay Later 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 issued $44.6 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 $16.4 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.

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, real time access to databases of buyers and sales, as well as a deep understanding of the underlying asset value across the more than 25 industrial sectors in which we operate. We believe we have the opportunity for growth in our auction services through our ability to secure ongoing contracts with large multinational sellers, to be a first mover in emerging sectors, and to gain market share in sectors in which we are currently less active. Our extensive network and ability to find and source new opportunities are key factors for expansion. 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 may incur additional costs in the future, 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 three months ended March 31, 2022.

Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

We had working capital of $8.8 million and $9.1 million as of March 31, 2022 and December 31, 2021, 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. During 2021 and the three months ended March 31, 2022, we deployed proceeds to fund the ALT acquisition, as well as various principal transactions in both our Financial Assets and Industrial Assets Divisions.

Our current assets as of March 31, 2022 increased to $24.1 million compared to $23.3 million as of December 31, 2021 primarily due to an increase cash as a result of cash provided by operating activities during the three months ended March 31, 2022. Our current liabilities as of March 31, 2022 increased to $15.4 million compared to $14.2 million as of December 31, 2021. The most significant change was an increase of $3.3 million in our payables to sellers due to the timing of certain asset liquidation settlements, offset by a decrease in accounts payable and accrued liabilities of $1.7 million and further offset by a decrease in the current portion of third party debt of $0.5 million.

During the three months ended March 31, 2022, our primary source of cash was the cash on hand plus the cash provided by our asset liquidation business. Cash disbursements during the three months ended March 31, 2022 consisted primarily of investments in equity method investments of $2.1 million, repayment on our 2021 Credit Facility of $0.5 million, payment of operating expenses, and settlement of auction liabilities.

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 a promissory note dated August 23, 2021 (the “ALT Note”) issued in the amount of $2.0 million as part of the aggregate purchase price paid to acquire certain assets and liabilities of American Laboratory Trading, as well as any amounts borrowed under our Credit Facility. We are required to pay off the ALT Note in 48 equal installments of approximately $44,000 with an interest rate of 3% per annum and a maturity date of August 23, 2025. On May 5, 2021, we entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “Credit Facility”) with C3bank, National Association for a $10.0 million revolving line of credit. The Credit Facility matures on May 7, 2023 and replaces our previous credit facility with C3bank of $5.0 million, which matured on April 5, 2021. We are permitted to use the proceeds of the loan solely for our business operations. As of March 31, 2022, we had an outstanding balance of $1.4 million on the Credit Facility.

Ownership Structure and Capital Resources

•

As of March 31, 2022, the Company had stockholders’ equity of $33.4 million, as compared to $32.6 million as of December 31, 2021.

•

On May 5, 2021, the Company entered into the 2021 Credit Facility. The 2021 Credit Facility has a maturity date of May 7, 2023. As of March 31, 2022, we had an outstanding balance of $1.4 million on the Credit Facility.

•

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 March 31, 2022 were $15.1 million as compared to $13.6 million as of December 31, 2021, an increase of approximately $1.5 million.

Cash provided by (used in) operating activities. Cash provided by operations was $3.1 million during the three months ended March 31, 2022 as compared to cash used in operating activities of $5.8 million during the same period in 2021. The approximate $8.9 million change was primarily attributable to a change of $9.2 million in operating assets and liabilities during the three months ended March 31, 2022 as compared to the same period in 2021. The amount was further attributable to a change in net income adjusted for noncash items, which was $0.3 million lower during the three months ended March 31, 2022 as compared to the same period in 2021.

The significant changes in operating assets and liabilities during the three months ended March 31, 2022 as compared to the same period in 2021 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 investing activities. Cash used in investing activities during the three months ended March 31, 2022 was $1.0 million compared to cash used in investing activities of $1.6 million during the same period in 2021. The approximate $0.6 million change was attributable to investing activities related to our specialty lending division, in both notes receivable and equity method investments.

Cash used in financing activities. Cash used in financing activities was approximately $0.6 million during the three months ended March 31, 2022 compared to cash used in financing activities of $0.1 million during the three months ended March 31, 2021. Financing activities during the three months ended March 31, 2022 consisted primarily of a $0.5 million repayment to our 2021 Credit Facility, $0.1 million in repayments to our ALT Note, 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 three months ended March 31, 2021 consisted primarily of 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.

Share Repurchase Program

On May 5, 2022, the Company's Board of Directors authorized the repurchase of up to $4.0 million of the Company's outstanding shares of common stock over a three-year period following the effective date of the share repurchase program (“2022 Repurchase Program”). The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and the existence of opportunities in the Company’s business. Under the repurchase program, repurchases can be made from time to time using a variety of methods, including open market purchases. The repurchase program does not obligate the Company to acquire any particular amount of common shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

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 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 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.

Management’s Discussion of Results of Operations

The following table sets out the Company’s condensed consolidated results of operations for the three months ended March 31, 2022 and 2021 (dollars in thousands).


	Three Months Ended March 31,					Change
	2022			2021		Dollars			Percent
Revenues:
Services revenue	$	4,168		$	5,030	$	(862	)		(17	)%
Asset sales		5,189			2,071		3,118			151	%
Total revenues		9,357			7,101		2,256			32	%

Operating costs and expenses:
Cost of services revenue		754			1,175		(421	)		(36	)%
Cost of asset sales		3,402			820		2,582			315	%
Selling, general and administrative		4,275			3,969		306			8	%
Depreciation and amortization		133			91		42			46	%
Total operating costs and expenses		8,564			6,055		2,509			41	%
Earnings of equity method investments		82			—		82			100	%
Operating income		875			1,046		(171	)		(16	)%
Interest and other expense, net		(38	)		3		(41	)		1367	%
Income before income tax expense		837			1,049		(212	)		(20	)%
Income tax expense		192			17		175			1029	%
Net income	$	645		$	1,032	$	(387	)		(38	)%

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 March 31,
	2022			2021
Industrial Assets Division:
Net operating income	$	846		$	1,340

Financial Assets Division:
Net operating income	$	731		$	461

Corporate and Other:
Net operating loss	$	(702	)	$	(755	)

Consolidated:
Net operating income	$	875		$	1,046

Three-Month Period Ended March 31, 2022 Compared to Three-Month Period Ended March 31, 2021

Revenues and cost of revenues – Revenues were $9.4 million during the three months ended March 31, 2022 compared to $7.1 million during the same period in 2021. Costs of services revenue and asset sales were $4.2 million during the three months ended March 31, 2022 compared to $2.0 million during the same period in 2021. The gross profit of these items was $5.2 million during the three months ended March 31, 2022 compared to $5.1 million during the same period in 2021, an increase of approximately $0.1 million, or approximately 2%. The increased gross profit in the first quarter of 2022 reflects the vagaries of the timing and magnitude of asset liquidation transactions.

Selling, general and administrative expense – Selling, general and administrative expense was $4.3 million during the three months ended March 31, 2022 compared to $4.0 million during the same period in 2021.

Significant components of selling, general and administrative expense for the three months ended March 31, 2022 and March 31, 2021 are shown below (dollars in thousands):


	Three Months Ended March 31,
	2022		2021		% change
Compensation
HGP	$	1,249	$	1,613		(23	)%
ALT		380		—		100	%
NLEX		867		873		(1	)%
HGI		261		288		(9	)%
HGC		145		130		12	%
Stock-based compensation		106		143		(26	)%

Consulting		16		13		23	%
Board of Directors fees		73		67		9	%
Accounting, tax and legal professional fees		311		255		22	%
Insurance		117		121		(3	)%
Occupancy		263		222		18	%
Travel and entertainment		212		39		444	%
Advertising and promotion		113		87		30	%
Information technology support		86		68		26	%
Other		76		50		52	%
Total selling, general & administrative expense	$	4,275	$	3,969		8	%

As compared to the first quarter of 2021, there was an increase in selling, general and administrative expense during the first quarter of 2022 due to increased compensation expense related to the acquisition of ALT in the third quarter of 2021 and increased travel and entertainment as a result of lifted travel restrictions related to the COVID-19 pandemic. The increase was offset by decreased compensation expense within our HGP division as a result of declined financial performance as compared to the first quarter of 2021.

Depreciation and amortization expense – Depreciation and amortization expense was $0.1 million during the three months ended March 31, 2022 and the same period in 2021, 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 March 31,
	2022		2021
Net income	$	645	$	1,032
Add back:
Depreciation and amortization		133		91
Interest and other expense, net		38		(3	)
Income tax expense		192		17
EBITDA		1,008		1,137

Management add back:
Stock based compensation		106		143
Separation Agreement		—		200
Adjusted EBITDA	$	1,114	$	1,480

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 three months ended March 31, 2022 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).

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: May 12, 2022	By:	/s/ Ross Dove
		Ross Dove
		Chief Executive Officer
		(Principal Executive Officer)

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