Heritage (HGBL) - 2021 Q4 - Annual Report

Part I Business Heritage Global Inc. is an asset services company operating through Financial and Industrial Assets Divisions, enhanced by the 2021 ALT acquisition and expecting future growth from nonperforming loans - The company provides a full suite of asset services, including market making, acquisitions, dispositions, valuations, and secured lending across over twenty-five global sectors[11] - On August 23, 2021, the Company acquired American Laboratory Trading (ALT), a supplier of refurbished lab equipment, to strengthen its service offerings in the life sciences sector[14][38] - The Financial Assets division includes National Loan Exchange, Inc. (NLEX), a major broker of charged-off receivables, and Heritage Global Capital LLC (HGC), which provides specialty financing[13][14][32] - The COVID-19 pandemic negatively impacted 2021 performance but is expected to create positive impacts going forward, such as increased activity for NLEX and HGC due to expanding volumes of nonperforming consumer loans[19][21] - The company operates in a highly fragmented market and competes with other liquidators, auction companies, dealers, and brokers, some of whom have greater financial resources[24] Risk Factors The company faces significant competitive, operational, and financial risks, including intense competition, fluctuating operating results, dependence on key personnel, and potential goodwill impairment - The company faces significant competition from numerous other organizations, some of which are larger and better-capitalized[45] - Operating results are subject to significant fluctuation due to the unpredictable nature and timing of discrete asset liquidation deals[47] - Operations are substantially dependent on key executive officers, and the loss of their services could have a material adverse effect on the business[52] - As of December 31, 2021, goodwill represented approximately 15% of total assets, and an impairment of this goodwill would result in a reduction in net income[73] - The company's ability to utilize approximately $77.8 million in income tax loss carryforwards may be restricted due to 'change in ownership' tax rules[74][320] - The company's common stock is listed on Nasdaq, and failure to meet listing criteria could result in delisting, harming liquidity and the ability to raise capital[80] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[87] Properties The company leases office spaces in San Diego, Hayward, and Edwardsville, and acquired warehouse and office space in East Lyme, CT, with the ALT acquisition - The company leases principal office locations in San Diego, CA, Hayward, CA, and Edwardsville, IL, with the Edwardsville office leased from a related party[88] - On August 23, 2021, the company acquired the warehouse and office space used by ALT's business in East Lyme, CT[88] Legal Proceedings The company is involved in various legal matters in the normal course of business, none of which are expected to have a material adverse effect on its operations or financial results - There are no legal matters expected to have a material adverse effect on the company's business and results of operations[89] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[90] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'HGBL', with approximately 340 record holders as of March 2022, and no dividends have been paid or are anticipated - Common stock is traded on the Nasdaq Stock Market under the symbol 'HGBL'[93] - As of March 1, 2022, there were approximately 340 holders of common stock of record[94] - The company has not paid dividends to date and does not anticipate paying them in the foreseeable future[95] Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Working capital and cash decreased in 2021 due to operational and investing activities, including the ALT acquisition, though management believes current resources and a $10.0 million credit line are sufficient for 2022 Working Capital and Cash Position (in millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Working Capital | $9.1 | $13.0 | | Cash and cash equivalents | $13.6 | $23.4 | Cash Flow Summary (in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Operating Activities | ($2.6) | $9.1 | | Investing Activities | ($10.2) | $4.5 | | Financing Activities | $3.1 | $7.0 | - The company has a $10.0 million revolving line of credit with C3bank, with an outstanding balance of $1.9 million as of December 31, 2021[107] Results of Operations In 2021, total revenues slightly decreased to $25.8 million, while gross profit increased, but operating income and net income significantly declined, primarily due to a non-recurring 2020 tax benefit, with Adjusted EBITDA also decreasing Consolidated Results of Operations (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues | $25,792 | $26,183 | | Operating income | $3,014 | $6,059 | | Income tax benefit | ($61) | ($3,644) | | Net income | $3,053 | $9,658 | Segment Net Operating Income (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Industrial Assets Division | $3,393 | $5,764 | | Financial Assets Division | $2,024 | $2,637 | Adjusted EBITDA Reconciliation (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income | $3,053 | $9,658 | | EBITDA | $3,474 | $6,421 | | Adjusted EBITDA | $4,082 | $6,774 | - Selling, general and administrative expense increased by 3% to $14.8 million in 2021, driven by expenses related to the ALT acquisition and a separation agreement, partially offset by an employee retention credit[126] Critical Accounting Policies The company's financial statements rely on critical accounting policies requiring significant estimates, including revenue recognition, annual goodwill and intangible asset impairment testing, deferred tax asset valuation, and the 2021 recognition of a $0.6 million Employee Retention Credit - Significant estimates are required for valuing accounts receivable, inventory, goodwill, intangible assets, and deferred tax assets[136] - Revenue is recognized based on the ASC 606 standard, where the company acts as an agent for fee-based transactions and reports this revenue on a net basis[139][141] - Goodwill is not amortized but is tested for impairment annually on October 1 using a qualitative approach initially[160] - The company recognized a $0.6 million receivable for the Employee Retention Credit (ERC) in 2021, which reduced payroll tax expense[155] Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Heritage Global Inc. is not required to provide the information for this item - The company has elected scaled reporting obligations and is not required to provide this information[165] Financial Statements and Supplementary Data Consolidated Balance Sheets As of December 31, 2021, total assets increased to $50.5 million, driven by the ALT acquisition's impact on goodwill and intangibles, while total liabilities rose to $17.8 million and stockholders' equity increased to $32.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $13,622 | $23,385 | | Goodwill | $7,446 | $5,585 | | Total assets | $50,464 | $44,555 | | Total liabilities | $17,825 | $14,612 | | Total stockholders' equity | $32,639 | $29,943 | Consolidated Statements of Income For 2021, net income significantly decreased to $3.1 million ($0.08 per diluted share) from $9.7 million in 2020, primarily due to a non-recurring $3.6 million income tax benefit in the prior year Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues | $25,792 | $26,183 | | Operating income | $3,014 | $6,059 | | Net income | $3,053 | $9,658 | | Net income per share – diluted | $0.08 | $0.30 | Consolidated Statements of Cash Flows In 2021, cash and cash equivalents decreased by $9.8 million, with $2.6 million used in operations and $10.2 million in investing activities, primarily for the ALT acquisition, partially offset by $3.1 million from financing activities Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($2,631) | $9,148 | | Net cash (used in) provided by investing activities | ($10,197) | $4,508 | | Net cash provided by financing activities | $3,065 | $7,001 | | Net (decrease) increase in cash | ($9,763) | $20,657 | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no disagreements with its auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the fiscal years 2021 and 2020 - During 2021 and 2020, the company had no disagreements with its auditors and no reportable events[168] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes in the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[169] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[173] - No changes in internal control over financial reporting occurred during the fourth fiscal quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[175] Other Information The company reported no other information for this item - None[176] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement, and the company has adopted a code of ethics - The required information for this item is incorporated by reference from the definitive proxy materials for the 2022 Annual Meeting of Stockholders[178] - The company has adopted a code of ethics (the HGI Code of Conduct) applicable to its employees and principal officers, which is available on its website[181] Executive Compensation Information required by this item concerning executive compensation is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - The required information is incorporated by reference from the definitive proxy materials for the 2022 Annual Meeting of Stockholders[182] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item concerning security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - The required information is incorporated by reference from the definitive proxy materials for the 2022 Annual Meeting of Stockholders[183] Certain Relationships and Related Transactions, and Director Independence Information required by this item concerning certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - The required information is incorporated by reference from the definitive proxy materials for the 2022 Annual Meeting of Stockholders[184] Principal Accountant Fees and Services Information required by this item concerning principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - The required information is incorporated by reference from the definitive proxy materials for the 2022 Annual Meeting of Stockholders[186] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements and various agreements - This item lists the financial statements and exhibits filed with the report, including the Report of Baker Tilly US, LLP and consolidated financial statements[188][189] Form 10-K Summary No Form 10-K summary was provided - None[194]