Heritage (HGBL) - 2020 Q4 - Annual Report

Part I Business Heritage Global Inc. is an asset services company specializing in financial and industrial asset transactions, growing through strategic acquisitions and anticipating increased distressed asset supply - The company operates as an asset services firm, advising and acting as principal in acquiring and monetizing assets across 28 global sectors[13] - The business is structured into two main divisions: Industrial Assets and Financial Assets[36][39][123] - Growth strategy includes acquisitions like HGP and NLEX, and the formation of Heritage Global Capital (HGC) for specialty financing[15][16][17] - Despite a minor negative impact in 2020, the COVID-19 pandemic is expected to increase distressed asset supply and demand for online services[22][23] - As of December 31, 2020, the company had 46 full-time employees[26] Risk Factors The company faces significant competition, operational dependencies, regulatory compliance, and financial vulnerabilities including goodwill impairment and stock price volatility - The company faces significant competition, assumes inventory risk in principal transactions, and experiences fluctuating operating results due to unpredictable asset liquidation deals[45][46][47] - Operations are dependent on key executives, vulnerable to cybersecurity breaches, and subject to costly government regulations including export controls[51][52][53] - Capitalization and market risks include potential need for additional financing, anti-takeover provisions, stock price volatility, and Nasdaq delisting risk[61][62][69][77] - As of December 31, 2020, goodwill represented approximately 14% of total assets, with impairment potentially reducing net income[71] - As of March 1, 2021, executive officers, directors, and affiliates beneficially own 28.5% of common stock, providing significant influence over stockholder matters[74] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties The company leases principal office and warehouse spaces in San Diego, Burlingame (to be replaced by Hayward), and Edwardsville, IL, with one leased from a related party - The company leases principal office spaces in San Diego, Burlingame (to be replaced by Hayward, CA in May 2021), and Edwardsville, IL[84] Legal Proceedings The company is involved in routine legal matters, none of which are expected to be materially adverse to its business or financial results - The company is involved in routine legal matters, none of which are expected to be materially adverse[85] Mine Safety Disclosures This item is not applicable to the company's operations - Not Applicable 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 346 holders of record as of March 2021, and no dividends are anticipated - The company's common stock is listed on the Nasdaq Stock Market under the symbol "HGBL"[89] - As of March 1, 2021, there were approximately 346 holders of common stock of record[90] - No dividends have been paid on common stock, and none are anticipated in the foreseeable future[91] Selected Financial Data As a Smaller Reporting Company, Heritage Global Inc. is not required to provide this information - The company is not required to provide this information as it qualifies as a Smaller Reporting Company[96] Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion covers 2020 financial performance, highlighting improved liquidity from a public offering, stable revenues, doubled operating income, and increased net income driven by lower SG&A and a tax benefit Equity Partners Separation The company completed its separation from Equity Partners on December 31, 2019, resulting in a $0.6 million non-cash goodwill impairment charge - The separation from Kenneth Mann and Equity Partners was effective December 31, 2019[99] - A non-cash goodwill impairment charge of $0.6 million was recorded on December 31, 2019, due to the separation[103] Liquidity and Capital Resources The company's liquidity significantly improved in 2020, with working capital increasing by $15.4 million and cash by $20.7 million, primarily due to an $8.7 million public stock offering and strong operating cash flow - Working capital increased by $15.4 million, from a deficit of $2.4 million in 2019 to a surplus of $13.0 million in 2020[105] - A public offering of common stock in October 2020 generated net proceeds of approximately $8.7 million[106] - Cash Position Change (2019 vs 2020) | Metric | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | 23.4 million | 2.7 million | | Cash provided by operating activities | 9.1 million | 0.8 million | - As of December 31, 2020, the company had a zero outstanding balance on its $5.0 million revolving line of credit[110] Results of Operations Total revenues remained flat at $26.2 million in 2020, while operating income more than doubled to $6.1 million and net income increased to $9.7 million, driven by lower SG&A and a tax benefit - Consolidated Results of Operations (in thousands) | Metric | 2020 (in thousands $) | 2019 (in thousands $) | | :--- | :--- | :--- | | Total Revenues | 26,183 | 26,168 | | Operating Income | 6,059 | 3,050 | | Net Income | 9,658 | 3,899 | - Net Operating Income by Segment (in thousands) | Segment | 2020 (in thousands $) | 2019 (in thousands $) | | :--- | :--- | :--- | | Industrial Assets Division | 5,764 | 2,834 | | Financial Assets Division | 2,637 | 3,337 | | Corporate and Other | (2,342) | (3,121) | - Selling, general and administrative (SG&A) expenses decreased by $1.4 million (9%) in 2020, primarily due to the elimination of compensation costs from the Equity Partners separation[127] Key Performance Indicators The company uses non-GAAP measures EBITDA and Adjusted EBITDA, with Adjusted EBITDA increasing 61% to $6.8 million in 2020, reflecting improved underlying profitability - EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Metric | 2020 (in thousands $) | 2019 (in thousands $) | | :--- | :--- | :--- | | Net Income | 9,658 | 3,899 | | EBITDA | 6,421 | 3,355 | | Adjusted EBITDA | 6,774 | 4,211 | Critical Accounting Policies Critical accounting policies involve significant estimates for revenue recognition, goodwill and intangible asset valuation, and deferred tax assets, notably the 2020 reduction of the deferred tax asset valuation allowance - Significant estimates are required for valuing accounts receivable, inventory, goodwill, intangible assets, and deferred tax assets[139] - Revenue is recognized under ASC 606, typically when performance obligations are satisfied, with fee-based transactions reported on a net basis as an agent[141][143] - Goodwill is tested for impairment annually on October 1, with a $0.6 million impairment charge recorded in 2019 related to the Equity Partners separation[156][157] - The company reduced its valuation allowance against deferred tax assets in 2020, resulting in a net deferred tax asset balance of $4.4 million, based on expected future profitability[159] Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Heritage Global Inc. is not required to provide this information - The company is not required to provide this information as it qualifies as a Smaller Reporting Company[162] Financial Statements and Supplementary Data The company's consolidated financial statements are included with the report, beginning on page F-1 - The company's consolidated financial statements required by this item are included starting on page F-1 of the report[163] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no disagreements with its auditors on accounting principles, financial disclosure, or auditing scope during 2020 and 2019 - During 2020 and 2019, the company had no disagreements with its auditors and no reportable events[164] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management, including Certifying Officers, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[166] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[170] Other Information The company reported no other information for this item - None Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, with the Code of Conduct available online - Information required by this item is incorporated by reference from the definitive proxy materials for the 2021 Annual Meeting of Stockholders[175] - The company has adopted a Code of Conduct, which is available on its website[178] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials - Information regarding executive compensation is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials[179] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials - Information regarding security ownership is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials[180] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials - Information regarding related party transactions and director independence is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials[182] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials - Information regarding principal accountant fees and services is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy materials[183] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and exhibits filed with the Form 10-K, with financial statement schedules omitted as not required or applicable - This item lists the financial statements and exhibits filed with the report, with financial statement schedules omitted as not required or applicable[186] Form 10-K Summary The company did not provide a summary for this item - None Financial Statements Consolidated Financial Statements The consolidated financial statements for 2020 and 2019 show significant increases in cash, total assets, and stockholders' equity, driven by a public offering and strong net income - Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 (in thousands $) | Dec 31, 2019 (in thousands $) | | :--- | :--- | :--- | | Cash and cash equivalents | 23,385 | 2,728 | | Total Assets | 44,555 | 21,917 | | Total Liabilities | 14,612 | 10,070 | | Total Stockholders' Equity | 29,943 | 11,847 | - Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | 2020 (in thousands $) | 2019 (in thousands $) | | :--- | :--- | :--- | | Total Revenues | 26,183 | 26,168 | | Operating Income | 6,059 | 3,050 | | Net Income | 9,658 | 3,899 | | Net income per share – diluted ($) | 0.30 | 0.13 | - Consolidated Cash Flow Highlights (in thousands) | Metric | 2020 (in thousands $) | 2019 (in thousands $) | | :--- | :--- | :--- | | Net cash provided by operating activities | 9,148 | 794 | | Net cash provided by (used in) investing activities | 4,508 | (1,156) | | Net cash provided by (used in) financing activities | 7,001 | (1,178) | Notes to Consolidated Financial Statements The notes provide detailed information on the October 2020 public offering, accounting policies, notes receivable, equity method investments, debt facilities, income taxes, and stock-based compensation plans - On October 6, 2020, the company completed a public offering of 5,462,500 shares, receiving approximately $8.7 million in net proceeds[228] - Goodwill balance was $5.585 million at both December 31, 2020 and 2019, with no impairment charges determined in Q4 2020[290][291] - The company has a $5.0 million revolving line of credit with a zero balance at year-end 2020, and its maturity was extended to April 5, 2021[297][346] - At December 31, 2020, the company had tax net operating loss carryforwards of approximately $77.6 million, and management reduced the valuation allowance expecting realization of deferred tax assets[303][304]