WASHINGTON, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of Common Stock held by non-affiliates based upon the closing price of $0.22 per share on June 30, 2016, as reported by the OTCQB, was approximately $5.0 million.
As of March 2, 2017, there were 28,470,148 shares of Common Stock, $0.01 par value, outstanding.
This Annual Report on Form 10-K (the “Report”) contains certain “forward-looking statements” that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may,” "will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties, including those noted under Item 1A “Risk Factors” 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.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Under our Charter documents, the Board of Directors (the “Board”) is divided into three classes, with the total number of directors to be not less than five and not more than nine. Each director is to serve a term of three years or until his or her successor is duly elected and qualified. As of the date hereof, the Board consists of six members: three Class I directors (Messrs. Dove, Perlis and Shimer), two Class II directors (Messrs. Hexner and Silber) and one Class III director (Mr. Ryan). The following table sets forth the names, ages and positions with the Company of our current directors and executive officers. With the exception of Ross Dove and Kirk Dove, who are brothers, there are no family relationships between any present executive officers and directors.
Name
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Age (1)
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Title
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Allan C. Silber
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68
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Chairman of the Board
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Michael Hexner
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63
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Director (2)
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Samuel L. Shimer
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53
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Director (2), (3), (4)
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J. Brendan Ryan
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74
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Director (2), (3), (4)
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Morris Perlis
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68
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Director (2), (3), (4)
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Ross Dove
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64
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Director, Chief Executive Officer
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Kirk Dove
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61
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Chief Operating Officer and President
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Scott A. West
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47
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Chief Financial Officer
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James Sklar
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51
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Executive Vice President, General Counsel, and Corporate Secretary
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Kenneth Mann
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49
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Senior Managing Director, Equity Partners HG LLC
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David Ludwig
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|
59
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President, National Loan Exchange
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|
(1)
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As of December 31, 2016
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(3)
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Member of the Audit Committee
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(4)
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Member of the Compensation Committee
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Set forth below are descriptions of the backgrounds of the executive officers and directors of the Company:
Allan C. Silber
, Chairman of the Board. Mr. Silber was elected to the Board as a Class II director in September 2001. He was appointed as Chairman of the Board in November 2001, a position he held until October 2004, and was again appointed as Chairman of the Board in March 2005. In January 2011, Mr. Silber resigned the position of Chief Executive Officer and assumed the position of President. In May 2015 in connection with the appointment of Ross Dove as Chief Executive Officer and Kirk Dove as Chief Operating Officer and President, Mr. Silber resigned the position of President. Mr. Silber is the Chairman of Street Capital, which he founded in 1979. Mr. Silber sits on a number of public, private and not for profit Boards. Mr. Silber attended McMaster University and received a bachelor’s degree from the University of Toronto.
Michael Hexner
, Director. Mr. Hexner was appointed by the Board as a Class II director in August 2016 to fill a Board vacancy. Mr. Hexner has expertise and extensive experience in executive leadership with growing businesses. Mr. Hexner co-founded Wheel Works in 1976, and grew the business, as its Chief Executive Officer, to become the largest independent tire chain in the United States. Mr. Hexner was the co-founder of Pacific Leadership Group in 2001, and has served as the Chairman and Chief Executive Officer of both SmartPillars and DealerFusion. Mr. Hexner currently serves as an operating partner of Fundamental Capital, a private equity firm, and as the Chairman of Zoomvy.com. Mr. Hexner holds a bachelor’s degree in Political Philosophy from Williams College, a master’s degree in Negotiation and Dispute Resolution from Creighton University, and has completed an executive management program at the Haas School of Business of the University of California.
Samuel L. Shimer
, Director. Mr. Shimer was appointed by the Board as a Class I director in April 2001 to fill a Board vacancy. Mr. Shimer has extensive expertise in mergers and acquisitions, including those transactions that occurred while he was an officer of the Company and Street Capital, where he was initially employed as a Senior Vice President, Mergers & Acquisitions and Business Development in July 1997. He was appointed Managing Director in February 2000 and he terminated his employment with the Company in February 2004 to join J. H. Whitney & Co., a private equity fund management company, where he remained as a Partner until December 2009. Mr. Shimer is currently Managing Director of SLC Capital Partners, LLC, a private equity fund management company that he co-founded in 2010. From 1991 to 1997, Mr. Shimer worked at two merchant banking funds affiliated with Lazard Frères & Co., Center Partners and Corporate Partners, ultimately serving as a Principal. Mr. Shimer earned a Bachelor of Science in Economics degree from The Wharton School of the University of Pennsylvania, and a Master of Business Administration degree from Harvard Business School.
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J. Brendan Ryan
, Director. Mr. Ryan was appointed by the Board as a Class III director in August 2011 to fill a Board vacancy. Mr. Ryan has had a distinguished career
in the advertising industry, most recently serving as the global CEO of Foote Cone & Belding Worldwide (now FCB), and as the Chairman and Chairman Emeritus from June 2005 to December 2010. He has served on the boards of several public companies and current
ly serves as a board member of several non-profit corporations. Mr. Ryan has extensive experience at the Board level with respect to the workings of public companies as well as an extensive network of contacts that could be of benefit to the Company. Mr. R
yan received his Bachelor degree in History from Fordham College and his Master of Business Administration in Marketing from the Wharton Graduate School of the University of Pennsylvania.
Morris Perlis
, Director. Mr. Perlis was appointed by the Board as a Class I director in May 2015. Mr. Perlis previously served as President of Street Capital from 1992 until 2001, a period of tremendous success that included guiding the Company’s health care strategy, resulting in superior growth of three investee companies. In addition to his past experience at Street Capital, Mr. Perlis bring a wealth of expertise gained in senior strategic and management roles with other leading organizations. He spent 13 years with American Express Inc., including five years as President of American Express Canada. During that time he obtained approval for, and directed the launch of, the AMEX Bank of Canada, for which he served as CEO. Among his other responsibilities with American Express, Mr. Perlis served as Executive Vice President, and was a key member of numerous senior level U.S. executive committees. Mr. Perlis also spent four years as President and CEO of Mad Catz Interactive, during which time he completely re-engineered the Company, leading it to become the largest third party manufacturer in its industry. Mr. Perlis is currently the President and CEO of Morris Perlis and Associates, and is active on a number of public, private and not for profit boards.
Ross Dove
, Chief Executive Officer and Director. Mr. Ross Dove was appointed Chief Executive Officer of the Company in May 2015 and has served as Co-Managing Partner of Heritage Global Partners, Inc. since its founding in October 2009. Together with his brother, Kirk Dove, Mr. Dove joined the Company when HGI acquired HGP in February 2012. 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. The Messrs. Dove remained as global presidents of the business until September 2009, and then formed HGP in October 2009. During his career, Mr. Dove has been actively involved in auction industry advances such as theatre-style auctions, which was a first step in migrating auction events onto the Internet. Mr. Dove has been a member of the National Auctioneers Associations since 1985, and a founding member of the Industrial Auctioneers Association. He served as a director of Critical Path from January 2002 to January 2005 and has served on the boards of several venture funded companies.
Kirk Dove
, Chief Operating Officer and President. Mr. Kirk Dove was appointed Chief Operating Officer and President of the Company in May 2015 and has served as Co-Managing Partner of Heritage Global Partners, Inc. since its founding in October 2009. Together with his brother, Ross Dove, Mr. Dove joined the Company when HGI acquired HGP in February 2012. Mr. Dove began his career in the auction business over thirty years ago, including, along with his brother, the position of global president of DoveBid, which was sold to a third party in 2008. The Messrs. Dove remained as global presidents of the business until September 2009, and then formed HGP in October 2009. In addition to his experience with the auction business, Mr. Dove was employed at Merrill Lynch for several years as a Senior Account Executive. Mr. Dove holds a Bachelor of Sciences degree in Business from Northern Illinois University. He is a Senior ASA Member of the American Society of Appraisers, and has been a member of the National Auctioneers Associations since 1985.
Scott A. West
, Chief Financial Officer. Mr. West became the Chief Financial Officer of HGP in March 2014 and was appointed the Chief Financial Officer of HGI in May 2015. Mr. West has over 25 years of multi-national executive financial accounting and business management experience serving various public and private equity funded companies, including a Fortune 500 company. He has expertise managing financial, technical, M&A and international accounting teams and has deep knowledge of SEC financial reporting, SOX compliance and international accounting matters. Mr. West is responsible for all of the Company’s financial and treasury functions including financial reporting, bank relationships, conducting internal and industry analysis to support the Company’s goals for growth, investor relations, and M&A activity. Mr. West has a bachelor’s degree in Accounting from Arizona State University.
James Sklar,
Executive Vice President, General Counsel, and Corporate Secretary. Mr. Sklar became the Executive Vice President and General Counsel of HGP in June 2013 and was appointed the Executive Vice President, General Counsel and Corporate Secretary of HGI in May 2015. Mr. Sklar has over two decades of relevant legal expertise serving leading worldwide asset advisory and auction services firms. Throughout his career, he has played a key role in establishing relationships with global alliance partners and implementing international contracts as well as expanding the adoption of the auction sale process in North America, Europe, Asia and Latin America. Mr. Sklar is responsible for all of the Company’s legal matters including negotiating global transactional business alliance documents, managing relationships and contracts with worldwide clients and business partners, and providing legal representation for all of the Heritage Global companies. Mr. Sklar has a bachelor’s degree in Economics from the Wharton School of the University of Pennsylvania and a Juris Doctorate from Wayne State University Law School.
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Kenneth Mann
, Senior Managing Director, Equity Partners HG LLC. Mr. Mann has been employed by the Company since March 2011, when he joined the Company in connection with its
acquisition of Equity Partners. Prior to the acquisition, Mr. Mann was a Partner at Equity Partners since 1995, and a Managing Partner since September 2002. During his career, Mr. Mann has had extensive experience handling investment banking services for
distressed businesses operating in a wide variety of industries. Mr. Mann holds a Bachelor of Science Degree in Business Administration from Salisbury University. He began sponsoring events with the American Bankruptcy Institute in 1995, became a member in
March 2003, and has served on its Asset Sales Committee since 2003.
David Ludwig
, President, National Loan Exchange Inc. (“NLEX”). Mr. Ludwig joined the Company when HGI acquired NLEX in June 2014. Mr. Ludwig has worked in the financial industry for over twenty-five years, and he developed NLEX from its start as a post-Resolution Trust Corporation (RTC) sales outlet to the nation's leading broker of charged-off credit card and consumer debt accounts. He is considered a leading pioneer in the debt sales industry, and has been a featured speaker at many industry conferences, as well as quoted in numerous publications including the New York Times, LA Times, Collections and Credit Risk, and Collector Magazine. Mr. Ludwig also serves as consultant and expert witness within the industry. Mr. Ludwig has a Bachelor of Science Degree in Economics from the University of Illinois
.
Each officer of the Company has been appointed by the Board and holds his office at the discretion of the Board.
No director or officer of our company has, during the last ten years: (i) been subject to or involved in any legal proceedings described under Item 401(f) of Regulation S-K, including, without limitation, any criminal proceeding (excluding traffic violations or similar misdemeanors), (ii) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities, or (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities or commodities laws and regulations, or finding any violations with respect to such laws and regulations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership of equity securities of HGI with the SEC. Officers, directors, and greater than ten percent stockholders are required by the SEC regulation to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant to Rule 16a-3 under the Exchange Act during our most recent fiscal year, and Forms 5 with respect to our most recent fiscal year, we believe that all such forms required to be filed pursuant to Section 16(a) were timely filed by the executive officers, directors and security holders required to file same during the fiscal year ended December 31, 2016.
Code of Ethics
HGI has adopted a code of ethics that applies to its employees, including its principal executive, financial and accounting officers or persons performing similar functions. The HGI Code of Conduct (the “Code”) can be found on the Company’s website at
http://www.heritageglobalinc.com
(follow Corporate Governance link to Governance Documents tab). The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any amendments to, or waivers from, a provision of the Code that applies to its principal executive, financial and accounting officers or persons performing similar functions by posting such information on its website at the website address set forth above.
Corporate Governance
Board Leadership and Risk Oversight
The Company is a small organization, with a market capitalization at December 31, 2016 of approximately $13.4 million. From 2001 until the first quarter of 2014, Street Capital was the Company’s majority shareholder. In the first quarter of 2014 Street Capital declared a dividend in kind, consisting of its 73.3% interest in the Company, which was paid to Street Capital shareholders in April 2014. The Company’s association with Street Capital continued into 2015, and Street Capital remained a related party, due to a management services agreement (the “Services Agreement”) between the Company and Street Capital. The Services Agreement is described in more detail in Item 13 of this Report and in Note 13 to the consolidated financial statements. The Services Agreement was terminated effective August 31, 2015, as described more fully in the Current Report on Form 8-K filed with the SEC on September 1, 2015. After the termination of the Services Agreement, Street Capital remained a related party as a result of the Street Capital Loan and the Company’s Chairman of the Board, Mr. Allan Silber, also holding a similar position for Street Capital.
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The Company’s operations, even following the acquisitions of HGP in 2012 and NLEX in 2014, remain relatively modest, with only forty-six employees, as detailed in Item 1 of this report. Given the current size and scale of the Company’s operations, the Company believes that the Board does not require a lead independent director in order to effectively oversee the strategic priorities of the Company. The Board meets quarterly to review the Company’s operating results. It meets annually to review and approve the Company’s strategy and budget. Material matters such as acquisitions and dispositions, investments and business initiatives are approved by the full Board.
Board Meetings and Committees
The Board held four meetings during the fiscal year ended December 31, 2016. The Board has designated two standing committees: the Audit Committee and the Compensation Committee. HGI does not have a nominating or a corporate governance committee. However, corporate governance functions are included in the Audit Committee Charter, and Board nominations are considered by the full Board. There are no specific criteria for Director nominees, and the Company does not specifically consider diversity with respect to the selection of its Board nominees. Given the Company’s limited operations, the Company believes that it would have difficulty identifying and attracting a diverse selection of candidates. To date, it has been deemed most effective to nominate and appoint individuals who are either former employees with detailed knowledge of the business, such as Mr. Shimer, or individuals with expertise that will be of value as the Company expands its market presence, such as Mr. Hexner, Mr. Ryan and Mr. Perlis. There has been no material change in the procedures by which our shareholders may recommend nominees to our Board since such procedures were adopted and implemented.
Audit Committee
The Audit Committee is responsible for making recommendations to the Board concerning the selection and engagement of independent accountants and for reviewing the scope of the annual audit, audit fees, results of the audit and independent registered public accounting firm’s independence. The Audit Committee is also responsible for corporate governance, and reviews and discusses with management and the Board such matters as accounting policies, internal accounting controls and procedures for preparation of financial statements. Its membership is currently comprised of Mr. Shimer (Chairman), Mr. Perlis, and Mr. Ryan, all three of whom are independent directors. The Audit Committee held five meetings during the fiscal year ended December 31, 2016. In 2000, the Board approved HGI’s Audit Committee Charter, which was subsequently revised and amended in 2001 and again in 2003 in order to incorporate certain updates in light of regulatory developments, including the Sarbanes-Oxley Act of 2002. A copy of the current Audit Committee Charter is available on the Company’s website
www.heritageglobalinc.com
.
Audit Committee Financial Expert
The Board has determined that Mr. Samuel L. Shimer is an Audit Committee financial expert as defined by Item 407(d) of Regulation S-K and is “independent” as such term is defined under NASDAQ Marketplace Rules and applicable federal securities laws and regulations.
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Item 11. Execut
i
ve Compensation.
Compensation Discussion and Analysis
Summary
The following sections provide an explanation and analysis of our executive compensation program and the material elements of total compensation paid to each of our named executive officers. Included in the discussion is an overview and description of:
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•
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our compensation philosophy and program;
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•
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the objectives of our compensation program;
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•
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what our compensation program is designed to reward;
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•
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each element of compensation;
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•
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why we choose to pay each element;
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•
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how we determine the amount for each element; and
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•
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how each compensation element and our decision regarding that element fit into our overall compensation objectives and affect decisions regarding other elements, including the relationship between our compensation objectives and our overall risk management.
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In reviewing our executive compensation program, we considered issues pertaining to policies and practices for allocating between long-term and currently paid compensation and those policies for allocating between cash and non-cash compensation. We also considered the determinations for granting awards, performance factors for our company and our named executive officers, and how specific elements of compensation are structured and taken into account in making compensation decisions. Questions related to the benchmarking of total compensation or any material element of compensation, the tax and accounting treatment of particular forms of compensation and the role of executive officers (if any) in the total compensation process also are addressed where appropriate. In addition to the named executive officers discussed below, the Company has only 43 salaried employees.
General Executive Compensation Philosophy
We compensate our executive management through a combination of base salaries, merit based performance bonuses, and long-term equity compensation. We adhere to the following compensation policies, which are designed to support the achievement of our business strategies:
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Our executive compensation program should strengthen the relationship between compensation, both cash and equity-based, and performance by emphasizing variable, at-risk earnings that are dependent upon the successful achievement of specified corporate, business unit and individual performance goals.
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A portion of each executive’s total compensation should be comprised of long-term, at-risk compensation to focus management on the long-term interests of shareholders.
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An appropriately balanced mix of at-risk incentive cash and equity-based compensation aligns the interests of our executives with that of our shareholders. The equity-based component promotes a continuing focus on building profitability and shareowner value.
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Total compensation should enhance our ability to attract, retain, motivate and develop knowledgeable and experienced executives upon whom, in large part, our successful operation and management depends.
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Total compensation should encourage our executives to ensure that the risks involved in any business decision align that executive’s potential personal return with maximal return to shareholders.
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A core principle of our executive compensation program is the belief that compensation paid to executive officers should be closely aligned with our near- and long-term success, while simultaneously giving us the flexibility to recruit and retain the most qualified key executives. Our compensation program is structured so that it is related to our stock performance and other factors, direct and indirect, all of which may influence long-term shareholder value and our success.
We utilize each element of executive compensation to ensure proper balance between our short- and long-term success as well as between our financial performance and shareholder return. In this regard, we believe that the executive compensation program for our named executive officers is consistent with our financial performance and the performance of each named executive officer. We do not utilize the services of compensation consultants in determining or recommending executive or director compensation.
26
Our Named Executive Officers
This analysis focuses on the compensation paid to our “named executive officers,” a defined term generally encompassing:
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•
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all persons that served as our principal executive officer (“PEO”) at any time during the fiscal year
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•
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the Company’s two most highly compensated executive officers, other than the PEO, serving in such positions at the end of the fiscal year.
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During 2016, our named executive officers were:
Ross Dove
– Chief Executive Officer. Mr. Dove (and his brother, Kirk Dove) co-founded HGP, which was acquired by the Company in 2012. Effective May 5, 2015, Mr. Dove became Chief Executive Officer of the Company, as more fully described on the Company’s Form 8-K filed with the SEC on May 7, 2015.
Kenneth Mann
– Senior Managing Director, Equity Partners. Mr. Mann has held this position prior to and since the Company’s acquisition of Equity Partners in 2011.
David Ludwig
– President, National Loan Exchange. Mr. Ludwig has held this position prior to and since the Company’s acquisition of National Loan Exchange in 2014.
Elements of Compensation
Base Salaries
Unless specified otherwise in their employment agreements, the base salaries of the Company’s named executive officers are evaluated annually. In evaluating appropriate pay levels and salary increases for such officers, the Compensation Committee uses a subjective analysis, considering achievement of the Company’s strategic goals, level of responsibility, individual performance, and internal equity and external pay practices. In addition, the Committee considers the scope of the executives’ responsibilities, taking into account competitive market compensation for similar positions where available, as well as seniority of the individual, our ability to replace the individual and other primarily judgmental factors deemed relevant by our Board and Compensation Committee. The Compensation Committee does not use any specific benchmark in the determination of base salaries.
Base salaries are reviewed annually by our Compensation Committee and our Board, and adjusted from time to time pursuant to such review or at other appropriate times, in order to align salaries with market levels after taking into account individual responsibilities, performance and experience.
During 2016 and 2015 all of the Company’s named executive officers were paid employees.
Mr. Mann earns a base salary of $375,000 and is eligible for a performance bonus as described below.
Mr. Dove earns a base salary of $350,000 and is eligible for a performance bonus as described below. Further, beginning in 2017, Mr. Dove will participate in a share of the net profits and net losses earned by the Company on certain industrial auction principal and guarantee transactions. For further information on the profit share refer to Item 13 below, and to Note 9 to the consolidated financial statements.
Mr. Ludwig earns a base salary of $400,000 and is subject to the earn-out consideration from the acquisitions of NLEX in 2014, as further described in Notes 2 and 10 to the consolidated financial statements.
Bonuses
Bonus awards are designed to focus management attention on key operational goals for the current fiscal year. Our executives may earn a bonus based upon achievement of their specific operational goals and achievement by the Company or business unit of its financial targets. Cash bonus awards are distributed based upon the Company and the individual meeting performance criteria objectives. The final determination for all bonus payments is made by our Compensation Committee based on a subjective analysis of the foregoing elements.
We set bonuses based on a subjective analysis of certain performance measures in order to maximize and align the interests of our officers with those of our shareholders. Although performance goals are generally standard for determining bonus awards, we have and will consider additional performance rating goals when evaluating the bonus compensation structure of our executive
27
management. In addition, in instances where the employee has responsibility over a specific area, performance goals may be directly t
ied to the overall performance of that particular area.
Mr. Mann is eligible for a performance bonus calculated as follows: Mr. Mann is entitled to receive the first $50,000 of net operating income achieved by Equity Partners (“HEP NOI”). Equity Partners retains the next $175,000 of HEP NOI, and after it achieves HEP NOI of $175,000, the Equity Partners team receives 75% of the next $250,000, with the allocation among the Equity Partners team to be determined by Mr. Mann and the Company’s Chief Executive Officer, Mr. Ross Dove. After this, 50% of HEP NOI (i.e. HEP NOI in excess of $425,000) is allocated to the Equity Partners team for allocation as described above. In 2016 Mr. Mann earned a bonus of $50,000, and in 2015 he earned a bonus of $103,705.
For fiscal years 2016 and 2015, Mr. Dove was eligible to receive an annual bonus of up to 50% of his annual salary. He did not receive a bonus in either 2016 or 2015.
Effective January 1, 2017, Mr. Dove is eligible to receive a performance bonus calculated as follows: after the Company achieves consolidated net operating income of $1,733,000, and the Heritage Global Partners auction division achieves net operating income of $352,000, Mr. Dove may share in a bonus pool of $100,000 (to be shared also with other officers of the Company, collectively the “Management Group”), which will be allocated at management’s discretion. After this, the Management Group receive 10% of the first $500,000 of net operating income above $1,733,000 (net operating income from $1,733,000 – $2,233,000), and then 20% of the net operating income in excess of $2,233,000.
As the bonuses described above, with the exception of Mr. Mann’s bonus, can only be awarded at the discretion of the Compensation Committee, they do not encourage inappropriate risk-taking on the part of the named executive officers, nor represent a risk to the Company. As Mr. Mann’s bonus is closely tied to the Company’s performance, it also does not encourage inappropriate risk-taking on his part.
Equity Incentive Grants
In keeping with our philosophy of providing a total compensation package that favors at-risk components of pay, long-term incentives can comprise a significant component of our executives’ total compensation package. These incentives are designed to motivate and reward executives for maximizing shareowner value and encourage the long-term employment of key employees. Our objective is to provide executives with above-average, long-term incentive award opportunities.
We view stock options as our primary long-term compensation vehicle for our executive officers. Stock options generally are granted at slightly above the prevailing market price on the date of grant and will have value only if our stock price increases. Grants of stock options generally are based upon our performance, the level of the executive’s position, and an evaluation of the executive’s past and expected future performance. We do not time or plan the release of material, non-public information for the purpose of affecting the value of executive compensation.
We believe that stock options will continue to be used as the predominant form of stock-based compensation. In 2016 the Company’s named executives participated in a Company-wide stock option grant. As part of the grant the named executives received options to purchase an aggregate 825,000 shares of the Company’s common stock at a strike price of $0.45 per share. No options were granted to any of our named executive officers during 2015.
Other Benefits
The only additional benefits provided to the named executive officers during 2016 and 2015 were the payment of an automobile allowance of $14,029 to Mr. Ross Dove and the payment of club membership dues for Mr. Ludwig ($10,000 in both 2016 and 2015). There were no pension or change in control benefits in either 2016 or 2015.
Upon termination of employment by the Company without cause, Mr. Dove and Mr. Mann are each entitled to twelve months base salary and a pro rata share of the bonus payable in the fiscal year of termination. Any bonus payable is based on the termination date (provided that, as of the termination date, the performance criteria established with respect to the bonus for the fiscal year have been met), subject to certain conditions.
Upon termination of employment by the Company without cause, Mr. Ludwig is entitled to receipt of his base salary, payable in equal monthly installments, that would have been received, through the earlier of (a) the last day of his original employment period, or (b) the date on which the Company satisfies in full its obligation to pay Mr. Ludwig any earn-out obligations.
28
Tax Considerations
Section 162(m) of the Internal Revenue Code places limits on the deductibility of compensation in excess of $1.0 million paid to executive officers of publicly held companies. The Compensation Committee does not believe that Section 162(m) has had or will have any impact on the compensation policies followed by the Company.
Executive Compensation Process
Compensation Committee
Our Compensation Committee oversees and approves all compensation and awards made to the Chief Executive Officer, Chief Operating Officer/President, Chief Financial Officer and General Counsel. The Compensation Committee reviews the performance and compensation of the executive officers, without their participation, and establishes their compensation accordingly, with consultation from others when appropriate.
Executive and Director Compensation – Tabular Disclosure
Summary Compensation Table
The following table sets forth the aggregate compensation for services rendered during the fiscal years ended December 31, 2016 and 2015 by our named executive officers.
Name and
Principal
Position
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Year
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Salary
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Bonus
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Option
Awards
3
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All Other Compensation
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Total
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross Dove
|
|
2016
|
|
|
350,000
|
|
|
|
—
|
|
|
|
101,433
|
|
(3)
|
|
14,029
|
|
(1)
|
|
465,462
|
|
Chief Executive Officer
|
|
2015
|
|
|
350,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,029
|
|
(1)
|
|
364,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Mann
|
|
2016
|
|
|
375,000
|
|
|
|
50,000
|
|
|
|
93,630
|
|
(3)
|
|
—
|
|
|
|
518,630
|
|
Senior Managing Director, Equity Partners
|
|
2015
|
|
|
375,000
|
|
|
|
103,705
|
|
|
|
—
|
|
|
|
—
|
|
|
|
478,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Ludwig
|
|
2016
|
|
|
400,000
|
|
|
|
—
|
|
|
|
62,420
|
|
(3)
|
|
826,733
|
|
(2)
|
|
1,289,153
|
|
President, National Loan Exchange
|
|
2015
|
|
|
400,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
523,526
|
|
(2)
|
|
923,526
|
|
(1)
|
This amount represents an automobile allowance.
|
(2)
|
This amount includes the contingent consideration payment to David Ludwig in connection with the acquisition of NLEX in 2014, and membership dues. Membership dues paid on behalf of Mr. Ludwig were $10,218 and $10,365 for 2016 and 2015, respectively.
|
(3)
|
See “Grants of Plan-Based Awards,” below, for details regarding the assumptions made in the valuation of these option awards.
|
Grants of Plan-Based Awards
In 2016 the Company granted stock option awards to its executive officers as part of an employee wide option award grant. All option awards were granted with a strike price of $0.45 per share. The table below details the option awards granted to the Company’s executive officers in 2016. No grants were made to the named executive officers of the Company noted above during 2015.
Name
|
|
Title
|
Plan of Grant
|
Number of Securities Underlying Option Grant
|
|
Option Exercise Price ($/sh)
|
|
Option Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
Ross Dove
|
(1)
|
Chief Executive Officer, Director
|
2010 Non-Qualified Stock Option Plan
|
|
325,000
|
|
$
|
0.45
|
|
December 9, 2026
|
Kenneth Mann
|
(1)
|
Senior Managing Director, Equity Partners
|
2016 Stock Option Plan
|
|
300,000
|
|
$
|
0.45
|
|
December 9, 2026
|
David Ludwig
|
(1)
|
President, NLEX
|
2010 Non-Qualified Stock Option Plan
|
|
200,000
|
|
$
|
0.45
|
|
December 9, 2026
|
(1)
|
The options vest 25% annually beginning on the first anniversary of the December 9, 2016 grant date.
|
29
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth the detail of outstanding equity awards at December 31, 2016.
Name
|
|
Number of Securities Underlying Unexercised Options: Exercisable
|
|
|
|
Number of
Securities Underlying
Unexercised Options:
Unexercisable
|
|
|
|
Option
Exercise
Price($/Sh)
|
|
|
Option Expiration Date
|
Kenneth Mann
|
|
|
200,000
|
|
(2)
|
|
|
—
|
|
|
|
$
|
1.83
|
|
|
June 23, 2018
|
Kenneth Mann
|
|
|
112,500
|
|
(3)
|
|
|
37,500
|
|
(3)
|
|
$
|
1.00
|
|
|
March 11, 2020
|
Kenneth Mann
|
|
|
—
|
|
(4)
|
|
|
300,000
|
|
(4)
|
|
$
|
0.45
|
|
|
December 9, 2026
|
David Ludwig
|
|
|
—
|
|
(4)
|
|
|
200,000
|
|
(4)
|
|
$
|
0.45
|
|
|
December 9, 2026
|
Ross Dove
|
|
|
312,500
|
|
(1)
|
|
|
—
|
|
(1)
|
|
$
|
2.00
|
|
|
February 28, 2019
|
Ross Dove
|
|
|
—
|
|
(4)
|
|
|
325,000
|
|
(4)
|
|
$
|
0.45
|
|
|
December 9, 2026
|
(1)
|
These options are fully vested.
|
(2)
|
These options were part of the consideration paid to acquire Equity Partners on June 23, 2011 and vested immediately.
|
(3)
|
The options vest 25% annually beginning on the first anniversary of the March 11, 2013 grant date.
|
(4)
|
The options vest 25% annually beginning on the first anniversary of the December 9, 2016 grant date.
|
In 2016 the Company adopted the Heritage Global Inc. 2016 Stock Option Plan. Refer to Note 15 to the consolidated financial statements for further discussion of the Company’s stock-based compensation. There were no other adjustments or changes in the terms of any of the Company’s equity awards in 2016 or 2015.
Compensation of Directors
The following table sets forth the aggregate compensation for services rendered during the fiscal year ended December 31, 2016 by each person serving as a director.
Name
|
|
Fees Earned or Paid in Cash
|
|
|
Option Awards
(1)
|
|
|
Total
|
|
Allan C. Silber
|
(4)
|
$
|
100,000
|
|
|
$
|
9,721
|
|
|
$
|
109,721
|
|
Samuel L. Shimer
|
|
|
34,000
|
|
|
|
9,721
|
|
|
|
43,721
|
|
Morris Perlis
|
|
|
32,500
|
|
|
|
9,721
|
|
|
|
42,221
|
|
J. Brendan Ryan
|
|
|
31,500
|
|
|
|
9,721
|
|
|
|
41,221
|
|
Henry Y.L. Toh
|
(3)
|
|
20,000
|
|
|
|
1,918
|
|
|
|
21,918
|
|
Hal B. Heaton
|
(3)
|
|
18,500
|
|
|
|
1,918
|
|
|
|
20,418
|
|
David L. Turock
|
(3)
|
|
12,000
|
|
|
|
1,918
|
|
|
|
13,918
|
|
Michael Hexner
|
|
|
6,000
|
|
|
|
7,803
|
|
|
|
13,803
|
|
Ross Dove
|
(2)
|
|
—
|
|
|
|
101,433
|
|
|
|
101,433
|
|
(1)
|
The value included in this column represents the grant date fair value of the option award computed in accordance with FASB ASC Topic 718. The number of shares underlying stock options granted during 2016 for each of the directors listed in the table was as follows: Mr. Silber – 35,000; Mr. Perlis – 35,000; Mr. Ryan — 35,000; Mr. Shimer — 35,000; Mr. Hexner – 25,000; Mr. Toh — 10,000; Dr. Heaton — 10,000; Mr. Turock — 10,000.
|
(2)
|
Mr. Dove was not compensated as a director during 2016 due to the compensation he received for his employment as an officer of the Company during 2016.
|
(3)
|
Effective May 5, 2016, the Messrs. Toh, Heaton and Turock resigned from the Board of Directors of the Company and all committees thereof.
|
(4)
|
In 2015 Mr. Silber was paid a salary by the Company for his service as the Company’s President and Chief Executive Officer. In 2015 he was not compensated for his services as a member of the Board. Mr. Silber’s salary ended December 31, 2015, and effective January 1, 2016, Mr. Silber was compensated for his services as member of the Board in accordance with established fee policy for the Board.
|
30
Each director who is not employed by the Company receives a $20,000 per year cash retainer, $1,000 per meeting attended in person or by telephone, and an annual grant of stock options to purcha
se 10,000 shares of common stock, which is awarded in March of each year. In addition, the Chairman of the Board receives a cash retainer of $75,000 per year, the Chairman of the Audit Committee receives a cash retainer of $10,000 per year, Audit Committee
members who are not the chair receive a cash retainer of $5,000 per year, and other committee chairpersons receive an annual cash retainer of $2,000 per year. The directors are also eligible to receive options under our stock option plans at the discretio
n of the Board. In December 2016 each member of the Board of Directors received a discretionary grant of stock options to purchase 25,000 shares of common stock with an exercise price of $0.45 per share. The discretionary grant was done in connection with
the Company’s employee-wide stock option grant (refer to Note 15 to the consolidated financial statements for further information). In 2015 no such discretionary stock options were awarded.
Stock Option Plans
At December 31, 2016, the Company had four stock-based employee compensation plans, which are described in Note 15 of the consolidated financial statements included in Item 15 of this Report.
31
Item 12. Security Ownership of Certain Beneficial Ow
ners and Management and Related Stockholder Matters.
The following table sets forth information regarding the ownership of our common stock as of March 2, 2017, except as otherwise footnoted, by: (i) each director; (ii) each of the Named Executive Officers in the Summary Compensation Table; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock. As of March 2, 2017, there are 28,470,148 shares of common stock and 569 shares of Class N Preferred stock issued and outstanding. Each share of Class N Preferred Stock is entitled to 40 votes.
Name and Address of
Beneficial Owner (1)
|
|
Number of Shares
Beneficially Owned
(2)
|
|
|
|
Percentage
of Common Stock
Beneficially Owned
|
|
Allan C. Silber
|
|
|
4,663,645
|
|
(3)
|
|
|
15.5
|
%
|
Ross Dove
|
|
|
2,424,300
|
|
(4)
|
|
|
8.1
|
%
|
Kirk Dove
|
|
|
1,973,200
|
|
(4)
|
|
|
6.6
|
%
|
Zachary Capital L.P.
|
|
|
1,613,454
|
|
(5)
|
|
|
5.4
|
%
|
Morris Perlis
|
|
|
602,639
|
|
(6)
|
|
|
2.0
|
%
|
Kenneth Mann
|
|
|
444,467
|
|
(7)
|
|
|
1.5
|
%
|
David Ludwig
|
|
|
292,500
|
|
(8)
|
|
*%
|
|
Samuel L. Shimer
|
|
|
148,389
|
|
(9)
|
|
*%
|
|
J. Brendan Ryan
|
|
|
125,000
|
|
(10)
|
|
*%
|
|
Michael Hexner
|
|
|
—
|
|
|
|
*%
|
|
All Executive Officers and Directors as a
Group (11 people)
|
|
|
11,089,090
|
|
|
|
|
37.0
|
%
|
*
|
Indicates less than one percent.
|
(1)
|
Unless otherwise noted, all listed shares of common stock are owned of record by each person or entity named as beneficial owner and that person or entity has sole voting and dispositive power with respect to the shares of common stock owned by each of them. All addresses are c/o Heritage Global Inc. unless otherwise indicated.
|
(2)
|
As to each person or entity named as beneficial owners, that person’s or entity’s percentage of ownership is determined based on the assumption that any options or convertible securities held by such person or entity which are exercisable or convertible within 60 days have been exercised or converted, as the case may be.
|
(3)
|
Includes 250,000 shares of common stock issuable pursuant to options.
|
(4)
|
Includes 312,500 shares of common stock issuable pursuant to options, and 1,155,000 shares of common stock held of record by a trust that is jointly controlled by the Messrs. Dove.
|
(5)
|
Unrelated third party with beneficial ownership greater than 5.0%, based solely upon a Schedule 13G filed on July 21, 2015 with the SEC. Zachary Capital L.P.’s address is 12 Castle Street, Helier, Jersey, JE2 3RT.
|
(6)
|
Includes 250,000 shares of common stock issuable pursuant to options.
|
(7)
|
Includes 312,500 shares of common stock issuable pursuant to options. Mr. Mann’s address is c/o Equity Partners HG LLC, 16 N. Washington St, Easton, MD 21601.
|
(8)
|
Represents shares of common stock. Mr. Ludwig’s address is c/o National Loan Exchange Inc., 10 Sunset Hills Professional Center, Floor 1, Edwardsville, IL 62025.
|
(9)
|
Includes 45,000 shares of common stock issuable pursuant to options.
|
(10)
|
Includes 25,000 shares of common stock issuable pursuant to options.
|
There are no arrangements, known to the Company, including any pledge by any person of securities of the registrant or any of its parents, the operation of which may at a subsequent date result in a change of control of the registrant.
32
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth, as of December 31, 2016, information with respect to equity compensation plans (including individual compensation arrangements) under which the Company’s securities are authorized for issuance.
Plan Category (1)
|
|
Number of Securities to be issued upon exercise of outstanding options
|
|
|
Weighted-average
exercise price of
outstanding options
|
|
|
Number of
securities
remaining available
for future issuance
under equity
compensation plans (excluding
securities reflected
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved
by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Stock Option and Appreciation
Rights Plan
|
|
|
995,000
|
|
|
$
|
1.78
|
|
|
—
|
|
Heritage Global Inc. 2016 Stock Option Plan
|
|
|
2,539,200
|
|
|
$
|
0.45
|
|
|
|
610,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Non-Qualified Stock Option Plan
|
|
|
780,000
|
|
|
$
|
0.46
|
|
|
|
470,000
|
|
Equity Partners Plan
|
|
|
230,000
|
|
|
$
|
1.83
|
|
|
—
|
|
Options issued upon acquisition of HGP
|
|
|
625,000
|
|
|
$
|
2.00
|
|
|
—
|
|
Total
|
|
|
5,169,200
|
|
|
$
|
0.96
|
|
|
|
1,080,800
|
|
(1)
|
For a description of the material terms of these plans, see Note 15 to the Company’s consolidated financial statements included in Item 15 of this Report.
|
33
Item 13. Certain Relationships and Relat
e
d Transactions, and Director Independence.
Transactions with Management and Others
See Item 7 hereof for discussion of the Company’s changes in the ownership and control by Street Capital, its former majority owner and parent. See Item 11 hereof for descriptions of the terms of employment, consulting and other agreements between the Company and certain officers and directors.
Transactions with Street Capital
Allan Silber, the Chairman of the Company’s Board, is also the Chairman of Street Capital.
Loan Agreement
The Street Capital Loan was originally entered into in 2003 and accrued interest at 10% per annum compounded quarterly from the date funds were advanced. The Street Capital Loan was secured by the assets of the Company.
In 2014, following Street Capital’s distribution of its ownership interest in the Company to Street Capital shareholders as a dividend in kind, the unpaid balance of the Street Capital Loan began accruing interest at a rate per annum equal to the lesser of the Wall St. Journal (“WSJ”) prime rate + 2.0%, or the maximum rate allowable by law. As of December 31, 2015, the interest rate on the loan was 5.50%.
In the third quarter of 2016, following an amendment to the loan agreement, the Street Capital Loan began accruing interest at a rate per annum equal to the WSJ prime rate + 1.0%. The Company also agreed to a payment schedule to begin in the third quarter of 2016, and Street Capital removed the security from the Company’s assets. As of December 31, 2016, the interest rate on the loan was 4.75%. See Note 13 to the consolidated financial statements for further discussion of transactions with
Street Capital
.
During 2016, the largest amount outstanding under the Street Capital Loan was $1.7 million, which occurred during the third quarter of 2016. During 2016, the Company made payments on the loan of $0.8 million. As of March 2, 2017, the outstanding balance of the loan was $0.8 million.
Street Capital Services Provided to the Company
Beginning in 2004, HGI and Street Capital entered into successive annual management services agreements (collectively, the “Agreement”). Under the terms of the Agreement, HGI agreed to pay Street Capital for ongoing services provided to HGI by Street Capital personnel. These services included preparation of the Company’s financial statements and regulatory filings, taxation matters, stock-based compensation administration, Board administration, patent portfolio administration and litigation matters.
In 2013, Street Capital announced its plan to dispose of its interest in HGI, and on March 20, 2014, Street Capital declared a dividend in kind, consisting of Street Capital’s distribution of its majority interest in HGI to Street Capital shareholders. The dividend was paid on April 30, 2014 to shareholders of record as of April 1, 2014.
Following this disposition, the Company and Street Capital entered into a replacement management services agreement (the “Services Agreement”). Under the terms of the Services Agreement, Street Capital remained as external manager and continued to provide the same services, at similar rates, until the Services Agreement was terminated effective August 31, 2015, as described more fully in the Current Report on Form 8-K filed with the SEC on September 1, 2015. See Note 13 to the consolidated financial statements for details of the amounts expensed during 2016 and 2015 relating to services provided by Street Capital under the agreements.
Transactions with Other Related Parties
Through April 2016, as part of the operations of HGP the Company leased office space in Foster City, CA that is owned by an entity jointly controlled by Ross Dove and Kirk Dove, the Company’s Chief Executive Officer and President and Chief Operating Officer, respectively (“Ross and Kirk”). The Company terminated the lease agreement in the second quarter of 2016. The total amount paid for the lease was $76,000 and $0.2 million in 2016 and 2015, respectively, and as a result, the total amount paid to both Ross Dove and Kirk Dove, individually, was $38,000 and $0.1 million in 2016 and 2015, respectively.
34
As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig. The total amount paid for the
lease in both 2016 and 2015 was $0.1 million, which was paid in its entirety directly to David Ludwig.
In the first quarter of 2016, the Company entered into a related party loan with a trust controlled by Ross and Kirk. The Company received proceeds of $0.4 million. The loan accrued interest at 10% per annum and was payable within 90 days of the loan date. The Company repaid the loan plus accrued interest of $8,000 in March 2016. The total amount paid to both Ross Dove and Kirk Dove, individually, was $4,000.
During 2016, the largest amount outstanding under the loan was $0.4 million, which occurred during the first quarter of 2016.
In the third quarter of 2016, the Company entered into a related party loan with both an entity owned by Ross and Kirk (the “Entity”), and Ross Dove. The Company received proceeds of $0.7 million. The loan accrued interest at 10% per annum and was payable within 180 days of the loan date. The Company repaid the loan plus accrued interest of $19,000 as of December 31, 2016. The total amount paid Ross Dove was approximately $0.4 million. The total amount paid to Kirk Dove was approximately $0.3 million.
During 2016, the largest amount outstanding under the loan with the Company’s Chief Executive Officer and the Entity was $0.7 million, which occurred during the third quarter of 2016.
In the fourth quarter of 2016, the Company entered into a related party secured promissory note with the Entity for a revolving line of credit (the “Line of Credit”). Under the terms of the Line of Credit, the Company received a revolving line of credit with an aggregate borrowing capacity of $1.5 million. Interest under the Line of Credit is charged at a variable rate. Aggregate loans under the Line of Credit up to $1.0 million incur interest at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%. Amounts outstanding at any time in excess of $1.0 million incur interest at a rate of 8.0% per annum. The Company is required to pay the Entity an annual commitment fee of $15,000, payable on a monthly basis, and due regardless of amounts drawn against the line. Further, the Entity is eligible to participate in the net profits and net losses of certain industrial auction principal and guarantee transactions entered into by the Company on or after January 1, 2017, and consummated on or prior to the maturity date. Principal transactions are those in which the Company purchases assets for resale. Guarantee transactions are those in which the Company guarantees its client a minimum amount of proceeds from the auction.
The Line of Credit matures at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following the date the Company closes a new credit facility with a financial institution
. For additional information on the Line of Credit refer to the Form 8-K filed with the SEC on December 27, 2016. There were no payments made to the Entity in 2016 related to the Line of Credit. Ross Dove and Kirk Dove each have an equal 50% share in the future payments made to the Entity. The Company did not draw on the Line of Credit during 2016, and did not incur nor pay any interest.
In connection with the acquisition of NLEX in 2014, the Company pays the former owner and current president of NLEX (“David Ludwig”) an earn-out provision, calculated as 50% of the Net Profits (as defined in the NLEX stock purchase agreement) of NLEX for each of the four years following the closing of the acquisition. The future payments expected to be made to David Ludwig under the earn-out provision are included within the consolidated balance sheet as contingent consideration. During 2016 the Company made its second earn-out payment to David Ludwig, in the amount of $0.8 million.
Director Independence
Our securities are quoted on the OTC market and the Canadian Securities Exchange. Our Board applies “independence” requirements and standards under the NASDAQ Marketplace Rules. Pursuant to the requirements, the Board annually undertakes a review of director independence. During this review, the Board considers transactions and relationships between each director or any member of his or her immediate family and HGI and its subsidiaries and affiliates. The purpose of this review is to determine whether any such relationships or transactions exist that are inconsistent with a determination that the director is independent. As a result of this review in 2016, the Board affirmatively determined that during 2016 Messrs. Hexner, Ryan, Shimer, and Perlis were deemed “independent” as defined under the NASDAQ Marketplace Rules. The Board further determined that each of the foregoing directors met the independence and other requirements, including the Audit Committee membership independence requirements, needed to serve on the Board committees for which they serve.
Item 14. Principal Accountant Fees and Services.
The Audit Committee has selected Squar Milner LLP (“Squar Milner”) as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2016. Squar Milner has served as our independent registered public accounting firm since the fiscal year ended December 31, 2014. All fees paid to independent registered public accounting firms were pre-approved by the Audit Committee.
The following is a summary of the fees paid or expected to be paid to Squar Milner for professional services rendered for the
35
fiscal years ended December 31, 2016 and 2015
(in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Audit fees
|
|
$
|
128
|
|
|
$
|
127
|
|
Audit-related fees, tax fees, and all other fees
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
128
|
|
|
$
|
127
|
|
Audit Fees
Audit fees are for professional services for the audit of our annual financial statements, the reviews of the financial statements included in our Quarterly Reports on Form 10-Q, and services in connection with our statutory and regulatory filings.
Audit-Related Fees
Audit-related fees are for assurance and related services that are reasonably related to the audit and reviews of our financial statements, exclusive of the fees disclosed as Audit Fees above. These fees include benefit plan audits and accounting consultations.
Tax Fees
Tax fees are for services related to tax compliance, consulting and planning services and include preparation of tax returns, review of restrictions on net operating loss carryforwards and other general tax services. For 2016 and 2015, these services were provided by an independent accounting firm other than Squar Milner.
All Other Fees
We did not incur fees for any other services provided by our principal accountant during the years ended December 31, 2016 and 2015.
Audit and Non-Audit Service Pre-Approval Policy
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, the Audit Committee has adopted an informal approval policy to pre-approve services performed by the independent registered public accounting firm. All proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the Chairman of the Audit Committee and the Chief Financial Officer. The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee. If there is any question as to whether a proposed service fits within a pre-approved service, the Audit Committee chair is consulted for a determination. The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent registered public accounting firm that the request or application is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its Chairman or any of its other members pursuant to delegated authority) for approval. All fees related to audit services during 2016 were pre-approved by the Audit Committee.
Audit Services.
Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent registered public accounting firm to be able to form an opinion on our financial statements. The Audit Committee pre-approves specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically pre-approved by the Audit Committee. The Audit Committee monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope or other items.
Audit-Related Services.
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements which historically have been provided to us by the independent registered public accounting firm and are consistent with the SEC’s rules on auditor independence. The Audit Committee pre-approves specified audit-related services within pre-approved fee levels. All other audit-related services must be pre-approved by the Audit Committee.
Tax Services.
The Audit Committee pre-approves specified tax services that the Audit Committee believes would not impair the independence of the independent registered public accounting firm and that are consistent with SEC rules and guidance. All other tax services must be specifically approved by the Audit Committee.
36
All Other Services.
Other services are services provided by the independent registered public accounting firm that do not fall within the established audit, audit-related and
tax services categories. The Audit Committee pre-approves specified other services that do not fall within any of the specified prohibited categories of services.
37
Report of Independent Regis
tered Public Accounting Firm
To the Board of Directors and Stockholders of
Heritage Global Inc.
We have audited the accompanying consolidated balance sheets of Heritage Global Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heritage Global Inc. and subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ SQUAR MILNER LLP
San Diego, California
March 7, 2017
F-2
HERITAGE GLOBAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except share amounts)
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,530
|
|
|
$
|
2,777
|
|
Accounts receivable, net
|
|
|
1,247
|
|
|
|
639
|
|
Inventory – equipment
|
|
|
263
|
|
|
|
395
|
|
Other current assets
|
|
|
393
|
|
|
|
453
|
|
Total current assets
|
|
|
4,433
|
|
|
|
4,264
|
|
Inventory – real estate
|
|
|
—
|
|
|
|
3,715
|
|
Property and equipment, net
|
|
|
156
|
|
|
|
110
|
|
Intangible assets, net
|
|
|
4,122
|
|
|
|
4,382
|
|
Goodwill
|
|
|
6,158
|
|
|
|
6,158
|
|
Other assets
|
|
|
275
|
|
|
|
173
|
|
Total assets
|
|
$
|
15,144
|
|
|
$
|
18,802
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
6,746
|
|
|
$
|
6,639
|
|
Current portion of related party debt
|
|
|
664
|
|
|
|
1,721
|
|
Current portion of contingent consideration
|
|
|
961
|
|
|
|
865
|
|
Other current liabilities
|
|
|
199
|
|
|
|
131
|
|
Total current liabilities
|
|
|
8,570
|
|
|
|
9,356
|
|
Non-current portion of related party debt
|
|
|
348
|
|
|
|
—
|
|
Non-current portion of third party debt
|
|
|
—
|
|
|
|
2,500
|
|
Non-current portion of contingent consideration
|
|
|
1,772
|
|
|
|
2,592
|
|
Deferred tax liabilities
|
|
|
960
|
|
|
|
960
|
|
Total liabilities
|
|
|
11,650
|
|
|
|
15,408
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and
outstanding 569 Class N shares at December 31, 2016 and December 31, 2015
|
|
|
6
|
|
|
|
6
|
|
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and
outstanding 28,470,148 shares at December 31, 2016 and 28,467,648 shares
at December 31, 2015
|
|
|
285
|
|
|
|
285
|
|
Additional paid-in capital
|
|
|
284,149
|
|
|
|
284,046
|
|
Accumulated deficit
|
|
|
(280,875
|
)
|
|
|
(280,889
|
)
|
Accumulated other comprehensive loss
|
|
|
(71
|
)
|
|
|
(54
|
)
|
Total stockholders’ equity
|
|
|
3,494
|
|
|
|
3,394
|
|
Total liabilities and stockholders’ equity
|
|
$
|
15,144
|
|
|
$
|
18,802
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HERITAGE GLOBAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands of US dollars, except per share amounts)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Services revenue
|
|
$
|
15,371
|
|
|
$
|
13,485
|
|
Asset sales
|
|
|
8,410
|
|
|
|
3,946
|
|
Total revenues
|
|
|
23,781
|
|
|
|
17,431
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of services revenue
|
|
|
4,187
|
|
|
|
3,125
|
|
Cost of asset sales
|
|
|
7,131
|
|
|
|
3,412
|
|
Real estate inventory write-down
|
|
|
—
|
|
|
|
2,748
|
|
Selling, general and administrative
|
|
|
12,009
|
|
|
|
12,774
|
|
Depreciation and amortization
|
|
|
316
|
|
|
|
575
|
|
Impairment of goodwill and intangible assets
|
|
|
—
|
|
|
|
5,437
|
|
Total operating costs and expenses
|
|
|
23,643
|
|
|
|
28,071
|
|
Earnings of equity method investments
|
|
|
52
|
|
|
|
286
|
|
Operating income (loss)
|
|
|
190
|
|
|
|
(10,354
|
)
|
Other income
|
|
|
119
|
|
|
|
69
|
|
Fair value adjustment of contingent consideration
|
|
|
(92
|
)
|
|
|
228
|
|
Interest expense
|
|
|
(182
|
)
|
|
|
(349
|
)
|
Income (loss) before income tax expense
|
|
|
35
|
|
|
|
(10,406
|
)
|
Income tax expense
|
|
|
21
|
|
|
|
15
|
|
Net income (loss)
|
|
|
14
|
|
|
|
(10,421
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
28,400,886
|
|
|
|
28,252,219
|
|
Weighted average common shares outstanding – diluted
|
|
|
28,434,832
|
|
|
|
28,252,219
|
|
Net income (loss) per share – basic
|
|
$
|
0.00
|
|
|
$
|
(0.37
|
)
|
Net income (loss) per share – diluted
|
|
$
|
0.00
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14
|
|
|
$
|
(10,421
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(17
|
)
|
|
|
(20
|
)
|
Comprehensive loss
|
|
$
|
(3
|
)
|
|
$
|
(10,441
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HERITAGE GLOBAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands of US dollars, except share amounts)
|
|
Preferred stock
|
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Accumulated
other
comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
income (loss)
|
|
|
Total
|
|
Balance at December 31, 2014
|
|
|
575
|
|
|
$
|
6
|
|
|
|
28,167,408
|
|
|
$
|
282
|
|
|
$
|
283,691
|
|
|
$
|
(270,468
|
)
|
|
$
|
(34
|
)
|
|
$
|
13,477
|
|
Conversion of Class N
preferred shares
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock from
restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
358
|
|
|
|
—
|
|
|
|
—
|
|
|
|
358
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,421
|
)
|
|
|
—
|
|
|
|
(10,421
|
)
|
Foreign currency translation
adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Balance at December 31, 2015
|
|
|
569
|
|
|
|
6
|
|
|
|
28,467,648
|
|
|
|
285
|
|
|
|
284,046
|
|
|
|
(280,889
|
)
|
|
|
(54
|
)
|
|
|
3,394
|
|
Issuance of common stock from
stock option awards
|
|
|
—
|
|
|
|
—
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Forfeiture of unvested common stock from restricted stock awards
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
Foreign currency translation
adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Balance at December 31, 2016
|
|
|
569
|
|
|
$
|
6
|
|
|
|
28,470,148
|
|
|
$
|
285
|
|
|
$
|
284,149
|
|
|
$
|
(280,875
|
)
|
|
$
|
(71
|
)
|
|
$
|
3,494
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HERITAGE GLOBAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14
|
|
|
$
|
(10,421
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Accrued management fees and other charges added to principal of related party
debt
|
|
|
—
|
|
|
|
290
|
|
Accrued interest added to principal of related party debt
|
|
|
65
|
|
|
|
90
|
|
Fair value adjustment of contingent consideration
|
|
|
92
|
|
|
|
(228
|
)
|
Stock-based compensation expense
|
|
|
99
|
|
|
|
358
|
|
Real estate inventory write-down
|
|
|
—
|
|
|
|
2,748
|
|
Earnings of equity method investments
|
|
|
(49
|
)
|
|
|
(291
|
)
|
Depreciation and amortization
|
|
|
316
|
|
|
|
575
|
|
Impairment of goodwill and intangible assets
|
|
|
—
|
|
|
|
5,437
|
|
Return on investment in equity method investments
|
|
|
93
|
|
|
|
680
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(601
|
)
|
|
|
216
|
|
Inventory - real estate and equipment
|
|
|
3,847
|
|
|
|
(211
|
)
|
Other assets
|
|
|
(37
|
)
|
|
|
299
|
|
Accounts payable and accrued liabilities
|
|
|
75
|
|
|
|
(378
|
)
|
Net cash provided by (used in) operating activities
|
|
|
3,914
|
|
|
|
(836
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
|
Cash distributions from equity method investments
|
|
|
20
|
|
|
|
850
|
|
Proceeds from sale of equity method investments
|
|
|
—
|
|
|
|
1,992
|
|
Investment in equity method investments
|
|
|
—
|
|
|
|
(143
|
)
|
Purchase of property and equipment
|
|
|
(99
|
)
|
|
|
(9
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(79
|
)
|
|
|
2,690
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from debt payable to related party
|
|
|
1,099
|
|
|
|
775
|
|
Repayment of debt payable to related party
|
|
|
(1,873
|
)
|
|
|
(2,419
|
)
|
Repayment of debt payable to third parties
|
|
|
(2,500
|
)
|
|
|
(525
|
)
|
Payment of contingent consideration
|
|
|
(816
|
)
|
|
|
(513
|
)
|
Proceeds from exercise of options to purchase common shares
|
|
|
4
|
|
|
|
—
|
|
Net cash used in financing activities
|
|
|
(4,086
|
)
|
|
|
(2,682
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(251
|
)
|
|
|
(828
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
4
|
|
|
|
(28
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
2,777
|
|
|
|
3,633
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,530
|
|
|
$
|
2,777
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
30
|
|
|
$
|
75
|
|
Cash paid for interest
|
|
$
|
187
|
|
|
$
|
178
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HERITAGE GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Description of Business and Principles of Consolidation
These consolidated financial statements include the accounts of Heritage Global Inc. together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), Equity Partners HG LLC (“Equity Partners”), National Loan Exchange Inc. (“NLEX”) and Heritage Global LLC (“HG LLC”). 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’s sole operating segment is its asset liquidation business, which began operations in 2009 with the establishment of HG LLC. The business was subsequently expanded by the acquisitions of Equity Partners, HGP and NLEX in 2011, 2012 and 2014, respectively. 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 financial solutions for distressed businesses and properties.
Note 2 – Summary of Significant Accounting Policies
Use of estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Significant estimates include the assessment of collectability of revenue recognized and the valuation of accounts receivable, inventory, investments, goodwill and intangible assets, liabilities, contingent consideration, deferred income tax assets and liabilities, and stock-based compensation. These estimates have the potential to significantly impact our consolidated financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.
Foreign Currency
The functional currency of foreign operations is deemed to be the local country’s currency. Assets and liabilities of operations outside of the United States are generally translated into U.S dollars, and the effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive loss.
Reclassifications
Certain prior year balances within the consolidated financial statements have been reclassified to conform to current year presentation.
Nature of Business
The Company earns revenue both from commission or fee-based services, and from the sale of distressed or surplus assets. With respect to the former, revenue is recognized as the services are provided. With respect to the latter, the majority of the asset sale transactions are conducted directly by the Company and the revenue is recognized in the period in which the asset is sold. Fee based revenue is reported as services revenue, and the associated direct costs are reported as cost of services revenue. At the balance sheet date, any unsold assets which the Company owns are reported as inventory, any outstanding accounts receivable are included in the Company’s accounts receivable, and any associated liabilities are included in the Company’s accrued liabilities. Equipment inventory is expected to be sold within a year and is therefore classified as a current asset; however, real estate inventory is generally classified as non-current due to the uncertainty in the timing of its sale.
The remaining asset sale transactions 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”). These transactions are
F-7
accounted for as equity
method investments, and, accordingly, the Company’s proportionate share of the net income (loss) is reported as earnings of equity method investments. At each balance sheet date, the Company’s investments in these Joint Ventures are reported in the consoli
dated balance sheet as equity method investments. Although the Company generally expects to exit each of its investments in Joint Ventures in less than one year, they are classified on the balance sheet as non-current assets
due to the uncertainties relati
ng to the timing of resale of the underlying assets as a result of the Joint Venture relationship
.
The Company monitors the value of the Joint Ventures’ underlying assets and liabilities, and records a write down of its investments if the Company concludes
that there has been a decline in the value of the net assets. As the activity of the Joint Ventures involves asset purchase/resale transactions, which is similar in nature to the Company’s other asset liquidation activities, the earnings (losses) of the J
oint Ventures are included in the operating income/loss in the accompanying consolidated statements of operations.
Liquidity
The Company has incurred significant operating losses for the past several years and has partially relied on debt financing to fund its operations. As of December 31, 2016, the Company had an accumulated deficit of $280.9 million and a working capital deficit of $4.1 million. Until the Company achieves profitability, it will need to continue to partially rely on debt financing to fund its operations. Management expects that a combination of the Company’s asset liquidation operations and debt financing will generate cash flow sufficient to fund the Company’s operations through the one year period subsequent to the financial statement issuance date, and beyond.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents with financial institutions in the United States and Spain. These accounts may from time to time exceed federally insured limits. The Company has not experienced any losses on such accounts.
Accounts receivable
The Company’s accounts receivable primarily relate to the operations of its asset liquidation business. They generally consist of three major categories: (1) fees, commissions and retainers relating to appraisals and auctions, (2) receivables from asset sales, and (3) receivables from Joint Venture partners. The initial value of an account receivable corresponds to the fair value of the underlying goods or services. To date, a majority of the receivables have been classified as current and, due to their short-term nature, any decline in fair value would be due to issues involving collectability. At each financial statement date the collectability of each outstanding account receivable is evaluated, and an allowance is recorded if the book value exceeds the amount that is deemed collectable. See Note 8 for more detail regarding the Company’s accounts receivable.
Inventory
The Company’s inventory consists of assets acquired for resale, which are normally expected to be sold within a one-year operating cycle. The inventory is recorded at the lower of cost or net realizable value. During the year ended December 31, 2015, the Company recorded an inventory write-down charge of $2.7 million to reduce the carrying value of its real estate inventory to its net realizable value. No such similar charge was required during the year ended December 31, 2016, as the Company sold its real estate inventory for an amount greater than its carrying value. See Note 3 for further discussion of the Company’s inventory real estate inventory.
Fair value of financial instruments
The fair value of financial instruments is the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. At December 31, 2016 and 2015, the carrying values of the Company’s cash, accounts receivable, deposits, other assets, accounts payable and accrued liabilities approximate fair value given the short term nature of these instruments. The Company’s debt obligations approximate fair value as a result of the interest rate on the debt obligation approximating prevailing market rates.
There are three levels within the fair value hierarchy: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – significant other observable inputs; and Level 3 – significant unobservable inputs. The Company employs fair value accounting for only the contingent consideration recorded as part of the acquisition of NLEX. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market and therefore fall within Level 3. See Note 10 for more discussion of this contingent consideration.
Business combinations
Acquisitions are accounted for under FASB Accounting Standards Codification Topic 805,
Business Combinations
(“ASC 805”), which requires that assets acquired and liabilities assumed that are deemed to be a business are recorded based on their respective acquisition date fair values. ASC 805 further requires that separately identifiable intangible assets be recorded at their acquisition date
F-8
fair values and that the excess of consideration paid over the fair value of assets acquired and liabilities assumed (including identifiable intangible assets) should be r
ecorded as goodwill.
Intangible assets
Intangible assets are recorded at fair value upon acquisition. Those with an estimated useful life are amortized, and those with an indefinite useful life are unamortized. Subsequent to acquisition, the Company monitors events and changes in circumstances that require an assessment of intangible asset recoverability. Indefinite-lived intangible assets are assessed at least annually to determine both if they remain indefinite-lived and if they are impaired. The Company assesses whether or not there have been any events or changes in circumstances that suggest the value of the asset may not be recoverable. Amortized intangible assets are not tested annually, but are assessed when events and changes in circumstances suggest the assets may be impaired. If an assessment determines that the carrying amount of any intangible asset is not recoverable, an impairment loss is recognized in the statement of operations, determined by comparing the carrying amount of the asset to its fair value. All of the Company’s identifiable intangible assets at December 31, 2016 have been acquired as part of the acquisitions of HGP in 2012 and NLEX in 2014, and are discussed in more detail in Note 7. During 2015 the Company recorded an impairment charge of $2.7 million related to the customer network acquired as part of the acquisition of HGP. No impairment charges were necessary during 2016. See Note 7 for more detail regarding the Company’s identifiable intangible assets.
Goodwill
Goodwill, which results from the difference between the purchase price and the fair value of net identifiable tangible and intangible assets acquired in a business combination, is not amortized but, in accordance with GAAP, is tested at least annually for impairment. The Company performs its annual impairment test as of October 1. Testing goodwill is a two-step process, in which the carrying amount of the reporting unit associated with the goodwill is first compared to the reporting unit’s estimated fair value. If the carrying amount of the reporting unit exceeds its estimated fair value, the fair values of the reporting unit’s assets and liabilities are analyzed to determine whether the goodwill of the reporting unit has been impaired. An impairment loss is recognized to the extent that the Company’s recorded goodwill exceeds its implied fair value as determined by this two-step process. FASB Accounting Standards Update 2011-08,
Testing Goodwill for Impairment
, provides the option to perform a qualitative assessment prior to performing the two-step process, which may eliminate the need for further testing. Goodwill, in addition to being tested for impairment annually, is tested for impairment at interim periods if an event occurs or circumstances change such that it is more likely than not that the carrying amount of goodwill may be impaired.
In testing goodwill, the Company initially uses a qualitative approach and analyzes relevant factors to determine if events and circumstances have affected the value of the goodwill. If the result of this qualitative analysis indicates that the value has been impaired, the Company then applies a quantitative approach to calculate the difference between the goodwill’s recorded value and its fair value. An impairment loss is recognized to the extent that the recorded value exceeds its fair value. All of the Company’s goodwill relates to its acquisitions of Equity Partners in 2011, HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 7. During 2015 the Company recorded an impairment charge of $2.7 million related to the goodwill from its acquisition of HGP. No impairment charges were necessary during 2016.
Deferred income taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. In 2014, as a result of incurring losses in previous years, the Company recorded a valuation allowance against all of its net deferred tax assets. The Company continues to carry the full valuation allowance as of December 31, 2016.
Contingent consideration
At December 31, 2016 the Company’s contingent consideration consists of the estimated fair value of remaining payments pursuant to an earn-out provision payable to the former owner and current president of NLEX (“David Ludwig”) that was part of the consideration for the acquisition of NLEX in 2014. The estimated fair value assigned to the contingent consideration at the acquisition date was determined using a discounted cash flow analysis. Its fair value is assessed quarterly, and any adjustments, together with the accretion of the present value discount, are reported as a fair value adjustment on the Company’s consolidated statement of operations. In the fourth quarter of 2016 the Company agreed in principle with David Ludwig to extend the earn-out provision. The extension of the earn-out is subject to ratification by the Board of Directors. As a result, and based on management’s best estimate as of December 31, 2016 that the earn-out will be extended by at least one year, the Company adjusted the earn-out liability in the fourth quarter of 2016 by approximately $1.0 million to reflect an increase in the expected payments to be made to David Ludwig. See Note 10 to the consolidated financial statements for more discussion of the contingent consideration.
F-9
Liabilities and contingencies
The Company is involved from time to time in various legal matters arising out of its operations in the normal course of business. On a case by case basis, the Company evaluates the likelihood of possible outcomes for this litigation. Based on this evaluation, the Company determines whether a loss accrual is appropriate. If the likelihood of a negative outcome is probable, and the amount can be estimated, the Company accounts for the estimated loss in the current period.
Revenue recognition
Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions and providing merger and acquisition advisory services. Revenue is recognized when persuasive evidence of an arrangement exists, the selling price is fixed and determinable, goods or services have been provided, and collectability is reasonably assured. For asset sales revenue is recognized in the period in which the asset is sold, the buyer has assumed the risks and awards of ownership, the Company has no continuing substantive obligations and collectability is reasonably assured.
We evaluate revenue from asset liquidation transactions in accordance with the accounting guidance to determine whether to report such revenue on a gross or net basis. We have determined that we act as an agent for our fee based asset liquidation transactions and therefore we report the revenue from transactions in which we act 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, 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.
Cost of services revenue and asset sales
Cost of services revenue generally includes the direct costs associated with generating commissions and fees from the Company’s auction and appraisal services, merger and acquisition advisory services, and brokering of charged-off receivable portfolios. The Company recognizes these expenses in the period in which the revenue they relate to is recorded. Cost of asset sales generally includes the cost of purchased inventory and the related direct costs of selling inventory. The Company recognizes these expenses in the period in which title to the inventory passes to the buyer, and the buyer assumes the risk and reward of the inventory.
Stock-based compensation
The Company’s stock-based compensation is primarily in the form of options to purchase common shares. The grant date fair value of stock options is calculated using the Black-Scholes option pricing model. The determination of the fair value of the Company’s stock options is based on a variety of factors including, but not limited to, the price of the Company’s common stock, the expected volatility of the stock price over the expected life of the award, and expected exercise behavior. The grant date fair value of the awards is subsequently expensed over the vesting period. The provisions of the Company’s stock-based compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore the Company classifies the option awards as equity. See Note 15 for further discussion of the Company’s stock-based compensation.
Advertising
The Company expenses advertising costs in the period in which they are incurred. Advertising and promotion expense included in selling, general and administrative expense for both the years ended December 31, 2016 and 2015, was $0.4 million.
Recently adopted accounting pronouncements
In 2014, the FASB issued Accounting Standards update 2014-15,
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”). ASU 2014-15 requires management to determine whether substantial doubt exists regarding the entity’s going concern presumption, which generally refers to an entity’s ability to meet its obligations as they become due, and provides guidance on determining when and how to disclose going-concern uncertainties in an entity’s financial statements. It requires management to perform both interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. The ASU contains guidance on 1) how to perform a going-concern assessment, and 2) when to provide going-concern disclosures. An entity must provide specified disclosures if conditions or events raise substantial doubt about its ability to continue as a going concern. ASU 2014-15 became effective for annual periods ending after December 15, 2016. The Company adopted ASU 2014-15 in the fourth quarter of 2016. Management concluded that there were no conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the financial statements are issued.
F-10
In 2015, the FASB issued Accounting Standards update 2015-01,
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
(“ASU 2015-01”). ASU 2015-01 eliminates the requirement for entities to consider whether an underlying event or transaction is extraordinary, and, if so, to separately present the item in the income statement net of tax, after income from continuing opera
tions. Instead, items that are both unusual and infrequent should be separately presented as a component of income from continuing operations, or be disclosed in the notes to the financial statements. ASU 2015-01 became effective January 1, 2016 and did n
ot have a material impact on the Company’s consolidated financial statements.
In 2015, the FASB issued Accounting Standards update 2015-02,
Amendments to the Consolidation Analysis
(“ASU 2015-02”). ASU 2015-02 eliminates entity-specific consolidation guidance for limited partnerships, and revises other aspects of the consolidation analysis, but does not change the existing consolidation guidance for corporations that are not variable interest entities (“VIEs”). ASU 2015-02 became effective January 1, 2016 and did not have a material impact on the Company’s consolidated financial statements.
In 2015, the FASB issued Accounting Standards update 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). ASU 2015-03 changes the presentation of debt issuance costs in financial statements, by requiring them to be presented in the balance sheet as a direct deduction from the related debt liability, rather than as an asset. Amortization of the costs is reported as interest expense. There is no change to the current guidance on the recognition and measurement of debt issuance costs. ASU 2015-03 became effective January 1, 2016 and did not have a material impact on the Company’s consolidated financial statements.
In 2015, the FASB issued Accounting Standards update 2015-15,
Interest – Imputation of Interest
, (“ASU 2015-15”). ASU 2015-15 amends subtopic 835-30 of the ASC (which was previously amended by ASU 2015-03) to allow for the capitalization of debt issuance costs related to line of credit agreements. Capitalized costs would be presented as an asset and subsequently amortized ratably over the term of the line of credit. ASU 2015-15 became effective January 1, 2016 and did not have a material impact on the Company’s consolidated financial statements.
In 2015, the FASB issued Accounting Standards update 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
(“ASU 2015-16”). ASU 2015-16 changes the recognition of business combination adjustments by requiring acquirers to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to record the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts. These amounts are calculated as if the accounting was completed at acquisition date. The acquirer is also required to present separately on the face of the income statement, or disclose in the notes, the amount recorded in current-period earnings (by line item) that would have been recorded in previous reporting periods had the adjustments been recognized as of the acquisition date. ASU 2015-16 became effective January 1, 2016 and did not have a material impact on the Company’s consolidated financial statements.
Future accounting pronouncements
In 2014, the FASB issued Accounting Standards update 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). ASU 2014-09 specifies a comprehensive model to be used in accounting for revenue arising from contracts with customers, and supersedes most of the current revenue recognition guidance, including industry-specific guidance. It applies to all contracts with customers except those that are specifically within the scope of other FASB topics, and certain of its provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities. The core principal of the model is that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the transferring entity expects to be entitled in exchange. To apply the revenue model, an entity will: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For public companies, ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is not permitted. Upon adoption, entities can choose to use either a full retrospective or modified approach, as outlined in ASU 2014-09. As compared with current GAAP, ASU 2014-09 requires significantly more disclosures about revenue recognition. The Company is still assessing the potential impact of ASU 2014-09 on its consolidated financial statements.
In 2015, the FASB issued Accounting Standards update 2015-17,
Balance Sheet Classification of Deferred
Taxes (“ASU 2015-17”). ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet. This amendment simplifies the presentation of deferred income taxes. ASU 2015-17 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company has not yet adopted ASU 2015-17, however its effects are not expected to have a material impact on the consolidated financial statements.
In 2016, the FASB issued Accounting Standards update 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize a lease asset representing its right to use the underlying asset for the lease term, and a lease liability for the payments to be
F-11
made to lessor, on its balance sheet for all operating leases great
er than 12 months. ASU 2016-02 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has not yet adopted ASU 2016-02 nor assessed its potential impact on the financial statements
.
In 2016, the FASB issued Accounting Standards update 2016-07,
Investments – Equity Method and Joint Ventures
(“ASU 2016-07”), which simplifies the transition to the equity method of accounting by, among other things, eliminating retroactive adjustments to the investments as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company has not yet adopted ASU 2016-07 nor assessed its potential impact on its consolidated financial statements.
In 2016, the FASB issued Accounting Standards update 2016-08,
Revenue from Contracts with Customers
(“ASU 2016-08”), which provides clarity on the implementation of guidance on principal versus agent considerations (reporting of revenue on a gross basis versus net basis). ASU 2016-08 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company does not believe that the clarification of the implementation of the guidance will change the conclusions reached in its current analysis of principal versus agent considerations for reporting of revenue.
In 2016, the FASB issued Accounting Standards update 2016-09,
Compensation – Stock Compensation
(“ASU 2016-09”), which provides improvements to employee share-based payment accounting. ASU 2016-09 simplifies the accounting and presentation of various elements of share-based compensation including, but not limited to, income taxes, excess tax benefits, statutory tax withholding requirements, payment of employee taxes, and award assumptions. ASU 2016-09 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is still assessing the impact ASU 2016-09 will have on its consolidated financial statements.
In 2016, the FASB issued Accounting Standards update 2016-10,
Revenue from Contracts with Customers
(“ASU 2016-10”), which provides clarity on identifying performance obligations and licensing. ASU 2016-10 clarifies how an entity identifies performance obligations and whether that entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property or a right to access the entity’s intellectual property. ASU 2016-10 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still assessing the potential impact of ASU 2014-09 on its consolidated financial statements.
In 2016, the FASB issued Accounting Standards update 2016-12,
Revenue from Contracts with Customers
(“ASU 2016-12”), which provides clarity and simplification to the transition guidance from the previously issued ASU 2014-09. ASU 2016-12 provides narrow scope improvements to assessing the collectability criterion, the presentation of sales and other similar taxes, non-cash consideration, contract modifications, completed contracts, and technical corrections. ASU 2016-12 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still assessing the potential impact of ASU 2014-09 on its consolidated financial statements.
In 2016, the FASB issued Accounting Standards update 2016-15,
Statement of Cash Flows
(“ASU 2016-15”), which clarifies the classification of certain cash receipts and payments. The specific cash flow issues addressed by ASU 2016-15, with the objective of reducing the existing diversity in practice, are as follows: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other debt instruments with insignificant coupon interest rates; (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interest in securitization transactions; and (8) Separately identifiable cash flows and application of the predominance in principle. ASU 2016-15 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still assessing the impact of ASU 2016-15 on its consolidated financial statements.
In 2017, the FASB issued Accounting Standards update 2017-01,
Business Combinations
(“ASU 2017-01”), which clarifies the definition of a business under topic 805 of the Accounting Standards Codification. The main provisions of ASU 2017-01 provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still assessing the impact of ASU 2017-01 on its consolidated financial statements.
In 2017, the FASB issued Accounting Standards update 2017-04,
Intangibles – Goodwill and Other
(“ASU 2017-04”), which simplifies the test for goodwill impairment. The main provisions of ASU 2017-04 eliminate the second step of the goodwill impairment test which previously was performed to determine the goodwill impairment loss for an entity by calculating the difference between the implied fair value of the entity’s goodwill and its carrying value. Under ASU 2017-04, if a reporting unit’s carrying value
F-12
exceeds its fair value, an entity will record an impairm
ent charge based on that difference. The impairment charge will be limited to the amount of goodwill which is allocated to that reporting unit. ASU 2017-04 will be effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is still assessing the impact of ASU 2017-04 on its consolidated financial statements.
Note 3 – Real Estate Inventory
In October 2015, the Company executed a listing agreement with a real estate broker to list its real estate inventory for sale at a list price of $4.9 million. The carrying value of the inventory had been $6.5 million. The Company determined that the net realizable value for the inventory, based on the most probable selling price net of costs to complete the sale, was $3.7 million. As such, the Company recorded an inventory write-down charge during 2015 of $2.7 million, reducing the carrying cost of the inventory to $3.7 million.
In the first quarter of 2016, the Company entered into a purchase and sale agreement with International Auto Processing Inc. (“IAP”) to sell the Company’s real estate inventory for $4.1 million. IAP subsequently assigned the purchase and sale agreement to an affiliate, International Investments and Infrastructure, LLC (“III”).
Concurrently, the Company entered into a five-year lease agreement with an affiliate of III to lease the building during the escrow period, which would terminate at the close of escrow. The purchase agreement gave III the right to terminate its obligation to consummate the sale for any reason before June 9, 2016, but in the event the sale was not consummated, the lease agreement would have continued through the end of the lease term.
Annual rental payments under the lease were $0.7 million, and the lessee was responsible for all operating costs associated with the property. During the year ended December 31, 2016, the Company earned rental income of $0.3 million, which is included within services revenue in the consolidated statement of operations. No rental income was earned during the year ended December 31, 2015.
In the third quarter of 2016, the Company completed the sale of its real estate inventory and, in accordance with the purchase and sale agreement, terminated the previously existing lease agreement between the Company and an affiliate of III. The Company sold the real estate inventory for $4.1 million and, after recognizing carrying costs of $3.7 million and closing costs of $0.3 million, realized a gross profit of $0.1 million.
Note 4 – Equity Method Investments
The table below details the Company’s share of revenues and operating income earned from the Joint Ventures in which it was invested during the years ended December 31, 2016 and 2015 (in thousands):
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
198
|
|
|
$
|
1,007
|
|
Operating income
|
|
$
|
52
|
|
|
$
|
286
|
|
The table below details the summarized components of assets and liabilities, as at December 31, 2016 and 2015, attributable to HGI from the Joint Ventures in which it was invested at those dates (in thousands):
|
|
2016
|
|
|
2015
|
|
Current assets
|
|
$
|
57
|
|
|
$
|
194
|
|
Current liabilities
|
|
$
|
106
|
|
|
$
|
291
|
|
The table below details the classification of the earnings of equity method investments within the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2016 and 2015 (in thousands):
|
|
2016
|
|
|
2015
|
|
Earnings of equity method investments included within operating income (loss)
|
|
$
|
52
|
|
|
$
|
286
|
|
(Losses) earnings of equity method investments included within other income
|
|
|
(3
|
)
|
|
|
5
|
|
Total earnings of equity method investments
|
|
$
|
49
|
|
|
$
|
291
|
|
F-13
Note 5 – Earnings per Share
The Company is required, in periods in which it has net income, to calculate basic earnings per share (“basic EPS”) using the two-class method. The two-class method is required because the Company’s Class N preferred shares, each of which is convertible to 40 common shares, have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock. Under the two-class method, earnings for the period are allocated on a pro-rata basis to the common and preferred stockholders. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares.
In periods in which the Company has a net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The two-class method is not used in periods in which the Company has a net loss because the preferred stock does not participate in losses.
Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”), since they are assumed to be exercised or converted, except when their effect would be anti-dilutive.
The table below shows the calculation of the shares used in computing diluted EPS:
|
|
For the Year Ended December 31,
|
|
Weighted Average Shares Calculation:
|
|
2016
|
|
|
2015
|
|
Basic weighted average shares outstanding
|
|
|
28,400,886
|
|
|
|
28,252,219
|
|
Treasury stock effect of common stock options and restricted stock awards
|
|
|
33,946
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
|
28,434,832
|
|
|
|
28,252,219
|
|
There were 5.1 million potential common shares not included in the computation of diluted EPS because they would have been anti-dilutive for the year ended December 31, 2016. There were 2.2 million potential common shares not included for the year ended December 31, 2015 as the Company generated a net loss, and therefore basic EPS was the same as diluted EPS during 2015.
Note 6 – Property and Equipment
Property and equipment are recorded at historical cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Estimated service lives are five years for furniture, fixtures and office equipment and three years for software and technology assets. Expenditures for repairs and maintenance not considered to substantially lengthen the life of the asset or increase capacity or efficiency are charged to expense as incurred.
The following summarizes the components of the Company’s property and equipment (in thousands):
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Furniture, fixtures and office equipment
|
|
$
|
144
|
|
|
$
|
95
|
|
Software and technology assets
|
|
|
254
|
|
|
|
245
|
|
|
|
|
398
|
|
|
|
340
|
|
Accumulated depreciation
|
|
|
(242
|
)
|
|
|
(230
|
)
|
Property and equipment, net
|
|
$
|
156
|
|
|
$
|
110
|
|
Depreciation expense related to property and equipment was $56,000 and $49,000 for the years ended December 31, 2016 and 2015, respectively.
F-14
Note 7 – Intangible Assets and Goodwill
Intangible assets
The details of identifiable intangible assets as of December 31, 2016 and 2015, are shown below (in thousands except for lives):
Amortized Intangible Assets
|
Original Life
(years)
|
|
Remaining Life
(years)
|
|
Carrying Value
December 31
2015
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Carrying Value
December
31,
2016
|
|
Customer Network (HGP)
|
12
|
|
7.2
|
|
$
|
178
|
|
|
$
|
(20
|
)
|
|
|
—
|
|
|
$
|
158
|
|
Trade Name (HGP)
|
14
|
|
9.2
|
|
|
1,059
|
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
953
|
|
Customer Relationships (NLEX)
|
7.6
|
|
5.1
|
|
|
660
|
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
550
|
|
Non-Compete Agreement (NLEX)
|
2
|
|
0
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
—
|
|
Website (NLEX)
|
5
|
|
2.4
|
|
|
33
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
24
|
|
Total
|
|
|
|
|
|
1,945
|
|
|
|
(260
|
)
|
|
|
—
|
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name (NLEX)
|
N/A
|
|
N/A
|
|
|
2,437
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,437
|
|
Total
|
|
|
|
|
$
|
4,382
|
|
|
$
|
(260
|
)
|
|
$
|
—
|
|
|
$
|
4,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets
|
Original Life
(years)
|
|
Remaining Life
(years)
|
|
Carrying Value
December 31
2014
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Carrying Value
December 31
2015
|
|
Customer Network (HGP)
|
12
|
|
8.2
|
|
$
|
3,193
|
|
|
$
|
(266
|
)
|
|
$
|
(2,749
|
)
|
|
$
|
178
|
|
Trade Name (HGP)
|
14
|
|
10.2
|
|
|
1,165
|
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
1,059
|
|
Customer Relationships (NLEX)
|
7.6
|
|
6.1
|
|
|
770
|
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
660
|
|
Non-Compete Agreement (NLEX)
|
2
|
|
0.4
|
|
|
50
|
|
|
|
(35
|
)
|
|
|
—
|
|
|
|
15
|
|
Website (NLEX)
|
5
|
|
3.4
|
|
|
42
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
33
|
|
Total
|
|
|
|
|
|
5,220
|
|
|
|
(526
|
)
|
|
|
(2,749
|
)
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name (NLEX)
|
N/A
|
|
N/A
|
|
|
2,437
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,437
|
|
Total
|
|
|
|
|
$
|
7,657
|
|
|
$
|
(526
|
)
|
|
$
|
(2,749
|
)
|
|
$
|
4,382
|
|
Amortization expense during each of 2016 and 2015 was $0.3 million and $0.5 million, respectively. No significant residual value is estimated for these intangible assets.
As part of its annual impairment test in 2015, the Company first performed a qualitative assessment of its intangible assets to determine if the two-step impairment test was required. The results of the qualitative analysis assessment of the HGP customer network and tradename indicated that, due to the sustained losses of HGP, the Company would be required to perform the two-step impairment test. The Company tested the recoverability of each asset using an undiscounted cash flow analysis. Based on the results of the test, the Company concluded that the carrying cost of the HGP tradename was recoverable, and therefore no further testing was warranted, however the carrying cost of the HGP customer network was not recoverable, and therefore the Company proceeded to step two of the impairment test. Under step two of the impairment test, the Company used a discounted cash flow analysis to determine the fair value of the customer network, which was then compared against the asset’s carrying cost to determine if an impairment charge is warranted. This step of the assessment indicated that the fair value of the customer network was less than its carrying value, and as a result, the Company recorded a non-cash impairment charge of $2.7 million in the fourth quarter of 2015, reducing the carrying amount of the HGP customer network to $0.2 million.
The Company performed its annual impairment test for the year ended December 31, 2016, in the fourth quarter, and determined that no impairment charges were necessary.
F-15
The estimated amortization expense during the next five fiscal years and thereafter is shown below:
Year
|
|
Amount
|
|
2017
|
|
$
|
245
|
|
2018
|
|
|
245
|
|
2019
|
|
|
240
|
|
2020
|
|
|
236
|
|
2021
|
|
|
236
|
|
Thereafter
|
|
|
483
|
|
Total
|
|
$
|
1,685
|
|
Goodwill
As part of its acquisitions, the Company recognized goodwill of $0.6 million related to Equity Partners in 2011, $4.7 million related to HGP in 2012, and $3.5 million related to NLEX in 2014.
A summary of the goodwill activity for 2016 and 2015 is shown below (in thousands):
Acquisition
|
|
December 31,
2014
|
|
|
Impairment
|
|
|
December 31, 2015
|
|
|
Impairment
|
|
|
December 31, 2016
|
|
Equity Partners
|
|
$
|
573
|
|
|
$
|
—
|
|
|
$
|
573
|
|
|
$
|
—
|
|
|
$
|
573
|
|
HGP
|
|
|
4,728
|
|
|
|
(2,688
|
)
|
|
|
2,040
|
|
|
|
—
|
|
|
|
2,040
|
|
NLEX
|
|
|
3,545
|
|
|
|
—
|
|
|
|
3,545
|
|
|
|
—
|
|
|
|
3,545
|
|
Total goodwill
|
|
$
|
8,846
|
|
|
$
|
(2,688
|
)
|
|
$
|
6,158
|
|
|
$
|
—
|
|
|
$
|
6,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of its annual impairment test in 2015, the Company first performed a qualitative assessment of its reporting units to determine if the two-step impairment test was required. The results of the qualitative assessment of the HGP reporting unit indicated that due to its sustained losses the Company would be required to perform the two-step impairment test. The Company performed the first step of the impairment test by comparing the fair value of the reporting unit to its carrying value. The Company determined the fair value of the reporting unit using a combination of valuation techniques, including multiples from comparable companies and discounted cash flows, due to the lack of quoted market prices for the reporting unit. The carrying value of the reporting unit exceeded its fair value, and the Company proceeded to step two of the impairment test. Under step two of the impairment test the Company performed a hypothetical purchase price allocation as if the reporting unit was being acquired in a business combination, and estimated the fair value of the identifiable assets and liabilities of the reporting unit.
This determination required the Company to make estimates and assumptions regarding the fair value of its recorded assets and liabilities. This step of the assessment indicated that the implied fair value of the Company’s goodwill for HGP was $2.0 million. As a result, the Company recorded a non-cash impairment charge of $2.7 million in the fourth quarter of 2015, reducing the carrying amount of its HGP goodwill to $2.0 million.
The Company performed its annual impairment test for the year ended December 31, 2016, in the fourth quarter, and determined that no impairment charges were necessary.
Note 8 – Accounts Receivable and Accounts Payable
Accounts receivable
As described in Note 2, the Company’s accounts receivable are primarily related to the operations of its asset liquidation business. With respect to auction proceeds and asset dispositions, including NLEX’s accounts receivable brokerage transactions, the assets are not released to the buyer until payment has been received. The Company, therefore, is not exposed to significant collectability risk relating to these receivables. Given this experience, together with the ongoing business relationships between the Company and its joint venture partners, the Company has not historically required a formal credit quality assessment in connection with these activities. The Company has not experienced any significant collectability issues with its accounts receivable. As the Company’s asset liquidation business expands, more comprehensive credit assessments may be required.
The Company’s allowance for doubtful accounts was $36,000 and $44,000 as of December 31, 2016 and 2015, respectively.
F-16
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consisted of the following at December 31, 2016 and 2015 (in thousands):
|
|
2016
|
|
|
2015
|
|
Due to auction clients
|
|
$
|
3,152
|
|
|
$
|
3,457
|
|
Sales and other taxes
|
|
|
935
|
|
|
|
1,421
|
|
Remuneration and benefits
|
|
|
637
|
|
|
|
645
|
|
Accounting, auditing and tax consulting
|
|
|
151
|
|
|
|
128
|
|
Customer deposits
|
|
|
—
|
|
|
|
108
|
|
Due to Joint Venture partners
|
|
|
1,371
|
|
|
|
69
|
|
Asset liquidation expenses
|
|
|
257
|
|
|
|
246
|
|
Interest expense
|
|
|
—
|
|
|
|
76
|
|
Other
|
|
|
243
|
|
|
|
489
|
|
Total accounts payable and accrued liabilities
|
|
$
|
6,746
|
|
|
$
|
6,639
|
|
Note 9 – Debt
Outstanding debt at December 31, 2016 and 2015 is summarized as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Related party debt
|
|
$
|
664
|
|
|
$
|
1,721
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Related party debt
|
|
|
348
|
|
|
|
—
|
|
Third party debt
|
|
|
—
|
|
|
|
2,500
|
|
Total debt
|
|
$
|
1,012
|
|
|
$
|
4,221
|
|
The Company entered into a loan with an unrelated third party (the “Third Party Debt”) during 2014 for a principal amount of $2.5 million. The loan bore interest at 6% and had an original maturity date of January 15, 2015. In December 2014, the maturity date was extended to January 15, 2016 at the same interest rate and in early 2016 the maturity date was further extended to January 15, 2017 at the same interest rate. In the third quarter of 2016 the Company repaid $2.5 million of outstanding principal, plus accrued interest, on the Third Party Debt, and terminated the loan agreement with the third party.
The Company’s related party debt (the “Street Capital Loan”) was originally entered into in 2003 and accrued interest at 10% per annum compounded quarterly from the date funds were advanced. The Street Capital Loan was originally secured by the assets of the Company.
In 2014, following Street Capital’s distribution of its ownership interest in HGI to Street Capital shareholders as a dividend in kind, the unpaid balance of the Street Capital Loan began accruing interest at a rate per annum equal to the lesser of the Wall St. Journal (“WSJ”) prime rate + 2.0%, or the maximum rate allowable by law. As of December 31, 2015, the interest rate on the loan was 5.50%.
In the third quarter of 2016, following an amendment to the loan agreement, the Street Capital Loan began accruing interest at a rate per annum equal to the WSJ prime rate + 1.0%. The Company also agreed to a monthly payment schedule to begin in the third quarter of 2016, and Street Capital removed the security from the Company’s assets. As of December 31, 2016, the interest rate on the loan was 4.75%. S
ee Note 13 for further discussion of transactions with Street Capital.
In the first quarter of 2016, the Company entered into a related party loan with a trust controlled by certain executive officers of the Company. The Company received proceeds of $0.4 million. The loan accrued interest at 10% per annum and was payable within 90 days of the loan date. The Company repaid the loan plus accrued interest of $8,000 in March 2016.
In the third quarter of 2016, the Company entered into a related party loan with both an entity owned by certain executive officers of the Company (the “Entity”) and the Company’s Chief Executive Officer. The Company received proceeds of $0.7 million. The loan accrued interest at 10% per annum and was payable within 180 days of the loan date. The Company repaid the loan plus accrued interest of $19,000 as of December 31, 2016.
F-17
In the fourth quarter of 2016, the Company entered into a related party secured promissory note with the Entity for a revolving line of credit (the “Line of Credit”). Under the terms of the Li
ne of Credit, the Company received a revolving line of credit with an aggregate borrowing capacity of $1.5 million. Interest under the Line of Credit is charged at a variable rate. Aggregate loans under the Line of Credit up to $1.0 million incur interes
t at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%. Amounts outstanding at any time in excess of $1.0 million incur interest at a rate of 8.0% per annum. The Company is required to pay the Entity an annual commi
tment fee of $15,000, payable on a monthly basis, and due regardless of amounts drawn against the line. Further, the Entity is eligible to participate in the net profits and net losses of certain industrial auction principal and guarantee transactions ent
ered into by the Company on or after January 1, 2017, and consummated on or prior to the maturity date. Principal transactions are those in which the Company purchases assets for resale. Guarantee transactions are those in which the Company guarantees it
s client a minimum amount of proceeds from the auction.
The Line of Credit matures at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following
the date the Company closes a new credit facility with a financial institution
.
As of December 31, 2016, the Company has not drawn on the Line of Credit.
Note 10 – Fair Value Measurements
In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis, the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions:
|
•
|
Level 1 – Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
|
|
•
|
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
•
|
Level 3 – Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.
|
As of December 31, 2016 and 2015, the Company had no Level 1 or Level 2 assets or liabilities measured at fair value. As of December 31, 2016 and 2015, the Company’s contingent consideration from the acquisition of NLEX in 2014 of $2.7 million and $3.5 million respectively, was the only liability measured at fair value on a recurring basis, and was classified as Level 3 within the fair value hierarchy. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market.
The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015 (in thousands):
|
|
Fair Value as of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,733
|
|
|
$
|
2,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,457
|
|
|
$
|
3,457
|
|
When valuing its Level 3 liabilities, the Company gives consideration to operating results, financial condition, economic and/or market events, and other pertinent information that would impact its estimate of the expected contingent consideration payment. The valuation of the liability is primarily based on management’s estimate of the Net Profits of NLEX (as defined in the NLEX stock purchase agreement). Given the short term nature of the contingent consideration periods, changes in the discount rate are not expected to have a material impact on the fair value of the liability.
The following table summarizes the changes in the fair value of the contingent consideration liability during 2015 and 2016 (in thousands):
F-18
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
4,198
|
|
Payment of contingent consideration
|
|
|
(513
|
)
|
Fair value adjustment of contingent consideration
|
|
|
(228
|
)
|
Balance at December 31, 2015
|
|
|
3,457
|
|
Payment of contingent consideration
|
|
|
(816
|
)
|
Fair value adjustment of contingent consideration
|
|
|
92
|
|
Balance at December 31, 2016
|
|
$
|
2,733
|
|
The fair value adjustment for the period ended December 31, 2016 includes the Company’s assumption that it will extend the earn-out period by at least one year (see Note 2 for further detail).
The Company had no assets measured at fair value on a non-recurring basis as of December 31, 2016. The Company’s assets measured at fair value on a non-recurring basis as of December 31, 2015 consisted of its goodwill and intangible assets subject to the impairment charges recorded during the fourth quarter of 2015. Refer to Note 7 for further detail on the fair value techniques used by the Company in assessing the fair value of the goodwill and intangible assets.
Note 11 – Commitments and Contingencies
At December 31, 2016, HGI’s lease commitments related to its offices in California, Illinois, Maryland, and Arizona, an automobile lease, and a copier lease. The California office leases expire in January 2020 and April 2021; the Illinois office lease expires in June 2018, and the Arizona office lease expires in August 2019. The automobile lease expires in June 2017, and the copier lease expires in October 2018. The annual lease obligations are as shown below (in thousands):
2017
|
|
|
$
|
543
|
|
2018
|
|
|
|
489
|
|
2019
|
|
|
|
456
|
|
2020
|
|
|
|
340
|
|
|
2021
|
|
|
|
113
|
|
Total
|
|
|
$
|
1,941
|
|
At December 31, 2016, HGI’s future debt obligations are related to the Street Capital Loan. Amounts owed under the loan are $0.7 million in 2017, and $0.3 million plus accrued interest in 2018.
In the normal course of its business, HGI may be subject to contingent liabilities with respect to assets sold either directly or through Joint Ventures. At December 31, 2016 HGI does not expect any potential contingent liabilities, individually or in the aggregate, to have a material adverse effect on its assets or results of operations.
Note 12 – Income Taxes
In 2014 the Company recorded a valuation allowance against its deferred tax assets, reducing the carrying value of those assets to zero, as a result of historical losses. At December 31, 2015 and 2016, the Company continued to carry a full valuation allowance against its deferred tax assets. The following table summarizes the change in the valuation allowance during 2015 and 2016 (in thousands):
Balance at December 31, 2014
|
|
$
|
28,842
|
|
Change during 2015
|
|
|
3,080
|
|
Balance at December 31, 2015
|
|
|
31,922
|
|
Change during 2016
|
|
|
(264
|
)
|
Balance at December 31, 2016
|
|
$
|
31,658
|
|
At December 31, 2016 the Company has aggregate tax net operating loss carry forwards of approximately $74.5 million ($59.3 million of unrestricted net operating tax losses and approximately $15.2 million of restricted net operating tax losses) and unused minimum tax credit carry forwards of $0.5 million. Substantially all of the net operating loss carryforwards and unused minimum tax credit carry forwards expire between 2024 and 2035.
F-19
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 (loss) be
fore income tax expense for the following reasons in each of the years ending December 31 (in thousands):
|
|
2016
|
|
|
2015
|
|
Expected federal statutory tax benefit
|
|
$
|
14
|
|
|
$
|
(4,130
|
)
|
Increase (reduction) in taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes recoverable
|
|
|
21
|
|
|
|
17
|
|
Non-deductible expenses (permanent differences)
|
|
|
45
|
|
|
|
1,162
|
|
Change in valuation allowance
|
|
|
(264
|
)
|
|
|
3,080
|
|
Other
|
|
|
205
|
|
|
|
(114
|
)
|
Income tax expense
|
|
$
|
21
|
|
|
$
|
15
|
|
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. These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years.
Restrictions in net operating loss carry forwards occurred in 2001 as a result of the acquisition of the Company by Street Capital. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Street Capital and disposition of business interests by the Company. Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carry forwards was limited to approximately $2.5 million per annum until 2008 and $1.7 million per annum thereafter. There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time. In addition, further restrictions, reductions in, or expiration of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities. Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carry forwards.
All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carry forwards against income for tax purposes in the later year. The 2013 through 2015 taxation years remain open for audit.
The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carry forwards available to shield income attributable to a particular state from being subject to tax in that particular state.
The components of the deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows in (thousands):
|
|
2016
|
|
|
2015
|
|
Net operating loss carry forwards
|
|
$
|
29,909
|
|
|
$
|
30,073
|
|
Stock based compensation
|
|
|
1,070
|
|
|
|
1,019
|
|
Write-down of real estate inventory
|
|
|
1,569
|
|
|
|
1,550
|
|
Trade names
|
|
|
(1,363
|
)
|
|
|
(1,388
|
)
|
Customer relationships
|
|
|
(293
|
)
|
|
|
(351
|
)
|
Fair value adjustment of contingent consideration
|
|
|
(55
|
)
|
|
|
91
|
|
Other
|
|
|
(139
|
)
|
|
|
(32
|
)
|
Gross deferred tax assets
|
|
|
30,698
|
|
|
|
30,962
|
|
Less: valuation allowance
|
|
|
(31,658
|
)
|
|
|
(31,922
|
)
|
Deferred tax assets (liabilities), net of valuation allowance
|
|
$
|
(960
|
)
|
|
$
|
(960
|
)
|
As a result of the acquisition of NLEX in 2014, and the recognition of an indefinite-lived intangible asset in the amount of $2.4 million related to the NLEX trade name, the Company is required to record a non-current deferred tax liability in the amount of $1.0 million.
Uncertain Tax Positions
The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Upon adoption of this principle in 2007, the Company
F-20
derecognized certain tax positions that, upon examination, more likely than not would not have been sustained as a recognized tax benefit. As a result of derecognizing uncertain tax positions, the Company has recorded a cumulative reduction in its deferr
ed tax assets of approximately $12.0 million associated with prior years’ tax benefits, which are not expected to be available primarily due to change of control usage restrictions, and a reduction in the rate of the tax benefit associated with all of its
tax attributes.
Due to the Company’s historic policy of applying a valuation allowance against its deferred tax assets, the effect of the above was an offsetting reduction in the Company’s valuation allowance. Accordingly, the above reduction had no net impact on the Company’s financial position, operations or cash flow. As of December 31, 2016, the unrecognized tax benefit has been determined to be $12.1 million, which is unchanged from the balance as of December 31, 2015.
In the unlikely event that these tax benefits are recognized in the future, the amount recognized at that time should result in a reduction in the Company’s effective tax rate.
The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Because the Company has tax loss carry forwards in excess of the unrecognized tax benefits, the Company did not accrue for interest and penalties related to unrecognized tax benefits either upon the initial derecognition of uncertain tax positions or in the current period.
It is possible that the total amount of the Company’s unrecognized tax benefits will significantly increase or decrease within the next 12 months. These changes may be the result of future audits, the application of “change in ownership” rules leading to further restrictions in tax losses arising from changes in the capital structure of the Company, reductions in available tax loss carry forwards through future merger, acquisition and/or disposition transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time. At this time, an estimate of the range of reasonably possible outcomes cannot be made.
Note 13 – Related Party Transactions
Debt with Street Capital
Until the second quarter of 2014, as discussed below, Street Capital was the Company’s majority shareholder. Street Capital remained a related party following the distribution of its investment in HGI to Street Capital shareholders as a result of the Services Agreement and the relationship of the Company’s Chairman of the Board discussed below. The Services Agreement terminated on August 31, 2015, however subsequent to its termination Street Capital remained a related party as a result of the Street Capital Loan as well as the Company’s Chairman of the Board, who is also a significant shareholder of the Company, is also the chairman of the board of Street Capital. At December 31, 2016 and 2015, the Company reported amounts owed to Street Capital of $1.0 million and $1.7 million, respectively, as related party debt (see Note 9). Total interest of $0.5 million has been accrued to the principal balance of the debt through December 31, 2016, and remains unpaid.
Street
Capital
Services Provided to Company
Beginning in 2004, HGI and Street Capital entered into successive annual management services agreements (collectively, the “Agreement”). Under the terms of the Agreement, HGI agreed to pay Street Capital for ongoing services provided to HGI by Street Capital personnel. These services included preparation of the Company’s financial statements and regulatory filings, taxation matters, stock-based compensation administration, Board administration, patent portfolio administration and litigation matters.
In 2013, Street Capital announced its plan to dispose of its interest in HGI, and on March 20, 2014, Street Capital declared a dividend in kind, consisting of Street Capital’s distribution of its majority interest in HGI to Street Capital shareholders. The dividend was paid on April 30, 2014 to shareholders of record as of April 1, 2014.
Following this disposition, the Company and Street Capital entered into a replacement management services agreement (the “Services Agreement”). Under the terms of the Services Agreement, Street Capital remained as external manager and continued to provide the same services, at similar rates, until the Services Agreement was terminated effective August 31, 2015, as described more fully in the Current Report on Form 8-K filed with the SEC on September 1, 2015.
F-21
The amounts charged by Street Capital, which are included in selling, general and administrative expenses and have been added to the Street Capital Loan balance, are detailed below (in thousands
):
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Management fees
|
|
$
|
—
|
|
|
$
|
240
|
|
Other charges
|
|
|
—
|
|
|
|
50
|
|
Total
|
|
$
|
—
|
|
|
$
|
290
|
|
Transactions with Other Related Parties
Through April 2016, as part of the operations of HGP the Company leased office space in Foster City, CA that is owned by an entity jointly controlled by Ross Dove and Kirk Dove, the Company’s Chief Executive Officer and President and Chief Operating Officer, respectively. The Company terminated the lease agreement in the second quarter of 2016. The total amount paid to the related party for the lease is outlined in the table below. Both Ross Dove and Kirk Dove shared equally in the payments in both 2016 and 2015.
As part of the operations of NLEX, the Company leases office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig. The total amount paid to the related party is outlined in the table below. All of the payments were made to David Ludwig.
The lease amounts paid by the Company to the related parties, which are included in selling, general and administrative expenses during the year ended December 31, 2016 and 2015, are detailed below (in thousands):
|
|
Year ended
December 31,
|
|
Leased premises location
|
|
2016
|
|
|
2015
|
|
Foster City, CA
|
|
$
|
76
|
|
|
$
|
228
|
|
Edwardsville, IL
|
|
|
99
|
|
|
|
97
|
|
Total
|
|
$
|
175
|
|
|
$
|
325
|
|
In 2016 the Company entered into multiple related party loan agreements with certain executive officers of the Company. These related party loans are described more fully in Note 9 to the consolidated financial statements. Both Ross Dove and Kirk Dove, who were parties to the related party loans, shared equally in all payments made by the Company to satisfy obligations under the loan agreements.
During 2016 the Company paid David Ludwig $0.8 million for his second earn-out provision payment.
Note 14 – Legal Proceedings
The Company is involved in various other legal matters arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on the Company.
Note 15 – Stockholders’ Equity
Capital Stock
The Company’s authorized capital stock consists of 300,000,000 common shares with a par value of $0.01 per share and 10,000,000 preferred shares with a par value of $10.00 per share.
During 2016 the Company issued 40,000 shares of common stock pursuant to the exercise of stock options. There were no options exercised during 2015.
Each Class N preferred share has a voting entitlement equal to 40 common shares, votes with the common stock on an as-converted basis and is senior to all other preferred stock of the Company. Dividends, if any, will be paid on an as-converted basis equal to common stock dividends. The conversion value of each Class N preferred share is $1,000, and each share is convertible to 40 common shares at the rate of $25.00 per common share. The Class N preferred shareholders are entitled to liquidation preference over common shareholders equivalent to $1,000 per share. During 2016, no shares of the Company’s Class N preferred stock were
F-22
converted into shares of the Company’s common stock; during 2015, six shares of the Class N preferred stock were converted into 240 shares of the Company’s common stock.
Stock- Based Compensation Plans
At December 31, 2016, the Company had four stock-based compensation plans which are described below. The fourth of these plans was adopted on May 5, 2016, and received approval from the Company’s shareholders at the special meeting of stockholders held on September 14, 2016.
2003 Stock Option and Appreciation Rights Plan
In 2003, the stockholders of the Company approved the 2003 Stock Option and Appreciation Rights Plan (the “2003 Plan”) which provided for the issuance of incentive stock options, non-qualified stock options and Stock Appreciation Rights (“SARs”) up to an aggregate of 2,000,000 shares of common stock (subject to adjustment in the event of stock dividends, stock splits, and other similar events). The plan had a ten-year term, and therefore after 2013 no options have been issued. The price at which shares of common stock covered by the option can be purchased was determined by the Company’s Board or a committee thereof; however, in the case of incentive stock options the exercise price was never less than the fair market value of the Company’s common stock on the date the option was granted.
2003 Plan
|
|
2016
|
|
|
2015
|
|
Options outstanding, beginning of year
|
|
|
1,170,000
|
|
|
|
1,210,000
|
|
Options forfeited
|
|
|
(115,000
|
)
|
|
|
—
|
|
Options exercised
|
|
|
(40,000
|
)
|
|
|
—
|
|
Options expired
|
|
|
(20,000
|
)
|
|
|
(40,000
|
)
|
Options outstanding, end of year
|
|
|
995,000
|
|
|
|
1,170,000
|
|
The outstanding options vest over four years at exercise prices ranging from $0.08 to $2.00 per share. No SARs were issued under the 2003 Plan.
2010 Non-Qualified Stock Option Plan
In 2010, the Company’s Board approved the 2010 Non-Qualified Stock Option Plan (the “2010 Plan”) to induce certain key employees of the Company or any of its subsidiaries who are in a position to contribute materially to the Company’s prosperity to remain with the Company, to offer such persons incentives and rewards in recognition of their contributions to the Company’s progress, and to encourage such persons to continue to promote the best interests of the Company. The Company reserved 1,250,000 shares of common stock (subject to adjustment under certain circumstances) for issuance or transfer upon exercise of options granted under the 2010 Plan. Options may be issued under the 2010 Plan to any key employees or consultants selected by the Company’s Board (or an appropriately qualified committee). Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant. Options granted pursuant to the plan are subject to limitations on transfer and execution and may be issued subject to vesting conditions. Options may also be forfeited in certain circumstances. During 2016, options to purchase 70,000 shares were granted to the Company’s independent directors as part of the annual compensation, options to purchase 125,000 shares were granted to the Company’s independent directors as a special grant in connection with the Company’s grant of options to its employee base in the fourth quarter, and options to purchase 525,000 shares were granted to the Company’s officers as part of the Company’s grant to its employee base in the fourth quarter. During 2015, options to purchase 50,000 shares were granted to the Company’s independent directors as part of their annual compensation.
2010 Plan
|
|
2016
|
|
|
2015
|
|
Options outstanding, beginning of year
|
|
|
150,000
|
|
|
|
100,000
|
|
Options granted
|
|
|
720,000
|
|
|
|
50,000
|
|
Options forfeited
|
|
|
(90,000
|
)
|
|
|
—
|
|
Options outstanding, end of year
|
|
|
780,000
|
|
|
|
150,000
|
|
The outstanding options vest over four years at exercise prices ranging from $0.24 to $0.70 per share.
Equity Partners Stock Option Plan
In 2011, the Company’s Board approved the Equity Partners Stock Option Plan (the “Equity Partners Plan”) to allow the Company to issue options to purchase common stock as a portion of the purchase price of Equity Partners. The Company reserved
F-23
230,000 shar
es of common stock for issuance upon exercise of options granted under the Equity Partners Plan. During 2011, options to purchase 230,000 shares with an exercise price of $1.83, vesting immediately, were granted under the Equity Partners Plan.
Equity Partners Plan
|
|
2016
|
|
|
2015
|
|
Options outstanding, beginning of year
|
|
|
230,000
|
|
|
|
230,000
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
Options outstanding, end of year
|
|
|
230,000
|
|
|
|
230,000
|
|
Other Options Issued
In 2012, the Company’s Board approved the issuance of options as part of the acquisition of HGP, and reserved 625,000 shares of common stock for issuance upon option exercise. The options have an exercise price of $2.00, and vested over four years, beginning on the first anniversary of the grant date. Unlike other options issued by the Company under its stock option plans, the options issued as part of the HGP acquisition survive termination of employment. None of the option holders have terminated their employment with the Company.
Other Options
|
|
2016
|
|
|
2015
|
|
Options outstanding, beginning of year
|
|
|
625,000
|
|
|
|
625,000
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
Options outstanding, end of year
|
|
|
625,000
|
|
|
|
625,000
|
|
Heritage Global Inc. 2016 Stock Option Plan
On May 5, 2016, subject to the approval received by the stockholders of the Company on September 14, 2016, the Company adopted the Heritage Global Inc. 2016 Stock Option Plan (the “2016 Plan”) which provided for the issuance of incentive stock options and non-qualified stock options up to an aggregate of 3,150,000 shares of common stock (subject to adjustment in the event of stock dividends, stock splits, and other similar events). Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant. Options granted pursuant to the plan are subject to limitations on transfer and execution and may be issued subject to vesting conditions. Options may also be forfeited in certain circumstances. During 2016 options to purchase 2,539,200 shares of common stock were granted to the Company’s employees.
2016 Plan
|
|
2016
|
|
|
2015
|
|
Options outstanding, beginning of year
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
2,539,200
|
|
|
|
—
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
Options outstanding, end of year
|
|
|
2,539,200
|
|
|
|
—
|
|
The outstanding options vest over four years at an exercise price of $0.45 per share.
Stock-Based Compensation Expense
Total compensation cost related to stock options in 2016 and 2015 was $0.1 million and $0.3 million, respectively. These amounts were recorded in selling, general and administrative expense in both years. During 2016 options to purchase 40,000 shares were exercised. The tax benefit recognized by the Company related to these option exercises was not material. During 2015 no options were exercised and therefore no tax benefit was recognized.
In connection with the stock option grants during 2016 and 2015, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
1% - 2%
|
|
|
0.99%
|
|
Expected life (years)
|
|
|
6.75
|
|
|
|
4.75
|
|
Expected volatility
|
|
94% - 99%
|
|
|
|
94%
|
|
Expected dividend yield
|
|
Zero
|
|
|
Zero
|
|
F-24
The risk-free interest rates are those for U.S. Treasury constant maturities for terms matching the expected term of the option. The expected life of the options is calculated according to the simplified
method for estimating the expected term of the options, based on the vesting period and contractual term of each option grant. Expected volatility is based on the Company’s historical volatility. The Company has never paid a dividend on its common stock an
d therefore the expected dividend yield is zero.
The following summarizes the changes in common stock options for 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of year
|
|
|
2,175,000
|
|
|
$
|
1.70
|
|
|
|
2,165,000
|
|
|
$
|
1.71
|
|
Granted
|
|
|
3,259,200
|
|
|
$
|
0.45
|
|
|
|
50,000
|
|
|
$
|
0.42
|
|
Exercised
|
|
|
(40,000
|
)
|
|
$
|
0.12
|
|
|
|
—
|
|
|
N/A
|
|
Expired
|
|
|
(20,000
|
)
|
|
$
|
0.15
|
|
|
|
(40,000
|
)
|
|
$
|
0.90
|
|
Forfeited
|
|
|
(205,000
|
)
|
|
$
|
0.92
|
|
|
|
—
|
|
|
N/A
|
|
Outstanding at end of year
|
|
|
5,169,200
|
|
|
$
|
0.96
|
|
|
|
2,175,000
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
|
|
1,847,500
|
|
|
$
|
1.86
|
|
|
|
1,743,750
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted
during the year
|
|
|
|
|
|
$
|
0.31
|
|
|
|
|
|
|
$
|
0.29
|
|
As of December 31, 2015, the Company had 431,250 unvested options with a weighted average grant date fair value of $1.13 per share. As of December 31, 2016, the Company had 3,321,700 unvested options with a weighted average grant date fair value of $0.32 per share.
As of December 31, 2016, the total unrecognized stock-based compensation expense related to unvested stock options was $1.0 million, which is expected to be recognized over a weighted-average period of 3.9 years.
The total fair value of options vesting during the years ending December 31, 2016 and 2015 was $0.4 million and $0.8 million, respectively. The unvested options have no associated performance conditions. In general, the Company’s employee turnover is low, and the Company expects that the majority of the unvested options will vest according to the standard four-year timetable.
The following table summarizes information about all stock options outstanding at December 31, 2016:
Exercise price
|
|
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Life
(years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Remaining
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$ 0.08 to $ 0.15
|
|
|
10,000
|
|
|
|
0.2
|
|
|
$
|
0.08
|
|
|
|
10,000
|
|
|
|
0.2
|
|
|
$
|
0.08
|
|
$ 0.24 to $ 0.40
|
|
|
40,000
|
|
|
|
9.3
|
|
|
$
|
0.24
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
$ 0.42 to $ 1.00
|
|
|
3,459,200
|
|
|
|
9.5
|
|
|
$
|
0.48
|
|
|
|
177,500
|
|
|
|
3.4
|
|
|
$
|
0.92
|
|
$ 1.83 to $ 2.00
|
|
|
1,660,000
|
|
|
|
1.8
|
|
|
$
|
1.97
|
|
|
|
1,660,000
|
|
|
|
1.8
|
|
|
$
|
1.97
|
|
|
|
|
5,169,200
|
|
|
|
7.0
|
|
|
$
|
0.96
|
|
|
|
1,847,500
|
|
|
|
2.0
|
|
|
$
|
1.86
|
|
At December 31, 2016 and 2015, the aggregate intrinsic value of exercisable options was $4,000 and $9,000, respectively.
Restricted Stock
Restricted stock awards represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. There is no exercise price and no monetary payment required for receipt of restricted stock awards or the shares issued in settlement of the award. Instead, consideration is furnished in the form of the participant’s services to the Company. Compensation cost for these awards is based on the fair value on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period.
The Company granted restricted stock awards for 300,000 shares to two key employees (150,000 each), in connection with their employment agreements in 2014.
F-25
The following summarizes the changes in restricted stock awards for the year ended December 31, 2016:
|
|
Restricted Stock Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested at December 31, 2015
|
|
|
150,000
|
|
|
$
|
0.38
|
|
Forfeited
|
|
|
(37,500
|
)
|
|
$
|
0.38
|
|
Vested
|
|
|
(75,000
|
)
|
|
$
|
0.38
|
|
Unvested at December 31, 2016
|
|
|
37,500
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2016
|
|
|
225,000
|
|
|
$
|
0.38
|
|
The Company recognized stock-based compensation expense related to restricted stock awards of $18,000 and $0.1 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016 there is approximately $4,000 of unrecognized stock-based compensation expense related to unvested restricted stock awards, which is expected to be recognized over the next three months.
Note 16 – Subsequent Events
The Company has evaluated events subsequent to December 31, 2016 for potential recognition or disclosure in its consolidated financial statements.
There have been no other material subsequent events requiring disclosure in this Report.
F-26