Heritage Global Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted. The company’s sole operating segment is asset liquidation, including auction and advisory services, asset sales, and charged-off receivables brokerage through NLEX.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.04 | $6.10 | $9.64 | $10.90 |
| Operating loss | $(3.47) | $(0.14) | $(4.57) | $(1.39) |
| Net loss | $(3.64) | $(0.19) | $(4.92) | $(26.34) |
| Net loss per share, basic and diluted | $(0.13) | $(0.01) | $(0.17) | $(0.94) |
| Operating cash flow | Not provided separately | Not provided separately | $(0.88) | $1.26 |
| Adjusted EBITDA, non-GAAP | $(0.51) | $0.23 | $(1.01) | $(0.50) |
For the nine-month period, asset-liquidation gross profit, including earnings or losses from equity-accounted asset-liquidation investments, was $7.6 million versus $6.4 million, an increase of about 19%. Q3 gross profit on the same basis was $2.5 million versus $2.7 million, down about 7%. The filing does not present a conventional consolidated gross-margin measure.
Revenue declined 12% year over year for the first nine months and 50% in Q3. Nine-month SG&A increased 20% to $9.0 million, while depreciation and amortization rose to $0.5 million. The nine-month 2014 net loss included a $24.7 million income-tax expense, principally reflecting a change in the deferred-tax-asset valuation allowance; this makes the reported net-loss improvement in 2015 a poor indicator of operating improvement.
Liquidity, cash flow and debt
- Cash was $2.7 million at September 30, 2015, down from $3.6 million at December 31, 2014. Current assets were $4.4 million and current liabilities $12.3 million, resulting in a $7.8 million working-capital deficit, compared with a $4.0 million deficit at year-end 2014.
- Nine-month operating cash use was $0.9 million. Investing activities provided $2.6 million, including $2.0 million of proceeds related to the Polaroid investment exit and $0.7 million of distributions from equity-method investments. Financing activities used $2.7 million, including debt repayments and a $0.5 million NLEX earn-out payment. Cash decreased by $1.0 million overall.
- Total debt was $4.2 million: $2.5 million of third-party debt and $1.7 million of related-party debt, all classified as current. The third-party loan bears 6% interest and matures January 15, 2016. The Counsel Loan is secured by company assets, due on demand, and bore 5.25% interest at quarter-end.
- NLEX contingent consideration was estimated at approximately $3.9 million present value, with $1.4 million current and $2.5 million non-current. The estimate depends on projected earnings through May 2018 and valuation assumptions.
Material changes, outlook and risks
- The company recorded a $2.7 million real-estate inventory write-down in Q3, reducing carrying value from $6.5 million to $3.8 million based on estimated net realizable value. In October 2015, it entered a listing agreement at a $4.9 million asking price.
- NLEX contributed $3.1 million of nine-month asset-liquidation gross profit, compared with $1.1 million for the comparable period, which included only four months of NLEX results. Management attributed much of the SG&A increase to including NLEX for the full nine months.
- The Counsel services agreement terminated effective August 31, 2015. Counsel nevertheless remained a related party under the circumstances described in the filing. Related-party management fees and other charges of $0.3 million were added to the Counsel Loan during the first nine months.
- Management expected the asset-liquidation business to remain the primary source of operating cash and stated that it believed current capital resources were sufficient, with potential additional debt financing available if needed. The filing provides no quantitative earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Key risks include the timing and variability of asset-liquidation transactions, the working-capital deficit, near-term third-party debt maturity, dependence on operating cash and financing, valuation of real estate and contingent consideration, and competition from better-resourced firms. The company also cited regulatory/compliance and foreign-currency exposures; it reported no material changes to previously disclosed risk factors or legal proceedings.
The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no defaults on senior securities.
Important facts for investors to verify
- Whether the January 15, 2016 third-party loan was repaid, refinanced, or otherwise addressed, and the availability and terms of further financing.
- Real-estate sale progress and actual proceeds versus the $3.8 million carrying value and $4.9 million listing price.
- Operating cash generation, working-capital needs, and whether the business can reduce its substantial quarterly and year-to-date losses.
- NLEX performance and whether projected earnings support the estimated $3.9 million contingent consideration.
- The basis and sustainability of reported results, particularly the large prior-year tax charge and management’s non-GAAP Adjusted EBITDA adjustments.