Heritage Global Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are with FY2014. The filing was signed March 17, 2016. Heritage Global provides asset liquidation services, including auctions, appraisals, advisory services, distressed-business M&A advice, and charged-off receivables brokerage through NLEX.
Financial results
| Metric (USD millions, except per-share data) | FY2015 | FY2014 |
|---|---|---|
| Revenue | $17.4 | $20.0 |
| Gross profit from services, asset sales and equity-method earnings, as described by management | $11.2 | $9.9 |
| Operating loss | $(10.4) | $(1.9) |
| Net loss | $(10.4) | $(26.5) |
| Net loss per share, basic and diluted | $(0.37) | $(0.94) |
| Cash from (used in) operating activities | $(0.8) | $0.6 |
| Cash from (used in) investing activities | $2.7 | $(1.5) |
| Cash from (used in) financing activities | $(2.7) | $1.3 |
| Cash and cash equivalents at year-end | $2.8 | $3.6 |
| Total assets | $18.8 | $31.9 |
| Stockholders’ equity | $3.4 | $13.5 |
Service revenue increased slightly to $13.5 million, while asset-sale revenue declined to $3.9 million from $6.7 million. Management’s stated combined gross profit measure increased about 14%, including a full year of NLEX results in 2015 versus seven months in 2014. NLEX reported $4.5 million of revenue and $1.6 million of net income in 2015.
There was no positive operating margin: operating costs included $12.8 million of selling, general and administrative expense, a $2.7 million real estate inventory write-down, and a $5.4 million goodwill and intangible-asset impairment. Interest expense was $0.35 million. The filing does not provide a conventional EBITDA figure.
Liquidity, debt and capital
- Working capital was negative $5.1 million at year-end, versus negative $4.0 million a year earlier; current assets were $4.3 million and current liabilities $9.4 million.
- Year-end debt was $4.2 million: $2.5 million of third-party debt, classified as non-current after its maturity was extended, and $1.7 million due on demand to related party Street Capital. The third-party loan bears 6%; the Street Capital loan bore 5.5% at year-end and is secured by company assets.
- NLEX contingent consideration was valued at $3.5 million, including $0.9 million classified as current. The earn-out is based on NLEX profits, capped at $5.0 million; $0.5 million was paid in 2015.
- Cash fell by $0.8 million during 2015. Operating cash use was partly offset by $2.0 million proceeds from the Polaroid investment exit and $0.9 million in distributions from other equity-method investments. The company repaid net $1.6 million to Street Capital and paid $0.5 million of NLEX contingent consideration.
- Management said operations, real estate sale proceeds, related-party financing and flexibility on debt repayment were expected to fund operations and address the working-capital deficit. The company had an accumulated deficit of $280.9 million and continued to carry a full valuation allowance against deferred tax assets.
Material changes and unusual items
- Revenue decreased $2.6 million year over year, principally as asset-sale revenue fell. Operating loss worsened substantially despite higher management-reported gross profit.
- The $5.4 million impairment followed sustained losses at HGP and reduced HGP goodwill by $2.7 million and its customer-network intangible by $2.7 million. The separate $2.7 million real-estate write-down reduced that inventory’s carrying value from $6.5 million to $3.7 million.
- FY2014 net loss included $24.7 million of income-tax expense, primarily from establishing a valuation allowance against deferred tax assets. This drove much of the reported improvement in FY2015 net loss; FY2015 itself remained loss-making.
- Street Capital’s management-services agreement ended August 31, 2015. Street Capital remained a related party and creditor. The company also disclosed leases with entities associated with executives and NLEX officers.
- After year-end, the third-party loan maturity was extended to January 2017; the company obtained a $0.4 million, 90-day related-party loan at 10%; and it agreed to sell its real estate inventory for $4.1 million. The buyer may terminate the purchase for any reason; if the sale does not close, a five-year lease is to continue.
Outlook, risks and controls
No numerical earnings or revenue guidance was provided. Management expected the asset-liquidation business to remain the principal source of operating cash and expressed confidence in funding needs through operations, the real-estate sale and financing. These expectations depend on transaction timing and access to funding.
Key disclosed risks include deal-driven volatility and inability to sustain profitability; inventory valuation, resale and credit risks; competition from larger, better-capitalized firms; reliance on joint-venture partners and key personnel; foreign-currency exposure; financing availability; regulatory, export-control, sanctions, FCPA and environmental risks; and restrictions on use of tax-loss carryforwards. The company reported ordinary-course legal matters not expected to have a material adverse effect. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2015; the auditor did not attest to internal-control effectiveness.
Investor facts to verify
- Whether the $4.1 million real-estate sale closed, its net proceeds, and the consequences if the buyer exercises its termination right.
- Cash generation and working-capital needs, including whether operating performance can support operations without additional or related-party financing.
- Repayment or refinancing terms for the $2.5 million third-party loan and the $1.7 million demand loan from Street Capital.
- NLEX’s subsequent profitability and the assumptions behind its contingent-consideration valuation and future payments.
- Whether HGP’s operating performance supports remaining goodwill and intangible carrying values after the 2015 impairment.
- The practical availability and expiration of tax-loss carryforwards, given ownership-change restrictions and the full valuation allowance.