Heritage Global Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Amounts below are in U.S. dollars; financial-statement amounts are in thousands unless noted. Heritage Global’s principal business is asset liquidation, including auctions, appraisals, asset sales, and financial solutions for distressed businesses. Intellectual-property licensing generated no revenue this quarter.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $1.985 million | $1.592 million; up 25% |
| Operating loss | $777,000 | $905,000 loss |
| Net loss | $25.571 million; $0.91 per share | $647,000 loss; $0.02 per share |
| Operating cash flow | $(676,000) | $174,000 provided |
| Cash and equivalents | $2.802 million at March 31 | $3.213 million at December 31, 2013 |
| Total debt | $4.305 million, all current | $3.988 million at December 31, 2013 |
| Working capital | $(5.075) million | $(3.174) million at December 31, 2013 |
| Total assets / equity | $23.716 million / $14.043 million | $49.995 million / $39.497 million at December 31, 2013 |
Asset liquidation revenue rose to $1.985 million from $1.392 million, including asset-sale revenue of $975,000 versus $446,000 and commissions and other revenue of $1.010 million versus $946,000. Patent licensing revenue was nil, compared with $200,000 in Q1 2013. Asset liquidation expenses were $465,000, versus $430,000, while equity-accounted asset liquidation investments produced a $30,000 loss, compared with $802,000 of earnings. The company reported no material margin measure.
The net loss principally reflects a $24.667 million income-tax expense from establishing a valuation allowance against all net deferred tax assets. This reduced deferred tax assets from $24.667 million at year-end to zero and was not a cash tax payment of that amount. Before this tax expense, the company recorded a $915,000 pretax loss, compared with a $1.000 million pretax loss in Q1 2013.
Cash used in investing activities was $26,000, compared with $692,000 provided in Q1 2013. Financing provided $239,000, including $439,000 of net advances from Counsel and $200,000 of third-party debt repayments. The company said working capital would be positive by $2.264 million at March 31 if real-estate inventory and asset-liquidation investments expected to convert to cash within a year were classified as current.
Material changes and management commentary
- Revenue increased, but combined net earnings from asset-liquidation revenue, related expenses, and equity-accounted investments declined to $1.490 million from $1.764 million, largely reflecting transaction timing and the investment earnings comparison.
- Operating expenses declined to $2.732 million from $3.299 million. Management cited lower SG&A, including lower HG LLC compensation after the Co-CEOs and other employees departed in June 2013, and lower patent-related costs.
- Related-party Counsel debt increased to $3.057 million from $2.550 million. It accrued interest at 10% and was due on demand at quarter-end. After quarter-end, the balance was transferred to a replacement facility, with payment due within 30 days after each quarter-end and unpaid balances accruing interest at the lesser of prime plus 2% or the legal maximum.
- Counsel distributed its majority ownership interest to its shareholders on April 30, 2014. Counsel continued providing management services under a replacement agreement; Heritage said it was considering future internalization but expected to continue using those services for now.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management expects asset liquidation to remain the primary source of cash for ongoing operations and expects future activity to continue to include asset acquisition and monetization, while focusing on HGP’s auction and appraisal business and Equity Partners’ financial solutions business. Management cautioned that quarterly results are not necessarily indicative of full-year results and that asset-liquidation performance varies with transaction timing.
Key risks include the working-capital deficit and reliance on asset-liquidation operations and related-party advances; all reported debt was current. The company has approximately $74.422 million of tax net operating loss carryforwards, but use of some losses is restricted by ownership-change rules, and further limitations or expirations could occur. Portfolio investments are illiquid. The revolving credit facility bears variable interest, although management estimated a 1% rate increase would add approximately $1,000 of annual interest at the March 31 balance. The company reported compliance with facility covenants at March 31; a December 31, 2013 covenant breach had been waived. Management did not expect contingent liabilities from assets sold to have a material adverse effect. No material subsequent events requiring disclosure, material changes in legal proceedings or risk factors, or material off-balance-sheet transactions were reported.
Important facts for investors to verify
- Whether the large deferred-tax-asset valuation allowance, and the company’s assessment of future use of tax carryforwards, remain appropriate.
- Near-term liquidity and repayment terms for current debt, particularly the Counsel facility and reliance on Counsel-provided services.
- Cash conversion and transaction pipeline in asset liquidation, including the timing and realizability of real-estate inventory and investments.
- Performance and liquidity of equity-accounted investments, including Polaroid, and any resulting distributions or impairment indicators.
- Progress toward management’s stated consideration of internalizing management and the costs or effects of that transition.