Heritage Global Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts below are in U.S. dollars, in thousands, except per-share data. Heritage Global’s main business is asset liquidation, including auctions, appraisals and customized financial solutions; it also reports intellectual-property licensing revenue. The company changed its name from Counsel RB Capital Inc. effective August 22, 2013.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $2,889 | $3,052 | $6,413 | $9,917 |
| Operating income (loss) | $234 | $(1,575) | $(1,778) | $(1,104) |
| Net income (loss) | $(260) | $(1,000) | $(1,650) | $(1,031) |
| Basic and diluted loss per share | $(0.01) | $(0.03) | $(0.06) | $(0.04) |
- Q3 asset-liquidation revenue was $2,265, down from $3,052; intellectual-property licensing contributed $624 versus none a year earlier. For the nine months, asset-liquidation revenue was $5,589 versus $9,917, while licensing contributed $824.
- Equity-accounted asset-liquidation investment earnings were $456 in Q3 and $1,265 for nine months, compared with $222 and $1,449, respectively, in 2012. The filing does not provide a consolidated gross-margin percentage.
- Operating cash flow was $2,368 for the first nine months, down from $3,453. Investing activities provided $718, while financing activities used $2,857. Cash increased $229 to $4,543. Operating cash flow included a $3,925 increase in accounts payable and accrued liabilities.
- At September 30, total assets were $57,687, equity was $44,144, and working capital was negative $3,624. The company notes that real-estate inventory and asset-liquidation investments are classified as non-current; including them as current would produce stated working capital of $6,028.
- All debt was current: $1,541 under the third-party revolving credit facility and $3,649 owed to related party Counsel, totaling $5,190. The Counsel loan bears 10% interest, compounded quarterly, and is due on demand. The company reported compliance with credit-facility covenants.
Changes, outlook and risks
- Q3 revenue declined 5% year over year; nine-month revenue fell 35%. Management attributed lower asset-liquidation results to the timing and variability of transactions. Nine-month net loss widened, despite lower selling, general and administrative costs, as asset-liquidation earnings declined and interest expense increased.
- The Co-CEOs and New York and Los Angeles HG LLC personnel departed effective June 30, 2013. The company returned and cancelled 800,000 shares previously issued to the Co-CEOs and recognized $624 of licensing revenue in the transaction. Related office leases ended without penalty. Management said operations would focus on auctions and appraisals and customized financial solutions, while continuing to consider asset acquisition and monetization.
- Management expects asset liquidation to remain the primary cash source and believes operations will generate sufficient cash for ongoing requirements. It provided no quantified revenue or earnings guidance. It also said Counsel’s announced plan to dispose of its HGI interest had not resulted in a formal disposal process or affected HGI operations as of the filing.
- Liquidity and financing warrant attention: working capital remained negative, the Counsel loan is callable, and the revolving facility is secured by eligible assets. The company’s portfolio investments are illiquid. Its $28,055 net deferred tax asset depends on future utilization of tax-loss carryforwards, some of which are restricted and may face further limitations.
- The company disclosed routine legal matters and possible contingent liabilities related to assets sold, but did not expect them to have a material adverse effect. No material subsequent events were reported; management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether asset-liquidation activity and cash generation recover after the revenue decline, and how much operating cash flow depends on changes in payables and other working-capital items.
- The terms, repayment expectations and ongoing availability of the $3,649 Counsel loan, along with any developments in Counsel’s proposed HGI divestiture.
- The recoverability of the deferred tax asset and the impact of ownership-change restrictions on tax-loss carryforwards.
- The sustainability and economics of the $624 related-party licensing transaction and the effect of leadership and staffing changes on operations.