Heritage Global Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 9, 2024. Heritage Global provides auction, liquidation, refurbishment and resale, brokerage, and specialty lending services through its Industrial Assets and Financial Assets divisions. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Services revenue | $9.0 million | $10.2 million | Down 12% |
| Asset sales | $3.2 million | $6.4 million | Down 50% |
| Total revenue | $12.2 million | $16.6 million | Down 27% |
| Gross profit on services and asset sales | $8.3 million | $9.9 million | Down 16% |
| Operating income | $2.6 million | $3.9 million | Down 34% |
| Net income | $1.8 million | $2.8 million | Down 36% |
| Diluted EPS | $0.05 | $0.08 | Down $0.03 |
| Operating cash flow | $1.7 million | $8.9 million | Down $7.2 million |
| Adjusted EBITDA | $2.9 million | $4.2 million | Down 30% |
Gross profit as presented by management was approximately 68% of revenue, versus 60% a year earlier; operating margin was approximately 21%, versus 23%. Net margin was approximately 15%, versus 17%.
Balance sheet, liquidity and debt
- Cash was $15.6 million at March 31, 2024, up from $12.3 million at year-end 2023. Working capital was $15.0 million, compared with $11.6 million.
- Current assets were $28.9 million and current liabilities $13.9 million, for a current ratio of approximately 2.1. Total assets were $83.7 million; stockholders’ equity was $63.0 million.
- Third-party debt totaled $6.8 million: approximately $6.0 million on the 2023 term loan and $0.8 million on the ALT note. The $7.0 million term loan matures in April 2028, bears a variable prime-based rate, and is secured in part by ALT’s East Lyme, Connecticut building. The ALT note bears 3% interest and matures in August 2025.
- The 2021 revolving credit facility had no outstanding balance and matures October 27, 2024. The company reported compliance with applicable covenants on both credit facilities.
- Cash increased by $3.3 million: operating activities provided $1.7 million, investing activities provided $2.1 million, and financing activities used $0.5 million.
Changes and segment results
The revenue and profit declines primarily reflect a significant one-time principal auction transaction in Industrial Assets in Q1 2023, as well as ordinary variation in the timing and size of liquidation transactions. SG&A was broadly stable at $6.4 million. Higher equity-method earnings ($0.8 million versus $0.4 million) and lower operating costs partly offset lower revenue.
- Industrial Assets: operating income was $0.8 million, down from $2.6 million. Auction and Liquidation contributed $0.8 million versus $1.5 million; Refurbishment & Resale contributed $0.02 million versus $1.1 million.
- Financial Assets: operating income was $2.9 million, up from $2.5 million. Brokerage contributed $2.1 million, broadly level year over year; Specialty Lending contributed $0.9 million versus $0.5 million.
- Operating cash flow was lower chiefly because of less favorable changes in operating assets and liabilities and lower net income adjusted for noncash items. Management noted that deal timing and settlement activity can cause significant period-to-period cash flow variation.
Outlook, risks and other notable items
- No specific revenue or earnings guidance was provided. Management stated it believes available working capital, operating cash flows, and borrowing capacity can fund operations and debt service for at least 12 months from the filing date and beyond.
- Management described an expected annual return of approximately 20% or more on its share of specialty-lending notes, subject to loan terms and collection performance; this is an expectation, not a guarantee.
- Specialty lending is concentrated: one borrower represented approximately $23.4 million, or 63%, of the disclosed $37.3 million gross investments in notes receivable and equity-method investments. The exposure comprises 11 loan agreements and collateralized portfolios, but remains a material concentration and collection risk. The company reported no actual credit losses since the program began.
- The notes-receivable allowance rate was 3.6%, above the cited Federal Reserve SCALE rate of 1.3861%, reflecting borrower concentration and declining collections across the industry. The equity-method investment allowance rate was 4.4%. These estimates depend on assumptions and may not reflect eventual recoveries.
- The filing reports approximately $50.0 million of federal net operating loss carryforwards, some beginning to expire in 2024; use of certain losses is subject to Section 382 ownership-change limitations. A partial valuation allowance was recorded against deferred tax assets.
- The company has a share repurchase authorization with approximately $3.2 million remaining through June 2025; no shares were repurchased in Q1. It has not paid dividends and does not expect to do so.
- No material changes to previously reported legal proceedings were disclosed. The company said disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether revenue and earnings recover after the prior-year one-time auction transaction, particularly in Auction and Liquidation and Refurbishment & Resale.
- Borrower concentration, collection trends, collateral quality, and the adequacy of credit-loss allowances in Specialty Lending; reconcile the filing’s gross exposure figures with its separately stated $35.9 million total loan investment balance.
- Variable-rate term-loan costs, compliance with covenants, and refinancing or repayment plans for the 2021 revolver due October 2024.
- Whether operating cash flow improves, given the large year-over-year decline and the business’s settlement-timing variability.
- Realizability and expiration restrictions affecting deferred tax assets and federal net operating losses.