Heritage Global Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are to FY2017. This is an annual report, not a standalone fourth-quarter report. The company operates one segment: asset liquidation, including auctions and appraisals, distressed-business advisory, and charged-off receivables brokerage.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $23.664 million | $20.129 million |
| Gross profit | $19.616 million; 82.9% margin | $15.416 million; 76.6% margin |
| Operating income | $4.078 million; 17.2% margin | $0.364 million; 1.8% margin |
| Net income (loss) | $3.751 million; $0.13 per share | $(0.249) million; $(0.01) per share |
| Adjusted EBITDA | $4.686 million | $2.065 million |
| Operating cash flow | $7.470 million | $1.182 million |
Revenue rose 17.6%, driven by higher services revenue ($21.658 million, up from $17.937 million); asset sales were $2.006 million versus $2.192 million. Gross profit increased about 27%. SG&A increased 12% to $15.219 million, mainly reflecting higher performance bonuses and compensation. Adjusted EBITDA is a non-GAAP measure; the company reconciles it to GAAP net income in the filing.
At year-end, cash was $4.268 million, total assets $20.631 million, total liabilities $13.031 million, and stockholders’ equity $7.600 million. Working capital was negative $2.5 million, improved from a $5.6 million deficit in 2017. Debt totaled $1.616 million: $1.178 million current and $0.438 million non-current. Cash increased $2.159 million during the year. Investing used $2.852 million, primarily for the Huntsville, Alabama joint-venture investment; financing used $2.459 million.
Material changes and notable items
- Operating income improved substantially, including because FY2017 included a $1.142 million settlement accrual; FY2018 had no comparable accrual.
- Operating cash flow improved, but working-capital movements contributed materially: accounts payable and accrued liabilities increased $3.839 million, and other non-current liabilities increased $1.838 million. Inventory purchases used $2.235 million of cash.
- The company paid the final $2.617 million NLEX earn-out to President David Ludwig; contingent consideration was zero at year-end. The related fair-value adjustment was a $0.157 million expense in 2018, versus a $0.938 million benefit in 2017.
- A $1.5 million bank revolving credit facility was established in September 2018, replacing a related-party credit line. The facility matures October 5, 2019, bears interest at prime subject to a 5.25% floor, and had $0.8 million drawn with $0.7 million available at year-end. It is secured by company and certain subsidiary assets and includes financial and other covenants.
- A separate $1.260 million settlement note is payable in 36 monthly installments of $35,000, with any remaining balance due January 30, 2021; $0.816 million was outstanding at year-end.
- The Huntsville campus transaction involved approximately $2.3 million of equipment inventory and a $2.753 million equity-method investment. The company has a remaining obligation to make approximately $3.8 million in guaranteed distributions to a partner by May 26, 2020, which it expects to fund from asset-sale proceeds.
Outlook, risks, and controls
Management expects ongoing asset-liquidation operations, existing cash, and available credit to fund operations and obligations during 2019 and beyond; it also says additional financing may be sought if needed. No clear numerical revenue or earnings guidance is provided. Results are inherently uneven because transactions are discrete and vary in size and timing. Key risks include competition, inventory resale and credit exposure, working-capital needs, dependence on key personnel and joint-venture partners, foreign-exchange and regulatory risks, cybersecurity, and potential impairment of goodwill. Goodwill was $6.158 million and acquired intangibles were $3.627 million; no impairment was recorded in 2018. The company reported a $277.4 million accumulated deficit and a full valuation allowance against deferred tax assets, including approximately $71.8 million in tax NOL carryforwards subject to limitations and expirations. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor issued an unqualified opinion on the financial statements and did not audit internal-control effectiveness. Management reported no legal matters expected to have a material adverse effect.
The filing gives two different year-end deferred-revenue figures: approximately $485,000 in the MD&A and approximately $795,000 in the financial-statement note. The text does not provide a clear reconciled value.
Important facts for investors to verify
- Reconcile the deferred-revenue discrepancy and confirm the related contract-liability balance.
- Track conversion of the Huntsville equipment inventory and investment into cash, and whether asset sales cover the $3.8 million partner-distribution commitment by May 2020.
- Assess refinancing or repayment plans for the bank facility maturing in October 2019, along with compliance with its covenants and the settlement-note schedule.
- Evaluate the sustainability of FY2018 earnings and cash generation, particularly the contribution from working-capital timing and variable transaction volumes.
- Review restrictions on tax-loss carryforwards, the company’s limited public trading market, and potential dilution; 29.253 million common shares were outstanding at year-end and 4.304 million options were outstanding.