Heritage Global Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance sheet compared with December 31, 2022. Heritage Global provides industrial asset auction, liquidation, refurbishment and resale services, and financial asset brokerage and specialty lending. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Services revenue | $10.245 | $4.168 | +146% |
| Asset sales revenue | $6.367 | $5.189 | +23% |
| Total revenue | $16.612 | $9.357 | +78% |
| Gross profit on services and asset sales | $9.937 | $5.201 | +91% |
| Operating income | $3.894 | $0.875 | +345% |
| Net income | $2.829 | $0.645 | +339% |
| Diluted EPS | $0.08 | $0.02 | — |
| Adjusted EBITDA (non-GAAP) | $4.193 | $1.114 | — |
Gross margin on services and asset sales was approximately 59.8%, versus 55.6%; operating margin was 23.4%, versus 9.4%; net margin was 17.0%, versus 6.9%. Gross profit and margins are calculated from reported revenue less cost of services and cost of asset sales. Adjusted EBITDA is management-defined and adds back stock-based compensation to EBITDA.
Cash, liquidity and debt
- Cash increased to $15.733 million from $12.667 million at year-end. Operating cash flow was $8.945 million, investing cash outflow was $6.786 million, and financing cash inflow was $0.907 million.
- Working capital was $8.6 million, compared with $7.7 million at December 31, 2022. Current assets were $30.160 million and current liabilities were $21.535 million. The current ratio was approximately 1.40.
- Total third-party debt was $5.279 million, including $4.531 million current; total lease liabilities were $2.714 million. The debt balance included $4.0 million outstanding on the $10 million revolving credit facility and $1.3 million on the ALT note.
- The revolving facility was scheduled to mature June 7, 2023. The company reported covenant compliance at March 31, 2023. Management said it expected to fund operations and debt service for at least 12 months after filing using working capital, operating cash flow and access to the existing facility.
- Investing cash outflows included $13.221 million of notes receivable investments, partly offset by $4.613 million received on transfer of notes to partners, $1.071 million of note repayments, and returns and distributions from equity-method investments.
Material changes and operating detail
- Management attributed higher gross profit to substantially increased sales and the timing and size of asset liquidation transactions. SG&A increased 47% to $6.300 million, primarily reflecting higher compensation associated with improved performance.
- Operating income increased in all reported segments: Auction and Liquidation to $1.468 million from $0.649 million; Refurbishment and Resale to $1.101 million from $0.197 million; Brokerage to $2.045 million from $0.495 million; and Specialty Lending to $0.533 million from $0.236 million. Segment figures are operating income, not segment revenue. Management cautioned that some overhead is not allocated to newer segments.
- Payables to sellers rose to $8.333 million from $3.188 million, primarily due to timing of liquidation settlements. These amounts relate to auction and brokerage proceeds held for sellers.
- Notes receivable, net, increased to $16.0 million from $8.5 million at year-end. The company also reported $13.326 million of equity-method investments on its balance sheet. Management described total specialty-lending exposure of $28.4 million; the filing separately reports gross notes and equity-method investments of $29.1 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects industrial surplus asset supply and demand to remain robust and believes rising consumer delinquencies and charge-offs may benefit its Financial Assets Division. These are expectations, not assured outcomes.
- One borrower represented approximately $22.4 million, or 77%, of gross notes and equity-method investment balances of $29.1 million. The company described underlying portfolio purchases and loan agreements as diversified and said it monitors collateral; it reported no actual credit losses to date. A $0.1 million provision for credit losses on notes receivable was recorded in Q1.
- The company adopted ASC 326, the current expected credit loss standard, on January 1, 2023. The adoption reduced opening equity by approximately $0.231 million after tax; prior periods were not restated.
- The company reported approximately $64.9 million of tax net operating loss carryforwards, substantially all expiring from 2024 through 2037; some are subject to ownership-change limitations. A partial valuation allowance remains against deferred tax assets.
- Management reported no material negative COVID-19 impact, no material change in legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2023. The company had no Q1 open-market repurchases and does not expect to pay dividends.
Important facts for investors to verify
- Whether the revolving credit facility was renewed, repaid or replaced ahead of its June 7, 2023 maturity, and the resulting borrowing availability and covenant terms.
- Subsequent performance, collections and collateral coverage for the concentrated borrower exposure, and any changes in credit-loss reserves.
- How much of Q1 operating cash flow reflects recurring earnings versus timing of seller settlements and other working-capital movements.
- Whether the sharp revenue and earnings growth is sustained, given the event-driven and transaction-timing-sensitive business model and higher SG&A.
- The composition and expected realization of deferred tax assets and NOLs, including expiration and Section 382 restrictions.