Heritage Global Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; amounts are in U.S. dollars, generally in thousands unless stated otherwise. Interim financial statements are unaudited. Heritage Global’s sole operating segment is its asset liquidation business, including auction, appraisal, advisory, asset sales and charged-off receivables brokerage. NLEX, acquired in 2014, is included in the current quarter but not the comparable 2014 quarter.
Financial performance and position
- Revenue: $3.645 million, up 83.6% from $1.985 million. Commissions and other revenue were $2.812 million; asset sales were $833,000. The filing attributes much of the improvement to NLEX.
- Profitability: Operating loss was $433,000 versus $777,000; net loss was $587,000 versus $25.571 million. Basic and diluted loss per share was $0.02 versus $0.91. Operating margin was approximately negative 11.9% versus negative 39.1%; net margin was approximately negative 16.1% versus negative 1,288%, with the prior period heavily affected by tax expense.
- Operating contribution and costs: Asset liquidation revenue less asset liquidation expense, plus earnings (losses) from asset liquidation investments, was $2.649 million versus $1.490 million, a 77.8% increase. NLEX contributed $962,000 of net asset liquidation earnings and, per management, $335,000 of operating profit. SG&A rose 34.9% to $2.885 million, primarily reflecting NLEX; depreciation and amortization was $159,000.
- Cash flow: Operating activities used $462,000, compared with $676,000 used in Q1 2014. Investing activities provided $2.132 million, including $1.992 million from the Polaroid investment exit and a $140,000 distribution from Knight’s Bridge GP. Financing activities used $1.493 million. Cash increased $177,000 to $3.810 million.
- Liquidity and debt: Working capital deficit widened to $6.400 million from $3.883 million at year-end; current assets were $5.595 million and current liabilities $11.995 million. Total debt was $4.670 million, all classified as current: $2.617 million third-party debt and $2.053 million related-party Counsel Loan. The third-party loan matures January 15, 2016; the Counsel Loan is payable within 30 days after each quarter. The prior bank credit facility was repaid in March, and equivalent third-party financing had not been obtained as of the filing.
- Balance sheet: Total assets were $29.419 million, liabilities $16.439 million, and stockholders’ equity $12.980 million. Real estate inventory and asset liquidation investments totaling $7.309 million were classified as non-current, although management expects them to convert to cash within a year.
Changes, outlook and risks
- Revenue and asset liquidation earnings increased substantially, with NLEX’s first full comparable contribution in Q1 2015. Higher SG&A and amortization partly offset that growth. Management cautions that results are affected by the timing of liquidation transactions.
- The prior-year net loss included $24.667 million of income tax expense, principally a write-down of deferred tax assets. Q1 2015 tax expense was $3,000; the company maintains a full valuation allowance against net deferred tax assets due to cumulative losses and uncertainty about future taxable income.
- No specific earnings or revenue guidance is provided. Management expects the asset liquidation business to remain the primary source of operating cash and says it continues to pursue patent licensing and royalty agreements, which it does not expect to be material at present.
- Liquidity risk is notable given the working capital deficit, current classification of all debt, and lack of replacement financing for the repaid credit facility. The company also has acquisition-related contingent consideration for NLEX, estimated at $4.287 million present value (including $803,000 current); payments depend on NLEX revenue and certain expenses and are capped at $5 million.
- Other disclosed risks include competition from larger, better-resourced participants; transaction timing and asset valuation/collectability estimates; regulatory and compliance costs; foreign currency exposure from European operations; and related-party management services and debt. Management reported no material changes to previously disclosed risk factors or legal proceedings, no material subsequent events, and effective disclosure controls.
Important facts for investors to verify
- Whether operating cash generation can improve and fund expenses and obligations without replacement credit financing.
- The maturity, repayment terms and refinancing plan for the $2.617 million third-party loan and the quarterly payment requirements on the Counsel Loan.
- Realizability and timing of cash conversion for the $7.309 million of real estate inventory and asset liquidation investments classified as non-current.
- Actual NLEX performance and the assumptions underlying its contingent consideration valuation and future payments.
- Whether future taxable income supports any deferred tax asset recognition; the filing reports substantial tax loss carryforwards, with some restricted by ownership-change rules.