Heritage Global Inc. — Q1 2022 Form 10-Q
Business and period. The filing covers the three months ended March 31, 2022, compared with Q1 2021; balance-sheet figures are compared with December 31, 2021. Heritage Global provides industrial asset auction, appraisal and disposition services, and brokerage and financing solutions for nonperforming and charged-off financial assets. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior balance date |
|---|---|---|
| Total revenue | $9.36 | $7.10 |
| Services revenue | $4.17 | $5.03 |
| Asset sales revenue | $5.19 | $2.07 |
| Operating income | $0.88 | $1.05 |
| Net income | $0.65 | $1.03 |
| Basic and diluted EPS | $0.02 | $0.03 |
| Operating cash flow | $3.09 | $(5.83) |
| Cash and cash equivalents | $15.10 | $13.62 at Dec. 31, 2021 |
| Working capital | $8.8 | $9.1 at Dec. 31, 2021 |
| Total debt | $3.21 | $3.83 at Dec. 31, 2021 |
| Total assets / stockholders’ equity | $52.11 / $33.37 | $50.46 / $32.64 at Dec. 31, 2021 |
Cost of services and asset sales totaled $4.16 million, leaving reported gross profit of approximately $5.2 million, versus $5.1 million a year earlier. Gross margin on total revenue was approximately 55.6%, compared with 71.9%. Selling, general and administrative expense increased 8% to $4.28 million. The company reported EBITDA of $1.01 million and adjusted EBITDA of $1.11 million, both non-GAAP measures.
Segment net operating income was $0.85 million for Industrial Assets, down from $1.34 million; $0.73 million for Financial Assets, up from $0.46 million; and a $0.70 million Corporate and Other loss, compared with $0.76 million. Investing cash outflow was $0.98 million, including $2.12 million invested in equity-method ventures; financing cash outflow was $0.64 million, including debt repayments.
At quarter-end, current assets were $24.15 million and current liabilities were $15.38 million. Debt comprised $1.98 million current and $1.23 million noncurrent. The company also had $2.63 million of lease liabilities. Its $10 million revolving credit facility matures May 7, 2023; $1.4 million was outstanding under the facility, and the $2 million ALT acquisition note had a $1.8 million balance and matures in 2025.
Changes, outlook and risks
- Revenue rose 32%, driven by a 151% increase in asset sales, while services revenue fell 17%. Operating income declined 16% and net income declined 38%; the company attributed deal-level gross profit variation to the timing and size of asset liquidation transactions.
- Operating cash flow improved by approximately $8.9 million year over year, primarily reflecting changes in operating assets and liabilities, including seller payables. Management cautions that deal timing can make these balances and cash flows variable.
- Management said it expects to fund operations and debt service for at least 12 months from filing through operating cash flows, existing cash and, if needed, credit-facility draws. No specific earnings or revenue guidance was provided.
- Management expects potential growth in surplus industrial assets and charged-off consumer loan activity, but noted that renewed COVID-19 surges, stimulus or credit policies could delay debt sales and revenue. Competition, transaction timing, and collectability and valuation estimates are also relevant risks.
- On April 6, 2022, the company announced participation in a partnership that acquired two pharmaceutical plants. On May 5, the board authorized a share repurchase program of up to $4 million over three years; repurchases are discretionary and not assured.
- A lessee had exercised a purchase option for a manufacturing facility and equipment, but had not completed the transaction as of March 31, 2022. The company reported no material change in legal proceedings, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the surge in asset-sale revenue and improvement in operating cash flow are repeatable, given transaction timing and movements in seller payables.
- Performance and funding needs of the Financial Assets division and equity-method ventures, including returns and collection risks on loans and investments.
- Remaining availability and covenant compliance under the revolving credit facility, and debt repayment requirements.
- Status and potential financial effect of the uncompleted facility purchase-option transaction and the announced pharmaceutical-plant partnership.
- Whether any shares are repurchased under the discretionary $4 million program and how repurchases would affect liquidity and investment capacity.