Heritage Global Inc. — Q1 2021 Form 10-Q
Business and period: The filing covers the unaudited three months ended March 31, 2021, compared with the same period in 2020. Heritage Global provides industrial asset auction, appraisal and disposition services, and financial asset brokerage and specialty financing. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and position
- Revenue: $7.10 million, up 67% from $4.24 million. Services revenue rose 23% to $5.03 million; asset sales increased to $2.07 million from $0.16 million.
- Profitability: Gross profit on services and asset sales was approximately $5.11 million, up 38%. Operating income was $1.05 million versus $0.09 million; net income was $1.03 million versus $0.04 million. Basic and diluted EPS were both $0.03, compared with $0.00 in Q1 2020. Operating margin was approximately 14.7% versus 2.2%; net margin was approximately 14.5% versus 0.9%.
- Segment results: Industrial Assets net operating income increased to $1.34 million from $0.05 million. Financial Assets net operating income decreased to $0.46 million from $0.55 million. Corporate and Other net operating loss widened to $0.76 million from $0.51 million.
- Cash flow: Operating activities used $5.83 million, versus $0.12 million used a year earlier. Investing activities used $1.59 million, versus $0.58 million provided; financing activities used $0.12 million in both periods. Cash declined $7.53 million to $15.85 million.
- Liquidity and debt: Working capital was $13.2 million, compared with $13.0 million at year-end. Current assets were $20.72 million and current liabilities $7.50 million. The company had no debt outstanding at March 31; liabilities included $0.87 million of lease liabilities. Total equity was $30.92 million.
- Other metrics: EBITDA was $1.14 million versus $0.18 million; Adjusted EBITDA was $1.48 million versus $0.26 million. Adjusted EBITDA adds back stock-based compensation and a $0.20 million separation cost. Notes receivable principal outstanding was approximately $3.6 million; no credit-loss allowance was recorded.
Changes and notable items
- Revenue and operating income rose substantially, driven principally by higher asset-sale activity and transaction timing. Management cautioned that the magnitude and timing of asset liquidation deals can vary considerably.
- SG&A increased 14% to $3.97 million, including increased HGP and corporate compensation and a one-time separation expense; lower NLEX compensation and pandemic-related travel expense partly offset the increase.
- Cash used in operations was primarily affected by a $6.49 million reduction in accounts payable and accrued liabilities, alongside $2.49 million of lending activity. Management attributed working-capital volatility to the discrete nature and timing of transactions.
- On May 11, 2021, after quarter-end, the company entered a new secured $10.0 million revolving credit facility, maturing May 11, 2023, replacing its prior facility. The rate is prime plus 1.70%, subject to a 4.95% floor; it includes financial and negative covenants and permits conversion of up to $5.0 million of revolving debt to term debt.
- The company reported $77.6 million of tax net operating loss carryforwards, some subject to Section 382 restrictions, and a partial valuation allowance on deferred tax assets.
Outlook, commentary and risks
No quantified revenue or earnings guidance was provided. Management said it expects sufficient resources to fund operations through operating cash flows, proceeds from its 2020 stock offering and, if needed, credit-facility draws. Management expects the pandemic and economic conditions could increase supplies of distressed and surplus assets, online auction demand, charged-off loan activity and financing opportunities. It also warned that stimulus payments and credit policies may delay debt sales and revenues, and that these potential benefits may be offset by adverse effects on certain consumer-loan-related businesses. Q1 performance was described as having a minor negative COVID-19 impact.
Relevant risks include transaction timing and variability, competitive pressure from larger and better-resourced competitors, customer concentration (one customer represented 10% of Q1 2021 revenue), uncertain collectability and valuation estimates, and the absence of an allowance against notes receivable. The new credit facility is secured and subject to covenants. The filing reports no material changes to previously disclosed legal proceedings and no material subsequent events other than the new facility. Management concluded disclosure controls were effective; it reported no material change in internal control over financial reporting.
Investor verification points
- Assess whether Q1’s asset-sale surge and exceptionally strong Industrial Assets result are repeatable, given management’s warning about deal timing and magnitude.
- Reconcile the $5.83 million operating cash outflow, particularly the settlement of auction liabilities and the reduction in accounts payable and accrued liabilities.
- Review the new $10.0 million facility’s full terms, collateral, covenants, borrowing availability and subsequent utilization; quarter-end debt was zero.
- Evaluate credit quality and recoverability of approximately $3.6 million of notes receivable, for which no allowance was recorded.
- Consider customer concentration, pandemic-related uncertainty, restricted tax-loss carryforwards and the assumptions supporting deferred tax assets.