Heritage Global Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The company operates an asset liquidation business, including auction, appraisal and advisory services, distressed-asset transactions, and charged-off receivables brokerage. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $5.412 million | $4.673 million |
| Operating income (loss) | $192,000 | $(432,000) |
| Net income (loss) | $60,000 | $(587,000) |
| Basic and diluted EPS | $0.00 | $(0.02) |
| Operating cash flow | $(1.442) million | $(343,000) |
| Adjusted EBITDA (non-GAAP) | $336,000 | $(149,000) |
- Services revenue was $4.192 million and asset sales were $1.220 million. Revenue increased 16% year over year. Management attributed improved gross profit to the timing and mix of asset liquidation transactions; gross profit across revenue, related costs and equity-method earnings was approximately $3.4 million, up about 24%.
- Operating expenses were $5.228 million, up 2%. SG&A increased 4% to $3.090 million, principally reflecting higher personnel costs and headcount; lower stock compensation and the end of Street Capital management fees partly offset the increase.
- Cash and equivalents were $1.323 million at March 31, versus $2.777 million at year-end. Total assets were $17.639 million and stockholders’ equity was $3.485 million.
- Working capital deficit widened to $7.4 million from $5.1 million at December 31, 2015. Current assets were $3.169 million and current liabilities $10.520 million.
- Total debt was $4.221 million: $2.5 million of third-party debt and $1.721 million owed to Street Capital. The third-party loan bears 6% interest and was extended to January 15, 2017; Street Capital debt is secured by company assets, bears 5.5% interest, and is due on demand. The filing also describes a $400,000 executive-related trust loan received and repaid, with interest, during the quarter.
Changes, outlook and risks
- Compared with Q1 2015, the company moved from an operating and net loss to modest profit. Cash used in operations increased to $1.442 million, mainly reflecting unfavorable working-capital movements and lower returns from equity-method investments. There was no investing cash flow in Q1 2016; Q1 2015 investing cash flow included proceeds from an investment exit.
- In March, the company agreed to sell its real estate inventory for $4.1 million. The buyer may terminate for any reason before June 9, 2016. The company separately agreed to lease the building to a buyer affiliate during escrow; if the sale does not close, the lease continues for its five-year term. Annual rent is $700,000, and Q1 2016 rental income was $100,000.
- Management expects the asset liquidation business to remain the primary source of operating cash and says it expects to finance operations through that business and additional debt financing as needed. It stated that current capital resources are sufficient for requirements, but the filing provides no quantified earnings or revenue guidance. Interim results are not necessarily indicative of full-year results.
- Contingent consideration related to the NLEX acquisition was $3.525 million, measured using Level 3 inputs and management estimates of NLEX net profits. Accretion added $68,000 in the quarter. The company reported approximately $74.0 million of tax net operating loss carryforwards, substantially offset by a full valuation allowance on net deferred tax assets.
- Risks include the working-capital deficit, low cash relative to current liabilities, debt due on demand, variability in deal timing and cash flows, and uncertainty over the real estate sale. Management reported no material changes to previously disclosed risk factors or legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
- After quarter-end, three directors resigned effective May 5, 2016; the company stated the resignations were not due to disagreements with the company.
Important facts for investors to verify
- Whether the $4.1 million real estate sale closed or was terminated, and the resulting effect on cash, inventory and the lease.
- How the company plans to fund operations and address its $7.4 million working-capital deficit, including the demand status and repayment prospects of Street Capital debt.
- Whether operating cash flow improves as receivables, payables and other deal-related balances fluctuate.
- The assumptions underlying NLEX contingent consideration and the recoverability of goodwill, intangible assets and tax attributes.
- Whether subsequent board changes affect oversight or governance.