Heritage Global Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 10, 2022. Amounts are in U.S. dollars; financial figures below are in millions unless noted. Heritage Global provides industrial asset auction, appraisal and advisory services, and brokers and finances nonperforming and charged-off loan portfolios.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $12.661 | $5.991 | $33.083 | $18.268 |
| Gross profit on services and asset sales | $7.595 | $4.185 | $17.320 | $13.163 |
| Operating income | $3.474 | $0.533 | $7.973 | $1.652 |
| Net income | $2.300 | $0.474 | $5.523 | $2.093 |
| Diluted EPS | $0.06 | $0.01 | $0.15 | $0.06 |
- Revenue rose 111% in Q3 and 81% year to date. Services revenue increased 52% and 15%, respectively; asset sales rose 354% and 300%.
- Gross margin on services and asset sales was approximately 60% in Q3 (versus 70%) and 52% year to date (versus 72%). The filing attributes changes in gross profit to the timing and magnitude of asset liquidation transactions.
- Q3 operating income included $1.706 million of equity-method investment earnings, compared with a loss of $0.084 million a year earlier. Nine-month equity-method earnings were $5.960 million versus a loss of $0.083 million.
- Segment net operating income for Q3 was $3.058 million in Industrial Assets, $1.566 million in Financial Assets, and a $1.150 million loss in Corporate and Other. Nine-month figures were $7.247 million, $3.480 million, and a $2.754 million loss, respectively.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was positive $2.571 million, versus negative $4.126 million in 2021. Investing activities provided $3.870 million, compared with $7.258 million used; financing activities used $2.581 million, versus $1.233 million provided.
- Cash and cash equivalents were $17.482 million at September 30, up from $13.622 million at year-end 2021. Working capital was $13.0 million, versus $9.1 million. Current assets were $26.475 million and current liabilities $13.458 million.
- Total debt was $1.524 million, down from $3.831 million at December 31, 2021. The company reported no outstanding balance on its $10 million revolving credit facility; the facility matures May 7, 2023. The $1.5 million ALT subordinated note bears 3% interest and matures August 23, 2025. Lease liabilities totaled $3.007 million.
- Stockholders’ equity increased to $38.272 million from $32.639 million. Notes receivable, net, declined to $2.1 million from $4.0 million; the company recorded no allowance for credit losses on these notes at September 30.
Material changes, outlook and risks
- Management said it expects available cash, ongoing operating cash flows and potential credit-facility draws to fund operations and debt service for at least 12 months from the filing date. No formal revenue or earnings guidance was provided.
- Management expects post-pandemic normalization and supply-chain disruption to support industrial surplus-asset demand, and expects rising consumer delinquencies and charge-offs to benefit loan-brokerage and specialty-financing activity. It cautioned that renewed COVID-19 surges or credit policies could delay debt sales and revenue.
- Investment and distribution activity in joint ventures was significant: the company invested $8.068 million in equity-method ventures and received $7.266 million in distributions plus a $2.945 million return of investment during the first nine months. Proceeds included real-estate and equipment transactions; the filing describes the timing and scale of such deals as variable.
- The company repurchased approximately 184,000 shares for $0.296 million through September 30 under a $4 million program, with about $3.706 million remaining. It had 36,932,177 common shares outstanding at September 30.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting. It reported no material changes to legal proceedings and no defaults on senior securities. Management identified estimates involving receivable collectability, inventory, investments, goodwill, deferred taxes and stock compensation as areas requiring judgment.
- The company had approximately $77.8 million of tax net operating loss carryforwards, some subject to ownership-change limits; substantially all expire from 2024 to 2037. A partial valuation allowance remains against deferred tax assets. Adoption of the expected-credit-loss standard was pending evaluation for 2022 year-end.
Important facts for investors to verify
- How much of reported earnings depends on joint-venture results and asset-sale timing, and how those earnings translate into cash distributions.
- Whether growth in asset sales and services is repeatable, given the substantial variability in transaction timing and the lower gross margin in the reported periods.
- Credit-facility availability, covenants and refinancing plans ahead of its May 2023 maturity, alongside scheduled ALT note payments and lease obligations.
- Cash held on behalf of sellers: auction funds are included in cash and matched by payables to sellers, so reported cash is not necessarily wholly available for corporate use.
- Collectability of notes receivable, realization of deferred tax assets, and potential dilution from outstanding options and other equity awards.