Heritage Global Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020. Heritage Global provides industrial and financial asset liquidation services, including auctions, appraisals, brokerage, asset sales, and specialty lending. It acquired American Laboratory Trading (ALT), a refurbished laboratory equipment and surplus-asset business, on August 23, 2021.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $25.8 | $26.2 |
| Gross profit | $18.4 | $17.1 |
| Operating income | $3.0 | $6.1 |
| Net income | $3.1 | $9.7 |
| Diluted earnings per share | $0.08 | $0.30 |
| EBITDA (company-defined, non-GAAP) | $3.5 | $6.4 |
| Adjusted EBITDA (company-defined, non-GAAP) | $4.1 | $6.8 |
| Cash and cash equivalents at year-end | $13.6 | $23.4 |
- Gross margin increased to approximately 71% from 65%, as service and asset-sale costs declined despite slightly lower revenue. Operating margin was approximately 12%, versus 23% in 2020.
- Operating cash flow was negative $2.6 million, compared with positive $9.1 million in 2020. Investing cash flow was negative $10.2 million; financing cash flow was positive $3.1 million. Cash fell by $9.8 million during 2021.
- Working capital was $9.1 million, down from $13.0 million. Current assets were $23.3 million and current liabilities $14.2 million at year-end.
- Total debt was $3.8 million: $1.9 million outstanding on a $10 million revolving credit facility and $1.9 million remaining on the ALT acquisition note. The facility matures in May 2023; the ALT note bears 3% interest and matures in August 2025. Lease liabilities totaled $2.8 million.
- Stockholders’ equity was $32.6 million, compared with $29.9 million. Notes receivable, net, were $4.0 million; the company reported no allowance for credit losses on these loans at year-end.
Changes versus 2020
- Revenue decreased 1.5%; service revenue fell to $20.0 million from $21.8 million, while asset-sale revenue rose to $5.8 million from $4.4 million.
- Operating income declined by about half. A major contributor was equity-method investment earnings, which shifted from $3.8 million of earnings in 2020 to a $79,000 loss in 2021. Segment operating income also fell: Industrial Assets to $3.4 million from $5.8 million, and Financial Assets to $2.0 million from $2.6 million.
- Net income declined to $3.1 million from $9.7 million. The 2020 result included a $3.6 million income tax benefit, compared with a $61,000 tax benefit in 2021.
- ALT added revenue, assets, goodwill and operating costs from its August acquisition. The purchase price was approximately $5.6 million, consisting of cash, a $2.0 million note and acquired real estate. The acquisition added $1.9 million of goodwill; no goodwill or intangible-asset impairment was recorded in 2021.
- SG&A increased 3% to $14.8 million, including ALT-related costs, partly offset by a $602,000 employee retention credit and lower NLEX compensation expense.
Outlook, risks and notable items
- The filing provides no specific numerical revenue or earnings guidance. Management said it expected to fund operations and debt service through operating cash flows and available credit, and believed current capital resources were sufficient for foreseeable requirements.
- Management reported that COVID-19 restrictions, stimulus payments and lender credit policies negatively affected 2021 performance. It expected surplus industrial-asset supply and demand, charged-off loan volumes, HGC lending opportunities and valuation work to improve as conditions changed. Renewed infection surges or continued stimulus and credit policies could delay debt-sale revenues.
- Key risks include volatile deal timing and results, competition from larger and better-capitalized firms, inventory valuation and resale risk, customer concentration, dependence on key personnel and joint-venture partners, financing needs, and cybersecurity, regulatory, tax and acquisition-integration risks. One customer represented 8% of 2021 revenue, versus 10% in 2020.
- ALT-related intangible valuations and deferred tax assets were identified as critical audit matters. The auditor issued an unqualified opinion on the financial statements; it did not audit internal control over financial reporting. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end.
- Legal matters in the ordinary course were not expected to have a material adverse effect. The company reported no off-balance-sheet arrangements and no material subsequent events. It had not paid, and did not expect to pay, common-stock dividends in the foreseeable future.
Important facts for investors to verify
- Whether operating cash flow improves and year-end cash remains adequate given the 2021 cash decline and increased lending and inventory investment.
- Credit-facility availability, covenant compliance, borrowing costs and repayment needs, including the remaining ALT note installments.
- ALT’s post-acquisition contribution to revenue, margins and cash flow, and the assumptions supporting its acquired intangible assets and goodwill.
- Performance and recoverability of HGC notes receivable, including the absence of a recorded credit-loss allowance at year-end.
- The sustainability of equity-method investment returns and the timing of the Huntsville property and equipment purchase-option transaction, which had not closed by year-end despite the lessee’s stated intention to exercise.
- Realization of deferred tax assets and use of approximately $77.8 million in tax net operating loss carryforwards, some of which are restricted or expire between 2024 and 2037.