Heritage Global Inc. — Q2 2016 Form 10-Q
Business and period: The company’s sole operating segment is asset liquidation, including auction and appraisal services, asset sales, advisory services, and brokerage of charged-off receivables. This unaudited report covers the three and six months ended June 30, 2016; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2016 (2015) | $3.917m ($3.534m), up 11% | $9.329m ($8.207m), up 14% |
| Services revenue, 2016 (2015) | $3.702m ($2.856m) | $7.894m ($6.540m) |
| Asset sales, 2016 (2015) | $0.215m ($0.678m) | $1.435m ($1.667m) |
| Operating loss, 2016 (2015) | $(0.234)m ($(0.670)m) | $(0.042)m ($(1.102)m) |
| Net income (loss), 2016 (2015) | $0.624m ($(0.693)m) | $0.684m ($(1.280)m) |
| Diluted EPS, 2016 (2015) | $0.02 ($(0.02)) | $0.02 ($(0.05)) |
| Adjusted EBITDA, 2016 (2015) | $(0.134)m ($(0.349)m) | $0.202m ($(0.497)m) |
For the six-month period, operating cash use was $0.262m, versus $1.312m used in 2015. Investing activities used $0.055m, compared with $2.586m provided in 2015; financing activities used $0.420m, versus $2.169m used. Cash declined to $2.041m from $2.777m at year-end 2015.
At June 30, total assets were $18.076m, total liabilities $13.942m, and stockholders’ equity $4.134m. Working capital was negative $3.952m (reported rounded deficit: $4.0m), improved from a $5.1m deficit at December 31, 2015. Current assets were $7.244m and current liabilities $11.196m. Total debt was $4.245m, including $2.5m third-party debt and $1.745m related-party debt. The related-party Street Capital loan is secured by company assets and payable on demand.
Changes and notable items
- Revenue growth was driven by services; asset sales declined. Management reported gross profit from services, asset sales, and equity-method earnings of approximately $2.9m in Q2, up 14%, and $6.3m in the first half, up 19%.
- Net income included a $0.925m Q2 and $0.857m first-half gain from remeasuring contingent consideration. Adjusted EBITDA excludes this gain; operating results remained loss-making in Q2.
- SG&A was $3.064m in Q2, essentially unchanged year over year, and $6.154m for the first half, up 2%. Lower stock compensation and the cessation of Street Capital management fees partly offset higher personnel and other costs. Depreciation and amortization declined following a 2015 impairment of an intangible asset.
- Real estate inventory of $3.715m was classified as current at June 30. The company completed its sale for $4.1m on July 5, 2016, and the related lease terminated.
- On July 8, 2016, the company repaid the $2.5m third-party loan, plus accrued interest, and terminated the loan agreement. These subsequent transactions occurred after the balance-sheet date.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expects the asset liquidation business to remain the primary source of operating cash and states it expects to finance operations through business cash generation and potentially additional debt financing; it believes current capital resources are sufficient. Asset liquidation deal timing and cash flows can vary considerably.
The company expects to pay approximately $2.2m to satisfy the remaining second, third, and fourth NLEX earn-out payments through 2018; the amount is based on NLEX net profits and is a Level 3 fair-value estimate. The company reported approximately $74.0m of tax net operating loss carryforwards, including $15.1m restricted by ownership-change rules, and maintained a full valuation allowance against net deferred tax assets. Management disclosed no material changes to previously reported risk factors or legal proceedings, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether proceeds from the completed $4.1m real estate sale were received as expected and how they affect liquidity after the subsequent $2.5m debt repayment.
- The cash-generation trend: first-half GAAP profit included a substantial noncash contingent-consideration gain, while operating cash flow was negative.
- The timing and final amount of NLEX earn-out obligations, including the assumptions behind the Level 3 valuation.
- The status and repayment terms of the $1.745m Street Capital debt, which is payable on demand and secured by company assets.
- Whether services growth and improved operating results persist, given management’s warning that liquidation transaction timing is variable.