Heritage Global Inc. — Q2 2015 Form 10-Q
Business context and period: The filing covers the three and six months ended June 30, 2015. Heritage Global’s sole operating segment is asset liquidation, including auctions and advisory services, asset sales, and NLEX’s brokerage of charged-off receivables. NLEX was acquired in 2014; 2015 comparisons include more months of its operations.
Key financial results
Amounts below are in U.S. dollars; financial statement figures are in thousands unless otherwise noted.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,958 | $2,811 | $6,603 | $4,796 |
| Operating loss | $(669) | $(469) | $(1,102) | $(1,246) |
| Net loss | $(693) | $(584) | $(1,280) | $(26,155) |
| Basic and diluted loss per share | $(0.02) | $(0.02) | $(0.05) | $(0.93) |
| Operating cash flow | Not provided separately | Not provided separately | $(1,343) | $(958) |
| Investing cash flow | Not provided separately | Not provided separately | $2,586 | $(931) |
| Financing cash flow | Not provided separately | Not provided separately | $(2,169) | $1,033 |
- Q2 revenue rose 5%; six-month revenue rose 38%, primarily reflecting NLEX’s inclusion for the full first half of 2015 versus one month in the 2014 comparison.
- For the first half, management reported asset-liquidation gross profit, including equity-method investment earnings, of $5.1 million, up from $3.8 million. NLEX contributed $2.2 million of 2015 year-to-date gross profit. Q2 gross profit on the same basis was $2.5 million versus $2.3 million.
- SG&A increased 14% to $3.0 million in Q2 and 24% to $5.9 million for the first half, largely due to NLEX. Depreciation and amortization was $324,000 for the first half, compared with $238,000.
- First-half adjusted EBITDA, a company-defined non-GAAP measure, was a loss of $497,000, versus a loss of $728,000 in 2014. Q2 EBITDA was a loss of $348,000 versus a loss of $203,000.
- Cash and cash equivalents were $2.7 million at June 30, down from $3.6 million at year-end 2014. Working capital deficit widened to $6.1 million from $4.0 million.
- Total debt was $4.1 million, all classified as current: $2.5 million third-party debt due January 15, 2016, and a $1.6 million Counsel related-party loan due on demand. The prior-year $2.5 million third-party loan was classified as non-current, and the $525,000 credit facility was repaid in March 2015.
- Total assets were $27.3 million and stockholders’ equity was $12.4 million at June 30, compared with $31.9 million and $13.5 million, respectively, at December 31, 2014.
Material changes and notable items
- First-half operating loss improved to $1.1 million from $1.2 million, while net loss was far smaller than in 2014, when a $24.7 million income tax expense was recorded. The 2015 first-half tax expense was $3,000. The company maintained a full valuation allowance against net deferred tax assets.
- Investing cash inflow included $2.0 million proceeds from the Polaroid investment exit and $737,000 of equity-method distributions. Financing cash outflow included $525,000 of third-party debt repayment and $2.4 million of Counsel debt repayment, partly offset by $775,000 of related-party advances.
- NLEX acquisition earn-out consideration was estimated at $4.2 million present value, subject to a $5.0 million cap. The recorded liability comprised $513,000 current and $3.7 million non-current; valuation depends on projected earnings and other assumptions.
- Common shares outstanding were 28,467,648 at June 30, 2015; the company reported 28,467,648 shares outstanding as of August 7, 2015.
Outlook, risks and other disclosures
- Management expects the asset-liquidation business to remain the primary source of cash for the foreseeable future. It believes current resources are sufficient for capital needs and expects to fund operations through the business and additional debt financing if needed; it intends to repay loans at maturity and expects refinancing may be available if necessary.
- The company and Counsel intended to terminate their management Services Agreement in Q3 2015 following executive and board changes. Counsel charged $218,000 in management fees and other charges in the first half; these amounts were accrued and added to the Counsel Loan balance.
- Management cautions that interim results are not necessarily indicative of full-year results. Results are exposed to transaction timing, competition, regulatory and compliance costs, estimates and valuations, and foreign-exchange movements. The filing reports no material change in risk factors or legal proceedings from the 2014 Form 10-K.
- The company had approximately $87.2 million of tax net operating loss carryforwards, including $28.8 million subject to ownership-change restrictions. The filing notes uncertainty about future taxable income and a full valuation allowance.
- No material subsequent events were reported. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating performance and cash generation can improve enough to address the $6.1 million working capital deficit and current debt maturities.
- NLEX’s continuing contribution to revenue and gross profit relative to its operating costs, and the assumptions underlying its earn-out liability.
- Timing and availability of repayment or refinancing for the January 2016 third-party loan and the Counsel Loan due on demand.
- Progress and final terms of the planned termination of Counsel’s Services Agreement, including any effects on costs and related-party balances.
- Whether tax-loss carryforwards and other significant asset valuations, including goodwill, intangibles, investments, and real estate inventory, remain recoverable.