Heritage Global Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Heritage Global provides industrial-asset auction, appraisal and disposition services, and financial-asset brokerage and specialty financing. Its reportable divisions are Industrial Assets and Financial Assets. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $11.07 | $5.18 | $20.42 | $12.28 |
| Services revenue | $4.60 | $4.17 | $8.76 | $9.20 |
| Asset sales | $6.47 | $1.01 | $11.66 | $3.08 |
| Net income | $2.58 | $0.59 | $3.22 | $1.62 |
| Diluted EPS | $0.07 | $0.02 | $0.09 | $0.04 |
| Operating cash flow | Not separately reported for the quarter | $1.12 | ($4.29) |
- Q2 revenue rose 114%; first-half revenue increased 66%. Growth was driven primarily by asset sales. Services revenue declined 5% in the first half.
- Gross profit on services and asset sales was $4.5 million in Q2, up approximately 18%, and $9.7 million in the first half, up approximately 9%. Implied gross margins were approximately 41% and 48%, respectively; deal timing and mix affect comparability.
- Reported operating income was $3.62 million for Q2 and $4.50 million for the first half, including equity-method investment earnings of $4.17 million and $4.25 million, respectively. Net income increased 339% in Q2 and 99% in the first half.
- Segment net operating income, Q2 / first half: Industrial Assets $3.34 million / $4.19 million (prior-year periods $0.43 million / $1.77 million); Financial Assets $1.18 million / $1.91 million (prior-year periods $0.46 million / $0.92 million). Corporate and Other recorded losses of $0.90 million / $1.60 million.
- At June 30, cash was $16.1 million, working capital $10.5 million, and total assets $53.5 million. Stockholders’ equity was $36.0 million, versus $32.6 million at year-end 2021.
- Total third-party debt was $3.09 million, down from $3.83 million at December 31, 2021. The $10 million revolving credit facility had $1.4 million outstanding; it matures May 7, 2023, bears a variable rate based on prime plus 1.70% (minimum 4.95%), and includes financial and negative covenants. Lease liabilities totaled $2.51 million.
- First-half investing cash flow was $2.18 million, including $6.8 million in returns and distributions from equity-method investments, partly offset by $6.1 million of new investments. Financing cash outflow was $0.84 million, including debt repayments and $0.1 million of share repurchases.
Material changes and unusual items
- Equity-method investment earnings rose sharply from $1,000 in each comparable 2021 period. The filing attributes significant cash distributions and returns to the sale of remaining Huntsville, Alabama real estate assets by CPFH LLC; the lessee also completed its purchase of real estate on June 30, 2022.
- Asset-sales costs increased alongside asset-sales revenue. Management attributed gross-profit changes to the timing and size of individual liquidation transactions.
- SG&A rose 35% in Q2 and 21% in the first half, principally reflecting the 2021 ALT acquisition, higher compensation and operating costs, and resumed travel. First-half travel and entertainment expense increased to $365,000 from $120,000.
- The company repurchased 71,512 shares in June at a weighted-average $1.46 per share under a $4 million program authorized in May 2022; approximately $3.90 million remained available.
- Notes receivable, net, declined to $2.4 million from $4.0 million at year-end. No allowance for credit losses was recorded at June 30. The company is evaluating the expected-credit-loss accounting standard scheduled to apply to it for fiscal years beginning after December 15, 2022.
Outlook, risks and other disclosures
- No quantified revenue or earnings guidance is provided. Management expects to fund operations and debt service for at least 12 months after filing through operating cash flows, existing cash and, if needed, revolver borrowings; it considers current capital resources sufficient.
- Management expects surplus industrial-asset supply to recover and sees potential for increased charged-off consumer-loan activity, specialty-financing opportunities and collateral valuation work. These expectations are forward-looking and not assured.
- Management cautions that renewed COVID-19 surges, stimulus payments or credit policies could delay financial-institution debt sales and revenues. The business is also exposed to transaction timing and magnitude, competition, loan and receivable collectability, and estimates used to value assets and investments.
- The company held approximately $77.8 million of tax net operating loss carryforwards, some subject to ownership-change restrictions; a partial valuation allowance remains against deferred tax assets.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter. No material subsequent events or changes to previously reported legal proceedings were disclosed.
Investor verification points
- Review the nature, sustainability and cash realization of the $4.25 million first-half equity-method earnings, especially the Huntsville transactions and joint-venture distributions.
- Assess the repeatability and economics of asset-sale revenue and margins, which management says vary with deal timing and size.
- Examine the $6.1 million first-half equity-method investment outlay, including investments related to pharmaceutical facilities and specialty lending, and the related joint-venture obligations and returns.
- Verify borrower performance and credit exposure behind notes receivable, given the absence of a recorded loss allowance, and review the expected impact of the forthcoming credit-loss accounting standard.
- Monitor revolver availability, covenant compliance and the May 2023 facility maturity, as well as the use of the share-repurchase authorization and tax-asset realizability.