Heritage Global Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 10, 2021. Amounts below are in U.S. dollars, generally in millions unless stated. Heritage Global provides industrial asset liquidation, auction and appraisal services, and financial asset brokerage and specialty financing.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.991 | $7.566 | $18.268 | $17.927 |
| Gross profit on services and asset sales | $4.216 | $4.971 | $13.163 | $13.225 |
| Operating income | $0.533 | $1.612 | $1.652 | $2.730 |
| Net income | $0.474 | $1.264 | $2.093 | $3.341 |
| Diluted EPS | $0.01 | $0.04 | $0.06 | $0.11 |
| Operating cash flow | Not provided by quarter | $(4.126) | $2.806 |
Gross margin was approximately 70.4% in Q3 versus 65.7% in the prior-year quarter; nine-month gross margin was approximately 72.1% versus 73.8%. Operating margin declined to approximately 8.9% from 21.3% in Q3, and to 9.0% from 15.2% for the nine-month period. EBITDA was $0.638 million for Q3 and $1.946 million for the nine months; Adjusted EBITDA was $0.740 million and $2.459 million, respectively. These are non-GAAP measures.
At September 30, cash was $13.234 million, down from $23.385 million at December 31, 2020. Working capital was $9.9 million, compared with $13.0 million at year-end; current assets were $19.822 million and current liabilities $9.931 million. Total assets were $45.352 million and stockholders’ equity $31.584 million. Debt was $2.0 million, entirely the ALT acquisition note; the $10 million revolving credit facility had no outstanding balance. Lease liabilities totaled $2.866 million.
Material changes and business developments
- Q3 revenue fell 21%, with services revenue down 20% and asset sales down 22%. For the nine months, total revenue rose 2% as asset sales increased 92%, offsetting an 11% decline in services revenue.
- Q3 operating income fell 67% and net income fell 63%; nine-month operating income declined 39% and net income declined 37%. Management attributed variation in gross profit to the timing and magnitude of individual asset liquidation transactions. Q3 equity-method investments recorded a loss of $84,000 versus earnings of $111,000 in the prior-year quarter; the nine-month result was a loss of $83,000 versus earnings of $293,000.
- Industrial Assets Division nine-month operating income increased to $2.538 million from $2.346 million; Financial Assets Division income declined to $1.372 million from $1.789 million. Corporate and Other losses widened to $2.258 million from $1.405 million.
- On August 23, 2021, the company acquired certain assets and liabilities of American Laboratory Trading (ALT), plus the real estate used in the business. The ALT business purchase price was approximately $4.3 million, comprising $2.3 million cash and a $2.0 million subordinated note; the real estate purchase cost $1.3 million. ALT contributed an immaterial amount of revenue and net income after acquisition during the period. Purchase accounting remained preliminary.
- Operating cash use of $4.126 million reflected, among other items, a $4.890 million reduction in accounts payable and accrued liabilities and a $1.555 million increase in receivables. Investing cash use was $7.258 million, including the ALT business and real estate acquisitions, lending and equity-method investments. Cash declined by $10.151 million over the nine months.
- Common shares outstanding increased to 36.575 million from 35.281 million at year-end. The filing reports 36,574,702 shares outstanding as of November 1, 2021.
Outlook, risks and other notable items
- Management stated it believes resources—including operating cash flows and, if needed, draws on the revolving facility—are sufficient to fund operations and debt service for at least 12 months from the filing date. No revenue, earnings or other quantified guidance was provided.
- Management said COVID-19-related restrictions, stimulus payments and credit policies, and delays in industrial asset sales negatively affected performance in the first three quarters. It expects potential future opportunities from increased distressed and surplus assets, loan-sale activity and demand for U.S.-based surplus assets, but warned renewed infection surges or policy changes could delay Financial Assets Division revenue.
- Other risks include deal timing and magnitude, competition, customer and credit-market conditions, and execution and valuation risks from the ALT acquisition. One customer represented 9% of nine-month revenue, versus 12% in the comparable 2020 period.
- The company recorded a $435,000 income tax benefit for the nine months. It reported approximately $77.6 million of tax net operating loss carryforwards, some restricted under Section 382, and a partial valuation allowance against deferred tax assets.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing reported no material subsequent events and no material changes to previously disclosed legal proceedings.
Key facts for investors to verify
- Whether operating cash flow and working capital recover, given the nine-month cash outflow and substantial cash decline.
- How the company’s service revenue and Financial Assets Division perform as COVID-era stimulus and credit policies change.
- ALT’s post-acquisition contribution, integration progress, preliminary purchase-price allocation and the economics of its $2.0 million note and separately acquired property.
- Availability and covenant compliance under the secured $10 million revolving facility, and repayment obligations on the ALT note.
- Whether lower earnings, stock issuance and customer concentration affect future per-share results and earnings quality.