Heritage (HGBL) - 2021 Q2 - Quarterly Report

Part I. Financial Information This section details Heritage Global Inc.'s unaudited condensed consolidated financial statements and management's analysis of financial condition and operations Item 1. Financial Statements This section presents Heritage Global Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, highlighting key financial position and performance changes Condensed Consolidated Balance Sheets The balance sheet as of June 30, 2021, shows a decrease in total assets and liabilities, primarily due to reduced cash, while stockholders' equity slightly increased Condensed Consolidated Balance Sheets (in thousands of US dollars) | | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $21,962 | $26,952 | | Total assets | $42,796 | $44,555 | | Total current liabilities | $9,328 | $13,989 | | Total liabilities | $11,813 | $14,612 | | Total stockholders' equity | $30,983 | $29,943 | Condensed Consolidated Statements of Income For Q2 2021, revenues and net income decreased year-over-year, while H1 2021 saw increased revenues but a decline in net income compared to H1 2020 Statements of Income Highlights (in thousands of US dollars, except per share amounts) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $5,176 | $6,117 | $12,277 | $10,361 | | Operating income | $73 | $1,024 | $1,119 | $1,118 | | Net income | $587 | $2,039 | $1,619 | $2,077 | | Net income per share – diluted | $0.02 | $0.07 | $0.04 | $0.07 | Condensed Consolidated Statements of Cash Flows For H1 2021, the company experienced a net decrease in cash and cash equivalents of $5.9 million, primarily due to cash used in operating, investing, and financing activities Cash Flow Summary for Six Months Ended June 30 (in thousands of US dollars) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,290) | $(827) | | Net cash (used in) provided by investing activities | $(780) | $502 | | Net cash used in financing activities | $(790) | $(170) | | Net decrease in cash and cash equivalents | $(5,860) | $(495) | | Cash and cash equivalents at end of period | $17,525 | $2,233 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of accounting policies and financial statement line items, including the impact of COVID-19, revenue recognition, debt, and segment performance - The COVID-19 pandemic negatively impacted Q1 and Q2 2021, but the company anticipates long-term positive effects from increased distressed assets and expanded loan volumes[21][22] - One customer accounted for 10% of total revenues for H1 2021, a decrease from 15% in the prior year period[36] - Notes receivable increased to approximately $2.3 million as of June 30, 2021, from $2.1 million at year-end 2020[41] - The company had no outstanding debt as of June 30, 2021, having secured a new $10.0 million revolving credit facility in May 2021[70][75] Segment Net Operating Income (in thousands of US dollars) | Segment | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Industrial Assets Division | $433 | $811 | $1,773 | $857 | | Financial Assets Division | $462 | $628 | $923 | $1,180 | | Corporate and Other (Loss) | $(822) | $(415) | $(1,577) | $(919) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, business segments, liquidity, and capital resources, highlighting revenue growth, stable operating income, and sufficient liquidity for future operations Business Overview and Strategy The company operates an asset liquidation business through Industrial and Financial Assets divisions, leveraging a diversified model and expertise for competitive advantage in a fragmented market - The company's business model is positioned for growth across all economic cycles, benefiting from distressed assets during recessions and competitive advantages during growth[101] - Key competitive strengths include a differentiated business model, macroeconomic growth drivers, high return on invested capital potential, and an experienced management team[103][104][105][106] Liquidity and Capital Resources Working capital decreased to $12.5 million as of June 30, 2021, but management believes liquidity is sufficient for the next 12 months, supported by cash and a new $10.0 million credit facility - Working capital was $12.5 million at June 30, 2021, a slight decrease from $13.0 million at December 31, 2020[120] - A new $10.0 million revolving line of credit was secured in May 2021, with no outstanding borrowings as of June 30, 2021[125] - Cash used in operations increased to $4.3 million in H1 2021 from $0.8 million in H1 2020, primarily due to timing of asset liquidation deals[129][130] Results of Operations H1 2021 saw an 18% increase in total revenues to $12.3 million and an 8% rise in gross profit, despite a Q2 2021 decline in both metrics, with SG&A expenses increasing 7% Consolidated Results of Operations (in thousands of US dollars) | | H1 2021 | H1 2020 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $12,277 | $10,361 | 18% | | Total operating costs and expenses | $11,159 | $9,425 | 18% | | Operating income | $1,119 | $1,118 | 0% | | Net income | $1,619 | $2,077 | (22)% | - SG&A expenses for H1 2021 increased by 7% to $7.6 million, primarily due to higher compensation and a one-time separation expense[146][147] Key Performance Indicators (Non-GAAP) The company utilizes EBITDA and Adjusted EBITDA as key performance indicators, with H1 2021 Adjusted EBITDA increasing to $1.7 million but Q2 2021 Adjusted EBITDA significantly decreasing to $0.2 million Reconciliation of Net Income to Adjusted EBITDA (in thousands of US dollars) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $587 | $2,039 | $1,619 | $2,077 | | EBITDA | $171 | $1,114 | $1,308 | $1,298 | | Adjusted EBITDA | $239 | $1,200 | $1,719 | $1,459 | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Heritage Global Inc. is exempt from providing quantitative and qualitative disclosures about market risk - The company is exempt from this disclosure requirement due to its status as a Smaller Reporting Company[153] Item 4. Controls and Procedures The company's disclosure controls and procedures were deemed effective as of June 30, 2021, with no material changes in internal control over financial reporting during the period - Certifying Officers concluded that disclosure controls and procedures were effective as of the reporting period end[154] - No material changes in internal control over financial reporting occurred during the six months ended June 30, 2021[155] Part II. Other Information This section provides other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings No material changes to legal proceedings have occurred since the company's last Annual Report on Form 10-K - No material changes to legal proceedings have occurred since the last annual report[156] Item 1A. Risk Factors As a Smaller Reporting Company, Heritage Global Inc. is exempt from providing risk factor disclosures - The company is exempt from this disclosure requirement due to its status as a Smaller Reporting Company[157] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported the issuance of 22,366 shares of common stock to personnel through the exercise of stock options in unregistered transactions during Q2 2021 - In Q2 2021, the company issued a total of 22,366 shares of common stock to personnel through the exercise of stock options in unregistered transactions[158] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - The company reported no defaults upon senior securities[159] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the new Business Loan Agreement, officer certifications, and Inline XBRL documents - Key exhibits filed include the Business Loan Agreement, Promissory Note, and Security Agreements related to the new 2021 Credit Facility with C3bank, National Association[163]