Heritage Global Inc. Reports 2017 Fourth Quarter and Full Year Operating Results

SAN DIEGO--(BUSINESS WIRE)--Heritage Global Inc. (OTCQB:HGBL, CSE:HGP) (“Heritage Global,” “HGI” or “the Company”), a value-driven, innovative leader in corporate and financial asset liquidation transactions, valuations and advisory services, today reported financial results for the fourth quarter and full-year ended December 31, 2017 as summarized below.

($ in thousands, except per share amounts)	Quarter Ended December 31,						Twelve Months Ended December 31,
		2017			2016			2017			2016
Revenue
Services revenue^(1)	$	5,300		$	3,653		$	17,937		$	15,371
Asset sales^(2)		277			2,217			2,192			8,462
Total revenue		5,577			5,870			20,129			23,833
Gross profit		4,696			3,782			15,416			12,515
Operating (loss) income		(372	)		634			364			190
Net (loss) income		(387	)		(299	)		(249	)		14
Net (loss) income per share – basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.00
(Non-GAAP Financial Measures)^(3)
EBITDA	$	(694	)	$	(282	)	$	(261	)	$	414
Adjusted EBITDA	$	909		$	738		$	2,065		$	605

(1)	Services revenue represents revenue generated from activities in which Heritage Global acted as an agent by either brokering a transaction or providing some other fee-based service.
(2)	Asset sales represent revenue generated from activities in which Heritage Global acted in a principal capacity, reselling assets that it had purchased.
(3)	Definitions and disclosures regarding non-GAAP financial information including reconciliations are included at the end of the press release.

Fourth Quarter 2017 Summary of Financial Results:

• Total revenue in the fourth quarter declined 5%, from $5.9 million to $5.6 million. However, the decrease in total revenue was due to a $1.9 million, or 88%, decline in asset sales revenue versus the prior year, with the absence of several large asset sales in 2017 being mostly offset by a $1.6 million, or 45%, year-over-year increase in higher-margin services revenue.
• Gross profit, or total revenue net of costs of revenue, increased 24% to $4.7 million in the fourth quarter of 2017 from $3.8 million in the fourth quarter level of 2016, due principally to higher margin services revenue and the timing and magnitude of certain asset liquidation transactions together resulting in a $1.2 million, or 58%, reduction in the cost of total revenue.
• During the fourth quarter, Heritage Global completed a number of successful global online sales, including projects for Pfizer, Amgen, PharmaScience, Vericel, Pharmaceutics International, Aerospace Manufacturing Group, and Astellas.
• Selling, general and administrative expenses were $3.8 million in the fourth quarter of 2017, compared to $3.1 million in the fourth quarter of 2016. The increase in selling, general and administrative expenses was largely attributable to compensation related items from variable compensation arrangements.
• Heritage Global recorded a $0.4 million non-operating loss in the fourth quarter of 2017 related to the non-cash fair value adjustment of its contingent consideration from the acquisition of National Loan Exchange Inc. (NLEX), compared to a non-operating loss of approximately $1.0 million in the fourth quarter of 2016.
• The Company recorded a net loss of approximately $0.4 million in the fourth quarter of 2017, or $0.01 per share, essentially flat compared to the prior year period.
• Adjusted EBITDA, a commonly used non-GAAP financial measure, was $0.9 million in the fourth quarter of 2017, compared to $0.7 million in the fourth quarter of 2016. Adjusted EBITDA is used by management as a supplemental tool to evaluate the underlying operating performance of the Company on an ongoing basis and should be considered together with Heritage Global’s GAAP financial measures. Adjustments in the quarter related to one-time or non-recurring items including the non-cash fair value adjustment of its contingent consideration from the acquisition of NLEX and the settlement costs related to a matter originating in 2009.

Full Year 2017 Summary of Financial Results:

• Total revenue in 2017 declined 16%, from $23.8 million to $20.1 million. However, the decrease in total revenue was due to a $6.3 million, or 74%, decline in asset sales revenue versus the prior year, with the sale of the Company’s real estate inventory in 2016 accounting for most of the decline. Lower asset sales were partially offset by a $2.6 million, or 17%, year-over-year increase in higher-margin services revenue.
• Gross profit, or total revenue net of costs of revenue, increased 23% to $15.4 million in 2017 from $12.5 million in 2016, due principally to higher margin services revenue and the timing and magnitude of certain asset liquidation transactions together resulting in a $6.6 million, or 58%, reduction in the cost of total revenue.
• Adjusted EBITDA, a commonly used non-GAAP financial measure, was increased 241% to $2.1 million in 2017, compared to $0.6 million in 2016. Adjusted EBITDA is used by management as a supplemental tool to evaluate the underlying operating performance of the Company on an ongoing basis and should be considered together with Heritage Global’s GAAP financial measures. Adjustments for the year related to one-time or non-recurring items including the non-cash fair value adjustment of its contingent consideration from the acquisition of NLEX and the settlement costs related to an almost decade old litigation matter.
• The 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% for HGI tax years beginning in 2018. The re-measurement of the federal portion of the Company’s deferred tax liabilities as of December 31, 2017 resulted in an approximate $1.4 million reduction HGI’s deferred tax liabilities. Additionally, the Company had no impact in the U.S. with respect to the Toll Charge under the Tax Act, as a result of the allocation of foreign subsidiary deficits against positive earnings.

Heritage Global Chief Executive Officer Ross Dove stated, “Heritage Global ended 2017 on a strong note and delivered another year of solid financial performance across our asset liquidation, valuation and advisory services businesses, resulting in a 23% increase in gross profit, compared to the prior year. The execution of our strategies to grow our platform, coupled with the progress we are making in improving the Company’s financial results, led to a significant gross margin improvement and record adjusted EBITDA growth to $2.1 million in 2017.

“HGI’s unique, value-driven corporate and financial asset solutions platform continued to generate positive results reflecting our growing base of global clients, with strong growth particularly in our brokerage and M&A advisory services divisions, which saw a 17% rise in services revenue.

“Looking ahead, HGI remains committed to strategically grow our portfolio of global asset solutions by adding complementary capabilities that serve a broad range of businesses, while creating added value for our corporate clients and customers. To support our goals for near and long-term growth, we will continue to implement our initiatives focused on enhancing profitability and driving efficiencies across our platform, while actively managing our capital structure to maximize cash flow and reduce leverage.

“In closing, we are pleased with our 2017 financial performance and the success we have achieved in improving top and bottom-line results. HGI’s business divisions focused on auction services, M&A advisory services, patents and trademarks, brokerage and real estate services continue to deliver value to our corporate clients, customers and partners. We remain confident that our strategy to further expand our platform of diversified global asset solutions, combined with the ongoing successful execution of our expense management and profitability initiatives, is a formula for sustainable financial growth and enhancement of long-term shareholder value.”

Definitions and Disclosures Regarding non-GAAP Financial Information

Adjusted EBITDA reflects the standard definition of EBITDA (net income (loss) plus depreciation and amortization, interest and other expense, and provision for income taxes), adjusted further to reflect the effects of settlement accrual charges, plus or minus fair value adjustments of contingent consideration and plus stock-based compensation. Management believes that the presentation of this non-GAAP financial measure, when considered together with the GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete understanding of the factors and trends affecting the Company than could be obtained absent these disclosures. Management uses Adjusted EBITDA to make operating and strategic decisions and to evaluate the Company’s performance. The Company has disclosed this non-GAAP financial measure so that investors have the same financial data that management uses, with the intention of assisting investors to make comparisons to the Company’s historical operating results and analyze its underlying performance. Management believes that Adjusted EBITDA is a useful supplemental tool to evaluate the underlying operating performance of the Company on an ongoing basis. The use of Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the financial information cited in the tables at the end of this news announcement which reconciles GAAP reported net income to Adjusted EBITDA for the periods presented herein.

About Heritage Global Inc. (www.heritageglobalinc.com)

Heritage Global Inc. (OTCQB: HGBL, CSE: HGP) is a value-driven, innovative leader in corporate and financial asset liquidation transactions, valuations and advisory services. Heritage Global focuses on identifying, valuing, acquiring and monetizing underlying tangible and intangible assets in twenty-eight global manufacturing and technology sectors. Heritage Global acts as an adviser, as well as a principal, acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, accounts receivable portfolios, intellectual property, and entire business enterprises.

Forward-Looking Statements

This communication includes forward-looking statements based on our current expectations and projections about future events. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this communication are based on knowledge of the environment in which the Company currently operates and are subject to change based on various important factors, including variability in magnitude and timing of asset liquidation transactions, the impact of changes in the U.S. national and global economies, interest rate and foreign exchange rate sensitivity, as well as other factors beyond the Company's control. Unless required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this release. For more details on factors that could affect these expectations, please see our filings with the Securities and Exchange Commission.

-financial tables follow-

HERITAGE GLOBAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of US dollars, except share and per share amounts)
	Three Months Ended December 31,						Twelve Months Ended December 31,
	2017			2016			2017			2016
Revenues:
Services revenue	$	5,300		$	3,653		$	17,937		$	15,371
Asset sales		277			2,217			2,192			8,462
Total revenues		5,577			5,870			20,129			23,833
Operating costs and expenses:
Cost of services revenue		716			436			3,007			4,187
Cost of asset sales		165			1,652			1,706			7,131
Selling, general and administrative		3,846			3,072			13,597			12,009
Depreciation and amortization		80			76			313			316
Settlement accrual		1,142			—			1,142			—
Total operating costs and expenses		5,949			5,236			19,765			23,643
Operating (loss) income		(372	)		634			364			190
Fair value adjustment of contingent consideration		(402	)		(992	)		(938	)		(92)
Interest expense		(51	)		51			(95	)		(63	)
(Loss) income before income tax expense		(825	)		(307	)		(669	)		35
Income tax (benefit) expense		(438	)		(8	)		(420	)		21
Net (loss) income	$	(387	)	$	(299	)	$	(249	)	$	14
Weighted average common shares outstanding – basic		28,480,148			28,432,648			28,468,545			28,400,886
Weighted average common shares outstanding – diluted		28,480,148			28,432,648			28,468,545			28,434,832
Net (loss) income per share – basic	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.00
Net (loss) income per share – diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.00

The notes contained in our Annual Report on Form 10-K are an integral part of these consolidated financial statements.

-balance sheets follow-

HERITAGE GLOBAL INC. CONSOLIDATED BALANCE SHEETS (In thousands of US dollars, except share and per share amounts) (audited)
	December 31, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	2,109		$	2,530
Accounts receivable, net		384			1,247
Inventory – equipment		170			263
Other current assets		357			393
Total current assets		3,020			4,433
Property and equipment, net		145			156
Identifiable intangible assets, net		3,877			4,122
Goodwill		6,158			6,158
Other assets		250			275
Total assets	$	13,450		$	15,144
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	5,019		$	6,746
Current portion of related party debt		382			664
Current portion of third part debt		356			—
Current portion of contingent consideration		2,774			961
Other current liabilities		133			199
Total current liabilities		8,664			8,570
Non-current portion of related party debt		—			348
Non-current portion of third party debt		786			-
Non-current portion of contingent consideration		—			1,772
Deferred tax liabilities		512			960
Total liabilities		9,962			11,650
Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 569 Class N shares at December 31, 2017 and December 31, 2016		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 28,480,148 shares at December 31, 2017 and 28,470,148 shares at December 31, 2016		285			285
Additional paid-in capital		284,396			284,149
Accumulated deficit		(281,124	)		(280,875	)
Accumulated other comprehensive loss		(75	)		(71	)
Total stockholders’ equity		3,488			3,494
Total liabilities and stockholders’ equity	$	13,450		$	15,144

The notes contained in our Annual Report on Form 10-K are an integral part of these consolidated financial statements.

– EBITDA and Adjusted EBITDA (non-GAAP measures) reconciliation follows –

HERITAGE GLOBAL INC. Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP Measures) (In thousands of US dollars) (unaudited)
	Three Months Ended December 31,						Twelve Months Ended December 31,
		2017			2016			2017			2016
Net Income	$	(387	)	$	(299	)	$	(249	)	$	14
Add back:
Depreciation and amortization		80			76			313			316
Interest and other expense, net		51			(51	)		95			63
Income tax (benefit) expense		(438	)		(8	)		(420	)		21
EBITDA		(694	)		(282	)		(261	)		414
Management add back:
Fair value adjustment of contingent consideration		402			992			938			92
Stock based compensation		59			28			246			99
Settlement accrual		1,142			—			1,142			—
Adjusted EBITDA	$	909		$	738		$	2,065		$	605

The notes contained in our Annual Report on Form 10-K are an integral part of these consolidated financial statements.