Heritage Global Inc. Reports 2018 Second Quarter 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 second quarter and six-months ended June 30, 2018 as summarized below.

($ in thousands, except per share amounts)	Quarter Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenue
Services revenue^(1)	$	6,471	$	3,945	$	11,510	$	8,406
Asset sales^(2)		345		837		1,120		1,409
Total revenue		6,816		4,782		12,630		9,815
Gross profit		5,790		3,106		10,776		6,787
Operating (loss) income		1,630		27		3,035		420
Net (loss) income		1,685		(199)		2,974		55
Net (loss) income per share – basic and diluted	$	0.06	$	(0.01)	$	0.10	$	0.00
(Non-GAAP Financial Measures)^(3)
EBITDA	$	1,863	$	(75)	$	3,352	$	285
Adjusted EBITDA	$	1,791	$	166	$	3,341	$	707

(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.

Second Quarter 2018 Summary of Financial Results:

• Total revenues were $6.8 million, compared to the year ago second quarter level of $4.8 million, representing an increase of 43%. The year-over-year growth in total revenues reflects the timing and magnitude of certain asset liquidation transactions and a higher volume of deals for the NLEX division. Services revenue increased 64% to $6.5 million in the second quarter of 2018 from $3.9 million in the second quarter of 2017, while asset sales revenue decreased 59% to $0.3 million in the second quarter of 2018 from $0.8 million in the second quarter of 2017.
• Gross profit, or total revenue net of costs of revenues, increased 86% to $5.8 million from the year ago second quarter level of $3.1 million, due principally to higher services revenue and improved gross margin on the asset sales, which together, resulted in a $0.7 million, or 39%, year-over-year reduction in the cost of total revenue.
• During the second quarter, Heritage Global completed a number of successful global online sales, including projects for Pfizer, Amgen, Stion Solar, and ET Solar.
• Selling, general and administrative expenses were $4.1 million, compared to $3.0 million in the second quarter of 2017. The increase was largely attributable to variable compensation arrangements resulting in higher commissions due to improved performance.
• Operating income grew more than sixty-fold to $1.6 million from the year ago second quarter level of $27,000.
• Heritage Global recorded a $0.2 million non-operating gain in the second quarter of 2018 for the fair value adjustment of its contingent consideration from the acquisition of National Loan Exchange Inc. (NLEX), compared to a $0.2 million non-operating charge in the second quarter of 2017.
• As a result, Heritage Global reported net income of $1.7 million, or $0.06 per share, compared to net loss of approximately $0.2 million, or $0.01 per share, in the second quarter of 2017. The continued financial improvement in Heritage Global’s operations is the result of its strong performance of its asset liquidation business line, coupled with continued operational discipline.
• Adjusted EBITDA, a commonly used non-GAAP financial measure, was $1.8 million in the second quarter of 2018, compared to $0.2 million in the second quarter of 2017. 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.

Heritage Global Chief Executive Officer, Ross Dove, stated, “Heritage Global’s operating momentum continued in the second quarter as we delivered another period of strong financial performance, resulting in a 86% increase in gross profit compared to the prior year period. The successful execution of our strategies to build the top-line, coupled with our continued cost management initiatives, resulted in higher gross margin and second quarter adjusted EBITDA growth of 979%.

“We continue to deliver added value for Heritage Global’s clients and customers by enhancing the overall collaboration between our business divisions, which are focused on auction services, distressed M&A, patents and trademarks, loan sale advisory and real estate services. This focus continues to be an essential component of our long-term growth strategy for our platform. Notably, the 623% increase in year-to-date operating income is perhaps the best measure of the success we are achieving through this disciplined approach.

“In closing, the significant improvement in our second quarter and year-to-date financial performance reflects our strong commitment to building Heritage Global into a leading provider of diversified and unique global asset solutions and services. As we continue aggressively pursuing the next phase of growth for the Company, we remain focused on actively managing our capital structure to maximize cash flow, while improving top and bottom-line financial performance to remain efficient and competitive. We are confident that this direction will enable us to meet our goal of enhancing long-term shareholder value as we move through the back half of 2018 and beyond.”

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), 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 June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues:
Services revenue	$	6,471		$	3,945		$	11,510		$	8,406
Asset sales		345			837			1,120			1,409
Total revenues		6,816			4,782			12,630			9,815
Operating costs and expenses:
Cost of services revenue		732			710			1,291			1,769
Cost of asset sales		294			966			563			1,259
Selling, general and administrative		4,084			3,002			7,581			6,212
Depreciation and amortization		76			77			160			155
Total operating costs and expenses		5,186			4,755			9,595			9,395
Operating income		1,630			27			3,035			420
Fair value adjustment of contingent consideration		157			(179	)		157			(290)
Interest and other expense, net		(38	)		(32	)		(154	)		(47	)
Income (loss) before income tax expense		1,749			(184	)		3,038			83
Income tax expense		64			15			64			28
Net income (loss)	$	1,685		$	(199	)	$	2,974		$	55
Weighted average common shares outstanding – basic		28,653,278			28,480,148			28,508,844			28,456,750
Weighted average common shares outstanding – diluted		29,067,365			28,480,148			28,916,149			28,472,910
Net income per share – basic	$	0.06		$	(0.01	)	$	0.10		$	0.00
Net income per share – diluted	$	0.06		$	(0.01	)	$	0.10		$	0.00
Comprehensive income (loss):
Net income	$	1,685		$	(199	)	$	2,974		$	55
Other comprehensive income (loss):
Foreign currency translation adjustment		4			(2	)		4			(3	)
Comprehensive income (loss)	$	1,689		$	(201	)	$	2,978		$	52

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

-balance sheets follow-

HERITAGE GLOBAL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of US dollars, except share and per share amounts)
	June 30, 2018			December 31, 2017
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents	$	4,752		$	2,109
Accounts receivable (net allowance for doubtful accounts of $0 in 2018; $71in 2017)		823			384
Inventory – equipment		222			170
Other current assets		433			357
Total current assets		6,230			3,020
Property and equipment, net		185			145
Identifiable intangible assets, net		3,754			3,877
Goodwill		6,158			6,158
Other assets		247			250
Total assets	$	16,574		$	13,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	6,530		$	5,019
related party debt		141			382
Current portion of third part debt		366			356
Contingent consideration		1,618			2,774
Other current liabilities		91			133
Total current liabilities		8,746			8,664
Non-current portion of third party debt		630			786
Deferred tax liabilities		512			512
Total liabilities		9,888			9,962
Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 569 Class N shares at June 30, 2018 and December 31, 2017		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 29,253,278 shares at June, 30, 2018 and 28,480,148 shares at December 31, 2017		293			285
Additional paid-in capital		284,608			284,396
Accumulated deficit		(278,150	)		(281,124	)
Accumulated other comprehensive loss		(71	)		(75	)
Total stockholders’ equity		6,686			3,488
Total liabilities and stockholders’ equity	$	16,574		$	13,450

The notes contained in our Annual Report on Form 10-Q 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 June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net Income	$	1,685		$	(199	)	$	2,974		$	55
Add back:
Depreciation and amortization		76			77			160			155
Interest and other expense, net		38			32			154			47
Income tax expense		64			15			64			28
EBITDA		1,863			(75	)		3,352			285
Management add back:
Fair value adjustment of contingent consideration		(157	)		179			(157	)		290
Stock based compensation		85			62			146			132
Adjusted EBITDA	$	1,791		$	166		$	3,341		$	707

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