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.

Contacts

Heritage Global Inc.
Scott West, 858-847-0656
Chief Financial
Officer
or
JCIR
Jennifer
Neuman, Joseph Jaffoni, 212-835-8500
HGBL@jcir.com