Heritage Global Inc. Announces 2019 Second Quarter Operating Results

Heritage Global Inc. HGBLHGP ("Heritage Global," "HGI" or "the Company"), a global diversified financial services and asset trading company with industry-leading capabilities across corporate and financial asset monetization, advisory, and valuation services, today reported financial results for the second quarter ended June 30, 2019.

Heritage Global Chief Executive Officer Ross Dove stated, "Heritage Global delivered strong second quarter results highlighted by solid performance across a more diversified and higher-margin fee base and continued profitability. While quarterly gross profits and net income were somewhat skewed by variability in the timing of asset sales transactions, the underlying strength in EBITDA, net income, and EPS remains consistent. Furthermore, we enhanced our financial flexibility, which bolsters our growth prospects – via strategic/complimentary acquisitions, joint ventures, or organic opportunities – with a strong balance sheet, ample liquidity, and growing net cash from operations.

"More broadly, we remain focused on becoming the preferred solution and most respected and trusted firm to corporations, trustees and lenders needing to monetize challenged assets across all classes and geographies. Beyond the firm's sustainable competitive advantages, including domain expertise and a unique business model, more specific strategic growth initiatives include building our principal activity, ongoing product and services development, target market extensions, as well as capitalizing on external growth opportunities, as appropriate. From an operational standpoint, we remain well positioned to take advantage of our increasing operating leverage, which will build our profitability. Further, we are actively seeking to improve our earnings visibility and sustainability, reflecting the scale and diversification we have achieved, as well as our efforts to more fully leverage systems and practices across the franchise.

"Stepping back, despite rising uncertainty around global economic growth, interest rates, and capital markets, our diversified and differentiated value proposition is increasingly resonating across an expanding range of clients, which we believe positions the company well for accelerating and more sustainable growth across varied economic conditions."

Second Quarter 2019 Summary of Financial Results:

($ in thousands, except per share amounts)	Quarter Ended June 30,				Six Months Ended June 30,
($ in thousands, except per share amounts)	2019		2018		2019		2018
Revenue
Services revenue⁽¹⁾	$	5,335	$	6,471	$	9,473	$	11,510
Asset sales⁽²⁾		2,089		345		4,232		1,120
Total revenue		7,424		6,816		13,975		12,630
Gross profit		4,075		5,790		8,735		10,776
Operating income		1,570		1,630		2,229		3,035
Net income		1,494		1,685		2,106		2,974
Net income per share – basic and diluted	$	0.05	$	0.06	$	0.07	$	0.10

(Non-GAAP Financial Measures)⁽³⁾
EBITDA	$	1,646	$	1,863	$	2,381	$	3,352
Adjusted EBITDA	$	1,722	$	1,791	$	2,528	$	3,341

(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 previously purchased assets.
(3)		EBITDA and Adjusted EBITDA are commonly used non-GAAP financial measures utilized 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. Definitions and disclosures regarding non-GAAP financial information including reconciliations are included at the end of the press release.

Second Quarter 2019 Highlights:

Total revenue grew 9% to $7.4 million, compared to the year ago level of $6.8 million, as asset sales increased to $2.1 million from $0.3 million, offsetting a $1.1 million decrease in services revenue. Importantly, revenue contributions across service revenue and asset sales were more balanced during the quarter as principal activity built.
Gross profit was $4.5 million compared to $5.8 million in the prior-year quarter reflecting higher cost of revenue during the period, largely reflecting the variability in size and timing of asset sale transactions.
Operating income was roughly flat year-over-year at $1.6 million in the second quarter of 2019. The timing-related decline in gross profit was offset by $1.3 million of earnings from equity method investments related to the company's Real Estate Joint Venture.
Net income was $1.5 million, or $0.05 per share, compared to $1.7 million, or $0.06 per share, in the prior year. Aside from the noted quarterly gross profit variability, earnings per share for the second quarter of 2018 included a $0.2 million pre-tax benefit related to a fair value adjustment of contingent consideration, effectively resulting in flat year over year performance.
EBITDA totaled $1.6 million in the second quarter versus $1.9 million in the prior year, while Adjusted EBITDA (excluding non-cash stock-based compensation expense and the fair value adjustment of contingent consideration) was $1.7 million compared to $1.8 million in the prior year. Over the last 12 months, Heritage Global has generated $3.9 million of Adjusted EBITDA.
Heritage Global's balance sheet has strengthened considerably since the end of 2018, with stockholders' equity increasing 29% to $9.8 million from $7.6 million at December 31, 2018, and net cash increasing 18% to $3.1 million over the same period.

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/minus stock-based compensation. Management believes that the presentation of this non-GAAP financial measure, when considered together with 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 believes that Adjusted EBITDA is a useful supplemental tool to evaluate the underlying operating performance of the Company on an ongoing basis and make operating and strategic decisions. 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. 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 press release which reconciles GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented herein.

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

Heritage Global Inc. HGBLHGP is a global diversified financial services and asset trading company with industry-leading capabilities across corporate and financial asset monetization, advisory, and valuation services. Heritage Global focuses on identifying, valuing, acquiring and monetizing underlying tangible and intangible assets across twenty-eight global sectors. The company 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 INCOME
(in thousands of US dollars, except share and per share amounts)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues:
Services revenue	$	5,335		$	6,471		$	9,743		$	11,510
Asset sales		2,089			345			4,232			1,120
Total revenues		7,424			6,816			13,975			12,630

Operating costs and expenses:
Cost of services revenue		1,483			732			2,214			1,291
Cost of asset sales		1,866			294			3,026			563
Selling, general and administrative		3,698			4,084			7,623			7,581
Depreciation and amortization		76			76			152			160
Total operating costs and expenses		7,123			5,186			13,015			9,595
Earnings of equity method investments		1,269			—			1,269			—
Operating income		1,570			1,630			2,229			3,035
Fair value adjustment of contingent consideration		—			157			—			157
Interest and other expense, net		(22	)		(38	)		(45	)		(154	)
Income before income tax expense		1,548			1,749			2,184			3,038
Income tax expense		54			64			78			64
Net income	$	1,494		$	1,685		$	2,106		$	2,974

Weighted average common shares outstanding – basic		28,653,278			28,653,278			28,653,278			28,508,844
Weighted average common shares outstanding – diluted		28,842,509			29,067,365			29,017,377			28,916,149
Net income (loss) per share – basic	$	0.05		$	0.06		$	0.07		$	0.10
Net income (loss) per share – diluted	$	0.05		$	0.06		$	0.07		$	0.10

The notes contained in our Quarterly Report on Form 10-Q 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)

	June 30, 2019			December 31, 2018
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents	$	3,751		$	4,268
Accounts receivable		2,769			400
Inventory – equipment		540			2,405
Other current assets		654			607
Total current assets		7,714			7,680
Property and equipment, net		181			175
Equity method investments		4,213			2,767
Right-of-use assets		985			—
Identifiable intangible assets, net		3,509			3,627
Goodwill		6,158			6,158
Other assets		224			224
Total assets	$	22,984		$	20,631

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	10,849		$	8,101
Current portion of debt		391			1,178
Current portion of lease liabilities		506			—
Other current liabilities		30			892
Total current liabilities		11,776			10,171
Non-current portion of debt		240			438
Non-current portion of lease liabilities		531			—
Other non-current liabilities		—			1,838
Deferred tax liabilities		584			584
Total liabilities		13,131			13,031

Stockholders' equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 569 Class N shares at June 30, 2019 and December 31, 2018		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 29,253,278 shares at June 30, 2019 and December 31, 2018		293			293
Additional paid-in capital		284,898			284,751
Accumulated deficit		(275,267	)		(277,373	)
Accumulated other comprehensive loss		(77	)		(77	)
Total stockholders' equity		9,853			7,600
Total liabilities and stockholders' equity	$	22,984		$	20,631

The notes contained in our Quarterly 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,
	2019		2018			2019		2018
Net income	$	1,494	$	1,685		$	2,106	$	2,974
Add back:
Depreciation and amortization		76		76			152		160
Interest and other expense, net		22		38			45		154
Income tax expense		54		64			78		64
EBITDA		1,646		1,863			2,381		3,352

Management add back:
Fair value adjustment of contingent consideration		—		(157	)		—		(157	)
Stock based compensation		76		85			147		146
Adjusted EBITDA	$	1,722	$	1,791		$	2,528	$	3,341