Heritage Global Inc. (OTCQB: HGBL, CSE: HGP) (“Heritage Global,” “HGI” or “the Company”), an asset services company specializing in financial and capital assets, today reported financial results for the second quarter ended June 30, 2020.
Heritage Global Chief Executive Officer Ross Dove stated, “We are pleased to report strong financial results for the second quarter of 2020, with net income of $2.0 million, reinforcing the efficacy of our ongoing efforts to leverage our P&L by growing gross profit while managing expenses. Importantly, economic tailwinds are building for Heritage Global, with capital and financial asset transaction activity continuing to grow, as we increasingly enhance our durable competitive advantages, including domain expertise related to deal sourcing and execution, flexibility in working with buyers and sellers to adapt to shifting market dynamics, as well as our strong relationships, compliance infrastructure, and customer service.”
“Further, as consumers increasingly face tougher economic conditions related to COVID-19, we have observed the build-up and future sale supply of nonperforming consumer loan volumes increasing, thereby indicating a pending wave of financial asset sales activity. As part of this opportunity, we are increasingly focused on penetrating underserved markets via Heritage Global Capital, our specialty financing platform that provides solutions to small- and medium-sized investors in charged-off and nonperforming asset portfolios and other asset-based lending classes.”
“We believe that we remain well positioned to drive strong and sustainable revenue growth, with attractive flow through to our bottom line. Our capital assets auction division is focused on distressed and surplus assets. A prolonged and challenging economic backdrop should result in an increased supply of such assets, as well as rising domestic demand for surplus assets, reflecting disruptions to the global supply chain, particularly those involving manufacturing and other capital assets.”
“Stepping back, we have completed the final steps to transform our business by pruning our smaller, underperforming business units, which will enhance our future results and enable management to focus on HGI’s core growth prospects.”
“Finally, corporate governance remains a priority, with our Board recently appointing Barbara Sinsley as a Director. Ms. Sinsley brings an impressive background and deep sector expertise that aligns well with our expanding Heritage Global Capital business.”
Second Quarter 2020 Summary of Financial Results:
($ in thousands, except per share amounts) | Quarter Ended June 30, | ||||
2020 | 2019 | ||||
Revenue | |||||
Services revenue(1) | $ | 5,565 | $ | 5,335 | |
Asset sales(2) | 552 | 2,089 | |||
Total revenue | 6,117 | 7,424 | |||
Gross profit | 4,599 | 4,075 | |||
Operating income | 1,024 | 1,570 | |||
Net income | 2,039 | 1,494 | |||
Net income per share – diluted | $ | 0.07 | $ | 0.05 | |
(Non-GAAP Financial Measures) (3) | |||||
EBITDA | $ | 1,114 | $ | 1,646 | |
Adjusted EBITDA | $ | 1,200 | $ | 1,722 | |
(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 2020 Highlights:
- Total revenue of $6.1 million in 2020 compared to $7.4 million in the prior-year quarter. The year-over-year decline reflects lower asset sales ($0.6 million versus $2.1 million in the second quarter of 2019), which vary depending on transaction activity and timing, partially offset by higher services revenue ($5.6 million versus $5.3 million in the prior year).
- Gross profit totaled $4.6 million, representing a 13% increase over $4.1 million in the prior-year quarter. The year-over-year growth, which reflected a gross margin of 75% in 2020 versus 55% in 2019, was a function of the mix shift to higher margin service revenue.
- Operating income was $1.0 million versus $1.6 million in the second quarter of 2019, with a $1.1 million decline in earnings of equity method investments related to an outsized gain on sale in the prior-year quarter partially offset by higher gross profit in the current year quarter. Selling, general and administrative expense was essentially flat in the two quarters, as the elimination of costs related to the disposition of Equity Partners at December 31, 2019 was offset by increased compensation expense driven by improved financial performance and additional headcount to drive growth, primarily in Heritage Global Capital. Excluding income from equity method investments, operating income for second quarter 2020 was $0.8 million, compared to $0.3 million in the prior year.
- Net income increased to $2.0 million, or $0.07 per share, for the second quarter of 2020 from $1.5 million, or $0.05 per share, in the prior-year quarter. In light of strong earnings in the second quarter of 2020 and visibility into the remainder of 2020 and 2021, we released a portion of our tax valuation allowance, resulting in a $1.0 million income tax benefit for the second quarter of 2020 compared to $0.1 million of income tax expense for the prior-year quarter.
- At June 30, 2020, the Company has remaining tax net operating loss carry forwards of approximately $82.1 million ($61.6 million of unrestricted net operating tax losses and approximately $20.5 million of restricted net operating tax losses), with substantially all of the net operating loss carry forwards expiring between 2024 and 2037.
- EBITDA totaled $1.1 million versus $1.6 million in the second quarter of 2019, while Adjusted EBITDA (excluding non-cash stock-based compensation expense) was $1.2 million compared to $1.7 million in the prior-year quarter. Excluding income from equity method investments, Adjusted EBITDA for 2020 was $1.0 million, compared to $0.5 million in the prior year.
- Heritage Global maintains a strong balance sheet, with stockholders’ equity of $14.1 million as of June 30, 2020, compared to $11.8 million as of December 31, 2019, and net cash of $2.0 million. As of June 30, 2020, the firm maintained an outstanding balance of zero on its $5.0 million credit facility.
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. (OTCQB: HGBL, CSE: HGP) is an asset services company specializing in financial and capital assets. The company provides a full suite of services including market making, acquisitions, dispositions, valuations and secured lending. 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, | ||||||||
2020 | 2019 | |||||||
Revenues: | ||||||||
Services revenue | $ | 5,565 | $ | 5,335 | ||||
Asset sales | 552 | 2,089 | ||||||
Total revenues | 6,117 | 7,424 | ||||||
Operating costs and expenses: | ||||||||
Cost of services revenue | 1,188 | 1,483 | ||||||
Cost of asset sales | 330 | 1,866 | ||||||
Selling, general and administrative | 3,666 | 3,698 | ||||||
Depreciation and amortization | 90 | 76 | ||||||
Total operating costs and expenses | 5,274 | 7,123 | ||||||
Earnings of equity method investments | 181 | 1,269 | ||||||
Operating income | 1,024 | 1,570 | ||||||
Interest and other expense, net | (8 | ) | (22 | ) | ||||
Income before income tax (benefit) expense | 1,016 | 1,548 | ||||||
Income tax (benefit) expense | (1,023 | ) | 54 | |||||
Net income | $ | 2,039 | $ | 1,494 | ||||
Weighted average common shares outstanding – basic | 28,751,689 | 28,653,278 | ||||||
Weighted average common shares outstanding – diluted | 30,961,261 | 28,842,509 | ||||||
Net income per share – basic | $ | 0.07 | $ | 0.05 | ||||
Net income per share – diluted | $ | 0.07 | $ | 0.05 | ||||
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, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,233 | $ | 2,728 | ||||
Accounts receivable | 1,902 | 1,859 | ||||||
Current portion of notes receivable, net | 793 | 1,295 | ||||||
Inventory – equipment | 609 | 104 | ||||||
Other current assets | 1,787 | 784 | ||||||
Total current assets | 7,324 | 6,770 | ||||||
Property and equipment, net | 180 | 221 | ||||||
Non-current portion of notes receivable, net | 651 | 1,366 | ||||||
Equity method investments | 3,361 | 2,516 | ||||||
Right-of-use assets | 1,225 | 1,483 | ||||||
Identifiable intangible assets, net | 3,257 | 3,392 | ||||||
Goodwill | 5,585 | 5,585 | ||||||
Deferred tax assets | 1,601 | 372 | ||||||
Other assets | 241 | 212 | ||||||
Total assets | $ | 23,425 | $ | 21,917 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 7,739 | $ | 8,113 | ||||
Current portion of debt | 240 | 403 | ||||||
Current portion of lease liabilities | 543 | 577 | ||||||
Total current liabilities | 8,522 | 9,093 | ||||||
Non-current portion of debt | — | 35 | ||||||
Non-current portion of lease liabilities | 735 | 942 | ||||||
Other long-term liabilities | 55 | — | ||||||
Total liabilities | 9,312 | 10,070 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 568 shares of Series N at June 30, 2020 and December 31, 2019 | 6 | 6 | ||||||
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 29,421,456 shares at June 30, 2020 and 29,339,101 at December 31, 2019 | 295 | 293 | ||||||
Additional paid-in capital | 285,286 | 285,099 | ||||||
Accumulated deficit | (271,397 | ) | (273,474 | ) | ||||
Accumulated other comprehensive loss | (77 | ) | (77 | ) | ||||
Total stockholders’ equity | 14,113 | 11,847 | ||||||
Total liabilities and stockholders’ equity | $ | 23,425 | $ | 21,917 | ||||
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, | ||||||||
2020 | 2019 | |||||||
Net income | $ | 2,039 | $ | 1,494 | ||||
Add back: | ||||||||
Depreciation and amortization | 90 | 76 | ||||||
Interest and other expense, net | 8 | 22 | ||||||
Income tax (benefit) expense | (1,023 | ) | 54 | |||||
EBITDA | 1,114 | 1,646 | ||||||
Management add back: | ||||||||
Stock based compensation | 86 | 76 | ||||||
Adjusted EBITDA | $ | 1,200 | $ | 1,722 | ||||
The notes contained in our Quarterly Report on Form 10-Q are an integral part of these consolidated financial statements.
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Contacts:
Chief Financial Officer
Heritage Global Inc.
858/847-0656
