Heritage Global Inc. (HGBL) Earnings Call Transcript

looking statements, which speak only as of the date of this call. For more details and factors that could affect these expectations, please see our filings with the Securities and Exchange Commission. I'd like to turn the call over to Heritage Global's Chief Executive Officer, Mr. Ross Dove. Ross, please go ahead.

Thank you, John. Welcome, everyone, to our third quarter call. Thank you all for joining. Before Brian walks you through the numbers in detail, I want to just take a few moments to give you my thoughts on what the numbers say to me from my up-front close view. Making $1 million in NOI was positive movement forward, but there is more to digest. It's always also about how we made it and what worked and what still needs work. On the real good news front, we had a great industrial quarter with diverse auction sectors and larger transactions. It was highlighted by also winning many quality assignments for 4Q along with a major acquisition of plant and real estate in Longmont, Boulder, Colorado, with our great partner team. Our pipeline now has multiple large opportunities that include other campuses and potential acquisitions, which is really very refreshing after a pause and slowdown. We're back with fences to swing at and a feeling many stalled projects are now really in motion. We've got our seat belts fastened to drive it hard and fast. As I often say, we're not the leading indicator, but the trailing benefactor. And in the marketplaces we see, they're open for business across multiple sectors, and we're very busy. On the financial assets side, financial assets has lots of promise, but also plenty of work to be done. We're winding down the business of HGC that was problematic and a distraction and putting all of our focus now completely on 3 complementary asset-light sectors. We have a very solid [ inlet ] and indicators the business has a bright finish to the year and well, well beyond. Our 2 newest acquisitions have had mixed results, with Bossa Nova exceeding early goals and DebtX not yet where it needs to be or where it can and will be and should be. We liked our plan of integrating the offering of all 3 and expanding the service lines, and believe in 2027 getting our capability and our stories out to the market along with the HGC cost eventually gone and finally compete, we're poised to capture our full potential. Morale and confidence in our team is high for a strong close to 2026 and a great next year and beyond. We're very confident, and we feel good about our position today. Brian, take it away.

Thank you, and welcome, everyone. We delivered a profitable third quarter that reflects solid execution across our core business, led by a strong performance from our Industrial Assets division. Consolidated operating income was $1 million in the third quarter of 2026, compared to $1.3 million in the prior year quarter. Our Industrial Assets division reported operating income of $1.5 million in the third quarter of 2026, compared to approximately $900,000 in the third quarter of 2025. In our Financial Assets division, we reported operating income of approximately $800,000 in the third quarter of 2026, compared to $1.6 million in the prior year quarter. Our Industrial Assets division had a strong quarter, highlighted by healthy auction volume and a return of larger-scale transactions. The industry range of our auction activity was also more diverse than prior quarters. We executed auctions across the transportation, metalworking, and semiconductor sectors, among others, in addition to continuing our long-standing biotech and pharma activity. We're encouraged by the depth and quality of our auction pipeline as we move into the fourth quarter and 2027. During the quarter, HGP also made a $2 million investment in a joint venture that acquired 2 pharmaceutical sites in Colorado. We currently have multiple planned auctions to monetize the equipment assets and are evaluating strategic options to maximize the real estate potential of the sites through lease sale or development. In our refurbishment and resale business, ALT delivered another good quarter as we've continued to upgrade the quality of our inventory and add assets to the business. Our Financial Assets division delivered another profitable quarter as NLEX reported solid results, and we continue to see steady activity across the charge-off and non-performing loan space. We're also very pleased with the early performance of Bossa Nova, which we acquired late July as the team delivered strong execution during the quarter while integrating quickly with the business. Results from DebtX did not meet our expectations for the third quarter. However, we remain confident in the business. We continue to see real opportunities in the CRE marketplace, and we're strengthening our sales and marketing efforts to better drive deal flow. Meanwhile, the wind-down of HGC is progressing as planned and is allowing us to sharpen our focus on growing our core asset-light business. Additional consolidated financial results include the following. Revenue was $14.6 million in third quarter of 2026, compared to $11.4 million in the third quarter of 2025. Adjusted EBITDA was $1.4 million compared to $1.6 million in the prior year period. Net income was $1 million or $0.03 per diluted share compared to approximately $600,000 or $0.02 per diluted share in the third quarter of 2025. Our balance sheet continues to be a strength. Stockholders' equity was $53.1 million as of September 30, 2026, compared to $67 million at December 31, 2025, with net working capital of $8 million. Our cash balance reflects a total of $15.6 million as of September 30, 2026. After removing amounts due to our clients, our net available cash balance was $6.4 million. And further, in September, we strengthened our financial flexibility by entering into a new $10 million revolving line of credit with C3 Bank that runs through January 2028, replacing our prior facility that matured this past July. As of September 30, 2026, we had a $2 million outstanding balance on the facility, drawn in connection with the initial cash outlay for our most recent HGP joint venture investment. And with that, Ross, I'll turn it back over to you.

Thank you, Brian. So, watching my son run 100-mile races, it's challenging. It changed my thinking about quarters. I don't see them as finish lines anymore, but actually as rest stops, a time to take a quick breather and refuel, head back up and down the hills until you run the tape, and then get ready for the next 100 miles. It's a long race, and hopefully we can take a few moments again in 90 days to talk about it again. If you guys want to chat sooner, just reach out, because we can run and talk at the same time. We're ready now for any questions. We thank you for participating, and we look forward to continued participation and us performing at a level to get you excited. Thanks a lot, guys.

[Operator Instructions] We'll take our first question from George Sutton with Craig-Hallum. Please go ahead.

This is Logan on for George. So, Ross, I wanted to start with DebtX. I mean, hear your comments that, you know, the performance hasn't been kind of up to par so far this year. Just wondering if you could give us some more details on kind of what's driving that. Is it just performance? Has something changed in the market? I guess, can you just speak to if your perspective on that business has changed at all as we head into next year?

I remain just as excited about the business as I was before we bought it and after we closed it. So, it hasn't changed my encouragement, but it's been slower than I expected in a marketplace where, you know, we've got $1 trillion of commercial loans coming due and there's been a lot of struggle with a lot of companies to refinance them. I just think there's been a bit of a lag in my anticipation of how fast we'd be able to jump in and monetize those. So, you know, the solution, if there is a solution, some of it is timing, to be honest with you, and they're forecasting a much stronger 4Q, so it's a little bit of a wait-and-see there, but we're not operating it like a wait-and-see company. We're looking to expand our sales force to reach a broader audience. There's more sales coming from non-banks than traditionally where most of the CRE sales were coming from banks selling the assets. Plenty of assets have been transferred to non-banks who are also looking to monetize assets. So, we're just going to expand and broaden our coverage and keep pushing forward in a market that we know is solid and growing. So, we're ambitious about proving the acquisition right and confident we're going to.

So, it was nice to see the auction results this quarter, and it certainly sounds like, I know you guys have been doing work across some different verticals, and it sounds like you're seeing good momentum there. So, I just wonder if you could speak a little bit to kind of what signals you're seeing to give you confidence that quarters like this are repeatable going forward?

So, like I've said many, many times, we're not the leading indicator, we're the trailing benefactor for what's happened over the last 2 years. And what's happened over the last 2 years is we saw a lot of layoffs, we saw a lot of companies file Chapter 11s, many of those have been converting to Chapter 7s now as there's been a time lag, and on the layoffs, obviously, those layoffs produce assets 6 months, a year, and a year and a half later. So, the pendulum has swung in our favor now, and we've just seen a lot of larger assets, some of which we've been able to monetize in a very solid 3Q, some of which will monetize in 4Q. And the pipeline has multiple large opportunities in it right now across multiple sectors. You know, there's a lot of potential trucking auctions. There's a lot of potential food and process auctions. There's a lot of medical device potential auctions. So, there's lots of broadened opportunity besides just our core business of the pharma and the bio. So, our core business is now expanding to a lot of different core business sectors, which bodes well for not just 4Q, but it bodes very well for 2027.

Okay, last one for me. I think you referred to NLEX as kind of performing steady. Could you just walk through maybe the supply and demand sides over there and just talk about kind of what's the limiting factor on growth right now?

So, right now, we're doing a lot of sales. The prices have slowed down a bit from the rising tide you saw, you know, kind of during the pandemic and right post-pandemic, because there's actually increased supply, but there's increased supply at a little lower price. So, that means we need more volume to grow, which we're working on and signing up more new forward-flow clients. Why do I feel really good about it? Because what hasn't slowed down is the capital raise in alternative lending. So, as the capital raise in alternative lending continues over a period of time, that turns into sales for us. And we've seen now that a lot of the non-performing loans are beginning to convert to charge-offs that were non-performing loans 6 months ago, 9 months ago, a year ago. So, if you just look at it and step back and say, "Are we getting more and more charge-offs or less charge-offs? Is it decreasing or is it growing?" It is growing. So, it's us getting new clients. And there are a lot of new clients out there that are fintech clients that are just starting to see that over the last 2 or 3 years, they've created part of their asset portfolio that needs to be monetized in an NPL-focused fashion. So, I think we've got a strong couple-year run.

Okay.

Thank you for asking.

We'll take our next question with Mikhail Paramonov with Freedom Broker. Please go ahead.

I don't hear. Hello, everybody. Can you hear me?

Now, yes.

My question will be on capital allocation. So, following the investments in DebtX and Bossa Nova, how are you thinking about capital allocation priorities going forward? Is the focus now more on scaling these businesses, or do you continue to see opportunities for additional investments?

So, it's a good question. We have, you know, a very active board discussing capital allocation and what's the best use of our money and what's the best use of our funds. And, you know, there's multiple choices right now. I would say M&A does not have the same urgency it did before our last 2 acquisitions. Right now, we really want to focus internally on getting everything in sync, finding all of the synergies in all of our core businesses. There's lots of opportunities that look like they're coming up that basically put out capital and potentially larger capital on industrial acquisitions. So, we're really kind of more focused on building our capital, building the amount of cash we have available, than we are deploying it. There's talk, obviously, always about keeping a buyback program in place that exists. There's talk about always wanting to have capital available if an M&A transaction comes up that it's just such a good fit that we don't want to wait. But if you ask me, the primary concern right now is let's grow organically what we have this quarter.