Heritage Global Inc. Price & Performance (HGBL)

Thank you, and good afternoon, everyone. Before we begin, I'd like to remind everyone that this conference call contains forward looking statements based on our current expectations and projections about future events and are subject to change based on various important factors. 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 call. For more details on factors that could affect these expectations, please see our filings with the Securities and Exchange Commission. Now I'd like to turn the call over to Heritage Global's Chief Executive Officer, Mr. Ross Stuff. Ross? Thank you, John, and welcome all to our first quarter earnings call. I'm pleased to again report a solid profitable quarter.

We once again executed safe and smart decisions and transactions across all of our revenue streams. Over $1,500,000 in free cash flow affording us the continued currency to fuel growth as we pursue both organic and M and A initiatives aggressively. We had a very slow start to the quarter, It was really a tale of two halves. Until mid February, the markets we operate in had the similar and continued wait and see sentiment of the second half of last year. But the feeling of a pent up demand continued as sellers and and then sellers eventually needed to realize that the dispositions decisions they needed to make really took way midway through the quarter and opened up in mid February across the board. We experienced a very strong March which followed with a particularly good April which really bodes well for both revenue generation and the conversion from our pipeline to contracts on multiple larger projects both fee driven and principal purchases. Our expectations have a very positive sense this is a trend that will continue throughout the year and well into 2026. Asset based lenders with both industrial assets and financial assets want to ensure they have strong cash positions in these uncertain geopolitical landscape.

And there is a greater push to mark to market now more expeditiously. We have experienced both large healthy corporations focusing a greater emphasis on surplus and the back end of their supply chains. Alongside this is an increase in corporate bankruptcy filings with more Chapter 11 filings converted to Chapter seven ations requiring auctioneer services like we do. Financial asset sellers moving quicker to recapture values on nonperforming loans at both the banking and fintech sectors as well as with consumer debt remaining still at record levels. Brian will now walk you through in detail our Q1 then I will come back and give you some thoughts on where we look for our growth going forward. Brian, you're up now. Thank you, Ross, and good afternoon, everyone. I'll begin by walking through the first quarter financial results with a focus on our key metric operating income and drilling down on segment performance before concluding with the consolidated financial Consolidated operating income was $1,400,000 in the first quarter of twenty twenty five compared to $2,600,000 in the first quarter of twenty twenty four. Our Industrial Assets division reported operating income of $1,000,000 in the first quarter of twenty twenty five.

Compared to $800,000 in the prior year quarter. While our Financial Assets division reported operating income of $1,700,000 in the first quarter of twenty twenty five, compared to $2,900,000 in the first quarter of twenty twenty four. Starting with our Industrial Asset division, our auction business specifically had a solid quarter as auction activity began to pick up in the second half The Auction Liquidation segment results aligned with our expectations with one exception Our appraisal business had a slow start to the year year generating roughly 300 to $400,000 less than anticipated which contributed to the negative segment comparison to the first quarter twenty twenty four. We have since built momentum in this revenue stream and expect a much stronger second quarter in alignment with our prior estimates. Our Refurbishment and Retail segment has focused on acquiring a broader mix of high demand higher value instruments. This enhanced inventory has driven faster sales as stronger price points, resulting in a $300,000 increase in segment operating income compared to the same quarter last year. Consistent with the Auctions Group, ALT has seen an increase in auction referral activity, which is expected to positively impact the division's operating income in the second quarter.

These business development indicators are beginning to validate our outlook on the industrial auction business as the macroeconomic environment continues to drive cost cutting measures layoffs, and facility closures, and we expect further momentum in our Industrial Division as we continue to move through 2025. One notable transaction during the quarter in the industrial side HTP along with certain partners entered into a purchase agreement for a pharmaceutical plant and its associated equipment assets in Huntsville, Alabama and executed a lease agreement with the seller for both the plant and equipment assets. It's important to note that this transaction is different from certain historical real estate purchases in the sense that the partnership doesn't intend to immediately flip the assets to auction or resell the building, but rather collect the lease payments through the first eighteen month term ending with a potential execution of the repurchase option by the seller and tenant. And it's similar in a sense that this transaction is expected to generate strong returns for HCP once the assets are ultimately sold Moving to the Financial Assets division, the brokerage segment got off to a slower start to the year than we anticipated but activity strengthened in the latter portion of the first quarter reaching $1,600,000 in segment operating income After experiencing record pandemic related prices, for charged off and non performing loans through the first quarter of twenty twenty four, we began to see movement to a more normalized pricing level over the last year, which is believed to have stabilized at approximately 30% below record highs.

However, we continue to see significant volume due to elevated levels of consumer debt and we expect the momentum experienced in the second half of the quarter to continue into the second quarter and beyond. Our Specialty Lending segment is the primary driver of Duke decreased operating income in the division as compared to the first quarter of twenty twenty four. Which is due to the lack of revenue recognition related to loans placed nonaccrual status in the second quarter of twenty twenty four. We've continued to make structural changes in our lending business with the expectation of further improving our collection rates moving forward and improving our long term potential realization for loans currently placed in nonaccrual status As we have mentioned previously, these efforts include accelerating legal methods utilized by our borrowers which may have the most significant impact on the overall collectability of the loans. Beyond operating income, other consolidated financial results include the following: adjusted EBITDA was 1,800,000.0 compared to $2,900,000 in the prior year period Net income was $1,100,000 or $03 per diluted share compared to net income of $1,800,000 or $05 per diluted share in the first quarter of twenty twenty four. Our balance sheet is strong with stockholders' equity of $65,400,000 as of 03/31/2025, compared to $65,200,000 at 12/31/2024 with net working capital of 14,700,000.0 Our cash balance reflects a total of $18,800,000 as of 03/31/2025, and after removing amounts due to our clients or payables to sellers on our balance sheet, our net available cash balance was 10,200,000.0 We also repurchased a approximately 500,000 shares in the open market during the first quarter.

And as of 03/31/2025, the company had approximately $2,000,000 in remaining aggregate dollar value shares that may be purchased under the program Lastly, as Ross has previously mentioned, M and A is an increasingly important component of our growth strategy. And we continue to evaluate strategic opportunities. We are focused on what's next while still managing the underlying core business which drives our sustained profitability and builds our available cash balance. And I'll end it there. Back over to you, Ross.

Thank you, Brian. So I'll continue on the what's next. So where do we go from here? After watching the Kentucky Derby again, it's evident the fastest horse out of the gate doesn't beat the horse with momentum. That closes strong. We believe we have built Heritage to be the horse with momentum and the skill to navigate the field with a clear view forward and the right path for our run for the Rose. Our M and A progress is closing in on exciting targets now, and we will be accretive and synergistic as they will both be profitable standalone and escalate our organic growth and with less liquidity in the market, we believe our momentum and our position with a strong balance sheet really works in our favor. The last eighteen months are really the telltale sign for the next eighteen months. We see that all sign points to the supply of assets are growing with the demand for quality used and refurbished industrial assets increasing especially including the tariff concerns. On the financial front, lenders are feeling pressure to ensure getting clean balance sheets with less wait and see and moving NPL assets to market now. Our team is totally in it to win it, and our definition of success is to raise the hurdle bar from steady profits to growing profits and we feel confident we can execute on that initiative.

Thank you all for listening. It's much appreciated.

At this time, if you'd like to ask a question, please press the star star and two. Again, We'll take our first question from Marc Argento with Lake Street. Please go ahead. Your line is open.

Yes. Hi, guys.

Just a few quick ones. On the financial assets business, I think you had mentioned a little slower to start, but it looks like things are picking up. Can you talk a little bit more about type of assets you're seeing in the market? Is there any kind of traditional seasonality you're seeing there? Anything could help us better get a feel for how that business is trending?

No, Mark. I think that it's really not about fintech versus traditional banking. I think that it was just the first two weeks or first three weeks everyone was kind of wait and see with this massive geopolitical question mark do we sell now, do we wait? And then at some point, kinda it flipped the switch in about, you know, midway through February and there was a big push to get stuff done. So we had a really strong second half of the quarter and a really good pipeline going into Q2. And everyone now I think really kind of moving forward with there's no good wait and see in the market and it's time to sell.

Got it. And and did you anticipate mean, in terms of that business, overall, we've been talking about this kind of macro and it's as Brian alluded to maybe, you know, things are stabilized kind of 30% off the highs, but do you anticipate there's going to be some growth there or how I guess how should we kind of model that or think about modeling that business? Is that just kind of a slow, consistent business quarter in and quarter out? Or do you think we could actually see a reacceleration in growth there?

I I think we've really kinda hit like, the sweet spot in what the acid flow is going to be as far as pricing. But I think we haven't hit the sweet spot in the growth what asset flow It's going to need to be to flow through the amount of assets they're gonna need to get converted. You're looking at, you know, record highs not just in credit card debt, but in automotive debt and in fintech debt. So at some point, there is an got to be almost mathematically an increase in flow through So I think we're in a growth trajectory, Mark.

Got it.

And Brian, just one for you quick. Where where's the where's the loan book kind of stand right now in terms of the balance? And have you made any progress in whittling that down since the end of the year?

Yeah. We're at around $29,000,000 just over $29,000,000 in gross loans outstanding. That's a little shy of 10,000,000 on our balance sheet and notes receivable. And the remaining piece in equity method investments. We are seeing we're still seeing a higher amount of cash inflows due to the fact that we're not funding or haven't been funding as much each quarter. So we're actually seeing a cash inflow from that business right now. But we did increase the amount of fundings we did in Q1 versus Q3 and Q4 of last year.

And then the balance on your non accrual lending partner Have you been able to whittle that down at all in the quarter?

Yeah, there's a little bit amount that's kind of staying pretty consistent The fact that they have lower remittances, as we talked about a lot previously, than what our contractual minimum payments would be. But also the economics and the joint ventures limit our cash flows a little bit or our cost recovery amounts due to the fact that that large borrower is still in default.

And the cash flows majority of the cash flows will go to the seniors first when requiring a preferred return. And we get secondarily some smaller cash flows. That's really a short term situation. Eventually our cash flows increase over time. When our seniors are paid down.

Got it. Appreciate it, guys. I'll hop back in the queue. Thanks.

Alright. Have a good day.

And as a reminder, We'll take our next question from Dave Marsh with Singular Research. Please go ahead. Your line is open.

Hello. This is Robert Maldi filling in for hello. Can you hear me?

Yeah. Hi, Rob. We can hear you. Thanks. This is Ross. We can hear you. Hi. Hi, Ross. I just want to say one thing, firstly, is I love the Kentucky Derby analogy. I had the winner I had sovereignty, and sovereignty was in the eighteenth position. So I love that analogy, and, we hope our stock analysis can be as good. As our horse racing analysis. So I love that. My first question relates to the, prepayment. With C3. [indiscernible] Prepayment and what opportunities do you see deploying that capital near term? So I'll take it, maybe Brian can answer afterwards. We're not looking to pay interest at all on money we don't need But it's very important to us to have the available credit because we have at any given time, very episodic transactions where we could need it. So unlike some companies who want to deploy all their capital we're a company that has a lot of needs to have capital in reserve in case we find that next big deal and we have to react fast. So paying back and having a zero credit line is a very strong comfort level with us. Brian, if you wanna add to that, go ahead.

I think the pre name payment option for the mortgage that we just got into is a good option for us if we don't have better uses for the capital. So we are very opportunistic as we've seen in the transaction that we just announced on the industrial side. So if we need capital, we can use our available cash or tapping into credit line. But if in a couple of years, if we determine that we do have sufficient amounts of cash and we could pay off that debt as well, we'll do that. But right now, I think it's safe to say we have some strategic initiatives that could require some of cash.

Great. I came a little late on the call. You may have answered this, Wondering about l NLEX performance. It it running at pretty high levels. What what's driving this? And how sustainable is is this trend? In in the current economy?

Go ahead, Brian.

So I believe the question was the performance of NLX and how sustainable that is. We've seen we saw a very high levels of performance at NLX. When the price both the prices were high during the pandemic as well as volumes were high. What we saw over the last year was that prices have come down. It's more normalized level For example, if something is selling at 10¢ on the dollar, [indiscernible] during the pandemic, now it's selling at around $07 on the dollar. Those prices we believe are stable [indiscernible] going forward, I think the key there is there's still a lot of volume to get through the brokerage. There's still a lot of charge offs that we believe are going to come through.

For the next few years. And I I think that that level is almost a really good benchmark for [indiscernible] What we did in Q1. And we could see upside due to some spikes in volume. Or adding clients or increasing the volume that is sold through our existing clients.

Oh, gotcha.

Regarding growth opportunities, are there specific sectors or asset classes where you see more significant growth opportunities and how are you getting positioned to capitalize on that? We're open to looking at opportunities both organic and M and A, to grow both sides of our business, to both the financial side and the industrial side. So there is no favoritism either way We see opportunities to expand on the financial side into increasing basically not just our market share, but moving into other kinds of loans performing loans, medical loans, etcetera. Real estate loans. So we see a growth there. On the industrial side. We see expanding our marketplace. Into growing our sectors and our international business, etcetera. So we're bullish that there's a big open market across all of our business streams to grow We're rapidly looking at ALT, figuring out how to expand their whole bio sector So we see lots of places and no favoritism, Robert.

Fair and balanced.

Love it. And finally, how is AI helping or reducing costs or leveraging up your activities? So I was actually an expert in artificial intelligence my whole life. I always thought I was smarter than I was. So it's nothing new there. But the new generation, the people underneath me, are actively embracing it, and it's actually helping not just on the front end with how to find the clients, but on the middle end, how to help the clients, and on the back end, how to solve the situations. So we're as aggressive as any other small cap company [indiscernible] and a big endorser that we think it's gonna move the needle in the right way for us. Excellent. Well, I'll go back in the queue. Thank you very much. [indiscernible] And there are no further questions on the line at this time. I'll turn the program back to your Ross Dove for any closing remarks.

Well, thank everybody for joining. Thank everybody for listening. This is like a really good time for me to close by saying, I have a huge amount of positive feeling that it's gonna be a good next quarter and a good year. And that there's all kinds of factors that are looking in the right way for us. So stay tuned, hang in there, I hope if you haven't joined yet as a holder, I hope you will. I hope if you are a holder, you'll stick around because I've got a really good feeling about what the next year will hold And thank you all graciously for being there.

This does conclude today's program. Thank you for your participation, and you may now disconnect.