Heritage Global posts $1.4 million EBITDA in Q3 as strategic M&A execution and smaller transactions drive performance amid economic uncertainty.

OPERATOR - (00:01:55)

Please stand by. Your program is about to begin. If you need assistance on today's program, please press star zero. Hello and welcome to today's Heritage Global third quarter 2025 earnings call. @ this time all participants are in a listen only mode. Later you will have the opportunity to ask questions. During the question and answer session. You may register to ask a question at any time by pressing the Star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star 2. Please note this call may be recorded. I'll be standing by. If you should need any assistance, it is my pleasure to turn the program over to IMS Investor Relations, John Nesbitt.

John Nesbitt - Investor Relations - (00:02:43)

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 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 Dove.

Ross Dove - Chief Executive Officer - (00:03:17)

Ross. Thank you John and welcome everyone and thank you for joining. The older I get, the faster every 90 days seems to come. What never changes is every 90 days presents new opportunities and challenges. Earning 1.4 million in EBITDA this 90 days was to me more than meets the eyes. My brother and lifetime business partner always said, Ross, numbers don't lie. To put that in context, every Sunday he was on the golf course and I was in the card room. Of course he was correct. But what I have learned is there are many factors to the story beyond the numbers. The greatest challenge in a business is not always execution, but equally significant how you play that curbs your doubts. For many reasons we were challenged and succeeded through a wait and see economy for transactions. We made a profit more like a journeyman fighter going all 12 rounds because we kept swinging. With many large transactions slowed in a wait and see time with interest rate and tariff considerations and overall less ability to execute large transactions. There were no needle movers. Opportunities we performed were at a high conversion rate on transactions that did occur, albeit a lot of smaller ones without overemphasizing the future outlook. On the financial side, regional banks continue to report an increase in distressed assets and every indicator says asset flow is on the rise. On the industrial side, a continued push towards lean manufacturing and a prediction of more consolidation over time also bodes well for increased asset flow. We have built both our balance sheet and staffing and systems very prepared to garner market share as opportunities arise. Further, I am excited to report after a two year phased approach to our M&A, we are well past fine tuning our strategy and 100% now in tactical execution. We have isolated the companies that I define as plugging in the gaps that will create long term shareholder value with the fastest accretion dynamics. I call it our GS Plan geography and sector growth. We know the sectors we believe we can serve as needle movers and the geographies we can win and execute in. We are also in advanced negotiations with who we have identified as best practices and as important a shared vision. Like minded DNA and all in one canoe paddles in tandem. When is day one on this? Near term is now our emphasis and all hands are on deck. With that, it's time for Brian to drill down on the corner and I am here to answer any questions when she shares the current results. Thank you all for joining. Brian, you're up.

Brian - (00:06:27)

Thank you Ross and good afternoon everyone. I'll begin with a brief overview of our third quarter operating results before walking through our industrial and financial segment Performance Consolidated operating income was 1.3 million in the third quarter of 2025 compared to 1.5 million in the third quarter of 2024. Our Industrial Assets division reported operating income of approximately 900,000 in the third quarter of 2025 compared by approximately 700,000 in the prior year quarter. Our Financial Assets Division reported operating income of 1.6 million in the third quarter of 2025 compared to 1.8 million in the third quarter of 2024. Our industrial assets Division executed well on auctions and liquidation opportunities and we saw growth in our refurbishment and Resale segment. ALT reported improved operating income of approximately 400,000 in the third quarter compared to approximately 200,000 in the third quarter of 2024. The third quarter also included a healthy amount of auctions, though the volume was primarily comprised of smaller scale activity as certain companies opted to hold off on larger scale non essential transaction decisions amid ongoing economic uncertainty. As we close out the year, we are energized by the opportunities ahead and proud to be nearing the completion of our new facility in San Diego, a key milestone that supports our next phase of growth. Our Financial Assets Division reported solid profitability in the third quarter while our brokerage business was down slightly quarter over quarter. MLEX continues to proactively add new sellers to our existing clients. Transaction volumes from our largest recurring clients softened early in the quarter but ended September in an upward trend leading into the fourth quarter, which historically represents a stronger period as lending institutions work to optimize their balance sheets ahead of year end. Overall consumer debt remains at high levels even as credit performance metrics suggest that the market has stabilized this year. At the same time, regional banks are facing increased scrutiny over the quality of their loan portfolios, which we believe will lead to higher charge offs and non performing loan volumes as these institutions begin to offload underperforming assets. Additional consolidated financial results include the following Adjusted EBITDA was $1.6 million compared to $1.9 million in the prior year period. Net income was approximately 600,000 or $0.02 per diluted share compared to net income of 1.1 million or $0.03 per diluted share in the third quarter of 2024. The change largely due to a non cash adjustment made to the valuation allowance against our deferred tax assets as we fine tune our estimated utilization of net operating loss carryforwards prior to expiration at year end, our balance sheet is strong with stockholders equity of 66.5 million as of September 30, 2025 compared to 65.2 million at December 31, 2024. With net working capital of 17.9 million, our cash balance reflects a total of 19.4 million as of September 30, 2025. And after removing amounts due to our clients or payables to sellers on our balance sheet, our net available cash balance was 12.6 million. M&A remains a critical component of our long term strategy and capital deployment framework. Now, with a sharpened focus, our team is laying the groundwork for accretive transactions that will define the next phase of the company's strategy and growth prospects. We are optimistic and motivated. This is the right time and the opportunities ahead are compelling. We did not repurchase any shares in the quarter as we have prioritized, meaning maintaining our cash position given our advancing progress on the M and A front. With that said, the company authorized a new share repurchase program on July 31 that allows for the repurchase of up to 7.5 million in common stock for the next three years, though it remains a part of a capital allocation strategy. And with that, I'll send it back over to Ross.

Ross Dove - Chief Executive Officer - (00:11:09)

Thank you Brian. After hearing you, I think it's worthwhile to take a moment to add some details to our M&A strategy. We're focused on businesses that are very capable of operating independently that we also believe can scale significantly and thrive within each g. Companies with systems and processes that are a match. Day one. Our goal is to build shareholder value that both lasts long term and it built to last heritage while we're also mindful that the value also needs to be transferable to the market at large. This took a long time to get there, but we're well on the way now and excited about our future. Thank you all for listening in. We're here for any questions.

OPERATOR - (00:11:58)

At this time. If you would like to ask a question, please press star one now on your telephone keypad to withdraw yourself from the queue, press star two. We'll take a question from Mark Argento of Lake Street. Your line is open.

Mark Argento - Equity Analyst - (00:12:18)

Yeah, Ross. Hey, Brian. Just one in terms of capital allocation question. I know M&A is important from a strategy perspective. You guys have been focused on it for a while, but with the stock kind of where it's at, you know, kind of coming to this question of just, you know, do you just get aggressive and buy more of your own stock back at a business you know and know well versus allocating capital to new acquisitions? Probably answer somewhere in between. But how do you guys think about it? What are the criteria when you're looking at, you know, M and A from, you know, both the strategic perspective, but also from an accretive, you know, financial perspective.

Ross Dove - Chief Executive Officer - (00:12:59)

Right. So if we thought these M&A transactions were more in the distance than they are, then we would have put a greater emphasis on buying the stock back. Yes, we think the stock is way undervalued. But at the same time, we think that, we think that these acquisitions are really going to help grow the company. And showing growth in the company is. Is really the most significant, most important thing we can do. However, we did authorize seven and a half million dollars and aren't prepared to flip the switch, so to speak, and start buying stock back. But you know, right now there's a heightened emphasis on getting some things that are right in front of us done first. Mark, if that's a fair answer.

Mark Argento - Equity Analyst - (00:13:52)

Yep. No, that's a fair answer. Just pivoting to the business. You said the industrial assets, you saw a decent amount of activity, but there were smaller, you know, either smaller ticket type transactions or a little different mix. What is it in particular? You know, I think you kind of called it taking a wait and see approach. But what is it that, you know, that you see a lot of these potential sellers or customers? What are they waiting for? Are they waiting to see the government.

Ross Dove - Chief Executive Officer - (00:14:25)

It felt like a lot of companies were releasing some surplus assets in kind of a hold on mode rather than shutting down. And it felt like other companies were holding assets because they're looking at, these are the larger companies, they were looking at M and A, but they have concerns about, you know, if the supply chain is going to be wide open and they can get new assets. So there was just a certain amount of people that weren't making the significant big decisions. So we made a profit working really hard, doing a lot of work on a lot of smaller transactions that were less needle movers. But fortunately you added them all up together and they added up to a profit. But we didn't have that one big or two big or three big really large auctions that we usually get in the quarter.

Mark Argento - Equity Analyst - (00:15:25)

Got it. And then one more housekeeping one for Brian. So it looks like he has paid off the remaining couple million dollars on that Alt Note. Really at this point, really the only real debt you guys have on the books is just the mortgage, right. For your new headquarters. Am I looking at that correctly?

Brian - (00:15:48)

Yeah. So we, we, we purchased a building early this year for $7.3 million approximately and took out a $4.1 million interest only mortgage for three years. And we did pay off the Alt note after four years. So that's the only debt currently on the balance sheet other than we have the capacity on our line of credit which is at a Zero balance, currently $10 million capacity.

Mark Argento - Equity Analyst - (00:16:20)

Awesome. Appreciate the help guys. I'll hop back in the queue.

Ross Dove - Chief Executive Officer - (00:16:25)

Thanks Mark.

OPERATOR - (00:16:27)

And once again, if you'd like to ask a question, please press Star one now on your telephone keypad. One moment while we queue. And it appears that we have no further questions. I'd be happy to return the call to management for closing comments. Actually we do have a follow up from Mark Argento of Lake Street. Your line is open.

Mark Argento - Equity Analyst - (00:16:53)

Hey, if I got the mic, I got the mic, right? Let's keep going.

Ross Dove - Chief Executive Officer - (00:16:57)

Yeah, go for it, go for it.

Mark Argento - Equity Analyst - (00:17:00)

Well one, I was gonna, I was gonna ask but wanted to see if somebody else would was just any updates on any progress in regards to Heritage Capital and working down the end of the portfolio there and the related, you know, related assets there.

Ross Dove - Chief Executive Officer - (00:17:21)

There's, there's real progress but I'll let Brian take over. Brian, go ahead.

Brian - (00:17:27)

Yeah, so I just. A couple high level notes. This is really a long term workout that requires a couple things meaning one alignment with our senior lenders and the borrowers. So all parties that are involved and requires a good plan. So we do have alignment with our senior lenders and we do have a plan. And we've talked about the plan being one of the key initiatives in that plan being allocating cash to the legal process. So we've been spending. We've been investing in that process since late last year and initial results are positive right now. And we're kind of on an accelerated timeframe now after those results to get as many consumer accounts into the process as we can. So progress is solid right now. No change to the reserve. And as long as we continue along this path, I think we'll be in the best position in the long term.

Mark Argento - Equity Analyst - (00:18:38)

Got it. Looks like you guys maybe, you know, got paid down a little bit like 100, couple hundred thousand bucks or something in the. In the quarter. Is that accurate?

Brian - (00:18:50)

Yeah, we have a small portion of really high performing loans and good borrowers that. That spins off some interest income. So we do. We are operating at a small profit right now.

Mark Argento - Equity Analyst - (00:19:10)

Got it. That's helpful. All right, that's it for me. Thanks, guys.

Ross Dove - Chief Executive Officer - (00:19:14)

Thanks, Mark.

OPERATOR - (00:19:18)

And it appears that we have no further questions at this time. I'd be happy to once again return the program to our management for closing comments.

Ross Dove - Chief Executive Officer - (00:19:29)

Thank you all for joining. Thank you all for listening. Thanking you all for sticking with us. I leave the call like I started the call, feeling very positive that we're in the right place at the right time with the right opportunities right in front of us. And we positioned ourselves well to capture and optimize what exists in front of us. So I'm feeling good and hopefully you enjoyed the call and we've given you some decent insight into where we're going. So thanks for joining. We're always available if you want to check in with us. Everyone have a great day.

OPERATOR - (00:20:09)

This does conclude today's conference. You may now disconnect your lines and everyone have a great day.