Heritage Global Inc. Reports Second Quarter 2024 Results

SAN DIEGO--(BUSINESS WIRE)--Heritage Global Inc. (NASDAQ: HGBL) ("Heritage Global," "HG" or "the Company"), an asset services company specializing in financial and industrial asset transactions, today reported financial results for the second quarter and six months ended June 30, 2024.

Second Quarter and First Six Months 2024 Summary of Financial Results (unaudited):

($ in thousands, except per share amounts)	Three Months Ended June 30,							Six Months Ended June 30,
	2024				2023			2024				2023
Operating income	$	3,544			$	3,101		$	6,102			$	6,995
Net income	$	2,497			$	2,779		$	4,296			$	5,608
Net income per share - diluted	$	0.07			$	0.07		$	0.12			$	0.15
(Non-GAAP Financial Measures) (1)
EBITDA	$	3,691			$	3,222		$	6,390			$	7,236
Adjusted EBITDA	$	3,981			$	3,450		$	6,908			$	7,643

(1)

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 2024 Review:

• The Company achieved operating income of $3.5 million for the second quarter of 2024, as compared to operating income of $3.1 million in the second quarter of 2023.
• EBITDA totaled $3.7 million in the second quarter of 2024 versus EBITDA of $3.2 million in the second quarter of 2023, and Adjusted EBITDA was $4.0 million compared to $3.5 million in the prior-year quarter.
• Net income totaled $2.5 million or $0.07 of diluted earnings per share for the second quarter of 2024, compared to net income of $2.8 million or $0.07 of diluted earnings per share in the prior-year quarter.
• The Company strengthened its balance sheet by increasing stockholders' equity to $65.8 million as of June 30, 2024, compared to $61.1 million as of December 31, 2023, and increased net working capital to $17.9 million at June 30, 2024, compared to $11.6 million at December 31, 2023.
• Specialty Lending Borrower Default: The largest borrower from Heritage Global Capital, the Company's Specialty Lending segment, remitted less than its required minimum payment in the second quarter and as a result the borrower's loans were placed into default status. The Company has determined that a full recovery of principal and interest on this borrower's outstanding loans is not probable without further restructuring efforts executed by the Company and its senior lenders, and as a result the impacted loans have been placed in nonaccrual status beginning in June of 2024. (See additional details below).
• Subsequent to the quarter, on July 24, 2024, the Company repaid in full the remaining principal balance outstanding under its credit agreement with C3 Bank, in advance of the loan's April 27, 2028 maturity date.

Heritage Global Chief Executive Officer Ross Dove commented, "Our second quarter results reflect solid performance from our industrial assets division, where we continue to see an active pipeline for the auction of equipment and other assets. During the quarter, as previously disclosed, our auction division, in conjunction with partners, completed a highly accretive transaction involving the sale of equipment and a 10-year building lease on a recently acquired pharmaceutical plant in Fenton, Missouri. Our auction services are in high demand as economic pressures force the consolidation or closure of many businesses across the US, and we expect to continue to see significant auction activity as we move through the balance of the year.

"Performance at NLEX, the brokerage division within our financial assets business, remained at historically high levels during the quarter and, with the addition of new forward flow agreements and continued growth in aggregate consumer loan charge-offs, we are optimistic about the opportunities we are seeing to capitalize on NLEX's industry leading market share and drive continued growth of the business.

"In a disappointing development on the specialty lending side, as noted above, our largest borrower continued to face challenges in the quarter and did not meet its minimum required payment amount. We are working closely with the borrower and our senior lenders in an effort to mitigate the default in an efficient and effective manner. The loans to this borrower are directly secured by tens of thousands of charged-off consumer loans and these consumer loans continue to produce significant monthly recoveries albeit not at the levels originally forecasted. Given all that we currently know, we believe that our existing credit loss reserve against these loans is a reasonable estimate."

Some additional details on the Specialty Lending Borrower Default include:

• As of June 30, 2024, the amortized cost basis of loans in nonaccrual status was $24.6 million. $5.7 million of these loans are recorded as notes receivable and represent direct loans to the Borrower that are wholly owned by the Company. $18.9 million of these loans are recorded as equity method investments and are comprised of subordinated debt in two separate lending Joint Ventures, each with a different Senior Lender.
• The loans are directly secured by specific pools of charged off consumer loans. In aggregate there are tens of thousands of these consumer loans across these pools. The Borrower continues to manage the collection process on these loans and remit net proceeds on a monthly basis.
• Due to cost recovery accounting provisions, all future payments received by the Company on nonaccrual loans will be applied against the outstanding loan balance. This treatment defers any interest income on those loans, including related earnings from our Joint Ventures, for as long as they remain in nonaccrual status and the cost recovery method is in effect.
• Primarily due to the loss of interest income from the cost recovery accounting treatment, the Default is currently expected to reduce the Company's total 2024 operating income by approximately $1.6 million.
• As the subordinated lender in the Joint Ventures, the Company is in first position to absorb any losses that may occur should the borrower ultimately fail to satisfy all of its financial obligations to the Joint Ventures.
• The Company and the Joint Venture Senior Lenders have several recovery options available to them, including restructuring the loans with the Borrower, assigning a new servicer for the collateral, and selling the loans or underlying collateral to a third party.
• The Company has concluded that, in conjunction with the cost recovery method of accounting, no changes are necessary to the current $1.2 million credit loss reserve balance on the loans in nonaccrual status. Additional provisions to credit loss reserves may be required in the future due to a variety of factors including, but not limited to, the performance of the underlying collateral and any restructuring of the loan agreements.
• The Company's board has hired an advisor to help it evaluate potential strategic options for its Specialty Lending segment. This process is in its early stages and there is no time frame for its conclusion.

"Fortunately, the foregoing issues are limited to our Specialty Lending segment. Our other operating businesses continue to perform well, as demonstrated by their consistent profitability. In addition, the Company has ample cash to fund our growth plans, even after paying down our term loan," Mr. Dove concluded.

Second Quarter Conference Call

Management will host a webcast and conference call on Thursday, August 8, 2024, at 5:00 p.m. ET to discuss financial results for the second quarter of 2024. Analysts and investors may participate via conference call, using the following dial-in information:

• 1-800-274-8461 (Domestic)
• 1-203-518-9814 (International)
• Conference ID: HGBLQ2

To access the webcast, individuals can use this link. The conference call will also be available in the Investor Relations section of the Company's website. To listen to a live broadcast, go to the site or click on the webcast link at least 10 minutes prior to the scheduled start time in order to register.

Replay

A replay of the call will be available approximately three hours after the call ends through August 22, 2024. To access the replay, dial 1-844-512-2921 (domestic) or 1-412-317-6671 (international). The replay pin number is 11156335. A webcast replay can also be accessed on the Investor Relations section of the Company's website.

About Heritage Global Inc. ("HG")

Heritage Global Inc. (NASDAQ: HGBL) values and monetizes industrial & financial assets by providing acquisition, disposition, valuation, and lending services for surplus and distressed assets. This aids in facilitating the circular economy by diverting useful industrial assets from landfills and operating an ethical supply chain by overseeing post-sale account activity of financial assets. Specialties consist of acting as an adviser, in addition to acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, real estate, and charged-off account receivable portfolios through its two business units: Industrial Assets and Financial Assets.

Definitions and Disclosures Regarding non-GAAP Financial Information

The Company defines EBITDA as net income/loss plus depreciation and amortization, interest and other expense, and provision for income taxes. Adjusted EBITDA reflects EBITDA adjusted further to eliminate the effects of stock-based compensation. Management uses EBITDA and Adjusted EBITDA in assessing the Company's results, evaluating the Company's performance and in reaching operating and strategic decisions. Management believes that the presentation of EBITDA and Adjusted EBITDA, when considered together with our GAAP financial statements and the reconciliation to the most directly comparable GAAP financial measure, is useful in providing investors a more complete understanding of the factors and trends affecting the underlying performance of the Company on a historical and ongoing basis. The Company's use of EBITDA and 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, below, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands).

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. While the Company believes the forward-looking statements contained in this communication are accurate, these forward-looking statements represent the Company's beliefs only as of the date of this communication, and there are a number of factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements, including variability in magnitude and timing of asset liquidation transactions, the collectability of the charged off receivables that secure our loan portfolio, the impact of changes in the U.S. national and global economies, and 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.
CONDENSED 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,
		2024				2023				2024				2023
Revenues:
Services revenue		$	8,481			$	9,810			$	17,464			$	20,055
Asset sales			3,542				3,288				6,720				9,655
Total revenues			12,023				13,098				24,184				29,710
Operating costs and expenses:
Cost of services revenue			1,450				1,807				2,930				4,147
Cost of asset sales			2,271				1,935				4,682				6,270
Selling, general and administrative			6,346				6,440				12,704				12,740
Depreciation and amortization			147				121				288				241
Total operating costs and expenses			10,214				10,303				20,604				23,398
Earnings of equity method investments			1,735				306				2,522				683
Operating income			3,544				3,101				6,102				6,995
Interest expense, net			(108	)			(101	)			(200	)			(169	)
Income before income tax expense			3,436				3,000				5,902				6,826
Income tax expense			939				221				1,606				1,218
Net income		$	2,497			$	2,779			$	4,296			$	5,608
Weighted average common shares outstanding - basic			36,741,439				36,700,830				36,674,620				36,627,200
Weighted average common shares outstanding - diluted			36,816,610				37,651,694				36,759,995				37,504,023
Net income per share - basic		$	0.07			$	0.08			$	0.12			$	0.15
Net income per share - diluted		$	0.07			$	0.07			$	0.12			$	0.15

HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except share and per share amounts) (unaudited)
		June 30, 2024				December 31, 2023
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents		$	24,583			$	12,279
Accounts receivable (net of allowance for credit losses of $131 in 2024 and $132 in 2023)			1,049				1,910
Current portion of notes receivable (net of allowance for credit losses of $466 in 2024 and $650 in 2023)			5,065				6,581
Inventory - equipment			4,285				5,074
Other current assets			953				448
Total current assets			35,935				26,292
Non-current portion of notes receivable, net			8,533				10,890
Equity method investments			22,380				21,361
Right-of-use assets			2,214				2,539
Property and equipment, net			1,712				1,705
Intangible assets, net			3,558				3,753
Goodwill			7,446				7,446
Deferred tax assets			8,159				9,115
Other assets			64				67
Total assets		$	90,001			$	83,168
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	5,107			$	7,237
Payables to sellers			10,381				4,975
Current portion of third party debt			1,797				1,733
Current portion of lease liabilities			740				789
Total current liabilities			18,025				14,734
Non-current portion of third party debt			4,579				5,495
Non-current portion of lease liabilities			1,584				1,859
Total liabilities			24,188				22,088
Stockholders' equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 563 of Series N as of June 30, 2024 and December 31, 2023; with liquidation preference over common stockholders equivalent to $1,000 per share			6				6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued 37,341,185 and 37,157,616 shares as of June 30, 2024 and December 31, 2023, respectively; and outstanding 36,945,010 and 36,761,441 shares as of June 30, 2024 and December 31, 2023, respectively			373				372
Additional paid-in capital			294,958				294,522
Accumulated deficit			(228,730	)			(233,026	)
Treasury stock at cost, 396,175 shares as of June 30, 2024 and December 31, 2023			(794	)			(794	)
Total stockholders' equity			65,813				61,080
Total liabilities and stockholders' equity		$	90,001			$	83,168

- 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,
		2024				2023				2024				2023
Net income		$	2,497			$	2,779			$	4,296			$	5,608
Add back:
Depreciation and amortization			147				121				288				241
Interest expense, net			108				101				200				169
Income tax expense			939				221				1,606				1,218
EBITDA			3,691				3,222				6,390				7,236
Management add back:
Stock based compensation			290				228			518				407
Adjusted EBITDA		$	3,981			$	3,450			$	6,908			$	7,643

Contacts

Investor Relations Contact:
John Nesbett/Jennifer Belodeau
IMS Investor Relations
203/972.9200
[e-mail]