Overview of Heritage Global Inc.

Heritage Global Inc. is a diversified financial services and asset liquidation company that operates through several divisions and subsidiaries. The company’s main business activities include:

• Auction and liquidation services for industrial assets and equipment
• Refurbishment and resale of laboratory equipment
• Brokerage of charged-off and non-performing consumer loans
• Specialty financing solutions for buyers of distressed debt portfolios

Heritage Global has a presence across the United States and Canada, with a focus on providing comprehensive financial and asset management solutions to its clients. The company has built a reputation for its deep industry expertise, extensive buyer networks, and ability to maximize recovery values through its various service offerings.

Financial Performance

For the nine months ended September 30, 2024, Heritage Global reported total revenues of $34.6 million, down 24% from the same period in 2023. This decline was primarily due to lower asset sales revenue, which fell 40% year-over-year, as well as a 15% decrease in services revenue.

Despite the revenue decline, the company was able to maintain profitability, reporting net income of $5.4 million for the first nine months of 2024, down 29% from the prior year period. Adjusted EBITDA, a key performance metric for the business, was $8.8 million, a 18% decrease compared to the first nine months of 2023.

The company’s liquidity position remained strong, with $26.6 million in cash and cash equivalents as of September 30, 2024, up from $12.3 million at the end of 2023. Working capital increased to $16.2 million from $11.6 million over the same period. Heritage Global has access to a $10 million credit facility to support its operations and growth initiatives.

Segment Performance

Heritage Global operates through four main business segments:

1. Auction and Liquidation: This division, operated through Heritage Global Partners (HGP), provides auction, appraisal, and asset advisory services for industrial machinery, equipment, and other surplus assets. Revenues and operating income in this segment declined in 2024 compared to 2023, due to normal fluctuations in the timing and magnitude of asset liquidation transactions.

2. Refurbishment & Resale: The American Laboratory Trading (ALT) subsidiary focuses on acquiring, refurbishing, and reselling specialized laboratory equipment. This segment saw a significant decline in operating income in 2024 compared to the prior year.

3. Brokerage: The National Loan Exchange (NLEX) business brokers the sale of charged-off and non-performing consumer loan portfolios on behalf of financial institutions. Brokerage revenues and operating income decreased in 2024 versus 2023.

4. Specialty Lending: Heritage Global Capital (HGC) provides financing solutions to buyers of distressed debt portfolios. This segment reported higher operating income in 2024, despite a significant default by the company’s largest borrower that resulted in most of HGC’s loan portfolio being placed on non-accrual status.

The company’s management team has deep industry expertise and has been able to leverage synergies across the different business units. However, the performance of the individual segments can vary significantly based on the timing and nature of asset liquidation and financing transactions.

Strengths and Weaknesses

Key strengths of Heritage Global’s business model include:

• Diversified revenue streams across asset liquidation, brokerage, and specialty lending services
• Strong reputation and extensive industry relationships that provide access to deal flow
• Ability to adapt to economic cycles, with liquidation and financing services in high demand during downturns
• Experienced management team with decades of relevant experience

Potential weaknesses and risks include:

• Concentration risk, with a significant portion of the specialty lending portfolio exposed to a single large borrower
• Reliance on the timing and magnitude of discrete asset liquidation transactions, which can create volatility in financial results
• Regulatory risks related to consumer protection laws and auction/brokerage licensing requirements
• Competition from larger, better-capitalized players in certain business segments

Outlook and Future Prospects

Looking ahead, Heritage Global believes it is well-positioned to capitalize on favorable industry trends. The company expects continued growth in charged-off consumer debt volumes, which should drive demand for its brokerage and specialty lending services. Additionally, the company sees opportunities to expand its industrial asset liquidation business by securing more long-term contracts with large corporate sellers.

However, the company’s near-term performance may be impacted by the default of its largest specialty lending borrower. While Heritage Global is working to mitigate the impact, the non-accrual status of these loans is likely to weigh on the segment’s profitability in 2024.

Overall, Heritage Global’s diversified business model, strong market position, and experienced management team suggest the company is well-equipped to navigate industry challenges and capitalize on growth opportunities. Continued execution on its strategic initiatives could drive improved financial performance and shareholder value in the years ahead.