Heritage (HGBL) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, statements of stockholders' equity, and cash flow statements, along with detailed notes Key Balance Sheet Metrics (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total Assets | $87,686 | $81,309 | | Total Liabilities | $21,980 | $16,108 | | Total Stockholders' Equity | $65,706 | $65,201 | | Property and equipment, net | $9,126 | $1,643 | | Non-current portion of third party debt | $4,100 | $0 | Condensed Consolidated Statements of Income For the six months ended June 30, 2025, total revenues increased by 15% to $27.8 million, but net income decreased by 37% to $2.7 million, primarily due to a 95% drop in equity method investment earnings Key Income Statement Metrics (in thousands) | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Change (%) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :--------- | | Total Revenues | $27,763 | $24,184 | 15% | | Net Income | $2,701 | $4,296 | (37)% | | Earnings of equity method investments | $123 | $2,522 | (95)% | | Net income per share – basic | $0.08 | $0.12 | (33)% | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased slightly to $65.7 million at June 30, 2025, driven by net income, partially offset by common stock repurchases totaling approximately $5.6 million Key Stockholders' Equity Metrics (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Total Stockholders' Equity | $65,706 | $65,201 | | Accumulated deficit | $(225,143) | $(227,844) | | Treasury stock at cost | $(5,619) | $(2,992) | - The Company repurchased 2,897,658 common shares for approximately $5.6 million under its share repurchase program, which ended on June 30, 2025[23] Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased to $4.5 million in H1 2025, while investing activities shifted to using $8.6 million, and financing activities provided $2.2 million from new mortgage debt Key Cash Flow Metrics (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net cash provided by operating activities | $4,496 | $7,730 | | Net cash (used in) provided by investing activities | $(8,581) | $5,507 | | Net cash provided by (used in) financing activities | $2,182 | $(933) | | Net change in cash and cash equivalents | $(1,903) | $12,304 | | Cash and cash equivalents as of end of period | $19,846 | $24,583 | - Cash used in investing activities during H1 2025 was primarily driven by the purchase of property and equipment ($7.6 million) and investments in notes receivable ($3.0 million)[17][162] - Cash provided by financing activities in H1 2025 included $4.1 million in proceeds from a new mortgage and $1.1 million from secured borrowing, partially offset by $2.6 million in common stock repurchases[17][164] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed disclosures on the Company's financial statements, covering accounting policies, specific asset and liability accounts, equity changes, and segment information Note 1 – Basis of Presentation - Heritage Global Inc (HG) consolidates its subsidiaries, including Heritage Global Partners, National Loan Exchange Inc, Heritage Global Capital LLC, and Heritage ALT LLC, operating in Auction and Liquidation, Refurbishment & Resale, Brokerage, and Specialty Lending segments[19][20] - The Company's share repurchase program ended on June 30, 2025, with approximately $5.6 million utilized out of the authorized $6.0 million for the repurchase of 2,897,658 common shares[23] Note 2 – Summary of Significant Accounting Policies - Significant estimates in financial statements include collectability of revenue, valuation of accounts/notes receivable, inventory, investments, goodwill, intangible assets, liabilities, deferred income tax assets/liabilities, and stock-based compensation[26] - Revenue recognition follows ASC Topic 606 for services and asset sales, and ASC Topic 310 for lending activities[27][28][33] - The amortized cost basis of loans in nonaccrual status was $22.4 million as of June 30, 2025 ($4.9 million in notes receivable and $17.5 million in equity method investments), primarily due to the largest borrower's default since June 2024[39] Allowance for Credit Loss Summary (in thousands) | Allowance for Credit Loss | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------ | :----------------------------- | :------------------------------- | | Accounts Receivable | $135 | $132 | | Notes Receivable | $376 | $383 | | Equity Method Investments | $985 | $986 | | Total | $1,496 | $1,501 | - The Company adopted ASU 2023-07 (Segment Reporting) as of December 31, 2024, and ASU 2023-09 (Income Taxes) effective January 1, 2025. ASU 2024-03 (Expense Disaggregation Disclosures) is effective for fiscal years beginning after December 15, 2026[53][54][55] Note 3 – Accounts Receivable, net - The reserve for credit losses related to accounts receivable remained approximately $0.1 million as of both June 30, 2025, and December 31, 2024, with no material adjustments during H1 2025[47][57] Note 4 – Notes Receivable, net Notes Receivable Summary (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Notes receivable, net | $9,167 | $10,409 | | Amortized cost basis of nonaccrual notes receivable | $4,900 | $5,300 | - During H1 2025, the Company made additional investments in notes receivable of approximately $3.0 million, offset by principal payments of approximately $3.9 million[59][60][61] Note 5 – Stock-based Compensation Stock Option Summary | Stock Options | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | Outstanding Options | 2,211,600 | 2,231,600 | | Weighted Average Exercise Price | $1.74 | $1.77 | | Options Exercisable | 1,672,725 | N/A | | Stock-based compensation expense (H1) | $0.3 million | $0.3 million | - Unrecognized stock-based compensation expense for unvested common stock options was approximately $0.7 million as of June 30, 2025, expected to be recognized over 1.5 years[63] - Stock-based compensation expense related to restricted stock awards was approximately $0.2 million for both H1 2025 and H1 2024, with $0.4 million unrecognized as of June 30, 2025[68] Note 6 – Equity Method Investments - The Company holds significant influence in several joint ventures across Industrial Assets (CPFH LLC, KNFH LLC, DHC8 LLC, KNFH II LLC, DLZ Solutions LLC) and Financial Assets (HGC Origination I LLC, HGC Funding I LLC, HGC MPG Funding LLC)[69] - As of June 30, 2025, the amortized cost basis of the Company's share of loans in nonaccrual status recorded in equity method investments was $17.5 million, with no actual credit losses incurred[70] Joint Venture Financial Performance (in thousands) | Joint Venture Financials | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :----------------------- | :------------------------------------------ | :------------------------------------------ | | Total Revenue | $5,538 | $18,622 | | Total Net Income (loss) | $5,221 | $10,309 | | Total Assets | $69,602 | $75,759 | | Total Liabilities | $2,861 | $4,318 | - In January 2025, DLZ Solutions LLC (20% share) purchased a pharmaceutical plant for approximately $7.8 million and entered a lease agreement with a purchase option. Concurrently, the Company purchased a 20% participating interest in a financial asset for $1.6 million to acquire machinery and equipment at the same plant, also with a leaseback and purchase option[74][75] Note 7 – Earnings Per Share Shares Outstanding Summary | Shares Outstanding | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Basic weighted average shares outstanding | 35,120,131 | 36,674,620 | | Diluted weighted average common shares outstanding | 35,800,352 | 36,759,995 | - Approximately 0.9 million potential common shares for H1 2025 (0.8 million for H1 2024) were excluded from diluted EPS calculation due to their anti-dilutive effect[79] Note 8 – Leases Lease Assets and Liabilities (in thousands) | Lease Assets & Liabilities | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------- | :----------------------------- | :------------------------------- | | Total right-of-use assets | $1,868 | $2,208 | | Total lease liabilities | $1,975 | $2,317 | - The weighted average remaining lease term for operating leases is 2.7 years, and the weighted average discount rate is 5.5% as of June 30, 2025[83] - Lease expense was approximately $0.4 million for both the six-month periods ended June 30, 2025, and 2024[84] Note 9 – Property and Equipment, net Property and Equipment Details (in thousands) | Property and Equipment, net | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Building | $3,797 | $985 | | Land | $4,985 | $397 | | Construction in progress | $182 | $0 | | Total Property and equipment, net | $9,126 | $1,643 | - On February 11, 2025, the Company purchased real estate for $7.4 million, consisting of land and a building, to be used as its future corporate headquarters and warehouse/office space for HGP operations[86] Note 10 – Intangible Assets and Goodwill Intangible Assets Summary (in thousands) | Intangible Assets | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------ | :----------------------------- | :------------------------------- | | Total amortizable intangible assets | $794 | $925 | | Indefinite-lived intangible assets (Trade Name NLEX) | $2,437 | $2,437 | | Total intangible assets | $3,231 | $3,362 | - Amortization expense for H1 2025 was $0.1 million, compared to $0.2 million for H1 2024[89] Goodwill by Segment (in thousands) | Goodwill | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :--------- | :----------------------------- | :------------------------------- | | ALT | $1,861 | $1,861 | | HGP | $2,041 | $2,041 | | NLEX | $3,544 | $3,544 | | Total goodwill | $7,446 | $7,446 | - There were no additions to goodwill and no impairments recorded during H1 2025[91] Note 11 – Debt Debt Summary (in thousands) | Debt | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Current portion of third party debt | $134 | $395 | | Non-current portion of third party debt | $4,100 | $0 | | Total third party debt | $4,234 | $395 | - A new $4.1 million mortgage loan was entered into on February 6, 2025, to purchase real property for the Company's future corporate headquarters[99][101] - The 2021 Credit Facility had no outstanding balance as of June 30, 2025, and its maturity date was extended to June 27, 2026[96][97] - The outstanding balance of the ALT Note was $0.1 million as of June 30, 2025, with a maturity date of August 23, 2025[98] Note 12 – Income Taxes - The Company had aggregate federal net operating loss carryforwards of $40.7 million as of June 30, 2025, beginning to expire in 2025[102] - A partial valuation allowance of approximately $3.5 million is maintained against net deferred tax assets as of June 30, 2025, and December 31, 2024[104] - The One Big Beautiful Bill Act (OBBB) is not expected to have a material impact on the Company's annual effective tax rate in 2025[105] Note 13 – Related Party Transactions - Payments to David Ludwig (President of NLEX and board member) for office space lease were approximately $58,000 for H1 2025, a slight increase from $57,000 in H1 2024[106] Note 14 – Segment Information - The Company's reportable segments are Auction and Liquidation, Refurbishment & Resale, Brokerage, and Specialty Lending[168] Consolidated Segment Performance (in thousands) | Segment Performance (H1) | 2025 (in thousands) | 2024 (in thousands) | Change (%) | | :------------------------- | :------------------ | :------------------ | :--------- | | Consolidated Gross Profit | $16,422 | $16,572 | (1)% | | Consolidated Operating Income | $3,635 | $6,102 | (40)% | | Earnings from equity method investments | $123 | $2,522 | (95)% | Segment Operating Income (H1 2025) (in thousands) | Segment Operating Income (H1 2025, in thousands) | | :-------------------------- | :----------------------------- | | Auction and Liquidation | $1,639 | | Refurbishment & Resale | $675 | | Brokerage | $3,577 | | Specialty Lending | $260 | | Corporate and other | $(2,516) | Note 16 – Subsequent Events - On July 31, 2025, the Board of Directors authorized a new share repurchase program (2025 Repurchase Program) for up to $7.5 million of common stock, effective through June 30, 2028, following the termination of the previous program[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, covering history, business segments, competitive landscape, strategic advantages, liquidity, capital resources, cash flows, and results of operations Overview, History and Recent Developments - Heritage Global Inc (HG) was incorporated in 1983 and adopted its current name in 2013 to better reflect its auction and specialty lending business lines[114] - The Company's corporate structure includes wholly-owned subsidiaries: Heritage Global Partners, Heritage Global LLC, National Loan Exchange, Heritage Global Capital LLC, and Heritage ALT LLC[118] Nonaccrual Loans - The Company's largest borrower defaulted in June 2024, leading to $22.4 million in nonaccrual loans as of June 30, 2025 ($4.9 million in notes receivable and $17.5 million in equity method investments)[123] - The Company does not expect to realize any return from these nonaccrual loans in 2025, and future realization remains uncertain[123] Industry and Competition - The Company operates in highly fragmented markets for industrial asset disposition and charged-off receivable brokerage/specialty financing, competing with various liquidators, auction companies, dealers, and brokers[124] - The business is positioned to grow in all economic cycles, benefiting from increased surplus assets and distressed debt during downturns, and leveraging competitive advantages during growth periods[125] - Joint ventures are a key strategy to access more opportunities, mitigate competition, and contribute to the objective of being a leading resource for clients[126] Our Competitive Strengths - Differentiated business model with diversified business lines (brokerage, principal-based auction services, refurbishment and resale, advisory services, secured lending) and multiple revenue streams[128] - Compelling macro growth drivers include increased supply of surplus assets during recessions, rising consumer lending charge-offs, and active M&A markets in manufacturing[129] - Strong management team with deep domain expertise, including Ross Dove (CEO), Nick Dove (President, Industrial Assets Division), and David Ludwig (President, Financial Assets Division)[132] Financial Assets Division - The Brokerage Segment (NLEX) acts as an advisor for sales of charged-off and nonperforming asset portfolios, having sold over $200 billion face value of assets since the 1980s[134] - The Specialty Lending Segment (HGC) provides financing solutions to investors in charged-off and nonperforming asset portfolios, having issued $157.2 million in total loans since 2019 ($70.8 million funded by the Company)[135] - As of June 30, 2025, the net balance related to investments in loans to buyers of charged-off portfolios was $27.1 million ($8.7 million notes receivable, $18.4 million equity method investments)[135] - A significant concentration risk exists with one borrower, whose $21.8 million note balance represents 77% of total gross notes receivable and is currently in nonaccrual status due to default[136] Industrial Assets Division - The Auction and Liquidation Segment (HGP) offers global full-service auction, appraisal, and asset advisory, with fees typically ranging from 15%-50%[140] - The Refurbishment & Resale Segment (ALT) specializes in refurbishing and reselling laboratory equipment, particularly in the biotech and pharma sectors[141] - Growth opportunities include securing ongoing contracts with large multinational sellers, being a first mover in emerging sectors, and expanding valuation services geographically and with existing bank relationships[142] Government Regulation and Activities - The Company is subject to federal, state, and local consumer protection laws, including privacy and trade practices, and regulations for auctions, which may incur substantial compliance costs[143] - The current domestic and international political environment, including tariffs and trade disputes, contributes to economic uncertainty, potentially increasing demand for used industrial assets but also affecting distressed debt collectability[145] Critical Accounting Policies and Estimates - Management's financial statements rely on significant estimates and assumptions, including collectability of revenue, valuation of accounts/notes receivable, inventory, investments, goodwill, intangible assets, liabilities, deferred income tax assets/liabilities, and stock-based compensation[147] - There were no material changes to the Company's critical accounting policies during the six months ended June 30, 2025[148] - The Company has no off-balance sheet arrangements and does not expect to pay any dividends in the future[148] Management's Discussion of Financial Condition Financial Condition Summary (in millions) | Metric | June 30, 2025 (in millions) | December 31, 2024 (in millions) | | :-------------------------- | :-------------------------- | :---------------------------- | | Working capital | $16.4 | $18.5 | | Current assets | $32.1 | $33.1 | | Current liabilities | $15.7 | $14.6 | | Net cash available (net of payables to sellers) | $11.7 | $14.3 | - The Company believes it can fund its operations and debt service obligations for 12 months and beyond through a combination of working capital, cash flows from operations, and its existing line of credit[152] - Indebtedness includes the ALT Note ($0.1 million outstanding) and a new Mortgage ($4.1 million outstanding), with no outstanding balance on the 2021 Credit Facility[153][154][155] Management's Discussion of Results of Operations Financial Data Table (in thousands) | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Change ($k) | Change (%) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :---------- | :--------- | | Total Revenues | $27,763 | $24,184 | $3,579 | 15% | | Asset sales | $9,849 | $6,720 | $3,129 | 47% | | Cost of services revenue | $4,647 | $2,930 | $1,717 | 59% | | Total operating costs and expenses | $24,251 | $20,604 | $3,647 | 18% | | Earnings of equity method investments | $123 | $2,522 | $(2,399) | (95)% | | Operating income | $3,635 | $6,102 | $(2,467) | (40)% | | Net income | $2,701 | $4,296 | $(1,595) | (37)% | - Gross profit for H1 2025 was $16.4 million, a slight decrease of 1% from $16.6 million in H1 2024, primarily due to normal changes in the timing and magnitude of asset liquidation transactions[180] - Selling, general and administrative expense remained generally consistent at $12.7 million for both H1 2025 and H1 2024[181] Key Performance Indicators - Management uses EBITDA and Adjusted EBITDA as key performance indicators (KPIs) to assess results and make strategic decisions, in addition to GAAP operating income[186] EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Net income | $2,701 | $4,296 | | Depreciation and amortization | $236 | $288 | | Interest expense, net | $(74) | $200 | | Income tax expense | $1,008 | $1,606 | | EBITDA | $3,871 | $6,390 | | Stock based compensation | $509 | $518 | | Adjusted EBITDA | $4,380 | $6,908 | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Heritage Global Inc is not required to provide detailed quantitative and qualitative disclosures about market risk in this report - The Company is a Smaller Reporting Company and is not required to provide quantitative and qualitative disclosures about market risk[188] Item 4. Controls and Procedures The CEO and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were effective as of June 30, 2025, as concluded by the Certifying Officers[189] - There were no material changes in the Company's internal control over financial reporting during the six months ended June 30, 2025[190] PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no material changes to the legal proceedings previously discussed in the Company's Annual Report on Form 10-K - No material changes to the legal proceedings discussed in the Company's Form 10-K[191] Item 1A. Risk Factors As a Smaller Reporting Company, Heritage Global Inc is not required to provide specific risk factor disclosures in this quarterly report - The Company is a Smaller Reporting Company and is not required to provide risk factor information[192] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 744,424 shares of common stock for approximately $1.6 million during Q2 2025 under its Repurchase Program, which concluded on June 30, 2025, utilizing approximately $5.6 million of the authorized $6.0 million Common Stock Repurchases (Q2 2025) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------- | :----------------------------- | :--------------------------- | | April 1 through April 30, 2025 | 199,328 | $2.08 | | May 1 through May 31, 2025 | 291,129 | $2.15 | | June 1 through June 30, 2025 | 253,967 | $2.15 | | Total (Q2 2025) | 744,424 | $2.13 | - The Repurchase Program ended on June 30, 2025, with approximately $5.6 million utilized out of the authorized $6.0 million for the repurchase of 2,897,658 common shares[195] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period covered by this report - No defaults upon senior securities were reported[196] Item 4. Mine Safety Disclosures This item is not applicable to the Company's operations - This item is not applicable to the Company[197] Item 5. Other Information James Sklar adopted a Rule 10b5-1 trading plan on June 25, 2025, for the sale of 33,606 shares between October 1, 2025, and June 25, 2026, with no other directors or officers adopting or terminating trading arrangements during the quarter - James Sklar, Executive Vice President, General Counsel and Secretary, adopted a Rule 10b5-1 trading plan on June 25, 2025, to sell 33,606 shares of common stock between October 1, 2025, and June 25, 2026[198] - No other directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2025[199] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate organizational documents, a warrant agreement, certifications from executive officers, and various Inline XBRL taxonomy documents - Exhibits include Second Amended and Restated Articles of Incorporation, Restated Bylaws, a Warrant Agreement, Certifications of Principal Executive Officer and Principal Financial Officer (pursuant to Sarbanes-Oxley Act), and Inline XBRL Instance, Schema, Calculation, Definition, Labels, and Presentation Linkbase Documents[201] Signature Page The report is duly signed on behalf of Heritage Global Inc by Ross Dove, Chief Executive Officer, and Brian J Cobb, Chief Financial Officer, on August 7, 2025 - The report was signed by Ross Dove, Chief Executive Officer, and Brian J Cobb, Chief Financial Officer, on August 7, 2025[205]