Heritage Global Inc. (HGBL) Q2 2026 Earnings Report, Transcript and Summary

Hello, and welcome, everyone, joining today's Heritage Global Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Jen Belodeau. Please go ahead.

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 Dove. Please go ahead, Ross.

Welcome, everyone, and thanks for joining us today. Before I turn it over to Brian to go through the financials, I want to take a few minutes to add some color to our recent news. Closing Heritage Capital was at a point of no return where it became both obvious and necessary on multiple fronts. First, the distraction on management team then coupled with the continued lag on collections that was not improving. Our Board and many investors had weighed in for several months that all focus should now be on growing the business units that are both profitable and strong and core to our future. So honestly, it's a relief moving forward to just do that. It can be hard to fold, but I look at the great poker player, Stu Ungar, and maybe he had the best advice of all: fold to live to fold again. With that, everyone here is moving on building the business units that are built to last. On the financial side, our acquisition of Boston Note that followed the DebtX acquisition is very exciting. With DebtX, along with NLEX and Boston Note, we have an asset-light brokerage now that truly serves a broad and diverse range of financial asset classes, both performing and nonperforming, and covering institutional and private sellers with all the building blocks ready to accelerate growth. It's exciting. On the industrial side, we have expanded our sales force and already see an expanded and more diverse sector pipeline with more bankruptcy assignments, and also added transportation and construction products, which are additive to our well-respected and key manufacturing and processing auctions. We have built an extremely robust inventory holding at ALT, bringing us more buyers to the HG family as well. The charter is simple and up to us: grow it strong and built to last. With that, I pass it back to Brian.

Thank you, Ross, and welcome, everyone. During the second quarter, we made the strategic decision to substantially wind down Heritage Global Capital. In connection with this wind-down, we recorded approximately $21.7 million in noncash charges during the second quarter related to the write-down of nonperforming loans within our specialty lending business. Despite the second quarter impact, we believe this is the right path forward in order to create a stronger platform anchored in the fundamentals of our core business that allows for growth and long-term shareholder value. We recorded a consolidated operating loss of $20.9 million in the second quarter of 2026 compared to consolidated operating income of $2.2 million in the prior year quarter. Our Industrial Assets division reported operating income of approximately $600,000 in the second quarter of 2026 compared to $1.3 million in the second quarter of 2025. In our Financial Assets division, due to the wind-down of HGC, we reported an operating loss of $20.4 million in the second quarter of 2026 compared to operating income of $2.2 million in the prior year quarter. Our Industrial Assets division continued to execute on a steady volume of auction activity, though we've continued to see a similar trend of smaller scale opportunities absent larger auctions in the marketplace. With that said, we're seeing a solid pipeline of activity and remain confident in our ability to capitalize on opportunities in the space as they arise. Our refurbishment and resale business has been performing well as we're seeing our improvements to the quality of inventory continuing to translate to meaningful increases in asset turnover and improved profitability. Our Financial Assets division was impacted this quarter by noncash charges associated with the wind-down of HGC. Excluding these charges, the division reported a decent quarter as we saw continued activity in NLEX across the charge-off and nonperforming loan space and began to realize gains from DebtX, a leading full-service loan sale adviser that we acquired in January of 2026. Subsequent to the quarter, we completed the acquisition of substantially all of the assets of the Boston Note Company, a seller-financed real estate brokerage with over 30 years of operating history in the residential space. The transaction acts as a bolt-on to DebtX and expands our financial assets platform as we look to enter additional asset classes and distribution channels while expanding upon the seller note category, which we believe is ripe with opportunity. We look forward to integrating Boston Note into the business and building upon their well-earned reputation in the marketplace. Additional consolidated financial results include the following: revenue was $12.3 million in the second quarter of 2026 compared to $14.3 million in the second quarter of 2025. Adjusted EBITDA was $1.2 million compared to $2.8 million in the prior year period. Net loss was $15.9 million or $0.46 per diluted share compared to net income of $1.6 million or $0.05 per diluted share in the second quarter of 2025. Our balance sheet remains a strength with stockholders' equity of $51.9 million as of June 30, 2026, compared to $67 million at December 31, 2025, with net working capital of $9.4 million. Our cash balance reflects a total of $13.2 million as of June 30, 2026. And after removing amounts due to our clients or payables to sellers on our balance sheet, our net available cash balance was $6.5 million. With that, Ross, I'll turn it back over to you.

Thank you, Brian. So just as an ending, my thinking on all of this. 50 years ago, when I lost my first deal, I took the long walk from the front of our warehouse to the back of the warehouse to face my grandfather, and I told my grandfather, I feel really, really bad about the loss. He was at 5:00 o'clock having his normal bourbon sitting at his desk, and he said to me, Rossy Boy, kid, I feel really, really good that you feel really bad. Now flash forward 50 years to where I'm the age he was then and I understand exactly what he meant. And I know exactly what we need to do to get out of feeling really bad and start feeling really good. So that is the plan. That is all the effort and that is everything we're going to do to move forward on the platforms that are strong and say goodbye to the platform that held us back. So -- and onward and upward, I'm proud to announce thank you all for everything you've done, sticking with this and staying with this, and we're on our way in the right direction. Best to all, and we're around to answer any questions.

[Operator Instructions] And we'll take our first question from Jacob Stephan with Lake Street Capital Markets.

Maybe just first, kind of, focusing on the 2 businesses that were recently acquired and maybe touching on how they fit together. I'm wondering if you could talk about DebtX's performance relative to Q1? And then also just how does Boston Note fit in with that?

I'll kind of start with how Boston Note fits in. This is Ross talking. We originally looked at Boston Note, and we didn't see where we were the perfect partner to Boston Note until after we acquired DebtX. Once we acquired DebtX, we really saw that there was an opportunity for Boston Note to convert from just doing seller-financed residential products to also seller-financed commercial products. And we knew that DebtX had an unparalleled exit platform as long as they could find the assets. We ran a trial for several months. And during the trial, we closed 8 transactions and over $0.5 million in revenue. And it really became kind of heir apparent that they fit like a glove. We'd already acquired DebtX, and we knew that putting Boston Note in tandem with them was going to really create some synergy. We also knew that Boston Note turned down pretty much every kind of nonperforming loan that was brought to them. And we had an avenue second to none on nonperforming loans with NLEX. So when we looked at it, we said putting these 3 companies under one roof will give us a commanding position in the marketplace. And we feel that on a go-forward basis, you're going to see that over the next 6 months, year, 2 years as we blend them together, unify our sales pitch and get them all working in consortium. So we're really excited about what we think we can build there.

Got it. And then -- sorry, I might have missed this in the comments, but the DebtX acquisition relative to Q1, it seemed -- I guess your comments made it seem like things have improved off of a seasonally slow quarter, but any kind of comments there.

They're a company that over the last -- maybe and Brian can give you the exact details, but over at least the last half decade, almost 50% to 60%, sometimes even 2/3 of their revenue comes in Q4. It's -- their revenue primarily comes from banks. And while the revenue comes from banks, it's very common for the banks to wait until the end of the year for a lot of the asset flow. So we'll know a lot better by January 1, how well we're doing. But the pipeline is growing and transactions are closing, and we're also adding the Boston Note transaction. So I don't want to overstate what hasn't happened yet, but we're on the right track.

Okay. And then maybe just touching on the auction activity. It sounded like the larger-type auctions were a little bit softer or few and far between in the first half. I guess what are you seeing in the second half that kind of gives you confidence in the pipeline that you referenced?

Yes. It's almost like when we're slow for 1 or 2 quarters, we almost follow with 1 or 2, 3 strong quarters afterwards. I've been doing this for 5 decades, and it's just the nature of the business that everything kind of comes in shifts. So you go from doing a bunch of smaller auctions to do a bunch of bigger auctions just by the sheer nature of the macro economy. Our pipeline has larger auctions now than it did in Q1 or Q2, and we're signing several of those. So all roads lead to a positive second half of the year. And the good news is a lot of the things we're signing now are not just in our strongest sectors, the pharma sector, the food and beverage sector, but they're in a lot of diverse sectors where we're also good. So I think there's bright days ahead on the industrial side.

We'll take our next question from George Sutton with Craig-Hallum.

Ross, Brian, you actually have Logan on for George here. So first one, Ross, obviously, the Capital segment has been in a tough spot here for several quarters. I wonder if you could just talk about what moving away from that opens up in terms of time and management focus. And I guess, how should we think about this move kind of lending itself to your desire to do more acquisitions?

It became a real burden because in the end of the day, it was taking a lot of management time without us necessarily doing anything really truly effective to improve it. And in the end of the day, I mean, nobody can ever be sure with thousands of accounts what you're going to collect back. But if you're in a junior position, there's always risk. So it just got to the point where we said, look, this is not the best place for us going forward to either operate or to put more capital that there's way better places to put our capital. It's time to basically end trying to fix something that is difficult to fix and try to focus all the energy on building what doesn't need fixing, but is ripe for growing. So it became kind of obvious. Lots of investors kept saying it's the right move. Lots of Board members kept saying it was the right move. And at some point in time, everyone in management kind of all stood up together and said, "All right, if we're ever going to do it, let's do it now." So the best thing I can tell you is it does feel good to have it over with.

Got it. And you mentioned doing some more hiring on the industrial side. I mean in the past, you've talked about maybe trying to add more business on that side that's outside the building. I'm curious if any of that hiring is focused there. or maybe just in general, help us understand kind of where you see opportunity to win new business there.

We've been winning in more diverse auctions, not just outside the building, but in other sectors. There's lots of new sectors that are basically getting busy now. The EV sector is getting busy. The cannabis sector is getting busy. Lots of the food and beverage sectors are getting busy. So there's lots of kind of inside-the-building manufacturing getting busy, coupled with a lot of outside-the-building construction and transportation. So when you see this kind of broad group of asset classes getting busy, we're just building up because we think the amount of auctions and the size of auctions are going to grow over the next year or 2 years, and we want to make sure that we have the right sector and geographic coverage. So this is not the type of business where we're looking to hire dozens of people, but we're going to add some select people to make sure we get as broad a coverage as we can.

We'll take our next question from Michael Diana with Maxim Group.

So you mentioned construction and transportation, which has been very successful for other people. What is your strategy or niche or whatever that you're going for there?

Yes. The really, really big firms doing it, and there's obviously one monster firm. We're not out to try to take them on. There are lots of regional auctions where in the end of the day, they're underneath the radar of somebody at that size, $0.5 million auctions, $1 million, $2 million auctions. And those are really kind of our sweet spot. The auctions from basically $0.5 million to $5 million to $10 million are our sweet spot. We're not looking to win the $50 million fleet auctions. But the individual owner retiring or the struggled company with some financial trouble that needs someone to come in right away with a lot of handholding kind of really fits our DNA and culture. And we've won what I'll call kind of one-off transactions that aren't from the biggest institutions or the biggest rental companies, but from individual sellers who were looking to really work with somebody on a one-on-one basis. And we think there's a lot of that coming forward right now. And so we just want to make sure we can serve that market, Michael.

Yes. Okay. That's what I figured. That's great. So you're in an area where you can compete well. Going to Boston Note, I'm somewhat ignorant on the terminology there. Could you just explain to us what a seller note and a carryback note is?

I sure can. So when an individual sells a property, it could be his residential property, it could be multifamily, it could be any really category of property. It could be any kind of commercial property and an individual sells that property and for whatever reason, the buyer won't either qualify for a bank loan or the seller of the property wanted a steady income and said, you don't need to go to the bank. I will become your lender. He carries back the loan. So the seller carried back a first deed of trust secured by the collateral of the property he used to own. Now 1 year later, 2 years later, 3 years, 4 years later, for whatever reason, he wishes he could monetize that loan, and he really would like to get all of this cash, not get the monthly payments anymore. So he didn't really know where to go. He or she as an individual, it wasn't that simple to go find a bank to sell it to. So Boston Note, for the last 30 years, primarily on the residential side, it says come to us and we will get you all cash and get you out of that seller carryback and you'll be done with it and have the money in the bank. We figured out with the CEO of Boston Note, what if you did this for commercial loans, which is 50x bigger business and what if you did this for larger jumbo real estate loans and nonperforming loans and really extended the offering, what would it look like? And he said, would it look like a lot more profitable, a lot larger company, how can you execute this? And we said, we think because of the 2 companies we already own that putting everything together, we think it can really scale.

Okay. That sounds very logical. Do you have any idea does anybody keep track of the magnitude of just the residential part of the market? I mean how many of these carryback notes are out there?

All I know -- I don't have the exact number. When we did the original basically analysis, we were under 2% of the market. So the market is 100x bigger than what Boston Note, which is a boutique firm was doing.

And I'm showing no additional questions at this time. I'd like to now turn the meeting back to Ross Dove for any additional or closing remarks.

Thank you all for attending. We got our work cut out for us, but we're very comfortable that we're in the right place at the right time with the right plan. So keep an eye on us, and I think you'll be very pleased as we move forward through the year. Thank you all and anybody who has questions, just -- you can contact us at any time, and we'd love to chat with you. Thank you again. Bye-bye.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.