Heritage Global Inc. Q4 FY2025 earnings call

• 2025 was a good, profitable year with lots of transactions but no major growth. 2026 is expected to be a break loose year with new deals entering the pipeline more aggressively and carryover deals converting to transactions. Internal growth drivers are in place with divisions expanding and adding business personnel. Moved into a new shiny facility which opens up warehouse and office space. Completed DedEx acquisition and focused on integrating the team. CRE markets under pressure to release loans. Goal for 2026 is to be the year of the needle mover. - Brian provided overview of fourth quarter operating results, industrial and financial segment performance. Industrial assets division had solid quarter with key auction and liquidation opportunities. ALT delivered strong close to the year. Opened new San Diego facility. Financial assets division maintained strong profitability but saw lower revenues from recurring clients. Acquired DedEx and integration has gone smoothly, expected to be accretive in 2026 with quarter to quarter variability.

Consolidated operating income was approximately $800,000 in the fourth quarter of 2025, compared to $1.5 million in the fourth quarter of 2024. Industrial assets division reported operating income of approximately $1.1 million in the fourth quarter of 2025, compared to approximately $800,000 in the prior year quarter. Financial assets division reported operating income of approximately $900,000 in the fourth quarter of 2025, compared to $1.9 million in the prior year quarter. Industrial assets division's ALT delivered operating income of $538,000 in the fourth quarter of 2025, compared to $276,000 in the prior year period. Revenue was $11.9 million in the fourth quarter of 2025 compared to $10.8 million in the fourth quarter of 2024. Adjusted EBITDA was $1.1 million compared to $2.1 million in the prior year period. Net income was approximately $300,000 or one cent for diluted share compared to a loss of approximately $200,000 or one cent for diluted share in the fourth quarter of 2024. Balance sheet is strong with stockholders' equity of $67 million as of December 31, 2025, compared to $65.2 million at December 31, 2024, with net working capital of $18.1 million. Cash balance reflects a total of $20.5 million as of December 31, 2025, and net available cash balance was $13.2 million. Approximately $18.9 million of federal net operating loss carry-forwards were unused and expired. Remaining net operating loss carry-forwards of approximately $15.5 million expected to be utilized and valuation allowance against deferred tax assets removed. Did not repurchase any shares in the fourth quarter of 2025 but intend to resume share repurchases moving forward.

• 2026 is expected to be the year of the needle mover. New deals entering the pipeline more aggressively and carryover deals converting to transactions bode well for start of 2026 and beyond. DedEx acquisition expected to be accreted in calendar year 2026 with potential quarter to quarter variability. Intend to resume share repurchases moving forward as company authorized a new share repurchase program on July 31st authorizing repurchase of up to $7.5 million in common stock for the next three years.

• Forward-looking statements subject to change based on various important factors. Consumer loan delinquencies such as credit card and auto remain at elevated levels which may translate to increased charge-offs. Geopolitical and macro issues causing companies to be in a wait-and-see situation affecting transaction activity. Specialty lending side has lack of funding issue which impacts profitability if not addressed.

Q: Hey, guys. Congrats on the Dedex acquisition, and it sounds like things are starting to progress nicely there and the overall business. But just kind of getting in the weeds on the acquisition, when you say you expect it to be accretive, is that on a – Net income basis, adjusted EBITDA basis, you know, I hate to, you know, split hairs, but would be helpful to at least better understand what accretive means.

A: Yeah. So, we expect it to be accretive on an operating income basis as well as net income basis. So, we've disclosed. a couple numbers just on the standalone DedEx 2025 result, which is a reminder that wasn't a part of our consolidated results, but they reported $800,000 in operating income in 2025. And even with adjustments that we'll disclose in Q1 numbers for pro forma purposes, it'll still be, you know, that number will still be accretive if they were to make that and we expect them to do more.

Q: And I know you mentioned some variability quarter to quarter, which is understandable. Is there any traditional seasonality to that business?

A: They generally have a very strong Q4, Mark. As you know, primarily their business is driven by lenders, by banks, more than by specialty lenders. Their primary client is banks. So there always seems to be in the last 60 days, a desire to clean up, so to speak. So generally, Q4, you'd expect to be their big quarter, sometimes over 50% of their revenue.

Q: And then in terms of the broader macro, you touched on it a little bit. You know, you're seeing – DEFAULT RATES CONTINUE TO WORK HIGHER ON THE CONSUMER. OBVIOUSLY THE, YOU KNOW, A LOT OF THE HEADLINES RECENTLY HAVE BEEN IN AND AROUND PRIVATE CREDIT. THERE'S BEEN, SEEMS TO BE SOME DISRUPTION THERE. DO YOU GUYS HAVE ANY EXPOSURE TO THAT PART OF THE MARKET? DOES DEDX GET ANY EXPOSURE THERE? HOW ARE YOU THINKING ABOUT, YOU KNOW, PRIVATE CREDIT AND MAYBE THAT OPPORTUNITY?

A: SO THERE'S A BIG OPPORTUNITY RIGHT NOW. obviously it did that acquisition was tied to the problems in the cre market and the amount of loans coming due that are struggling to get refinanced a lot of those loans have transferred from the banks already to private credit but there's still going to be a desire to take out you know the more struggling part of the portfolios so we see growth kind of overall right now and not just the CRE with DedEx, but there was a lot of hold back in NLEX. We had a very profitable year, but not close to our record year. We just didn't see as aggressive movement from the sellers as we anticipated. So we think there's a pent up amount of assets to come to market.

Q: So, Ross, I'm curious, as you talk about 2026 being the year of hopefully some larger transactions and I know you've already signed a large oil and gas deal. Can you just give us a picture of what you see relative to larger transactions and maybe a little sense on why did we not see it last year? Why would we see it differently this year?

A: I mean, I'm not going to be like the general economist and try to outsmart the marketplaces. I can only tell you from my front row seat talking to clients and from my front row seat there was a hesitation to make decisions. And just from a geopolitical, the going back and forth on the tariffs and many other macro issues, people weren't sure exactly what they wanted to do. So I don't want to say that people don't have a lot of assets they wanted to sell, but it just appeared that, yes, they would chip away at the smaller sales, the stuff that was really obviously declared surplus, but on the larger transactions where maybe you have to replace the assets and you're worried about the availability, maybe you're not sure if you're going to expand or hold back. There was just a general sentiment that not just Heritage saw, but I think everybody watching the economy saw many, many companies in a wait-and-see situation And in a wait-and-see, auctions are not your first move. They're a tertiary move once you have the other plans in place. So we had a lot of people just say, call us back in a month, call us back in two months, call us back in three months. So the good news is we didn't really lose our conversion rate. It's just that a lot of the transactions just didn't happen that we felt were going to happen. They're starting to come back now. That's why I say I feel positive that I've never seen a year after year wait and see period where eventually people don't commit. So I feel good about 2026, George.

Q: Well, let me ask a little more specifically, you know, you mentioned we're about to close out Q1. Are we starting to see the indications of these larger deals? And again, I'll point to the oil and gas transaction. I think that was happening earlier in the year.

A: Yeah, you're starting to see the signing of them. We're going to have a decent Q1 for sure on the industrial side. When I say decent, meaning I'm excited about the amount of auctions we're doing in Q1, and some of them are of a larger nature. So it looks good on the industrial side. On the financial side, it takes a little longer for the pickup in the curve. But, you know, all signs point to the amount of meetings they're having and that they're signing some new forward flows. So I think you'll see that pick up as the year goes on, maybe a little bit slower than you'll see the pickup in industrial. But we're busy on all fronts. And it feels like when you start a year busy, it usually stays busy all year, George.

Q: One small question for Brian on the specialty lending side. It normally is a modest positive every quarter, and it was modestly negative this quarter. What do you account for that delta?

A: The main reason why we're kind of right around that break-even point or slightly under is the lack of funding. We've been only funding smaller loans on a self-funded basis without any partners and at a low level. So in order to maintain profitability, we have to be able to and be willing to put more dollars out to work with new borrowers in 2026.