Executive Summary

Q3 2020 revenue rose 14% year over year to $7.6M, driven by 16% growth in services revenue; operating income increased 27% YoY to $1.6M while diluted EPS was flat at $0.04. Gross profit declined to $5.0M on liquidation mix/timing; Adjusted EBITDA grew 28% YoY to $1.8M. Management highlighted strong online auction demand and an expected multi‑year uptrend in nonperforming loan (NPL) volumes. Operating income +27% YoY; Adjusted EBITDA +28% YoY .
Sequentially, revenue accelerated 24% q/q (Q2: $6.1M vs. Q3: $7.6M), while diluted EPS declined from $0.07 in Q2 to $0.04 in Q3 as mix and tax expense shifted; gross profit was ~$4.6M in Q2 vs. $5.0M in Q3 .
Balance sheet strengthened: stockholders’ equity increased to $16.0M, net cash was $5.7M, and the $5.0M credit facility remained undrawn. The company uplisted to NASDAQ and completed an equity offering (press release cites $9.1M net proceeds; CFO later referenced $8.7M) .
Management expects 2021–2023 to see rising NPL supply and continued strength in recommerce of industrial equipment; HGBL introduced preliminary Q3 Adjusted EBITDA guidance ($1.3–$1.7M) on Oct 2, then delivered $1.8M actual. No full‑year quantitative guidance was provided beyond this update .

What Went Well and What Went Wrong

What Went Well

Industrial auctions saw “record attendance” and “record pricing” amid supply chain delays for new equipment, supporting services revenue growth and improved operating leverage .
Strategic capital actions: uplisting to NASDAQ and an underwritten equity offering to fund higher‑contribution principal deals in Industrial Assets and specialty lending via Heritage Global Capital, enhancing growth prospects and ROIC .
Margin scalability: CFO detailed strong incremental margins once fixed costs are covered—~$0.70–$0.75 per $1 on Financial Assets and ~$0.40–$0.45 on Industrial Assets—supporting earnings power as volumes expand .

What Went Wrong

Gross profit fell YoY to $5.0M from $5.3M due to timing/mix of liquidation transactions and a shift between financial and industrial assets .
Sequential EPS declined to $0.04 from $0.07 in Q2 as mix/taxes shifted; net income was $1.26M in Q3 vs. $2.04M in Q2 .
NPL volumes remained constrained in 2020 despite bank loss reserve builds; management expects the “dam” to start opening in 2021, implying near‑term backlog but delayed revenue realization on Financial Assets .

Financial Results

Metric	Q1 2020	Q2 2020	Q3 2020
Total Revenue ($USD Millions)	$4.244	$6.117	$7.566
Services Revenue ($USD Millions)	$4.088	$5.565	$6.060
Asset Sales Revenue ($USD Millions)	$0.156	$0.552	$1.506
Gross Profit ($USD Millions)	~$3.7	~$4.6	$4.971
Operating Income ($USD Millions)	$0.094	$1.024	$1.612
Net Income ($USD Millions)	$0.038	$2.039	$1.264
Diluted EPS ($USD)	$0.00	$0.07	$0.04
EBITDA ($USD Millions)	$0.184	$1.114	$1.704
Adjusted EBITDA ($USD Millions)	$0.259	$1.200	$1.801

Segment/Revenue Mix

Revenue Type ($USD Millions)	Q1 2020	Q2 2020	Q3 2020
Services Revenue	$4.088	$5.565	$6.060
Asset Sales	$0.156	$0.552	$1.506
Total Revenue	$4.244	$6.117	$7.566

KPIs and Balance Sheet Highlights

KPI	Period	Value
Stockholders’ Equity ($USD Millions)	9/30/2020	$15.957
Net Cash ($USD Millions)	9/30/2020	$5.7
Credit Facility ($USD Millions)	9/30/2020	$5.0 undrawn
NOL Carryforwards ($USD Millions)	9/30/2020	~$82.4 (unrestricted $61.6; restricted ~$20.8)

YoY Reference (Q3 2019 vs. Q3 2020, for context): Q3 2019 revenue $6.622M, gross profit $5.261M, operating income $1.267M, net income $1.216M, diluted EPS $0.04, EBITDA $1.341M, Adjusted EBITDA $1.404M .

Non‑GAAP notes: EBITDA = NI + D&A + interest/other + taxes; Adjusted EBITDA excludes stock‑based compensation. Reconciliations provided in the press release and 10‑Q filings .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Adjusted EBITDA (non‑GAAP)	Q3 2020	None	$1.3–$1.7M (preliminary, Oct 2)	Introduced
Revenue	N/A	—	None disclosed	No formal guidance (see earnings materials)
Margins/OpEx/Tax rate	N/A	—	None disclosed	No formal guidance
Dividends	Ongoing	—	None; company does not expect to pay dividends	Maintained stance

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2 and Q-1)	Current Period (Q3 2020)	Trend
Online auctions & recommerce	COVID had minor impact; supply chain disruptions expected to increase demand for U.S.-based surplus assets	“Record attendance” and “record pricing” for used equipment; strong online auction volumes	Strengthening
NPL supply & Financial Assets	Expect increased supply as economy weakens; lending platforms growth a driver	Pent‑up demand; banks/fintechs likely to release volumes over next 2–3 years; dam to open gradually	Building backlog; multi‑year uptrend
Credit environment & underwriting	Tightening underwriting standards expected; demand for specialty lending	HGC positioned to lend; plan to expand credit lines; partnerships to leverage first‑loss structures	Capacity expansion
Pharma retooling & asset turnover	JV leasing of pharma campus; valuations support transactions	Multiple Pfizer assets on books; vaccine rollout expected to free redundant equipment for secondary market	Positive catalyst
Operating leverage & mix shift	SG&A benefits from Equity Partners exit; incremental margins improve with scale	Focus on higher contribution principal deals; explicit incremental margin math shared	Improving margin profile
Regulatory/Political	Not a key driver in filings	Management neutral on election; expects volumes to rise regardless	Neutral impact

Management Commentary

CEO on industrial demand: “We’ve seen record attendance at our auctions and record pricing… used assets are bringing a premium… demand is very high because you’re able to get those assets and purchase them real time.”
CEO on NPL outlook: “Pent‑up demand by the buyers of nonperforming loans… general enthusiasm there’s going to be a lot of product… probably looking at not hitting until next year.”
CFO on scalability: “Our overall fixed operating costs are about $10 million a year… on the financial assets side… drops about $0.75 to the bottom line… on the industrial assets side… about $0.40 to $0.45.”
CEO on capital strategy: Equity raised will primarily fund organic growth; bolt‑on M&A only if highly strategic; leveraging >$100M in partner commitments with first‑loss structures to scale lending .

Q&A Highlights

NPL cadence: Expect a measured, multi‑quarter release from lenders (non‑banks/fintech earlier than FDIC banks); no “one gigantic quarter,” more of a steady increase over 2–3 years .
Capital needs: Industrial principal deals recycle capital in 45–60 days; lending ties up capital for 2–4 years—hence reliance on expanded credit lines and partner capital; not planning near‑term equity issuance .
Sector insights: Pharma vaccine rollout likely to free secondary equipment; online auction model benefits from social distancing; resilience of secondary market surprised management .

Estimates Context

Wall Street consensus (S&P Global) for Q1–Q3 2020 EPS and Revenue was attempted but unavailable due to data access limits. As a result, we cannot assess beats/misses versus consensus for Q3 2020 at this time. We will update when S&P Global estimates can be retrieved [GetEstimates error].

Key Takeaways for Investors

Strong quarter with diversified revenue drivers: services up 16% YoY; total revenue +14% YoY; Adjusted EBITDA +28% YoY despite gross profit mix headwinds .
Industrial Assets segment is a near‑term engine: “record pricing” and demand for used equipment amid supply constraints; supports continued services revenue momentum .
Financial Assets optionality: NPL volumes likely to inflect in 2021, with a multi‑year tailwind; HGBL has credit lines and partner capital (including first‑loss arrangements) to scale lending economics .
Margin scalability: High incremental margins once fixed costs are covered, plus mix shift to principal deals should expand contribution over time .
Capital position supports growth: equity raise and net cash provide flexibility; untapped $5M revolver; NOLs (~$82.4M) enhance after‑tax cash flow potential as profitability grows .
Watch items: Gross profit variability tied to liquidation timing/mix; sequential EPS decline vs. Q2 reflects mix/tax—monitor mix evolution and tax impacts .
Near‑term trading implications: Positive narrative around industrial recommerce and upcoming NPL cycle; potential catalysts include additional principal deals, credit line expansions, and partner‑driven lending volume .

Sources: Q3 2020 8‑K press release and financial tables ; Oct 2, 2020 8‑K preliminary Adjusted EBITDA ; Q3 2020 earnings call transcripts ; Q2 2020 and Q1 2020 10‑Qs .

Heritage Global Inc. (HGBL)·Q3 2020 Earnings Summary