Heritage Global Inc.

Good day ladies and gentlemen and welcome to the Heritage Global Inc second quarter 2021 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator please press star and zero. As a reminder this conference is being recorded. I would now like to turn the call over to John Nesbitt of IMS Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Before we begin, I'd like to remind everyone that this conference call contains forward-looking statements based on 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 the date of this conference call. For more details on facts 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. Ross?

Thanks, John, and good afternoon, everyone. Welcome to our second quarter 2021 earnings conference call. We will start today's call with Brian Cobb, VP of Finance, who will discuss the financial performance of the quarter. Brian, you're up.

Thanks, Ross. The company achieved operating income of $73,000 for the second quarter of 2021 compared to operating income of $1 million in the second quarter of 2020. This decline was primarily due to delayed asset supply resulting in lower volumes across both our industrial and financial asset divisions. For the six months ended June 30, 2021, the company achieved an operating income of $1.1 million consistent with operating income for the six months ended June 30, 2020. Net income decreased to $600,000 or $0.02 diluted earnings per share for the second quarter of 2021 compared to $2 million or $0.07 diluted earnings per share in the second quarter of 2020. Net income year-to-date was $1.6 million compared to net income of $2.1 million for the six months ended June 30, 2020. The company recorded EBITDA of $200,000 in the second quarter of 2021 compared to EBITDA of $1.1 million in the second quarter of 2020. Adjusted EBITDA was $200,000 compared to $1.2 million in the second quarter of 2020. EBITDA for the six months ended June 30, 2021 was $1.3 million consistent with the prior year period. Adjusted EBITDA for the six months ended June 30, 2021, was $1.7 million compared to $1.5 million for the prior year period. At June 30, 2021, the company had aggregate tax net operating loss carry-forwards of approximately $78 million, including $62 million of unrestricted net operating tax losses and approximately $16 million of restricted net operating tax losses. Substantially, all of the net operating loss carry-fords expire between 2024 and 2037. Finally, turning to our financial position, our balance sheet remains strong with net working capital of $12.6 million and stockholders' equity of $31 million as of June 30, 2021. With that, I will now turn the call back over to Rostov.

Thank you, Brian, for the overview of the quarter. I'd like to add some color to the achievements not always as evident in 90-day results. Hopefully, it'll reflect where we're going in each business segment and demonstrate why we remain excited about very promising growth opportunities over the next 24 months. Our financial industrial asset, divisions have seen a contraction in supply and also increased pricing. With both divisions finding lower asset flow, it explains lower income for the quarter. Importantly, we have stayed very active in relation to the competition and gained market share in both business segments. As supply is now returning in both financial and industrial sectors, we expect a very positive increase in asset flow, and our profits to follow. Let me start with the two financial asset revenue streams. NLEX is the leading broker of charge-off loans and Heritage Global Capital, which is a niche lender to purchasers of charge-offs from the financial institutions. NLEX has faced true headwinds in the current cycle with consumer spending delays, and stimulate checks properly and successfully used to retire debt. As a result, prices have reached record levels, while the supply of assets to sell has reached record lows. The bright side looking forward is we see a large uptick in consumer spending, over $27 billion increase this quarter alone. To us, it's really simply follow-up money, as it's been proven time and again, that the future of our supply correlates to rising spending. Clearly, this also builds well for Heritage Global Capital, who will have increased flow as our onboarded, vetted, and qualified borrower base was already showing increased activity. Moving to our industrial asset sector, the pandemic actually helped prices of quality used manufacturing and processing equipment, primarily due to supply chain delays on new equipment orders. That said, many closed plants have taken a wait-and-see approach, choosing to mothball plants versus sell as a way to address supply when there is much more clarity in the market. The bright side is in talking with clients in the planning stages, we anticipate an uptick in surplus dispositions going forward. This is coupled with large enterprises pacing a far greater ESG focus on surplus being recycled and repurposed to avoid tons of landfills and rapidly deploying zero-carbon initiatives. Going forward, we're going to remain highly disciplined to continue our track record of consecutive quarterly profits while always thinking forward to ensure we have the growth drivers in place to execute and build a world-class enterprise growing in value continually. We're here to answer any questions and thank you all for your time.

Thank you. If you would like to register for a question, please press the one followed by the four on your telephone. You will hear a three-toned prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Again, to register for a question, please press 1-4 on your telephone now. One moment please for the first question. Our first question comes from the line of Mark Aginto with Lake Street. Please proceed. Your line is open.

Hey, Ross. Just wanted to maybe dig in a little bit on kind of additional asset flows. It sounds like you're starting to see a pickup in activity here in the second half already. Is there any industries that you can point to that are picking their head up a little bit? Maybe give us a little more color on what's going on in the market.

Yeah, let me do it twofold. First on the financial asset side and then second on the industrial side where I'm proud to say we had a killer auction today. So on the financial side, there was a tremendous amount of capital that did go into buy now, pay later. It was really the only kind of growing sector during this really kind of hiatus in consumer spending for kind of logical reasons. The first reason is over the last year, a lot of people were staying home and a lot of people were purchasing via the Internet. And the buy now, pay later was really very much, a proponent of all of that. So we're now coming into what I'll call some of the issues with the pay later part. The beginning part did not create supply for us because, as you know, our marketplace is not performing loans. It's non-performing loans. So there is a cycle between the increase in consumer spending and when those loans become a certain portion of them charge us. So we're just starting to see growth there and we're starting to see that a lot of the clients that we've signed up we're basically looking forward and we onboarded them but they're just beginning their activity so you're going to see a much better q3 and hopefully by q4 we really are pretty convinced back to normalized flows so i think that it was not you know an easy 90 days but i think it's uh It's 90 days we got through staying profitable, and at least in financial assets, we're very bullish on this year. And on the flip side, on basically the industrial assets, there really hasn't been any insolvency business for the last year to speak of, which is a part of our business. There have been Chapter 11 filings, but during kind of this pandemic holdoff, nobody was sure they wanted to dispose of a plant anymore.

Hold on. Can you hear me? Yes. I was getting calls on my phone.

I apologize. So there is, we believe, very positive growth that I almost want to say is starting now. Fair enough, Mark?

Yeah. And back on the financial side, I know you guys have I think you guys have brokered a buy-now-pay-later portfolio using a $25 million book, if I'm not mistaken. Is that the same customer, or do you have multiple buy-now-pay-later partners, customers?

The only difficulty is it's very easy on the industrial side to tell you who our client is. On the financial side, they many, many times want to remain anonymous for obvious reasons. So We have several clients, but we generally speaking only give their names to the registered buyers that are pre-qualified.

But the answer is we believe it's going to be a big growth part of our business. Great.

And then historically, you know, when you've, you know, in past cycles, when you see credit We're starting to see consumer credit starting to elevate, and granted, you've got the offset with the stimulus checks. But historically, when you see consumers' balance sheets starting to get stretched out a little bit, how long does it typically take for that to manifest itself in NPL portfolios being generated and put to market?

So the cycle is different for each client. It's not so much different in when it becomes a charge-off. It's different on when they want to monetize it. With some clients, we have forward flows, and they're monetizing their charge-offs monthly. Some clients want to wait until there's a certain buildup and they have a large enough portfolio to make it more attractive. So really anywhere from 90 days to six months, even seven months sometimes. before they actually bring the product to market. So that's why I'm saying Q3 will be stronger, but it will be building through Q3, Q4, and Q1 of next year.

On the financial asset side. Right. Great. Thanks, Ross. Appreciate the caller. Good luck. Thank you, Mark.

Thank you for your question. As a reminder, to register for a question, please press 1-4 on your telephone now. Our next question comes from the line of Michael Diana with Maxim Group. Please proceed. Your line is open. Thank you. Hey, Rob.

I was very interested in the statement in the release, and you also said it in your prepared remarks about gaining market share. without naming names, which you just said is sometimes not possible. Could you just give us an indication of why you think?

I can give you a really good example. Gaining market share is not always gaining market share in the sector you're strong in. So our strongest sector has been pharma, and we've had a very strong growth there. but we've gained market share in the food processing. We did more food processing auctions recently. They were small, but we've signed up very large multinational companies in that, uh, segment. So we're looking at growth there. We've just really begun to make headway, um, in the oil field sector. And, um, one of the largest clients in the world is now uses four times, uh, If you look at our website, you can see we have an auction of tankers. It's a pretty large auction for us next week. And a year and a half ago, you wouldn't have saw that. You wouldn't have saw us making a real big market in that sector. So we've gained market share by expanding, not really geographic region, but industrial segments, Michael. So once all the segments are robust at once, You can expect that the headwinds that we saw this quarter really quickly turn into tailwinds.

Okay, that's great. And on the financial side, when you were discussing that, I think you said you had some clients. You said you onboarded some clients. So are those your sort of usual suspects, which I understand you have the largest market share, or do you have new ones as well?

It's really we went out. and we onboarded not just new sellers, but we onboarded who we think are going to be the top 10 or 15 borrowers that are private companies that basically need capital in order to grow. And all of them have been in the planning stages for what they think is going to be exponential growth in the marketplace on the release of NPLs. So during a time when there wasn't a lot of volume, we put a lot of energy into basically going through the stringent process of qualifying them as borrowers, vetting them, going out and seeing their operations, making sure that their SOC's compliant. And these are people we've known for years, but these are people we now have onboarded. And some of these people we've gained market share because they've left other institutions to now start using us as the market picks up. So we think that Heritage Global Capital, is the best poised it's been since inception by far.

Okay. So you're saying both of your subsectors, if you will, of financial are going to pick up the, the brokering, the loans from sellers and then financing the buyers.

Yeah. I think that the financing is going to pick up dramatically because a lot of what we've been selling now has been selling to public companies and larger companies and that do not really need the use of capital. They have their own proceeds. But as the market picks up, the slightly smaller players that are aggressive but at the same time can't always compete with the large guys on every transaction, with more volume, they'll buy more. And as they buy more, we definitely succeed with basically growing our lending platform.

Okay, that's great. Thank you. Thank you, Michael.

That does conclude the question and answer session. I'll turn it back to management for closing remarks.

So this is Ross, the CEO. I'd like to thank everybody for listening. I've tried for the last two or three years to let everybody know that we don't view this as a 90-day business. We view this by the year. and I'm very comfortable that all of you that can look at it that way will see we had a lot of progress in the quarter that isn't always visible, but it will show over time is how the people inside here strongly feel. So thank you very much for your commitment, and thank you for listening.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.