Heritage Global Inc.

Good afternoon and welcome to the Heritage Global third quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Nesbitt. 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 conference 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 Duff. Ross?

Thank you, John, and hi. Let me first turn the call over to Brian to give a quarterly play-by-play of And then I'll join afterwards with some color commentary. Brian, you're up.

Thanks, Ross. Let me first state that we are especially proud of how our employees and collectively our business segments have responded to disruptions in the industry related to the pandemic. Although the supply of financial and industrial assets remained relatively low, we have seen strong progress as it relates to the development of new and existing customer relationships. and have remained profitable in each quarter of 2021. That, in combination with our recent acquisition of ALT during the quarter, is evidence of an even stronger foundation to support improved performance in each of our revenue streams, which we anticipate to be further improved by an increase in asset supply. The company achieved operating income of $533,000 for the third quarter of 2021 compared to operating income of $1.6 million in the third quarter of 2020. This decline was primarily due to relatively low asset flow volumes across both our industrial and financial segments. That said, we did see sequential improvement as compared to operating income of $73,000 in the second quarter of 2021, and we believe that this trend will continue into the fourth quarter. Where the nine months ended September 30, 2021, the company achieved operating income of $1.7 million compared to operating income of $2.7 million in the nine months ended September 30, 2020. Net income was $474,000 or one cent per diluted share for the third quarter of 2021 compared to $1.3 million or four cents per diluted share in the third quarter of 2020. Net income year to date was $2.1 million compared to a net income of $3.3 million for the nine months ended September 30, 2020. We recorded EBITDA of $638,000 in the third quarter of 2021, compared to $1.7 million in the third quarter of 2020. Adjusted EBITDA was $740,000 for the quarter. Again, while down year over year, we saw sequential improvement in EBITDA and adjusted EBITDA as compared to the second quarter of 2021. EBITDA for the nine months ended September 30, 2021 was $1.9 million compared to $3 million in the first nine months of 2020. Adjusted EBITDA for the first nine months of 2021 was $2.5 million compared to $3.3 million in the first nine months of 2020. At September 30, 2021, we had aggregate tax net operating loss carry boards 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 forwards expire between 2024 and 2037. Our balance sheet remains strong with stockholders' equity of $32 million as of September 30, 2021, compared to $30 million as of December 31, 2020. and networking capital of $9.9 million. Cash used in investing activities during the nine-month period was $7.3 million, which was primarily attributable to the acquisition of ALT for $4.3 million and the purchase of real estate used in ALT's business for $1.3 million during the third quarter. In closing, while our business environment is dynamic, We are confident in our future and believe we are well positioned for further growth in Q4 and into 2022. With that, I'll now turn the call back over to Ross. Thanks, Brian.

So for the last two earnings calls, I asked afterwards colleagues and friends, how did I do? And they all had the same answer. Ross, you did okay, but you sound scripted. So I've made a game change, and this is the unedited raw stuff where I'm talking to you without a script, just telling you how I feel and what I think about us going forward. So think of this more like you and I are both sitting on bar stools having a beer, and I'm just bragging about Heritage and how proud I am of it. So here goes. The way that I look at it from my CEO dashboard We have five revenue streams. I believe we've worked really hard before the pandemic and in the pandemic to get all five revenue streams poised for growth. I'm very charged up on what I see is a bullish next year and the year after. So let me just touch real briefly on each of the five revenue streams and give you kind of the CEO insight of how I look at it. Two of them are on the financial side. Three of them are on the industrial side. On the financial side, we're a broker of charge-offs and we're a lender to the buyers. That business has not grown in the last 18 months because of very simple factors. There's been massive stimulus checks that have impacted the amount of volume, tied to the fact that consumer spending has hit all-time lows. What do we see going forward? We see that people are now starting to travel. We see that people are now starting to spend money. We see that there looks like the appearance of growth in consumer spending. If there's growth in consumer spending, both our borrowers can buy more products so we can lend more, and our sellers will have more volume to give us. We can't tell you what's going to happen next week or next month, but we can tell you that all signs point the growth over the next 24 to 36 months. We've seen an increase already. We have an increase in product and buy now pay later coming on board in December and January. We have an increase in FinTech peer to peer loans, and we have a solid belief that we're on a track forward in financial assets shifting to industrial assets. We have three revenue streams, two of them I've talked about forever, our industrial auction division and our valuation division. They've held solid during the pandemic, and they've actually in many ways grown. Q4 could be one of our largest quarters ever in industrial asset auctions, and we've got a strong pipeline. On the valuation end, asset-based lending is growing. and the universe of lenders looking more to the collateral and less just to the enterprise value is increasing. So that business bodes well over the next 24 months. But the secret sauce, the thing that I'm mostly jazzed about, is the acquisition of American Lab Trading. We believe we bought that fundamentally at the perfect time in the economy with the perfect acquisition. of the right management team with the right business strategy that fits today. Everyone knows that the top 2000 global manufacturers are focused far more than they were two years ago or three years ago on being environmentally sound and on ESG practices. As they focus on ESG practices, you'll see more and more assets not go to landfill and more and more assets Return to the marketplace. ALT is the best positioned company in America in the biopharma sector and the pharma sector to repurpose and reposition assets. We're sitting on 12,000 assets right now in spare parts. We can go out to the marketplace and we can tell the marketplace, send the assets to us. We will refurb them. We will repair them. We will test them. We will certify them. And then unlike any other auctioneer in America, we can sell them not as is, where is, but we can place a one-year warranty on those assets and drive premium prices. So I believe both the industrial sector and the financial sector have hit a sweet spot for the next two years where there should really truly be on a growth trajectory. That's me on the barstool bragging, and I'm proud to be bragging because I think We really are in the right direction with the right team, the right people, and the right motivation. So I'll end it there and turn it over for questions. And thank you for hearing me out.

We will now begin the question and answer session. To ask a question, please press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mark Argentino from Lake Street. Please go ahead.

Hey, Ross. How are you doing?

I'm doing good, Mark. Good to hear your voice. What's up?

Just had a couple quick ones for you. So, you know, we've been kind of waiting on the financial assets to come off of the, you know, the balance sheets, the non-performings, come off the balance sheets and get liquidated. What is it, or I guess how, a couple things here. How are the financial institutions able to hold on to these portfolios for as long as they are without having to run some type of chart drop process. And maybe they already just written them off, but they're just holding on to them. And then what, you know, what, what do you see out there like real time in terms of gives you confidence that this market is actually going to come to fruition? Is it stimulus, less stimulus in the market and increasing delinquency rates with consumer credit? What are the things that you guys focus on when, when you kind of try to forecast that business?

So you're looking at two different kinds of financial institutions. You're looking at FDIC chartered finance institutions, which have regulations on charge-offs and rules on when they have to basically go to the market with charge-offs or write them off. And you're looking at fintech lenders and alternative lenders who basically are not chartered by the government, and they write them off on different terms. But Both of them have one thing in common, Mark, and that is that there is a rising amount of consumer spending, and that rising amount of consumer spending correlates to a rising amount of charge-offs down the road. So what do we think? We think that we're really tied to one common denominator. The more money that is utilized basically in the marketplace, to borrow is the more supply we eventually get. So is it going to impact us next month? Probably not. But next year, probably yes.

Got it. And then in terms of the industrial side of the business, sounds like you're pretty bullish for Q4. You've got, obviously, a good real-time pipeline. And what's driving that? Is it just an end of year kind of purge, cleaning off, you know, cleaning the books out here for the year end? Or what's going on driving that demand?

You're seeing a lot of plant closings that happened literally in Q1, Q2, and Q3, where they were really not yet ready to monetize the assets, thinking, are they going to mothball the plant? Are they going to reopen the plant? what are they going to do in the process of looking at the future, starting to rationalize their decisions now and sell assets. So the plant closings that you saw earlier on in the year are now coming to fruition as plant dispositions. So plant closings don't always, when you see the announcement, create plant dispositions, but we're starting to see more and more idle assets coming to market.

And then last one on ALT. It sounds like you guys are pretty excited about that business. Are you leaving that as a separate standalone business? Are you guys cross-selling already, you know, services or how you turn that?

Nick Dove, who runs industrial, has oversight over American lab trading and But we're leaving the brand in place. We're leaving the current incumbent president in place running it. But we're trying to integrate it more and more into our business. In fact, we're actually doing an auction of surplus from their facility in this quarter. And the best I can tell you is it's very synergistic and we're working as a team. Great. Thanks, Ross. Good luck the rest of the way this year. Thank you, Mark. Write something good about us.

The next question is from Michael Fianna with Maxim Group. Please go ahead. Hey, Ross.

Hey, Michael.

I know you're excited about ALT. I know you have a history with ALT, which... impacted your decision to buy it. And also, I think you just mentioned synergies. I think that history sort of plays into those synergies. Could you just give us a more complete description of how the whole ALT thing came about and how that informs the synergies going forward?

Sure, Michael. So American Lab Trading has been a 20-year-old business in the biopharma and pharma sector, selling scientific equipment, doing a combination of acquiring it and doing advisory work for the community and helping with the refurb, the recalibration, the recertification, and the remarketing of the assets. Over the last Three years. They came to us when they needed capital to buy assets. They came to us when they needed an auction capability. We came to them when we needed some help in the valuation at certain times in assets, and we formed a collaboration. That collaboration turned into a relationship that was very positive where we looked at the reality of the fact that we thought one and one equals three rather than one and one equals two, and that if we joined together at the hips and became one entity, we could scale both their company better, which became our company and our company. We worked with their management team. Their management team saw the logic in our findings that we were better off together. We worked a while. They had an investment banker. They looked around. And they finally came to terms with we were the right buyer at the right time. And a lot of it is tied to the new regulations on ESG and the largest corporations in the world really focusing now on being environmentally strong and safe. And they have the ability that we didn't have on our own to basically take assets in that would have been cannibalized in the old world and in the new world, refurb, reprogram, and repurpose to get out into the circular economy. And we thought that by being a bigger part of the circular economy, it would just grow our enterprise overall.

Okay. And is it true that they tend to deal in smaller assets and you in bigger assets, so it's a good combination?

So if you really look at how it works, There's really two kinds of assets out there to be marketed. There's aggregated assets and unaggregated assets. In the aggregated asset category, we're a dominant player. If there's $500,000, $1 million, $2 million in one facility, in one factory, we're not a dominant player in the unaggregated assets where there's a scientist that's working basically at a university and he has two assets to sell. We really didn't have a program for him. They do. So we're now trying to basically aggregate the unaggregated assets where they can do one, two, three, four at a time and create 100, 200 assets that they've aggregated from a community of lots of scientists and lots of engineers that we can then present in an auction format where we have enough product to get the marketplace interested we couldn't have done that on their own but they have the capacity to do that they also have the capacity to buy these assets one two three at a time or to take them in on consignment to test them to basically make sure they're operating and then to relocate them into our auction process all right well

You know, everybody, when they make an acquisition, says it's synergistic, but this one actually sounds like it is.

Well, everyone says that, but the difference is we're the auctioneer for Pfizer. We're the auctioneer for Amgen. We're the auctioneer for Genentech. So buying a company that specializes in scientific and lab assets is was not far reaching to us. It was in our sweet spot. So everyone says it, but when we're saying it, it's true, Michael.

Yeah. Okay. Great.

Thanks, Russ.

Be good. Again, if you have a question, please press star then one.

At this time, there are no further questions. So this concludes our question and answer session. I would like to turn the conference back over to Ross Dove for any closing remarks.

Thank you. So we thank everybody for joining, and we very much appreciate your interest in our company, and we look forward and we're very easy to access to talking to you at any time you have more questions. You can reach out to me, Ross Dove, or you can reach out to Brian Cobb, head of finance. We're around and we're easy to access, and we're very appreciative of you joining in. Have a great afternoon. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.