Heritage Global Inc.

Good day and welcome to the Heritage Global Incorporated fourth quarter and year-end earnings conference call. All participants will be in a 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 a touch-tone phone. 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, Investor Relations for Heritage Global. 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 a date of this call. For more details and 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, Ross Dove. Go ahead, Ross.

Brian, why don't you take off and start us, and then I'll give a follow-up afterwards. Go ahead, Brian.

Thanks, Ross. We are excited to announce the company's strong performance in the fourth quarter, posting its highest net operating income for the year with continued sequential growth. At $1.4 million, net operating income grew significantly over the third quarter's net operating income of $533,000. Breaking that down between the two segments, net operating income in the industrial assets division grew sequentially from $765,000 to $855,000 in the fourth quarter, and we saw 45% sequential growth in financial assets from $449,000 to $652,000. Net operating income was $1.4 million compared to $3.3 million in the fourth quarter of 2020. The year-over-year comparison is not apples to apples given the operating income in the fourth quarter of 2020 included $2.3 million in net profits related to our first completed real estate transaction from our Huntsville partnership holdings. In our business model, we periodically purchase real estate as part of the assets we acquire for resale. These real estate sales can be a profitable aspect of our business, albeit a bit lumpy. We recorded EBITDA of $1.5 million in the fourth quarter of 2021 compared to EBITDA of $3.4 million in the fourth quarter of 2020. Adjusted EBITDA was $1.6 million for the quarter. Sequentially, we achieved improved EBITDA and adjusted EBITDA, which were $640,000 and $740,000 respectively in the third quarter of 2021. EBITDA for the full year ended December 31, 2021, was $3.5 million and adjusted EBITDA for the full year was $4.1 million. We have shown the resiliency and strength of our business model in our ability to remain profitable during the pandemic. Net income in the fourth quarter doubled to $1 million, or $0.03 per share, compared to $500,000 in the third quarter. For the full year, we achieved just over $3 million in net income, or $0.08 per share. At December 31, 2021, we 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 forwards will expire between 2024 and 2037. We believe that The considerable amount of lost carry forwards will prove to be a valuable asset to the company as we continue to generate positive and upward results. Finally, our balance sheet remains strong with stockholders' equity of $32.6 million as of December 31, 2021, compared to $29.9 million as of December 31, 2020, and net working capital of $9.1 million. And with that, I will now turn the call back over to Ross

Well, thank you, Brian. So to me, these calls can sometimes be all-encompassing on the numbers, but sometimes not enough insight into our plans and how we measure our progress against our plans. As the CEO, I look at three factors that really drive us. The first one is garnering more asset supply. The second one is ensuring we have the execution capacity to support that growth. And finally, the third one is maintaining consistent profitability through rigid cost controls as supply varies. Today we have high confidence we're headed in the right direction. So let's start with execution. We've hired a world-class chief marketing officer recently that's really going to ensure that our product offerings are constantly expanding and growing. As you know, we acquired recently ALT, which is a world leader in life science asset recycling, as the market moves constantly to more sustainability. And we believe there's heightened growth there. We've built a highly skilled valuation team. And all of this we've done while expanding our warehouse capability and building out our operations. Why did we do this? Because for the last 18 months, we've consistently believed that we're gaining momentum, that we're garnering more supply, and that we have growth. So right now we're sitting with execution capabilities where we can have two, three, four times the current sell-through rate without raising OpEx. So we're really poised as supply grows. So now let me go to supply and why we think supply is going to grow. And some of it is very, very micro. because we're looking at our pipeline and we're seeing the growth in our pipeline. But some of it is also macro, where we're looking at the total all-encompassing financial environment. So let's start with financial assets and then I'll roll into industrial assets. On the financial asset side, for the past 18 months, we've seen constant stimulus packages that have impacted the amount of charge-offs going into the marketplace, which is our core business. that's changing now. There's not just a stopping of the stimulus, but there's been, looking at the Fed reports, extremely large growth in the amount of lending activity. You've seen a 20-year high in credit card usage. You've seen the beginning of increased defaults. All of that bodes well, three, six, nine months, for both our brokerage practice and LACs, which sells these loans on a fee basis, and our lending practice, Heritage Global Capital, which funds the buyers of these loans. As that market expands, our buyers are not the public companies mostly. A lot of our buyers are the private companies that also need lending services from us. So we're bullish not just on our pipeline, but on all the evidence we're seeing from the outside world looking in. Now moving to industrial assets. Industrial assets has remained profitable just like financial assets. However, we see a really good window into an uptick that has really tied the ESG and a big push for the largest global companies in the world to do far less salvage, far less scrap, and far more reworking and repurposing their assets to resell to build a circular economy. That bodes very well for us, who has an international buyer base and the ability to market those assets all over the world, even trailing assets that may not be basically hugely valuable to a brand new company, but very valuable to a growing company that can't afford new assets or that is bogged down with the supply chain where the orders on new assets can take longer than they expected. So we feel solid across the board in both financial and industrial assets. We see a clear path over the next couple of years to solid growth, and it's really just up to us to execute, to continue to do the three things that are most important to us, to garner the asset supply, to ensure our execution capacity, and to maintain consistent profitability through rigid cost controls. So far we've executed on all three platforms in that agenda, and we're confident that going forward we can deliver the kind of results that Garner shareholders support. So thank you all for hearing me out. We're always available anytime anybody wants to chat with us, talk with us, or get more information. And we're very pleased with all the support we've received. Thank you all. I'll end it here.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your hands up before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Diana with Maxim Group. Please go ahead.

Thank you. Hey, Ross. Hi, Michael. You mentioned American Laboratory Trading. I know when you bought it, you were excited about the interaction you have with them already, and you look forward to a lot of synergies coming out of that. Can you remind us of... you know, what the situation was when you bought it and how that's improved since?

So we acquired a 20-year-old company with a solid reputation in the repurposing and the reselling of life science assets. We got them at an influx where there was two people running the company, one ready to retire and another one very ambitious to stay. and we were able to retain the younger, more ambitious one. The whole concept is that we see this company as rapidly growing as the life science industry is really pushing forward to be basically a leader in the repurposing of assets and the remarketing of assets and getting those assets out to other companies versus sending them to landfill. Years ago, the big, big pharma companies didn't really worry about de minimis surplus. They were basically stripping apart machines and scrapping machines. Now they're looking at repurposing machines and rebuilding and helping a circular economy. And that really flows into our auction format, where we're doing auctions for Pfizer, for Amgen, where we have this large database of buyers. So we saw a lot of synergy there, and we saw a lot of synergy in the fact that they own 5,000 service parts. We didn't own any service parts. So if somebody needs a machine that we can enhance the value of, we now have a full-service in-house partner. So it's early for bragging rights, but We're confident it's going to bode well, Michael.

Okay, that's great. And you spoke very highly of your new chief marketing officer. Without giving away any competitive secrets, can you give us like an example or a category of things that you're going to have that person work on?

So Respina, who we hired to come in as the CMO – came from a multi-billion dollar publicly traded auction technology group, which is the largest provider in the world of services to industrial auctioneers. They run the bid spotter platform, they run the proxy bid platform, and she was a key contributor to building those platforms and marketing industrial assets all over the world. So she brings a heightened approach to advancing not just our technology, but our marketing component. And so that's, I'd say, a big part of why we're so excited. But another part is we haven't really had the kind of marketing push forward as an enterprise that we think we now should get to get visibility from investors. So overall, we're thrilled to have somebody on board who's a real pro.

Okay, great. Thanks, Ross.

The next question comes from Walter Bellinger with Mayflower Capital. Please go ahead.

Hi, Walter. Hey, guys. Just a quick question for me. How's it going with your Huntsville disposition?

So I guess the first word would say well. So we're at the point now where where we've sold all of the capital assets, all the machinery and equipment in all of the buildings. We've monetized one of the three buildings. And the good news is we've done all of the capital requirements on the other two buildings to get them prepared for sale. So there is no more capital expenditures whatsoever other than the minimal operating costs and holding costs. We're very positive, feeling very positive that they will be monetized in the near term. I'm not going to put a date on it for you, Walter, but I will say as the CEO of the company, I'm bullish that we're going to monetize them at a profitable price in the near versus the long term.

Okay, great. Thank you. That's it for me. Thanks.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

So as a closing remark from management, as always, we're thankful for your participation. We're extremely thankful for everyone who's basically stepped on board and supported us by investing in us as shareholders and stakeholders. All of us in management are also shareholders and stakeholders, and we continue to invest in the company and truly are proud of the fact that many of you also continue to invest in the company. And we have very ambitious goals for the future, and I'll always say the same thing. We're responsible and we're accountable, and you should hold us responsible and accountable to perform. So thank you all for turning in. Bye.

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