Heritage Global Inc.

Good afternoon, and welcome to the Heritage Global Incorporated first quarter 2022 earnings conference 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, President, IMF Investor Relations. 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 Harris Global's Chief Executive Officer, Mr. Ross Dove. Ross?

Thank you, John. Everyone, welcome to today's 2022 earnings call. I'd like to start with our VP of Finance, Brian Cobb, going through our financial performance, and then afterwards I'll join in and add some color. Brian, you're up.

Thanks, Ross. 2022 is off to a solid start with net operating income of $875,000, continued profitability, and adjusted EBITDA of $1.1 million. As we kick off the year, we believe our industry is transitioning away from some of the pandemic related headwinds we've seen during the past two years. With our diverse revenue streams, we believe we're well positioned in both our financial assets division and our industrial assets division to capitalize on anticipated tailwinds and more favorable market conditions. Looking at the two segments. Net operating income in the industrial assets division was $846,000 in the first quarter of 2022, as compared to $1.3 million in the first quarter of 2021. Within our financial assets division, we saw significant growth, resulting in net operating income of $731,000, an increase of 59% as compared to $461,000 in the first quarter of 2021. Sequentially, net operating income in the financial assets division grew 12% as compared to the fourth quarter of 2021. On a consolidated basis, net operating income was $875,000 compared to $1 million in the first quarter of 2021. Net income was $645,000 or two cents per diluted share compared to net income of $1 million or three cents per diluted share in the first quarter of 2021. We achieved EBITDA of $1 million as compared to EBITDA of $1.1 million in the same quarter last year. And adjusted EBITDA was $1.1 million for the first quarter of 2022 compared to $1.5 million in the first quarter of 2021. We also continue to pursue strategic real estate opportunities, which has proven to be a very profitable aspect of our business. With our visibility today, we anticipate closing our two remaining Huntsville real estate transactions in Q2 or Q3, which are expected to contribute more than $2.5 million in combined net profit. In addition, and subsequent to the close of the quarter, we announced that we have entered into a partnership that has acquired two pharmaceutical plants in St. Louis, Missouri. We anticipate that the sale of these facilities will follow a similar model to that of our successful Huntsville partnership. At March 31, 2022, 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 expire between 2024 and 2037. We believe that the considerable amount of loss 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 $33.4 million as of March 31, 2022. compared to 32.6 million as of December 31, 2021, and networking capital of 8.8 million. With that, I'll now turn the call back over to Ross.

Good afternoon, everyone, and thank you for joining. As we began 2022, we were seeing multiple signs of our business and pipelines accelerated and entered the year cautiously optimistic. As we progress to near mid-year today, We are now confidently optimistic across all five revenue streams and look forward to the most profitable and active year since our founding. Both external and internal signs point to a record Q2 and ongoing growth drivers throughout the remaining quarters. Let me break it down across all five revenue streams. Beginning with our financial asset division, both our NLEX brokerage of non-performing loans and our lending business to buyers of these assets are rapidly now shifting to post-pandemic supply increases of product we offer and more active current requirements from additional sellers. The buyers that we have vetted and onboarded are now actively purchasing assets and beginning to increase their usage of Heritage Global Capital. This is attributed to two factors. On the macroeconomic front, the dramatic rise in consumer spending across all sectors we serve, from traditional consumer loans like auto and credit card to fintech and peer-to-peer and BNPL, inevitably accelerate defaults and charge-offs as volumes rise. The second and as prominent a factor is our success gaining market share during the pandemic. This has added new sellers with increasing requirements to monetize assets. Clearly, our country is back out traveling, purchasing, and using credit products. And as this continues, our revenues have steadfast gains tied directly to the increased credit usage. Let me move now to industrial assets. All three revenue streams are targeting record quarters moving throughout 2022, and volumes have already increased now in this quarter, Q2. First, our industrial auction divisions is benefiting from most manufacturers initiating sustainable ESG programs and establishing measurable metrics as they put increased emphasis on surplus asset management. Our flow of assets keeps increasing month over month. Assets that formerly were scrapped, salvaged, and cannibalized for parts are now rapidly being managed for repurpose and reuse in a more transparent circular economy with greater frequency and speed to market. So second here is our acquisition of American Lab Trading, which we closed recently. We are now fully integrated, and it's been accretive from almost day one. Lab and scientific assets are critical to research and development that benefits the health and welfare of us all. With supply chain issues not yet solved, our ability to fill this void getting premium used assets to research universities and biotech development companies continues to expand quarter by quarter. Finally, our valuation business, appraising inventory and equipment for lenders, is benefiting from recession concerns where enterprise value is often acceptable and now more reliance is being placed on tangible hard asset values. In closing, I'll give you my final comment. As an old auctioneer, The saying has always been, put your money where your mouth is. To that end, the Heritage Board of Directors agrees, and we are instituting a $4 million three-year stock repurchase plan. We're not at the top of the mountain yet, but our employees are committed to the climb. Thank you all. We appreciate everyone listening, and we're now open for any questions any of you may have.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mark Argento with Lake Street. Please go ahead.

Hey, Ross. Hey, Brian. Congrats on a really nice quarter. Brian, I was just wondering, can you break down for me? I tried to jot it down quick enough, but I wasn't quick enough in terms of the two different segments looking at the financial assets versus the industrial, just the revenue contribution from each.

Yeah, so financial assets, typically contributes about the same as industrial assets in a general year. But the actual NOI for financial assets was $746,000, I believe. And the actual NOI for industrial assets NOI for industrial, sorry about that, I was just going back to my notes, was $846,000 for the quarter. So we've seen an increase in financial assets over the prior year quarters and a slight decrease in industrial assets over prior year quarters.

And that was operating profit? That operating profit is what you're referring to? NOI, yeah.

That's the net operating profit per division. So they make, generally speaking, it goes back and forth on whether financial assets makes more or industrial assets. The last couple of years, industrial assets has made more money than financial assets. But that was primarily pandemic related, where the amount of charge-offs was basically not at the level that it's now coming back to. So with the new increase in the amount of charge-offs, I think it's a fair race to see which one makes more, Mark.

Yeah, I was just going to say, is there any kind of anecdotal, you know, trends that you guys are seeing right now? So, you know, obviously, you know, the economy seems to have gotten overheated, consumer credit's gone sky high. Are you guys starting to see more portfolios come to market?

Yes, we're seeing a tremendous amount of growth over this year from last year. Partially, it's still going to be somewhat slanted to the second half of the year because we're selling charge-offs. So the first thing that happens is you see a huge rise in consumer spending. Then that follows with a rise in defaults. and the rise in defaults eventually produces charge-offs, which flow through our channels to our buyers. So Q1 was a decent quarter. Q2 is going to beat Q1, and we think we're going to have sequential growth for the next couple of years because, in our opinion, consumer spending is going to stay fairly strong, and as it stays strong, the supply follows, Mark.

Got it. I'm assuming there's a kind of a similar trajectory on the industrial side of the house. I know it seemed like even as companies were shedding assets, repositioning, the market there remained decent, but it's really when things get a little more difficult, you go into a recession that you typically see a pickup in industrial assets as well. Is that a fair statement?

Yeah, if you actually look at things like the National Association of Manufacturers and people that actually track layoffs, there's actually been an increase in layoffs. And as you see an increase in layoffs, it simultaneously produces surplus assets. So that's part of it. The other part of it is that everyone now has really strong ESG metrics. And with the ESG metrics, one of the obvious things you need to do is take a look at the back end of the supply chain, your surplus asset management, because one of the things most prominently going into landfill is surplus assets if you're not really focused on reuse and repurpose. So we're seeing an increased supply from sellers who maybe would have cannibalized the assets in the past, Mark, or maybe left them in a warehouse and eventually scrapped them they're now really pressured to try to monetize those assets and put them back into the circular economy. So we think there's going to be a real growth over the next 24 months.

Right now, it's super helpful. And then this last question for me kind of ties a little back into the buyback, but from an operating standpoint, cash flow and a working capital perspective, I'm guessing, you know, there's going to be more opportunities to deploy capital, not only on the industrial side, but also lending as well. Maybe talk about, you know, where you guys sit right now in terms of, you know, capital. It sounds like you're comfortable hopefully deploying some of the capital in the buyback. But, you know, the opportunity, you know, are you guys well positioned to be able to take advantage of the environment right now?

Yeah, we're sitting on – a $10 million credit line with our bank, C3. We've renewed a very large $100 million partnership line with the New York hedge fund that funds us. So we're very solid on the lending side, and we're also very comfortable we're going to be able to put out more capital because when there was a lack of volume, the really large public companies were doing most of the buying and they have a very low cost of capital and don't need us. But now our purchasers, meaning the people we've vetted and onboarded are now starting to win more deals. And as they win more deals, there's more deals for us to underwrite. So we're underwriting more deals than we have in the past. And because we're underwriting more deals, more of them will get approved, Mark.

Yeah. And I would just like to add to that, Mark, the, As we ramp up in our lending business, we're seeing more and more returns, principal remittances on all those loans outstanding. So although we deployed some capital in the last year, we're seeing that we're deploying less and less capital. We're recycling those funds back out in the market, which is kind of evolving and it's building for our business, our lending business.

Great. Well, it feels like you're kind of marked it here that we're in, so good luck the rest of the way this year. Thanks, guys.

All right. Thanks, Mark.

Be good.

Again, if you have a question, please press star, then 1. The next question is from Michael Diana with Maxim Group. Please go ahead. Hi, Michael.

Thank you. Hey, Ross. So you're about to, it seems – monetize your Huntsville real estate assets. And I think you say here 2.5 million over the next two quarters. But can you tell us, not but, but in addition, you have an exciting new partnership. Can you tell us more about the St. Louis acquisition?

So the St. Louis acquisition is very similar in the fact that we acquired two real estate facilities completely full of high-end processing equipment used in the biopharm and pharmaceutical sectors. So it's a very similar plan where part one is to monetize the capital assets, the tangible equipment, then part two is to repurpose the buildings and sell the buildings in the open market. So after doing a long analysis on it, bringing in our partners where we have real estate specialists and we have equipment specialists along with us, we're extremely comfortable that it's going to be highly profitable in a similar fashion to Huntsville. The only thing that I will say as a caveat that these deals where you have to first sell the equipment and then sometimes repurpose the buildings, they're not 90-day in and out transactions. It could be over the course of a year or 18 months that we realize all of the profits similar to Huntsville. So, you know, you're not going to recognize 100% of the profit this year. You'll start getting back money this year and recognize 100% of the profit in fiscal year 2023.

Okay, that's great. And when you're selling the assets in the buildings, does American Laboratory Trading help with that, or is that not in their ballpark sort of?

American laboratory trading helps in the essence that we now have access to a substantial database of tens of thousands of people that they've sold assets to all over the world. So merging that database with our database is a collaborative effort where it just produces more buyers and more competition and enhances the value.

Okay. That's great. Thanks a lot.

Be good, Michael. Thank you.

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

So thank you all for listening. It's greatly appreciated. It feels good to have a call where I can be bullish on all five of our revenue streams with a high degree of confidence that this will be our best year ever. So I thank those of you who have been patient when we were a little slower during the pandemic And I can tell you now that it's full speed ahead. We're very comfortable that this is going to be a highly successful year. And all of you that invest, we're highly appreciative and thankful. Everyone have a great day.

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