Thank you for your patience. This is the conference operator. Welcome to the Heritage Global Inc. Fourth Quarter 2020 Earnings Call. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. I will now turn the conference over to John Nesbett from IMS Investor Relations. Please proceed.

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 release. 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 Dove. Go ahead, Ross.

Thanks, John, and good afternoon, everyone. Welcome to our fourth quarter and full year 2020 earnings conference call. As you all know, 2020 was quite the ride. Yet despite the public health and economic challenges presented by the COVID-19 pandemic, Heritage closed the year with record fourth quarter results as reflected in net income of $6.3 million and substantially improved EBITDA of $3.5 million. We believe these results demonstrate the strength and the resilience of our diverse business model, which has enabled us to continue to drive momentum in our business despite the challenging economic landscape. We saw a particular strength during the quarter from our industrial assets division, where the close of several large transactions contributed significantly to the growth in the fourth quarter. We expect to experience continued robust supply on the auction side of the business, and as the pandemic continues to drive the liquidation of industrial equipment and assets. The reality is, there are many companies out there that need to reduce and monetize surplus equipment as they reposition themselves to emerge viably from the pandemic economy. And we are seeing strong growth in our online auction volumes. With our visibility in the marketplace today, we expect to see continued and increasing demand for our industrial re-commercing capabilities. We are similarly optimistic about our prospects in our financial assets division. Over the course of the calendar year, we expect to see an increase in the release of non-performing loans into the marketplace. The National Loan Exchange, or NLEX as we've referred to it, is poised to benefit from the increased activity. Specifically, the current stay-at-home economy as resulted from COVID-19 restrictions has produced increased online shopping activity, which has driven rapid growth of the buy now pay later, or BNPL sales, and this is resulting in an increase in charged-off inventories of these assets in the US. NLEX is competitively positioned to provide an effective and efficient debt sale process between our BNPL issuers. In fact, we recently announced the closure of a sale of a $25 million portfolio of BNPL charged-off accounts, and we believe to see similar opportunities in the coming year and beyond. Likewise, Heritage Global Capital continues to ramp up its business providing specialty financing solutions for small and medium-sized investors of charged-off and non-performing loan portfolios. Looking ahead, we expect the challenging economic landscape to endure for some time, presenting increased opportunities for both sides of our business. Our industrial assets business is a well-established and respected partner in the liquidation of surplus and distressed assets and we believe the current economy will drive rising demand through our expertise and proven success with brokered asset sales and online auctions. Additionally, even as vaccinations take hold and the economy begins to emerge from the pandemic, we believe NLEX is well-positioned to address the market opportunity around continued increases in charged-off and non-performing consumer loans related to the growth of digital and other non-bank lending platforms that proliferate at the stay-at-home economy. And finally, Heritage Global Capital remains well-positioned to benefit from this demand. We are pleased with the progress we made in 2020 and focused on continuing to capitalize on the interest and demand we're seeing across both our industrial and financial segments in our business. With that, I'd like to pass it over to our Chief Financial Officer, Scott West, who will do a deeper dive into our financials. Thank you all.

Thanks, Ross. The company achieved operating income of $3.3 million for the fourth quarter of 2020, demonstrating significant improvement as compared to an operating loss of $446,000 in the fourth quarter of 2019. The improved performance was primarily due to the completion of multiple large transactions in the company's industrial auction business. As Ross mentioned, this growth reflects the underlying strength of our multiple revenue streams from brokered asset sales, principal auctions, sales commissions, and advisory and secured lending fees. The fourth quarter of 2019 included a $600,000 impairment charge related to Equity Partners, which was discontinued as of December 31, 2019. From a margin perspective, we believe that tailwinds going forward will include a favorable shift in mix toward a higher contribution from businesses and fee structures, as well as rising operational leverage as economies of scale increasingly build within businesses and across platforms. We remain focused on managing expenses both at the corporate level and across business units, and increasingly leveraging synergies across processes and systems to drive further operational efficiencies. Net income increased to $6.3 million or $0.17 diluted earnings per share for the fourth quarter of 2020, as compared to $600,000, or $0.02 diluted earnings per share in the fourth quarter of 2019. The financial results for 2020 include an income tax benefit of $3 million for the fourth quarter of 2020, and an income tax benefit of $3.6 million for the year ended December 31, 2020, which included the reversal of the Income Tax Valuation allowance, as required according to the income tax accounting standards. Excluding the income tax benefit resulting from the Income Tax Valuation allowance, the net income for the fourth quarter of 2020 would have been $2.5 million or $0.07 diluted earnings per share, and $4.5 million or $0.14 diluted earnings per share for the year ended December 31, 2020, compared to net loss for the fourth quarter of 2019 of $1.2 million or $0.04 diluted earnings per share, and net income of $2.1 million or $0.07 diluted earnings per share for the year ended December 31, 2019. The company recorded EBITDA of $3.4 million in the fourth quarter of 2020 versus an EBITDA loss of $400,000 in the fourth quarter of 2019. Adjusted EBITDA was $3.5 million compared to $300,000 in the fourth quarter of 2019, reflecting the earnings power of our model. Now let's take a look at full year 2020 results. For the year 2020, operating income almost doubled to a record $6.1 million compared to $3.1 million in the prior year. SG&A expense decreased to $14.4 million in full year 2020 compared to $15.9 million in 2019, primarily due to the elimination of costs related to Equity Partners, which as previously mentioned, was discontinued as of December 31, 2019. Net income grew significantly to $9.7 million, or $0.30 per diluted share for the full year 2020 compared to net income of $3.9 million, or $0.13 per diluted share in 2019. The company achieved EBITDA of $6.4 million for 2020, compared to $3.4 million in 2019. Adjusted EBITDA for the full year 2020 was $6.8 million, compared to $4.2 million for the full year 2019. At December 31, 2020, 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-forwards expire between 2024 and 2037. Finally, turning to our financial position, the company maintained a strong and growing balance sheet with net cash of $23.4 million at December 31, 2020, and stockholders' equity of $29.9 million. Importantly, our $5 million credit facility remained untapped, and we raised approximately $8 million of net proceeds from the company's common stock offering that closed on October 6, 2020. With that, we'll open up the call for questions.

The first question comes from Mike Shlisky from Colliers Securities. Please go ahead.

Good afternoon. So you did raise some capital during the quarter, but your cash balance of $23 million was very large. Can you take us through some of the finer points of the cash flow in the quarter? And maybe, besides the equity, were there any other large, chunky types of one-time cash inflows at all?

So, obviously, there was the capital raise which is reflected, on top of the capital raise, there was substantial free cash flow in the quarter. We had some very significant transaction wins. We did a transportation auction of some assets from Coca-Cola that belonged to Odwalla, and made a significant profit on the realized return of that cash in the quarter. We had the sale of a building that we've been holding for multiple months, in fact, for over a year, which was part of a larger acquisition of a pharmaceutical plant, and that sale closed in that quarter, and returned a lot of capital to the company. So both of those capital returns had been outstanding. And so I'll turn it over to Scott to add color, but those were two of the significant wins.

Hey Mike, good to hear from you. So yes, just to add on to what Ross said, the way our industrial assets auction business works is that on the day an auction closes, we invoice all the buyers, and the buyers have essentially 24 to 48 hours to wire us the funds, the winning bid price. Then, we actually sit on that cash for anywhere from 30 to 45 days before we settle with the seller. So there, because of the large transactions that Ross had mentioned, we do have inflated cash balances at the quarter end. But Ross is right; we had a fantastic year with the free cash flow and great EBITDA. And with the equity raise, that's how we ended up with so much cash at December 31. Does that make sense?

Yes, that makes perfect sense. I want to go through some of the individual numbers, but thank you very much for that. I also wanted to discuss the buy now pay later portfolio and that entire sector. Was that one large $25 million transaction an unusually large deal for the BNPL sector?

No.

It's not, okay.

It was actually not large; it was actually a trial where potentially, since we did great, it could actually expand and the other ones be bigger. $25 million of BNPL doesn't scratch the surface on what's starting to come to market. The fact is, we're very early and it was an entry deal. FinTech and peer-to-peer has been around a long time. BNPL is really just starting to grow in leaps due to the pandemic and everybody staying home and buying all of their retail items and using BNPL. So, no, it was actually a small transaction compared to what could come if we become basically the dominant or preeminent firm that they're using, Mike.

Yes, just to follow on to what Ross said, there's just a tremendous amount of capital being raised in that space, in the buy now pay later space. As a matter of fact, the largest BNPL lender was Klarna, I believe Sweden, and they, I believe, raised another $1 billion last week. So, we see tremendous growth opportunities in this space.

And just to clarify, that space is not seeing the same pent-up charge offs that you're seeing in other types of loans, like a student loan, or a credit card portfolio. Is that a more open market right now?

The curve takes a while. In FinTech, a lot of these companies are basically three and four and five years into their alternative lending platforms, and they're starting to build up non-performing loan portfolios. We're not trying to be the soothsayer and say what's going to happen with BNPL, but we do know that as we track the amount of loans that increased on a monthly basis, the increase in loans almost always produces an increase in non-performing loans down the road. So we're extrapolating from how much money is going out that at some point in time, we're going to see a much bigger non-performing loan segment come to the market, Mike.

Got it. And then, one last one for me, there's a lot of headlines about a rising interest rate environment, does that help your auction business at all, as companies who have some variable rate debt might want to sell off some old assets to raise some cash to pay things down? Has that been in the past a tailwind for you?

It's a little bit different than that, but you're onto something. Rising interest rates often are tied to companies struggling, that are manufacturing companies, and corporate companies with loan covenants, and the rising interest rates sometimes indicate that the company is not necessarily going to meet all its obligations, and have to monetize idle or underperforming assets in order to meet their obligations. Rising interest rates can impact companies needing to service their debt, leading them to look harder at what assets are truly performing in their manufacturing process, and what assets they can free up. So, we think it will have more of a positive impact than a negative impact on the asset flow.

Got it. That makes sense. Ross, Scott, thank you. I'll pass it over.

The next question comes from Mark Argento from Lake Street Capital. Please go ahead.

Ross, Scott, congrats on a strong quarter, big year for you. Looking at the mix of industrial businesses, as you look out into 2021, is there still quite a bit of pharma involved in that M&A cycle in pharma, and are you still looking to be a big beneficiary of that? And are there any other key sectors that you're focusing on right now?

Well, I'll start on the industrial side. We've got a ton of pharma stuff signed right now; if you look at our website, you can see auctions for Pfizer, you can see auctions for AMGEN. But we're also starting to see an increase in the number of auctions we're looking at in the aerospace side. We've got an auction coming up now for iAero Thrust, which is very large, with older airplanes that are going to sell for parts, etc. And engines that are going to sell to resellers. We're seeing that a lot of the people in the aerospace business that we're servicing are looking to monetize assets. Obviously, when you look at the big manufacturers of airplanes, they're sitting on a lot of inventory. So, many of the manufacturers, we believe, are not going to be building many planes for a while post-COVID. So I would say our second sector, other than pharma, is aerospace, which I think could be hot over the next two or three years. Additionally, we're looking at many deals from the food processing space, and things look fairly robust across the manufacturing sectors we're in, Mark. On the financial assets side, our problem is the same; there's a massive, still pent-up demand among buyers. We still haven't seen the release of all the loans, everybody says are coming forward. So, the auction side is super busy, while the financial side is trying to get super busy.

When it comes to the financial side, I know politically, it's been a little bit of a hot-button issue in terms of potentially writing off or forgiving some student loans. Does any of that really play into what you are doing? I assume that's more of the federally backed loans versus any private market loans, but any thoughts there?

The buyers are uncertain about the future economic landscape; they either wish to purchase at a lower price or prefer to wait. Ultimately, if they are unsure about potential forbearances, they can't determine when they'll be able to collect. They can navigate forbearance scenarios and still acquire assets, but they cannot do the same if they are considering possible forgiveness. The crucial difference lies in forbearance being a timing issue that can be calculated, while forgiveness cannot. Additionally, sellers have been reluctant to list assets during the pandemic, as they don't want to contribute to premature collections. This suggests that they will need to address these concerns in the latter half of the year. What I'm interpreting from this is that there is an expectation for a vaccine to be available by then, along with no new stimulus packages. The conclusion of stimulus measures, paired with the positive news of widespread vaccinations and health recovery, is anticipated to bring business back to normal levels. However, we are merely facilitating the auction process, not analyzing the situation.

You did a good job. And then just lastly, Scott, in terms of the amount of capital that you have out right now, in terms of lending on some of these portfolios, have you been able to deploy more capital initiatives there in terms of ramping up the book?

Yes, that's a good question, Mark. We have deployed some of the capital that we raised, not as much as we'd like, but there's just not the volume yet. We know that there will be, and we expect it to happen in 2021. But we recently funded a very large deal, which we're very happy about, that bodes really well because it's one of our identified super mid-tier debt buyers, that we have a 20-plus year long relationship with. Did that answer your question, Mark?

Yes, do you anticipate whether that is for three-year or five-year terms? Can you remind us how quickly you turn that book?

Yes, it's in the two-to-four year range, Mark. Some of them will be on the shorter end and others will be on the longer end. But on average, around three years is a safe rule of thumb to use.

Great, appreciate it. Thanks. Good luck.

The next question comes from Michael Diana from Maxim Group. Please go ahead.

Thank you. Just on the staging of your probable revenue growth, it sounds like from what you've been saying, you expect the surplus equipment business to be very strong and then the next wave would be the financial assets and then after that the capital business, the lending. I know those two go together, but it sounds like it's setting up for a somewhat lengthy stage.

Yes, the problem is, it's very hard to take our company and say, this is what we think we're going to make annually, and then cut it up by the quarter and make it equivalent quarter after quarter. A lot of times there are big spikes. But on top of big spikes, there's also a building effect. In our lending business, the reporting is tied to GAAP, so even if you're collecting large fees upfront, a lot of those fees are amortized and reflect more towards the back end of the year. In our financial assets business, everyone says the second half is going to be twice as big as the first half. I'm not going to be the analyst, but I can tell you that we're talking to so many people who are telling us to get ready; there's going to be asset flow, it just hasn't happened yet. The same thing is true for our valuation business, which is starting to pick up now. So, without a crystal ball, everyone looking in is telling us it's going to get busier as the year progresses. We have not been incredibly busy in Q1 in financial assets, but we've been busy in industrial assets. That's all I can tell you from what I see today, Michael.

Yes, okay. That's great. Thank you.

This concludes the question and answer session. I'd like to turn the conference back over to Ross Dove for any closing remarks.

For any closing remarks, I just wanted to take a real quick moment to thank everybody for their participation, for their interest. And we're very encouraged by the people who are following us, that are paying attention to us. It is a growing cadre of investors who are learning to believe in us, and we're here to work as hard as we can, perform as well as we can. We see that there's a bright future out there, and our belief is that if you keep an eye on us, we'll try to make it worth your while. So, thank you very much. Bye.

Thank you. Take care. Bye, everyone.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.