Good day ladies and gentlemen and welcome to the Heritage Global Inc. Second Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to John Nesbett of IMS Investor Relations. Please go ahead, sir.

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 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 for 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 carryforwards 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 carryforwards 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 Ross Dove.

Thank you, Brian, for the overview of the quarter. I’d like to add some color to the achievements, which are not always evident in 90-day results. Hopefully, it will 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 and industrial asset division has seen a contraction in supply, but also increased pricing, with both divisions finding their way through ebbs and flows, resulting in lower income for the quarter. Importantly, we have remained 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 will follow. Let me start with the two financial assets revenue streams: NLEX, which is a leading broker of charged-off assets, and Heritage Global Capital, a niche lender to purchasers of charge-offs from financial institutions. NLEX has faced significant headwinds in the current cycle with consumer spending delays, and stimulus checks have been 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 that we see a significant uptick in consumer spending, with over $27 billion increased this quarter alone. It’s really simply following the money, as it has been proven time and again that the future of our supply correlates to rising spending. Clearly, this also bodes well for Heritage Global Capital, which will see increased flow as our onboarded base of qualified borrowers is already showing increased activity. Moving to our industrial assets, the pandemic has 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 hold onto their assets rather than 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 placing a greater emphasis on ESG growth by recycling and repurposing surplus to avoid tons of landfill and rapidly deploying zero carbon initiatives. Going forward, we will remain highly disciplined to continue our track record of consecutive quarterly profits while always thinking ahead to ensure we have the growth drivers in place to execute and build a world-class enterprise rolling in value continually. We’re here to answer any questions, and thank you all for your time.

Thank you. Our first question comes from the line of Mark Argento with Lake Street. Please proceed. Your line is open.

Hey Ross, just wanted to 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. Are there any industries that you can point to that are showing improvement? Maybe give us a little more color on what’s going on in the market.

Yes. Let me address this in two parts. First on the financial asset side, and then second on the industrial side, where I’m proud to say we've had significant success. So on the financial side, there has been a tremendous amount of capital that has gone into buy now pay later. It was truly the only growing sector during this hiatus in consumer spending for logical reasons. Over the last year, many people were staying home and purchasing via the internet, and buy now pay later was a key contributor to that trend. We are now encountering some issues with the pay later aspect. In the initial stages, it didn’t create supply for us because, as you know, our marketplace involves non-performing loans, not performing loans. Thus, there’s a lag between the increase in consumer spending and when those loans convert into charge-offs. However, we are beginning to see growth in this area. Many of our clients that we’ve signed up are moving forward after onboarding, and we expect a much stronger Q3, and hopefully by Q4, we will see normalized flows returning. So, although the last 90 days were not easy, we managed to stay profitable, and at least on the financial assets side, we are very bullish for this year. Regarding the industrial assets, there really hasn’t been any insolvency business for the past year, which is a component of our business. There have been Chapter 11 filings, but during this pandemic, many businesses hesitated to take action. Overall, we believe there will be very positive growth beginning now. Fair enough, Mark.

Yes. Back on the financial side, I believe you have a broker for a buy now pay later portfolio, which I think had a $25 million book if I'm not mistaken. Is that the same customer, or do you have multiple buy now pay later partners?

Yes. The only difficulty is that it’s very easy on the industrial side to identify our clients. On the financial side, many times they want to remain anonymous for obvious reasons. So, we have several clients, but generally speaking, we only disclose their names to registered buyers who are pre-qualified. The simple answer is that we believe this will be a significant growth area for our business.

Historically, when you notice credit elevating—and we’re starting to see consumer credit climb—how long does it typically take for that to manifest itself into non-performing loan portfolios being generated and entering the market?

The cycle varies per client. It's not so much about when it becomes a charge-off but rather when they choose to monetize it. Some clients have forward flows and monetize their charge-offs monthly, while others prefer to wait until they have a larger portfolio to make it more attractive. This can range from as little as 90 days to as long as six or seven months before they bring their product to market. Hence, I anticipate that Q3 will be stronger, building through Q3, Q4, and Q1 of next year.

That’s great. Thanks, Ross. Appreciate the color. Good luck.

Thank you, Mark.

Thank you for your question. Our next question comes from the line of Michael Diana with Maxim Group. Please proceed. Your line is open.

Thank you. I was very interested in the statement in the release, and you also mentioned it in your prepared remarks about gaining market share. Without disclosing names, could you give us an indication of what you’re thinking?

I can provide a good example. Gaining market share is not solely about expanding in the sectors where you’re already strong. Our strongest sector has been pharma, where we have experienced strong growth. However, we’ve gained market share in the food processing sector as well. Recently, we've conducted more food processing auctions, albeit small ones, but we have signed up large multinational companies in that segment and expect growth there. We’ve also begun to make strides in the oil field sector, where we now count one of the largest clients in the world as a repeat customer. If you check our website, you will see we have a significant auction of tankers happening next week. A year and a half ago, that would not have been the case. We are gaining market share by expanding not just geographically but across various industrial segments. Once all segments rebound simultaneously, the headwinds we observed this quarter could rapidly transform into tailwinds.

Okay. That’s great. On the financial side, when you mentioned onboarding clients, are those typical clients, or do you have?

We have proactively onboarded not just new sellers, but we have also onboarded what we believe to be the top 10 or 15 borrowers, which are private companies needing capital to grow. They are all in the planning stages with expectations of exponential growth in the marketplace with the impending release of NPLs. During a time of low volume, we invested significant energy into qualifying them as borrowers. We have vetted their operations to ensure compliance, and many of these clients are familiar to us from years of collaboration. We have gained market share as some have transitioned from other institutions to use our services as the market picks up. We believe that Heritage Global Capital is better positioned now than it has ever been.

So you’re saying that both of your financial sub-sectors will pick up, brokering loans from sellers and financing buyers?

Yes. We expect financing to pick up significantly because much of what we have been selling has been primarily to public companies and larger firms that do not necessarily need to utilize capital. They have their own proceeds. However, as the market improves, the slightly smaller players who are aggressive will begin to purchase more. As their purchasing volume increases, our lending platform will also expand.

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.

This is Ross, the CEO. I’d like to thank everybody for listening. I’ve tried for the last two or three years to convey 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 who can look at it that way will see the progress. We achieved a lot in the quarter that isn't always visible, but it will show over time, and that’s how those of us inside the company strongly feel. 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.