Good afternoon, and welcome to the Heritage Global Third Quarter 2021 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to John Nesbett. 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 Dove. Ross?

Thank you, John, and hi. Let me first turn the call over to Brian to give a quarterly play-by-play, 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, provides evidence of an even stronger foundation to support improved performance in each of our revenue streams, which we anticipate to further improve with 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. For 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 $0.01 per diluted share for the third quarter of 2021 compared to $1.3 million or $0.04 per diluted share in the third quarter of 2020. Net income year-to-date was $2.1 million compared to 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 observed a 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 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. 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 net working 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 will now turn the call back over to Ross.

Thanks, Brian. For the last two earnings calls, I asked colleagues and friends how they thought I did. They all had the same answer, 'Ross, you did okay, but you sounded scripted.' So I've made a game change, and this is the unedited Ross now, where I'm talking to you without a script, just sharing how I feel and what I think about us going forward. So think of this as though you and I are both sitting on barstools, having a beer and I'm just bragging about Heritage and how proud I am of it. So here it goes. From my CEO dashboard, we have five revenue streams. I believe we've worked hard before the pandemic and through the pandemic to prepare all five revenue streams for growth. I'm very charged up about what I see as a bullish outlook for next year and the year after. I'll briefly touch on each of the five revenue streams and give you some insight into how I look at it. Two are on the financial side, and three are on the industrial side. On the financial side, we're a broker of charge-offs and a lender to the buyers. That business has not grown in the last 18 months due to simple factors. There have been massive stimulus checks impacting the volume tied to the fact that consumer spending has hit all-time lows. What do we see going forward? People are starting to travel again. We see that people are beginning to spend money. There seems to be growth in consumer spending. If there's growth in consumer spending, both our borrowers can buy more products, allowing us to lend more, and our sellers will have more volume to provide to us. We can't predict what's going to happen next week or next month, but we can indicate that all signs point towards growth over the next 24 to 36 months. We have already seen an increase, including a boost in product and a Buy Now Pay Later option coming onboard in December and January, as well as an increase in fintech peer-to-peer loans, leading to our belief that we're on a positive track in financial assets. Shifting to industrial assets, we have three revenue streams, two of which I have discussed continuously, our industrial auction division and our valuation division. They have remained stable during the pandemic and have grown in many aspects. Q4 could be one of our largest quarters ever in industrial asset auctions, and we also have a strong pipeline in valuation. Asset-based lending is increasing, with a growing number of lenders focusing more on collateral and less solely on enterprise value. This business looks promising for the next 24 months. The secret sauce – what I’m most excited about – is the acquisition of American Lab Trading. We believe we bought that at the perfect time in the economy, alongside the right management team and business strategy that fits today. Everyone knows the top 2,000 global manufacturers are now more focused than ever on being environmentally sound and on ESG practices. As they prioritize these practices, we expect more and more assets to return to the marketplace rather than end up in landfills. ALT is optimally positioned in the biopharma sector to repurpose and reposition assets. We're currently sitting on 12,000 spare parts and we can go out into the marketplace and assure them, 'Send the assets to us. We will refurbish, repair, test, and certify them.' Unlike any other auctioneer in America, we can sell these with a one-year warranty and drive premium prices. Therefore, I believe both the industrial and financial sectors are on a promising growth trajectory for the next two years. That's me on the barstool bragging, and I'm proud to do it because I believe we're genuinely moving in the right direction with the right team, people, and motivation. I’ll end it there and open the floor for questions, and thank you for listening.

Our first question comes from Mark Argento from Lake Street.

I have a couple of quick questions for you. We’ve been waiting for the financial assets to be cleared from the balance sheet and for the non-performing assets to be liquidated. How are the financial institutions managing to keep these portfolios for so long without implementing any charge-off process? Have they not written them off but are still holding onto them? Additionally, what do you see in real-time that gives you confidence that this market is going to develop? Is it the reduction in stimulus and the rise in delinquency rates for consumer credit? What are the key factors you consider when forecasting that business?

You're looking at two kinds of financial institutions: FDIC-chartered financial institutions, which have regulations on charge-offs and rules on when they need to take charge-offs to the market or write them off, and fintech lenders and alternative lenders that are not chartered by the government and write them off on different terms. But both types share one commonality, Mark: a rising amount of consumer spending correlating to rising charge-offs down the line. We think we are tied to one common denominator. The more money that circulates in the marketplace to borrow, the more supply we ultimately get. So will this impact us next month? Probably not, but next year? Probably yes.

Got it. And regarding the industrial side of the business, it sounds like you're quite optimistic for Q4. You've got a good real-time pipeline. What’s driving that? Is it just an end-of-year kind of purge, cleaning off the books for the year-end? What’s fueling that demand?

You're seeing many plant closings from Q1, Q2, and Q3, where they were not yet ready to monetize the assets, pondering whether to mothball or reopen the plants. Now they are starting to rationalize their decisions and sell assets. The plant closings we witnessed earlier in the year are now resulting in plant dispositions. Announcements of plant closings do not necessarily lead to immediate asset sales, but we're increasingly seeing more idle assets entering the market.

Last one on ALT. It sounds like you are quite excited about that business. Are you leaving it as a separate, stand-alone entity? Are you cross-selling services? How are you treating that?

Nick Dove, who runs industrial, has oversight over American Lab Trading, but we're allowing the brand to remain intact. We're keeping the current president in place to run it. However, we're integrating it more and more into our operations. In fact, we are conducting an auction of surplus from their facility this quarter. The best I can tell you is it's very synergistic, and we are collaborating effectively as a team.

All right. Thanks, Ross. Good luck for the rest of the year.

Thank you, Mark. Write something good about us.

The next question is from Michael Diana with Maxim Group.

I know you're excited about ALT. I know you have a history with ALT, which impacted your decision to buy. Also, you just mentioned synergies. Could you give us a more complete description of how the ALT acquisition came about and how that informs the synergies going forward?

Sure, Michael. American Lab Trading has been a business for 20 years in the biopharma and pharma sector, selling scientific equipment, which includes acquiring and advising on refurbishing, recalibrating, certifying, and remarketing assets. Over the last three years, they approached us when they needed capital to buy assets and auction capabilities. We turned to them when we needed assistance in valuation at various times. This collaboration turned into a positive relationship where we both realized that joining forces made us stronger. Their management saw the logic in merging as we both believed we would be more successful together. They worked with an investment banker and realized we were the right buyer at the right time. A lot of this is linked to the new regulations on ESG, with major corporations focusing on environmental responsibility. They possess capabilities that we lacked, allowing us to take assets that would have previously been discarded and now refurbish, reprogram, and repurpose them into the circular economy. We are confident that being part of the circular economy will bolster our overall enterprise.

Okay. Is it true that they deal in smaller assets while you deal in larger assets, making it a good combination?

If you analyze how it functions, there are two types of assets: aggregated and unaggregated. We dominate in aggregated assets valued at $500,000, $1 million, or $2 million within one facility. However, we're not strong in unaggregated assets, where a scientist at a university may want to sell one or two items; we didn't have a program for that. They do. We are now working to aggregate those unaggregated assets, where they can sell one, two, or three at a time, creating larger groups of assets from a community of scientists and engineers that we can present in an auction format to generate marketplace interest. We couldn't achieve that alone, but they have the capacity to do so. They can also buy these assets one, two, or three at a time or take minimal consignment to test them, ensure they operate well, and integrate them into our auction process.

Everyone claims that acquisitions are synergistic, but yours actually sounds plausible.

Everyone makes that claim, but the difference is we're the auctioneer for Pfizer, Amgen, and Genentech. Buying a company specializing in scientific and lab assets was right in our wheelhouse. We believe in the authenticity of our claims.

At this time, there are no further questions. 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. We appreciate everyone joining us and your interest in our company. We look forward to communicating further, so please feel free to reach out to me, Ross Dove, or Brian Cobb, Head of Finance. We are accessible and thankful you joined us. Have a great afternoon. Thank you.

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