Good afternoon and welcome to the Heritage Global Inc. First Quarter 2022 Earnings Conference Call. Please be aware that this event is being recorded. I will now hand the conference over to John Nesbett, President of 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 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, 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 will 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 $0.02 per diluted share compared to net income of $1 million or $0.03 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 have 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, 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 forward 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 working 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 accelerating and entered the year cautiously optimistic. As we progress near mid-year today, we are now confidently optimistic across all five revenue streams and look forward to the most profitable and active years 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 assets division, both our index 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 on-boarded 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 cards 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 division 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 Laboratory Trading, which we closed recently. We are now fully integrated, and it's been a credo 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 3-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. 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 it 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?

Yes. So financial assets typically contribute about the same as industrial assets in a general year. But the actual NOI for financial assets was $746,000 I believe, and actual 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 slight decrease in industrial assets of our prior year quarters.

And that was operating profit, that operating profit is only referring to?

That's the net operating profit. 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 is not 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.

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

Yes, really, 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 it was a kind of a similar trajectory on the industrial side of the house. And now it seems like even as companies were shutting, 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?

Yes, 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 the 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 landfills 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 real growth over the next 24 months.

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

Yes, we are 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.

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

Great, well, feels like your kind of market here that we're in. So good luck the rest of the way this year. Thanks, guys.

Thanks, Mark. Be good.

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 biopharma 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 an equipment specialist 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 is 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, 18 months that we realize on all of the profit, similar to Huntsville. So 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?

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 that answers 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 Ross Dove 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 to all of you who 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.