Thank you for waiting. This is the conference operator. Welcome to the Heritage Global Inc. Fourth Quarter and Year-end 2022 Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. I would now like to turn the conference over to John Nesbett. 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 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. Good afternoon, everyone. Welcome to our fourth quarter and year-end 2022 earnings conference call. Let's start the call today with Brian Cobb, our Chief Financial Officer, who will discuss our financial forms. Brian, you’re up.

Thanks, Ross. We closed 2022 with strong operating results in the fourth quarter, which included operating income of $3.1 million, improved profitability and EBITDA of $3.3 million driven by solid results from both our industrial and financial asset divisions. Additionally, for the full year ended December 31, 2022, we achieved record net operating income of $11.1 million and delivered full year earnings per share of $0.42. Throughout 2022, activity in our industrial assets division showed continued momentum, and we closed out the fourth quarter with a 310% increase in asset sales to $6.5 million, compared to asset sales of $1.6 million in the fourth quarter of 2021. Our industrial assets division sees increased activity as more businesses scale down their operations, and surplus assets and equipment become available for sale. A challenging economic landscape often accelerates auction activity as companies look to responsibly dispose of assets. Our financial assets division is benefiting from increased volumes as the economy has slowed, and pandemic-related stimulus checks have dried up, causing consumers to more frequently rely on credit cards and installment loans to make purchases. Predictably, as consumer debt grows, so does the volume of charge-off consumer loans being sold by financial institutions, and we anticipate that we'll continue to see increasing asset flow as we move through 2023. The current economic environment is producing encouraging tailwinds that we believe position both our divisions for continued financial success. Turning to the financial details for the fourth quarter, consolidated net operating income more than doubled to $3.1 million as compared to $1.4 million in the fourth quarter of 2021. Based on the past several years of taxable income and projected operating results for the next five years, the company determined that it is more likely than not that it will utilize a significant portion of its net operating loss carryforwards and thus reduce $7.1 million of its valuation allowance against its deferred tax assets. As a result, during the fourth quarter of 2022, the company recognized an income tax benefit of $6.8 million compared to an income tax expense of $0.4 million a year ago. Net income was $9.9 million or $0.28 per basic and $0.27 per diluted share compared to net income of $1 million or $0.03 per basic and diluted share in the fourth quarter of 2021. EBITDA of $3.3 million was significantly improved as compared to EBITDA of $1.5 million in the fourth quarter of 2021. Adjusted EBITDA grew to $3.4 million for the fourth quarter of 2022, up from $1.6 million in the fourth quarter of 2021. For the full year 2022, we achieved record consolidated net operating income of $11.1 million. Operating income in our industrial assets division increased 168% to $9.2 million in fiscal 2022, compared to $3.4 million in 2021. In our financial assets division, we saw growth of 193% to $5.9 million in operating income compared to $2 million in the prior year. Our balance sheet remains strong with stockholders' equity of $48.3 million as of December 31, 2022, compared to $32.6 million as of December 31, 2021, and net working capital of $7.7 million. With that, I'll now turn the call back over to Ross.

Thank you, Brian. This is a great time to be the CEO of Heritage Global. The numbers are impressive, and I must admit it’s exciting to be here today to express my pride in our team and our company, as well as my satisfaction with last year's results. Let me share some thoughts on our outlook. One of the key questions we face is whether 2022 was a unique occurrence or the start of consistent growth. If ongoing growth is indeed a possibility, how long can we expect it to last? These are the important questions that I, as an investor, am eager to explore. I'm confident in our short-term prospects and reasonably optimistic about the long-term potential for success. My confidence stems from the fact that we are currently thriving in the sectors where we are most active. We are experiencing growth in both the industrial and financial sectors. Notably, consumer spending is at all-time highs, but what's even more critical for us is our focus on charge-offs—selling credit cards, auto loans, and FinTech loans. Each of these areas is seeing rapid growth in asset supply. I have consistently emphasized that asset supply is crucial to our success; the more we can sell, the higher our profits. Our systems enable us to increase sales, and demand from buyers continues to be steady. Currently, auto loan delinquencies are increasing each month and each quarter, and credit card defaults are on the rise, all while our volume expands. As these defaults increase, so do our lending practices, as buyers of those products require our services. Consequently, we are deploying more capital, and the returns are improving. I believe this trend has several years of favorable conditions ahead. We are just beginning to see the impact of rising consumer spending, and I anticipate growth this year and next. Conversely, in our industrial asset division, we are observing a general trend across various sectors to right-size manufacturing and companies. This leads to layoffs that create auctions three to nine months later. The layoff announcements take time to actualize, after which companies assess surplus and seek ways to dispose of it. In this economic climate, businesses prefer not to waste surplus by sending it to a landfill. Increasingly, they are opting for industrial auctioneers, which we believe represents a sustainable trend poised for growth over the coming years. Therefore, when I analyze both industrial and financial segments, I conclude that we are not experiencing an anomaly; we are in a growth phase. This is a solid company positioned optimally. Although my pipeline isn't always consistently full throughout the year, I can confidently say that, from my perspective today, we are off to an exceptional start this quarter, following a record Q4. Specifically, we are seeing returns two to three times greater than last year's same quarter. So, when you compare this year’s first quarter to last year’s first quarter, the results will clearly indicate that the company is thriving. I don’t wish to come off as overly confident, but I would like to express my gratitude to all of you listening. Stay with us, as this is a promising time for Heritage Global. Thank you.

Our first question is from Mark Argento with Lake Street Capital Markets. Please go ahead.

Hey, Ross. Hey, Brian, congrats on a strong year. Just hoping to drill down a little bit. Ross, you talked about just an increase in asset flows. Is there any way to help us quantify how many more portfolios you guys are seeing now on the NPL side or NLEX side? How many more auctions are you guys doing? Any kind of KPIs or operating metrics that you can point us to that can really help us better understand what's going on in terms of the volumes?

Let me give it to you in an abstract way because these are not numbers we report, and they’re not metrics we put out in our filings. But just from a high-level perspective, I can tell you this: on our financial assets side, clients that we had pre-pandemic and maintained through the pandemic are now operating with volumes back to, and in many cases, above, the levels before we went into the pandemic. Most of those companies saw their volumes cut in half during the pandemic. That represents probably 60% of the companies we are working with. The other 40%, Mark, are companies that are now beginning to come on board with us, as we've grown. The number of companies using our platform to grow is really starting to take off now. The companies that we’re selling to directly are basically getting a certain price for assets. There has been price point pressure now, after the pandemic, on what people were paying for the assets. So when they were just selling to one client, they now want a more transparent marketplace and are increasingly using us. That’s fresh data, but right now, financial assets at the charge-off level aren’t selling at the premium they were when there was a shortage during the pandemic, but they’re back to normalized pricing.

Alright. Can you discuss the scalability of both businesses, particularly in relation to the industrial side? I'm assuming the NLEX side is more scalable due to its digital nature.

The industrial auction business has already made giant leaps. This is coming from someone who grew up in the business. You’re not calling bids anymore, and you’re not deploying a bunch of auctioneers. You’re not asking all the buyers to get on planes and travel for every auction. It took a bit of the fun out of it if you ask an old auctioneer but it made it massively scalable. Ross and Kirk Dove running things back in the day could only do one auction in one day. Now, if Nick runs the shop, they can handle eight auctions in one day if they get enough supply. Buyers no longer have to travel, which means they can bid on several auctions in one day instead of just one. Industrial auctions are now about 100x scalable compared to when I started. The only cost that's variable at this time is operational expenses associated with the labor required to perform the tangible work before and after the auction, such as writing specs and working with shippers and safety. The bottom line is, we can grow exponentially without a larger sales force if we have the marketplace, without significantly increasing finance or marketing personnel, and only adding operational staff as required. We believe one of the strengths of this company is our ability to handle two to three times the volume across all services with minimal operational expenditure. We think we've reached a time of real operating leverage.

Great, and then maybe one for Brian, just to change it up a little bit. So when Ross says two…

Ask him a harder one, Mark. You’ve asked me softballs, give him a tough one.

So when Ross tells us they're off to a flying start, 2 to 3x better than Q1 last year. So 2 to 3x better on what, on revenue, on operating income, on everything? That's not a softball. I don't know what it is?

Well, when Ross talks about 2 to 3x times last quarter, he's usually referring to operating income. And so that position he’s taken is absolutely a reasonable position based on what we're looking at right now.

Great. Alright, Ross, you pass. Congrats. Thanks, guys. Good work.

This concludes the question. Our next question is from Michael Diana with Maxim Group. Please go ahead.

Okay, thanks. Hey, Ross. So you're talking a lot about your financial assets, mostly about auctioning off charge-offs. What about the financing end of that? I think that's going pretty well too, isn't it?

Yes, so what happened is that during the pandemic, there was not enough supply to truly meet our specific onboarded buyers' needs; much of that supply was going to the multibillion-dollar public companies in that business, who really didn't need our capital. They have a very low cost of capital. Now that the markets have opened up, the 25 guys we've onboarded are now purchasing more fully more portfolios. So there's a much bigger need for us, and our funding has been growing over the last three quarters, basically related to the increasing volume of sales. There’s an empirical truth that as the volume increases, the demand for our services also rises. As volumes keep growing, we are going to need to provide more capital and keep funding more deals. The good news is we receive increasing monthly remittances and have free cash flow to keep deploying, so we expect constant growth there. As long as we stay profitable and get back the remittances, we think we can grow year over year.

And I assume because of rising interest rates, you're likely charging more to your borrowers. Is that constraining this business at all or not?

No, the truth is that we haven’t really raised our capital for our buyers as interest rates have gone up. Since we've been primarily deploying free cash flow, we haven’t needed to borrow a lot of money to fund these deals. Many of them are self-funded, and our ROI has remained steady on self-funding. Obviously, as our cost of capital increases, like any traditional lender in any marketplace, there will be a pass-through of the cost of capital, but we are not looking to take advantage of anyone or gouge them. We want to be a fair, ethical lender and recoup our capital costs.

Okay, great. I appreciate it. I'm looking forward to your first quarter report.

Thank you. So do we. We're anxious to get it out, and we're working hard to make it a good one. You have a great day, Michael.

Thanks.

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

Hi, this is Ross. On behalf of myself, Brian, and the entire team here at Heritage Global, we'd like to thank everybody for participating. We appreciate all current investors for sticking with us. We're easy to get a hold of if you have further questions, so feel free to reach out at any time. If you're a new investor and would like more information before you decide to join us, we are available on a regular basis to talk with you. We just want to let you know we're thankful and here to provide you with the right information so you understand our company, and we will keep working hard. Thank you.

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