Welcome to Heritage Global Inc. Fourth Quarter and Full Year 2024 Earnings Call. All participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Your call may be recorded. It is now my pleasure to turn the conference over to Mr. John Nesbett.

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.

Thank you, John, and welcome, everyone, and thank you for joining. Let me give you my thoughts first, and then I'll turn it over to Brian to go into more details. 2024 was not the easiest year as I had originally predicted. I'm really proud of the strength of our team and what they showed throughout a series of challenges, staying profitable all year, in all our business units quarter after quarter. $9 million in cash flow for the year and $2 million in EBITDA through Q4 would have, a few short years ago, been considered some giant windfall. In many ways, it's still an extremely positive outcome. Industrial supply was light in Q3 and again in Q4. However, we stayed profitable and continued to grow our pipeline as many projects were continued delayed into 2025. We're now seeing much larger asset flow already, and with recorded layoffs at an all-time high, indulging accelerative corporate rightsizing initiatives we're now ramping up to meet the supply. We've expanded our warehouse size and our staffing. We've dramatically upgraded our inventory at ALT. We're very positive as we move into the next year. Our M&A efforts have yielded multiple prospects, and we're actively engaged with them. On the financial front, we're excited to be seeing more and more sellers enter the market, and more of them rely upon EnWix. There's been an extended period of high default volumes driving a steady flow of consumer charge loss. Pricing has stabilized, and with increasing buyers absorbing supply, we're now in a robust, active, and growing market. In summary, I find myself with near zero debt and entering what I will call an auctioneer's market. Take a look at it. Fourteen thousand industrial workers have been laid off in the US, Canada, and Mexico just since February 1. With the wave of closures announced in food processing, automotive, trucking, distribution, and more. It appears clearly there's a rise that's basically caused by a combination of people's thoughts about the defaults and an increasing likelihood that it will continue. Demand for used equipment is at an all-time high as people are looking at supply chain tightening and the potential with tariffs raising prices on new equipment and possibly delaying orders. It looks like 2025 is the year of the auctioneer. Near the end of 2024, on the financial side, we saw charge loss with credit cards hit a decade-plus high. As did delinquencies. The delinquency high tells us the market will be strong for the next six to twelve to eighteen months. We're seeing the same with auto loans and we have a very busy fintech schedule as well. All signs point to an economy that is live for auctioneers and a great execution for auctioneers to really take advantage of 2025. It's on us to perform. I feel very comfortable we can. We're rolling strong into the New Year, and we're starting out with a very positive outlook going forward. I'll now turn it over to Brian to give you the background and the details. Thank you all for listening in and for sticking with this. We're feeling good about our future. Go ahead, Brian.

Thanks, Ross. Before moving to our consolidated financial results, I'd like to touch upon a few key points. Despite a tough comparison to a record 2023, we reported strong operating income for the full year, demonstrating the strength in our diversified business model and commitment to driving consistent profitability for our shareholders. From a macro standpoint, it's important to point out that with the economic uncertainty that many companies and consumers are facing, we believe we are in an advantageous position given the services which we offer. Our industrial assets division reported divisional operating income of $800,000 in the fourth quarter of 2024 as compared to $1.6 million in the prior year period. The segment saw sequential improvement over the third quarter of 2024 but had a tough comparison to a strong 2023 fourth quarter. We saw a lot of volume, but the auctions tended to be smaller in terms of total dollars. Looking to 2025, we expect increased economic pressures to continue to drive cost-cutting measures, including layoffs and facility closures. And with our proven track record facilitating and executing on a wide range of industrial auctions, we expect increased momentum in our auction pipeline moving forward. Our financial assets division reported total divisional operating income of $1.9 million. Our brokerage business recorded operating income of $1.7 million as compared to $2.7 million in the fourth quarter of 2023. We remain focused on capital on increased charge-off in nonperforming loans as a result of elevated consumer spending and household debt, and we're seeing a promising pipeline at the start of the year. As a reminder, in the second quarter of 2024, Heritage Global Capital's largest borrower was placed into default, and the loans extended to this borrower were placed into non-accrual status. This borrower has since remitted 100% of net collections for the remainder of 2024, and while net collections continue to be lower than contract monthly minimums, we're seeing early signs of progress in our negotiations with this borrower to further improve their cash flows and subsequent collection rates. I also want to quickly mention that segment information can be found in our SEC filings and is now expanded to include gross profit, operating expense, and earnings from equity method investments for each of our segments. We're pleased to be able to make this change and provide further operational transparency to our shareholders. Now onto the consolidated financials. Consolidated operating income was $1.5 million in the fourth quarter of 2024 compared to $4.6 million in the fourth quarter of 2023. Adjusted EBITDA was $2.1 million compared to $4.9 million in the prior year period. For the quarter, the company recorded a net loss of $200,000 or one cent per diluted share compared to net income of $4.9 million or thirteen cents per diluted share in the fourth quarter of 2023. It's important to note that the company's net loss in the fourth quarter includes a discrete adjustment to the income tax valuation allowance against its deferred tax assets by approximately $1.3 million, which is reflected as an increase to income tax expense for the quarter. As of December 31, 2024, the company determined that we'll likely utilize a lower portion of its net operating loss carry forwards than previously estimated. This determination was primarily due to the decreased revenue related to the company's extended loans placed in non-accrual status. Our balance sheet reflects stockholders' equity of $65.2 million as of December 31, 2024, up from $61.1 million at December 31, 2023, with net working capital of $18.5 million. The health of our balance sheet remains a key strategic asset for us. In 2024, we further solidified our position with a strong cash balance due to cash provided during the year from both operations and investment activity while ending the year with no long-term debt. With cash on hand, we were able to repurchase approximately 1.3 million shares in the open market during fiscal 2024. And as of December 31, 2024, the company had approximately $3 million in remaining aggregate dollar value of shares that may be purchased under the program. Additionally, subsequent to the quarter, we entered into a $4.1 million mortgage loan agreement for the company's new corporate headquarters. The new location will provide us with expanded office and warehouse space to support the company's long-term growth while also giving us a real estate asset in what we believe to be a prime business district of San Diego. As we move through 2025, we're focused on capitalizing on the opportunities in front of us and delivering continued profitability, particularly given the uncertain economic environment. Our balance sheet strength coupled with our continued profitability will provide us with the flexibility to seize new opportunities and drive sustainable growth. And with that, I'll turn the call back over to Ross.

And thank you all for listening. It's an exciting time to be the CEO of Heritage Global on pretty much every front. We see huge upside and big things in our future both short-term and long-term. The goal here is to get back on track to have a record year, and we see that there's a lot of opportunity if we execute to do just that. So we're roaring to go ahead, and we thank you all for listening, and I'm always available to talk anytime anybody wants to chat. Thank you once again.

And we will now facilitate your questions.

Hey, guys. A couple quick things. Back on the loan book, did you guys increase any more of the provisions there? Or is there any relation between that and what you did on the tax asset side? But just maybe you could help think through that a little bit more.

Go ahead, Mark. We have not increased or substantially decreased the reserve against the loan book. We did a valuation this year in Q2 at the time when our largest borrower defaulted. Since then, in my opinion, we've seen a positive sign. So we've held steady with the reserve. The balance overall has gone down a little bit during the year, but the reserve is consistent. The tax valuation allowance is really a change based on what we're able to reach in terms of our 2024 results, actual results and the utilization of NOLs, but also an assessment of 2025. The biggest change there was a lower forecast in 2025 due to the loan book and the non-accrual status.

I’m assuming that the accrual status, you guys that gets fairly well scrutinized at your end as well. Is that accurate?

Yes. The audit team has gone through the full audit for the entire year, and we've touched base on that every quarter since we implemented the credit loss reserve back in early 2023. It's been a big topic.

Got it. Just pivoting in the operating business. It seems like you talk about the financial asset kind of the backdrop in terms of the macro remains very favorable for the financial asset business. You know, operating income was on the brokerage side, $1.7 million, I think you said, versus $2.7 million a year ago. I got my notes right there. What is it that we need to see in the industry to actually benefit and actually grow that business? Is it the type of assets coming to market? Or is it your ability to land some chunkier flow? What is it that you need to see to be able to materially grow that business? Given how favorable the backdrop is?

So there's basically a timing issue between the defaults versus charge offs. It's common knowledge that defaults ultimately lead to charge offs. Defaults have grown, which means that as these defaults mature, some get cured and some turn to charge offs. But the increase in defaults dictates an increase in charge offs, which is our marketplace. So when you look at the record number of defaults over the last year, you can look forward to the next six, twelve, eighteen, twenty-four months of more products coming to market in our marketplace. So yes, we're bullish on the future over the next one to two years just because we see more product flow coming forward. And similar on the industrial asset side, everybody is trying to tighten up a little bit, and it appears we have an environment where increased demand is merging with supply constraints.

Do you have any state or federal exposure at this point? How do you see ways to play on that whole trend?

It was an incredibly frustrating Q3 and Q4 with so many projects looking ready to come to fruition rolling over. We didn't lose a lot of deals; we did a lot of small deals. But all the big deals, for whatever reason, succumbed to this pause period, and they're now coming to fruition. We're seeing a really big bullish anticipation for this year with everything backed up in our pipeline starting to happen. As far as our analytics about what's going on on a geopolitical basis, I'm not going to try to be some super analyst, but it's clear that layoffs are heightened right now, plant closures are heightened, and volumes will be heightened. I anticipate that we're going to be extremely busy.

I appreciate the color, guys. I'll back in the queue. Thanks.

Thank you, Ross. You mentioned you've increased your capacity fairly significantly. Can you discuss what kind of capacity you would have to serve the market now versus what you had before?

So we see a wave of bank closings not just within our operations but the marketplace in general. With the wave of plant closings, we acquired a new building that will allow us to relocate more assets as a lot of people need to get their assets out of their buildings. We also expanded our team that can go out to analyze, value, and acquire assets. We are positioning ourselves aggressively ahead of the anticipated growth in the marketplace.

On the EnWix business, you called out auto loans and mentioned a busy fintech schedule. I'm curious if you could give us a sense of what types of assets you anticipate building up?

In the last six months of the prior year, everything was starting to escalate, not just in charge-offs, but the amount of defaults. What we look at for the future is really the growth in defaults on credit cards and auto loans because ultimately a higher default rate means a more likely charge-off, which is our market. We're not looking at anything other than the facts. The facts are saying that defaults are growing, and the amount of defaults that have increased will produce more products going forward. We had a good Q4 and we are looking forward to a very solid Q1 with expanded opportunities as more sellers are entering the market. There's greater pressure under the new administration for people to alleviate the non-performing loans from their balance sheets, which offers us a great opportunity.

So lastly, can you give us any sense of size or vertical focus that you're seeing there?

For the last year and a half, we have been actively pursuing M&A deals, and it has been somewhat difficult, not in finding deals but in the price points that we felt were unreasonable. There are a lot more realistic sellers now who want to monetize their assets. Specifically, if you're asking what direction, the closest things we have would be in the bio sector, which would enlarge our presence at ALT. Though I don’t want to say we are close to a deal, I will say we are in an advanced stage.

Just sticking with the M&A conversation, can you elaborate on the size of the deals and how you'd pay for it? Are you going to use stock or cash on hand?

I don't like our stock price; I think it's too low to use our stock to acquire a company. It would be a combination of debt and equity. We have $10 million on our current credit line, which is at zero, plus more than $15 million cash in the bank. So they would be bolt-on acquisitions of a combination of cash and equity. I don't anticipate giving away a lot of stock at its current value; we're more buyers of stock than sellers at this time.

Why do you think you're not trading on a proper valuation? You're trading for cash on hand, but why do you think that's happening?

I think the big buyers of our stock would have been my mom, and she passed away. We're going to get there, and people are going to figure it out. Every other auction company is trading at a forty P/E, while we're trading at seven or eight P/E. I think we are unrecognized, and over time, we will get there. The people that believe in us will benefit from that.

If it’s a good market for acquisitions, what would you get if you were to sell? It goes both ways.

I don't want to sell because I'm a builder, not a seller. My company is a builder, not a seller, and I'm confident we're going to get there. The market will realize at some point that the really smart people are the ones buying our stock, not selling it.

Can you disclose the amount of money that's in non-accrual right now?

Twenty-two million to twenty-three million, and it is disclosed in the filing.

And how much do you have reserved right now?

About $1.4 million.

Do you think there's a high probability that you're getting paid eventually on this money?

That's right.

Do you think that's one of the reasons why there's a stock overhang?

Yes.

If that is long, how long do you think it'll take for that to work itself out?

At some point, we believe that the management team and the board of directors will see people realize that we are undervalued and they will jump on board. The timeline for that is uncertain, but I do believe it will happen. We're profitable for a micro-cap company, and we think we can grow it substantially. We expect that over time, we will be recognized, and we are very positive about not being a company that's for sale but one focused on growth.

I hope that your people will figure it out sooner than later. Thank you.

Do me a favor; reach out to me as a new shareholder. Let’s talk, and see if I can get you to be a bigger shareholder.

We'll go next to David Marsh with Singular Research.

Hey, guys. I wanted to ask with regard to the industrial business, do you have exposure to the federal space? Is there an opportunity for you guys to pick up some assets related to actions that are being taken in D.C.?

We have a long history with the government; it goes all the way back to my grandfather working with the GSA. We've done government work over many decades. While we're not a government contractor company, we've had several government assignments and we’re obviously looking to be opportunistic in getting involved with these actions. This will create many selling opportunities outside of the government contracts, especially concerning the defense industry. Heritage Global Partners, our auction company, was the auctioneer for Twitter, which gives us an inroad into opportunities moving forward.

Do you have the ability to take advantage of the higher interest rates with your cash balance? Or are you in a position where you have an immediate need for that cash?

We do take advantage of short-term vehicles to earn interest income on our cash balance. This quarter, we actually had interest income rather than interest expense in the fourth quarter. Right now, we're looking at deploying capital into the business more than concentrating on earning interest, but it's a good point. If we didn't have opportunities to deploy cash, we'd look into that.

I saw that you guys reauthorized up to $6 million for share repurchases. What is the total capacity you could repurchase right now?

We had a plan starting in 2022 for a total spend of $4 million that was increased to $6 million. That plan ends in June of this year. We've spent approximately half of that plan, around $3 million, over the last three years, leaving $3 million to deploy in the first half of 2025.

It appears that we have no further questions at this time. I will now turn the program back over to management for any additional or closing remarks.

Thank you all for listening in, for asking great questions, and for your involvement. We strongly feel that the market is favorable to what we're trying to accomplish over the next year and beyond. Stick with us, and we hope to deliver on our promises. We're looking forward to winning together. Thank you.

This concludes today's call. We thank you for your participation. You may disconnect at any time.