Two lost sites on hold. We appreciate your patience, and please continue to stand by. To all sites on hold, we appreciate your patience. And please continue to stand by. Please standby. Your program is about to begin. Good day, everyone, and welcome to today's Heritage Global Inc. Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may withdraw yourself in the queue by pressing star two. Please note this call may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. John Nesbett. 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 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 continue 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 here at an all-time high, indulge accelerating even further 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 produced now 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 now of high default volumes driving a steady flow of consumer charge loss. Pricing is stabilized and with increasing buyers absorbing supply, we're now in a robust active and growing market. In summary, I with near zero debt and entering what I will call and what I will truly define as an auctioneers market. Take a look at it. Fourteen thousand industrial workers have been…

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 a 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 options, 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 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 the default and the loans extended to this borrower were placed into non-accrual status. This borrower has since remitted…

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 always around to talk anytime anybody wants to chat. Thanks once again.

And we will now facilitate your question.

Hey, guys. A couple quick things. Back on the loan book, did you guys increase any more of the provisions there? Or and 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, Matt. I haven't Yeah. Thanks, Russell. We have not increased or substantially decreased the reserve against the loan book. We did a valuation this year in Q2 was the time which our largest borrower defaulted. And 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 as far as our 2024 results, actual results and the utilization of NOLs. But also an assessment of 2025. And the biggest change there was a lower forecast. In 2025 due to the loan book and the non-accrual status.

And I'm assuming that the accrual status, you guys that gets fairly well scrutinized at your end as well. Yeah. I'm sure it's getting looked at every quarter, but year-end in particular. Is that accurate?

Yeah. Then the audit team has gone through the full audit per year for the entire year, and we've touched base on that every quarter since I guess, we implemented the credit loss reserve back in the beginning of 2023. It's been a big topic.

Yep. Great. Just pivoting in the operating business and you know, Ross, it seems like, you know, 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 you know, on the brokerage side, a million seven, I think you said, versus two seven a year ago. I got my notes right there. Know, what is it that we need to see as the industry you guys to actually benefit and actually grow that business? Is it the type of assets coming to market? Or is it you guys' ability to, you know, land some chunkier you know, flow? What is it that we need to see or you need to see to be able to kinda materially grow that business given how favorable the backdrop is.

So there's basically a timing issue between when you look at default versus charge offs. So it's kind of common knowledge that defaults ultimately lead to charge offs. And defaults have grown, which means that as 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 a 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 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, Mark. And similar on the industrial asset side and, you know, sounds like getting doge, you know, is obviously going on the federal level, but starting to happen the state level. And even, you know, it's, you know, everybody is trying to tighten up a little bit.

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

It was an incredibly frustrating Q3 and Q4 with so many projects that looked like they were about 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 just for whatever reasons, kinda succumb to this thing, basically, in a pause period and they're now coming to fruition. So we're seeing a really big bullish anticipation for this year with a lot of everything backed up in our pipeline starting to happen. As far as what our analytics about what's going on, on a geopolitical basis, I'm not gonna try to be you know, some super analyst, but it's pretty clear that you know, layoffs are heightened right now, plant closures are heightened, and volumes will be heightened. And you know, I anticipate that we're gonna be extremely busy, Mark.

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

We will go next to George Sutton with Craig Hallum.

Thank you, Ross. With respect to the opportunity, you mentioned you've increased your capacity fairly significantly. Can you just 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 closing, but I mean, not just we see, but the marketplace in general sees. And with the wave of plant closings, we're basically we acquired a new building where we're gonna have a lot more space to relocate assets because we're in a situation now where a lot of people need to get the assets out of their buildings and we're gonna be able to basically do more acquisitions where we take internal control of the physical assets. At the same time, we've expanded our team that can go out and basically analyze the assets, value the assets, and make the acquisitions. So we basically we're being aggressively ahead of the marketplace that we anticipate is going to grow. If that's a fair analysis, George.

Okay. And then on the EnWix business, you called out auto loans. You mentioned a busy fintech schedule. I'm curious if you could give us a sense of what types of assets that you anticipate building up? I mean, would these be credit card loans? Would these be buy now, pay later? Loans? Just if you can give us any sense of what you're seeing there and any sense of the timing of these.

So pretty much we saw in the last six months of the prior year everything starting to escalate. Meaning, when I say escalate, escalate the amount not just of charge offs, which we get right away, when they charge off, but the amount of default. So what we look at as far as the future is really looking at defaults. On credit cards and on auto loans because ultimately, the higher the default rate, the more likelihood it becomes a charge off, which is our market. And so, you know, we're not looking at anything other than the facts. And the facts are saying that the faults of growing and the amount of defaults that have grown are going to produce more products going forward? We had a good Q4 and we're looking at a very good Q1, and we're looking at expanded opportunities. And, also, we're seeing more sellers enter the market now. There's more pressure under the new administration for people to basically not hold on to non-performing loans, but to basically alleviate the non-performing loans from their balance sheet. So there's a greater pressure to basically sell those assets and were a likely one to win from that. In our opinion.

So lastly, you were I think, further along in the process. Can you give us any sense of size or vertical focus? That you're Yeah. Seeing there?

So for the last year and a half, we've been really trying hard to do M&A deals and we add really some difficulty. Only not in finding deals, but in price points where we just didn't feel that the deals that were available were available at a price that made sense. And we're seeing a lot more realistic sellers now. Of companies that really do want to find a way to monetize themselves and go forward. And specifically, if you're asking in what direction, I would say the closest things we have would be on the bio side. That would be companies that would enlarge our presence at ALT and I don't wanna tell you we're close. And then not have something done. But I'll tell you we're close. Fair enough.

Fair enough. That's it for me. Thanks, guys.

We'll go next to Gregory Fortnoff with Sixty Squared LLC.

Good afternoon. How are you doing?

Good.

Good. I have a few different questions. Just sticking just staying along with the M&A conversation. I think the one thing you didn't answer was the size of the deals and maybe how you'd pay for it. Are you gonna use stock? Are you gonna use cash on hand? Or how are you financing these deals?

So at this time, I mean, this is coming from the CEO of the company, so it may be self-serving. I don't like our stock price. I think it's way too low to basically use our stock to acquire a company. And even no matter how great the buy might be, so it would be a combination of debt and equity. We have $10 million on our current credit line. It's zero. We have $15 million plus cash in the bank. And 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 of a buyer of stock than a seller of our stock, if that's fair.

Okay. Well, you bring up a good question. You bring up a good point. It was literally on my list of why do you think you're not trading on a proper I mean, basically, right now, you're trading for cash. I mean, usually, when you have an operating business, there's whatever you have in cash plus some value for the business. How come you're not getting anything for that? In your opinion?

I think because the big buyer of our stock would have been my mom and she passed away. So we're gonna get there. We're gonna get there. People are gonna figure it out. People are gonna see that every other auction company is trading at a forty P/E and we're trading at seven P/E or eight P/E. And I think that we're just unrecognized, and we're gonna get there, and that the people that believe in us are gonna really benefit from believing in us because, yeah, I think we're undervalued. Fair enough?

Yes. So that begs the question, if it's a good market for acquisitions and all that, what would you get if you were to sell? I mean, it goes both ways. Now if you think you're under value, that's always one way to get value. You know?

No. I know. I know. I don't wanna sell because I'm a builder, not a seller. And my company is a builder, not a seller. And I'm confident we're gonna get there, and the market is gonna realize at one point in time that the really smart people are the guys that are buying us, not the guys that are selling us.

Okay. Fair enough. Fair enough. I know that sounds pushy, but I'm the senior.

No. It doesn't sound pushy. Because you have the optionality. You could always turn around and sell it. In the meantime, you're trying to build it and see if you could do. I'm off for it as long as you don't make any mistakes. Speaking of that, can have you just disclose the amount of money that's in non-accrual right now, or is that has that not been disclosed?

I'll share that with you. Twenty-two.

Yeah. It says it's about $22 million to $23 million. It is disclosed in the filing.

Okay. So when you talk about your book value and is that taking I mean, is that still counting that as if it's paid? Or how does that work?

That's the amortized basis of the loan. How you hold it on the balance sheet, less the reserve against the loan.

And how much do you have reserve right now?

About $1.4 million.

So based on that, I mean, you feel there's a high probability that you're getting paid eventually on this money. Otherwise, you'd be reserving more, I would assume. Right?

That's right. Yeah. Okay. Yes.

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

Yes.

Okay. So if that is long do you think it'll take for that to work itself out? I mean, because guess it goes hand in hand. Stock's cheap, but there's that's why if that goes away, maybe it I mean, how does that all work itself out or is it too hard to know?

At some point, we believe as a management team, as a board of directors, that people are gonna figure out that we're undervalued, and they're gonna jump on board. You're asking me what that date will be, I don't know. But if you're asking me if I believe it's going to happen, it's going to happen because yes, we went from making $14 million to making $10 million. That's not a hundred percent great that we didn't have sequential growth it's also not a crime that we're highly profitable for a micro-cap company. If you go to the conferences and listen to all the other micro-cap companies, very few of them make a million dollars, let alone five, ten, fifteen million a year. We think we can grow it a big chunk of money at $10 million and we think we're in a strong marketplace, and we think that over time, we're gonna get recognized. So we're very positive on not being a company that's for sale and being a company that's for growth.

Okay. So I obviously, you've I've never asked questions. I'm a new shareholder. One of the things I've read from the comp of management. And the way you comp manage management. Is that still in place at the order by Reuters? Fairly old. Is that still in place, that that comp of our guess, a percentage of sales? I think that's what it was?

Everything we're doing as far as how everybody gets paid, is variable and is based upon the performance. If we make no money at all then people do not get paid a lot. We make $10 million, people get paid quite a bit of money. If we make $20 million, you can get really mad at us because people will get paid more. But it's all done on what we achieved. So it's variable and it's all based upon you know, what you how hard you work, is not what we base it on. It's how much you produce.

So are the salaries lower than the market because there's so much upside or is it good as salary plus upside?

You wanna retain the best people. So the best people you give them the best deal they can get so that they stay at the company that you have. So we actually we want to pay everyone the most that they can make in the industry to get the best people to stay at the company we have. So we don't look at it like we're saving money by trying to pay somebody less. We look at it like we're trying to pay somebody more that's more talented than anybody who can work anywhere else. So we think in our mind, in our DNA, let's pay the people the most and get the best people. And with the best people that you pay the most, you ultimately make the most profit. And that's our belief.

Okay. Do you know how much was paid during you know, on this this way in 2024 above and beyond based salaries? Like, I guess you call it a bonus. Like, what In other words, everyone gets a salary. Everyone gets a salary, and then they get some performance bonus based on profit of the company. So if you could you know what that extra money equated to in 2024?

Do I know how much bonuses we paid to all of the people in aggregate?

Right. So in other words, the Yeah. Yeah.

I know yes. I know, but I don't really I don't feel I need to disclose that to you. We paid them bonuses based upon contract. So if a person was a salesperson and they got paid a commission on each sale, they didn't get a bonus. If the person was in management, and we hit our numbers, they got a bonus. But it's not something I need to disclose. But I know that it was fair, and I know that the people were compensated in a way that we basically have not lost any employee and we've continued to be substantially profitable.

Okay. Understood. Thank you for your time, and I hope that your people will figure it out sooner than later. Thank you.

Hey. Do me a favor. I lost you as the new shareholder. Give me a call. And let's talk, and let me see if I can get you to be a bigger shareholder. Fair enough?

I'm yes. Absolutely. I'm already pretty big, but I will happy to talk to you. Do you wanna give me your number now, or should I just look it up online?

I think we're on a call where we'll just look it up and

Alright. I'll look it up. I have my Bloomberg. I'll just call the corporate number. Alright. Thank you.

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

Hey, guys. Thanks so much for taking the questions. Hey, Still wanted to ask, with regard to the yeah, with regard to the the industrial business, do you guys have exposure to the federal space? I mean, is there an opportunity for you guys to pick up some stuff that might shake out from the actions that Doge is taking here, you know, over here in DC?

So we have a very long story history with the government. It goes all the way back to my grandfather working with the GSA to sell Fort Beal and etcetera. And we've done government work literally over a fifty or sixty year decade on and off. We're not like, we're not a government contractor company. We're a preenterprise company, but we've had multiple government assignments in our history from the SBA to the FDIC to etcetera. So we're obviously looking hard at how we can be opportunistic and get involved with what's going on with those. Those is also gonna create a lot of basically selling assets outside of those where they're gonna slow down different parts of government contracting with defense industry people and we've done work, obviously, for the Boeings, the Raytheons, etcetera. So we think we're gonna be a benefactor on the outside of the government contracting with the people that basically getting support from the government. We also think that we could potentially have inroads into the assets that those There's one thing that's undeniable and that's that Heritage Global Partners, our auction company, was the auctioneer of Twitter, and we all know who owns the Twitter and who gave the auctions out. And we all know that they went from basically, they went from the person that is running those to Heritage Global Partners. So if you ask us if we're pursuing it, the answer is, of course, we're pursuing it.

Okay. That's very helpful. Appreciate that. And then the other question I wanted to ask, I mean, you guys have built a nice little cash balance here. I mean, obviously, I know you need some of the for the business, but are you able to take advantage of, you know, kinda higher interest rates and earn some interest on that cash balance? Is that something that you guys are looking to take advantage of right now? Or do you feel like you have an immediate need for the cash that you can't take advantage of that?

I'll turn that over to my CFO. We do take advantage of short-term vehicles to get interest income. This quarter, we actually had interest income rather than interest expense in the fourth quarter. It's more of a short-term proposition right now, and we're basically looking at ways to deploy capital deploy cash, into the business more so than taking advantage of the interest rate. But it's a good point. And if we did not have other ways to deploy the cash, we are always looking at that.

I appreciate that. And then just last one from me. You know, in terms of the reauthorization, I saw that you guys the board reauthorize or gave you an authorization up to six million keys. Just give me an update of, you know, what the capacity is total in terms of what you could repurchase right now. Please?

Yeah. So we had a plan starting in 2022. And I was a four million dollar dollar total spend. And that was increased to six million dollars. And that plan ends in June of this year. And so we've spent half of the plan dollars approximately three million over the last three years. And so we have three million left. To presumably deploy in the first six months of 2025.

Great. Thanks so much. Appreciate taking the questions, guys.

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.

So thank everybody for listening in, for actually very, very good questions, and for basically being involved and caring and paying attention. And I will tell you that we have a very strong feeling that the market is very favorable to what we're trying to accomplish over the next year, two, three years. And stick with this and, hopefully, we're gonna be able to do everything that we've been trying to promise we're gonna do and that we're all gonna be winners together. So thank you all. And thank you for listening.

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