Good day, everyone, and welcome to today's Heritage Global Inc. First Quarter 2025 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. [Operator Instructions] Please note this call may be recorded, and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to John Nesbett of IMS, Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Before we begin, I'd like to remind everyone 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 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 welcome all to our first quarter earnings call. I'm pleased to again report a solid profitable quarter. We once again executed safe and smart decisions and transactions across all of our revenue streams, over $1.5 million in free cash flow affording us the continued currency to fuel growth as we pursue both organic and M&A initiatives aggressively. We had a very slow start to the quarter. It was really a tale of two halves. Until mid-February, the markets we operate in had the similar and continued wait-and-see sentiment of the second-half of last year. But the feeling of a pent up demand continued as sellers -- and then, sellers eventually needed to realize that the decisions they needed to make really took way midway through the quarter, and opened up in mid-February across the board. We experienced a very strong March, which followed with a particularly good April, which really bodes well for both revenue generation and the conversion from our pipeline to contracts on multiple larger projects, both fee-driven and principal purchases. Our expectations have a very positive sense that this is a trend that will continue throughout the year and well into 2026. Asset-based lenders for both industrial assets and financial assets want to ensure they have strong cash positions in these uncertain geopolitical landscapes, and there is a greater push to mark-to-market now more expeditiously. We have experienced both large healthy corporations focusing a greater emphasis on surplus, and the back-end of their supply chains. Alongside this, is an increase in corporate bankruptcy filings with more Chapter 11 filings converted to chapter seven liquidations, requiring auctioneer services like we do. Financial asset sellers are moving quicker to recapture values on non-performing loans at both the banking and fintech sectors, as well as with consumer debt remaining still at record levels. Brian will now walk you through in detail our Q1, and then, I will come back and give you some thoughts on where we look for our growth going forward. Brian, you're up now.

Thank you, Ross, and good afternoon, everyone. I'll begin by walking through the first quarter financial results with a focus on our key metric, operating income, and drilling down on segment performance before concluding with the consolidated financials. Consolidated operating income was $1.4 million in the first quarter of 2025 compared to $2.6 million in the first quarter of 2024. Our Industrial Assets Division reported operating income of $1 million in the first quarter of 2025, compared to $800,000 in the prior-year quarter. While our Financial Assets Division reported operating income of $1.7 million in the first quarter of 2025 compared to $2.9 million in the first quarter of 2024. Starting with our Industrial Asset division, our auction business specifically had a solid quarter as auction activity began to pick up in the second-half. The Auction Liquidation segment results aligned with our expectations with one exception. Our appraisal business had a slow start to the year, generating roughly $300,000 to $400,000 less than anticipated, which contributed to the negative segment comparison to the first quarter of 2024. We have since built momentum in this revenue stream and expect a much stronger second quarter in alignment with our prior estimates. Our Refurbishment and Retail segment has focused on acquiring a broader mix of high demand, higher value instruments. This enhanced inventory has driven faster sales at stronger price points, resulting in a $300,000 increase in segment operating income, compared to the same quarter last year. Consistent with the Auctions Group, ALT has seen an increase in auction referral activity, which is expected to positively impact the division's operating income in the second quarter. These business development indicators are beginning to validate our outlook on the industrial auction business as the macroeconomic environment continues to drive cost-cutting measures, layoffs, and facility closures,…

Thank you, Brian. So, I'll continue on what's next. So, where do we go from here? After watching the Kentucky Derby again, it's evident the fastest horse out of the gate doesn't beat the horse with momentum that closes strong. We believe we have built Heritage to be the horse with momentum and the skill to navigate the field with a clear view forward and the right path for our run for the roses. Our M&A progress is closing in on exciting targets now, and we will be accretive and synergistic as they will both be profitable standalone and escalate our organic growth, and with less liquidity in the market, we believe our momentum and our position with a strong balance sheet really works in our favor. The last 18 months are really the telltale sign for the next 18 months. We see that all sign points to the supply of assets are growing with the demand for quality used and refurbished industrial assets increasing, especially including the tariff concerns. On the financial front, lenders are feeling pressured to ensure getting clean balance sheets with less wait-and-see and moving NPL assets to market now. Our team is totally in it to win it. And our definition of success is to raise the hurdle bar from steady profits to growing profits, and we feel confident we can execute on that initiative. Thank you all for listening. It's much appreciated.

[Operator Instructions] We'll take our first question from Mark Argento with Lake Street. Please go ahead. Your line is open.

Yes. Hi, guys. Just a few quick ones. On the financial assets business, I think you've mentioned a little slower to start, but it looks like things are picking up. Could you talk a little bit more about the type of assets you're seeing in the market? Is there any kind of traditional seasonality you're seeing there? Anything could help us kind of better get a feel for how that business is trending?

No, Mark, I think that it's really not about fintech versus traditional banking. I think that it was just the first two weeks or first three weeks, everyone was kind of wait-and-see with this massive geopolitical question mark. Do we sell now? Do we wait? And then at some point, it flipped the switch in about midway through February and there was a big push to get stuff done. So, we had a really strong second-half of the quarter and a really good pipeline going into Q2. And everyone now, I think really kind of moving forward with there's no good wait-and-see in the market and it's time to sell.

Got it. And did you anticipate, I mean, you know, in terms of that business overall, you know, we've been talking about this kind of macro, and as Brian alluded to, maybe things have stabilized kind of 30% off the highs, but do you anticipate there's going to be some growth there, or I guess, how should we kind of model that or think about modeling that business? Is that just kind of a slow consistent business quarter in and quarter out, or do you think we could actually see a reacceleration in growth there?

I think we've really kind of hit, like, the sweet spot in what the asset flow is going to be as far as pricing. But I think we haven't hit the sweet spot in the growth with asset flow. It's going to need to be the flow through the amount of assets they're going to need to get converted. You're looking at record highs, not just in credit card debt, but in automotive debt and in fintech debt. So, at some point, there's got to be almost mathematically an increase in flow through. So, I think we're in a growth trajectory, Mark.

Got it. And Brian, just one for you quick, where's the loan book kind of stand right now in terms of the balance? And have you made any progress in whittling that down since the end of the year?

Yes. We're at around $29 million, just over $29 million in gross loans outstanding. That's a little shy of $10 million on our balance sheet and notes receivable and the remaining piece in equity method investments. So, we are seeing we're still seeing a higher amount of cash inflows due to the fact that we're not funding or haven't been funding as much each quarter. So, we're actually seeing a cash inflow from that business right now. But we did increase the amount of fundings we did in Q1 versus Q3 and Q4 of last year.

And then, the balance on your non-accrual lending partner, have you been able to whittle that down at all in the quarter?

Yes. There's a little bit amount that's kind of staying pretty consistent. The fact that they have lower remittances, as we've talked about a lot previously, than what our contractual minimum payments would be. But also the economics in the joint ventures limit our cash flows a little bit or our cost recovery amounts due to the fact that large borrower is still in default and the cash flows, majority of the cash flows will go to the seniors first when requiring a preferred return and we get secondarily some smaller cash flows. That's really a short term situation. Eventually our cash flows increase over time when our seniors are paid down.

Got it. I appreciate it, guys. I'll hop back in the queue. Thanks.

All right. Have a good day.

[Operator Instructions] We'll take our next question from Dave Marsh with Singular Research. Please go ahead. Your line is open.

Hello. This is Robert Maltbie filling in for -- hello, can you hear me?

Yes. Hi, Robert. We can hear you. Thanks. This is Ross. We can hear you.

Hi, Ross. I just want to say one thing, firstly, is, I love the Kentucky Derby analogy. I had the winner. I had Sovereignty, and Sovereignty was in the 18th position. So, I love that analogy, and we hope our stock analysis can be as good as our horse racing analysis. So, I love that. My first question relates to the prepayment with C3. What motivated that prepayment? And what opportunities do you see deploying that capital near term?

So, I'll take it, maybe Brian can answer afterwards. We're not looking to pay interest at all on money we don't need. But it's very important to us to have the available credit because we have, at any given time, very episodic transactions, where we could need it. So, unlike some companies who want to deploy all their capital, we're a company that has a lot of needs to have capital in reserve in case we find the, "Next big deal," and we have to react fast. So, paying back and having a zero credit line is a very strong comfort level with us. Brian, if you want to add to that, go ahead.

I think the free main payment option for the mortgage that we just got into is a good option for us if we don't have better uses for the capital. So, we are very opportunistic as we've seen in the transaction that we just announced on the industrial side. So, if we need capital, we can use our available cash or tapping into the credit line. But if in a couple of years if we determine that we do have sufficient amounts of cash and we could pay off that debt as well, we'll do that. But right now, I think it's safe to say we have some strategic initiatives that could require some of the cash.

Great. I came a little late on the call. You may have answered this. Wondering about NLEX performance, it is running at pretty high levels. What's driving this and how sustainable is this trend in the current economy?

Go ahead, Brian.

So, I believe the question was the performance of NLEX and how sustainable that is. We saw very high levels of performance at NLEX when both the prices were high during the pandemic, as well as volumes were high. What we saw over the last year was that prices have come down as more normalized level. For example, if something is selling at $0.10 on the dollar now during the pandemic, now it's selling at around $0.07 on the dollar. Those prices we believe are stable. And going forward, think the key there is there's still a lot of volume to get through the brokerage. There's still a lot of charges that we believe are going to come through for the next few years. And I think that that level almost a really good benchmark for NLEXs, what we did in Q1. And we could see upside due to some spikes in volume or adding clients or increasing the volume that is sold through our existing clients.

Oh, got you. Regarding growth opportunities, are there specific sectors or asset classes where you see more significant growth opportunities and how are you getting positioned to capitalize on that?

We're open to looking at opportunities, both organic and m and a, the growth both sides of our business, both the financial side and the industrial side. So, there is no favoritism either way. We see opportunities to expand on the financial side into increasing basically not just our market share, but moving into other kinds of loans, performing loans, medical loans, et cetera, real estate loans. So, we see a growth there. On the industrial side, we see expanding our marketplace into growing our sectors and our international business, et cetera. So, we're bullish that there's a big open market across all of our business streams to grow. We're rapidly looking at ALT figuring out how to expand their whole bio sector. So, we see lots of places and no favoritism, Robert.

Fair and balanced. Love it. And finally, how is AI helping or reducing costs or, leveraging up, your activities?

So, I was actually an expert in artificial intelligence my whole life. I always thought I was smarter than I was, so it's nothing new there. But the new generation, the people underneath me are actively embracing it, and it's actually helping not just on the front end with how to find the clients, but on the middle end, how to help the clients, and on the back end, how to solve the situations. So, we're as aggressive as any other small cap company in embracing it and a big endorser that we think it's going to move the needle in the right way for us.

Excellent. Well, I'll go back in the queue. Thank you very much, Ross.

And there are no further questions on the line at this time. I'll turn the program back to CEO, Ross Dove, for any closing remarks.

Well, thank everybody for joining. Thank everybody for listening. This is like a really good time for me to close by saying I have a huge amount of positive feeling that it's going to be a good next quarter and a good year and that there's all kinds of factors that are looking in the right way for us. So, stay tuned, hang in there. I hope if you haven't joined yet as a holder, I hope you will. I hope if you are a holder, you'll stick around, because I've got a really good feeling about what the next year will hold. And thank you all graciously for being there.

This does conclude today's program. Thank you for your participation. And you may now disconnect.