What changed in this filing

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Item 9A. Controls and Procedures

2025-03-13 compared with 2024-03-14 · 296 added, 274 removed, 844 unchanged (40% of the section changed)

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Directors, Executive Off icers and Corporate Governance.

The information required by this Item regarding the identity and business experience of our directors and executive officers is set forth under the heading “Election of Class III Director” in the definitive proxy materials of Heritage Global Inc.

The information required by this Item regarding the identity and business experience of our directors and executive officers is set forth under the heading “Proposal No.

Election of Class I Directors” in the definitive proxy materials of Heritage Global Inc.

to be filed in connection with our 2025 Annual Meeting of Stockholders with respect to our directors and is set forth under the heading “Information About Our Executive Officers” in the definitive proxy materials to be filed in connection with our 2025 Annual Meeting of Stockholders, as well as in Item 1 of Part I of this Report with respect to our executive officers.

The information required by this Item contained in such definitive proxy materials is incorporated herein by reference.

Information on the beneficial ownership reporting for our directors and executive officers required by this Item is contained under the caption “Delinquent Section 16(a) Reports” in the definitive proxy materials to be filed in connection with our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.

Information regarding procedures for stockholder nominations to our Board required by Item 407(c)(3) of Regulation S-K is incorporated by reference to the discussion under the heading “Shareholder Proposals for the 2026 Annual Meeting of Shareholders” in the definitive proxy materials of Heritage Global Inc.

to be filed in connection with our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.

Information on our Audit and Corporate Governance Committee and Audit Committee Financial Experts required by this Item is contained under the caption “Corporate Governance” in the definitive proxy materials to be filed in connection with our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.

Information required by Item 408(b) of Regulation S-K is contained under the heading “Insider Trading Policy” in the definitive proxy materials to be filed in connection with our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.

A copy of the insider trading policy is filed as an exhibit to this Annual Report on Form 10-K.

Code of Ethics

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Title of Exhibit

Amended and Restated Articles of Incorporation (restated for filing purposes only) (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 9, 2020 (File No.

Second Amended and Restated Articles of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 7, 2024 (File No.

001-39471), and incorporated herein by reference).

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001-39471), and incorporated herein by reference).

2003 Stock Option and Appreciation Rights Plan (filed as Appendix E to the Company’s Definitive Proxy Statement filed on October 31, 2003 (File No.

000-17973), and incorporated herein by reference).

2010 Non-Qualified Stock Option Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 24, 2011 (File No.

000-17973), and incorporated herein by reference).

Form of Option Grant for Options Granted Under 2003 Stock Option and Appreciation Rights Plan (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No.

000-17973), and incorporated herein by reference) .

Form of Option Grant for Options Granted Under 2010 Non-Qualified Stock Option Plan (filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on March 31, 2011 (File No.

000-17973), and incorporated herein by reference) .

Stock option grant notice to Ross Dove effective February 29, 2012 (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No.

000-17973), and incorporated herein by reference) .

Stock option grant notice to Kirk Dove effective February 29, 2012 (filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No.

000-17973), and incorporated herein by reference).

Management Services Agreement between Heritage Global Inc.

1 unchanged sentence

000-17973), and incorporated herein by reference) .

Stock Purchase Agreement between Heritage Global Inc., National Loan Exchange, Inc., and David Ludwig, signed on June 2, 2014 and effective as of May 31, 2014 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 6, 2014 (File No.

000-17973), and incorporated herein by reference) .

Employment Agreement between Ross Dove and Heritage Global Partners, Inc.

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000-17973), and incorporated herein by reference) .

Employment Agreement between Kirk Dove and Heritage Global Partners, Inc.

effective as of February 29, 2012.

(filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No.

000-17973), and incorporated herein by reference) .

Employment Agreement between James Sklar and Heritage Global Partners, Inc.

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001-39471), and incorporated herein by reference).

Amendment to Stock Option Award, by and between Heritage Global, Inc.

and Kirk Dove, effective as of September 20, 2020 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 21, 2020 (File No.

001-39471), and incorporated herein by reference).

Separation Agreement, dated March 30, 2021, by and between Heritage Global Inc.

and Scott West (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 13, 2021, and incorporated herein by reference).

Business Loan Agreement, dated May 11, 2021, by and between Heritage Global Inc.

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001-39471), and incorporated herein by reference).

Promissory Note, by and between Heritage Global Inc.

and C3bank, National Association, effective as of May 26, 2023 (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2023 (File No.

001-39471), and incorporated herein by reference).

Business Loan Agreement, by and between Heritage Global Inc.

and C3bank, National Association, effective as of May 26, 2023 (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2023 (File No.

Loan Modification Agreement and Reaffirmation of Loan, by and between Heritage Global Inc.

and C3bank, National Association, effective as of July 24, 2024 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2024 (File No.

001-39471), and incorporated herein by reference).

Pledge and Security Agreement, by and between Heritage Global Inc.

and C3bank, National Association, effective as of May 26, 2023 (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2023 (File No.

Loan Modification Agreement and Reaffirmation of Loan, by and between Heritage Global Inc.

and C3bank, National Association, effective as of October 4, 2024 (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2024 (File No.

001-39471), and incorporated herein by reference).

Loan Modification Agreement and Reaffirmation of Loan, by and between Heritage Global Inc.

and C3bank, National Association, effective as of December 27, 2024 and incorporated herein by reference).

Asset Purchase Agreement, dated August 18, 2021, by and among Heritage ALT LLC, American Laboratory Trading, Inc., Dante LaTerra and Heritage Global Inc.

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Form of Option Grant for Options to Employees Granted Under 2022 Heritage Global Inc.

Equity Incentive Plan.

Equity Incentive Plan (filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K on March 14, 2024 (File No.

001-39471), and incorporated herein by reference).

Form of Option Grant for Options to Non-employees Granted Under 2022 Heritage Global Inc.

Equity Incentive Plan.

Equity Incentive Plan (filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K on March 14, 2024 (File No.

001-39471), and incorporated herein by reference).

Form of Restricted Stock Grant for Restricted Stock Granted Under 2022 Heritage Global Inc.

Equity Incentive Plan.

Letter from Baker Tilly US, LLP, dated August 9, 2022, regarding change in certifying accountant (filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on August 15, 2022 (File No.

Equity Incentive Plan (Non-employee Director) (filed as Exhibit 10.36 to the Company’s Annual Report on Form 10-K on March 14, 2024 (File No.

001-39471), and incorporated herein by reference).

Form of Restricted Stock Grant for Restricted Stock Granted Under 2022 Heritage Global Inc.

Equity Incentive Plan (Employee).

Statement of Company Policy Regarding Insider Trading and Company Policy Regarding Special Trading Procedures

List of subsidiaries.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

of Heritage Global Inc.

To the Board of Directors and

Stockholders of Heritage Global Inc

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Heritage Global Inc.

and its subsidiaries (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the year ended December 31, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America.

and subsidiaries (the Company) as of December 31, 2024 and 2023, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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Critical Audit Matter

The critical audit matters communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation Allowance for Deferred Tax Assets

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The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.

The valuation allowance was $3.5 million as of December 31, 2024.

We identified the valuation allowance on deferred tax assets as a critical audit matter due to the high degree of judgment in projecting the realization of net operating losses.

The primary procedures we performed to address this critical audit matter include the following:

• Obtained an understanding of management’s estimate regarding the valuation allowance including the method, assumptions, and data used to develop the estimate by reviewing management prepared memo.

• Examined the underlying data used in determining the valuation allowance, including historical financial data and prior utilization of net operating losses.

• Obtained an understanding of management’s estimate regarding the valuation allowance on the net operating losses including the method, assumptions, and data used to develop the estimate by reviewing managements prepared memorandum and supporting schedules.

• Examined the underlying data used in determining the valuation allowance on the net operating losses, including historical financial data and prior utilization of net operating losses.

• Evaluated the Company’s projections of future taxable income for reasonableness.

1 unchanged sentence

Allowance for Credit Losses over Notes Receivable

On January 1, 2023 the Company adopted Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which resulted in an adjustment to retained earnings on January 1, 2023 of $0.2 million.

As described in Notes 2 and 3, the Company has recognized an allowance for credit losses for notes receivable of $0.7 million and within the Company’s portion of equity method investments of $0.9 million (together, “Receivables”).

The allowance is a valuation account that is deducted from the carrying amount of Receivables to present the net amount of Receivables expected to be collected.

The Company’s analysis uses a probability weighted cash flow analysis and other qualitative factors to measure the allowance for credit losses as of December 31, 2023.

We identified the cash flow analysis and qualitative factors applied to the allowance for credit losses as a critical audit matter as auditing management’s determination of the qualitative factors and forecasts required significant auditor judgment.

As described in Notes 2 and 3, the Company has recognized an allowance for credit losses for notes receivable of $0.4 million and within the Company’s portion of equity method investments of $1.0 million.

The allowance is a valuation account that is deducted from the carrying amount of notes receivable and equity method investments to present the net amount of notes receivable and equity method investments expected to be collected.

The Company’s analysis uses forecasts of expected cash receipts provided by an external specialist, which are then applied to a cash flow waterfall to project expected cash receipts.

The shortfall in projected cash receipts is used as the Company’s estimate of the allowance.

We identified the use of specialist and forecasts of cash receipts as a critical audit matter as auditing the forecasts required significant auditor judgment.

The primary procedures we performed to address this critical audit matter include the following:

• Obtained an understanding of management’s estimate regarding the allowance for credit losses including the method, assumptions, and data used to develop the estimate by reviewing management prepared memorandum and analysis.

• Examined the underlying data used in determining the allowance for credit losses, including forecasts of future collection, as well as historical collection data compared to the related forecasts.

• Evaluated the repayment history for certain borrowers and evaluated future cash flow projections.

• Evaluated management’s assessment of the external specialist.

• Examined the underlying data used in determining the allowance for credit losses, including forecasts provided by the external specialist.

• Evaluated the Company’s waterfall calculations and the application of forecasted cash receipts.

We have served as the Company's auditor since 2022.

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Cash and cash equivalents

Accounts receivable (net of allowance for credit losses of $ 132 in 2023 and $ 122 in 2022)

Current portion of notes receivable (net of allowance for credit losses of $ 650 in 2023 and $ 0 in 2022)

Accounts receivable, net

Current portion of notes receivable, net

Inventory – equipment

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Non-current portion of notes receivable, net

Equity method investments

Equity method investments, net

Right-of-use assets

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Total liabilities

Commitments and contingencies (Note 12)

Commitments and contingencies (Note 12 and Note 15)

Stockholders’ equity:

Preferred stock, $ 10.00 par value, authorized 10,000,000 shares;

issued and outstanding 563 and 565 shares of Series N as of December 31, 2023 and December 31, 2022;

respectively, with liquidation preference over common stockholders equivalent to $ 1,000 per share

issued and outstanding 563 shares of Series N as of both December 31, 2024 and December 31, 2023, with liquidation preference over common stockholders equivalent to $ 1,000 per share

Common stock, $ 0.01 par value, authorized 300,000,000 shares;

and outstanding 37,157,616 shares as of December 31, 2023 and 36,932,177 shares as of December 31, 2022

37,380,944 and 37,157,616 shares as of December 31, 2024 and December

31, 2023, respectively;

and outstanding 35,718,361 and 36,761,441 shares

as of December 31, 2024 and December 31, 2023, respectively

Additional paid-in capital

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Interest expense, net

Income before income tax expense (benefit)

Income tax expense (benefit)

Income before income tax expense

Income tax expense

Weighted average common shares outstanding – basic

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Balance as of December 31, 2022

Cumulative change in accounting principle (Note 2)

Issuance of common stock from stock option awards

Issuance of restricted common stock

Issuance of common stock due to conversion of Series N Preferred stock

Stock-based compensation expense

1 unchanged sentence

Balance as of December 31, 2023

Cumulative change in accounting principle (Note 2)

Issuance of common stock from stock option awards

Issuance of restricted common stock

Issuance of common stock due to conversion of Series N Preferred stock

Stock-based compensation expense

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Adjustments to reconcile net income to net cash provided by operating

Amortization of deferred issuance costs and fees

Amortization of deferred issuance costs and fees, net

Earnings of equity method investments

Noncash credit loss

Noncash lease expense

Noncash credit loss (recovery) expense

Amortization of right-of-use assets

Depreciation and amortization

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Cash received on transfer of notes receivable to partners

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

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Repurchase of common stock

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net change in cash and cash equivalents

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Cash paid for interest

Noncash change in right-of-use assets

Noncash change in lease liabilities

Noncash transfer of notes receivable to equity method investments

Noncash change in lease liabilities and right-of-use assets

The accompanying notes are an integral part of these consolidated financial statements.

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These consolidated financial statements include the accounts of Heritage Global Inc.

together with its subsidiaries, including Heritage Global Partners, Inc.

("HG") together with its subsidiaries, including Heritage Global Partners, Inc.

(“HGP”), National Loan Exchange Inc.

(“NLEX”), Heritage Global LLC (“HG LLC”), Heritage Global Capital LLC (“HGC”), and Heritage ALT LLC (“ALT”).

These entities, collectively, are referred to as “HG,” the “Company,” “we” or “our” in these consolidated financial statements.

These entities, collectively, are referred to as the “Company,” “we” or “our” in these consolidated financial statements.

These consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and include the assets, liabilities, revenues, and expenses of all subsidiaries over which HG exercises control.

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The Company’s Board of Directors authorized a share repurchase program on May 5, 2022 (“Repurchase Program”), which permits the Company to purchase up to an aggregate of $ 4.0 million in common shares over a three-year period ending in June of 2025.

On September 13, 2024 the Company's Board of Directors approved an amendment to the Repurchase Program which increased the authorized aggregate amount of common shares the Company may repurchase to an aggregate of $ 6.0 million in common shares.

The Company repurchased 1,266,408 shares in the open market for a purchase price of approximately $ 2.2 million during the year ended December 31, 2024.

As of December 31, 2024, the Company had approximately $ 3.0 million in remaining aggregate dollar value of shares that may be purchased under the program.

During the year ended December 31, 2023 there were 152,707 shares repurchased in the open market for approximately $ 0.4 million and during the year ended December 31, 2022 there were 243,468 shares repurchased in the open market for approximately $ 0.4 million .

Note 2 – Summary of Significant Accounting Policies

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As of December 31, 2024, the Company held a gross balance of investments in notes receivable of $ 30.2 million, recorded in both notes receivable and equity method investments.

The Company's portfolio includes one borrower’s notes receivable balance of approximately $ 23.8 million, representing 62 % of the Company's total notes receivable balance as of December 31, 2023, down from 82 % as of December 31, 2022.

The Company does not intend to hold highly concentrated balances due from any one borrower as part of its long-term strategy but will in the short term have concentration risk on its path to an established and more diversified portfolio.

The Company's portfolio includes one borrower’s gross notes receivable balance of approximately $ 22.2 million, representing 74 % of our total gross notes receivable balance as of December 31, 2024, as compared to 62 % as of December 31, 2023.

T he Company does not intend to hold highly concentrated balances due from one borrower as part of its long-term strategy but will in the short term have concentration risk on its path to an established and diversified portfolio.

The Company does not evaluate concentration risk solely based on balance due from specific borrowers, but also considers the number of portfolio purchases, type of charged off accounts within the portfolio, and the seller of the portfolio when determining the overall risk.

Of the balance due from one borrower of $ 23.8 million, there are 11 distinct loan agreements.

The underlying portfolio of accounts are diversified throughout FinTech loans, installment loans and credit card accounts, and further diversified amongst six separate sellers of these charged off portfolios.

Of the balance due from one borrower of $ 22.2 million, there are 11 distinct loan agreements, the underlying portfolio of accounts are diversified throughout FinTech loans, installment loans and credit card accounts, and further diversified amongst six separate sellers of these charged off portfolios.

The Company mitigates this concentration risk by requiring, and monitoring, security from each borrower consisting of their charged off and nonperforming receivable portfolios.

The Company engages in a due diligence process that leverages its valuation expertise and knowledge in the underlying nonperforming receivable portfolios marketplace.

In the event of default, the Company is entitled to call the unpaid interest and principal balances and receive all net collections directly.

The Company may also recover its investment by engaging a third party to collect on the underlying charged off or nonperforming receivable portfolio or the underlying portfolio can be sold through the Company's Brokerage segment.

The Company engages in a due diligence process that leverages our valuation expertise, knowledge and experience in the underlying nonperforming receivable portfolios marketplace.

In the event of default, we are entitled to call the unpaid interest and principal balances and receive all net collections directly.

In certain cases, the Company's recovery options may be subject to concurrence of the originator or other prior holder of the assets.

From inception of the specialty lending program through December 31, 2023, the Company has incurred no actual credit losses.

Loan Restructuring

In October 2023, the Company became aware that its largest borrower was experiencing financial difficulty.

In November 2023, the Company's subsidiary HGC and its affiliated joint ventures restructured loans with this borrower by restructuring certain outstanding loans (the "Restructured Loans") with an amortized cost basis of $ 51.6 million or 59 % of the amortized cost basis of the total charged-off asset portfolio loans of HGC and its affiliated joint ventures.

The Company’s share of the Restructured Loans amortized cost basis is $ 22.2 million, or 57 % of HGC’s share of the loan book.

On the Company's financial statements, $ 8.4 million is classified as notes receivable and $ 13.8 million is classified as equity method investments.

All Restructured Loans were restructured by term extension, adding a weighted average of 1.5 years to the life of the Restructured Loans, which reduced the monthly payments for the borrower.

HGC closely monitors the loans and the borrower’s financial condition and evaluates the borrower and loans for credit risk on a quarterly basis.

As of September 30, 2023, the Company increased its allowance for credit losses related to its largest borrower experiencing financial difficulties.

This resulted in an allowance for credit losses on the loans later restructured of $ 1.0 million as of September 30, 2023.

Management reevaluated the potential credit loss related to the Restructured Loans again at year-end and as of December 31, 2023, the Company’s allowance for credit losses related to the Restructured Loans was $ 1.1 million, of which $ 0.4 million was classified as notes receivable and $ 0.7 million was recorded within equity method investments .

From the inception of the specialty lending program through December 31, 2024, the Company has incurred no actual credit losses.

Cash and cash equivalents

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Notes receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off and nonperforming receivable portfolios, which is considered the only loan category or segment to be reported under the applicable accounting guidance.

The Company’s notes receivable balance consists of loans to buyers of charged-off and nonperforming receivable portfolios through HGC and financing of laboratory equipment sales through ALT.

These loans are measured at historical costs and reported at their outstanding principal balances net of any unamortized deferred fees and costs on originated loans.

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ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC Topic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, which provides authoritative guidance for the accounting of the Company’s notes receivable.

With respect to smaller reporting companies, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The adoption of ASU 2016-13 resulted in an adjustment to retained earnings on January 1, 2023 of $ 0.3 million, and established an expected credit loss reserve against our receivables related to loans outstanding, including those held within equity method investments.

The increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio.

The table below summarizes the allowance for credit loss balance as of, and the changes made during the years ending December 31, 2024 and 2023 (in thousands):

Accounts Receivable

Notes Receivable

Equity Method Investments

Balance as of January 1, 2023

Provision for credit losses

Balance as of December 31, 2023

(Recovery) provision for credit losses

Balance as of December 31, 2024

Accounts receivable

The Company carries accounts receivable at the face amounts less an allowance for estimated credit losses.

As of December 31, 2022, an allowance for doubtful accounts of $ 0.1 million had been recorded.

The Company estimates its reserve for credit losses using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

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Consequently, historical accounts receivable credit losses are nearly zero, which provides the starting point for management’s assessment of the reserve for credit losses for its accounts receivable.

The Company elected to base its estimation of expected credit losses for accounts receivable on historical credit loss experience.

However, in assessing relevant information including its assessment of current conditions, management determined that a credit loss allowance slightly higher than its historical data would indicate is appropriate for certain of its revenue generating activities.

As of December 31, 2022 and under previously applicable GAAP, the Company recorded a $ 0.1 million allowance for doubtful accounts for accounts receivable.

Using a revised basis for estimation under ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”), the Company increased the reserve for credit losses against its accounts receivable balances by approximately $ 10,000 .

Consequently, to reflect the cumulative effects of the adoption of ASC 326, which requires the application of a credit loss model based prospectively on current expected credit losses (CECL), the Company recorded an additional reserve for credit losses and an increase to accumulated deficit of approximately $ 10,000 on the January 1, 2023 condensed consolidated balance sheets, and the balance of the reserve for credit losses was therefore $ 0.1 million as of January 1, 2023.

As of December 31, 2023 the reserve for credit losses related to accounts receivable was approximately $ 0.1 million.

The Company estimates its expected credit losses for accounts receivable based on historical credit loss experience, its assessment of current conditions, and other relevant available information from internal and external sources on a quarterly basis.

Notes receivable

Under ASC 326, the Company elected to evaluate notes receivable as a single pool, for individual notes receivable and borrowers with similar risk characteristics.

Under ASC 326, the Company evaluates notes receivable as a single pool, for individual notes receivable and borrowers with similar risk characteristics.

Notes receivable and borrowers that do not share risk characteristics are evaluated on an individual basis.

Management evaluates the Company's notes receivables related to financing laboratory equipment sales within the notes receivable pool.

Management estimates the reserve balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

2 unchanged sentences

Additionally, since the Company began recording notes receivable on the condensed consolidated balance sheets, the Company has recorded no actual credit losses to notes receivable.

Lacking historical internal data upon which to base a reserve for credit losses to notes receivable, the Company, under ASC 326, elected to base its reserve on external credit loss experience data.

Lacking historical internal data upon which to base a reserve for credit losses to notes receivable, the Company, under ASC 326, estimates its reserve using external credit loss experience data.

Management observes that the Company's notes receivable are similar in character to transactions undertaken by smaller banking institutions.

The Company elected to base its estimation of expected credit losses on the Scaled Current Expected Credit Loss (CECL) Allowance Loss Estimator ("SCALE rate") available from the Federal Reserve, which was 1.3231 % as of January 1, 2023.

The Company estimates its expected credit losses based on the Scaled Current Expected Credit Loss (CECL) Allowance Loss Estimator ("SCALE rate") available from the Federal Reserve.

The SCALE rate methodology is endorsed by the FASB and the Conference of State Bank Supervisors.

Management determined under ASC 326 that the SCALE rate, a generally applicable rate, may be appropriately adjusted by its assessment of observable facts and relevant circumstances indicating that the factors analyzed in the determination of the SCALE rate may not conform to the Company's operations and borrower assessments.

However, in conducting its assessment of these factors, management concluded that no adjustment to the SCALE rate is warranted as of January 1, 2023.

As of December 31, 2022 and under previously acceptable GAAP, the Company recorded no reserve for credit losses to notes receivable.

Using a revised basis for estimation under ASC 326, management determined the cumulative reserve for credit losses of $ 0.2 million was appropriate for notes receivable recorded on the consolidated balance sheet as of December 31, 2022.

Consequently, to reflect the cumulative effects of the adoption of ASC 326, the Company recorded the reserve for credit losses and an increase to accumulated deficit of $ 0.2 million on the January 1, 2023 consolidated balance sheet, and balance of the reserve for credit losses was therefore $ 0.2 million as of January 1, 2023.

As of December 31, 2023, the SCALE rate increased to 1.4183 % and the Company's credit loss rate specific to notes receivable was 3.6 %.

As of December 31, 2024, the SCALE rate decreased to 1.3644 % from 1.4183 % as of December 31, 2023, and the Company's credit loss allowance rate specific to notes receivable was 3.7 %.

The increase over the SCALE rate was due to both the above mentioned risks presented by a concentrated balance with a single borrower and declining collections industry-wide.

As of December 31, 2023 the Company has recorded an allowance for credit losses related to notes receivable outstanding of $ 0.7 million.

In order to evaluate the need for an adjustment to the receivable balance related to credit losses, or impairment, the Company performs a review of all outstanding loan receivables on a quarterly basis to determine if any indicators exist that suggest the loan will not be fully recoverable and assess the credit quality of the loan receivables.

This review includes monthly and cumulative key performance indicators for each loan and borrower, as well as evaluation of borrower's financial condition.

The Company has one class of financing receivables with similar credit risk.

The only specific breakout to the credit risk policy is if a borrower is experiencing financial difficulty.

As described above, the Company notes that one of its borrowers was experiencing financial difficulty.

All of the loans comprising this borrower’s $ 23.8 million loan balance outstanding at December 31, 2023 were originated or restructured during 2023.

Of the loan balance outstanding at December 31, 2023, originations on loans to the Company's other borrowers were $ 13.6 million and $ 1.0 million in 2023 and 2022, respectively.

Equity method investments

Upon adoption of ASC 326 on January 1, 2023, the Company evaluated the receivable balances held by its affiliated joint ventures and recorded an adjustment to reduce earnings from equity method investments by the Company's share of the allowance for credit losses recorded on the joint ventures’ books of $ 0.2 million.

Similar to notes receivable, the loans held by the joint ventures are evaluated on a quarterly basis to determine if an adjustment to the allowance for credit losses is needed.

As of December 31, 2023, the SCALE rate increased to 1.4183 % and the credit loss rate specific to equity method investments was 4.3 %.

As of December 31, 2024, the SCALE rate decreased to 1.3644 % from 1.4183 % as of December 31, 2023, and the credit loss rate specific to equity method investments was 4.5 %.

The increase over the SCALE rate was due to both the above mentioned risks presented by a concentrated balance with a single borrower and declining collections industry-wide.

As of December 31, 2023, the Company has recorded an allowance for credit losses related to its equity method investments of $ 0.9 million.

Inventory - equipment

The Company’s inventory consists of assets acquired for resale, which are normally expected to be sold within a one-year operating cycle.

The Company’s inventory consists of assets acquired for resale or auction.

Assets acquired to be sold at auction are generally expected to be sold within 90 days while assets acquired for refurbishment and resale are generally expected to be sold within a two-year operating cycle.

All inventory is recorded at the lower of cost or net realizable value.

Employee retention credit

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including the Employee Retention Credit ("ERC"), which is a refundable tax credit against certain employment taxes.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.

As an employer that carried on a trade or business during calendar year 2020 and whose gross receipts were less than 80 % in relation to comparable periods in 2019, the Company is eligible for the refundable ERC under the Cares Act for the quarters ended June 30, 2021 and September 30, 2021.

As the Company has incurred certain employment taxes during 2021 and have yet to receive the refundable ERC, the Company has accounted for the credit as a loss recovery under ASC Topic 410, Asset Retirement and Environmental Obligations (by analogy), which indicates that a claim for recovery should be recognized only when the claim is probable as it is defined in ASC Topic 450, Contingencies .

The Company has determined that the claim is in alignment with applicable regulatory criteria, the amounts are known and realizable, and refundable ERC is probable.

As of December 31, 2023, we have received $ 0.7 million related to the employee retention credit.

$ 0.6 million was recorded as a receivable as of December 31, 2022, and $ 0.1 million was offset against selling, general and administrative costs on the statement of income in 2023.

Equity method investments

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Goodwill, in addition to being tested for impairment annually, is tested for impairment at interim periods if an event occurs or circumstances change such that it is more likely than not that the carrying amount of goodwill may be impaired.

No impairment charges were necessary during 2024 and 2023.

All of the Company’s goodwill relates to its acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, and is discussed in more detail in Note 9.

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In 2014, as a result of incurring losses in previous years, the Company recorded a valuation allowance against all of its net deferred tax assets.

In the fourth quarter of 2022, the Company recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $ 9.4 million as it was more likely than not that a significant portion our net operating loss carryforwards will be utilized.

In the fourth quarter of 2023, the Company further reduced the valuation allowance by $ 2.2 million, resulting in a net deferred tax asset balance of approximately $ 9.1 million, to align with the Company's updated forecasts.

In 2023, the Company recorded a reduction to the valuation allowance of $ 2.2 million resulting in a net deferred tax asset balance of approximately $ 9.1 million as it was more likely than not that a significant portion our net operating loss carryforwards will be utilized.

In 2024, the Company increased the valuation allowance by $ 1.3 million, resulting in a net deferred tax asset balance of approximately $ 6.0 million, to align with the Company's updated forecasts.

The change to the valuation allowance was primarily due to the application of our nonaccrual loan policy, which resulted in a decrease to our estimates related to the utilization of net operating loss carryforwards in 2025.

For further discussion of our income taxes, see Note 13.

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Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and the Company’s “contract liability”.

As of December 31, 2023, the deferred revenue balance was approximately $ 0.5 million and is recorded within accounts payable and accrued liabilities on the consolidated balance sheet.

As of December 31, 2024, 2023 and 2022, the deferred revenue balance was approximately $ 0.6 million, $ 0.5 million and $ 0.4 million, respectively, and is recorded within accounts payable and accrued liabilities on the consolidated balance sheet.

The deferred revenue balance is primarily related to customer deposits on asset sales within the Refurbishment & Resale segment.

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In general, the Joint Ventures apply the same revenue recognition and other accounting policies as the Company.

Through our Specialty Lending segment, the Company provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

Through its Specialty Lending segment, the Company provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

The Company recognizes revenue generated by lending activity in accordance with ASC 310.

Fees collected in relation to the issuance of loans includes loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

The loan origination fees are offset with any direct origination costs and are deferred upon issuance of the loan and amortized over the lives of the related loans, as an adjustment to interest income.

The interest method is used to arrive at a periodic interest cost (including amortization) that will represent a level effective rate on the sum of the face amount of the debt and (plus or minus) the unamortized premium or discount and expense at the beginning of each period.

The monitoring fees and the backend profit share are considered a separate earnings process as compared to the origination fees and interest income.

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The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized.

Through its Refurbishment and Resale segment, the Company offers financing on its standard laboratory equipment sales.

The Company recognizes revenue upon shipment of its financed products in accordance with ASC 606.

The Company records a loan receivable for the unpaid balance of the order.

A loan amortization table is created upon shipment outlining the principal and interest income portion of each future payment.

These loans are classified as held-for-investment and accounted for under the guidelines of ASC 310.

For both the Specialty Lending and Refurbishment and Resale segments, loan origination fees are offset with any direct origination costs and are deferred upon issuance of the loan and amortized over the lives of the related loans, as an adjustment to interest income.

Nonaccrual Loans

The Company determines a loan to be in a default status when the minimum payment amount has not been received within the grace period of the payment due date.

The status of default does not solely trigger nonaccrual loan status.

The Company considers quantitative and qualitative factors when evaluating a loan in default status to determine the likelihood of recovering the outstanding principal balance and contractual interest payments.

The Company also monitors the financial standing and performance of its borrowers on an ongoing basis and regularly updates the collection forecasts for the underlying charged off or nonperforming receivable portfolios related to each outstanding loan.

If the Company determines (1) it is not probable that the projected cash flows expected from the borrower’s collection efforts on the underlying charged off or nonperforming receivable portfolio will be sufficient to satisfy all of the outstanding principal balance and contractual interest payments, and (2) it is not probable that the borrower will be able to meet the minimum required principal and interest payments through other operational cash flows, the Company will place the loans on nonaccrual status.

If, based on its analysis, the Company elects to maintain accrual status after initial payment default, the loan will generally be placed on nonaccrual status if principal or interest payments become 90 days past due.

The accrual of interest is generally discontinued and all accrued interest is reversed against interest income when a loan is placed on nonaccrual status.

Interest received on such loans is accounted for using the cost-recovery or the cash-basis method, until qualifying for return to accrual.

Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero.

Under the cash-basis method, interest payments received by the creditor are recorded as interest income provided the amount does not exceed the amount that would have been earned at the loan’s original effective interest rate.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and all remaining principal and interest payments are deemed probable.

In November 2023, the Company and its affiliated Joint Ventures restructured loans (the "Restructured Loans") with its largest borrower by restructuring certain outstanding loans with an amortized cost basis of $ 51.6 million or 59 % of the amortized cost basis of the total charged-off asset portfolio loans of our and our affiliated Joint Ventures.

The Company's share of the Restructured Loans amortized cost basis was $ 22.2 million, or 57 % of HGC's share of the loan book.

All Restructured Loans were restructured by term extension, adding a weighted average of 1.5 years to the life of the Restructured Loans, which reduced the monthly payments for the borrower.

As of September 30, 2023, we increased the allowance for credit losses related to our largest borrower experiencing financial difficulties.

This resulted in an allowance for credit losses on the loans later restructured of $ 1.0 million as of September 30, 2023.

As of December 31, 2024, the Company's allowance for credit losses related to the Restructured Loans was $ 1.1 million, of which $ 0.3 million was classified as notes receivable and $ 0.8 million was recorded within equity method investments.

The Company's largest borrower continues to collect on the underlying charged off and nonperforming consumer loan portfolios and remit net collections to the Company and senior lenders, however this borrower's remittance in June of 2024 did not meet the minimum required payment amount.

The Company has determined that (1) it is not probable that the projected cash flows expected from the borrower’s collection efforts on the underlying charged off or nonperforming receivable portfolio will be sufficient to satisfy all of the outstanding principal balance and contractual interest payments, and (2) it is not probable that the borrower will be able to meet the minimum required principal and interest payments through other operational cash flows.

While the Company continues to work closely with the borrower and its senior lenders in an effort to mitigate the default in an efficient and effective manner, the impacted loans have been placed in nonaccrual status beginning in June 2024.

In addition, there was a balance of $ 1.5 million from the Company's share of other loans within its affiliated Joint Ventures that are impacted by the default with its largest borrower and have been placed in nonaccrual status in June 2024.

The Company's share of payments received from this borrower, including interest, will be applied against the outstanding loan balance.

As of December 31, 2024, the amortized cost basis of loans in nonaccrual status was $ 23.5 million, of which $ 5.3 million is recorded within notes receivable and $ 18.2 million is recorded within equity method investments.

There were no loans in nonaccrual status as of December 31, 2023.

Cost of services revenue and asset sales

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The Company expenses advertising costs in the period in which they are incurred.

Advertising and promotion expense included in selling, general and administrative expense for the years ended December 31, 2023 and 2022, was $ 0.6 million and $ 0.4 million, respectively.

Future accounting pronouncements

Advertising and promotion expense included in selling, general and administrative expense for both the years ended December 31, 2024 and 2023, was $ 0.6 million.

Recently adopted accounting pronouncements

In November 2023,the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280):

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ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption.

Early adoption is permitted.

The Company is evaluating the impact of ASU 2023-07 on its consolidated financial statements and the related disclosures.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740):

The Company adopted ASU 2023-07 as of December 31, 2024 and as a result has expanded its segment reporting disclosures.

See note 17 for further details.

Future accounting pronouncements

On December 14, 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740):

Improvements to Income Tax Disclosures" ("ASU 2023-09"), which requires enhanced annual disclosures with respect to the rate reconciliation and income taxes paid information.

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Early adoption is permitted.

The Company is evaluating the impact of ASU 2023-07 on its consolidated financial statements and the related disclosures.

The Company anticipates that ASU 2023-09 will have no accounting impact but will require additional disclosure related to certain income tax calculations.

On November 4, 2024, the FASB issued ASU 2024-03, "Reporting Comprehensive Income—Expense Disaggregation Disclosures" ("ASU 2024-03") which requires disaggregated disclosure of income statement expenses for public business entities.

The ASU does not change the expense captions an entity presents on the face of the income statement;

rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements.

ASU 2024-03 is effective for all public business entities for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027.

Early adoption is permitted.

The Company anticipates that ASU 2024-03 will have no accounting impact but will require additional disclosure to further detail certain income statement expense information.

Note 3 – Notes Receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off and nonperforming receivable portfolios, which resulted in a total balance of approximatel y $ 17.5 million, net of unamortized deferred fees and costs on originated loans and the allowance for credit losses as of December 31, 2023.

The activity during 2023 includes the additional investment in notes receivable net of transfers to partners of approximately $ 21.0 million, principal payments made by borrowers of approximately $ 11.9 million, adjustments to the deferred fees and costs balance of approximately $ 0.1 million, and the allowance for credit losses totaling approximately $ 0.7 million.

The Company’s notes receivable, net consists of investments in loans to buyers of charged-off and nonperforming receivable portfolios through HGC and financing of laboratory equipment sales through ALT.

As of December 31, 2024 and 2023, the Company’s outstanding notes receivable balance related to loans to buyers of charged-off and nonperforming receivable portfolios, net of unamortized deferred fees and costs on originated loans and adjusted for the allowance for credit losses, was $ 9.6 million and $ 17.5 million, respectively.

The activity during 2024 includes the additional investment in notes receivable of approximately $ 5.0 million, which was offset by principal payments made by borrowers of approximately $ 10.8 million and noncash transfer of notes receivable to equity method investments of approximately $ 2.5 million.

As of December 31, 2024, the Company’s outstanding notes receivable balance related to financing of laboratory equipment sales, net of unamortized deferred fees and costs on originated loans and adjusted for the allowance for credit losses, was $ 0.4 million.

There was no notes receivable balance related to financing of laboratory equipment sales as of December 31, 2023.

The activity during 2024 includes investment in notes receivable of approximately $ 0.6 million, which was offset by principal payments made by purchasers of $ 0.3 million and an immaterial amount of deferred financing fees, and allowance for credit losses.

The table below shows the Company’s lending activity:

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Investment in notes receivable

Transfer of notes

Noncash transfer of notes receivable to equity method investments

Principal repayments

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Deferred financing fees and costs, net

Allowance for credit loss

Allowance for credit losses

Notes receivable, net, end of year

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During 2023, the Company recorded a provision for credit losses in selling, general and administrative expense on the consolidated statement of income of approximately $ 0.5 million.

As of December 31, 2023, the allowance for credit losses was approximately $ 0.7 million.

An allowance for credit losses was no t recorded as of December 31, 2022.

The allowance for credit losses in 2023 was primarily driven by weakening economic conditions for the underlying charged-off and nonperforming portfolio collections and increases in loan balances.

As of December 31, 2024 and 2023, the allowance for credit losses was approximately $ 0.4 million and $ 0.7 million, respectively.

The change in allowance for credit losses in 2024 was primarily driven by decreases in loan balances.

The Company's credit loss reserve rate specific to its notes receivable balance as of December 31, 2024 was 3.7 %.

As of December 31, 2024, the Company has recorded no actual credit losses on notes receivable.

As of December 31, 2024, the amortized cost basis of notes receivable in nonaccrual status was approximately $ 5.3 million.

There were no notes receivable in nonaccrual status as of December 31, 2023.

Note 4 – Lessor Arrangement

In June 2019, the Company, with certain partners, entered into agreements to lease, with a purchase option, a fully functional manufacturing building, including all machinery and equipment held within.

The assets under lease relate to the Company’s purchase, with certain partners, of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018.

The lessee is obligated to make monthly lease payments over a ten year period, totaling approximately $ 13.2 million for the real estate portion, and monthly lease payments over a six year period totaling approximately $ 9.7 million for the machinery and equipment.

The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments has been recognized as revenue and a lease receivable as of the effective date.

The real estate portion of the arrangement is held by CPFH LLC, the joint venture, and is accounted for under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the income statement.

In December 2023, the Company, with certain partners making up the KNFH II LLC joint venture, entered into a purchase and sale agreement for a pharmaceutical plant in Fenton, Missouri, including land, a building, and all machinery and equipment held within with a purchase price of $ 8.0 million.

In April 2024, KNFH II LLC entered into a purchase and sale agreement for the machinery and equipment within the pharmaceutical plant with a purchase price of $ 5.0 million.

Additionally, KNFH II LLC entered into a lease agreement for the lease of the real estate assets;

the building and land.

This lease agreement includes a purchase option with a purchase price of $ 8.0 million that is expected to be exercised by the lessee.

The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments, including the purchase option, has been recognized as revenue and a lease receivable as of the effective date.

As of December 31, 2024, the Company has recognized approximately $ 1.3 million in earnings from equity method investments related to the Company’s share of net income attributable to KNFH II LLC.

The Company accounts for the transaction under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the income statement.

Refer to Note 5 for further information.

The machinery and equipment portion of the arrangement is jointly owned by all the partners of CPFH LLC, apart from the joint venture entity.

Therefore, the Company has derecognized the leased asset of approximately $ 0.9 million and recognized as revenue approximately $ 1.2 million, which represents the present value of future lease payments and a lease receivable included in the accounts receivable line item on the balance sheet, consistent and reflective of its business model for asset sales.

The purchase option for both the real estate and machinery and equipment could be exercised at any time on or after December 1, 2019, and before May 31, 2021, for a total purchase price of $ 20.0 million, of which $ 12.0 million and $ 8.0 million are allocated to the real estate and machinery and equipment, respectively.

On May 31, 2021, the lessee delivered written notice to exercise the purchase option.

The lessee confirmed that its intention was to exercise the option, however, was unable to complete the transaction before the purchase option’s original expiration date of November 30, 2021.

CPFH LLC and lessee negotiated an amendment to the purchase option in March of 2022, increasing the purchase price for the real estate to $ 15.0 million.

On June 30, 2022, the lessee exercised its purchase option by completing the real estate transaction and terminating the lease.

Note 5 – Equity Method Investments

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In accordance with ASC 326, the Company performs a review of notes receivable on a quarterly basis for each of its specialty lending investments.

For the year ended December 31, 2023, the Company’s share of the joint venture’s provision for credit losses was approximately $ 0.7 million.

As of December 31, 2023, the Company's share of the allowance for credit losses was approximately $ 0.9 million, representing a credit loss rate of 4.3 % specific to its equity method investments, which was primarily related to HGC Origination I LLC and HGC MPG Funding LLC.

The provision for credit losses was primarily driven by weakening economic conditions for the underlying charged-off and nonperforming portfolio collections and increases in loan balances.

For the year ended December 31, 2024, the Company’s share of the joint venture’s provision for credit losses was approximately $ 1.0 million, representing a credit loss rate of 4.5 % specific to its equity method investments, which was primarily related to HGC Origination I LLC and HGC MPG Funding LLC.

The provision for credit losses was primarily driven by increases in loan balances.

As of December 31, 2023, the Company's share of the allowance for credit losses was approximately $ 0.9 million, representing a credit loss rate of 4.3 % specific to its equity method investments.

As of December 31, 2024, the Company has recorded no actual credit losses through its equity method investments.

As of December 31, 2024, the amortized cost basis of the Company's share of loans in nonaccrual status recorded in equity method investments was $ 18.3 million.

Based on the nature of our equity method investments, the joint venture entities' revenues and gross profit are not materially different and furthermore, operating income and net income have no material differences.

The table below details the Company’s joint venture revenues and earnings (in thousands):

The table below details the Company’s joint venture revenues, earnings, assets, and liabilities as of December 31, 2024 (in thousands):

Year Ended December 31, 2024

Revenues and gross profit:

HGC Funding I LLC and Origination I LLC

HGC MPG Funding LLC

Total revenues and gross profit

Operating income (loss) and net income (loss):

HGC Funding I LLC and Origination I LLC

HGC MPG Funding LLC

Total operating income (loss) and net income (loss)

The table below details the summarized components of assets and liabilities of the Company’s joint ventures (in thousands):

HGC Funding I LLC and Origination I LLC

HGC MPG Funding LLC

Operating income

Net income (loss)

The table below details the Company’s joint venture revenues, earnings, assets, and liabilities as of December 31, 2023 (in thousands):

Year Ended December 31, 2023

HGC Funding I LLC and Origination I LLC

HGC MPG Funding LLC

Total liabilities

Operating income

Net income (loss)

Note 6 – Earnings per Share

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Diluted weighted average common shares outstanding

For both 2023 and 2022 there were potential common shares totaling approximately 0.8 million that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

For 2024 and 2023 there were potential common shares relating to common stock options totaling approximately 0.9 million and 0.8 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

Note 7 – Leases

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It provides for an initial monthly base rent of $ 9,412 , which increases on an annual basis to $ 9,914 per month in the final year.

On September 23, 2024, the Company amended its Del Mar office lease with OF 09 Hacienda, LLC, extending the term of the agreement by 24 months to February 28, 2027 and setting rent amounts for the new term.

The amended Del Mar office lease provides for an initial monthly base rent of $ 14,660 beginning March 1, 2025 and increases on an annual basis to $ 15,099 per month in the final year.

The right-of-use assets and lease liabilities for each location are as follows (in thousands):

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For leases commencing after January 1, 2019 the Company uses its incremental borrowing rate at time of commencement.

On September 1, 2022 and June 1, 2023, the Company’s incremental borrowing rate was 5.50 %.

and 7.25 %, respectively.

The weighted average remaining lease term for operating leases is 4.1 years and the weighted average discount rate is 5.35 %.

On September 1, 2022, June 1, 2023, and September 23, 2024, the Company’s incremental borrowing rate was 5.50 %, 7.25 %, and 6.25 %, respectively.

The weighted average remaining lease term for operating leases is 3.2 years and the weighted average discount rate is 5.50 % as of December 31, 2024.

The weighted average remaining lease term for operating leases was 4.1 years and the weighted average discount rate was 5.35 % as of December 31, 2023.

Lease expense for leases determined to be operating leases is recognized on a straight-line basis over the lease term.

For 2023 and 2022, lease expense was approximately $ 0.8 million and $ 0.7 million, respectively.

Cash paid for operating leases in both 2023 and 2022 was $ 0.8 million.

For both 2024 and 2023, lease expense was approximately $ 0.8 million.

Cash paid for operating leases in 2024 and 2023 was $ 0.9 million and $ 0.8 million, respectively.

The Company had no short-term or variable leases in 2024 or 2023.

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Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis.

The life of the building acquired in connection of the ALT purchase transaction was determined to be 25 years.

The life of the building acquired in connection with the ALT purchase transaction was determined to be 25 years.

Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter.

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Property and equipment, net

Depreciation expense related to property and equipment was $ 0.1 million for both the years ended December 31, 2023 and 2022.

Depreciation expense related to property and equipment for the years ended December 31, 2024 and 2023 was $ 0.2 million and $ 0.1 million, respectively.

Note 9 – Intangible Assets and Goodwill

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The details of identifiable intangible assets as of December 31, 2024 and 2023 are shown below (in thousands except for lives):

Carrying Value

Amortized & Unamortized Intangible Assets

Original Life

Remaining Life

Carrying Value

Amortized Intangible Assets

Trade Name (HGP)

Trade Name (ALT)

Vendor Relationship (ALT)

Unamortized Intangible Assets

Trade Name (NLEX)

December 31, 2022

Carrying Value

December 31, 2023

Carrying Value

Amortized Intangible Assets

Customer Relationships (HGP)

December 31, 2023

Trade Name (HGP)

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Vendor Relationship (ALT)

Unamortized Intangible Assets

Trade Name (NLEX)

Amortization expense during each of 2023 and 2022 was $ 0.4 million.

Unamortized Trade Name (NLEX)

Amortization expense during both 2024 and 2023 was $ 0.4 million.

No significant residual value is estimated for these intangible assets.

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As the Company’s business expands, more comprehensive credit assessments may be required.

The Company's allowance for doubtful accounts was approximately $ 0.1 million as of December 31, 2022.

In accordance with ASC 326, the Company performs a review of accounts receivables on a quarterly basis.

During the year ended December 31, 2023, the Company recorded no material adjustments for credit losses in selling, general and administrative expense on the condensed consolidated statement of income related to accounts receivable.

As of December 31, 2023, the allowance for credit losses was approximately $ 0.1 million.

During the years ended December 31, 2024 and 2023, the Company recorded no material adjustments for credit losses in selling, general and administrative expense on the condensed consolidated statement of income related to accounts receivable.

As of both December 31, 2024 and 2023, the allowance for credit losses related to accounts receivable was approximately $ 0.1 million.

Accounts payable and accrued liabilities

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December 31, 2023

Current portion of third party debt:

2021 credit facility

2023 credit facility

Total third party debt, current

Non-current portion of third party debt:

2023 credit facility

Total third party debt, non-current

Total third party debt

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On May 26, 2023, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Modification Agreement”), effective as of May 26, 2023, by and between the Company and Lender.

The Modification Agreement modifies and reaffirms the 2021 Credit Facility to, among other things, extend the maturity date, modify the applicable interest rate, and further modify the loan covenants.

The Modification Agreement modified and reaffirmed the 2021 Credit Facility to, among other things, extend the maturity date, modify the applicable interest rate, and further modify the loan covenants.

The maturity date was modified to October 27, 2024 .

The applicable interest rate spread and floor was modified to be the Wall Street Journal Prime rate plus 1.00 % (such rate not to be less than 6.75 % per annum).

Additionally, the Modification Agreement modifies the loan covenants to provide that the Company shall pay the Lender an annual unused line fee, payable on the earlier of (a) bi-annually every six (6) months in arrears, within ten (10) days thereof, commencing on October 27, 2023, or (b) the payment in full of the 2021 Credit Facility, but only if the average balance of the 2021 Credit Facility for the respective nine months is below $ 5.0 million.

Additionally, the Modification Agreement modified the loan covenants to provide that the Company shall pay the Lender an annual unused line fee, payable on the earlier of (a) bi-annually every six (6) months in arrears, within ten (10) days thereof, commencing on October 27, 2023, or (b) the payment in full of the 2021 Credit Facility, but only if the average balance of the 2021 Credit Facility for the respective nine months is below $ 5.0 million.

The availability of additional draws under the 2021 Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including default, insolvency or bankruptcy, material adverse change in financial condition and any guarantor’s attempt to revise its guarantee.

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The 2021 Credit Facility contains certain customary financial covenants and negative covenants that, among other things, include restrictions on the Company’s ability to create, incur or assume indebtedness for borrowed money, including capital leases or to sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Company’s assets.

As of December 31, 2023, the Company was in compliance with all financial and negative covenants.

As of December 31, 2024, there was no outstanding balance on the 2021 Credit Facility.

On July 24, 2024 the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Second Modification Agreement”), effective as of July 24, 2024, to modify certain loan covenants.

On October 4, 2024 the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Third Modification Agreement”), effective as of October 4, 2024, to extend the maturity date of the 2021 Credit Facility to December 27, 2024.

The Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Fourth Modification Agreement”), effective as of December 27, 2024, to extend the maturity date of the 2021 Credit Facility to June 27, 2026.

The Fourth Modification Agreement also raises the interest rate floor by 0.25 % to 7.0 % and modifies certain compliance covenants.

As of December 31, 2024 and 2023 the Company was in compliance with all financial and negative covenants.

The Company's weighted average interest rate on short-term borrowings as of December 31, 2024 and December 31, 2023 was 8.75 % and 9.51 %, respectively.

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The ALT Note requires 48 equal installments of approximately $ 44,000 on the first day of each month beginning September 23, 2021 with the final payment due on August 23, 2025.

The outstanding balance of the ALT Note as of December 31, 2023 was $ 0.9 million of which $ 0.5 million was classified as "current" and $ 0.4 million was classified as "non-current."

The outstanding balance of the ALT Note as of December 31, 2024 was $ 0.4 million and was classified as "current".

2023 Credit Facility

On May 26, 2023, the Company entered into a promissory note, a business loan agreement and commercial security agreement (collectively, the “2023 Credit Facility”) with C3 Bank.

The 2023 Credit Facility provides for a new $ 7.0 million term loan (the "Term Loan") which is repayable in monthly installments of principal and interest until the maturity date of April 27, 2028.

The company determines the current portion of the Term Loan to be the amount of principal owed in the next 12 months.

The Term Loan sets the interest rate spread and interest rate floor to accrue at a variable interest rate, which is based on the rate of interest last quoted by The Wall Street Journal as the “prime rate,” plus a margin of 0.250 %.

Additionally, the Term Loan provides that in the event of prepayment the Company shall pay the Lender a prepayment fee during the first year equal to twelve months of interest (less interest actually paid).

The Company is the borrower under the Term Loan and is permitted to use the proceeds of the Term Loan solely for its business operations.

The Term Loan is secured by a security interest in certain of the Company’s and its certain subsidiaries’ current and future tangible and intangible assets, inventory, chattel paper, accounts, equipment and general intangibles and a pledge of the equity of the direct and indirect subsidiaries of the Company.

Specifically, the Term Loan is secured by the building currently used by ALT in East Lyme, CT.

As of December 31, 2023, the Company was in compliance with all financial and negative covenants.

As of December 31, 2023, the outstanding balance on the Term Loan was $ 6.3 million, of which $ 1.2 million was classified as "current" and $ 5.1 million was classified as "non-current."

As of December 31, 2023, undiscounted future principal debt payments are as follows (in thousands):

The 2023 Credit Facility provided for a new $ 7.0 million term loan (the "Term Loan") which was repayable in monthly installments of principal and interest until the maturity date of April 27, 2028.

On July 24, 2024, the Company paid $ 5.8 million for the full remaining principal balance outstanding of $ 5.7 million on its Term Loan agreement with C3 Bank, in advance of the loan’s April 27, 2028 maturity date, and $ 0.1 million in interest accrued to July 24, 2024.

Note 12 – Commitments and Contingencies

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As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

At December 31, 2022, and due primarily to the performance of the Company, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred tax assets of $ 7.1 million are realizable.

The Company therefore reduced the valuation allowance accordingly.

At December 31, 2023, management reevaluated the Company's performance and forecast for the next five years and concluded that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred tax assets of $ 2.2 million are realizable.

At December 31, 2024 management reevaluated the Company's performance and forecast for the following five years and concluded that it is more likely than not that the Company will be able to use $ 24.3 million of the remaining $ 41.0 million federal NOL carryforwards.

Based on management's new estimate, the Company believes it is appropriate to increase the valuation allowance to a total of $ 3.5 million, recognizing $ 1.3 million as a discrete expense (tax effected at 21%) at December 31, 2024.

At December 31, 2024, the Company has aggregate federal net operating loss carry forwards of $ 41.0 million.

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Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carry forwards was limited to approximately $2.5 million per annum until 2008 and $1.7 million per annum through December 31, 2023.

There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time.

In addition, further restrictions, reductions in, or expiration of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities.

Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carry forwards.

The Company has not identified any change in ownership in prior years that would render current non-limited net operating loss carryforwards to be limited under Section 382.

As of December 31, 2023, all of the Company's restricted net operating loss carry forwards have been fully utilized.

The Company has no net operating loss carry forwards limited under Section 382 of the Internal Revenue Code as of December 31, 2024.

All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year.

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The reported tax expense varies from the amount that would be provided by applying the statutory U.S.

Federal income tax rate to the income before income tax expense for the following reasons in each of the years ended December 31, (in thousands):

Expected federal statutory tax expense

Federal income tax rate to the income before income tax expense for the following reasons in each of the years ended December 31, (in thousands except for percentages):

Expected income tax expense at federal statutory rate

Increase (reduction) in taxes resulting from:

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Change in valuation allowance

Income tax expense (benefit)

Income tax expense/(benefit) for the years ended December 31, 2023 and 2022 was comprised of the following (amounts in thousands):

Total current provision for (benefit from) income taxes

Total deferred provision for (benefit from) income taxes

Total provision for (benefit from) income taxes

Changes in unrecognized tax benefits

Income tax expense

Income tax expense (benefit) for the years ended December 31, 2024 and 2023 was comprised of the following (in thousands):

Current provision for income taxes:

Deferred provision for income taxes:

Total provision for income taxes

The components of the net deferred tax assets as of December 31, 2024 and 2023 are as follows (in thousands):

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It is possible that the total amount of the Company’s unrecognized tax benefits will significantly increase or decrease within the next 12 months.

transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time.

These changes may be the result of future audits, the application of “change in ownership” rules leading to further restrictions in tax losses arising from changes in the capital structure of the Company, reductions in available tax loss carry forwards through future merger, acquisition and/or disposition transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time.

At this time, an estimate of the range of reasonably possible outcomes cannot be made.

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During 2024 and 2023 the Company issued 45,752 and 75,767 shares of common stock, respectively, pursuant to the exercise of stock options.

On March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”).

Under the terms of the Separation Agreement, Mr.

West’s separation from the Company was effective on March 31, 2021.

On April 8, 2021, the Company granted 25,000 shares of the Company’s restricted common stock, for which the restrictions lapsed on April 8, 2023.

In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr.

West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations.

The full amount of the restricted common stock was expensed as of March 31, 2021 and there was no remaining unrecognized stock-based compensation expense as of December 31, 2022.

Each share of Series N preferred stock has a voting entitlement equal to 40 common shares, votes with the common stock on an as-converted basis and is senior to all other preferred stock of the Company.

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The Company reserved 1,250,000 shares of common stock (subject to adjustment under certain circumstances) for issuance or transfer upon exercise of options granted under the 2010 Plan.

may be issued under the 2010 Plan to any key employees or consultants selected by the Company’s Board (or an appropriately qualified committee).

Options may be issued under the 2010 Plan to any key employees or consultants selected by the Company’s Board (or an appropriately qualified committee).

Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant.

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Options may also be forfeited in certain circumstances.

During 2022 options to purchase 100,000 shares were granted to the Company’s executive and independent directors as part of their annual compensation.

No awards under this plan were granted during 2023.

No awards under this plan were granted during 2024 or 2023.

Options outstanding, beginning of year

Options granted

Options exercised

Options forfeited

Options outstanding, end of year

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Options outstanding, beginning of year

Options issued

Options exercised

Options forfeited

Options outstanding, end of year

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2016 Stock Option Plan (the “2016 Plan”) which provided for the issuance of incentive stock options and non-qualified stock options up to an aggregate of 3,150,000 shares of common stock (subject to adjustment in the event of stock dividends, stock splits, and other similar events).

Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant.

Options granted pursuant to the plan are subject to limitations on transfer and execution and may be issued subject to vesting conditions.

Options may also be forfeited in certain circumstances.

Options may be forfeited in certain circumstances.

On June 8, 2022 the 2016 plan was replaced by the 2022 Heritage Global Inc.

Equity Incentive Plan.

Equity Incentive Plan, and as such, no awards under this plan were granted during 2024 or 2023.

Options outstanding, beginning of year

Options granted

Options exercised

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2016 Plan and authorized the issuance of an aggregate of 3.5 million shares of Common Stock for awards made after June 8, 2022.

Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant.

Options granted pursuant to the plan are subject to limitations on transfer and execution and may be issued subject to vesting conditions.

Options may also be forfeited in certain circumstances.

In 2024 and 2023, the Company issued options to purchase 112,500 and 470,000 shares of common stock to certain of the Company's employees under this plan, respectively.

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The following summarizes the changes in common stock options:

Aggregate Intrinsic Value

(In thousands)

Aggregate Intrinsic Value

(In thousands)

Outstanding at beginning of year

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As of December 31, 2023, the Company had unvested options for the purchase of 990,125 shares with a weighted average grant date fair value of $ 1.90 per share.

At December 31, 2024 and 2023, the aggregate intrinsic value of exercisable options was $ 0.9 million and $ 2.0 million, respectively.

At December 31, 2024 and 2023, the aggregate intrinsic value of options exercised was $ 0.1 million and $ 0.2 million, respectively.

As of December 31, 2024, the total unrecognized stock-based compensation expense related to unvested stock options was $ 0.9 million, which is expected to be recognized over a weighted-average period of 1.6 years.

The total fair value of options vesting during 2023 and 2022 was $ 0.6 million and $ 0.7 million, respectively.

The total fair value of options vesting during both 2024 and 2023 was $ 0.6 million.

The unvested options have no associated performance conditions.

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$ 2.39 to $ 3.55

At December 31, 2023 and 2022, the aggregate intrinsic value of exercisable options was $ 2.0 million and $ 1.5 million, respectively.

Restricted Stock

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On June 1, 2018, the Company granted 600,000 shares of Company restricted common stock in connection with the Addenda to the Employment Agreements of David Ludwig and Tom Ludwig.

The shares are subject to certain restrictions on transfer and a right of repurchase over five years, which ended on May 31, 2023.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $ 0.43 per share, was $ 21,500 and $ 51,600 for the years ended December 31, 2023 and 2022, respectively.

The unrecognized stock-based compensation expense as of December 31, 2022 was approximately $ 21,500 and there was no unrecognized stock-based compensation expense as of December 31, 2023.

On March 30, 2021, the Company and Scott West entered into a Separation Agreement and General Release (the “Separation Agreement”).

Under the terms of the Separation Agreement, Mr.

West’s separation from the Company was effective on March 31, 2021.

On April 8, 2021, the Company granted 25,000 shares of the Company’s restricted common stock, which will be forfeited to the Company during the two years following the effective date of the Separation Agreement in the event Mr.

West breaches the terms of the Separation Agreement.

In addition, the Separation Agreement provides for customary mutual releases by the Company and Mr.

West, and the Separation Agreement includes confidentiality, non-disparagement and other obligations.

The full amount of the restricted common stock was expensed as of March 31, 2021 and all restrictions were removed on April 8, 2023.

The shares were subject to certain restrictions on transfer and a right of repurchase over five years, which ended on May 31, 2023.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $ 0.43 per share, was $ 21,500 for the year ended December 31, 2023.

There was no stock based compensation expense related to the restricted stock awards in 2024 and there was no unrecognized stock-based compensation expense as of December 31, 2024 or 2023.

On August 3, 2022, the Company granted 115,000 shares of Company restricted common stock to non-executive directors under the 2022 Heritage Global Inc.

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We determined the fair value of the shares awarded by using the closing price of our common stock as of the grant date.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $ 1.58 per share, was $ 44,400 and $ 124,600 for the years ended December 31, 2023 and 2022, respectively.

The unrecognized stock-based compensation expense as of December 31, 2022, was approximately $ 44,000 and there was no unrecognized stock-based compensation expense as of December 31, 2023.

On March 1, 2023, the Company granted 97,290 shares of Company restricted common stock to employees under the 2022 Heritage Global Inc.

Equity Incentive Plan.

The restricted stock shares vested on March 1, 2024.

On March 31, 2023, the Company granted 90,000 shares of Company restricted common stock to non-executive directors under the 2022 Heritage Global Inc.

Equity Incentive Plan.

The shares will vest in full on March 31, 2024.

We determined the fair value of the shares awarded by using the closing price of our common stock as of the grant date.

Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $ 1.58 per share, was $ 44,400 for the year ended December 31, 2023.

The unrecognized stock-based compensation expense as of December 31, 2023, was approximately $ 39,500 .

There was no stock based compensation expense related to the restricted stock awards in 2024 and there was no unrecognized stock-based compensation expense as of December 31, 2024 or 2023.

The following summarizes the restricted stock awards and related stock based compensation expense in 2024 and 2023 (in thousands, except share count and award fair value):

Compensation Expense for the year ended,

Unrecognized Compensation Expense as of,

Restricted Stock Granted

Grant Date Fair Value

December 31, 2024

Ludwig Employment Agreements

Non-executive directors

August 3, 2022

March 31, 2023

March 1, 2023

March 1, 2024

Non-executive directors

March 31, 2023

March 31, 2024

March 7, 2024

March 7, 2025

Non-executive directors

March 7, 2024

March 7, 2025

The Company's unrecognized stock-based compensation expense related to restricted stock as of December 31, 2024 is expected to be recognized over a weighted average period of 0.2 years.

The tax benefit recognized by the Company related to restricted stock awards was approximately $ 0.4 million in 2024, as compared to $ 2.2 million recognized in 2023.

Note 17 – Segment Information

The Company reports segment information based on the “management” approach.

The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.

The management approach designates the internal reporting used by the Chief Operating Decision Maker (CODM), which was determined to be Ross Dove, CEO, for making decisions and assessing performance as the source of the Company’s reportable segments.

The Company manages its business primarily on differentiated revenue streams for services offered.

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The Specialty Lending segment, through HGC, provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

The Company evaluates the performance of its reportable segments based primarily on operating income.

Our CODM evaluates the performance of the Company's reportable segments based primarily on operating income and routinely receives internal reports that analyze operating income for the reporting segments.

The CODM is not routinely provided detailed information regarding significant operating expenses by segment, and such information is not considered critical for allocating resources or assessing the performance of each segment.

The Company’s operating expenses are comprised mainly of fixed and variable compensation, marketing, outside services such as audit, legal and information technology, occupancy, and other regulatory costs incurred as a public entity.

Additionally, earnings from equity method investments related to significant transactions involving real estate, machinery and equipment in the Company's Auction and Liquidation segment and Joint Venture lending activity related to the Company's Specialty Lending segment are significant in the computation of segment operating income and reported separately as shown in the table below.

Notwithstanding the foregoing, the reported segment operating income for ALT and HGC represents incremental costs for managing these segments as part of their sister segments (HGP for ALT and NLEX for HGC).

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Further, the Company does not utilize segmented asset information to evaluate the performance of its reportable segments and does not include intercompany transfers between segments for management reporting purposes.

The following table sets forth operating income information for the Company's reportable segments (in thousands):

The following table sets forth certain financial information for the Company's reportable segments (in thousands):

Year Ended December 31, 2024

Industrial Assets Division:

Auction and Liquidation

Refurbishment & Resale

Total divisional operating income

Financial Assets Division:

Specialty Lending

Total divisional operating income

Corporate & other operating loss

Consolidated operating income

Corporate and other

Gross profit [1]

Operating expenses [2]

Earnings from equity method investments

Operating income (loss)

Year Ended December 31, 2023

Auction and Liquidation

Refurbishment & Resale

Specialty Lending

Corporate and other

Gross profit [1]

Operating expenses [2]

Earnings from equity method investments

Operating income (loss)

[1] Within the Company’s Industrial Asset division, management allocates gross profit resulting from certain auctions from Auctions and Liquidation (HGP) to Refurbishment & Resale (ALT).

From time to time, ALT may source and refer an auction project to HGP or directly sell lab equipment inventory through the auction channel.

In these instances, the profits relates to these transactions are allocated to ALT rather than accounted for under the segment profit or loss of HGP.

In 2024, the total amount of gross profit allocated to ALT from

HGP was approximately $ 1.4 million, as compared to the total amount of gross profit allocated to ALT in 2023 of approximately $ 3.8 million .

[2] All financing arrangements are originated with Corporate and other.

Management may determine from time to time that interest incurred from financing arrangements are directly attributable to a specific segment.

As a result, interest incurred may be charged to the segment and included in that segment’s profit or loss as a charge to operating expense.

In 2024, the total amount of interest allocated to Specialty Lending (HGC) from Corporate and other was approximately $ 0.3 million, as compared to the total amount of interest allocated to HGC in 2023 of approximately $ 0.5 million .

Note 18 – Subsequent Events

The Company has evaluated events subsequent to December 31, 2024 for potential recognition or disclosure in its condensed consolidated financial statements.

There have been no material subsequent events requiring recognition or disclosure in this Annual Report on Form 10-K, other than noted below.

On February 6, 2025, Heritage Nancy Ridge LLC (“Heritage Nancy Ridge”), an indirect and wholly-owned subsidiary of HG entered into a promissory note, a business loan agreement and commercial security agreement (collectively, the “Mortgage Loan Agreement”) with C3bank, National Association (the “Lender”).

The Mortgage Loan Agreement provides for a $ 4.1 million term loan (the “Mortgage”).

Heritage Nancy Ridge used the proceeds of the Mortgage to purchase real property and the building located at 6130 Nancy Ridge Drive in San Diego, California (the “Nancy Ridge Property”), which will be used as HG’s future corporate headquarters and as future warehouse and office space for the operations of HGP.

The maturity date of the Mortgage Loan Agreement is February 5, 2035 .

The Mortgage Loan Agreement sets the interest rate to accrue at a rate of 6.500% for the first three years of the Mortgage.

For the remainder of the term, the Mortgage Loan Agreement sets the interest rate spread and interest rate floor to accrue at a variable interest rate, which is based on the one-month Term SOFR as published daily by CME Group, plus a margin of 2.250%.

Heritage Ridge Nancy is the borrower and HG is the guarantor under the Mortgage Loan Agreement.

The Mortgage Loan Agreement is secured by a security interest in the Nancy Ridge Property.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures