What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-03-12 compared with 2025-03-13 · 83 added, 81 removed, 214 unchanged (43% of the section changed)

9 unchanged sentences

Liquidity and Capital Resources

At December 31, 2024, we had working capital of $18.5 million, as compared to working capital of $11.6 million at December 31, 2023, an increase of $6.9 million.

At December 31, 2025, we had working capital of $18.1 million, as compared to working capital of $18.5 million at December 31, 2024, a decrease of $0.4 million.

Our current assets increased to $33.6 million at December 31, 2025 compared to $33.1 million at December 31, 2024.

The change in our current assets of $6.8 million is primarily due to a decrease in the current portion of notes receivable of $3.2 million and accounts receivable of $0.4 million, offset by increases in cash and cash equivalents of $9.5 million, inventory of $0.3 million, and other current assets of $0.6 million.

Our current liabilities decreased to $14.6 million at December 31, 2024 as compared to $14.7 million at December 31, 2023.

The decrease of $0.1 million is primarily due to a decrease in accounts payable and accrued liabilities of $1.2 million and the current portion of third party debt of $1.3 million, offset by an increase in payables to sellers of $2.4 million.

The change in our current assets of $0.5 million is primarily due to an increase in the current portion of notes receivable of $1.1 million, inventory of $0.6 million and accounts receivable of $0.3 million, offset by decreases in cash and cash equivalents of $1.2 million and other current assets of $0.3 million.

Our current liabilities increased to $15.5 million at December 31, 2025 as compared to $14.6 million at December 31, 2024.

The increase of $0.9 million is primarily due to an increase in accounts payable and accrued liabilities of $1.1 million and other current liabilities of $0.4 million, offset by decreases in the current portion of third party debt of $0.4 million and payables to sellers of $0.1 million.

We believe we can fund our operations and our debt service obligations during 2025 and beyond through a combination of cash flows from our on-going operations and accessing financing from our existing line of credit.

Our indebtedness consists of a promissory note dated August 23, 2021 (the “ALT Note”) issued in the amount of $2.0 million as part of the aggregate purchase price paid to acquire certain assets and liabilities of American Laboratory Trading and any amounts borrowed under the promissory note, business loan agreement, commercial security agreement and pledge agreement (the “2021 Credit Facility”) with C3bank, National Association, for a $10.0 million revolving line of credit.

The terms of the ALT Note require us to pay off the Note in 48 equal installments of approximately $44,000 with an interest rate of 3% per annum and a maturity date of August 23, 2025.

As of December 31, 2024, we had an outstanding balance of $0.4 million on the ALT Note.

On December 27, 2024, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Modification Agreement”), by and between the Company and C3 Bank.

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 maturity date was modified to June 27, 2026.

We are permitted to use the proceeds of the loan solely for our business operations.

Our indebtedness consists of a promissory note, a business loan agreement and commercial security agreement (collectively, the “Mortgage Loan Agreement”) with C3bank, National Association (the “Lender”), that provides for a $4.1 million term loan (the “Mortgage”) and any amounts borrowed under the promissory note, business loan agreement, commercial security agreement and pledge agreement (the “2021 Credit Facility”) with the Lender, for a $10.0 million revolving line of credit.

On February 6, 2025 we entered into the Mortgage Loan Agreement with the Lender.

The Mortgage Loan Agreement provides for the Mortgage that we used to purchase real property and the building located at 6130 Nancy Ridge Drive in San Diego, California on February 11, 2025 for $7.4 million.

This property is used as the Company’s corporate headquarters and as warehouse and office space for the operations of Heritage Global Partners, Inc., our subsidiary that operates our Auction and Liquidation segment.

As of December 31, 2025, we had an outstanding balance of $4.1 million on the Mortgage.

On December 27, 2024, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the “Fifth Modification Agreement”), by and between the Company and the Lender.

The Fifth Modification Agreement modified and reaffirmed the 2021 Credit Facility to, among other things, extend the maturity date to June 27, 2026, modify the applicable interest rate, and further modify the loan covenants.

We are permitted to use the proceeds of the 2021 Credit Facility solely for our business operations.

As of December 31, 2025, we had no outstanding balance on the 2021 Credit Facility.

During 2024, our primary source of cash was the cash on hand, payments received on notes receivable of $11.0 million and $7.7 million of cash provided by our operating activities.

Cash disbursements during 2024 consisted primarily of investments in notes receivable of $5.7 million, repurchase of our common stock under our Repurchase Program of approximately $2.2 million, repayments on our ALT Note of $0.5 million, repayments on our Term Loan of $6.3 million (as discussed further under Note 11 – Debt), payment of operating expenses, and settlement of auction liabilities.

The Company also had indebtedness that consisted of a promissory note dated August 23, 2021 (the “ALT Note”) issued in the amount of $2.0 million as part of the aggregate purchase price paid to acquire certain assets and liabilities of American Laboratory Trading.

The Company repaid the ALT Note in full in August, 2025.

As of December 31, 2025, we had no outstanding balance on the ALT Note.

During 2025, our primary source of cash was cash on hand, cash provided by operating activities, principal repayments on notes receivable of $6.5 million, and proceeds from the Mortgage of $4.1 million.

Cash disbursements during the year ended December 31, 2025 consisted primarily of investment in our new San Diego facility for $8.5 million, investments in notes receivable of $5.9 million, and repurchases of our common stock of $2.6 million.

We expect that future net cash flows from our operating activities will continue to be the primary source of cash required to fund our ongoing operations for the foreseeable future.

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Cash provided by operating activities was $6.1 million during 2025 as compared to $7.7 million during 2024.

The approximate $5.3 million decrease was primarily attributable to a decrease of $6.3 million in net income adjusted for noncash items during 2024 as compared to 2023, offset by an increase in operating assets and liabilities of $1.0 million during 2024 as compared to 2023.

The approximate $1.6 million decrease was primarily attributable to a decrease of $0.6 million in net income adjusted for noncash items during 2025 as compared to 2024 and a decrease in operating assets and liabilities of $1.0 million during 2025 as compared to 2024.

The significant changes in operating assets and liabilities during 2025 as compared to 2024 are primarily due to the nature of our operations.

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Cash flows from investing activities.

Cash provided by investing activities during 2024 was $10.9 million, as compared to cash used in investing activities of $15.9 million during 2023.

Cash used in investing activities during 2025 was $9.4 million, as compared to cash provided by investing activities of $10.9 million during 2024.

Cash used in investing activities consisting primarily of purchase of property and equipment of $8.5 million, investments in notes receivable of $5.9 million, investments in equity method investments of $1.6 million and investments in participating interest of $1.6 million.

Cash used in investing activities during 2025 was offset by cash provided by payments received on notes receivable of $6.5 million as well as return of investment and cash distributions received from equity method investments of $1.5 million.

Cash provided by investing activities during 2024 consisted primarily of payments received on notes receivable of $11.0 million as well as return of investment and cash distributions received from equity method investments of $6.0 million.

Cash provided by investing activities during 2024 was offset by cash used in investing activities consisting primarily of investments in notes receivable of $5.7 million and equity method investments of $0.3 million.

Cash used in investing activities during 2023 consisted primarily of investments in notes receivable of $29.8 million and equity method investments of $17.2 million.

Cash used in investing activities during 2023 was offset by cash provided by investing activities primarily of cash received on transfer of notes receivable to partners of $8.9 million, payments received on notes receivable of $11.9 million as well as return of investment and cash distributions received from equity method investments of $10.7 million.

Cash flows from financing activities.

Cash used in financing activities was $9.1 million during 2024, as compared to cash provided by financing activities of $2.5 million during 2023.

Cash used in financing activities in 2024 of $9.1 million was primarily attributable to $6.3 million in repayments to our Term Loan (as discussed further under Note 11 – Debt), $0.5 million in repayments to our ALT Note, as well as repurchase of our common stock under our Repurchase Program of approximately $2.2 million.

Cash provided by financing activities in 2023 of $2.5 million was primarily attributable to $13.0 million in proceeds from draws on our 2021 Credit Facility and Term Loan, offset by $8.9 million in repayments to our 2021 Credit Facility, $0.7 million in repayments to our Term Loan, $0.5 million in repayments to our ALT Note, as well as repurchase of our common stock under our Repurchase Program of approximately $0.4 million.

Cash provided by financing activities was $2.0 million during 2025, as compared to cash used in financing activities of $9.1 million during 2024.

Cash provided by financing activities in 2025 was primarily attributable to $4.1 million in proceeds from our Mortgage (as discussed further under Note 11 – Debt) and $1.1 million in proceeds from secured borrowing related to the machinery and equipment lessor arrangement (as discussed further under Note 5 - Lessor Arrangements), offset by cash used in financing activities of $0.4 million in repayments to our ALT Note and approximately $2.6 million in repurchases of our common stock under our Repurchase Program.

Cash used in financing activities in 2024 was primarily attributable to $6.3 million in repayments to our Term Loan (as discussed further under Note 11 – Debt), $0.5 million in repayments to our ALT Note, as well as repurchase of our common stock under our Repurchase Program of approximately $2.2 million.

Management’s Discussion of Results of Operations

11 unchanged sentences

Operating income

Interest expense, net

Interest income (expense), net

Income before income tax expense

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

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

Our CODM evaluates the performance of our reportable segments based primarily on gross profit and operating income.

The CODM routinely receives internal reports that analyze these metrics 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.

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

In 2025, no interest was allocated to the Specialty Lending segment (HGC) from Corporate and other, as compared to the total amount of interest allocated to HGC from Corporate and other in 2024 of approximately $0.3 million.

2025 Compared to 2024

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This resulted in gross profit of $31.0 million in 2025 compared to $31.2 million in 2024, a decrease of approximately $0.2 million or approximately 1%.

The decrease in gross profit in the current year is primarily due to a significant one-time principal auction transaction in our Industrial Asset Division in the first quarter of 2023, as well as decreased volume of transactions within our Brokerage segment as compared to 2023.

Selling, general and administrative expense – Selling, general and administrative expense was $24.3 million in 2024 as compared to $26.0 million in 2023, a decrease of $1.8 million or 7%.

As compared to 2023 there was a decrease in selling, general and administrative expense during 2024 primarily due to decreased compensation expense as a result of lower performance in certain operational segments.

Although gross profit was relatively consistent year over year, we experienced a product mix shift in 2025 from financial assets to industrial assets.

In 2025, we saw an increase in gross profit related to our Auction and Liquidation segment of approximately $0.4 million and an increase in gross profit related to our Refurbishment and Resale segment of approximately $1.7 million, offset by a decrease in gross profit in both our Brokerage and Specialty Lending segments of approximately $1.2 million.

The product mix results in a lower gross margin overall due to the nature of our business and higher cost of revenues associated with the Industrial Asset Division.

Selling, general and administrative expense – Selling, general and administrative expense was $25.0 million in 2025 as compared to $24.3 million in 2024, an increase of $0.7 million or approximately 3%, which included legal and professional fees associated with due diligence efforts of approximately $0.4 million.

Significant components of selling, general and administrative expense were as shown below (dollars in thousands):

11 unchanged sentences

Information technology support

Provision for credit losses

(Recovery) provision for credit losses

Total selling, general and administrative expense

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Depreciation and amortization expense in both years consisted primarily of amortization expense related to intangible assets, while the depreciation of property, plant and equipment was not material.

Earnings in Equity Method Investments – Earnings in equity method investments were $0.1 million in 2025 compared to $2.7 million in 2024.

The $2.6 million decrease is primarily due to our $1.3 million share of earnings from the KNFH II LLC joint venture recorded in the second quarter of 2024 and a $1.3 million decrease in earnings due to the implementation of the modified cost recovery method in our Specialty Lending segment for loans placed in nonaccrual status in June of 2024.

Off-Balance Sheet Arrangements – We had no off-balance sheet arrangements during the years ended December 31, 2025 and 2024.

12 unchanged sentences

Depreciation and amortization

Interest expense, net

Interest (income) expense, net

Income tax expense

3 unchanged sentences

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which applies a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses.

The expected credit losses, and subsequent adjustments to such losses, is recorded through an allowance account that is deducted from, or added to, the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

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 our 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.

As of December 31, 2024, the allowance for credit losses was $1.5 million, with $0.1 million classified as accounts receivable, $0.4 million classified as notes receivable and $1.0 million classified as equity method investments.

As of December 31, 2023, the allowance for credit losses was $1.7 million, with $0.1 million classified as accounts receivable, $0.7 million classified as notes receivable and $0.9 million classified as equity method investments.

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

Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which, among other updates, requires enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker, as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss.

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.

The adoption of ASU 2023-07 resulted in additional disclosures for our segment results, which are included in Note 17 of our consolidated financial statements.

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.

ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with adoption permitted on a prospective basis.

We adopted this standard for the year ended December 31, 2025 and applied the new disclosure requirements prospectively.

See Note 13 Income Taxes in the accompanying notes to the consolidated financial statements for further detail.

Critical Accounting Policies

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The exception to recognition at this point in time occurs when certain contracts provide for advance payments recognized over a period of time.

Services revenue recognized over a period of time is not material in comparison to total revenues (less than 1% of total revenues for the year ended December 31, 2024), and therefore not reported on a disaggregated basis.

Services revenue recognized over a period of time is not material in comparison to total revenues (approximately 1% of total revenues for the year ended December 31, 2025), and therefore not reported on a disaggregated basis.

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

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.

As of December 31, 2025, 2024 and 2023, the deferred revenue balance was approximately $0.9 million, $0.6 million and $0.5 million, respectively, and is recorded within other current liabilities on the consolidated balance sheet.

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

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Nonaccrual Loans

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

We determine 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.

We consider 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.

We also monitor financial standing and performance of our borrowers on an ongoing basis and regularly update the collection forecasts for the underlying charged off or nonperforming receivable portfolios related to each outstanding loan.

If we determine (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, we will place the loans on nonaccrual status.

We also monitor our borrowers’ financial standing and performance on an ongoing basis and regularly update the collection forecasts for the underlying charged off or nonperforming receivable portfolios related to each outstanding loan.

If management 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 our analysis, we elect 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.

The accrual of interest is generally discontinued when a loan is placed in 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.

2 unchanged sentences

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, we and our affiliated Joint Ventures restructured loans (the "Restructured Loans") with our 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.

Our share of the Restructured Loans amortized cost basis was $22.2 million, or 57% of our 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, our 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.

As of December 31, 2023, our 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.

Pursuant to the terms of existing credit agreements, our largest borrower was required to collect on underlying charged off and nonperforming consumer loan portfolios and remit a required minimum monthly payment to us.

However, this borrower became unable to make the required minimum monthly payments and therefore is in default.

While in default, this borrower continues to collect on the underlying charged off and nonperforming consumer loan portfolios but must remit all such net collections to us and senior lenders.

These remittances of net collections have not met the amount of the required minimum monthly payments since June of 2024.

We 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.

We do not expect to realize any return with respect to these loans in 2025, and whether we will realize any return with respect to these loans is uncertain.

As we continue 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 our share of other loans within affiliated Joint Ventures that are impacted by the default with our largest borrower and have been placed in nonaccrual status as of June 2024.

Our share of payments received from this borrower, including interest, will be applied against the outstanding loan balance.

However, this borrower became unable to make the required minimum monthly payments beginning in June 2024 and therefore is in default.

This borrower continues to collect on the underlying charged off and nonperforming consumer loan portfolios and remit net collections to the Company and senior lenders.

We have determined (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 we continue 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 were placed in nonaccrual status in June 2024.

In addition, there was a balance of $1.5 million from our share of other loans within our affiliated joint ventures that are impacted by the default with this borrower and were placed in nonaccrual status in June 2024.

Our share of payments received from the nonaccrual loans, including interest, will be applied against the outstanding loan balance.

As of December 31, 2025, the amortized cost basis of loans in nonaccrual status was $23.9 million, of which $4.9 million is recorded within notes receivable and $19.0 million is recorded within equity method investments.

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

In coordination with our senior lenders, we are actively engaged in a workout process with respect to loans currently in nonaccrual status, with the objective of maximizing recoveries over the remaining economic life of the underlying collateral.

Our recovery strategy is centered on the monetization of the charged-off and nonperforming consumer receivable portfolios securing these loans and is expected to occur over multiple years.

The primary component of the workout strategy involves transitioning a greater portion of the underlying consumer accounts into legal collection channels.

During the fourth quarter of 2025, we reached a restructuring agreement with the senior lender for HGC MPG Funding LLC.

As a result of this restructuring agreement and our regular quarterly portfolio analysis, we have determined it appropriate to place all loans associated with our joint ventures with senior lenders in nonaccrual status given the senior lender’s priority position in cash flows generated from the underlying portfolios.

As of December 31, 2025, additional loan balances placed in nonaccrual status was approximately $1.7 million.

Notes receivable, net

2 unchanged sentences

Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans.

We adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”) on January 1, 2023, which requires the application of a credit loss model based prospectively on current expected credit losses (CECL).

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

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

As we lack historical internal data, we observe that our notes receivable are similar in character to transactions undertaken by smaller banking institutions.

We elect to base our 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.

To reflect the cumulative effects of the adoption of ASC 326, we recorded the allowance for credit losses and an increase to accumulated deficit of $0.2 million and deferred tax asset of $0.1 million on the January 1, 2023 consolidated balance sheet, and balance of the allowance for credit losses was therefore $0.3 million as of January 1, 2023.

In order to evaluate the need for an adjustment to the receivable balance related to credit losses, or impairment, we perform 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.

As of December 31, 2024, the SCALE rate increased to 1.3644% and our credit loss rate specific to notes receivable was 3.7%.

The increase over the SCALE rate was due to both risks with the concentrated balance and declining collections industry-wide.

As of December 31, 2024 and December 31, 2023, our allowance for credit losses related to notes receivable outstanding was $0.4 million and $0.7 million, respectively.

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.

Historical credit loss experience typically provides the basis for an estimation of expected credit losses;

however, the Company lacks sufficient data upon which to base a historical estimation.

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 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 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 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.

As of December 31, 2025, the SCALE rate increased to 1.3767% from 1.3644% as of December 31, 2024, and the Company's credit loss allowance rate specific to notes receivable was 3.5%.

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

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.

As of December 31, 2025 and December 31, 2024, the allowance for credit losses recorded against our notes receivable balance was $0.3 million and $0.4 million, respectively.

See Note 2 and Note 3 to our consolidated financial statements for further detail.

5 unchanged sentences

These investments have historically been classified as non-current in our consolidated financial statements due to the uncertainties relating to the timing of resale of the underlying assets as a result of the Joint Venture relationship.

Upon adoption of ASC 326 on January 1, 2023, we evaluated the receivable balances held by our affiliated Joint Ventures and recorded an adjustment to reduce earnings from equity method investments by our 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, 2024, the SCALE rate increased to 1.3644% and the credit loss rate specific to equity method investments was 4.5%.

The increase over the SCALE rate was due to both risks with the concentrated balance and declining collections industry-wide.

As of December 31, 2024 and December 31, 2023, we have recorded an allowance for credit losses related to its equity method investments of $1.0 million and $0.9 million, respectively.

As of December 31, 2025, the SCALE rate increased to 1.3767% from 1.3644% as of December 31, 2024, 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 both December 31, 2025 and December 31, 2024, the allowance for credit losses recorded against our equity method investments balance was $1.0 million.

See Note 2 and Note 4 to our consolidated financial statements for further detail.

2 unchanged sentences

We periodically assess the recoverability of our deferred tax assets, which have been generated by a history of net operating and net capital losses, and determine the necessity for a valuation allowance that will reduce deferred tax assets to the amount expected to be realized.

We evaluate which portion of the deferred tax assets, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on our use of our net operating and net capital loss carryforwards.

In 2023, we 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 we believed that it was more likely than not that a significant portion of our net operating loss carryforwards will be utilized.

In 2024, we increased the valuation allowance by $1.3 million, resulting in a net deferred tax asset balance of approximately $6.0 million.

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.

As of December 31, 2025, approximately $18.9 million of federal net operating loss carry forwards were unused and expired and we recorded discrete expense (tax effected at 21%) of $0.5 million during 2025, reflecting the difference between our valuation allowance estimate at December 31, 2024 and actual results in 2025.

We expect to utilize our remaining net operating loss carry forwards, and as such have removed the valuation allowance against our deferred tax assets.

For further discussion of our income taxes, see Note 13 to our consolidated financial statements.

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What changed 10-K

Item 7. Management’s Discussion and Analysis