Heritage Global Inc. [HGBL] Filings

10-Q 1 hgbl-20240930.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-39471

HERITAGE GLOBAL INC.

(Exact name of registrant as specified in its charter)


Florida	59-2291344
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

12625 High Bluff Drive, Suite 305, San Diego, CA 92130

(Address of Principal Executive Offices)

(858) 847-0659
(Registrant’s Telephone Number)

N/A

(Registrant’s Former Name)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common stock, $0.01 par value HGBL The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of November 1, 2024, there were 37,341,185 shares of common stock outstanding, $0.01 par value.

TABLE OF CONTENTS


Part I.	Financial Information

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2024 (unaudited) and December 31, 2023	3

	Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2024 and 2023 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2024 and 2023 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 (unaudited)	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

Part II.	Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	35

Item 6.	Exhibits	36

	Signature Page	37

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of US dollars, except share and per share amounts)



	September 30, 2024			December 31, 2023
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	26,571		$	12,279
Accounts receivable (net of allowance for credit losses of $130 in 2024 and $132 in 2023)		877			1,910
Current portion of notes receivable (net of allowance for credit losses of $422 in 2024 and $650 in 2023)		3,959			6,581
Inventory – equipment		4,721			5,074
Other current assets		833			448
Total current assets		36,961			26,292
Non-current portion of notes receivable, net		7,337			10,890
Equity method investments		21,447			21,361
Right-of-use assets		2,381			2,539
Property and equipment, net		1,692			1,705
Intangible assets, net		3,460			3,753
Goodwill		7,446			7,446
Deferred tax assets		7,740			9,115
Other assets		64			67
Total assets	$	88,528		$	83,168

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	6,268		$	7,237
Payables to sellers		13,125			4,975
Current portion of third party debt		525			1,733
Current portion of lease liabilities		802			789
Total current liabilities		20,720			14,734
Non-current portion of third party debt		—			5,495
Non-current portion of lease liabilities		1,681			1,859
Total liabilities		22,401			22,088

Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 563 of Series N as of September 30, 2024 and December 31, 2023; with liquidation preference over common stockholders equivalent to $1,000 per share		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued 37,341,185 and 37,157,616 shares as of September 30, 2024 and December 31, 2023, respectively; and outstanding 36,343,561 and 36,761,441 shares as of September 30, 2024 and December 31, 2023, respectively		373			372
Additional paid-in capital		295,241			294,522
Accumulated deficit		(227,641	)		(233,026	)
Treasury stock at cost, 997,624 and 396,175 shares as of September 30, 2024 and December 31, 2023, respectively		(1,852	)		(794	)
Total stockholders’ equity		66,127			61,080
Total liabilities and stockholders’ equity	$	88,528		$	83,168

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

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands of US dollars, except share and per share amounts)

(unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2024		2023			2024			2023
Revenues:
Services revenue	$	8,063	$	9,985		$	25,527		$	30,040
Asset sales		2,347		5,566			9,067			15,221
Total revenues		10,410		15,551			34,594			45,261

Operating costs and expenses:
Cost of services revenue		1,735		2,423			4,665			6,570
Cost of asset sales		1,458		3,413			6,140			9,683
Selling, general and administrative		5,686		6,806			18,390			19,546
Depreciation and amortization		152		132			440			373
Total operating costs and expenses		9,031		12,774			29,635			36,172
Earnings of equity method investments		100		(8	)		2,622			675
Operating income		1,479		2,769			7,581			9,764
Interest income (expense), net		17		(56	)		(183	)		(225	)
Income before income tax expense		1,496		2,713			7,398			9,539
Income tax expense		407		736			2,013			1,954
Net income	$	1,089	$	1,977		$	5,385		$	7,585

Weighted average common shares outstanding – basic		36,576,931		36,742,018			36,641,820			36,675,838
Weighted average common shares outstanding – diluted		37,189,029		37,647,321			37,292,200			37,605,363
Net income per share – basic	$	0.03	$	0.05		$	0.15		$	0.21
Net income per share – diluted	$	0.03	$	0.05		$	0.14		$	0.20

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

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands of US dollars, except share amounts)
(unaudited)


									Additional
	Preferred stock				Common stock				paid-in			Accumulated			Treasury stock
	Shares		Amount		Shares		Amount		capital			deficit			Shares		Amount			Total
Balance as of December 31, 2023		563	$	6		37,157,616	$	372	$	294,522		$	(233,026	)		396,175	$	(794	)	$	61,080
Issuance of common stock from stock option awards		—		—		1,200		—		—			—			—		—			—
Issuance of restricted common stock		—		—		177,576		1		(76	)		—			—		—			(75	)
Stock-based compensation expense		—		—		—		—		228			—			—		—			228
Net income		—		—		—		—		—			1,799			—		—			1,799
Balance as of March 31, 2024		563		6		37,336,392		373		294,674			(231,227	)		396,175		(794	)		63,032
Issuance of common stock from stock option awards		—		—		4,793		—		(6	)		—			—		—			(6	)
Issuance of restricted common stock		—		—		—		—		—			—			—		—			—
Stock-based compensation expense		—		—		—		—		290			—			—		—			290
Net income		—		—		—		—		—			2,497			—		—			2,497
Balance as of June 30, 2024		563		6		37,341,185		373		294,958			(228,730	)		396,175		(794	)		65,813
Issuance of common stock from stock option awards		—		—		—		—		—			—			—		—			—
Stock-based compensation expense		—		—		—		—		283			—			—		—			283
Repurchase of common stock		—		—				—		—			—			601,449		(1,058	)		(1,058	)
Net income		—		—		—		—		—			1,089			—		—			1,089
Balance as of September 30, 2024		563	$	6		37,341,185	$	373	$	295,241		$	(227,641	)		997,624	$	(1,852	)	$	66,127


										Additional
	Preferred stock					Common stock				paid-in		Accumulated			Treasury stock
	Shares			Amount		Shares		Amount		capital		deficit			Shares		Amount			Total
Balance as of December 31, 2022		565		$	6		36,932,177	$	369	$	293,589	$	(245,270	)		243,468	$	(395	)	$	48,299
Cumulative change in accounting principle (Note 2)		—			—		—		—		—		(231	)		—		—			(231	)
Balance as of January 1, 2023 (as adjusted for change in accounting principle)		565			6		36,932,177		369		293,589		(245,501	)		243,468		(395	)		48,068
Issuance of common stock from stock option awards		—			—		31,191		—		5		—			—		—			5
Issuance of restricted common stock		—			—		134,592		2		150		—			—		—			152
Stock-based compensation expense		—			—		—		—		179		—			—		—			179
Net income		—			—		—		—		—		2,829			—		—			2,829
Balance as of March 31, 2023		565			6		37,097,960		371		293,923		(242,672	)		243,468		(395	)		51,233
Issuance of common stock from stock option awards		—			—		32,111		—		5		—			—		—			5
Issuance of restricted common stock		—			—		15,000		—		—		—			—		—			—
Issuance of common stock due to conversion of Series N Preferred stock		(2	)		—		80		—		—		—			—					—
Stock-based compensation expense		—			—		—		—		228		—			—		—			228
Net income		—			—		—		—		—		2,779			—		—			2,779
Balance as of June 30, 2023		563			6		37,145,151		371		294,156		(239,893	)		243,468		(395	)		54,245
Issuance of common stock from stock option awards		—			—		6,773		1		—		—			—		—			1
Stock-based compensation expense		—			—		—		—		175		—			—		—			175
Net income		—			—		—		—		—		1,977			—		—			1,977
Balance as of September 30, 2023		563		$	6		37,151,924	$	372	$	294,331	$	(237,916	)		243,468	$	(395	)	$	56,398

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

HERITAGE GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of US dollars)

(unaudited)


	Nine Months Ended September 30,
	2024			2023
Cash flows from operating activities:
Net income	$	5,385		$	7,585
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred issuance costs and fees		(77	)		76
Earnings of equity method investments		(2,622	)		(675	)
Noncash credit loss (recovery) expense		(228	)		632
Noncash lease expense		484			483
Depreciation and amortization		440			373
Deferred taxes		1,375			1,170
Stock-based compensation expense		801			582
Changes in operating assets and liabilities:
Accounts receivable		1,032			(1,910	)
Inventory – equipment		353			173
Other current assets		(382	)		428
Accounts payable and accrued liabilities		(965	)		(2,869	)
Payables to sellers		8,150			6,996
Lease liabilities		(492	)		(469	)
Net cash provided by operating activities		13,254			12,575

Cash flows from investing activities:
Investment in notes receivable		(5,047	)		(27,636	)
Payments received on notes receivable		9,039			6,147
Cash received on transfer of notes receivable to partners		—			8,851
Investment in equity method investments		(343	)		(6,465	)
Return of investment in equity method investments		2,744			4,124
Cash distributions from equity method investments		2,622			675
Purchase of property and equipment		(134	)		(237	)
Net cash provided by (used in) investing activities		8,881			(14,541	)

Cash flows from financing activities:
Proceeds from debt payable to third parties		—			13,000
Repayment of debt payable to third parties		(6,704	)		(8,039	)
Proceeds from issuance of common stock from stock option awards		—			36
Payments of tax withholdings related to issuance of restricted common stock and stock option awards		(81	)		(120	)
Repurchase of common stock		(1,058	)		—
Net cash (used in) provided by financing activities		(7,843	)		4,877
Net increase in cash and cash equivalents		14,292			2,911
Cash and cash equivalents as of beginning of period		12,279			12,667
Cash and cash equivalents as of end of period	$	26,571		$	15,578

Supplemental cash flow information:
Cash paid for taxes, net	$	682		$	547
Cash paid for interest	$	326		$	323
Noncash transfer of notes receivable to equity method investments	$	2,487		$	—
Noncash change in lease liabilities and right-of-use assets	$	327		$	405

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

HERITAGE GLOBAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 –Basis of Presentation

These unaudited condensed consolidated interim financial statements include the accounts of Heritage Global 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 "the Company,” "us" “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. All significant intercompany accounts and transactions have been eliminated upon consolidation.

The Company began its operations in 2009 with the establishment of HG LLC. The business was subsequently expanded by the acquisitions of HGP, NLEX, and ALT in 2012, 2014, and 2021 respectively, and the creation of HGC in 2019. As a result, HG is positioned to provide an array of value-added capital and financial asset solutions: auction and appraisal services, traditional asset disposition sales, and specialty financing solutions. The Company’s reportable segments consist of Auction and Liquidation, through HGP, Refurbishment & Resale, through ALT, Brokerage, through NLEX and Specialty Lending, through HGC.

The Company prepared the unaudited condensed consolidated interim financial statements included herein pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of management, these condensed financial statements reflect all adjustments that are necessary to present fairly the results for the interim periods included herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are appropriate. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 14, 2024 (the “Form 10-K”).

The results of operations for the nine-month period ended September 30, 2024 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2024. The accompanying condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated balance sheet as of December 31, 2023, contained in the Company’s Form 10-K.

Repurchase Program

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 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 601,449 shares in the open market for a purchase price of approximately $1.1 million during the three and nine months ended September 30, 2024. As of September 30, 2024, the Company had approximately $4.1 million in remaining aggregate dollar value of shares that may be purchased under the Repurchase Program.

Note 2 – Summary of Significant Accounting Policies

Use of estimates

The preparation of the Company’s unaudited condensed consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Significant estimates include the assessment of collectability of revenue recognized and the valuation of accounts receivable and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities, including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our condensed consolidated interim financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

Revenue recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) and ASC Topic 310, Receivables (“ASC 310”).

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions, and secured lending. Asset sales revenue generally consists of proceeds obtained through sales of purchased assets. With the exception of revenue generated within our Specialty Lending segment, revenue is recognized for both services revenue and asset sales revenue based on the ASC 606 standard recognition model, which consists of the following: (1) an agreement exists between two or more parties that creates enforceable rights and obligations, (2) the performance obligations are clearly identified, (3) the transaction price has been determined, (4) the transaction price has been properly allocated to each performance obligation, and (5) the entity satisfies a performance obligation by transferring a promised good or service to a customer for each of the entities.

All services and asset sales revenue from contracts with customers consists of three reportable segments: Auction and Liquidation, Refurbishment & Resale, and Brokerage. Generally, revenue is recognized at the point in time in which the performance obligation has been satisfied and full consideration is received. The exception to recognition at a 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 nine months ended September 30, 2024 and 2023), 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 the Company’s “contract liability”. The deferred revenue balance was approximately $0.5 million as of both September 30, 2024 and December 31, 2023 and is reflected in accounts payable and accrued liabilities on the condensed consolidated balance sheets. The deferred revenue balance is primarily related to customer deposits on asset sales within the Refurbishment & Resale segment. The Company records receivables in certain situations based on timing of payments for Auction and Liquidation transactions held at the end of the reporting period; however, revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected. The Company does not record a “contract asset” for partially satisfied performance obligations.

For auction services and brokerage sale transactions, funds are typically collected from buyers and are held by the Company on the seller's behalf. The funds are included in cash and cash equivalents in the condensed consolidated balance sheets. The Company releases the funds to the seller, less the Company's commission and other fees due, after the buyer has accepted the goods. The amount of cash held on behalf of the sellers is recorded as payables to sellers in the accompanying condensed consolidated balance sheets.

The Company evaluates revenue from Auction and Liquidation and Brokerage segment transactions in accordance with the accounting guidance to determine whether to report such revenue on a gross or net basis. The Company has determined that it acts as an agent for its fee based transactions and therefore reports the revenue from transactions in which the Company acts as an agent on a net basis.

The Company also earns income through transactions that involve the Company acting jointly with one or more additional purchasers or lenders, pursuant to a partnership, joint venture or limited liability company (“LLC”) agreement (collectively, “Joint Ventures”). For these transactions, in which the Company’s ownership share meets the criteria for the equity method investments under ASC Topic 323, Equity Method and Joint Ventures, the Company does not record revenue or expense. Instead, the Company’s proportionate share of the net income (loss) is reported as earnings of equity method investments. 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. The Company recognizes revenue generated by lending activity in accordance with ASC 310. Fees collected in relation to the issuance of loans include 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. Monitoring fees are recorded at the agreed upon rate, and at the moment in which payments are made by the borrower. The backend profit share is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned. The recognition policy was established due to the uncertainty of timing of the amount of backend profit share which will be realized.

Through our 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. Direct loan origination fees are offset by the expenses incurred and the net amount is amortized over the life of the related loan using the interest method described in ASC 835.

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 its borrowers’ financial standing and performance 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 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 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 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 with its largest 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 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, 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. As of September 30, 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 June remittance did not meet the minimum required payment amount. The Company has 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 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 were placed in nonaccrual status 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 the largest borrower and were placed in nonaccrual status in June 2024. The Company's share of payments received from the nonaccrual loans, including interest, will be applied against the outstanding loan balance. As of September 30, 2024, the amortized cost basis of loans in nonaccrual status was $24.0 million, of which $5.4 million is recorded within notes receivable and $18.6 million is recorded within equity method investments. There were no loans in nonaccrual status as of December 31, 2023.

Specialty Lending - Concentration and credit risk

As of September 30, 2024, the Company held a gross balance of investments in notes receivable of $32.0 million, recorded in both notes receivable and equity method investments, and consisting of one borrower’s note balance of approximately $22.5 million, or 70% as of September 30, 2024, as compared to 62% as of December 31, 2023. The Company does not intend to hold highly concentrated balances due from one borrower as part of its long-term strategy but may, 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 $22.5 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. In certain cases, the Company’s recovery options may be subject to concurrence of the originator or other prior holder of the assets.

Accounts receivable

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

The Company only extends credit to entities and institutions of significance, such as well-known academic and financial institutions and U.S. government agencies. 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 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.

As of both September 30, 2024 and December 31, 2023, the reserve for credit losses related to accounts receivable was approximately $0.1 million.

Notes receivable

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. 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, 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 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.

As of September 30, 2024, the SCALE rate was 1.3834% and the Company's credit loss allowance rate specific to notes receivable was 3.6%. 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 September 30, 2024 and December 31, 2023, the Company's allowance for credit losses related to notes receivable outstanding was $0.4 million and $0.7 million, respectively. 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.

Equity method investments

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 September 30, 2024, the SCALE rate was 1.3834% and the credit loss allowance rate specific to equity method investments was 4.8%. 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 September 30, 2024 and December 31, 2023, the Company's allowance for credit losses related to its equity method investments was $1.0 million and $0.9 million, respectively.

Future accounting pronouncements

In November 2023, the Financial Accounting Standards Board ("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. Early adoption is permitted. The Company anticipates that ASU 2023-07 will have no accounting impact, but will require additional disclosure for each of its reportable segments.

In December 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, and may be adopted on a prospective or retrospective basis. Early adoption is permitted. The Company anticipates that ASU 2023-09 will have no accounting impact but will require additional disclosure related to certain income tax calculations.

Note 3 – Accounts Receivable, net

The Company’s accounts receivable, net consists of accounts receivables recorded in the ordinary course of business associated with the recognition of revenue from contracts with customers.

In accordance with ASC 326, the Company performs a review of accounts receivables on a quarterly basis. During the nine months ended September 30, 2024, the Company recorded no material adjustments for credit losses in selling, general and administrative expense on the consolidated statement of income related to accounts receivable. As of both September 30, 2024 and December 31, 2023, the reserve for credit losses was approximately $0.1 million.

Note 4 – Notes Receivable, net

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 September 30, 2024 and December 31, 2023, the Company’s outstanding notes receivables 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 reserve for credit losses was $10.9 million and $17.5 million, respectively. The activity during the nine months ended September 30, 2024 includes the additional investment in notes receivable of approximately $4.5 million, which was offset by principal payments made by borrowers of approximately $8.8 million and noncash transfer of notes receivable to equity method investments of approximately $2.5 million.

As of September 30, 2024, the Company’s outstanding notes receivables related to financing of laboratory equipment sales, net of unamortized deferred fees and costs on originated loans and adjusted for the reserve 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 the nine months ended September 30, 2024 includes the investment in notes receivable of approximately $0.6 million, which was offset by principal payments made by purchasers of $0.2 million and immaterial deferred financing fees, and allowance for credit losses.

The table below shows the Company’s lending activity as of September 30, 2024 (in thousands):



	September 30, 2024
Notes receivable as of December 31, 2023	$	18,262
Investment in notes receivable		5,047
Noncash transfer of notes receivable to equity method investments		(2,487	)
Principal repayments		(9,039	)
Notes receivable, as of September 30, 2024		11,783
Deferred financing fees and costs, net