What changed in Heritage Global Inc.'s 2023 10-K compared to 2022?

Across the narrative sections we track, Heritage Global Inc. (HGBL) added 141 paragraphs, removed 123, and edited 91 between the 2022 and 2023 10-K filings. The biggest movers are Item 7. Management's Discussion & Analysis (+64/−65), Item 1. Business (+38/−26), Item 1A. Risk Factors (+31/−23).

Did Heritage Global Inc. add new Risk Factors in the 2023 10-K?

Yes — Item 1A Risk Factors shows 31 new/edited paragraphs and 23 removed paragraphs versus the 2022 10-K.

What changed in Heritage Global Inc.'s MD&A (Item 7) in 2023?

Item 7 Management's Discussion & Analysis shows 64 new/edited paragraphs and 65 removed paragraphs year-over-year. Read the side-by-side diff to see exactly which revenue, margin, and outlook commentary was rewritten.

Did Heritage Global Inc.'s Legal Proceedings (Item 3) change in 2023?

Item 3 shows 1 added/edited paragraphs and 1 removed paragraphs — usually indicating new litigation disclosed or settled cases removed.

Where does this HGBL 10-K diff come from?

The source filings are Heritage Global Inc.'s official 2022 and 2023 Form 10-K annual reports from SEC EDGAR. 10q10k.net parses each filing, aligns paragraphs by section (Item 1, 1A, 1C, 2, 3, 7, 7A), and highlights every added, removed and edited sentence side-by-side.

What changed in Heritage Global Inc.'s 10-K — 2022 vs 2023

Paragraph-level year-over-year comparison of Heritage Global Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+141 added−123 removedSource: 10-K (2024-03-14) vs 10-K (2023-03-24)

Top changes in Heritage Global Inc.'s 2023 10-K

141 paragraphs added · 123 removed · 91 edited across 7 sections

Item 7. Management's Discussion & Analysis+64 / −65 · 43 edited
Item 1. Business+38 / −26 · 20 edited
Item 1A. Risk Factors+31 / −23 · 21 edited
Item 5. Market for Registrant's Common Equity+5 / −6 · 4 edited
Item 2. Properties+1 / −1 · 1 edited

Item 1. Business

Business — how the company describes what it does

20 edited+18 added−6 removed23 unchanged

2022 filing

2023 filing

Biggest change(“NLEX”), we broker charged-off receivables in the United States and Canada on behalf of lenders including banks, mortgage companies, and auto and alternative lending sources. • Specialty Lending – Through our subsidiary Heritage Global Capital LLC (“HGC”), we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. 3 Corporate Information HG was incorporated in Florida in 1983 under the name “MedCross, Inc.” Our name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, to “Counsel RB Capital Inc.” in 2011, and to Heritage Global Inc. in 2013.

We believe we have an opportunity to drive improved auction economics by serving more frequently in the role of principal rather than the lower margin role of broker. Further, we believe we have a strong growth opportunity in providing secured loans to our financial asset debt buyers, a service we are providing through HGC. 5 Strong Management Team.

Please note that our website address is provided as an inactive textual reference only. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report. 7

Dove began his career in the auction business over thirty years ago, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008. In addition, our senior management team has deep domain expertise in both industrial asset and financial asset transactions.

Dove began his career in the auction business over forty years ago, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008. In addition, our senior management team has deep domain expertise in both industrial asset and financial asset transactions.

The organization chart below outlines our basic domestic corporate structure as of December 31, 2022. Heritage Global Inc. (Florida) (1) 100% 100% 100% 100% Heritage Global Partners, Inc. (California) (2) Heritage Global LLC (Delaware) (3) National Loan Exchange, Inc. (Illinois) (5) Heritage Global Capital LLC (Delaware)(6) 100% Heritage ALT LLC (Delaware) (4) (1) Registrant. (2) Auction and Liquidation.

The organization chart below outlines our basic domestic corporate structure as of December 31, 2023. 3 Heritage Global Inc. (Florida) (1) 100% 100% 100% 100% Heritage Global Partners, Inc. (California) (2) Heritage Global LLC (Delaware) (3) National Loan Exchange, Inc. (Illinois) (5) Heritage Global Capital LLC (Delaware) (6) 100% Heritage ALT LLC (Delaware) (4) (1) Registrant. (2) Auction and Liquidation.

Item 1. B usiness. Overview and History HG is an asset services company specializing in financial and industrial asset transactions. We provide a full suite of services including market making, acquisitions, refurbishment, dispositions, valuations and secured lending. We focus on identifying, valuing, acquiring and monetizing underlying tangible and intangible assets across more than twenty-five global sectors.

Item 1. B usiness. Overview and History We are an asset services company specializing in financial and industrial asset transactions. We provide a full suite of services including market making, acquisitions, refurbishment, dispositions, valuations and secured lending. We focus on identifying, valuing, acquiring and monetizing underlying tangible assets across more than twenty-five global sectors.

We act as an advisor, as well as a principal, acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, charged-off receivable portfolios and entire business enterprises. Our operations are organized into two divisions, Financial Assets and Industrial Assets.

We act as an advisor, as well as a principal, acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, and charged-off receivable portfolios. Our operations are organized into two divisions, Industrial Assets and Financial Assets.

The most recent name change more closely identifies HG with its auction and specialty lending business lines. Our corporate headquarters are located at 12625 High Bluff Drive, Suite 305, San Diego, CA 92130. Our telephone number is (858) 847-0659 and our corporate website is www.hginc.com .

The most recent name change more closely identifies HG with its auction and liquidation and specialty lending segments. Our corporate headquarters are located at 12625 High Bluff Drive, Suite 305, San Diego, CA 92130. Our telephone number is (858) 847-0659 and our corporate website is www.hginc.com .

(“HGP”), we operate a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. • Refurbishment & Resale – Through our American Laboratory Trading division (“ALT”), we acquire refurbish and supply specialized laboratory equipment. Financial Assets Division • Brokerage – Through our subsidiary National Loan Exchange, Inc.

(“HGP”), we operate a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. • Refurbishment & Resale – Through our subsidiary Heritage ALT LLC (“ALT”), we acquire, refurbish and supply specialized laboratory equipment. Financial Assets Division • Brokerage – Through our subsidiary National Loan Exchange, Inc.

Our key competitive strengths are described below. Differentiated Business Model. We believe we have diversified business lines serving the financial and industrial asset liquidation market. We have multiple revenue streams in our brokerage and principal based auction services, advisory services and secured lending services.

Our key competitive strengths are described below. 4 Differentiated Business Model. We believe we have diversified business lines serving the financial and industrial asset liquidation market. We have multiple revenue streams including our brokerage, principal based auction services, refurbishment and resale, advisory services and secured lending services.

Our management team has decades of domain expertise with the ability to leverage extensive industry relationships, real time access to databases of buyers and sales, as well as a deep understanding of the underlying asset value across the more than 25 industrial sectors in which we operate.

ALT focuses on refurbishing and reselling laboratory equipment. 6 Our management team has decades of domain expertise with the ability to leverage extensive industry relationships, real time access to databases of buyers and sales, as well as a deep understanding of the underlying asset value across the more than 25 industrial sectors in which we operate.

Our buyers consist of both end-users and dealers. 6 Refurbishment & Resale Segment Through ALT, we have specialized our offering in the biotech and pharma sectors, which have been key verticals over the past decade. ALT focuses on refurbishing and reselling laboratory equipment.

Our buyers consist of both end-users and dealers. Refurbishment & Resale Segment Through ALT, we have specialized our offering in the biotech and pharma sectors, which have been key verticals over the past decade.

Historically, recessions drive an increased supply of surplus assets and increased demand for liquidation services, which we believe we are well-positioned to provide. Further, consumer lending and resulting charge-offs are expected to continue their upward trend to meet, and possibly exceed, pre-pandemic levels, which we believe will drive an increased supply of non-performing consumer loans.

Historically, recessions drive an increased supply of surplus assets and increased demand for liquidation services, which we believe we are well-positioned to provide. Further, consumer lending and charge-off rates are expected to continue their upward trend (currently the highest in over a decade), which we believe will drive an increased supply of non-performing consumer loans.

Since the 1980s, NLEX has sold over $150 billion face value of performing, nonperforming and charged-off assets. NLEX sales are concentrated in online, automotive, consumer credit card, student loan and real estate charge-offs. The typical credit we broker sells at a deep discount to face value, and we typically receive a commission for these services from both buyers and sellers.

NLEX sales are concentrated in online, automotive, credit card, secured and unsecured consumer and business loan and real estate charge-offs. The typical credit we broker sells at a deep discount to face value, and we typically receive a commission for these services from both buyers and sellers. We have existing relationships with high quality, top-tier and mid-tier debt buyers.

Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit. Brokerage Segment Through NLEX, we act as an advisor for sales of charged-off and nonperforming asset portfolios via an electronic auction exchange platform for banks, the U.S. government, and other debt holders throughout the United States and Canada.

Brokerage Segment Through NLEX, we act as an advisor for sales of charged-off and nonperforming asset portfolios via an electronic auction exchange platform for banks and other debt holders throughout the United States and Canada. Since the 1980s, NLEX has sold over $200 billion face value of performing, nonperforming and charged-off assets.

We believe we have the opportunity for growth through increased penetration of the underserved market of mid-tier buyers of charged-off receivables, providing more economic financing options and a greater variety of funding solutions to our customers. 5 Specialty Lending - Concentration and credit risk As of December 31, 2023, we held a gross balance of investments in notes receivable of $38.4 million, recorded in both notes receivable and equity method investments.

Employees As of December 31, 2022, we had 75 total and full-time employees, broken down by segment as follows: 30 are employed by HGP, 15 by NLEX, 20 by ALT, 4 by HGC and 6 by HG. 4 Industry and Competition Our business consists primarily of the auction, appraisal, refurbishment and asset advisory services provided by our Industrial Assets Division and the charged-off receivable brokerage and specialty financing services provided by our Financial Assets Division, each of which is further described below.

Industry and Competition Our business consists primarily of the auction, appraisal, refurbishment and asset advisory services provided by our Industrial Assets division and the charged-off receivable brokerage and specialty financing services provided by our Financial Assets division, each of which is further described below.

In general, we expect to earn an annual rate of return on our share of notes receivable outstanding of approximately 20% or more based on established terms of the loans funded and performance of collections. Our management team has decades of domain expertise with the ability to leverage extensive funding activity and widespread industry relationships.

Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share. In general, we expect to earn an annual rate of return on our share of notes receivable outstanding of approximately 20% or more based on established terms of the loans funded and performance of collections.

David Ludwig previously served as President of NLEX, a wholly owned subsidiary of the Company, and has served in such capacity since the Company acquired NLEX in 2014. Financial Assets Division Our Financial Assets division provides services to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable.

David Ludwig previously served as President of NLEX, a wholly owned subsidiary of the Company, and has served in such capacity since the Company acquired NLEX in 2014.

Since the inception of HGC in 2019, we have issued $92.6 million in total loans to investors by both self-funded loans and in partnership with senior lenders. Our portion of the total loans funded since inception is $34.3 million. Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share.

Specialty Lending Segment Through HGC, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. Since the inception of HGC in 2019, we have issued $148.9 million in total loans to investors through both self-funded loans and in partnership with senior lenders. Our portion of the total loans funded since inception is $62.9 million.

Removed

(3) Holding Company. (4) Refurbishment & Resale. (5) Brokerage. (6) Specialty Lending.

Added

Corporate Information HG was incorporated in Florida in 1983 under the name “MedCross, Inc.” Our name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, to “Counsel RB Capital Inc.” in 2011, and to Heritage Global Inc. in 2013.

Removed

COVID-19 While the novel coronavirus (“COVID-19”) pandemic had a negative impact on our performance during 2021 due to evolving travel and work restrictions, stimulus payments and credit policies impacting debt sales by financial institutions, and a delay in the typical process for the sale of certain industrial assets by manufacturing companies, it did not have a material negative impact on our Industrial Assets Division during 2022, as the supply of surplus industrial assets largely returned to pre-pandemic levels and the continuing disruptions to the global supply chain, particularly those involving industrial assets, increased demand for U.S. based surplus assets.

Added

(3) Holding Company. (4) Refurbishment & Resale. (5) Brokerage. (6) Specialty Lending. Employees As of December 31, 2023, we had 82 total and full-time employees, broken down by segment as follows: 33 are employed by HGP, 16 by NLEX, 22 by ALT, 5 by HGC and 6 by HG.

Removed

COVID-19’s negative impact on our Financial Assets Division in 2022 from reduced charged-off receivable portfolio volumes was offset by an increase in business volume and an influx of new clients for our NLEX brokerage business as a result of adaptive changes made during 2021.

Added

Financial Assets Division Our Financial Assets division provides services to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off due to failure to pay. Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit.

Removed

Going forward, we do not believe the COVID-19 pandemic will have material negative impacts on our financial performance, as we expect that supply and demand will remain robust in our Industrial Assets Division and increasing consumer spending and rising delinquency and charge-off rates will result in expanding volumes of nonperforming and charged-off consumer loans, which will benefit our Financial Assets Division.

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In addition to its banking relationships, NLEX has continued to be opportunistic as new lending facilities, such as FinTech, peer-to-peer and more recently Buy Now Pay Later lenders have expanded the availability of consumer credit.

Removed

We have existing relationships with high quality, top-tier and mid-tier debt buyers. NLEX is in the process of expanding into the FinTech lenders, peer-to-peer lending and Buy Now Pay Later sectors, where we believe NLEX has opportunity for significant growth.

Added

Together with growing volume in this industry, due to large increases in delinquency and charge-off rates, we anticipate significant growth opportunities in our brokerage segment as these sectors evolve. Given many of our clients' limited resources in this space, we have also implemented post-sale support, further entrenching NLEX with our dedicated clients as well as differentiating us from competitors.

Removed

In addition, we plan to add post-sale initiatives, making our services more attractive to our customers as compared to our competitors. Specialty Lending Segment Through HGC, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

Added

Our management team has decades of domain expertise with the ability to leverage extensive funding activity and widespread industry relationships.

Added

Our portfolio includes one borrower’s notes receivable balance of approximately $23.8 million, representing 62% of our total notes receivable as of December 31, 2023, down from 70% as of December 31, 2022.

Added

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

Added

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

Added

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.

Added

We mitigate this concentration risk by requiring, and monitoring, security from each borrower consisting of their charged off and nonperforming receivable portfolios. We engage in a due diligence process that leverages our valuation expertise, knowledge and experience in the underlying nonperforming receivable portfolios marketplace.

Added

In the event of default, we are entitled to call the unpaid interest and principal balances and receive all net collections directly. We may also recover our 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 our Brokerage segment.

Added

In certain cases, our recovery options may be subject to concurrence of the originator or other prior holder of the assets. From inception of the specialty lending segment through December 31, 2023, we have not incurred actual credit losses.

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Loan Restructuring In November 2023, our subsidiary, HGC and its affiliated joint ventures restructured loans with our largest borrower, which was experiencing financial difficulty, 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.

Added

Our share of the Restructured Loans at amortized cost basis is $22.2 million, or 57% of HGC’s share of the loan book. On our financial statements, $8.4 million is classified as notes receivable and $13.8 million is classified as equity method investments.

Added

All Restructured Loans were modified 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.

Added

As of September 30, 2023, we increased our allowance for credit losses related to our largest borrower experiencing financial difficulty. This resulted in an allowance for credit losses on the loans later restructured of $1.0 million as of September 30, 2023.

Added

We reevaluated the potential credit loss related to the Restructured Loans again at year-end and 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.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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2023 filing

Biggest changeAs our operations expand, we will be required to hire additional employees and may face competition for them. Therefore, either the loss of the services of the above existing officers, or the inability to attract and retain appropriately skilled new employees, could have a material adverse effect upon our business and results of operations.

Biggest changeTherefore, either the loss of the services of the above existing officers, or the inability to attract and retain appropriately skilled new employees, could have a material adverse effect upon our business and results of operations. 8 Disruptions to information systems and those of certain third-party service providers utilized by us could adversely impact our operations, reputation and brand.

Failure to anticipate and manage these risks could have a material adverse effect upon our business and results of operations. 8 A portion of our business is conducted through Joint Ventures. Conducting business through Joint Ventures, as described above under “Industry and Competition,” allows us to participate in significantly larger deals than those we could fund independently.

Failure to anticipate and manage these risks could have a material adverse effect upon our business and results of operations. A portion of our business is conducted through Joint Ventures. Conducting business through Joint Ventures, as described above under “Industry and Competition,” allows us to participate in significantly larger deals than those we could fund independently.

If funds are not available, or not available on acceptable terms, we could experience a material adverse effect upon our business. 10 Provisions in our organizational documents and Florida or certain other state laws could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

If funds are not available, or not available on acceptable terms, we could experience a material adverse effect upon our business. Provisions in our organizational documents and Florida or certain other state laws could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

Litigation of this type is often expensive to defend and may divert our management team’s attention as well as resources from the operation of our business. We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net income.

Litigation of this type is often expensive to defend and may divert our management team’s attention as well as resources from the operation of our business. 11 We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net income.

These factors also could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, particularly to serve on our Audit Committee and Compensation Committee, or as executive officers. Item 1B. Unresolve d Staff Comments None.

Declines in our profitability or the value of comparable companies may impact the fair value of our reporting units, which could result in a write-down of goodwill and a reduction in net income. 12 We may not be able to utilize income tax loss carry forwards.

Declines in our profitability or the value of comparable companies may impact the fair value of our reporting units, which could result in a write-down of goodwill and a reduction in net income. We may not be able to utilize income tax loss carry forwards.

The price of our common stock could be subject to wide fluctuations in response to a number of factors. 13 We could be delisted from Nasdaq, which could seriously harm the liquidity of our stock and our ability to raise capital. Our common stock is currently listed on Nasdaq, which has qualitative and quantitative listing criteria.

The price of our common stock could be subject to wide fluctuations in response to a number of factors. 12 We could be delisted from Nasdaq, which could seriously harm the liquidity of our stock and our ability to raise capital. Our common stock is currently listed on Nasdaq, which has qualitative and quantitative listing criteria.

To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2022, we do not have any preferred stock outstanding that has any preferential dividends.

To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2023, we do not have any preferred stock outstanding that has any preferential dividends.

Our executive officers, directors and their affiliates hold a large percentage of our common stock and their interests may differ from other stockholders. Our executive officers, directors and their affiliates beneficially own, in the aggregate, 12% of our common stock as of March 1, 2023.

Goodwill represents the amount by which the cost of an acquisition accounted for using the purchase method exceeds the fair value of the net assets acquired. Current accounting standards require that goodwill be periodically evaluated for impairment based on the fair value of the reporting unit. As of December 31, 2022 approximately 11% of our total assets represents goodwill.

Goodwill represents the amount by which the cost of an acquisition accounted for using the purchase method exceeds the fair value of the net assets acquired. Current accounting standards require that goodwill be periodically evaluated for impairment based on the fair value of the reporting unit. As of December 31, 2023 approximately 9% of our total assets represents goodwill.

Pursuant to Section 607.0901 of the FBCA, a publicly held Florida corporation may not engage in a broad range of extraordinary corporate transactions with an interested shareholder within three years of when the shareholder became an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder), unless, among other exceptions: the transaction is approved by a majority of disinterested directors; the interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least three years preceding the announcement date of any such extraordinary corporate transaction; the interested shareholder is the beneficial owner of at least 90% of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; or the consideration paid to the holders of the corporation’s voting stock is at least equal to certain fair price criteria.

We may need additional funds to finance the operations of our business, to make additional investments, to expand our specialty financing division, or to acquire complementary businesses or assets. We may be unable to generate these funds from our operations.

We may need additional funds to finance the operations of our business, to make additional investments, to expand our Specialty Lending segment, or to acquire complementary businesses or assets. We may be unable to generate these funds from our operations.

Moreover, such dilution could have a material adverse effect on the market price for the shares of our common stock. 11 The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock.

The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock.

We could issue a significant number of shares of common stock in the future in connection with investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution could be significant. Moreover, such dilution could have a material adverse effect on the market price for the shares of our common stock.

These restrictions prohibit us from, among other things, selling property to (1) persons or entities that appear on lists of restricted or prohibited parties maintained by the United States or other governments or (2) countries, regimes, or nationals that are the target of applicable economic sanctions or other embargoes. 9 We may incur significant costs or be required to modify our business to comply with these requirements.

Although our purchase process includes due diligence to determine that there are no material adverse environmental issues, it is possible that such issues could be discovered subsequent to a completed purchase. Any remediation and related costs could have a material adverse effect upon our business and results of operations.

Changes in tax laws or their interpretations, or becoming subject to additional foreign, U.S. federal, state or local taxes, could negatively affect our business, financial condition and results of operations. We are subject to extensive tax liabilities, including U.S. federal and state taxes.

Any remediation and related costs could have a material adverse effect upon our business and results of operations. 9 Changes in tax laws or their interpretations, or becoming subject to additional foreign, U.S. federal, state or local taxes, could negatively affect our business, financial condition and results of operations.

This statutory provision may prevent takeover attempts that might result in a premium over the market price for shares of our common stock. Our Board of Directors may issue additional shares of preferred stock without stockholder approval. Our Articles authorize the issuance of up to 10,000,000 shares of preferred stock, $10.00 par value per share.

Although permitted by the FBCA, we have not elected in our Articles to opt out of the terms of Section 607.0901. This statutory provision may prevent takeover attempts that might result in a premium over the market price for shares of our common stock. Our Board of Directors may issue additional shares of preferred stock without stockholder approval.

Of the 10,000,000 shares of preferred stock authorized under our Articles, the Company has designated 20,000 shares as Series N Preferred Stock. There are 565 shares of Series N Preferred Stock issued and outstanding. Our Board is authorized to determine the rights and preferences of any additional series or class of preferred stock.

Our Articles authorize the issuance of up to 10,000,000 shares of preferred stock, $10.00 par value per share. Of the 10,000,000 shares of preferred stock authorized under our Articles, the Company has designated 20,000 shares as Series N Preferred Stock. There are 563 shares of Series N Preferred Stock issued and outstanding.

Disruptions to information systems and those of certain third-party service providers utilized by us could adversely impact our operations, reputation and brand. The protection of client, employee and company data is extremely important to us. The regulatory environment surrounding information security and privacy is becoming increasingly demanding and frequently changing in the jurisdictions in which we do business.

The protection of client, employee and company data is extremely important to us. The regulatory environment surrounding information security and privacy is becoming increasingly demanding and frequently changing in the jurisdictions in which we do business. Clients and employees have expectations that we will protect their information from cyber-attacks and other security breaches.

Either situation could have a material adverse effect upon our use of working capital and our results of operations. Our operating results are subject to significant fluctuation.

Either situation could have a material adverse effect upon our use of working capital and our results of operations. 7 Our Specialty Lending segment may be concentrated. A significant portion of our Specialty Lending loan portfolio may at any time be concentrated with a small number of borrowers.

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Clients and employees have expectations that we will protect their information from cyber-attacks and other security breaches.

Added

Our Specialty Lending loan portfolio includes a notes receivable balance of approximately $23.8 million from one borrower, representing 62% of our total notes receivable as of December 31, 2023.

Removed

Subject to certain exceptions, an interested shareholder is defined as a person who beneficially owns more than 15% of a corporation’s outstanding voting shares. Although permitted by the FBCA, we have not elected in our Articles to opt out of the terms of Section 607.0901.

Added

Concentration with a small number of borrowers exposes us to the risk that financial difficulty with a single borrower or a small number of borrowers can materially affect our business, financial conditions or operating results. Our Specialty Lending segment depends on the expertise, efforts and financial health of our borrowers.

Added

The ability of our borrowers to repay the loans we make to them depends on the ability of our borrowers to collect the charged off receivables purchased with the proceeds of these loans in accordance with their projections, which in turn requires our borrowers to properly evaluate the collectability of the charged off receivables as well as the costs of collection.

Added

If our borrowers' collection model forecasts are incorrect, or if unanticipated market conditions cause our borrowers' evaluations to be incorrect, our business, financial conditions and operating results could be negatively affected. Our Specialty Lending segment depends on the ability of our borrowers to purchase charged off receivables at favorable prices.

Added

Portfolios of charged off receivables fluctuate in price and volume, according to both the availability of new charged off receivables and the demand for these receivables.

Added

If our borrowers are unable to purchase a sufficient volume of charged off receivables, or to purchase charged off receivables at a favorable price, our business, financial conditions and operating results could be negatively affected. Our operating results are subject to significant fluctuation.

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As our operations expand, we will be required to hire additional employees and may face competition for them.

Added

We may incur significant costs or be required to modify our business to comply with these requirements.

Added

We are subject to extensive tax liabilities, including U.S. federal and state taxes.

Added

Our Board is authorized to determine the rights and preferences of any additional series or class of preferred stock.

Item 2. Properties

Properties — owned and leased real estate

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2023 filing

Biggest changeThe Edwardsville office is leased from a related party, as discussed in Note 15 to our consolidated financial statements. We own a warehouse and office space East Lyme, CT, which is related to our ALT operations. 14

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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2022 filing

2023 filing

Biggest changeItem 3. Legal Proceedings. We are involved in various legal matters arising out of our operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on our business and results of operations. Item 4. Mine Saf ety Disclosures. Not Applicable. 15 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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2022 filing

2023 filing

Biggest changeDuring the three months ended December 31, 2022, repurchases of the Company's common stock were as follows: Period (a) Total Number of Shares Purchased [1] (b) Average Price Paid per Share [2] (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs [3] October 1 through October 31, 2022 59,469 $ 1.65 243,168 $ 3,607,436 November 1 through November 30, 2022 300 $ 1.65 243,468 $ 3,606,941 December 1 through December 31, 2022 — $ — 243,468 $ 3,606,941 [1] No shares of our common stock were purchased other than through a publicly announced plan or program. [2] Amounts in this column reflect weighted average price paid per share, which includes commissions and other expenses associated with the repurchases. [3] This column reflects the approximate dollar value of shares of our common stock that are available for purchase under the $4.0 million repurchase program authorized by our Board of Directors on May 5, 2022 (“2022 Repurchase Program”).

Biggest changeDuring the three months ended December 31, 2023, repurchases of the Company's common stock were as follows: Period (a) Total Number of Shares Purchased [1] (b) Average Price Paid per Share [2] (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs [3] October 1 through October 31, 2023 — $ — — $ — November 1 through November 30, 2023 — $ — — $ — December 1 through December 31, 2023 152,707 $ 2.62 396,175 $ 3,207,096 [1] No shares of our common stock were purchased other than through a publicly announced plan or program. [2] Amounts in this column reflect weighted average price paid per share, which includes commissions and other expenses associated with the repurchases. [3] This column reflects the approximate dollar value of shares of our common stock that are available for purchase under the $4.0 million repurchase program authorized by our Board of Directors on May 5, 2022 (“2022 Repurchase Program”).

Dividends To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2022, we do not have any preferred stock outstanding that has any preferential dividends. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Dividends To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2023, we do not have any preferred stock outstanding that has any preferential dividends. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Item 5. Market for Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities. Market Information Shares of our common stock, $0.01 par value per share, are quoted under the symbol “HGBL” on the Nasdaq Stock Market. Holders As of March 1, 2023, we had approximately 341 holders of common stock of record.

Item 5. Market for Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities. Market Information Shares of our common stock, $0.01 par value per share, are quoted under the symbol “HGBL” on the Nasdaq Stock Market. Holders As of March 1, 2024, we had approximately 338 holders of common stock of record.

The 2022 Repurchase Program expires in June 2025. Item 6. [ Reserved]. 16

The 2022 Repurchase Program expires in June 2025. Item 6. [ Reserved]. 15

Removed

On March 10, 2021, the Company issued 12,019 shares of common stock to certain accredited personnel pursuant to the exercise of stock options. On May 17, 2021 we issued an additional 10,347 shares of common stock to certain accredited personnel pursuant to the exercise of stock options.

Added

The Company did not sell any of its securities during the fiscal year ended December 31, 2023 that were not registered under the Securities Act of 1933, as amended. Issuer Purchases of Equity Securities.

Removed

On March 28, 2022 we issued 21,250 shares of common stock to certain accredited personnel pursuant to the exercise of stock options. These securities were issued in reliance on the exemptions set forth in Rule 506(b) of Regulation D under the Securities Act of 1933 (the “Act”), as amended and Section 4(a)(2) of the Act, respectively.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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2022 filing

2023 filing

Biggest changeItem 6. [Reserved]. 16 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 26 Item 8. Financial Statements and Supplementary Data. 26 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 26 Item 9A. Controls and Procedures. 26

Biggest changeItem 6. [Reserved]. 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 23 Item 8. Financial Statements and Supplementary Data. 23 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 23 Item 9A. Controls and Procedures. 23 Item 9B.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

43 edited+21 added−22 removed38 unchanged

2022 filing

2023 filing

Biggest changeCash provided by financing activities in 2021 of $3.1 million consisted primarily of $2.0 million in proceeds from the issuance of the ALT Note as part of the acquisition of certain assets and liabilities of American Laboratory Trading, and draws on our 2021 Credit Facility of $3.2 million, offset by aggregate repayments of debt payable to third parties of $1.4 million and payments of tax withholdings related to cashless exercises of stock option awards of approximately $1.0 million. 18 Management’s Discussion of Results of Operations The following table summarizes our consolidated results of operations (in thousands): Year Ended December 31, 2022 2021 Revenues: Services revenue $ 23,419 $ 19,954 Asset sales 23,495 5,838 Total revenues 46,914 25,792 Operating costs and expenses: Cost of services revenue 4,654 4,499 Cost of asset sales 16,256 2,929 Selling, general and administrative 21,326 14,811 Depreciation and amortization 536 460 Total operating costs and expenses 42,772 22,699 Earnings of equity method investments 6,978 (79 ) Operating income 11,120 3,014 Interest expense, net (113 ) (22 ) Income before income tax benefit 11,007 2,992 Income tax benefit (4,486 ) (61 ) Net income $ 15,493 $ 3,053 Our revenue has several components: (1) traditional fee based asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment and real estate, and (3) fees and interest earned for appraisal, management advisory services and specialty lending services.

Biggest changeManagement’s Discussion of Results of Operations The following table summarizes our consolidated results of operations (in thousands): 17 Year Ended December 31, 2023 2022 Revenues: Services revenue $ 39,480 $ 23,419 Asset sales 21,065 23,495 Total revenues 60,545 46,914 Operating costs and expenses: Cost of services revenue 8,007 4,654 Cost of asset sales 12,724 16,256 Selling, general and administrative 26,040 21,326 Depreciation and amortization 514 536 Total operating costs and expenses 47,285 42,772 Earnings of equity method investments 1,059 6,978 Operating income 14,319 11,120 Interest expense, net (324 ) (113 ) Income before income tax expense (benefit) 13,995 11,007 Income tax expense (benefit) 1,520 (4,486 ) Net income $ 12,475 $ 15,493 Our revenue has several components: (1) traditional fee based asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment and real estate, and (3) fees and interest earned for appraisal, management advisory services and specialty lending services.

The expected 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 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 expected credit losses, and subsequent adjustments to such losses, will be 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.

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.

For further discussion of our income taxes, see Note 14 to our consolidated financial statements. Stock-based compensation Our stock-based compensation is primarily in the form of options to purchase common shares. The fair value of stock options is calculated using the Black-Scholes option pricing model.

For further discussion of our income taxes, see Note 14 to our consolidated financial statements. 22 Stock-based compensation Our stock-based compensation is primarily in the form of options to purchase common shares. The fair value of stock options is calculated using the Black-Scholes option pricing model.

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 23 which payments are made by the borrower.

In both years the depreciation of property, plant and equipment was not material. Off-Balance Sheet Arrangements – We had no off-balance sheet arrangements during the years ended December 31, 2022 and 2021. Key Performance Indicators We monitor a number of financial and non-financial measures on a regular basis in order to track our underlying operational performance and trends.

In both years the depreciation of property, plant and equipment was not material. Off-Balance Sheet Arrangements – We had no off-balance sheet arrangements during the years ended December 31, 2023 and 2022. Key Performance Indicators We monitor a number of financial and non-financial measures on a regular basis in order to track our underlying operational performance and trends.

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, 2022), and therefore not reported on a disaggregated basis.

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, 2023), and therefore not reported on a disaggregated basis.

Our critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. 22 Revenue recognition We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) and ASC Topic 310, Receivables (“ASC 310”).

Our critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. 20 Revenue recognition We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) and ASC Topic 310, Receivables (“ASC 310”).

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

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

We periodically assess the value 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 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.

See Note 17 to our consolidated financial statements for further discussion of our stock-based compensation. 25

See Note 17 to our consolidated financial statements for further discussion of our stock-based compensation.

We believe we can fund our operations and our debt service obligations during 2023 and beyond through a combination of cash flows from our on-going operations, and accessing financing from our existing line of credit.

We believe we can fund our operations and our debt service obligations during 2024 and beyond through a combination of cash flows from our on-going operations and accessing financing from our existing line of credit.

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, 2022, the deferred revenue balance was $0.4 million. The deferred revenue balance is primarily related to customer deposits on asset sales within our Refurbishment & Resale segment.

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, 2023, the deferred revenue balance was $0.5 million. The deferred revenue balance is primarily related to customer deposits on asset sales within our Refurbishment & Resale segment.

The operating assets and liabilities associated with such transactions are therefore subject to the same variability and can be different at the end of any given period. Cash used in investing activities. Cash used in investing activities during 2022 was $7.5 million, as compared to cash used in investing activities of $10.2 million during 2021.

The operating assets and liabilities associated with such transactions are therefore subject to the same variability and can be different at the end of any given period. Cash used in investing activities. Cash used in investing activities during 2023 was $15.9 million, as compared to cash used in investing activities of $7.5 million during 2022.

These KPIs may not be defined or calculated in the same way as similar KPIs used by other companies. 21 We prepared our audited consolidated financial statements in accordance with GAAP. We define EBITDA as net income plus depreciation and amortization, interest and other expense, and provision for income taxes.

These KPIs may not be defined or calculated in the same way as similar KPIs used by other companies. We prepared our audited consolidated financial statements in accordance with GAAP. We define EBITDA as net income plus depreciation and amortization, interest expense, and provision for income taxes. Adjusted EBITDA reflects EBITDA adjusted further to eliminate the effects of stock-based compensation.

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. See Note 2 and Note 6 to our consolidated financial statements for further detail.

Further, we do not utilize segmented asset information to evaluate the performance of our reportable segments and do not include intercompany transfers between segments for management reporting purposes. 19 The following table sets forth operating income information for the Company's reportable segments (in thousands): Year Ended December 31, 2022 2021 Industrial Assets Division: Auction and Liquidation $ 7,979 $ 3,467 Refurbishment & Resale 1,187 (41 ) Total divisional operating income 9,166 3,426 Financial Assets Division: Brokerage 4,709 1,731 Specialty Lending 1,213 293 Total divisional operating income 5,922 2,024 Corporate & other operating loss (3,968 ) (2,436 ) Consolidated operating income $ 11,120 $ 3,014 2022 Compared to 2021 Revenues and cost of revenues – Revenues were $46.9 million in 2022 as compared to $25.8 million in 2021 and costs of services revenue and asset sales were $20.9 million in 2022 compared to $7.4 million in 2021.

Further, we do not utilize segmented asset information to evaluate the performance of our reportable segments and do not include intercompany transfers between segments for management reporting purposes. 18 The following table sets forth operating income information for the Company's reportable segments (in thousands): Year Ended December 31, 2023 2022 Industrial Assets Division: Auction and Liquidation $ 4,918 $ 7,979 Refurbishment & Resale 2,847 1,187 Total divisional operating income 7,765 9,166 Financial Assets Division: Brokerage 8,946 4,709 Specialty Lending 1,862 1,213 Total divisional operating income 10,808 5,922 Corporate & other operating loss (4,254 ) (3,968 ) Consolidated operating income $ 14,319 $ 11,120 2023 Compared to 2022 Revenues and cost of revenues – Revenues were $60.5 million in 2023 as compared to $46.9 million in 2022 and costs of services revenue and asset sales were $20.7 million in 2023 compared to $20.9 million in 2022.

The increase of $2.0 million is primarily due to an increase in accounts payable and accrued liabilities of $4.1 million and the current portion of third party debt of $0.9 million offset by a decrease in payables to sellers of $3.3 million.

The decrease of $1.5 million is primarily due to a decrease in accounts payable and accrued liabilities of $1.7 million and the current portion of third party debt of $1.7 million, offset by an increase in payables to sellers of $1.8 million.

Cash provided by financing activities. Cash provided by financing activities was $0.1 million during 2022, as compared to cash provided by financing activities of $3.1 million during 2021.

Cash provided by financing activities. Cash provided by financing activities was $2.5 million during 2023, as compared to cash provided by financing activities of $0.1 million during 2022.

Year Ended December 31, 2022 2021 Net income $ 15,493 $ 3,053 Add back: Depreciation and amortization 536 460 Interest expense, net 113 22 Income tax benefit (4,486 ) (61 ) EBITDA 11,656 3,474 Management add back: Stock based compensation 540 408 Separation agreement — 200 Adjusted EBITDA $ 12,196 $ 4,082 Future accounting pronouncements In 2016, the 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.

Year Ended December 31, 2023 2022 Net income $ 12,475 $ 15,493 Add back: Depreciation and amortization 514 536 Interest expense, net 324 113 Income tax expense (benefit) 1,520 (4,486 ) EBITDA 14,833 11,656 Management add back: Stock based compensation 776 540 Adjusted EBITDA $ 15,609 $ 12,196 Recently adopted accounting pronouncements In 2016, the 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.

We currently expect the adoption of ASU 2016-13 will result in an adjustment to retained earnings on January 1, 2023 between $0.3 million and $0.4 million, in order to establish an expected credit loss reserve against our receivables related to loans outstanding, including those held within equity method investments. increase in our allowance for loan losses.

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.

Liquidity and Capital Resources Liquidity At December 31, 2022, we had working capital of $7.7 million, as compared to working capital of $9.1 million at December 31, 2021, a decrease of $1.4 million. Our current assets increased to $23.9 million at December 31, 2022 compared to $23.3 million at December 31, 2021.

Liquidity and Capital Resources Liquidity At December 31, 2023, we had working capital of $11.6 million, as compared to working capital of $7.7 million at December 31, 2022, an increase of $3.9 million. Our current assets increased to $26.3 million at December 31, 2023 compared to $23.9 million at December 31, 2022.

As compared to 2021 there was an increase in selling, general and administrative expense during 2022 primarily due to increased compensation and operation expenses related to the acquisition of ALT in the third quarter of 2021 and increased compensation expense as a result of improved performance in our other segments.

As compared to 2022 there was an increase in selling, general and administrative expense during 2023 primarily due to increased compensation expense as a result of improved performance across our segments and increased headcount.

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, 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, and the Term Loan (as defined below).

We are required to pay off the ALT 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.

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, 2023, we had an outstanding balance of $0.9 million on the ALT Note.

The change in our current assets was primarily due to an increase in notes receivable of $2.3 million and inventory of $1.4 million, offset by decreases in cash of $1.0 million and accounts receivable of $1.7 million. Our current liabilities increased to $16.2 million at December 31, 2022 as compared to $14.2 million at December 31, 2021.

The change in our current assets was primarily due to an increase in the current portion of notes receivable of $2.1 million, accounts receivable of $0.9 million, and inventory of $0.5 million, offset by decreases in cash and cash equivalents of $0.4 million and other current assets of $0.7 million.

Notes receivable, net Our notes receivable balance consists of loans to buyers of charged-off receivable portfolios, which is considered the only loan category or segment to be reported under the applicable accounting guidance. 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.

The increased travel and entertainment expenses were due to the lift in travel restrictions related to the COVID-19 pandemic. 20 Significant components of selling, general and administrative expense were as shown below (dollars in thousands): Year Ended December 31, 2022 2021 % change Compensation: Auction and Liquidation $ 6,380 $ 5,473 17 % Refurbishment & Resale 1,601 436 267 % Brokerage 4,911 3,267 50 % Specialty Lending 659 446 48 % Corporate & other 2,061 999 106 % Employee retention tax credit - (602 ) -100 % Stock-based compensation 540 408 32 % Consulting 108 75 44 % Board of Directors fees 308 260 18 % Accounting, tax and legal professional fees 1,200 1,183 1 % Insurance 467 442 6 % Occupancy 1,105 964 15 % Travel and entertainment 683 368 86 % Advertising and promotion 448 357 25 % Information technology support 383 326 17 % Other 472 409 15 % Total selling, general and administrative expense $ 21,326 14,811 44 % Depreciation and amortization expense – Depreciation and amortization expense in each of the years ended 2022 and 2021 was $0.5 million, and consisted almost entirely of amortization expense related to intangible assets.

Significant components of selling, general and administrative expense were as shown below (dollars in thousands): Year Ended December 31, 2023 2022 % change Compensation: Auction and Liquidation $ 6,502 $ 6,380 2 % Refurbishment & Resale 2,314 1,601 45 % Brokerage 6,217 4,911 27 % Specialty Lending 1,030 659 56 % Corporate & other 2,357 2,061 14 % Stock-based compensation 776 540 44 % Consulting 98 108 -9 % Board of Directors fees 322 308 5 % Accounting, tax and legal professional fees 1,696 1,200 41 % Insurance 540 467 16 % Occupancy 1,285 1,105 16 % Travel and entertainment 831 683 22 % Advertising and promotion 604 448 35 % Information technology support 436 383 14 % Provision for credit losses 530 — 100 % Other 502 472 6 % Total selling, general and administrative expense $ 26,040 21,326 22 % 19 Depreciation and amortization expense – Depreciation and amortization expense in each of the years ended 2023 and 2022 was $0.5 million and consisted almost entirely of amortization expense related to intangible assets.

Cash disbursements during 2022 consisted primarily of investments in equity method investments of $14.6 million, repayment on our 2021 Credit Facility of $1.9 million, repayment on our ALT Note of $0.5 million, payment of operating expenses, and settlement of auction liabilities.

Cash disbursements during 2023 consisted primarily of investments in notes receivable net of cash received on transfer of notes to partners of $21.0 million, equity method investments of $17.2 million, repayment on our 2021 Credit Facility of $8.9 million, repayment on our ALT Note of $0.5 million, repayment on our Term Loan of $0.7 million, payment of operating expenses, and settlement of auction liabilities.

Selling, general and administrative expense – Selling, general and administrative expense was $21.3 million in 2022 as compared to $14.8 million in 2021, an increase of $6.5 million or 44%.

Selling, general and administrative expense – Selling, general and administrative expense was $26.0 million in 2023 as compared to $21.3 million in 2022, an increase of $4.7 million or 22%.

The amount was further attributable to a change in net income adjusted for noncash items, which was $0.9 million higher during 2022 as compared to 2021. The significant changes in operating assets and liabilities during 2022 as compared to 2021 are primarily due to the nature of our operations.

The amount was offset by changes in operating assets and liabilities of $2.0 million during 2023 as compared to 2022. The significant changes in operating assets and liabilities during 2023 as compared to 2022 are primarily due to the nature of our operations.

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.

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. 16 Ownership Structure and Capital Resources At December 31, 2023 and 2022, we had stockholders’ equity of $61.1 million and $48.3 million, respectively.

Adjusted EBITDA reflects EBITDA adjusted further to eliminate the effects of stock-based compensation and a one-time separation agreement. Management uses EBITDA and Adjusted EBITDA in assessing the Company’s results, evaluating the Company’s performance and in reaching operating and strategic decisions.

Management uses EBITDA and Adjusted EBITDA in assessing the Company’s results, evaluating the Company’s performance and in reaching operating and strategic decisions.

In addition, we used $8.4 million in funding our notes receivable and approximately $0.2 million in the purchase of fixed assets.

In addition, we used $8.4 million in funding our investment in notes receivable.

We are permitted to use the proceeds of the loan solely for our business operations. As of December 31, 2022, we had an outstanding balance of $2.9 million on the 2021 Credit Facility. During 2022, our primary source of cash was the cash on hand plus the cash provided by our operating activities.

The maturity date was modified to October 27, 2024. We are permitted to use the proceeds of the loan solely for our business operations. As of December 31, 2023, we had no outstanding balance on the 2021 Credit Facility.

We expect to be able to finance our future operations through a combination of future net cash flows from operating activities, our 2021 Credit Facility and securing additional debt financing if needed. Our contractual requirements are limited to the outstanding debt and lease commitments with related and unrelated parties.

We determine our future capital and operating requirements based upon our current and projected operating performance and contractual commitments. We expect to be able to finance our future operations through a combination of working capital, future net cash flows from operating activities, our 2021 Credit Facility and Term Loan.

Critical Accounting Policies The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions.

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. Critical Accounting Policies The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions.

On May 5, 2021, we entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “2021 Credit Facility”) with C3bank, National Association for a $10.0 million revolving line of credit. The 2021 Credit Facility matures on May 7, 2023.

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"). The Company is permitted to use the proceeds of the Term Loan solely for its business operations.

Capital requirements are generally limited to our purchases of surplus and distressed assets and our lending activity under our specialty finance unit of HGC. We believe that our current capital resources, including available borrowing capacity from our 2021 Credit Facility, are sufficient for these requirements.

We believe that our current capital resources, including available borrowing capacity from our 2021 Credit Facility and Term Loan, are sufficient for these requirements. In the event additional capital is needed, we believe we can obtain additional debt financing through capital partners.

In the event additional capital is needed, we believe we can obtain additional debt financing through either capital partners or a new credit facility. Cash Position and Cash Flows Cash and cash equivalents at December 31, 2022 were $12.7 million compared to $13.6 million at December 31, 2021. Cash provided by (used in) operating activities.

Cash Position and Cash Flows Cash and cash equivalents at December 31, 2023 were $12.3 million compared to $12.7 million at December 31, 2022. Cash provided by operating activities. Cash provided by operating activities was $13.0 million during 2023 as compared to $6.5 million during 2022.

Cash provided by operations was $6.5 million during 2022 as compared to cash used in operating activities of $2.6 million during 2021. The approximate $9.1 million change was primarily attributable to a change of $8.2 million in operating assets and liabilities during 2022 as compared to 2021.

The approximate $6.5 million change was primarily attributable to a change of $8.6 million in net income adjusted for noncash items during 2023 as compared to 2022, which includes significant changes of a $5.9 million change in earnings from equity method investments and a $5.4 million change in deferred taxes, offset by a $3.0 million decrease in net income.

Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. As of December 31, 2022, we have not recorded an allowance for credit losses related to notes receivable outstanding.

Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. 21 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).

Equity Method Investments As noted above, we conduct a portion of our business through Joint Ventures.

As of December 31, 2023, we have recorded an allowance for credit losses related to notes receivable outstanding of $0.7 million. See Note 2 and Note 3 to our consolidated financial statements for further detail. Equity Method Investments As noted above, we conduct a portion of our business through Joint Ventures.

Removed

Ownership Structure and Capital Resources At December 31, 2022 and 2021, we had stockholders’ equity of $48.3 million and $32.6 million, respectively. 17 We determine our future capital and operating requirements based upon our current and projected operating performance and contractual commitments.

Added

Our current liabilities decreased to $14.7 million at December 31, 2023 as compared to $16.2 million at December 31, 2022.

Removed

Cash used in investing activities during 2021 of $10.2 million was primarily attributable to the acquisition of certain assets and liabilities of American Laboratory Trading for $4.3 million, real estate used in American Laboratory Trading’s business for $1.4 million, and net increase of activity within our specialty lending segment of $2.1 million and $2.4 million net investments in equity method investments.

Added

On May 26, 2023, 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.

Removed

Resulting in gross profit of $26.0 million in 2022 compared to $18.4 million in 2021, an increase of approximately $7.6 million or approximately 42%. The increased gross profit in the current year reflects the vagaries of the timing and magnitude of asset liquidation transactions, in addition to increases resulting from operations of ALT, which was acquired in August of 2021.

Added

The maturity date of the Term Loan is April 27, 2028.

Removed

As we are currently finalizing the execution of our implementation controls and processes, the ultimate impact of the adoption of ASU 2016-13 as of January 1, 2023 could differ from our current expectation.

Added

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 0.25% and a floor of no less than 6.5%.

Removed

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.

Added

The Term Loan requires we pay monthly installments over a 5-year term with adjustments for changes in the variable interest rate. As of December 31, 2023, we had an outstanding balance of $6.3 million on the Term Loan.

Removed

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.

Added

During 2023, our primary source of cash was the cash on hand, proceeds from the Term Loan and cash provided by our operating activities.

Removed

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, we are eligible for the refundable ERC under the Cares Act for the quarters ended June 30, 2021 and September 30, 2021.

Added

Our contractual requirements are limited to the outstanding debt and lease commitments with related and unrelated parties. Capital requirements are generally limited to our purchases of surplus and distressed assets and our investment activity under our Specialty Lending segment.

Removed

As we have incurred certain employment taxes during 2021 and have yet to receive the refundable ERC, we have 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.

Added

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

Removed

We have determined that the claim is in alignment with applicable regulatory criteria, the amounts are known and realizable, and refundable ERC is probable. As of both December 31, 2022 and 2021, we have recorded a $0.6 million receivable classified in other current assets on our consolidated balance sheet.

Added

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.

Removed

Business combinations Acquisitions are accounted for under ASC Topic 805, Business Combinations (“ASC 805”), which requires that assets acquired and liabilities assumed that are deemed to be a business are recorded based on their respective acquisition date fair values.

Added

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 2022 Repurchase Program of approximately $0.4 million.

Removed

ASC 805 further requires that separately identifiable intangible assets be recorded at their acquisition date fair values and that the excess of consideration paid over the fair value of assets acquired and liabilities assumed (including identifiable intangible assets) should be recorded as goodwill. In August 2021 we acquired American Laboratory Trading for approximately $5.6 million.

Added

This resulted in gross profit of $39.8 million in 2023 compared to $26.0 million in 2022, an increase of approximately $13.8 million or approximately 53%. The increased gross profit in the current year reflects the significant improvement in performance of our core business segments and increased volume in the financial assets division from both the brokerage and specialty lending segments.

Removed

Our purchase price allocation was based on an evaluation of the appropriate fair values and represents management's best estimate. 24 Intangible assets and goodwill Intangible assets are recorded at fair value upon acquisition. Those with an estimated useful life are amortized, and those with an indefinite useful life are unamortized.

Added

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 and allowance for credit losses.

Removed

Subsequent to acquisition, we monitor events and changes in circumstances that require an assessment of intangible asset recoverability. Indefinite-lived intangible assets are assessed at least annually to determine both if they remain indefinite-lived and if they are impaired.

Added

Under ASC 326, we elected to evaluate 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.

Removed

We assess whether or not there have been any events or changes in circumstances that suggest the value of the asset may not be recoverable. Amortized intangible assets are not tested annually, but are assessed when events and changes in circumstances suggest the assets may be impaired.

Added

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.

Removed

If an assessment determines that the carrying amount of any intangible asset is not recoverable, an impairment loss is recognized in the income statement, determined by comparing the carrying amount of the asset to its fair value.

Added

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.

Removed

All of our identifiable intangible assets at December 31, 2022 have been acquired as part of the acquisitions of HGP in 2012, NLEX in 2014 and ALT in 2021, and are discussed in more detail in Note 10 to our consolidated financial statements. No impairment charges were necessary during 2022.

Added

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 on the January 1, 2023 consolidated balance sheet, and balance of the allowance for credit losses was therefore $0.2 million as of January 1, 2023.

Removed

Goodwill, which results from the difference between the purchase price and the fair value of net identifiable tangible and intangible assets acquired in a business combination, is not amortized, but is tested at least annually for impairment. We perform our annual impairment test on October 1.

Added

As of December 31, 2023, the SCALE rate increased to 1.4183% and our credit loss rate specific to notes receivable was 3.6%. The increase over the SCALE rate was due to both risks with the concentrated balance and declining collections industry-wide.

Removed

In testing goodwill, we initially use a qualitative approach and analyze relevant factors to determine if events and circumstances have affected the value of the goodwill.

Added

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.

Removed

If the result of this qualitative analysis indicates it is more likely than not that the value has been impaired, we then apply a quantitative approach to calculate the difference between the goodwill’s recorded value and its fair value. An impairment loss is recognized to the extent that the recorded value exceeds its fair value.

… 6 more changes not shown on this page.

Top changes in Heritage Global Inc.'s 2023 10-K

Item 1. Business

Item 1A. Risk Factors

Item 2. Properties

Item 3. Legal Proceedings

Item 5. Market for Registrant's Common Equity

Item 6. [Reserved]

Item 7. Management's Discussion & Analysis

Other HGBL 10-K year-over-year comparisons