Heritage Global Inc.

Previous wording

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of Heritage Global Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three-month periods ended March 31, 2025 and 2024, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2025 (the “Form 10-K”).

Current wording

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of Heritage Global Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) and the related notes thereto for the three and six month periods ended June 30, 2025 and 2024, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2025 (the “Form 10-K”).

Previous wording

Pursuant to the terms of existing credit agreements, our largest borrower was required to collect on underlying charged off and nonperforming consumer loan portfolios and remit a required minimum monthly payment to us. However, this borrower became unable to make the required minimum monthly payments and therefore is in default. While in default, this borrower continues to collect on the underlying charged off and nonperforming consumer loan portfolios but must remit all such net collections to us and senior lenders. These remittances of net collections have not met the amount of the required minimum monthly payments since June of 2024. We determined that (1) it is not probable that the projected cash flows expected from the borrower’s collection efforts on the underlying charged off or nonperforming receivable portfolio will be sufficient to satisfy all of the outstanding principal balance and contractual interest payments, and (2) it is not probable that the borrower will be able to meet the minimum required principal and interest payments through other operational cash flows. We do not expect to realize any return with respect to these loans in 2025, and whether we will realize any return with respect to these loans is uncertain. As we continue to work closely with the borrower and its senior lenders in an effort to mitigate the default in an efficient and effective manner, the impacted loans have been placed in nonaccrual status beginning in June 2024. In addition, there was a balance of $1.5 million from our share of other loans within affiliated Joint Ventures that are impacted by the default with our largest borrower and have been placed in nonaccrual status as of June 2024. Our share of payments received from this borrower, including interest, will be applied against the outstanding loan balance. As of March 31, 2025, the amortized cost basis of loans in nonaccrual status was $22.9 million, of which $5.1 million is recorded within notes receivable and $17.8 million is recorded within equity method investments. As of December 31, 2024, the amortized cost basis of loans in nonaccrual status was $23.5 million, of which $5.3 million is recorded within notes receivable and $18.2 million is recorded within equity method investments.

Current wording

Pursuant to the terms of existing credit agreements, our largest borrower was required to collect on underlying charged off and nonperforming consumer loan portfolios and remit a required minimum monthly payment to us. However, this borrower became unable to make the required minimum monthly payments and therefore is in default. While in default, this borrower continues to collect on the underlying charged off and nonperforming consumer loan portfolios but must remit all such net collections to us and senior lenders. These remittances of net collections have not met the amount of the required minimum monthly payments since June of 2024. We determined that (1) it is not probable that the projected cash flows expected from the borrower’s collection efforts on the underlying charged off or nonperforming receivable portfolio will be sufficient to satisfy all of the outstanding principal balance and contractual interest payments, and (2) it is not probable that the borrower will be able to meet the minimum required principal and interest payments through other operational cash flows. We do not expect to realize any return with respect to these loans in 2025, and whether we will realize any return with respect to these loans is uncertain. As we continue to work closely with the borrower and its senior lenders in an effort to mitigate the default in an efficient and effective manner, the impacted loans have been placed in nonaccrual status beginning in June 2024. In addition, there was a balance of $1.5 million from our share of other loans within affiliated Joint Ventures that are impacted by the default with our largest borrower and have been placed in nonaccrual status as of June 2024. Our share of payments received from this borrower, including interest, will be applied against the outstanding loan balance. As of June 30, 2025, the amortized cost basis of loans in nonaccrual status was $22.4 million, of which $4.9 million is recorded within notes receivable and $17.5 million is recorded within equity method investments. As of December 31, 2024, the amortized cost basis of loans in nonaccrual status was $23.5 million, of which $5.3 million is recorded within notes receivable and $18.2 million is recorded within equity method investments.

Previous wording

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 $155.7 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 $69.3 million. Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share. As of March 31, 2025, our net balance related to investments in loans to buyers of charged-off and nonperforming receivable portfolios was $28.1 million, of which $9.3 million is classified as notes receivable and $18.8 million is classified as equity method investments.

Current wording

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 $157.2 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 $70.8 million. Our income from secured lending consists of upfront fees, interest income, monthly monitoring fees and backend profit share. As of June 30, 2025, our net balance related to investments in loans to buyers of charged-off and nonperforming receivable portfolios was $27.1 million, of which $8.7 million is classified as notes receivable and $18.4 million is classified as equity method investments.

Previous wording

As of March 31, 2025, we held a gross balance of investments in notes receivable of $29.3 million, recorded in both notes receivable and equity method investments, and consisting of one borrower’s note balance of approximately $22.1 million, representing 75% of our total gross notes receivable balance as of March 31, 2025, as compared to 74% as of December 31, 2024. As discussed further above, our largest borrower is in default. As a result, the balance of the loans outstanding with our largest borrower were in nonaccrual status as of March 31, 2025. Whether we will realize any return with respect to the impacted loans is uncertain. We do not intend to hold highly concentrated balances due from one borrower as part of its long-term strategy but will in the short term have concentration risk on our path to an established and diversified portfolio.

Current wording

As of June 30, 2025, we held a gross balance of investments in notes receivable of $28.3 million, recorded in both notes receivable and equity method investments, and consisting of one borrower’s note balance of approximately $21.8 million, representing 77% of our total gross notes receivable balance as of June 30, 2025, as compared to 74% as of December 31, 2024. As discussed further above, our largest borrower is in default. As a result, the balance of the loans outstanding with our largest borrower were in nonaccrual status as of June 30, 2025. Whether we will realize any return with respect to the impacted loans is uncertain. We do not intend to hold highly concentrated balances due from one borrower as part of its long-term strategy but will in the short term have concentration risk on our path to an established and diversified portfolio.

Previous wording

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. Of the balance due from one borrower of $22.1 million, there are 11 distinct loan agreements, the underlying portfolio of accounts are diversified throughout FinTech, installment loans and credit card accounts, and further diversified amongst six separate sellers of these charged off portfolios.

Current wording

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. Of the balance due from one borrower of $21.8 million, there are 11 distinct loan agreements, the underlying portfolio of accounts are diversified throughout FinTech, installment loans and credit card accounts, and further diversified amongst six separate sellers of these charged off portfolios.

Previous wording

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Form 10-K. There were no material changes to these policies during the three months ended March 31, 2025.

Current wording

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Form 10-K. There were no material changes to these policies during the six months ended June, 2025.

Previous wording

We had working capital of $14.7 million and $18.5 million as of March 31, 2025 and December 31, 2024, respectively.

Current wording

We had working capital of $16.4 million and $18.5 million as of June 30, 2025 and December 31, 2024, respectively.

Previous wording

Our current assets as of March 31, 2025 decreased to $29.5 million compared to $33.1 million as of December 31, 2024. This change was primarily due to a decrease in cash of $2.9 million, a decrease in other current assets of $0.6 million, and a decrease in inventory of $0.2 million, partially offset by an increase in accounts receivable of $0.1 million. Our current liabilities as of March 31, 2025 increased to $14.8 million compared to $14.6 million as of December 31, 2024. The most significant change was an increase in our payables to sellers due to the timing of certain asset liquidation settlements of $1.2 million, partially offset by a decrease of $0.1 million in current portion of third party debt and $0.9 million in accounts payable and accrued liabilities.

Current wording

Our current assets as of June 30, 2025 decreased to $32.1 million compared to $33.1 million as of December 31, 2024. This change was primarily due to a decrease in cash of $1.9 million and a decrease in other current assets of $0.3 million, partially offset by an increase in inventory of $0.3 million, an increase in the current portion of notes receivable of $0.2 million, and an increase in accounts receivable of $0.6 million. Our current liabilities as of June 30, 2025 increased to $15.7 million compared to $14.6 million as of December 31, 2024. The most significant changes were an increase of $0.6 million in accounts payable and accrued liabilities and a $0.7 increase in our payables to sellers due to the timing of certain asset liquidation settlements, partially offset by a decrease of $0.3 million in current portion of third party debt.

Previous wording

During the three months ended March 31, 2025, our primary source of cash was cash on hand, cash provided by operating activities, principal repayments on outstanding loans, and proceeds from a promissory note, a business loan agreement and commercial security agreement (collectively, the “Mortgage Loan Agreement”) with C3bank, National Association, that provides for a $4.1 million term loan (the “Mortgage”). Cash disbursements during the three months ended March 31, 2025 consisted primarily of investments in notes receivable, investments in equity method investments including related participating interest, repurchases of our common stock, and the purchase of our new building for $7.4 million.

Current wording

During the six months ended June 30, 2025, our primary source of cash was cash on hand, cash provided by operating activities, principal repayments on outstanding loans, and proceeds from a promissory note, a business loan agreement and commercial security agreement (collectively, the “Mortgage Loan Agreement”) with C3bank, National Association, that provides for a $4.1 million term loan (the “Mortgage”). Cash disbursements during the six months ended June 30, 2025 consisted primarily of investments in notes receivable, investments in equity method investments including related participating interest, repurchases of our common stock, and the purchase of our new building for $7.4 million.

Previous wording

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, the Mortgage of $4.1 million and any amounts borrowed under our 2021 Credit Facility. 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 March 31, 2025, we had an outstanding balance of $0.3 million on the ALT Note.

Current wording

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, the Mortgage of $4.1 million and any amounts borrowed under our 2021 Credit Facility. 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 June 30, 2025, we had an outstanding balance of $0.1 million on the ALT Note.

Previous wording

As of March 31, 2025 and December 31, 2024, we had stockholders’ equity of $65.4 million and $65.2 million, respectively.

Current wording

As of June 30, 2025 and December 31, 2024, we had stockholders’ equity of $65.7 million and $65.2 million, respectively.

Previous wording

Cash and cash equivalents as of March 31, 2025 were $18.8 million as compared to $21.7 million as of December 31, 2024, a decrease of approximately $2.9 million. The total cash amount reflected on our balance sheet represents the total cash and cash equivalents held on account. Cash amounts owed to our clients are identified as payables to sellers within current liabilities. We view cash net of payables to sellers as available for operations or investment purposes. As of March 31, 2025 payables to sellers was $8.6 million, resulting in a net cash available balance of $10.2 million compared to available cash of $14.3 million as of December 31, 2024.

Current wording

Cash and cash equivalents as of June 30, 2025 were $19.8 million as compared to $21.7 million as of December 31, 2024, a decrease of approximately $1.9 million. The total cash amount reflected on our balance sheet represents the total cash and cash equivalents held on account. Cash amounts owed to our clients are identified as payables to sellers within current liabilities. We view cash net of payables to sellers as available for operations or investment purposes. As of June 30, 2025 payables to sellers was $8.1 million, resulting in a net cash available balance of $11.7 million compared to available cash of $14.3 million as of December 31, 2024.

Previous wording

Cash provided by operations was $2.6 million during the three months ended March 31, 2025 as compared to $1.7 million during the same period in 2024. The approximate $0.9 million change was primarily attributable to an increase in operating assets and liabilities of $1.1 million offset by a decrease of $0.2 million in net income adjusted for noncash items during the three months ended March 31, 2025 as compared to the same period in 2024.

Current wording

Cash provided by operations was $4.5 million during the three months ended June 30, 2025 as compared to $7.7 million during the same period in 2024. The approximate $3.2 million change was primarily attributable to a decrease in operating assets and liabilities of $3.8 million offset by an increase of $0.6 million in net income adjusted for noncash items during the six months ended June 30, 2025 as compared to the same period in 2024.

Previous wording

The changes in operating assets and liabilities during the three months ended March 31, 2025 as compared to the same period in 2024 are primarily due to the nature of our operations. We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination thereof. The operating assets and liabilities associated with these deals are, therefore, subject to the same variability and can be quite different at the end of any given period.

Current wording

The changes in operating assets and liabilities during the six months ended June 30, 2025 as compared to the same period in 2024 are primarily due to the nature of our operations. We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination thereof. The operating assets and liabilities associated with these deals are, therefore, subject to the same variability and can be quite different at the end of any given period.

Previous wording

Cash used in investing activities during the three months ended March 31, 2025 was $9.5 million compared to cash provided by investing activities of $2.1 million during the same period in 2024.

Current wording

Cash used in investing activities during the six months ended June 30, 2025 was $8.6 million compared to cash provided by investing activities of $5.5 million during the same period in 2024.

Previous wording

Cash used in investing activities during the three months ended March 31, 2025 consisted primarily of purchase of property and equipment of $7.4 million, investments in notes receivable of $1.3 million, investment in equity method investments of $1.6 million and an investment in a participating interest of $1.6 million. Cash used in investing activities during the three months ended March 31, 2025 was offset by payments received on notes receivable of $1.6 million and return of investment and cash distributions received from equity method investments of $0.8 million.

Current wording

Cash used in investing activities during the six months ended June 30, 2025 consisted primarily of purchase of property and equipment of $7.6 million, investments in notes receivable of $3.0 million, investment in equity method investments of $1.6 million and an investment in a participating interest of $1.6 million. Cash used in investing activities during the six months ended June 30, 2025 was offset by payments received on notes receivable of $3.9 million and return of investment and cash distributions received from equity method investments of $1.3 million.

Previous wording

Cash provided by investing activities during the three months ended March 31, 2024 consisted primarily of payments received on notes receivable of $2.5 million and return of investment and cash distributions received from equity method investments of $2.1 million. Cash provided by investing activities during the three months ended March 31, 2024 was offset by cash used in investing activities primarily of investments in notes receivable of $2.3 million and equity method investments of $0.2 million.

Current wording

Cash provided by investing activities during the six months ended June 30, 2024 consisted primarily of payments received on notes receivable of $6.1 million and return of investment and cash distributions received from equity method investments of $4.3 million. Cash provided by investing activities during the three months ended June 30, 2024 was offset by cash used in investing activities primarily of investments in notes receivable of $4.5 million and equity method investments of $0.3 million.

Previous wording

Cash provided by financing activities was approximately $3.9 million during the three months ended March 31, 2025 compared to cash used in financing activities of $0.5 million during the three months ended March 31, 2024. Financing activities during the three months ended March 31, 2025 consisted primarily of $4.1 million in proceeds from our Mortgage and $1.1 million of proceeds from secured borrowing, partially offset by $1.0 million in repurchases of our common stock. Financing activities during the three months ended March 31, 2024 consisted primarily of $0.3 million in repayments of our Term Loan and $0.1 million in repayments to our ALT Note.

Current wording

Cash provided by financing activities was approximately $2.2 million during the six months ended June 30, 2025 compared to cash used in financing activities of $0.9 million during the six months ended June 30, 2024. Financing activities during the six months ended June 30, 2025 consisted primarily of $4.1 million in proceeds from our Mortgage and $1.1 million of proceeds from secured borrowing, partially offset by $2.6 million in repurchases of our common stock. Financing activities during the six months ended June 30, 2024 consisted primarily of $0.6 million in repayments of our Term Loan and $0.3 million in repayments to our ALT Note.

Previous wording

The following table sets out the Company’s condensed consolidated results of operations for the three months ended March 31, 2025 and 2024 (in thousands).

Current wording

The following table sets out the Company’s condensed consolidated results of operations for the six months ended June 30, 2025 and 2024 (in thousands).

Previous wording

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

Current wording

The following table sets forth certain financial information for the Company's reportable segments for the three month periods ended June 30, 2025 and 2024 (in thousands):

Previous wording

[1] Within the Company’s Industrial Asset division, management allocates gross profit resulting from certain auctions from Auctions and Liquidation (HGP) to Refurbishment & Resale (ALT). From time to time, ALT may source and refer an auction project to HGP or directly sell lab equipment inventory through the auction channel. In these instances, the profits relating to these transactions are allocated to ALT rather than accounted for under the segment profit or loss of HGP. During the three months ended March 31, 2025, the total amount of gross profit allocated to ALT from HGP was approximately $0.3 million, as compared to the total amount of gross profit allocated to ALT during the same period of 2024 of approximately $0.4 million.

Current wording

[1] Within the Company’s Industrial Asset division, management allocates gross profit resulting from certain auctions from Auctions and Liquidation (HGP) to Refurbishment & Resale (ALT). From time to time, ALT may source and refer an auction project to HGP or directly sell lab equipment inventory through the auction channel. In these instances, the profits relating to these transactions are allocated to ALT rather than accounted for under the segment profit or loss of HGP. During the three months ended June 30, 2025, the total amount of gross profit allocated to ALT from HGP was approximately $0.4 million, as compared to the total amount of gross profit allocated to ALT during the same period of 2024 of approximately $0.2 million. During the six months ended June 30, 2025, the total amount of gross profit allocated to ALT from HGP was approximately $0.6 million, as compared to the total amount of gross profit allocated to ALT during the same period of 2024 of approximately $0.5 million.

Previous wording

[2] All financing arrangements are originated with Corporate and other. Management may determine from time to time that interest incurred from financing arrangements are directly attributable to a specific segment. As a result, interest incurred may be charged to the segment and included in that segment’s profit or loss as a charge to operating expense. During the three months ended March 31, 2024, the total amount of interest allocated to Specialty Lending (HGC) from Corporate and other was approximately $0.1 million. No interest expense has been allocated to operating segments as of March 31, 2025.

Current wording

[2] All financing arrangements are originated with Corporate and other. Management may determine from time to time that interest incurred from financing arrangements are directly attributable to a specific segment. As a result, interest incurred may be charged to the segment and included in that segment’s profit or loss as a charge to operating expense. During the three months ended June 30, 2024, the total amount of interest allocated to Specialty Lending (HGC) from Corporate and other was approximately $0.1 million. During the six months ended June 30, 2024, the total amount of interest allocated to Specialty Lending (HGC) from Corporate and other was approximately $0.3 million. No interest expense has been allocated to operating segments as of June 30, 2025.

Previous wording

Revenues and cost of revenues –Revenues were $13.5 million during the three months ended March 31, 2025 compared to $12.2 million during the same period in 2024. Costs of services revenue and asset sales were $5.4 million during the three months ended March 31, 2025 compared to $3.9 million during the three months ended March 31, 2024. The gross profit of these items was $8.0 million during the three months ended March 31, 2025 compared to $8.3 million during the same period in 2024, a decrease of approximately $0.3 million, or approximately 4%. The decrease in gross profit in the first quarter of 2025 compared to the first quarter of 2024 is primarily due to normal changes in the timing and magnitude of transactions and partially due to a lower amount of revenue recognized under the modified cost recovery method in our Specialty Lending segment.

Current wording

Revenues and cost of revenues –Revenues were $14.3 million during the three months ended June 30, 2025 compared to $12.0 million during the same period in 2024. Costs of services revenue and asset sales were $5.9 million during the three months ended June 30, 2025 compared to $3.7 million during the three months ended June 30, 2024. The gross profit of these items was $8.4 million during the three months ended June 30, 2025 compared to $8.3 million during the same period in 2024, an increase of approximately $0.1 million, or approximately 1%. The increase in gross profit in the second quarter of 2025 compared to the second quarter of 2024 is primarily due to normal changes in the timing and magnitude of transactions.

Previous wording

Selling, general and administrative expense –Selling, general and administrative expense was $6.5 million during the three months ended March 31, 2025 compared to $6.4 million during the same period in 2024.

Current wording

Selling, general and administrative expense –Selling, general and administrative expense was $6.1 million during the three months ended June 30, 2025 compared to $6.3 million during the same period in 2024.

Previous wording

Depreciation and amortization expense –Depreciation and amortization expense was $0.1 million during both the three month periods ended March 31, 2025 and 2024, which consisted primarily of amortization expense related to intangible assets in both periods.

Current wording

Depreciation and amortization expense –Depreciation and amortization expense was $0.1 million during both the three month periods ended June 30, 2025 and 2024.