Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto, included in "Item 15. Exhibits and Financial Statement Schedules" of this Report. Our accounting policies have the potential to significantly impact our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

Business Overview, Recent Developments and Outlook

Please see "Item 1. Business" of this Report for an overview of our business and recent developments. Please see "Item 1A. Risk Factors" of this Report for a discussion of the risk factors that may impact our current and future operations, and financial condition.

Liquidity and Capital Resources

Liquidity

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

Our current assets increased to $33.1 million at December 31, 2024 compared to $26.3 million at December 31, 2023. The change in our current assets of $6.8 million is primarily due to a decrease in the current portion of notes receivable of $3.2 million and accounts receivable of $0.4 million, offset by increases in cash and cash equivalents of $9.5 million, inventory of $0.3 million, and other current assets of $0.6 million.

Our current liabilities decreased to $14.6 million at December 31, 2024 as compared to $14.7 million at December 31, 2023. The decrease of $0.1 million is primarily due to a decrease in accounts payable and accrued liabilities of $1.2 million and the current portion of third party debt of $1.3 million, offset by an increase in payables to sellers of $2.4 million.

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

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

The terms of the ALT Note require us to pay off the Note in 48 equal installments of approximately $44,000 with an interest rate of 3% per annum and a maturity date of August 23, 2025. As of December 31, 2024, we had an outstanding balance of $0.4 million on the ALT Note.

On December 27, 2024, the Company entered into a Loan Modification Agreement and Reaffirmation of Loan (the "Modification Agreement"), by and between the Company and C3 Bank. The Modification Agreement modifies and reaffirms the 2021 Credit Facility to, among other things, extend the maturity date, modify the applicable interest rate, and further modify the loan covenants. The maturity date was modified to June 27, 2026. We are permitted to use the proceeds of the loan solely for our business operations. As of December 31, 2024, we had no outstanding balance on the 2021 Credit Facility.

During 2024, our primary source of cash was the cash on hand, payments received on notes receivable of $11.0 million and $7.7 million of cash provided by our operating activities. Cash disbursements during 2024 consisted primarily of investments in notes receivable of $5.7 million, repurchase of our common stock under our Repurchase Program of approximately $2.2 million, repayments on our ALT Note of $0.5 million, repayments on our Term Loan of $6.3 million (as discussed further under Note 11 - Debt), payment of operating expenses, and settlement of auction liabilities.

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.

Ownership Structure and Capital Resources

At December 31, 2024 and 2023, we had stockholders' equity of $65.2 million and $61.1 million, respectively.

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

Cash Position and Cash Flows

Cash and cash equivalents at December 31, 2024 were $21.7 million compared to $12.3 million at December 31, 2023.

Cash flows from operating activities.Cash provided by operating activities was $7.7 million during 2024 as compared to $13.0 million during 2023. The approximate $5.3 million decrease was primarily attributable to a decrease of $6.3 million in net income adjusted for noncash items during 2024 as compared to 2023, offset by an increase in operating assets and liabilities of $1.0 million during 2024 as compared to 2023.

The significant changes in operating assets and liabilities during 2024 as compared to 2023 are primarily due to the nature of our operations. We earn revenue from discrete auction and 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 of all. 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 flows from investing activities.Cash provided by investing activities during 2024 was $10.9 million, as compared to cash used in investing activities of $15.9 million during 2023.

Cash provided by investing activities during 2024 consisted primarily of payments received on notes receivable of $11.0 million as well as return of investment and cash distributions received from equity method investments of $6.0 million. Cash provided by investing activities during 2024 was offset by cash used in investing activities consisting primarily of investments in notes receivable of $5.7 million and equity method investments of $0.3 million.

Cash used in investing activities during 2023 consisted primarily of investments in notes receivable of $29.8 million and equity method investments of $17.2 million. Cash used in investing activities during 2023 was offset by cash provided by investing activities primarily of cash received on transfer of notes receivable to partners of $8.9 million, payments received on notes receivable of $11.9 million as well as return of investment and cash distributions received from equity method investments of $10.7 million.

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

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

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

Management's Discussion of Results of Operations

The following table summarizes our consolidated results of operations (in thousands):

		Year Ended December 31,
		2024				2023
Revenues:
Services revenue		$	32,607			$	39,480
Asset sales			12,754				21,065
Total revenues			45,361				60,545
Operating costs and expenses:
Cost of services revenue			5,805				8,007
Cost of asset sales			8,321				12,724
Selling, general and administrative			24,266				26,040
Depreciation and amortization			591				514
Total operating costs and expenses			38,983				47,285
Earnings of equity method investments			2,688				1,059
Operating income			9,066				14,319
Interest expense, net			(93	)			(324	)
Income before income tax expense			8,973				13,995
Income tax expense			3,791				1,520
Net income		$	5,182			$	12,475

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.

We report segment information based on the "management" approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (CODM), which we determined to be Ross Dove, CEO, for making decisions and assessing performance as the source of our reportable segments. We manage our business primarily on differentiated revenue streams for services offered. Our reportable segments consist of the Auction and Liquidation segment, Refurbishment & Resale segment, Brokerage segment, and Specialty Lending segment. Our Auction and Liquidation segment, through HGP, operates as a global full-service auction, appraisal and asset advisory firm, including the acquisition of turnkey manufacturing facilities and used industrial machinery and equipment. Our Refurbishment & Resale segment, through ALT, acquires, refurbishes and supplies specialized laboratory equipment. Our Brokerage segment, through NLEX, brokers charged-off receivables in the U.S. and Canada on behalf of financial institutions. Our Specialty Lending segment, through HGC, provides specialty financing solutions to investors in charged-off and nonperforming asset portfolios.

Our CODM evaluates the performance of our reportable segments based primarily on operating income and routinely receives internal reports that analyze operating income for the reporting segments. The CODM is not routinely provided detailed information regarding significant operating expenses by segment, and such information is not considered critical for allocating resources or assessing the performance of each segment. Our operating expenses are comprised mainly of fixed and variable compensation, marketing, outside services such as audit, legal and information technology, occupancy, and other regulatory costs incurred as a public entity. Additionally, earnings from equity method investments related to significant transactions involving real estate, machinery and equipment in the Company's Auction and Liquidation segment and Joint Venture lending activity related to the Company's Specialty Lending segment are significant in the computation of segment operating income and reported separately as shown in the table below.

Notwithstanding the foregoing, the reported segment operating income for ALT and HGC represents incremental costs for managing these segments as part of their sister segments (HGP for ALT and NLEX for HGC). As such, the reported operating income for ALT and HGC does not represent their true standalone contribution, as we do not attempt to allocate existing fixed divisional overhead costs of the sister divisions to the newer segments. Similarly, corporate overhead cost is not allocated to the operating divisions for management reporting purposes. 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.

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

		Year Ended December 31, 2024
		Auction and Liquidation				Refurbishment & Resale				Brokerage				Specialty Lending				Corporate and other				Consolidated
Gross profit [1]		$	10,560			$	4,103			$	14,069			$	2,503			$	-			$	31,235
Operating expenses [2]			(7,911	)			(3,655	)			(6,717	)			(1,800	)			(4,774	)			(24,857	)
Earnings from equity method investments			1,391				-				-				1,297				-				2,688
Operating income (loss)		$	4,040			$	448			$	7,352			$	2,000			$	(4,774	)		$	9,066

		Year Ended December 31, 2023
		Auction and Liquidation				Refurbishment & Resale				Brokerage				Specialty Lending				Corporate and other				Consolidated
Gross profit [1]		$	13,545			$	6,285			$	16,762			$	3,223			$	-			$	39,815
Operating expenses [2]			(8,767	)			(3,438	)			(7,816	)			(2,280	)			(4,254	)			(26,555	)
Earnings from equity method investments			140				-				-				919				-				1,059
Operating income (loss)		$	4,918			$	2,847			$	8,946			$	1,862			$	(4,254	)		$	14,319

[1] Within the Company's Industrial Asset division, management allocates gross profit from certain auctions from the Auction and Liquidation segment (HGP) to the Refurbishment & Resale segment (ALT). From time to time, ALT may source and refer an auction project to HGP or directly sell equipment inventory through the auction channel. In these instances, the gross profit related to these transactions are allocated to ALT rather than accounted for under the segment profit or loss of HGP. In 2024, the total amount of gross profit allocated to ALT from HGP was approximately $1.4 million, as compared to the total amount of gross profit allocated to ALT from HGP in 2023 of approximately $3.8 million.

[2] All financing arrangements are originated with Corporate and other. Management may determine from time to time that interest incurred from financing arrangements are directly attributable to a specific segment. As a result, interest incurred may be charged to the segment and included in that segment's profit or loss as a charge to operating expense. In 2024, the total amount of interest allocated to the Specialty Lending segment (HGC) from Corporate and other was approximately $0.3 million, as compared to the total amount of interest allocated to HGC from Corporate and other in 2023 of approximately $0.5 million.

2024 Compared to 2023

Revenues and cost of revenues - Revenues were $45.4 million in 2024 as compared to $60.5 million in 2023 and costs of services revenue and asset sales were $14.1 million in 2024 compared to $20.7 million in 2023. This resulted in gross profit of $31.2 million in 2024 compared to $39.8 million in 2023, a decrease of approximately $8.6 million or approximately 22%. The decrease in gross profit in the current year is primarily due to a significant one-time principal auction transaction in our Industrial Asset Division in the first quarter of 2023, as well as decreased volume of transactions within our Brokerage segment as compared to 2023.

Selling, general and administrative expense - Selling, general and administrative expense was $24.3 million in 2024 as compared to $26.0 million in 2023, a decrease of $1.8 million or 7%. As compared to 2023 there was a decrease in selling, general and administrative expense during 2024 primarily due to decreased compensation expense as a result of lower performance in certain operational segments.

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

		Year Ended December 31,
		2024				2023				% change
Compensation:
Auction and Liquidation		$	5,714			$	6,502				(12	)%
Refurbishment & Resale			2,413				2,314				4	%
Brokerage			5,185				6,217				(17	)%
Specialty Lending			1,483				1,030				44	%
Corporate & other			2,228				2,357				(5	)%
Stock-based compensation			1,253				776				61	%
Board of Directors fees			401				322				25	%
Accounting, tax and legal professional fees			1,558				1,421				10	%
Insurance			590				540				9	%
Occupancy			1,263				1,285				(2	)%
Travel and entertainment			603				831				(27	)%
Advertising and promotion			611				604				1	%
Information technology support			607				711				(15	)%
Provision for credit losses			(256	)			530				(148	)%
Other			613				600				2	%
Total selling, general and administrative expense		$	24,266				26,040				(7	)%

Reclassifications - Certain prior year balances within schedule of selling, general and administrative expense above have been reclassified to conform to current year presentation.

Depreciation and amortization expense - Depreciation and amortization expense in 2024 was $0.6 million, as compared to $0.5 million in 2023. Depreciation and amortization expense in both years consisted primarily of amortization expense related to intangible assets, while the depreciation of property, plant and equipment was not material.

Off-Balance Sheet Arrangements - We had no off-balance sheet arrangements during the years ended December 31, 2024 and 2023.

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. Other than operating income (a GAAP financial measure as shown in our consolidated income statements), which we believe is the most important measure of our operational performance and trends, we believe that EBITDA and Adjusted EBITDA (non-GAAP financial measures) are key performance indicators ("KPIs") for our business. 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. 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 believes that the presentation of EBITDA and Adjusted EBITDA, when considered together with our GAAP financial statements and the reconciliation to the most directly comparable GAAP financial measure, is useful in providing investors a more complete understanding of the factors and trends affecting the underlying performance of the Company on a historical and ongoing basis. Our use of EBITDA and Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the financial information below, which reconciles our GAAP reported net income to EBITDA and Adjusted EBITDA for the periods presented (in thousands).

		Year Ended December 31,
		2024				2023
Net income		$	5,182			$	12,475
Add back:
Depreciation and amortization			591				514
Interest expense, net			93				324
Income tax expense			3,791				1,520
EBITDA			9,657				14,833
Management add back:
Stock based compensation			1,253				776
Adjusted EBITDA		$	10,910			$	15,609

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which applies a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. The expected credit losses, and subsequent adjustments to such losses, is recorded through an allowance account that is deducted from, or added to, the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC Topic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, which provides authoritative guidance for the accounting of our notes receivable. With respect to smaller reporting companies, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2016-13 resulted in an adjustment to retained earnings on January 1, 2023 of $0.3 million, and established an expected credit loss reserve against our receivables related to loans outstanding, including those held within equity method investments. The increase is a result of changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of December 31, 2024, the allowance for credit losses was $1.5 million, with $0.1 million classified as accounts receivable, $0.4 million classified as notes receivable and $1.0 million classified as equity method investments. As of December 31, 2023, the allowance for credit losses was $1.7 million, with $0.1 million classified as accounts receivable, $0.7 million classified as notes receivable and $0.9 million classified as equity method investments.

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which, among other updates, requires enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker, as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. The adoption of ASU 2023-07 resulted in additional disclosures for our segment results, which are included in Note 17 of our consolidated financial statements.

Critical Accounting Policies

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

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").

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

All services and asset sales revenue from contracts with customers consists of three of our reportable segments: Auction and Liquidation, Refurbishment & Resale, and Brokerage segments. Generally, revenue is recognized at the point in time in which the performance obligation has been satisfied and full consideration is received. The exception to recognition at this point in time occurs when certain contracts provide for advance payments recognized over a period of time. Services revenue recognized over a period of time is not material in comparison to total revenues (less than 1% of total revenues for the year ended December 31, 2024), and therefore not reported on a disaggregated basis. Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and our "contract liability". As of December 31, 2024, 2023 and 2022, the deferred revenue balance was approximately $0.6 million, $0.5 million and $0.4 million, respectively, and is recorded within accounts payable and accrued liabilities on the consolidated balance sheet. The deferred revenue balance is primarily related to customer deposits on asset sales within our Refurbishment & Resale segment. We record receivables in certain situations based on timing of payments for Auction and Liquidation transactions held at the end of the reporting period; however, revenue is generally recognized in the period that we satisfy the performance obligation and cash is collected. We do not record a "contract asset" for partially satisfied performance obligations.

For auction services and brokerage sale transactions, funds are typically collected from buyers and are held by us on the seller's behalf. The funds are included in cash and cash equivalents in the Consolidated Balance Sheets. We release the funds to the seller, less our commission and other fees due, after the buyer has accepted the goods. The amount of cash held on behalf of the sellers is recorded as payables to sellers in the accompanying Consolidated Balance Sheets.

We evaluate revenue from Auction and Liquidation and Brokerage segment transactions in accordance with the accounting guidance to determine whether to report such revenue on a gross or net basis. We have determined that we act as an agent for our fee based transactions and therefore we report the revenue from transactions in which we act as an agent on a net basis.

We also earn income through transactions that involve us acting jointly with one or more additional purchasers or lenders, pursuant to a partnership, joint venture or limited liability company agreement (collectively, "Joint Ventures"). For these transactions, in which our ownership share meets the criteria for the equity method investments under ASC Topic 323, Equity Method and Joint Ventures("ASC 323"), we do not record revenue or expense. Instead, our proportionate share of the net income (loss) is reported as earnings of equity method investments. In general, the Joint Ventures apply the same revenue recognition and other accounting policies as the Company.

Through our Specialty Lending segment, we provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. We recognize revenue generated by lending activity in accordance with ASC 310. Fees collected in relation to the issuance of loans includes loan origination fees, interest income, portfolio monitoring fees, and a backend profit share percentage related to the underlying asset portfolio.

The monitoring fees and the backend profit share are considered a separate earnings process as compared to the origination fees and interest income. Monitoring fees are recorded at the agreed upon rate, and at the moment in which payments are made by the borrower. The backend profit share is recognized in accordance with the agreed upon rate at the time in which the amount is realizable and earned. The recognition policy was established due to the uncertainty of timing of the amount of backend profit share that will be realized.

Through our Refurbishment and Resale segment, we offer financing on our standard laboratory equipment sales. We recognize revenue upon shipment of our financed products in accordance with ASC 606. We record a loan receivable for the unpaid balance of the order. A loan amortization table is created upon shipment outlining the principal and interest income portion of each future payment. These loans are classified as held-for-investment and accounted for under the guidelines of ASC 310.

For both the Specialty Lending and Refurbishment and Resale segments, loan origination fees are offset with any direct origination costs and are deferred upon issuance of the loan and amortized over the lives of the related loans, as an adjustment to interest income. The interest method is used to arrive at a periodic interest cost (including amortization) that will represent a level effective rate on the sum of the face amount of the debt and (plus or minus) the unamortized premium or discount and expense at the beginning of each period.

Nonaccrual Loans

We determine a loan to be in default status when the minimum payment amount has not been received within the grace period of the payment due date. The status of default does not solely trigger nonaccrual loan status. We consider quantitative and qualitative factors when evaluating a loan in default status to determine the likelihood of recovering the outstanding principal balance and contractual interest payments. We also monitor financial standing and performance of our borrowers on an ongoing basis and regularly update the collection forecasts for the underlying charged off or nonperforming receivable portfolios related to each outstanding loan. If we determine (1) it is not probable that the projected cash flows expected from the borrower's collection efforts on the underlying charged off or nonperforming receivable portfolio will be sufficient to satisfy all of the outstanding principal balance and contractual interest payments, and (2) it is not probable that the borrower will be able to meet the minimum required principal and interest payments through other operational cash flows, we will place the loans on nonaccrual status. If, based on our analysis, we elect to maintain accrual status after initial payment default, the loan will generally be placed on nonaccrual status if principal or interest payments become 90 days past due.

The accrual of interest is generally discontinued and all accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery or the cash-basis method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest payments received by the creditor are recorded as interest income provided the amount does not exceed the amount that would have been earned at the loan's original effective interest rate. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and all remaining principal and interest payments are deemed probable.

In November 2023, we and our affiliated Joint Ventures restructured loans (the "Restructured Loans") with our largest borrower by restructuring certain outstanding loans with an amortized cost basis of $51.6 million or 59% of the amortized cost basis of the total charged-off asset portfolio loans of our and our affiliated joint ventures. Our share of the Restructured Loans amortized cost basis was $22.2 million, or 57% of our share of the loan book. All Restructured Loans were restructured by term extension, adding a weighted average of 1.5 years to the life of the Restructured Loans, which reduced the monthly payments for the borrower. As of September 30, 2023, we increased the allowance for credit losses related to our largest borrower experiencing financial difficulties. This resulted in an allowance for credit losses on the loans later restructured of $1.0 million as of September 30, 2023. As of December 31, 2024, our allowance for credit losses related to the Restructured Loans was $1.1 million, of which $0.3 million was classified as notes receivable and $0.8 million was recorded within equity method investments. As of December 31, 2023, our allowance for credit losses related to the Restructured Loans was $1.1 million, of which $0.4 million was classified as notes receivable and $0.7 million was recorded within equity method investments.

Pursuant to the terms of existing credit agreements, our largest borrower was required to collect on underlying charged off and nonperforming consumer loan portfolios and remit a required minimum monthly payment to us. However, this borrower became unable to make the required minimum monthly payments and therefore is in default. While in default, this borrower continues to collect on the underlying charged off and nonperforming consumer loan portfolios but must remit all such net collections to us and senior lenders. These remittances of net collections have not met the amount of the required minimum monthly payments since June of 2024. We determined that (1) it is not probable that the projected cash flows expected from the borrower's collection efforts on the underlying charged off or nonperforming receivable portfolio will be sufficient to satisfy all of the outstanding principal balance and contractual interest payments, and (2) it is not probable that the borrower will be able to meet the minimum required principal and interest payments through other operational cash flows. We do not expect to realize any return with respect to these loans in 2025, and whether we will realize any return with respect to these loans is uncertain. As we continue to work closely with the borrower and its senior lenders in an effort to mitigate the default in an efficient and effective manner, the impacted loans have been placed in nonaccrual status beginning in June 2024. In addition, there was a balance of $1.5 million from our share of other loans within affiliated Joint Ventures that are impacted by the default with our largest borrower and have been placed in nonaccrual status as of June 2024. Our share of payments received from this borrower, including interest, will be applied against the outstanding loan balance. As of December 31, 2024, the amortized cost basis of loans in nonaccrual status was $23.5 million, of which $5.3 million is recorded within notes receivable and $18.2 million is recorded within equity method investments. There were no loans in nonaccrual status as of December 31, 2023.

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

We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326") on January 1, 2023, which requires the application of a credit loss model based prospectively on current expected credit losses (CECL). Under ASC 326, we elected to evaluate notes receivable as a single pool, for individual notes receivable and borrowers with similar risk characteristics. Notes receivable and borrowers that do not share risk characteristics are evaluated on an individual basis. Management estimates the allowance for credit losses using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. As we lack historical internal data, we observe that our notes receivable are similar in character to transactions undertaken by smaller banking institutions. We elect to base our estimation of expected credit losses on the Scaled Current Expected Credit Loss (CECL) Allowance Loss Estimator ("SCALE rate") available from the Federal Reserve, which was 1.3231% as of January 1, 2023. To reflect the cumulative effects of the adoption of ASC 326, we recorded the allowance for credit losses and an increase to accumulated deficit of $0.2 million and deferred tax asset of $0.1 million on the January 1, 2023 consolidated balance sheet, and balance of the allowance for credit losses was therefore $0.3 million as of January 1, 2023.

In order to evaluate the need for an adjustment to the receivable balance related to credit losses, or impairment, we perform a review of all outstanding loan receivables on a quarterly basis to determine if any indicators exist that suggest the loan will not be fully recoverable. As of December 31, 2024, the SCALE rate increased to 1.3644% and our credit loss rate specific to notes receivable was 3.7%. The increase over the SCALE rate was due to both risks with the concentrated balance and declining collections industry-wide. As of December 31, 2024 and December 31, 2023, our allowance for credit losses related to notes receivable outstanding was $0.4 million and $0.7 million, respectively.

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. Transactions in which our ownership share meets the criteria for the equity method investments under ASC 323 are accounted for using the equity method of accounting whereby our proportionate share of the Joint Venture's net income (loss) is reported in the consolidated income statement as earnings of equity method investments. At the balance sheet date, our investments in these Joint Ventures are reported in the consolidated balance sheet as equity method investments. We monitor the value of each Joint Ventures' underlying assets and liabilities, and record a write down of our investments should we conclude that there has been a decline in the value of the net assets. These investments have historically been classified as non-current in our consolidated financial statements due to the uncertainties relating to the timing of resale of the underlying assets as a result of the Joint Venture relationship.

Upon adoption of ASC 326 on January 1, 2023, we evaluated the receivable balances held by our affiliated Joint Ventures and recorded an adjustment to reduce earnings from equity method investments by our share of the allowance for credit losses recorded on the Joint Ventures' books of $0.2 million. Similar to notes receivable, the loans held by the Joint Ventures are evaluated on a quarterly basis to determine if an adjustment to the allowance for credit losses is needed. As of December 31, 2024, the SCALE rate increased to 1.3644% and the credit loss rate specific to equity method investments was 4.5%. The increase over the SCALE rate was due to both risks with the concentrated balance and declining collections industry-wide. As of December 31, 2024 and December 31, 2023, we have recorded an allowance for credit losses related to its equity method investments of $1.0 million and $0.9 million, respectively.

See Note 2 and Note 5 to our consolidated financial statements for further detail.

Deferred income taxes

We recognize deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. We periodically assess the recoverability of our deferred tax assets, which have been generated by a history of net operating and net capital losses, and determine the necessity for a valuation allowance that will reduce deferred tax assets to the amount expected to be realized. We evaluate which portion of the deferred tax assets, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on our use of our net operating and net capital loss carryforwards. In 2023, we recorded a reduction to the valuation allowance of $2.2 million resulting in a net deferred tax asset balance of approximately $9.1 million as we believed that it was more likely than not that a significant portion of our net operating loss carryforwards will be utilized. In 2024, we increased the valuation allowance by $1.3 million, resulting in a net deferred tax asset balance of approximately $6.0 million. The change to the valuation allowance was primarily due to the application of our nonaccrual loan policy, which resulted in a decrease to our estimates related to the utilization of net operating loss carryforwards in 2025. For further discussion of our income taxes, see Note 13 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. The determination of the fair value of our stock options is based on a variety of factors including, but not limited to, the price of our common stock, the expected volatility of the stock price over the expected life of the award and expected exercise behavior. The fair value of the awards is subsequently expensed over the vesting period, net of estimated forfeitures. The provisions of our stock-based compensation plans do not require that we settle any options by transferring cash or other assets, and therefore we classify the option awards as equity. See Note 16 to our consolidated financial statements for further discussion of our stock-based compensation.