Heritage Global Inc. Fair Value Disclosure
Note 13 – Fair Value Measurements
In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis, the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions:
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Level 1 – Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date. |
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Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
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Level 3 – Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation. |
As of December 31, 2019 and 2018, the Company had no Level 1, Level 2 or Level 3 assets or liabilities measured at fair value. As of December 31, 2017, the Company’s contingent consideration from the acquisition of NLEX in 2014 of $2.8 million, was the only financial asset or liability measured at fair value on a recurring basis, and was classified as Level 3 within the fair value hierarchy. The final payment on the contingent consideration was paid during 2018. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market.
When valuing its Level 3 liabilities, the Company gives consideration to operating results, financial condition, economic and/or market events, and other pertinent information that would impact its estimate of the expected contingent consideration payment. The valuation of the liability was primarily based on management’s estimate of the Net Profits of NLEX (as defined in the NLEX stock purchase agreement). Given the short term nature of the contingent consideration periods, changes in the discount rate were not expected to have a material impact on the fair value of the liability.
The following table summarizes the changes in the fair value of the contingent consideration liability during 2018 (in thousands):
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Balance at December 31, 2017 |
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$ |
2,774 |
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Payment of contingent consideration |
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(2,617 |
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Fair value adjustment of contingent consideration |
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(157 |
) |
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Balance at December 31, 2018 |
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$ |
— |
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2019 | Mar 9, 2020 | Showing above |
| 2018 | Mar 11, 2019 | |
| 2017 | Mar 13, 2018 | |
| 2016 | Mar 7, 2017 | |
| 2015 | Mar 17, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.