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Item 9A. Controls and Procedures

2021-03-08 compared with 2020-03-09 · 256 added, 744 removed, 725 unchanged (58% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), we conducted an evaluation of our disclosure controls and procedures.

As of the end of the period covered by this Report, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), we conducted an evaluation of our disclosure controls and procedures.

As defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

15 unchanged sentences

Directors, Executive Officers and Corporate Governance.

Under our Articles of Incorporation, the Board is divided into three classes, with the total number of directors to be not less than five and not more than nine.

Each director is to serve a term of three years or until his or her successor is duly elected and qualified.

As of the date hereof, the Board consists of seven members:

three Class I directors (Messrs.

Dove, Perlis and Shimer), two Class II directors (Messrs.

Hexner and Silber) and two Class III directors (Messrs.

Ryan and DeMoss).

The following table sets forth the names, ages and positions with us of our current directors and executive officers.

With the exception of Ross Dove and Kirk Dove, who are brothers, there are no family relationships between any present executive officers and directors.

Director, Chief Executive Officer

Emmett DeMoss

Director (2), (3)

Michael Hexner

Director (2), (3)

Morris Perlis

Director (2), (4)

Director (2), (3), (4)

Chairman of the Board (2)

Director (2), (4)

Chief Operating Officer and President

Chief Financial Officer

Executive Vice President, General Counsel, and Corporate Secretary

Senior Managing Director, Equity Partners HG LLC (5)

President, National Loan Exchange

As of December 31, 2019

Independent Director

Member of the Audit Committee

Member of the Compensation Committee

Mann is no longer with the Company, effective January 1, 2020.

Set forth below are descriptions of the backgrounds of our executive officers and directors:

Silber , Chairman of the Board.

Silber was elected to the Board as a Class II director in September 2001.

He was appointed as Chairman of the Board in November 2001, a position he held until October 2004, and was again appointed as Chairman of the Board in March 2005.

In January 2011, Mr.

Silber resigned the position of Chief Executive Officer and assumed the position of President.

In May 2015 in connection with the appointment of Ross Dove as Chief Executive Officer and Kirk Dove as Chief Operating Officer and President, Mr.

Silber resigned the position of President.

Through December 2018 Mr.

Silber was the Chairman of Street Capital, which he founded in 1979.

Silber sits on one public and several private and not for profit boards.

Silber attended McMaster University and received a Bachelor of Science from the University of Toronto.

Michael Hexner , Director.

Hexner was appointed by the Board as a Class II director in August 2016 to fill a Board vacancy.

Hexner has expertise and extensive experience in executive leadership with growing businesses.

Hexner co-founded Wheel Works in 1976, and grew the business, as its Chief Executive Officer, to become the largest independent tire chain in the United States.

Hexner was the co-founder of Pacific Leadership Group in 2001, and has served as the Chairman and Chief Executive Officer of both SmartPillars and DealerFusion.

Hexner currently serves as an operating partner of Fundamental Capital, a private equity firm, and as the Chairman of Zoomvy.com.

Hexner received a Bachelor of Arts in political philosophy from Williams College, a master’s degree in negotiation and dispute resolution from Creighton University, and has completed an executive management program at The Haas School of Business of the University of California.

Shimer , Director.

Shimer was appointed by the Board as a Class I director in April 2001.

Shimer has extensive expertise in mergers and acquisitions, including those transactions that occurred while he was an officer of our company and Street Capital, where he was initially employed as a Senior Vice President, Mergers & Acquisitions and Business Development in July 1997.

He was appointed Managing Director in February 2000 and he terminated his employment with the Company in February 2004.

Shimer is currently Managing Director of SLC Capital Partners, LLC, a private equity fund management company that he co-founded in 2010.

Shimer serves as Chairman and CEO of Salon Professional Education Company, LLC, a franchisor of cosmetology schools, and on the board of two other private companies.

Shimer earned a Bachelor of Science in economics from The Wharton School of the University of Pennsylvania, and a Master of Business Administration degree from Harvard Business School.

Brendan Ryan , Director.

Ryan was appointed by the Board as a Class III dire ctor in August 2011 to fill a Board vacancy.

Ryan has had a distinguished career in the advertising industry, most recently serving as the global CEO of Foote Cone & Belding Worldwide (now FCB), and as the Chairman and Chairman Emeritus from June 2005 to December 2010.

He has served on the boards of several public companies and currently serves as a board member of several non-profit corporations.

Ryan h as extensive experience at the b oard level with respect to the workings of public companies as we ll as an extensive network of contacts that could be of benefit to us.

Ryan received his Bachelor of Arts in history from Fordham College and his Master of Business Administration in marketing from the Wharton Graduate School of the University of Penns ylvania.

Morris Perlis , Director.

Perlis was appointed by the Board as a Class I director in May 2015.

Perlis previously served as President of Street Capital from 1992 until 2001, a period of tremendous success that included guiding our health care strategy, resulting in superior growth of three investee companies.

In addition to his past experience at Street Capital, Mr.

Perlis brings a wealth of expertise gained in senior strategic and management roles with other leading organizations.

He spent 13 years with American Express Inc., including five years as President of American Express Canada.

During that time he obtained approval for, and directed the launch of, the AMEX Bank of Canada, for which he served as CEO.

Among his other responsibilities with American Express, Mr.

Perlis served as Executive Vice President, responsible for that company’s U.S.

personal card division, and was a key member of numerous senior level U.S.

executive committees.

Perlis also spent four years as President and CEO of Mad Catz Interactive, during which time he completely re-engineered the company, leading it to become the largest third party manufacturer in its industry.

Perlis is currently the President and CEO of Morris Perlis and Associates, and is active on one public and several private and not for profit boards.

Perlis earned a Bachelor of Arts in economics and history from Sir George Williams University in Montreal, and a Master of Business Administration degree from York University in Toronto.

Emmett DeMoss , Director.

DeMoss was appointed by the Board as a Class III director in August 2017.

He worked in the business sector as a Corporate Finance Officer for Dean Witter and for Hambrecht & Quist, where he managed the initial public offerings (“IPO”) of several companies.

He later served as Chief Operating Officer of Grubb & Ellis (“G&E”), a commercial real estate brokerage and advisory firm, where he helped foster significant growth and led the reverse IPO of G&E.

DeMoss has extensive executive leadership experience with growing businesses and was the founder, director and senior officer of Rackwise and Real Bid, the first on-line Company to offer indicative bidding for commercial real estate, which eventually merged with CoStar (Nasdaq:

He also held positions as a director and senior officer of Docutel.

DeMoss received his Bachelor of Science in Mechanical Engineering from Princeton University and a Master of Business Administration in Finance from Stanford University.

Ross Dove , Chief Executive Officer and Director.

Ross Dove was appointed by the Board as a Class I director in May 2015.

Ross Dove was appointed our Chief Executive Officer in May 2015 and has served as Co-Managing Partner of Heritage Global Partners, Inc.

since its founding in October 2009.

Together with his brother, Kirk Dove, Mr.

Ross Dove joined our company when HGI acquired HGP in February 2012.

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.

Dove remained as global presidents of the business until September 2009, and then formed HGP in October 2009.

During his career, Mr.

Dove has been actively involved with advances in the auction industry such as theatre-style auctions, which was a first step in migrating auction events onto the Internet.

Dove has been a member of the National Auctioneers Association since 1985, and a founding member of the Industrial Auctioneers Association.

He served as a director of Critical Path from January 2002 to January 2005 and has served on the boards of several venture funded companies.

Kirk Dove , Chief Operating Officer and President.

Kirk Dove was appointed our Chief Operating Officer and President in May 2015 and has served as Co-Managing Partner of HGP since its founding in October 2009.

Together with his brother, Ross Dove, Mr.

Kirk Dove joined our company when HGI acquired HGP in February 2012.

Dove began his career in the auction business over thirty years ago, including, along with his brother, the position of global president of DoveBid, which was sold to a third party in 2008.

Dove remained as global presidents of the business until September 2009, and then formed HGP in October 2009.

In addition to his experience with the auction business, Mr.

Dove was employed at Merrill Lynch for several years as a Senior Account Executive.

Dove received a Bachelor of Science in business from Northern Illinois University.

He has been a member of the National Auctioneers Association since 1985.

West , Chief Financial Officer.

West became the Chief Financial Officer of HGP in March 2014 and was appointed the Chief Financial Officer of HGI in May 2015.

West has over 25 years of multi-national executive financial accounting and business management experience serving various public and private equity funded companies, including a Fortune 500 company.

He has expertise managing financial, technical, M&A and international accounting teams and has deep knowledge of SEC financial reporting, compliance with the Sarbanes Oxley Act and international accounting matters.

West is responsible for all of the Company’s financial and treasury functions including financial reporting, bank relationships, conducting internal and industry analysis to support the Company’s goals for growth, investor relations, and M&A activity.

West received a Bachelor of Science in accounting from Arizona State University.

James Sklar, Executive Vice President, General Counsel, and Corporate Secretary.

Sklar became the Executive Vice President and General Counsel of HGP in June 2013 and was appointed the Executive Vice President, General Counsel and Corporate Secretary of HGI in May 2015.

Sklar has over two decades of relevant legal expertise serving leading worldwide asset advisory and auction services firms.

Throughout his career, he has played a k ey role in establishing relationships with global alliance partners and implementing international contracts as well as expanding the adoption of the auction sale process in North America, Europe, Asia and Latin America.

Sklar is responsible for all o f the Company’s legal matters including negotiating global transactional business alliance documents, managing relationships and contracts with worldwide clients and business partners, and providing legal representation for all of the Heritage Global compa nies.

Sklar received a Bachelor of Science in economics from the Wharton School of the University of Pennsylvania and a Juris Doctorate from Wayne State University Law School.

Kenneth Mann , Senior Managing Director, Equity Partners HG LLC.

Mann had been employed by us since March 2011, when he joined our company in connection with our acquisition of Equity Partners.

Prior to the acquisition, Mr.

Mann was a Partner at Equity Partners since 1995, and a Managing Partner since September 2002.

During his career, Mr.

Mann has had extensive experience handling investment banking services for distressed businesses operating in a wide variety of industries.

Mann received a Bachelor of Science in business administration from Salisbury University.

He began sponsoring events with the American Bankruptcy Institute in 1995, became a member in March 2003, and has served on its Asset Sales Committee since 2003.

As of January 1, 2020, Mr.

Mann is no longer with the Company (Refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Partners Separation” for more information).

David Ludwig , President, National Loan Exchange Inc.

Ludwig joined our company when HGI acquired NLEX in June 2014.

Ludwig has worked in the financial industry for over twenty-five years, and he developed NLEX from its start as a post-Resolution Trust Corporation (RTC) sales outlet to the nation’s leading broker of charged-off credit card and consumer debt accounts.

He is considered a leading pioneer in the debt sales industry, and has been a featured speaker at many industry conferences, as well as quoted in numerous publications including the New York Times, LA Times, Collections and Credit Risk, and Collector Magazine.

Ludwig also serves as consultant and expert witness within the industry.

Ludwig received a Bachelor of Science in economics from the University of Illinois .

Each of our officers has been appointed by the Board and holds his office at the discretion of the Board.

No director or officer of our company has, during the last ten years:

(i) been subject to or involved in any legal proceedings described under Item 401(f) of Regulation S-K, including, without limitation, any criminal proceeding (excluding traffic violations or similar misdemeanors), (ii) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities, or (iii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities or commodities laws and regulations, or finding any violations with respect to such laws and regulations.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership of equity securities of HGI with the SEC.

Officers, directors, and greater than ten percent stockholders are required by the SEC regulation to furnish us with copies of all Section 16(a) forms that they file.

Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant to Rule 16a-3 under the Exchange Act during our most recent fiscal year, and Forms 5 with respect to our most recent fiscal year, we believe that all such forms required to be filed pursuant to Section 16(a) were timely filed by the executive officers, directors and security holders required to file same during the fiscal year ended December 31, 2019, except for (i) a Form 4 inadvertently filed late by the Company on behalf of Mr.

Michael Hexner, reporting eight transactions during 2019, (ii) a Form 4 inadvertently filed late by the Company on behalf of Mr.

David Ludwig, reporting three transactions during 2019, (iii) a Form 4 inadvertently filed a day late by the Company on behalf Mr.

Emmett DeMoss, reporting one transaction, (iv) a Form 5 inadvertently filed late by the Company on behalf of Mr.

Emmet DeMoss, reporting six transactions during 2018.

The information required by this Item regarding the identity and business experience of our directors and executive officers is set forth under the heading “Nominees for Election” and “Election of Directors” in the definitive proxy materials of Heritage Global Inc.

to be filed in connection with our 2021 Annual Meeting of Stockholders with respect to our directors and is set forth in Item 1 of Part I of this Report with respect to our executive officers.

The information required by this Item contained in such definitive proxy materials is incorporated herein by reference.

Information on the beneficial ownership reporting for our directors and executive officers required by this Item is contained under the caption “Delinquent Section 16(a) Reports” in the definitive proxy materials to be filed in connection with our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

Information on our Audit and Corporate Governance Committee and Audit Committee Financial Experts required by this Item is contained under the caption “Corporate Governance” in the definitive proxy materials to be filed in connection with our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

Code of Ethics

HGI has adopted a code of ethics that applies to our employees, including its principal executive, financial and accounting officers or persons performing similar functions.

The HGI Code of Conduct (the “Code”) can be found on our website at

http://www.heritageglobalinc.com (follow Corporate Governance link to Governance Documents tab).

We intend to satisfy the disclosure req uirements under Item 5.05 of Form 8-K regarding any amendments to, or waivers from, a provision of the Code that applies to our principal executive, financial and accounting officers or persons performing similar functions by posting such information on it s website at the website address set forth above.

The HGI Code of Conduct (the “Code”) can be found on our website at http://www.

hginc.com/governance-documents/ , or a copy of the Code can be requested, free of charge, by writing to the following address:

Heritage Global Inc., 12625 High Bluff Drive, Suite 305, San Diego, California 92130, Attention:

Investor Relations.

We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any amendments to, or waivers from, a provision of the Code that applies to our principal executive, financial and accounting officers or persons performing similar functions by posting such information on its website at the website address set forth above.

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.

Corporate Governance

Board Leadership and Risk Oversight

We are a small organization, with a market capitalization at December 31, 2019 of approximately $28.8 million.

Our operations, even following the acquisitions of HGP in 2012 and NLEX in 2014, remain relatively modest, with only 46 employees, as detailed in “Item 1.

Business” of this Report.

Given the current size and scale of our operations, we believe that the Board does not require a lead independent director in order to effectively oversee our strategic priorities.

The Board meets quarterly to review our operating results.

It meets annually to review and approve our strategy and budget.

Material matters such as acquisitions and dispositions, investments and business initiatives are approved by the full Board.

The Board has risk oversight responsibility for the Company and administers this responsibility both directly and with assistance from its committees.

Board Meetings and Committees

The Board held four meetings during the fiscal year ended December 31, 2019.

The Board has designated two standing committees:

the Audit Committee and the Compensation Committee.

HGI does not have a nominating or a corporate governance committee.

However, corporate governance functions are included in the Audit Committee Charter, and Board nominations are considered by the full Board.

There are no specific criteria for Director nominees, and we do not specifically consider diversity with respect to the selection of our Board nominees.

Given our limited operations, we believe that we would have difficulty identifying and attracting a diverse selection of candidates.

To date, it has been deemed most effective to nominate and appoint individuals who are either former employees with detailed knowledge of the business, such as Mr.

Shimer, or individuals with expertise that will be of value as we expand our market presence, such as Mr.

There has been no material change in the procedures by which our stockholders may recommend nominees to our Board since such procedures were adopted and implemented.

Audit Committee

The Audit Committee is responsible for making recommendations to the Board concerning the selection and engagement of independent accountants and for reviewing the scope of the annual audit, audit fees, results of the audit and independent registered public accounting firm’s independence.

The Audit Committee is also responsible for corporate governance, and reviews and discusses with management and the Board such matters as accounting policies, internal accounting controls and procedures for preparation of financial statements.

Its membership is currently comprised of Mr.

Shimer (Chairman), Mr.

DeMoss, and Mr.

Hexner, all three of whom are independent directors.

The Audit Committee held four meetings during the fiscal year ended December 31, 2019.

In 2000, the Board approved HGI’s Audit Committee Charter, which was subsequently revised and amended in 2001 and again in 2003 in order to incorporate certain updates in light of regulatory developments, including the Sarbanes-Oxley Act of 2002.

A copy of the current Audit Committee Charter is available on our website www.heritageglobalinc.com .

Audit Committee Financial Expert

The Board has determined that Mr.

Shimer is an Audit Committee financial expert as defined by Item 407(d) of Regulation S-K and is “independent” as such term is defined under Nasdaq Marketplace Rules and applicable federal securities laws and regulations.

Executi ve Compensation.

Compensation Discussion and Analysis

The following sections provide an explanation and analysis of our executive compensation program and the material elements of total compensation paid to each of our named executive officers.

Included in the discussion is an overview and description of:

our compensation philosophy and program;

the objectives of our compensation program;

what our compensation program is designed to reward;

each element of compensation;

why we choose to pay each element;

how we determine the amount for each element;

how each compensation element and our decision regarding that element fit into our overall compensation objectives and affect decisions regarding other elements, including the relationship between our compensation objectives and our overall risk management.

In reviewing our executive compensation program, we considered issues pertaining to policies and practices for allocating between long-term and currently paid compensation and those policies for allocating between cash and non-cash compensation.

We also considered the determinations for granting awards, performance factors for our company and our named executive officers, and how specific elements of compensation are structured and taken into account in making compensation decisions.

Questions related to the benchmarking of total compensation or any material element of compensation, the tax and accounting treatment of particular forms of compensation and the role of executive officers (if any) in the total compensation process also are addressed where appropriate.

In addition to the named executive officers discussed below, we have only 44 salaried employees.

General Executive Compensation Philosophy

We compensate our executive management through a combination of base salaries, merit-based performance bonuses, and long-term equity compensation.

We adhere to the following compensation policies, which are designed to support the achievement of our business strategies:

Our executive compensation program should strengthen the relationship between compensation, both cash and equity-based, and performance by emphasizing variable, at-risk earnings that are dependent upon the successful achievement of specified corporate, business unit and individual performance goals.

A portion of each executive’s total compensation should be comprised of long-term, at-risk compensation to focus management on the long-term interests of stockholders.

An appropriately balanced mix of at-risk incentive cash and equity-based compensation aligns the interests of our executives with that of our stockholders.

The equity-based component promotes a continuing focus on building profitability and shareowner value.

Total compensation should enhance our ability to attract, retain, motivate and develop knowledgeable and experienced executives upon whom, in large part, our successful operation and management depends.

Total compensation should encourage our executives to ensure that the risks involved in any business decision align that executive’s potential personal return with maximal return to stockholders.

A core principle of our executive compensation program is the belief that compensation paid to executive officers should be closely aligned with our near- and long-term success, while simultaneously giving us the flexibility to recruit and retain the most qualified key executives.

Our compensation program is structured so that it is related to our stock performance and other factors, direct and indirect, all of which may influence long-term stockholder value and our success.

We utilize each element of executive compensation to ensure proper balance between our short- and long-term success as well as between our financial performance and stockholder return.

In this regard, we believe that the executive compensation program for our named executive officers is consistent with our financial performance and the performance of each named executive officer.

We do not utilize the services of compensation consultants in determining or recommending executive or director compensation.

Our Nam ed Executive Officers

This analysis focuses on the compensation paid to our “named executive officers,” a defined term generally encompassing:

all persons that served as our principal executive officer (“PEO”) at any time during the fiscal year;

our two most highly compensated executive officers, other than the PEO, serving in such positions at the end of the fiscal year.

During 2019, our named executive officers were:

Ross Dove — Chief Executive Officer.

Dove (and his brother, Kirk Dove) co-founded HGP, which we acquired in 2012.

Effective May 2015, Mr.

Dove became our Chief Executive Officer.

Kenneth Mann — Senior Managing Director, Equity Partners.

Mann has held this position prior to and since our acquisition of Equity Partners in 2011.

As of January 1, 2020, Mr.

Mann’s employment with Equity Partners was terminated (Refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Partners Separation” for more information).

David Ludwig — President, National Loan Exchange.

Ludwig has held this position prior to and since our acquisition of National Loan Exchange in 2014.

Elements of Compensation

Base Salaries

Unless specified otherwise in their employment agreements, the base salaries of our named executive officers are evaluated annually.

In evaluating appropriate pay levels and salary increases for such officers, the Compensation Committee uses a subjective analysis, considering achievement of our strategic goals, level of responsibility, individual performance, and internal equity and external pay practices.

In addition, the Committee considers the scope of the executives’ responsibilities, taking into account competitive market compensation for similar positions where available, as well as seniority of the individual, our ability to replace the individual and other primarily judgmental factors deemed relevant by our Board and Compensation Committee.

The Compensation Committee does not use any specific benchmark in the determination of base salaries.

Base salaries are reviewed annually by our Compensation Committee and our Board, and adjusted from time to time pursuant to such review or at other appropriate times, in order to align salaries with market levels after taking into account individual responsibilities, performance and experience.

During 2019 and 2018 all of our named executive officers were paid employees.

Mann earned a base salary of $375,000 and was eligible for a performance bonus as described below.

Dove earned a base salary of $350,000 and was eligible for a performance bonus as described below.

Ludwig earned a base salary of $400,000 and was eligible for a performance bonus as described below.

Bonus awards are designed to focus management attention on key operational goals for the current fiscal year.

Our executives may earn a bonus based upon achievement of their specific operational goals and achievement by us or our business unit of financial targets.

Cash bonus awards are distributed based upon the Company and the individual meeting performance criteria objectives.

The final determination for all bonus payments is made by our Compensation Committee based on a subjective analysis of the foregoing elements.

We set bonuses based on a subjective analysis of certain performance measures in order to maximize and align the interests of our officers with those of our stockholders.

Although performance goals are generally standard for determining bonus awards, we have and will consider additional performance rating goals when evaluating the bonus compensation structure of our executive management.

In addition, in instances where the employee has responsibility over a specific area, performance goals may be directly tied to the overall performance of that particular area.

For 2019 , Mr.

Mann was eligible for a performance bonus calculated as follows:

t he first $50,000 of net operating income generated by Equity Partners (“EP NOI”) is allocated to Mr.

Mann as a bonus.

After the first $50,000 of EP NOI, the Equity Partners team is entitled to receive 50% of the remaining EP NOI.

In addition, we make avail able annually a bonus in the amount of $25,000 to be allocated to a member or members of the Equity Partners team.

The allocation among the Equity Partners team is determined by Mr.

Mann and our Chief Executive Officer, Mr.

Mann earn ed a bonus of $50,000 , and in 2018 he earned a bonus of $2 87,736 .

For 2019, Mr.

Dove was eligible to receive a performance bonus calculated as follows:

after we achieve the consolidated net operating income target and the Heritage Global Partners auction division achieves the net operating income target, Mr.

Dove may share in a potential bonus pool of 5% of consolidated net operating income (to be shared also with the Executive Management Group).

Dove earned a bonus of $40,250.

Pursuant to an agreement reached between Mr.

Dove and board member Mr.

Emmett DeMoss, and further approved by the remaining board members, one-half of Mr.

Dove’s 2019 bonus is to be paid to Mr.

Dove and the other half is to be paid directly to Mr.

Emmett DeMoss from the Company in consideration of Mr.

DeMoss’ ongoing strategic consulting services.

Dove did not earn a bonus as the bonus criteria were not met.

For 2020, Mr.

Dove will be eligible for a performance bonus consistent with the calculation for 2019.

For 2019, Mr.

Ludwig was eligible to receive a performance bonus calculated in accordance with an Addendum to the Employment Agreements of David and Tom Ludwig (the “Addendum”), effective on June 1, 2018.

Pursuant to the Addendum, for each calendar year, NLEX will allocate 30% of its Net Operating Income in the aggregate for cash incentive awards.

Also pursuant to the Addendum, for each calendar year, NLEX will allocate 20% of its Principal Net Operating Income for cash incentive awards.

Each year David Ludwig will recommend to our Board of Directors the NLEX employees (including David Ludwig) entitled to receive a portion, as well as the portion to be received by Mr.

Ludwig earned a bonus of $689,490, and in 2018 he earned a bonus of $386,544.

For 2020, Mr.

Ludwig will be eligible for a performance bonus consistent with the calculation for 2019.

Ludwig’s, Mr.

Dove’s and Mr.

Mann’s bonuses are closely tied to our profitability, we believe the bonus structure does not encourage inappropriate risk-taking on their part.

Equity Incentive Grants

In keeping with our philosophy of providing a total compensation package that favors at-risk components of pay, long-term incentives can comprise a significant component of our executives’ total compensation package.

These incentives are designed to motivate and reward executives for maximizing shareholder value and encourage the long-term employment of key employees.

Our objective is to provide executives with above-average, long-term incentive award opportunities.

We view stock options as our primary long-term compensation vehicle for our executive officers.

Stock options generally are granted at slightly above the prevailing market price on the date of grant and will have value only if our stock price increases.

Grants of stock options generally are based upon our performance, the level of the executive’s position, and an evaluation of the executive’s past and expected future performance.

We do not time or plan the release of material, non-public information for the purpose of affecting the value of executive compensation.

We believe that stock options will continue to be used as the predominant form of stock-based compensation.

In 2016, our named executives participated in a Company-wide stock option grant.

As part of the grant the named executives received options to purchase an aggregate 825,000 shares of our common stock at a strike price of $0.45 per share.

On June 1, 2018, the Company granted 300,000 shares of Company restricted common stock, and on May 2, 2019, the Company granted 42,500 options to purchase common stock;

both grants being in connection with an addendum to the Employment Agreement of David Ludwig (see “— Executive and Director Compensation – Tabular Disclosure — Grants of Plan-Based Awards,” below, for details).

No other options were granted to any of our named executive officers during 2018 and 2019.

Other Benefits

In connection with the terms of the related party line of credit as more fully described in “Item 13.

Certain Relationships and Related Transaction, and Director Independence” of this Report and Note 12 to our consolidated financial statements, the Company paid approximately $87,000 to Mr.

Dove based on the profit share provision for principal and guarantee transactions that occurred in 2017 and the first three quarters of 2018.

Additional benefits provided to the named executive officers during 2019 and 2018 were the payment of an automobile allowance to Mr.

Ross Dove ($14,029 in 2019 and $14,879 in 2018) and the payment of club membership dues for Mr.

Ludwig ($9,513 in 2019 and $10,117 in 2018).

There were no pension or change in control benefits in either 2019 or 2018.

Upon termination of employment by us without cause, Mr.

Dove is entitled to 12 months base salary and a pro rata share of the bonus payable in the fiscal year of termination.

Any bonus payable is based on the termination date (provided that, as of the termination date, the performance criteria established with respect to the bonus for the fiscal year have been met), subject to certain conditions.

Upon termination of employment by us without cause, Mr.

Ludwig is entitled to receipt of his base salary, payable in equal monthly installments that would have been received through the last day of the term of the Employment Agreement of David Ludwig .

Executive Compensation Process

Compensation Committee

Our Compensation Committee oversees and approves all compensation and awards made to the Chief Executive Officer, Chief Operating Officer/President, Chief Financial Officer and General Counsel.

The Compensation Committee reviews the performance and compensation of the executive officers, without their participation, and establishes their compensation accordingly, with consultation from others when appropriate.

Executive and Director Compensation – Tabular Disclosure

Summary Compensation Table

The following table sets forth the aggregate compensation for services rendered during the fiscal years ended December 31, 2019 and 2018 by our named executive officers.

All Other Compensation

Chief Executive Officer

Senior Managing Director, Equity Partners

President, National Loan Exchange

This amount represents Mr.

Dove’s full 2019 bonus, however one-half of Mr.

Dove’s 2019 bonus is to be paid to Mr.

Dove and the other half is to be paid directly to Mr.

Emmett DeMoss from the Company in consideration of Mr.

DeMoss’ ongoing strategic consulting services.

Refer to the “Bonuses” section above for more information.

This amount represents payment for the profit share provision for principal and guarantee transactions of approximately $87,000 during 2018.

The remaining amounts represent an automobile allowance.

See “— Grants of Plan-Based Awards,” below, for details regarding the assumptions made in the valuation of these stock awards.

This amount includes the final contingent consideration payment in 2018 to David Ludwig in connection with the acquisition of NLEX in 2014, and membership dues.

Membership dues paid on behalf of Mr.

Ludwig were $9,513 and $10,117, for 2019 and 2018, respectively.

Grants of Plan-Based Awards

On June 1, 2018, the Company granted 300,000 shares of Company restricted common stock in connection with an addendum to the Employment Agreement of David Ludwig.

The shares are subject to certain restrictions on transfer and a right of repurchase over five years, ending May 31, 2023, and require a continued term of service to the Company.

All restricted common stock was issued with grant date fair value of $0.43 per share and an exercise price of zero.

On May 2, 2019, the Company granted 42,500 options to purchase common stock at an exercise price of $0.70 per share in connection with an addendum to the Employment Agreement of David Ludwig.

No other option grants were made to our named executive officers noted above during 2018 and 2019.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth the detail of outstanding equity awards at December 31, 2019.

Number of Securities Underlying Unexercised Options:

Securities Underlying

Unexercised Options:

Unexercisable

Option Expiration Date

Equity Incentive

Number of Unearned Units of Stock That Have Not Vested

Equity Incentive

Market Value of Unearned Units of Stock That Have Not Vested

December 9, 2026

The options vest 25% annually beginning on the first anniversary of the December 9, 2016 grant date.

The Company granted 300,000 shares of Company restricted common stock in connection with an addendum to the Employment Agreement of David Ludwig (as described previously in “Grants of Plan-Based Awards”).

The Company granted 42,500 options to purchase common stock in connection with an addendum to the Employment Agreement of David Ludwig (as described previously in “Grants of Plan-Based Awards”).

The options vest 25% annually beginning on June 1, 2020.

There were no adjustments or changes in the terms of any of our option awards in 2019 or 2018.

Compensation of Directors

The following table sets forth the aggregate compensation for services rendered during the fiscal year ended December 31, 2019 by each person serving as a director.

Fees Earned or Paid in Cash

Option Awards

Morris Perlis

Michael Hexner

Emmett DeMoss

Ross Dove (3)

The value included in this column represents the grant date fair value of the option award computed in accordance with FASB ASC Topic 718.

The number of shares underlying stock options granted during 2019 for each of the directors listed in the table was as follows:

Silber — 10,000;

Perlis — 10,000;

Ryan — 10,000;

Shimer — 10,000;

Hexner — 10,000;

DeMoss — 10,000.

DeMoss earned board fees of $33,000.

In addition, Mr.

DeMoss earned $20,125 in consideration of Mr.

DeMoss’ ongoing strategic consulting services.

Refer to the “Bonuses” section above for more information.

Dove was not compensated as a director during 2019 due to the compensation he received for his employment as one of our officers.

Each director who is not an employee receives a $20,000 per year cash retainer, $1,000 per meeting attended in person or by telephone, and an annual grant of stock options to purchase 10,000 shares of common stock, which is awarded in March of each year.

In addition, the Chairman of the Board receives a cash retainer of $75,000 per year, the Chairman of the Audit Committee receives a cash retainer of $10,000 per year, Audit Committee members who are not the chair receive a cash retainer of $5,000 per year, and

other committee chairpersons receive an annual cash retainer of $2,000 per year.

The directors are also eligible to receive options under our stock option plans at the discretion of the Board.

Stock Option Plans

At December 31, 2019, we had four stock-based employee compensation plans, which are described in Note 18 of our consolidated financial statements included in “Item 15.

Exhibits and Financial Statement Schedules” of this Report.

Anti-Hedging Policy

The Company maintains an anti-hedging policy in its Code of Conduct.

The Company’s policy prohibits directors, officers and employees, with respect to the Company’s stock, from trading on a short-term basis, engaging in short sales, or buying or selling puts or calls.

Moreover, all transactions in the Company’s stock by directors and officers must be cleared by the Corporation’s secretary.

The Company believes that it is improper and inappropriate for its directors, officers and employees to engage in short-term or speculative transactions involving the Company’s stock.

Security Ownership of Certain Beneficial Ow ners and Management and Related Stockholder Matters.

The following table sets forth information regarding the ownership of our common stock as of March 1, 2020, except as otherwise footnoted, by:

(i) each director;

(ii) each of the Named Executive Officers in the Summary Compensation Table;

(iii) all of our executive officers and directors as a group;

and (iv) all those known by us to be beneficial owners of more than five percent of our common stock.

As of March 1, 2020, there are 29,352,837 shares of common stock and 569 shares of Series N preferred stock issued and outstanding.

Each share of Series N preferred stock is entitled to 40 votes.

Name and Address of

Beneficial Owner (1)

Number of Shares

Beneficially Owned (2)

of Common Stock

Beneficially Owned

Topline Capital Partners, LP

Zachary Capital L.P.

Morris Perlis

Emmett DeMoss

Michael Hexner

All Executive Officers and Directors as a

Group (12 people)

Indicates less than one percent.

Unless otherwise noted, all listed shares of common stock are owned of record by each person or entity named as beneficial owner and that person or entity has sole voting and dispositive power with respect to the shares of common stock owned by each of them.

All addresses are c/o Heritage Global Inc.

unless otherwise indicated.

As to each person or entity named as beneficial owners, that person’s or entity’s percentage of ownership is determined based on the assumption that any options or convertible securities held by such person or entity which are exercisable or convertible within 60 days of March 1, 2020 have been exercised or converted, as the case may be.

Includes 43,750 shares of common stock issuable pursuant to options.

Unrelated third party with beneficial ownership greater than 5.0%, based solely upon a Schedule 13G/A filed on February 13, 2020 with the SEC.

Topline Capital Partners, LP’s address is 2913 3rd Street, Unit 201, Santa Monica, CA 90405.

Includes 243,750 shares of common stock issuable pursuant to options.

Unrelated third party with beneficial ownership greater than 5.0%, based solely upon a Schedule 13G filed on July 21, 2015 with the SEC.

Zachary Capital L.P.’s address is 12 Castle Street, Helier, Jersey, JE2 3RT.

Includes (i) 243,750 shares of common stock issuable pursuant to options, and (ii) 10,000 shares of common stock held by an immediate family member of Mr.

Includes 150,000 shares of common stock issuable pursuant to options.

Ludwig’s address is c/o National Loan Exchange Inc., 10 Sunset Hills Professional Center, Floor 1, Edwardsville, IL 62025.

Includes 43,750 shares of common stock issuable pursuant to options.

Mann’s address is c/o Equity Partners HG LLC, 16 N.

Washington St, Easton, MD 21601.

Includes 63,750 shares of common stock issuable pursuant to options.

Includes 20,000 shares of common stock issuable pursuant to options.

Includes 33,750 shares of common stock issuable pursuant to options.

We are not aware of any arrangements, including any pledge by any person of securities of the registrant or any of its parents, the operation of which may at a subsequent date result in a change of control of the registrant.

Certain Relationships and Relate d Transactions, and Director Independence.

Transactions with Management and Others

Pursuant to an agreement reached between Mr.

Dove and board member Mr.

Emmett DeMoss, and further approved by the remaining board members, one-half of Mr.

Dove’s 2019 bonus is to be paid to Mr.

Dove and the other half is to be paid directly to Mr.

Emmett DeMoss from the Company in consideration of Mr.

DeMoss’ ongoing strategic consulting services.

As part of the operations of NLEX, we lease office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig.

The total amount paid for the lease in both 2019 and 2018 was $0.1 million, which was paid in its entirety directly to David Ludwig.

In the fourth quarter of 2016, we entered into a related party secured promissory note with an entity owned by certain executive officers of our company (the “Entity”) for a revolving line of credit (the “Line of Credit”).

Under the terms of the Line of Credit, we received a revolving line of credit with an aggregate borrowing capacity of $1.5 million.

Interest under the Line of Credit is charged at a variable rate.

Aggregate loans under the Line of Credit up to $1.0 million incur interest at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%.

Amounts outstanding at any time in excess of $1.0 million incur interest at a rate of 8.0% per annum.

We are required to pay the Entity an annual commitment fee of $15,000, payable on a monthly basis, and due regardless of amounts drawn against the line.

Further, the Entity is eligible to participate in the net profits and net losses of certain industrial auction principal and guarantee transactions entered into by us on or after January 1, 2017, and consummated on or prior to the maturity date.

Principal transactions are those in which we purchase assets for resale.

Guarantee transactions are those in which we guarantee our client a minimum amount of proceeds from the auction.

The Line of Credit matures at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following the date we close a new credit facility with a financial institution.

Ross Dove and Kirk Dove each have an equal 50% share in the payments made to the Entity.

For additional information on the Line of Credit refer to the Form 8-K filed with the SEC on December 27, 2016.

During the year ended December 31, 2018, the Company made aggregate payments of approximately $179,000 to the respective parties based on the profit share provision for principal and guarantee transactions that occurred in 2017 and the first three quarters of 2018.

In connection with the Company entering into the Credit Facility with a third party bank on September 27, 2018, the Company terminated the Line of Credit.

Director Independence

Our securities are quoted on the OTC market and the Canadian Securities Exchange.

Our Board applies “independence” requirements and standards under the Nasdaq Marketplace Rules.

Pursuant to the requirements, the Board annually undertakes a review of director independence.

During this review, the Board considers transactions and relationships between each director or any member of his or her immediate family and HGI and its subsidiaries and affiliates.

The purpose of this review is to determine whether any such relationships or transactions exist that are inconsistent with a determination that the director is independent.

As a result of this review in 2019, the Board affirmatively determined that during 2019 Messrs.

Silber, Hexner, Ryan, Shimer, Perlis and DeMoss were deemed “independent” as defined under the Nasdaq Marketplace Rules.

The Board further determined that during 2019 each of the foregoing directors met the independence and other requirements, including the Audit Committee membership independence requirements, needed to serve on the Board committees for which they serve.

Executive Compensation.

The information required by this Item is set forth under the headings “Executive Compensation” and “Compensation Committee” in the definitive proxy materials to be filed in connection with our 2021 Annual Meeting of Stockholders, which information is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information about security ownership of certain beneficial owners required by this Item is set forth under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the definitive proxy materials to be filed in connection with our 2021 Annual Meeting of Stockholders, which information is incorporated herein by reference.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is set forth under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance” in the definitive proxy materials to be filed in connection with our 2021 Annual Meeting of Stockholders, which information is incorporated herein by reference.

Principal Accountant Fees and Services.

The Audit Committee has selected Squar Milner LLP (“Squar Milner”) as our independent registered public accounting firm for the fiscal year ended December 31, 2018 and 2019.

Squar Milner has served as our independent registered public accounting firm since the fiscal year ended December 31, 2014.

All fees paid to independent registered public accounting firms were pre-approved by the Audit Committee.

The following is a summary of the fees paid or expected to be paid to Squar Milner for professional services rendered for the fiscal years ended December 31, 2019 and 2018 (in thousands):

Year Ended December 31,

Audit-related fees, tax fees, and all other fees

Audit fees are for professional services for the audit of our annual financial statements, the reviews of the financial statements included in our Quarterly Reports on Form 10-Q, and services in connection with our statutory and regulatory filings.

Audit-Related Fees

Audit-related fees are for assurance and related services that are reasonably related to the audit and reviews of our financial statements, exclusive of the fees disclosed as audit fees above.

Tax fees are for services related to tax compliance, consulting and planning services and include preparation of tax returns, review of restrictions on net operating loss carry forwards and other general tax services.

For 2019 and 2018, these services were provided by an independent accounting firm other than Squar Milner.

All Other Fees

We did not incur fees for any other services provided by our principal accountant during the years ended December 31, 2019 and 2018.

Audit and Non-Audit Service Pre-Approval Policy

In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, the Audit Committee has adopted an informal approval policy to pre-approve services performed by the independent registered public accounting firm.

All proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the Chairman of the Audit Committee and the Chief Financial Officer.

The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee.

If there is any question as to whether a proposed service fits within a pre-approved service, the Audit Committee chair is consulted for a determination.

The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent registered public accounting firm that the request or application is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its Chairman or any of its other members pursuant to delegated authority) for approval.

All fees related to audit services during 2018 and 2019 were pre-approved by the Audit Committee.

Audit Services.

Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent registered public accounting firm to be able to form an opinion on our financial statements.

The Audit Committee pre-approves specified annual audit services engagement terms and fees and other specified audit fees.

All other audit services must be specifically pre-approved by the Audit Committee.

The Audit Committee monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope or other items.

Audit-Related Services.

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements which historically have been provided to us by the independent registered public accounting firm and are consistent with the SEC’s rules on auditor independence.

The Audit Committee pre-approves specified audit-related services within pre-approved fee levels.

All other audit-related services must be pre-approved by the Audit Committee.

Tax Services.

The Audit Committee pre-approves specified tax services that the Audit Committee believes would not impair the independence of the independent registered public accounting firm and that are consistent with SEC rules and guidance.

All other tax services must be specifically approved by the Audit Committee.

All Other Services.

Other services are services provided by the independent registered public accounting firm that do not fall within the established audit, audit-related and tax services categories.

The Audit Committee pre-approves specified other services that do not fall within any of the specified prohibited categories of services.

The information required by this Item is set forth under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the definitive proxy materials to be filed in connection with our 2021 Annual Meeting of Stockholders, which information is incorporated herein by reference.

Exhibits and Financial Statement Schedules

4 unchanged sentences

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2019 and 2018

Consolidated Statements of Income for the years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019

6 unchanged sentences

Title of Exhibit

Amended and Restated Articles of Incorporation (restated for filing purposes only)

Bylaws as amended (incorporated by reference to the Company’s Quarterly Report on Form 10-Q (File No.

000-17973) filed on November 19, 1998).

Amended and Restated Articles of Incorporation (restated for filing purposes only) (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 9, 2020 (File No.

000-17973), and incorporated herein by reference).

Restated Bylaws (incorporated by reference to the Company’s Current Report on Form 8-K (File No.

001-39471) filed on September 30, 2020).

Warrant Agreement by and between Heritage Global Inc.

17 unchanged sentences