Heritage Global Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective as of December 31, 2020. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, in accordance with Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Certifying Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made by us only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its assessment using these criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2020. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the fourth fiscal quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. 27 PART III Item 10. Directors, Executive Officers and Corporate Governance. 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. 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. Item 11. 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. Item 12. 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. 28 Item 13. 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. Item 14. Principal Accountant Fees and 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. 29 PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following financial statements and those financial statement schedules required by “Item 8. Financial Statements and Supplementary Data” hereof are filed as part of this Report: 1. Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2020 and 2019 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 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: These schedules are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (b) The following exhibits are filed as part of this Report: Exhibit Number Title of Exhibit 3.1 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). 3.2 Restated Bylaws (incorporated by reference to the Company’s Current Report on Form 8-K (File No. 001-39471) filed on September 30, 2020). 4.1 Warrant Agreement by and between Heritage Global Inc. and Napier Park Industrial Asset Acquisition, LP effective as of March 19, 2019 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 25, 2019 (File No. 000-17973), and incorporated herein by reference). 4.2 Description of Securities . 10.1* 2003 Stock Option and Appreciation Rights Plan (filed as Appendix E to the Company’s Definitive Proxy Statement filed on October 31, 2003 (File No. 000-17973), and incorporated herein by reference). 10.2* 2010 Non-Qualified Stock Option Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 24, 2011 (File No. 000-17973), and incorporated herein by reference). 10.3* Form of Option Grant for Options Granted Under 2003 Stock Option and Appreciation Rights Plan (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.4* Form of Option Grant for Options Granted Under 2010 Non-Qualified Stock Option Plan (filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on March 31, 2011 (File No. 000-17973), and incorporated herein by reference) . 10.5* Stock option grant notice to Ross Dove effective February 29, 2012 (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.6* Stock option grant notice to Kirk Dove effective February 29, 2012 (filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference). 10.7* Management Services Agreement between Heritage Global Inc. and Street Capital, effective as of May 1, 2014 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 1, 2014 (File No. 000-17973), and incorporated herein by reference) . 30 Exhibit Number Title of Exhibit 10.8 Stock Purchase Agreement between Heritage Global Inc., National Loan Exchange, Inc., and David Ludwig, signed on June 2, 2014 and effective as of May 31, 2014 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 6, 2014 (File No. 000-17973), and incorporated herein by reference) . 10.9 Promissory Note by and between Heritage Global Inc. and Harvey Frisch, effective as of June 19, 2014 (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.10 Renewed Note to the Promissory Note by and between Heritage Global Inc. and Harvey Frisch dated June 19, 2014, effective as of December 31, 2014 (filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.11 Second Renewed Note to the Promissory Note by and between Heritage Global Inc. and Harvey Frisch dated June 19, 2014, effective as of January 15, 2016 (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.12* Employment Agreement between Ross Dove and Heritage Global Partners, Inc. effective as of February 29, 2012 (filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.13* Employment Agreement between Kirk Dove and Heritage Global Partners, Inc. effective as of February 29, 2012. (filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.14* Employment Agreement between James Sklar and Heritage Global Partners, Inc. effective as of June 23, 2013 ( filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.15* Employment Agreement between Scott A. West and Heritage Global Partners, Inc. effective as of March 6, 2014 (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.16* Employment Agreement between David Ludwig and National Loan Exchange, Inc. effective as of May 31, 2014 (filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed on March 17, 2016 (File No. 000-17973), and incorporated herein by reference) . 10.17 Secured Promissory Note by and between Heritage Global Inc. and The Dove Holdings Corporations, effective as of December 23, 2016 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 27, 2016 (File No. 000-17973), and incorporated herein by reference). 10.18* Form of Option Grant for Options Granted Under Heritage Global Inc. 2016 Stock Option Plan (filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed on March 13, 2018 (File No. 000-17973), and incorporated herein by reference). 10.19* 2016 Stock Option Plan (filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed on March 13, 2018 (File No. 000-17973), and incorporated herein by reference) . 10.20* Addendum to Employment Agreements, effective June 1, 2018, by and between Heritage Global Inc., National Loan Exchange, Inc., Tom Ludwig and David Ludwig (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 24, 2018 (File No. 000-17973), and incorporated herein by reference) . 10.21 Secured Promissory Note by and between Heritage Global Inc. and First Choice Bank, effective as of September 27, 2018 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 3, 2018 (File No. 000-17973), and incorporated herein by reference). 10.22 Business Loan Agreement by and between Heritage Global Inc. and First Choice Bank, effective as of September 27, 2018 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 3, 2018 (File No. 000-17973), and incorporated herein by reference) . 31 Exhibit Number Title of Exhibit 10.23 Change in Terms Agreement by and between Heritage Global Inc. and First Choice Bank, effective as of March 29, 2019 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 3, 2019 (File No. 000-17973), and incorporated herein by reference) . 10.24 First Amendment to Business Loan Agreement by and between Heritage Global Inc. and First Choice Bank, effective as of March 29, 2019 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 3, 2019 (File No. 000-17973), and incorporated herein by reference) . 10.25 Amendment to Employment Agreement by and between Equity Partners HG LLC f/k/a Equity Partners CRB, LLC and Kenneth Mann, effective as of September 13, 2019 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 8, 2019 (File No. 000-17973), and incorporated herein by reference) . 10.26 Promissory Note by and between Heritage Global Inc. and C3bank, National Association, effective as of February 5, 2020 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 14, 2020 (File No. 000-17973), and incorporated herein by reference) . 10.27 Business Loan Agreement by and between Heritage Global Inc. and C3bank, National Association, effective as of February 5, 2020 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 14, 2020 (File No. 000-17973), and incorporated herein by reference) . 10.28 Commercial Security Agreement by and between Heritage Global Inc. and C3bank, National Association, effective as of February 5, 2020 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 14, 2020 (File No. 000-17973), and incorporated herein by reference) . 10.29* Employment Agreement, by and between Heritage Global, Inc. and Kirk Dove, effective as of September 17, 2020 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2020 (File No. 001-39471), and incorporated herein by reference). 10.30* Amendment to Stock Option Award, by and between Heritage Global, Inc. and Kirk Dove, effective as of September 20, 2020 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 21, 2020 (File No. 001-39471), and incorporated herein by reference). 21 List of subsidiaries. 23.1 Consent of Baker Tilly US, LLP. 31.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase * Indicates a management contract or compensatory plan required to be filed as an exhibit. (c) Financial Statement Schedules 32 The following Schedules are included in our Financial Statements: None. Item 16. Form 10-K Summary None. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. HERITAGE GLOBAL INC. (Registrant) Dated: March 8, 2021 By: /s/ Ross Dove Ross Dove, Chief Executive Officer (Principal Executive Officer) By: /s/ Scott A. West Scott A. West, Chief Financial Officer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Ross Dove Chief Executive Officer and Director (Principal Executive Officer) March 8, 2021 Ross Dove /s/ Michael Hexner Director March 8, 2021 Michael Hexner /s/ J. Brendan Ryan Director March 8, 2021 J. Brendan Ryan /s/ Barbara Sinsley Director March 8, 2021 Barbara Sinsley /s/ Kelly Sharpe Director March 8, 2021 Kelly Sharpe /s/ Samuel L. Shimer Chairman of the Board of Directors March 8, 2021 Samuel L. Shimer 34 INDEX OF FINANCIAL STATEMENTS Title of Document Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4 Consolidated Statements of Income for the years ended December 31, 2020 and 2019 F-5 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Heritage Global Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Heritage Global, Inc. and its subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, stockholders’ equity and cash flows for each of the years then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. DEFERRED TAX ASSETS Critical Audit Matter Description As described in Notes 2 and 13 to the consolidated financial statements, the Company recognizes 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. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. We identified the deferred tax assets as a critical audit matter due to the valuation allowance assessment which represents a significant estimate with a high degree of subjectivity. How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: F-2 • Obtained an understanding of management’s estimate regarding the valuation allowance including the method/assumptions/data used to develop the estimate by reviewing management prepared memo. • Reviewed the qualification and objectivity of the Company’s outside consultant who assisted in management’s determination of the valuation allowance. • Examined the underlying data used in determining the valuation allowance, including historical financial data and future financial projections for reasonableness. • Reviewed tax position and other disclosures related to the tax provision. /s/ BAKER TILLY US, LLP We have served as the Company's auditor since 2014. San Diego, California March 8, 2021 F-3 HERITAGE GLOBAL INC. CONSOLIDATED BALANCE SHEETS (In thousands of US dollars, except share amounts) December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 23,385 $ 2,728 Accounts receivable 1,496 1,859 Current portion of notes receivable, net 1,338 1,295 Inventory – equipment 235 104 Other current assets 498 784 Total current assets 26,952 6,770 Non-current portion of notes receivable, net 748 1,366 Equity method investments 2,402 2,516 Right-of-use asset 963 1,483 Property and equipment, net 130 221 Intangible assets, net 3,123 3,392 Goodwill 5,585 5,585 Deferred tax assets 4,402 372 Other assets 250 212 Total assets $ 44,555 $ 21,917 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 13,609 $ 8,113 Current portion of third party debt — 438 Lease liabilities 380 577 Total current liabilities 13,989 9,128 Non-current portion of lease liabilities 623 942 Total liabilities 14,612 10,070 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 568 Series N shares at December 31, 2020 and December 31, 2019 6 6 Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 35,281,183 shares at December 31, 2020 and 29,339,101 shares at December 31, 2019 353 293 Additional paid-in capital 293,400 285,099 Accumulated deficit (263,816 ) (273,474 ) Accumulated other comprehensive loss — (77 ) Total stockholders’ equity 29,943 11,847 Total liabilities and stockholders’ equity $ 44,555 $ 21,917 The accompanying notes are an integral part of these consolidated financial statements. F-4 HERITAGE GLOBAL INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands of US dollars, except share and per share amounts) Year Ended December 31, 2020 2019 Revenues: Services revenue $ 21,806 $ 20,100 Asset sales 4,377 6,068 Total revenues 26,183 26,168 Operating costs and expenses: Cost of services revenue 6,320 3,374 Cost of asset sales 2,789 4,365 Selling, general and administrative 14,449 15,874 Depreciation and amortization 362 305 Impairment of goodwill — 573 Total operating costs and expenses 23,920 24,491 Earnings of equity method investments 3,796 1,373 Operating income 6,059 3,050 Interest and other expense, net (45 ) (64 ) Income before income tax benefit 6,014 2,986 Income tax benefit (3,644 ) (913 ) Net income $ 9,658 $ 3,899 Weighted average common shares outstanding – basic 30,200,053 28,662,297 Weighted average common shares outstanding – diluted 32,708,235 29,271,375 Net income per share – basic $ 0.32 $ 0.14 Net income per share – diluted $ 0.30 $ 0.13 The accompanying notes are an integral part of these consolidated financial statements. F-5 HERITAGE GLOBAL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands of US dollars, except share amounts) Preferred stock Common stock Additional paid-in Accumulated Accumulated other comprehensive Shares Amount Shares Amount capital deficit loss Total Balance at December 31, 2018 569 $ 6 29,253,278 $ 293 $ 284,751 $ (277,373 ) $ (77 ) $ 7,600 Issuance of common stock from stock option awards — — 10,783 — — — — — Issuance of common stock for services rendered — — 75,000 — 65 — — 65 Issuance of common stock due to conversion of Series N Preferred stock (1 ) — 40 — — — — — Stock-based compensation expense — — — — 283 — — 283 Net income — — — — — 3,899 — 3,899 Balance at December 31, 2019 568 6 29,339,101 293 285,099 (273,474 ) (77 ) 11,847 Issuance of common stock from stock option awards — — 274,582 4 (107 ) — — (103 ) Issuance of common stock for services rendered — — 205,000 2 568 — — 570 Issuance of common stock in public offering, net — — 5,462,500 54 7,487 — — 7,541 Stock-based compensation expense — — — — 353 — — 353 Net income — — — — — 9,658 — 9,658 Foreign currency translation adjustments — — — — — — 77 77 Balance at December 31, 2020 568 $ 6 35,281,183 $ 353 $ 293,400 $ (263,816 ) $ — $ 29,943 The accompanying notes are an integral part of these consolidated financial statements. F-6 HERITAGE GLOBAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of US dollars) Year Ended December 31, 2020 2019 Cash flows provided by operating activities: Net income $ 9,658 $ 3,899 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred issuance costs and fees (30 ) — Earnings of equity method investments (3,796 ) (1,373 ) Noncash lease expense 520 (262 ) Impairment of goodwill — 573 Depreciation and amortization 362 305 Deferred taxes (4,030 ) (956 ) Stock-based compensation expense 353 283 Non-cash expense related to foreign operations 77 — Changes in operating assets and liabilities: Accounts receivable 363 (1,459 ) Inventory – equipment (131 ) 2,301 Other assets 818 (100 ) Accounts payable and accrued liabilities 5,500 (2,652 ) Lease liabilities (516 ) 235 Net cash provided by operating activities 9,148 794 Cash flows provided by (used in) investing activities: Investment in notes receivable (6,081 ) (2,827 ) Payments received on notes receivable 1,736 166 Cash received on transfer of notes receivable to partners 4,950 — Investment in equity method investments (1,428 ) (604 ) Cash distributions from equity method investments 5,338 2,225 Purchase of property and equipment (7 ) (116 ) Net cash provided by (used in) investing activities 4,508 (1,156 ) Cash flows provided by (used in) financing activities: Proceeds from debt payable to third parties 5,625 1,250 Repayment of debt payable to third parties (6,063 ) (2,428 ) Proceeds from issuance of common stock in public offering, net 7,541 — Proceeds from issuance of common stock from stock option awards 66 — Payments of tax withholdings related to cashless exercises of stock option awards (168 ) — Net cash provided by (used in) financing activities 7,001 (1,178 ) Net increase (decrease) in cash and cash equivalents 20,657 (1,540 ) Cash and cash equivalents at beginning of year 2,728 4,268 Cash and cash equivalents at end of year $ 23,385 $ 2,728 Supplemental cash flow information: Cash paid for income taxes $ 143 $ 290 Cash paid for interest 43 74 Issuance of common stock for services rendered 570 65 The accompanying notes are an integral part of these consolidated financial statements. F-7 HERITAGE GLOBAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Description of Business and Principles of Consolidation These consolidated financial statements include the accounts of Heritage Global Inc. together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), Equity Partners HG LLC (“Equity Partners”), National Loan Exchange Inc. (“NLEX”), Heritage Global LLC (“HG LLC”), and Heritage Global Capital LLC (“HGC”). These entities, collectively, are referred to as “HGI,” the “Company,” “we” or “our” in these consolidated financial statements. These consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and include the assets, liabilities, revenues, and expenses of all subsidiaries over which HGI exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation. The Company began its asset liquidation operations in 2009 with the establishment of HG LLC. The business was subsequently expanded by the acquisitions of Equity Partners, HGP and NLEX in 2011, 2012 and 2014, respectively, and the creation of HGC in 2019. As a result, HGI is positioned to provide an array of value-added capital and financial asset solutions: auction and appraisal services, traditional asset disposition sales, and specialty financing solutions. The Company’s reportable segments consist of the Industrial Assets Division and Financial Assets Division. COVID-19 The spread of the novel coronavirus (“COVID-19”) pandemic had a minor negative impact on the Company’s performance for the year ended December 31, 2020 due to evolving travel and work restrictions as well as a delay in the sale of certain assets. Going forward, the Company does not believe COVID-19 and the recent developments surrounding the global pandemic will have material negative impacts on the Company’s financial performance, as our asset liquidation business is highly concentrated in distressed and surplus assets and we expect that there will be an increased supply of distressed and surplus assets as a result of the COVID-19 pandemic and any downward trends in the overall economy, resulting in more potential for principal and fee based deals. The Company believes that the continuing disruptions to the global supply chain, particularly those involving industrial assets, will further increase demand for U.S.-based surplus assets. Further, the Company expects that the COVID-19 pandemic will have the following positive impacts: • continued increase in demand for HGP’s online auctions as a result of ongoing social distancing requirements in connection with the COVID-19 pandemic; • increased activity for NLEX and HGC due to expanding volumes of nonperforming and charged-off consumer loans; • increased funding opportunities for HGC due to tightening underwriting standards at conventional lenders; and • incremental valuation opportunities for our valuation business as a result of greater focus on collateral on bank balance sheets. However, positive expected impacts of the COVID-19 pandemic on the Company’s business could be offset, at least in part, by negative impacts on certain business units relying on travel and field work. Any continuation of travel and work restrictions may result in decreased revenues depending on the scope and duration of such restrictions. Public Offering On October 6, 2020, the Company completed a public offering (the “2020 Public Offering”) of 5,462,500 shares of its common stock, at a public offering price of $1.75 per share, which included a full exercise of the underwriters’ option to purchase 712,500 additional shares of common stock from the Company. The Company received approximately $8.7 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We intend to use the net proceeds to provide additional funds for general corporate purposes, which may include, without limitation, the expansion of the businesses of HGC and HGP, working capital and growth capital. F-8 Note 2 – Summary of Significant Accounting Policies Use of estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Significant estimates include the assessment of collectability of revenue recognized and the valuation of accounts receivable and notes receivable, inventory, investments, goodwill and intangible assets, liabilities, deferred income tax assets and liabilities including projecting future years’ taxable income, and stock-based compensation. These estimates have the potential to significantly impact our consolidated 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. Foreign Currency The functional currency of foreign operations is deemed to be the local country’s currency. Assets and liabilities of operations outside of the United States are generally translated into U.S. dollars, and the effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income. Reclassifications Certain prior year balances within the consolidated financial statements have been reclassified to conform to current year presentation. Nature of Business The Company earns revenue both from commission or fee-based services, and from the sale of distressed or surplus assets. With respect to the former, revenue is recognized as the services are provided. With respect to the latter, the majority of the asset sale transactions are conducted directly by the Company and the revenue is recognized in the period in which the asset is sold. Fee based revenue is reported as services revenue, and the associated direct costs are reported as cost of services revenue. At the balance sheet date, any unsold assets which the Company owns are reported as inventory, any outstanding accounts receivable are included in the Company’s accounts receivable, and any associated liabilities are included in the Company’s accrued liabilities. Equipment inventory is expected to be sold within a year and is therefore classified as a current asset. The remaining asset sale transactions involve the Company acting jointly with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). Transactions in which the Company’s ownership share meets the criteria for the equity method investments under ASC 323 are accounted for as equity method investments, and, accordingly, the Company’s proportionate share of the net income (loss) is reported as earnings of equity method investments. At each balance sheet date, the Company’s investments in these Joint Ventures are reported in the consolidated balance sheet as equity method investments. Although the Company generally expects to exit each of its investments in Joint Ventures in less than one year, they are classified on the balance sheet as non-current assets due to the uncertainties relating to the timing of resale of the underlying assets as a result of the Joint Venture relationship. The Company monitors the value of the Joint Ventures’ underlying assets and liabilities, and records a write down of its investments if the Company concludes that there has been a decline in the value of the net assets. As the activity of the Joint Ventures involves asset purchase/resale transactions, which is similar in nature to the Company’s other asset liquidation activities, the earnings (losses) of the Joint Ventures are included in the operating income in the accompanying consolidated income statements. In 2019, the Company formed Heritage Global Capital LLC (“HGC”), a wholly owned subsidiary of HGI, in order to provide specialty financing solutions to investors in charged-off and nonperforming asset portfolios. F-9 Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents with financial institutions in the United States. These accounts may from time to time exceed federally insured limits. The Company has not experienced any losses on such accounts. Accounts receivable The Company’s accounts receivable primarily relate to the operations of its asset liquidation business. They generally consist of three major categories: (1) fees, commissions and retainers relating to appraisals and auctions, (2) receivables from asset sales, and (3) receivables from Joint Venture partners. The initial value of an account receivable corresponds to the fair value of the underlying goods or services. To date, a majority of the receivables have been classified as current and, due to their short-term nature, any decline in fair value would be due to issues involving collectability. At each financial statement date the collectability of each outstanding account receivable is evaluated, and an allowance is recorded if the book value exceeds the amount that is deemed collectable. See Note 10 for more detail regarding the Company’s accounts receivable. Notes receivable, net The Company’s notes receivable balance consists of loans to buyers of charged-off and nonperforming 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. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. As of December 31, 2020, the Company has not recorded an allowance for credit losses related to notes receivable outstanding. In order to evaluate the need for an adjustment to the receivable balance related to credit losses, or impairment, the Company performs 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. Inventory The Company’s inventory consists of assets acquired for resale, which are normally expected to be sold within a one-year operating cycle. All inventory is recorded at the lower of cost or net realizable value. Equity Method Investments As noted above, we conduct a portion of our asset liquidation business through Joint Ventures. Transactions in which the Company’s 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. Given that the underlying transactions are identical, in all material aspects, to asset liquidation transactions that we undertake independently, the net assets are similarly expected to be sold within a one-year operating cycle. However, these investments have historically been classified as non-current in our consolidated financial statements due to the uncertainties relating to the timing of resale of the underlying assets as a result of the Joint Venture relationship. See Note 2 and Note 5 for further detail. Fair value of financial instruments The fair value of financial instruments is the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. At December 31, 2020 and 2019, the carrying values of the Company’s cash, accounts receivable, other assets, accounts payable and accrued liabilities approximate fair value given the short term nature of these instruments. The Company’s notes receivable and debt obligations approximate fair value as a result of the interest rate on the receivable or debt obligation approximating prevailing market rates. F-10 There are three levels within the fair value hierarchy: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – significant other observable inputs; and Level 3 – significant unobservable inputs . At December 31, 2020 and 2019, t he Company had no material financial instruments requiring fair value measurement. Business combinations Acquisitions are accounted for under FASB Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”), which requires that assets acquired and liabilities assumed that are deemed to be a business are recorded based on their respective acquisition date fair values. ASC 805 further requires that separately identifiable intangible assets be recorded at their acquisition date fair values and that the excess of consideration paid over the fair value of assets acquired and liabilities assumed (including identifiable intangible assets) should be recorded as goodwill. Intangible assets Intangible assets are recorded at fair value upon acquisition. Those with an estimated useful life are amortized, and those with an indefinite useful life are unamortized. Subsequent to acquisition, the Company monitors events and changes in circumstances that require an assessment of intangible asset recoverability. Indefinite-lived intangible assets are assessed at least annually to determine both if they remain indefinite-lived and if they are impaired. The Company assesses whether or not there have been any events or changes in circumstances that suggest the value of the asset may not be recoverable. Amortized intangible assets are not tested annually, but are assessed when events and changes in circumstances suggest the assets may be impaired. If an assessment determines that the carrying amount of any intangible asset is not recoverable, an impairment loss is recognized in the income statement, determined by comparing the carrying amount of the asset to its fair value. All of the Company’s identifiable intangible assets at December 31, 2020 have been acquired as part of the acquisitions of HGP in 2012 and NLEX in 2014, and are discussed in more detail in Note 9. No impairment charges were necessary during 2020. Goodwill Goodwill, which results from the difference between the purchase price and the fair value of net identifiable tangible and intangible assets acquired in a business combination, is not amortized but, in accordance with GAAP, is tested at least annually for impairment. The Company performs its annual impairment test as of October 1. In testing goodwill, the Company initially uses a qualitative approach and analyzes relevant factors to determine if events and circumstances have affected the value of the goodwill. If the result of this qualitative analysis indicates that the value has been impaired, the Company then applies a quantitative approach to calculate the difference between the goodwill’s recorded value and its fair value. An impairment loss is recognized to the extent that the recorded value exceeds its fair value. Goodwill, in addition to being tested for impairment annually, is tested for impairment at interim periods if an event occurs or circumstances change such that it is more likely than not that the carrying amount of goodwill may be impaired. All of the Company’s goodwill relates to its acquisitions of HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 9. As a result of the Equity Partners separation transaction at the end of 2019, the Company recorded an impairment charge of $0.6 million to reduce the carrying value of goodwill related to the acquisition of Equity Partners in 2011. Deferred income taxes The Company recognizes 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. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. In 2014, as a result of incurring losses in previous years, the Company recorded a valuation allowance against all of its net deferred tax assets. In 2019 and 2020 the Company recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million and $4.4 million, respectively, as it is more likely than not that some of our net operating loss carryforwards will be utilized. For further discussion of our income taxes, see Note 13. F-11 Liabilities and contingencies The Company is involved from time to time in various legal matters arising out of its operations in the normal course of business. On a case by case basis, the Company evaluates the likelihood of possible outcomes for this litigation. Based on this evaluation, the Company determines whether a loss accrual is appropriate. If the likelihood of a negative outcome is probable, and the amount can be reasonably estimated, the Company accounts for the estimated loss in the current period. See Note 15 for further discussion. Revenue recognition In 2018, the Company adopted the accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method. Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions, secured lending and providing merger and acquisition advisory services. Asset sales revenue generally consists of proceeds obtained through sales of purchased assets. 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 is considered to be within the asset liquidation business, which consists of two reportable segments, the Industrial Assets Division and the Financial Assets Division. Generally, revenue is recognized in the asset liquidation business at the point in time in which the performance obligation has been satisfied and full consideration is received. The exception to recognition at a 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, 2020), 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 the Company’s “contract liability”. As of December 31, 2020, the deferred revenue balance was approximately $17,000. The Company records receivables related to asset liquidation in certain situations based on timing of payments for asset liquidation transactions held at the end of the reporting period; however, revenue is generally recognized in the period that the Company satisfies the performance obligation and cash is collected. The Company does not record a “contract asset” for partially satisfied performance obligations. We evaluate revenue from asset liquidation 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 asset liquidation transactions and therefore we report the revenue from transactions in which we act as an agent on a net basis. The Company also earns asset liquidation income through asset liquidation transactions that involve the Company acting jointly with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company (“LLC”) agreement (collectively, “Joint Ventures”). For these transactions, in which the Company’s ownership share meets the criteria for the equity method investments under ASC 323, the Company does not record asset liquidation revenue or expense. Instead, the Company’s 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. In 2019, the Company began providing specialty financing solutions to investors in charged-off and nonperforming asset portfolios. 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 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. F-12 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 which will be realized, and the lack of historical precedence as this is a new business for the Company . During 2020 and 2019, the Company generated revenues specific to one customer representing 10% and 14% of total revenues for the respective periods. Cost of services revenue and asset sales Cost of services revenue generally includes the direct costs associated with generating commissions and fees from the Company’s auction and appraisal services, merger and acquisition advisory services, and brokering of charged-off receivable portfolios. The Company recognizes these expenses in the period in which the revenue they relate to is recorded. Cost of asset sales generally includes the cost of purchased inventory and the related direct costs of selling inventory. The Company recognizes these expenses in the period in which title to the inventory passes to the buyer, and the buyer assumes the risk and reward of the inventory. Stock-based compensation The Company’s stock-based compensation is primarily in the form of options to purchase common shares. The grant date fair value of stock options is calculated using the Black-Scholes option pricing model. The determination of the fair value of the Company’s stock options is based on a variety of factors including, but not limited to, the price of the Company’s common stock, the expected volatility of the stock price over the expected life of the award, and expected exercise behavior. The grant date fair value of the awards is subsequently expensed over the vesting period, net of estimated forfeitures. The provisions of the Company’s stock-based compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore the Company classifies the option awards as equity. See Note 16 for further discussion of the Company’s stock-based compensation. Advertising The Company expenses advertising costs in the period in which they are incurred. Advertising and promotion expense included in selling, general and administrative expense for the years ended December 31, 2020 and 2019, was $0.4 million and $0.6 million, respectively. Recently adopted accounting pronouncements In 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (“ASU 2017-04”), which simplifies the test for goodwill impairment. The main provisions of ASU 2017-04 eliminate the second step of the goodwill impairment test which previously was performed to determine the goodwill impairment loss for an entity by calculating the difference between the implied fair value of the entity’s goodwill and its carrying value. Under ASU 2017-04, if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill which is allocated to that reporting unit. ASU 2017-04 applies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. ASU 2017-04 became effective January 1, 2020 and did not have a material impact on our consolidated financial statements. In 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (“ASU 2018-07”), which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 became effective January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements. F-13 Future accounting pronouncements In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We anticipate that the impact will not be material to our consolidated financial statements. In 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which applies a current expected credit loss model which is a new impairment model based on expected losses rather than incurred losses. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from, or added to, the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC 310-30, which provides authoritative guidance for the accounting of the Company’s 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. We are currently evaluating the impact of the new guidance on our consolidated financial statements. Note 3 – Notes Receivable, net The Company’s notes receivable balance consists of loans to buyers of charged-off and nonperforming receivable portfolios which resulted in a total outstanding principal balance of approximately $2.1 million, net of unamortized deferred fees and costs on originated loans. The activity during 2020 includes the issuance of additional notes of approximately $6.1 million, principal payments made by borrowers of approximately $1.7 million, and the transfer of notes to partners as detailed below. In March 2020, the Company closed a $6.0 million receivables purchasing agreement with a partner, an alternative asset manager focused on asset-based lending transactions, for the purpose of funding a portion of loans to debt purchasing clients. In March 2020, approximately $1.0 million of the notes receivable balance for certain loans was transferred to the partner. Additionally, in March 2020 HGC Origination I LLC and HGC Funding I LLC were formed as joint ventures with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. In March 2020, approximately $3.0 million of the notes receivable balance for certain loans was transferred into the joint venture. In May 2020, an additional $1.0 million of the notes receivable balance for certain loans was transferred into the joint venture. Refer to Note 5 for further information. As of December 31, 2020, the Company has not recorded an allowance for credit losses related to notes receivable outstanding. The Company’s total gross loan amount as shown in the table below represents all loans funded, either solely by HGC or in partnership with our two senior lenders. The HGC share of loan amount represents the Company’s portion of the total gross loan amount. The table below shows the Company’s lending activity during 2020 and 2019: F-14 2020 2019 Total Gross Loan Amount HGC Share of Loan Amount Total Gross Loan Amount HGC Share of Loan Amount Notes receivable outstanding, beginning of year $ 2,661 $ 2,661 $ — $ — Loan originations: HGC funded loans 5,781 5,781 2,851 2,851 Loans funded with senior lender #1 1,201 300 — — Loans funded within joint ventures with senior lender #2 3,843 663 — — Total loan originations 10,825 6,744 2,851 2,851 Transfer of notes to/from senior lenders: HGC funded loans (5,340 ) (5,340 ) — — Loans funded with senior lender #1 1,317 329 — — Loans funded within joint ventures with senior lender #2 4,023 762 — — Total transfer of notes to/from senior lenders: — (4,249 ) — — Principal repayments: HGC funded loans (1,022 ) (1,022 ) (166 ) (166 ) Loans funded with senior lender #1 (2,517 ) (629 ) — — Loans funded within joint ventures with senior lender #2 (7,868 ) (1,426 ) — — Total principal payments (11,407 ) (3,077 ) (166 ) (166 ) Deferred financing fees and costs, net 7 7 (24 ) (24 ) Notes receivable outstanding, end of year $ 2,086 $ 2,086 $ 2,661 $ 2,661 Current portion of notes receivable, net $ 1,338 $ 1,295 Non-current portion of notes receivable, net 748 1,366 Notes receivable, net, end of year $ 2,086 $ 2,661 Note 4 – Lessor Arrangement In June 2019, the Company, with certain partners, entered into agreements to lease, with a purchase option, a fully functional manufacturing building, including all machinery and equipment held within. The assets under lease relate to the Company’s purchase, with certain partners, of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018. The lessee is obligated to make monthly lease payments over a ten year period, totaling approximately $13.2 million for the real estate portion, and monthly lease payments over a six year period totaling approximately $9.7 million for the machinery and equipment. The purchase option for both the real estate and machinery and equipment can be exercised at any time on or after December 1, 2019 and before May 31, 2021 for a total purchase price of $20.0 million; of which $12.0 million and $8.0 million are allocated to the real estate and machinery and equipment, respectively. The lessor arrangement is classified as a sales-type lease, and, therefore, the present value of future lease payments has been recognized as revenue and a lease receivable as of the effective date. The real estate portion of the arrangement is held by CPFH LLC, the joint venture, and is accounted for under the equity method where the Company’s share in earnings from equity method investments is shown in one line item on the income statement. Refer to Note 5 for further information. The machinery and equipment portion of the arrangement is jointly owned by all the partners of CPFH LLC, apart from the joint venture entity. Therefore, the Company has derecognized the leased asset of approximately $0.9 million and recognized as revenue approximately $1.2 million, which represents the present value of future lease payments and a lease receivable included in the accounts receivable line item on the balance sheet, consistent and reflective of its business model for asset sales. The Company expects to recognize approximately $0.5 million in interest income prior to the exercise of the purchase option, which is the difference between the present value (at a 5.50% discount rate) and the undiscounted lease payments. Note 5 – Equity Method Investments F-15 In November 2018, CPFH LLC was formed to purchase certain real estate assets among partners in a Joint Venture. The Company’s share of the Joint Venture is 25%. In March 2019, Oak Grove Asset Acquisitions LP was formed for the execution of auction deals with Napier Park, of which the Company holds a 50% share. In March 2020 HGC Origination I LLC and HGC Funding I LLC were formed as joint ventures with a partner for purposes of conducting business relating to the sourcing, origination and funding of loans to debt purchasing clients. The table below details the Company’s Joint Venture revenues and earnings during 2020 and 2019 (in thousands): 2020 2019 Revenues: Oak Grove Asset Acquisitions LP $ 1,129 $ 522 CPFH LLC 15,538 $ 10,985 HGC Funding I LLC and Origination I LLC 761 — Total Revenues $ 17,428 $ 11,507 Operating income: Oak Grove Asset Acquisitions LP $ 237 $ 151 CPFH LLC 13,930 5,046 HGC Funding I LLC and Origination I LLC 689 — Total operating income $ 14,856 $ 5,197 The table below details the summarized components of assets and liabilities, as at December 31, 2020 and 2019, of the Company’s Joint Ventures at those dates (in thousands): 2020 2019 Assets: Oak Grove Asset Acquisitions LP $ — $ 1,602 CPFH LLC 10,791 20,016 HGC Funding I LLC and Origination I LLC — — Total assets $ 10,791 $ 21,618 Liabilities: Oak Grove Asset Acquisitions LP $ 1 $ 797 CPFH LLC 5,374 10,245 HGC Funding I LLC and Origination I LLC — — Total liabilities $ 5,375 $ 11,042 Note 6 – Earnings per Share The Company is required, in periods in which it has net income, to calculate basic earnings per share (“basic EPS”) using the two-class method. The two-class method is required because the Company’s shares of Series N preferred stock, each of which is convertible to 40 common shares, have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock. Under the two-class method, earnings for the period are allocated on a pro-rata basis to the common and preferred stockholders. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares. In periods in which the Company has a net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The two-class method is not used in periods in which the Company has a net loss because the preferred stock does not participate in losses. Stock options and other potential common shares are included in the calculation of diluted earnings per share (“diluted EPS”), since they are assumed to be exercised or converted, except when their effect would be anti-dilutive. F-16 The table below shows the calculation of the shares used in computing diluted EPS: For the Year Ended December 31, Weighted Average Shares Calculation: 2020 2019 Basic weighted average shares outstanding 30,200,053 28,662,297 Treasury stock effect of common stock options and restricted stock awards 2,508,182 609,078 Diluted weighted average common shares outstanding 32,708,235 29,271,375 For 2020 and 2019 there were potential common shares totaling approximately 0.1 million and 0.7 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive. Note 7 – Leases The Company leases office and warehouse space primarily in three locations: Del Mar, CA; Burlingame, CA; and Edwardsville, IL. In connection with the Burlingame lease termination, which will take effect on April 30, 2021, we have executed a new warehouse lease in Hayward, CA with an effective date of May 1, 2021. As each contract does not meet any of the four criteria of ASC 842 for financing lease classification, the Company has determined that each lease arrangement should be classified as an operating lease. The right-of-use assets and lease liabilities for each location are as follows (in thousands): December 31, December 31, Right-of-use assets: 2020 2019 Del Mar, CA $ 613 $ 745 Burlingame, CA 99 392 Edwardsville, IL 251 346 $ 963 $ 1,483 December 31, December 31, Lease liabilities: 2020 2019 Del Mar, CA $ 641 $ 745 Burlingame, CA 109 429 Edwardsville, IL 253 345 $ 1,003 $ 1,519 The Company’s leases generally do not provide an implicit rate, and, therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used its incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. As of January 1, 2019, the Company’s incremental borrowing rate was 5.25%. Lease expense for these leases is recognized on a straight-line basis over the lease term. For 2020 and 2019, lease expense was approximately $0.6 and $0.5 million, respectively. Undiscounted future minimum lease commitments as of December 31, 2020 that have initial or remaining lease terms in excess of one year are as follows (in thousands): F-17 2021 $ 385 2022 278 2023 218 2024 176 2025 30 Total undiscounted future minimum lease payments 1,087 Less: imputed interest 84 Present value of lease liabilities $ 1,003 Note 8 – Property and Equipment, net Property and equipment are recorded at historical cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. Leasehold improvements are amortized over the useful life of the asset or the lease term, whichever is shorter. Estimated service lives are five years for furniture, fixtures and office equipment and three years for software and technology assets. Expenditures for repairs and maintenance not considered to substantially lengthen the life of the asset or increase capacity or efficiency are charged to expense as incurred. The following summarizes the components of the Company’s property and equipment (in thousands): December 31, 2020 December 31, 2019 Furniture, fixtures and office equipment $ 203 $ 214 Software and technology assets 340 333 543 547 Accumulated depreciation (413 ) (326 ) Property and equipment, net $ 130 $ 221 Depreciation expense related to property and equipment was $94,000 and $70,000 for the years ended December 31, 2020 and 2019, respectively. F-18 Note 9 – Intangible Assets and Goodwill Intangible assets The details of identifiable intangible assets as of December 31, 2020 and 2019 are shown below (in thousands except for lives): Amortized Intangible Assets Original Life (years) Remaining Life (years) Carrying Value December 31, 2019 Amortization Carrying Value December 31, 2020 Customer Network (HGP) 12 2.0 $ 92 $ (30 ) $ 62 Trade Name (HGP) 14 4.0 642 (129 ) 513 Customer Relationships (NLEX) 7.6 1.0 221 (110 ) 111 Total 955 (269 ) 686 Unamortized Intangible Assets Trade Name (NLEX) N/A N/A 2,437 — 2,437 Total $ 3,392 $ (269 ) $ 3,123 Amortized Intangible Assets Original Life (years) Remaining Life (years) Carrying Value December 31, 2018 Amortization Carrying Value December 31, 2019 Customer Network (HGP) 12 3.0 $ 114 $ (22 ) $ 92 Trade Name (HGP) 14 5.0 746 (104 ) 642 Customer Relationships (NLEX) 7.6 2.0 330 (109 ) 221 Total 1,190 (235 ) 955 Unamortized Intangible Assets Trade Name (NLEX) N/A N/A 2,437 — 2,437 Total $ 3,627 $ (235 ) $ 3,392 Amortization expense during each of 2020 and 2019 was $0.3 million and $0.2 million, respectively. No significant residual value is estimated for these intangible assets. The Company performed its annual impairment test for the year ended December 31, 2020, in the fourth quarter, and determined that no impairment charges were necessary. The estimated amortization expense during future years is shown below (in thousands): Year Amount 2021 $ 270 2022 159 2023 129 2024 128 Total $ 686 Goodwill As part of its acquisitions, the Company recognized goodwill of $4.7 million related to HGP in 2012 and $3.5 million related to NLEX in 2014. F-19 Goodwill consisted of t he following at December 31, 2020 and 201 9 (in thousands): Acquisition December 31, 2020 December 31, 2019 HGP 2,040 2,040 NLEX 3,545 3,545 Total goodwill $ 5,585 $ 5,585 On September 13, 2019, the Company entered into an Amendment (the “Mann Amendment”) to the Employment Agreement (the “Mann Employment Agreement”) for Kenneth Mann, a named executive officer of the Company and the Senior Managing Director of Equity Partners. Pursuant to the terms of the Mann Amendment, Mr. Mann continued his employment with Equity Partners until December 31, 2019, after which time the Mann Employment Agreement and Mann Amendment terminated and Mr. Mann’s employment with Equity Partners ceased (the “Resignation Time”). As a result of the Mann Amendment, the Company recorded an impairment charge of $0.6 million at December 31, 2019 to reduce the carrying value of goodwill, which resulted from the acquisition of Equity Partners in 2011. The Company performed its annual impairment test for the year ended December 31, 2020, in the fourth quarter, and determined that no additional impairment charges were necessary. Note 10 – Accounts Receivable and Accounts Payable Accounts receivable As described in Note 2, the Company’s accounts receivable are primarily related to the operations of its asset liquidation business. With respect to auction proceeds and asset dispositions, including NLEX’s accounts receivable brokerage transactions, the assets are not released to the buyer until payment has been received. The Company, therefore, is not exposed to significant collectability risk relating to these receivables. Given this experience, together with the ongoing business relationships between the Company and its joint venture partners, the Company has not historically required a formal credit quality assessment in connection with these activities. The Company has not experienced any significant collectability issues with its accounts receivable. As the Company’s asset liquidation business expands, more comprehensive credit assessments may be required. The Company recorded no allowance for doubtful accounts as of December 31, 2020 and 2019. Accounts payable and accrued liabilities Accounts payable and accrued liabilities consisted of the following at December 31, 2020 and 2019 (in thousands): 2020 2019 Due to auction clients $ 8,026 $ 2,776 Remuneration and benefits 2,498 2,484 Due to Joint Venture partners 1,349 2,067 Sales and other taxes 831 113 Accrued asset liquidation expenses 346 212 Accounting, auditing and tax consulting 166 187 Other 393 274 Total accounts payable and accrued liabilities $ 13,609 $ 8,113 F-20 Note 11 – Debt Outstanding debt is summarized as follows (in thousands): December 31, December 31, 2020 2019 Third party debt: Current portion $ — $ 438 Total third party debt $ — $ 438 In September 2018, Heritage Global Inc. entered into a secured promissory note and business loan agreement (the “2018 Credit Facility”) with First Choice Bank, for a $1.5 million revolving line of credit. The 2018 Credit Facility had an initial maturity date of October 5, 2019 and replaced the Line of Credit. The Company is permitted to use the proceeds of the loan solely for its business operations. The 2018 Credit Facility accrues interest at a variable rate, which is equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.25% per annum, with a minimum interest charge of $100.00 per month. In March 2019, Heritage Global Inc. entered into the Change in Terms Agreement and the First Amendment to Business Loan Agreement (collectively, the “Amendments”), which amended the Company’s 2018 Credit Facility. The Amendments, among other things, (i) increased the principal amount of the revolving line of credit to $3.0 million, (ii) extended the maturity date of the 2018 Credit Facility to April 5, 2020, and (iii) raised the floor interest rate under the 2018 Credit Facility from 5.25% to 5.50%. During 2019, the Company drew on the line of credit for a total of $1.3 million and made repayments of principal totaling $2.1 million resulting in a zero balance as of December 31, 2019. On February 10, 2020, the Company entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit. The Credit Facility matures on April 5, 2021, which was subsequently amended on March 3, 2021, and replaced the 2018 Credit facility, as amended. The Company is permitted to use the proceeds of the loan solely for its business operations. The Credit Facility accrues at a variable interest rate, which is equal to the rate of interest last quoted by The Wall Street Journal as the “prime rate,” not to be less than 5.50% per annum. The Company will pay interest on the Credit Facility in regular monthly payments, beginning on March 5, 2020. The Company may prepay the Credit Facility without penalty. The Company is the borrower under the Credit Facility. The Credit Facility is secured by a first priority security interest in certain of the Company’s and its certain subsidiaries’ current and future tangible and intangible assets, inventory, chattel paper, accounts, equipment and general intangibles. The availability of additional draws under the Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including default, insolvency or bankruptcy, material adverse change in financial condition and any guarantor’s attempt to revise its guarantee. The agreement governing the Credit Facility also contains customary affirmative covenants regarding, among other things, the maintenance of records, maintenance of certain insurance coverage, compliance with governmental requirements and maintenance of a debt to equity ratio. The Credit Facility contains certain customary financial covenants and negative covenants that, among other things, include restrictions on the Company’s ability to create, incur or assume indebtedness for borrowed money, including capital leases or to sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Company’s assets. During the year ended December 31, 2020, the Company drew on the line of credit for a total of $5.6 million and made repayments of principal totaling $5.6 million resulting in a zero balance as of December 31, 2020. In January 2018, HG LLC, a wholly owned subsidiary of HGI, settled a long-standing litigation matter that was commenced against the predecessor in interest of HG LLC. The settlement, which also involved several other co-defendant parties, included a complete release of HG LLC’s predecessor in interest and its successors and affiliates by the plaintiffs from all claims arising from or relating to the facts and circumstances underlying the litigation. The portion of the settlement attributable to HG LLC’s predecessor in interest was paid on behalf of HG LLC by 54 Finance, LLC (“54 Finance”) (an affiliate of a co-defendant in the litigation) in consideration of a Promissory Note dated January 30, 2018 (the “Note”) from HG LLC in the amount of $1,260,000. Pursuant to a Guaranty dated January 30, 2018, HGI has guaranteed the obligations of HG LLC under the Note, which are required to be paid in 36 equal installments of $35,000, and any remaining outstanding balance hereunder shall be due and payable in full on January 30, 2021. As of December 31, 2017, we accrued the present value of the Note based on the payment terms noted above and at an interest rate of 6.5%. The Note was recorded as of December 31, 2017 as this was determined to be a recognized subsequent event pursuant to ASC 855, Subsequent Events. Upon the occurrence of any Event of Default (as defined below), in the sole discretion of 54 Finance, the outstanding principal balance of the Note will bear interest at a rate per annum (computed on the basis of a 360-day year, actual days F-21 elapsed) equal to 12 %. An “Event of Default” means: (a) any failure of HG LLC to pay when due any amount thereunder, when and as due, (b) any failure on the part of HG LLC to pay upon 54 Finance’s demand any fees, costs, expenses or other charges hereunder or otherwise due to HG LLC under the Note or the Guaranty, (c) any breach, failure or default under the Guaranty, (d) HG LLC or HGI repudiates or revokes, or purports to repudiate or revoke, any obligation under the Note or the Guaranty, or the obligation of HGI under the Guaranty is limited or terminated by operation of law or by HGI, or (e) HG LLC or HGI are insolvent or admit in writing its inability to pay debts as they mature, or make a general assignment for the benefit of its creditors, or institute any bankruptcy, insolvency or similar proceeding under the laws of any jurisdiction, or take any action to authorize such proceeding. During 2020 the Company made the remaining scheduled payments on the Note totaling $ 4 55 ,000 resulting in a zero b alance on the Note as of Dec ember 31, 2020 . Note 12 – Commitments and Contingencies In the normal course of its business, HGI may be subject to contingent liabilities with respect to assets sold either directly or through Joint Ventures. As of December 31, 2018, in connection to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, the Company had a contractual obligation to make remaining guaranteed distribution payments to a partner totaling approximately $3.8 million by no later than May 26, 2020. The Company made all guaranteed distribution payments by May 2020. At December 31, 2020 HGI does not expect any potential contingent liabilities, individually or in the aggregate, to have a material adverse effect on its assets or results of operations. Note 13 – Income Taxes In 2014 the Company recorded a valuation allowance against its deferred tax assets, reducing the carrying value of those assets to zero as a result of historical losses. At December 31, 2019 and 2020, the Company recorded a reduction to the valuation allowance based on the potential utilization of net operating loss carryforwards in future periods. The following table summarizes the change in the valuation allowance during 2019 and 2020 (in thousands): Balance at December 31, 2018 $ 28,933 Change during 2019 (11,294 ) Balance at December 31, 2019 17,639 Change during 2020 (4,542 ) Balance at December 31, 2020 $ 13,097 As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, and due primarily to the performance of the Company, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred taxes of $5.1 million are realizable. The Company therefore reduced the valuation allowance accordingly. At December 31, 2020 the Company has aggregate tax net operating loss carry forwards of approximately $77.6 million ($61.6 million of unrestricted net operating tax losses and approximately $16.0 million of restricted net operating tax losses). Substantially all of the net operating loss carry forwards and unused minimum tax credit carry forwards expire between 2024 and 2037. F-22 The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal inco me tax rate to the income before income tax expense for the following reasons in each of the years ending December 31 (in thousands): 2020 2019 Expected federal statutory tax expense $ 1,263 $ 625 Increase (reduction) in taxes resulting from: State income taxes recoverable 388 258 Non-deductible expenses (permanent differences) (193 ) (15 ) Change in valuation allowance (4,542 ) (11,294 ) Tax rate changes (599 ) 9,522 Other 39 (9 ) Income tax benefit $ (3,644 ) $ (913 ) The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code. These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years. Restrictions in net operating loss carry forwards occurred in 2001 as a result of the acquisition of the Company by Street Capital. Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carry forwards was limited to approximately $2.5 million per annum until 2008 and $1.7 million per annum thereafter. There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time. In addition, further restrictions, reductions in, or expiration of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities. Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carry forwards. All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carry forwards against income for tax purposes in the later year. The 2017 through 2019 taxation years remain open for audit. The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carry forwards available to shield income attributable to a particular state from being subject to tax in that particular state. The components of the net deferred tax assets as of December 31, 2020 and 2019 are as follows in (thousands): 2020 2019 Net operating loss carry forwards $ 17,623 $ 18,535 Stock based compensation 1,007 921 Trade names and customer relationships (805 ) (876 ) Equity method investments (478 ) (497 ) Other 152 (72 ) Gross deferred tax assets 17,499 18,011 Less: valuation allowance (13,097 ) (17,639 ) Deferred tax assets, net of valuation allowance $ 4,402 $ 372 F-23 As a result of the acquisition of NLEX in 2014, and the recognition of an indefinite-lived intangible asset in the amount of $2.4 million related to the NLEX trade name, the Company is required to record a non-current deferred tax liability in the amount of $0.6 million. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. There have been no significant impacts to the Corporation's provision for income taxes in 2020 as a result of the CARES Act legislation. Uncertain Tax Positions The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Upon adoption of this principle in 2007, the Company derecognized certain tax positions that, upon examination, more likely than not would not have been sustained as a recognized tax benefit. As a result of derecognizing uncertain tax positions, the Company has recorded a cumulative reduction in its deferred tax assets of approximately $4.4 million associated with prior years’ tax benefits, which are not expected to be available primarily due to change of control usage restrictions, and a reduction in the rate of the tax benefit associated with all of its tax attributes. Due to the Company’s historic policy of applying a valuation allowance against its deferred tax assets, the effect of the above was an offsetting reduction in the Company’s valuation allowance. Accordingly, the above reduction had no net impact on the Company’s financial position, operations or cash flow. As of December 31, 2020, the unrecognized tax benefit has been determined to be $4.4 million. In the unlikely event that these tax benefits are recognized in the future, the amount recognized at that time should result in a reduction in the Company’s effective tax rate. The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Because the Company has tax loss carry forwards in excess of the unrecognized tax benefits, the Company did not accrue for interest and penalties related to unrecognized tax benefits either upon the initial derecognition of uncertain tax positions or in the current period. It is possible that the total amount of the Company’s unrecognized tax benefits will significantly increase or decrease within the next 12 months. These changes may be the result of future audits, the application of “change in ownership” rules leading to further restrictions in tax losses arising from changes in the capital structure of the Company, reductions in available tax loss carry forwards through future merger, acquisition and/or disposition transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time. At this time, an estimate of the range of reasonably possible outcomes cannot be made. Note 14 – Related Party Transactions Pursuant to an agreement reached between our CEO and President Mr. Ross Dove and board member Mr. Emmett DeMoss, and further approved by the remaining board members, one-half of Mr. Dove’s 2019 bonus was paid to Mr. Dove and the other half was 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, the Company leases office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig. The total amount paid to the related party was approximately $110,000 and $108,000 for the years ended December 31, 2020 and 2019, respectively, and is included in selling, general and administrative expenses in the consolidated income statement. All of the payments in both 2020 and 2019 were made to David Ludwig. Note 15 – Legal Proceedings The Company is involved in various legal matters arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on the Company. F-24 Note 16 – Stockholders’ Equity Capital Stock The Company’s authorized capital stock consists of 300,000,000 common shares with a par value of $0.01 per share and 10,000,000 preferred shares with a par value of $10.00 per share. On October 6, 2020, we completed a public offering (the “2020 Public Offering”) of 5,462,500 shares of our common stock, at a public offering price of $1.75 per share, which included a full exercise of the underwriters’ option to purchase 712,500 additional shares of common stock from us. We received approximately $8.7 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We intend to use the net proceeds to provide additional funds for general corporate purposes, which may include, without limitation, the expansion of the businesses of HGC and HGP, working capital and growth capital. During 2019 and 2020 the Company issued 10,783 and 274,582 shares of common stock, respectively, pursuant to the exercise of stock options. In connection with an agreement entered on November 25, 2019, the Company issued 75,000 common shares to Maxim Group LLC for services rendered during 2019 and 205,000 common shares for services rendered during 2020. As further described below, the Company issued a total of 600,000 shares of restricted stock during 2018. Each share of Series N preferred stock has a voting entitlement equal to 40 common shares, votes with the common stock on an as-converted basis and is senior to all other preferred stock of the Company. Dividends, if any, will be paid on an as-converted basis equal to common stock dividends. The conversion value of each share of Series N preferred stock is $1,000, and each share is convertible to 40 common shares at the rate of $25.00 per common share. The holders of shares of Series N preferred stock are entitled to liquidation preference over common stockholders equivalent to $1,000 per share. During 2019, one share of the Company’s Series N preferred stock was converted into 40 shares of the Company’s common stock. During 2020, no shares of the Company’s Series N preferred stock were converted into shares of the Company’s common stock. Stock-Based Compensation Plans At December 31, 2020, the Company had four stock-based compensation plans which are described below. The fourth of these plans was adopted on May 5, 2016, and received approval from the Company’s stockholders at the special meeting of stockholders held on September 14, 2016. 2003 Stock Option and Appreciation Rights Plan In 2003, the stockholders of the Company approved the 2003 Stock Option and Appreciation Rights Plan (the “2003 Plan”) which provided for the issuance of incentive stock options, non-qualified stock options and Stock Appreciation Rights (“SARs”) up to an aggregate of 2,000,000 shares of common stock (subject to adjustment in the event of stock dividends, stock splits, and other similar events). The plan had a ten-year term, and therefore after 2013 no options have been issued. The price at which shares of common stock covered by the option can be purchased was determined by the Company’s Board or a committee thereof; however, in the case of incentive stock options the exercise price was never less than the fair market value of the Company’s common stock on the date the option was granted. 2003 Plan 2020 2019 Options outstanding, beginning of year 20,000 310,000 Options expired (20,000 ) (140,000 ) Options forfeited — (150,000 ) Options outstanding, end of year — 20,000 No SARs were issued under the 2003 Plan. 2010 Non-Qualified Stock Option Plan In 2010, the Company’s Board approved the 2010 Non-Qualified Stock Option Plan (the “2010 Plan”) to induce certain key employees of the Company or any of its subsidiaries who are in a position to contribute materially to the Company’s prosperity to remain with the Company, to offer such persons incentives and rewards in recognition of their contributions to F-25 the Company’s progress, and to encourage such persons to continue to promote the best interests of the Company. The Company reserved 1,250,000 shares of common stock (subject to adjustment under certain circumstances) for issuance or transfer upon exercise of options granted under the 2010 Plan. Options may be issued under the 2010 Plan to any key employees or consultants selected by the Company’s Board (or an appropriately qualified committee). Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant. Options granted pursuant to the plan are subject to limitations on transfer and execution and may be issued subject to vesting conditions. Options may also be forfeited in certain circumstances . During both 2019 and 20 20 , options to purchase 60 ,000 shares were granted to the Company’s independent directors as part of their annual compensation . During 2020, options to purchase 5 0 ,000 shares were granted to newly appointed independent directors . Also d uring 2020, the Company issued options to purchase 15,000 shares of common stock to an outside consultant. 2010 Plan 2020 2019 Options outstanding, beginning of year 975,000 915,000 Options granted 125,000 60,000 Options outstanding, end of year 1,100,000 975,000 The outstanding options vest over four years at exercise prices ranging from $0.24 to $2.77 per share. Other Options Issued In 2012, the Company’s Board approved the issuance of options for 625,000 shares of common stock. The options expired during 2019. In 2019, the Company’s Board approved the issuance of options to purchase 265,000 shares at exercise prices ranging from $0.70 to $0.85 to certain accredited personnel. In 2020, the Company’s Board approved the issuance of options to purchase 90,000 shares at an exercise price of $1.41 to certain accredited personnel. Other Options 2020 2019 Options outstanding, beginning of year 265,000 625,000 Options issued 90,000 265,000 Options exercised (10,625 ) — Options expired — (625,000 ) Options outstanding, end of year 344,375 265,000 Heritage Global Inc. 2016 Stock Option Plan In 2016, the Company adopted the Heritage Global Inc. 2016 Stock Option Plan (the “2016 Plan”) which provided for the issuance of incentive stock options and non-qualified stock options up to an aggregate of 3,150,000 shares of common stock (subject to adjustment in the event of stock dividends, stock splits, and other similar events). Options may not be granted with an exercise price less than the fair market value of the common stock of the Company as of the day of the grant. Options granted pursuant to the plan are subject to limitations on transfer and execution and may be issued subject to vesting conditions. Options may also be forfeited in certain circumstances. During 2016 options to purchase 2,539,200 shares of common stock were granted to the Company’s employees. During 2019 and 2020, options to purchase a total of 324,850 and 259,750 shares, respectively, were granted to the Company’s employees under the 2016 Plan. 2016 Plan 2020 2019 Options outstanding, beginning of year 2,351,850 2,453,900 Options granted 259,750 324,850 Options exercised (372,725 ) (31,276 ) Options forfeited (167,025 ) (395,624 ) Options outstanding, end of year 2,071,850 2,351,850 The outstanding options under the 2016 Plan vest over four years at exercise prices ranging from $0.45 to $2.77 per share. F-26 Stock-Based Compensation Expense Total compensation cost related to stock options in 2020 and 2019 was $0.4 million and $0.3 million, respectively. These amounts were recorded in selling, general and administrative expense in both years. During 2020 and 2019, options to purchase 383,350 and 31,276 shares were exercised, respectively. The tax benefit recognized by the Company related to these option exercises was approximately $0.2 million in 2020, as compared to an immaterial amount recognized in 2019. In connection with the stock option grants during 2020 and 2019, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: 2020 2019 Risk-free interest rate 0% - 2% 2% - 3% Expected life (years) 6.8 6.8 Expected volatility 74% 73% Expected dividend yield Zero Zero The risk-free interest rates are those for U.S. Treasury constant maturities for terms matching the expected term of the option. The expected life of the options is calculated according to the simplified method for estimating the expected term of the options, based on the vesting period and contractual term of each option grant. Expected volatility is based on the Company’s historical volatility. The Company has never paid a dividend on its common stock and therefore the expected dividend yield is zero. The following summarizes the changes in common stock options for 2020 and 2019: 2020 2019 Options Weighted Average Exercise Price Options Weighted Average Exercise Price Outstanding at beginning of year 3,611,850 $ 0.51 4,303,900 $ 0.75 Granted 474,750 $ 1.62 649,850 $ 0.74 Exercised (383,350 ) $ 0.46 (31,276 ) $ 0.45 Expired (20,000 ) $ 0.83 (765,000 ) $ 2.00 Forfeited (167,025 ) $ 1.15 (545,624 ) $ 0.61 Outstanding at end of year 3,516,225 $ 0.63 3,611,850 $ 0.51 Options exercisable at year end 2,566,100 $ 0.47 2,157,336 $ 0.46 Weighted-average fair value of options granted during the year $ 1.10 $ 0.50 As of December 31, 2019, the Company had unvested options for the purchase of 1,454,514 shares with a weighted average grant date fair value of $0.39 per share. As of December 31, 2020, the Company had unvested options for the purchase of 950,125 shares with a weighted average grant date fair value of $0.71 per share. As of December 31, 2020, the total unrecognized stock-based compensation expense related to unvested stock options was $0.6 million, which is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of options vesting during both 2020 and 2019 was $0.3 million. The unvested options have no associated performance conditions. In general, the Company’s employee turnover is low, and the Company expects that the majority of the unvested options will vest according to the standard four-year timetable. F-27 The following table summarizes information about all stock options outstanding at December 31 , 2020 : Exercise price Options Outstanding Weighted Average Remaining Life (years) Weighted Average Exercise Price Number Exercisable Weighted Average Remaining Life (years) Weighted Average Exercise Price $ 0.24 to $ 0.40 100,000 6.4 $ 0.34 75,000 6.2 $ 0.31 $ 0.42 to $ 0.48 2,357,600 6.0 $ 0.45 2,279,350 5.9 $ 0.45 $ 0.53 to $ 1.00 758,625 7.9 $ 0.77 211,750 5.9 $ 0.73 $ 1.41 to $ 2.77 300,000 9.5 $ 1.76 — N/A N/A 3,516,225 6.7 $ 0.63 2,566,100 5.9 $ 0.47 At December 31, 2020 and 2019, the aggregate intrinsic value of exercisable options was $6.3 million and $1.2 million, respectively. Restricted Stock Restricted stock awards represent a right to receive shares of common stock at a future date determined in accordance with the participant’s award agreement. There is no exercise price and no monetary payment required for receipt of restricted stock awards or the shares issued in settlement of the award. Instead, consideration is furnished in the form of the participant’s services to the Company. Compensation cost for these awards is based on the fair value on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period. In June 2018, the Company granted 600,000 shares of Company restricted common stock in connection with the Addendum to the Employment Agreements of David Ludwig and Tom 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. Stock-based compensation expense related to the restricted stock awards, calculated by using the grant date fair value of $0.43 per share, was $52,000 for both 2019 and 2020. The unrecognized stock-based compensation expense as of December 31, 2019 and 2020 was approximately $0.2 million and $0.1 million, respectively. Note 17 – Segment Information The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company manages its business primarily on differentiated revenue streams for services offered. The Company’s reportable segments consist of the Industrial Asset Division and Financial Assets Division. Our Industrial Assets division advises enterprise and financial customers on the sale of industrial assets mostly from surplus and sometimes distressed circumstances while acting as an agent, guarantor or principal in the sale. Our Financial Assets division provides liquidity to issuers of consumer credit that are looking to monetize nonperforming and charged-off loans — loans that creditors have written off as uncollectable. Nonperforming and charged-off loans typically originate from banks that issue unsecured consumer credit. The Company evaluates the performance of its reportable segments based primarily on net operating income. Further, the Company does not utilize segmented asset information to evaluate the performance of its reportable segments and does 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, 2020 2019 Industrial Assets Division: Net operating income $ 5,764 $ 2,834 Financial Assets Division: Net operating income $ 2,637 $ 3,337 Corporate and Other: Net operating income $ (2,342 ) $ (3,121 ) Consolidated: Net operating income $ 6,059 $ 3,050 Note 18 – Subsequent Events The Company has evaluated events subsequent to December 31, 2020 for potential recognition or disclosure in its consolidated financial statements. There have been no material subsequent events requiring disclosure in these financial statements, other than noted below: On March 3, 2021, the Company extended the maturity date of its Credit Facility with C3bank from February 5, 2021 to April 5, 2021. F-28