10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Commission File No. 0-17973

HERITAGE GLOBAL INC.

(Exact Name of Registrant as Specified in Its Charter)

Florida	59-2291344
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
12625 High Bluff Drive, Suite 305, San Diego, CA	92130
(Address of Principal Executive Offices)	(Zip Code)

(858) 847-0656

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of Common Stock held by non-affiliates based upon the closing price of $0.67 per share on June 30, 2019, as reported by the OTCQB, was approximately $13.6 million.

As of March 1, 2020, there were 29,352,837 shares of Common Stock, $0.01 par value, outstanding.

TABLE OF CONTENTS

		PAGE
PART I
Item 1.	Business.		3
Item 1A.	Risk Factors.		5
Item 1B.	Unresolved Staff Comments.		8
Item 2.	Properties.		9
Item 3.	Legal Proceedings.		9
Item 4.	Mine Safety Disclosures.		9
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.		10
Item 6.	Selected Financial Data.		11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		11
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.		20
Item 8.	Financial Statements and Supplementary Data.		20
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.		20
Item 9A.	Controls and Procedures.		21
Item 9B.	Other Information.		21
PART III
Item 10.	Directors, Executive Officers and Corporate Governance.		22
Item 11.	Executive Compensation.		26
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.		32
Item 13.	Certain Relationships and Related Transactions, and Director Independence.		33
Item 14.	Principal Accountant Fees and Services.		33
PART IV
Item 15.	Exhibits and Financial Statement Schedules.		35
Item 16.	Form 10-K Summary		37

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Forward-Looking Information

This Annual Report on Form 10-K for the year ended December 31, 2019 (the “Report”) contains certain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties, including those noted under Item 1A. “Risk Factors” below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

PART I

Item 1. Business.

Overview and History

Heritage Global Inc. (“HGI”, and together with its consolidated subsidiaries, “we”, “us”, “our” or the “Company”) was incorporated in Florida in 1983 under the name “MedCross, Inc.” Our name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, to “Counsel RB Capital Inc.” in 2011, and to Heritage Global Inc. in 2013. The most recent name change more closely identifies HGI with its core auction business, Heritage Global Partners, Inc. (“HGP”).

In 2014, HGI acquired all of the issued and outstanding capital stock in National Loan Exchange, Inc. (“NLEX”), a broker of charged-off receivables in the United States and Canada. As a result of this acquisition, NLEX operates as one of our wholly owned divisions.

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.

The organization chart below outlines our basic domestic corporate structure as of December 31, 2019.

		Heritage Global Inc.
		(Florida) (1)
	100%		100%		100%		100%
Heritage Global Partners, Inc. (California) (2)		Heritage Global LLC (Delaware) (3)		National Loan Exchange, Inc. (Illinois) (5)		Heritage Global Capital LLC (Delaware)(6)
			100%
		Equity Partners HG LLC (Delaware) (4)

(1) Registrant.

(2) Full service global auction, appraisal and asset advisory company.

(3) Asset liquidation company which acquires and monetizes distressed and surplus assets.

(4) Mergers and acquisitions (M&A) advisory firm specializing in financially distressed businesses and properties.

(5) Broker of charged-off receivables.

(6) Specialty financing solutionsfor charged-off and nonperforming asset portfolios.

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Asset liquidation

We are a diversified financial services company providing acquisition, disposition, valuation and lending services for surplus and distressed assets. We specialize both in acting as an adviser, as well as acquiring or brokering turnkey manufacturing facilities, surplus industrial machinery and equipment, industrial inventories, real estate, accounts receivable portfolios, and intellectual property.

Our asset liquidation business began operations in 2009 with the establishment of Heritage Global LLC (“HG LLC”). In addition to acquiring turnkey manufacturing facilities and used industrial machinery and equipment, HG LLC arranges traditional asset disposition sales, including liquidation and auction sales. In 2011, HG LLC acquired 100% of the business of Equity Partners HG LLC f/k/a EP USA, LLC (“Equity Partners”), thereby expanding our operations. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Equity Partners Separation” for information regarding the separation of the Company and Ken Mann, Managing Director of Equity Partners at December 31, 2019.

In 2012, we increased our in-house asset liquidation expertise with our acquisition of 100% of the outstanding equity of HGP, a global full-service auction, appraisal and asset advisory firm.

In 2014, we again expanded our asset liquidation operations with the acquisition of 100% of the outstanding equity of NLEX. NLEX is the largest volume broker of charged-off receivables in the United States and Canada, and its offerings include national, state and regional portfolios on behalf of many of the world’s top financial institutions. The NLEX acquisition is consistent with our strategy to expand and diversify the services provided by its asset liquidation business.

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.

As a result of the events and acquisitions outlined above, management believes that our expanded platform will allow us to achieve our long term industry leadership goals.

Employees

As of December 31, 2019, we had 46 employees: 30 are employed by HGP and 16 by NLEX.  

Industry and Competition

Our asset liquidation business consists primarily of the auction, appraisal and asset advisory services provided by HGP and the accounts receivable brokerage services provided by NLEX. Our asset liquidation business also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. The market for these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, we compete with other liquidators, auction companies, dealers and brokers. We also compete with them for potential purchasers, as well as with equipment manufacturers, distributors, dealers and equipment rental companies. Some competitors have significantly greater financial and marketing resources and name recognition.

Our business strategy includes the option of partnering with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). These Joint Ventures give us access to more opportunities, helping to mitigate some of the competition from the market’s larger participants and contribute to our objective to be the leading resource for clients requiring capital asset solutions.

Government Regulation

We are subject to federal, state and local consumer protection laws, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices. Many jurisdictions also regulate “auctions” and “auctioneers” and may regulate online auction services. These consumer protection laws and regulations could result in substantial compliance costs and could interfere with the conduct of our business.

Legislation in the United States has increased public companies’ regulatory and compliance costs as well as the scope and cost of work provided by independent registered public accountants and legal advisors. As regulatory and compliance guidelines continue to evolve, we may incur additional costs in the future, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies.

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Available Information

We file certain reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The SEC maintains an Internet site at http://www.sec.gov that contains the reports and information statements and other information we file electronically. Our website address is www.heritageglobalinc.com. Through our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Please note that our website address is provided as an inactive textual reference only. 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 1A. Risk Factors.

You should carefully consider and evaluate these risk factors, as any of them could materially and adversely affect our business, financial condition and results of operations, which, in turn, can adversely affect the price of our securities.

We face significant competition in our asset liquidation business.

Our asset liquidation business depends on our ability to successfully obtain a continuous supply of auction or appraisal contracts, or distressed and surplus assets for profitable resale to third parties. In this regard, we compete with numerous other organizations, some of which are much larger and better-capitalized, with greater resources available for both asset acquisition and associated marketing to potential customers. Additionally, some competitors have a longer history of activity in the asset liquidation business and may have advantages with respect to accessing both deals and capital.

Our asset liquidation business is subject to inventory risk and credit risk.

Under our business model, when not acting solely as an auctioneer, we assume the general and physical inventory and credit risks associated with purchasing assets for subsequent resale. Although we do enter into transactions for which a subsequent purchaser has already been identified, in most cases we purchase assets and assume the risk that they may sell for less than our forecasted price. Further, we may miscalculate demand or resale value and subsequently sell the assets for less than their original purchase price. Either situation could have a material adverse effect upon our use of working capital and our results of operations.

Our operating results are subject to significant fluctuation.

Our revenue and operating results are subject to fluctuation from quarter to quarter and from year to year due to the nature of the asset liquidation business, which involves discrete deals of varying size that are very difficult to predict. The timing of revenue recognition related to significant transactions can materially affect quarterly and annual operating results. Despite the accompanying variability of direct asset liquidation costs, quarterly fixed costs that are largely composed of salaries and benefits could exceed our gross profit. There can therefore be no assurance that we can achieve or sustain profitability on a quarterly or annual basis.

We are subject to the risks associated with managing growth.

Since the establishment of our asset liquidation business in 2009, we have experienced significant growth.  This has occurred through the acquisitions of Equity Partners in 2011, HGP in 2012, NLEX in 2014 and the creation of HGC in 2019. This growth requires an increased investment in personnel, systems and facilities. In the absence of continued revenue growth, our operating margins could decline from current levels. Additional acquisitions will be accompanied by such risks as exposure to unknown liabilities of acquired businesses, unexpected acquisition expenses, greater than anticipated investments in personnel, systems and facilities, the expense of integrating new and existing operations, diversion of senior management resources, and dilution to existing stockholders. Failure to anticipate and manage these risks could have a material adverse effect upon our business and results of operations.

A portion of our asset liquidation business is conducted through Joint Ventures.

Conducting business through Joint Ventures, as described above under “Industry and Competition,” allows us to participate in significantly larger deals than those we could fund independently. If we ceased entering into Joint Ventures, or our Joint Venture partners decide not to partner with us, the pool of potential transactions would be reduced. Further, upon entering into Joint Ventures,

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we become exposed to the uncertainties of the activities of our partners.  This could negatively impact our ability to obtain a continuous supply of assets for resale, and could have a material adverse effect upon our use of working capital and our results of operations.

The auction portion of our asset liquidation business may be subject to a variety of additional costly government regulations.

Many states and other jurisdictions have regulations governing the conduct of traditional “auctions” and the liability of traditional “auctioneers” in conducting auctions, which may also apply to online auction services. In addition, certain states have laws or regulations that expressly apply to online auction services. We may incur additional costs in the future to comply with these laws and could be subject to fines or other penalties for any failure to comply with these laws. We may be required to make changes in our business to comply with these laws, which could increase our costs, reduce our revenue, and cause us to prohibit the listing of certain items, or otherwise adversely affect our financial condition or operating results.

Certain categories of merchandise that we sell are subject to government restrictions.

We sell merchandise, such as scientific instruments, that is subject to export control and economic sanctions laws, among other laws, imposed by the United States and other governments. Such restrictions include the U.S. Export Administration regulations, the International Traffic in Arms regulations, and economic sanctions and embargo laws administered by the Office of the Foreign Assets Control regulations. These restrictions prohibit us from, among other things, selling property to (1) persons or entities that appear on lists of restricted or prohibited parties maintained by the United States or other governments or (2) countries, regimes, or nationals that are the target of applicable economic sanctions or other embargoes.

We may incur significant costs or be required to modify our business to comply with these requirements. If we are alleged to have violated any of these laws or regulations we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with U.S. federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety are made against us, whether or not true.

We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”).

We are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Failure to comply with the FCPA could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

Our asset liquidation business is subject to environmental risk.

Our asset liquidation business at times includes the purchase and resale of buildings and land. Although our purchase process includes due diligence to determine that there are no material adverse environmental issues, it is possible that such issues could be discovered subsequent to a completed purchase. Any remediation and related costs could have a material adverse effect upon our business and results of operations.

We are dependent upon key personnel.

Our operations are substantially dependent on the knowledge, skills and performance of several of our executive officers, particularly our Chief Executive Officer, Chief Operating Officer/President, and President of NLEX. The loss of any of these officers could damage key relationships and result in the loss of essential information and expertise. As our operations expand, we will be required to hire additional employees and may face competition for them. Therefore, either the loss of the services of the above existing officers, or the inability to attract and retain appropriately skilled new employees, could have a material adverse effect upon our business and results of operations.

Disruptions to information systems and those of certain third-party service providers utilized by us could adversely impact our operations, reputation and brand.

The protection of client, employee and company data is extremely important to us. The regulatory environment surrounding information security and privacy is becoming increasingly demanding and frequently changing in the jurisdictions in which we do business. Clients and employees have expectations that we will protect their information from cyber-attacks and other security

6

breaches. We have implemented systems and processes that are designed to protect personal and company information and to prevent data losses, however, these measures cannot provide absolute security, and our systems may be vulnerable to cyber-security breaches such as viruses, hacking, and similar disruptions from unauthorized intrusions. As part of our information systems infrastructure, we rely increasingly upon third-party service providers to perform services related to our asset liquidation services. Any failure on our part or by these third-party service providers to maintain the security of our confidential data and our client and employee personal information could result in business disruption, damage to reputation, financial obligations, lawsuits, sizable fines and costs, and loss of employee and client confidence in our Company, and thus could have a material adverse impact on our business and financial condition, and adversely affect our results of operations. A significant security breach could require future expenditures to implement additional security measures to protect against new privacy threats or to comply with state, federal and international laws aimed at addressing those threats.

We may require additional financing in the future, which may not be available, or may not be available on favorable terms.

We may need additional funds to finance the operations of our asset liquidation business, to make additional investments, or to acquire complementary businesses or assets. We may be unable to generate these funds from our operations. If funds are not available, or not available on acceptable terms, we could experience a material adverse effect upon our business.

Provisions in our Articles of Incorporation, as amended, could prevent or delay stockholders’ attempts to replace or remove current management.

Our Articles of Incorporation, as amended, provide for staggered terms for the members of our Board of Directors (the “Board”). The Board is divided into three staggered classes, and each director serves a term of three years. This means that only one class of directors can be replaced at a single annual stockholders’ meeting. These provisions may tend to preserve our current management and the Board in a hostile tender offer, and may have an adverse impact on stockholders who may want to participate in such a tender offer, or who may want to replace some or all of the members of the Board.

Our Board of Directors may issue additional shares of preferred stock without stockholder approval.

Our Articles of Incorporation, as amended, authorize the issuance of up to 10,000,000 shares of preferred stock, $10.00 par value per share. The Board is authorized to determine the rights and preferences of any additional series or class of preferred stock. The Board may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights that are senior to our shares of common stock or that could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or common stock. The issuance of additional shares of preferred stock may also hamper or discourage an acquisition or change in control of the Company.

We may conduct future offerings of our common stock and preferred stock and pay debt obligations with our common and preferred stock that may diminish our investors’ pro rata ownership and depress our stock price.

We reserve the right to make future offers and sales, either public or private, of our securities including shares of our preferred stock, common stock or securities convertible into common stock at prices differing from the price of the common stock previously issued. In the event that any such future sales of securities are affected or we use our common or preferred stock to pay principal or interest on our debt obligations, an investor’s pro rata ownership interest may be reduced to the extent of any such issuances and, to the extent that any such sales are effected at consideration which is less than that paid by the investor, the investor may experience dilution and a diminution in the market price of the common stock.

There is a limited public trading market for our common stock; the market price of our common stock has been volatile and could experience substantial fluctuations.

Our common stock is currently traded in the OTC market in the United States and has a limited public trading market in the United States.  Our common stock is traded on the Canadian Securities Exchange, and the market there is similarly limited.  Without an active trading market, there can be no assurance regarding the liquidity or resale value of the common stock. In addition, the market price of our common stock has been, and may continue to be, volatile. Such price fluctuations may be affected by general market price movements or by reasons unrelated to our operating performance or prospects such as, among other things, announcements concerning us or our competitors, technological innovations, government regulations, and litigation concerning proprietary rights or other matters.

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We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net income.

Goodwill represents the amount by which the cost of an acquisition accounted for using the purchase method exceeds the fair value of the net assets acquired. Current accounting standards require that goodwill be periodically evaluated for impairment based on the fair value of the reporting unit. A significant percentage of our total assets represents goodwill. Declines in our profitability or the value of comparable companies may impact the fair value of our reporting units, which could result in a write-down of goodwill and a reduction in net income. During 2019 we recorded a $0.6 million goodwill impairment charge in connection with the separation of Equity Partners at the end of 2019.

Changes in tax laws or their interpretations, or becoming subject to additional foreign, U.S. federal, state or local taxes, could negatively affect our business, financial condition and results of operations.

We are subject to extensive tax liabilities, including U.S. federal and state taxes. Changes in tax laws or their interpretations could decrease the amount of earnings we retain, the value of any tax loss carry forwards and tax credits recorded on our balance sheet and the amount of our cash flow, and have a material adverse impact on our business, financial condition and results of operations. Some of our tax liabilities are subject to periodic audits by the respective taxing authority which could increase our tax liabilities. If we are required to pay additional taxes, our costs would increase and our net income would be reduced, which could have a material adverse effect on our effective tax rate, business, financial condition and results of operations.

We may not be able to utilize income tax loss carry forwards.

Restrictions in our ability to utilize income tax loss carry forwards have occurred in the past due to the application of certain changes in ownership tax rules in the United States. There is no certainty that the application of these rules may not recur. In addition, further restrictions of, 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 through failure to continue a significant level of business activities. Any such additional limitations could require us to pay income taxes in the future and record an income tax expense to the extent of such liability. We could be liable for income taxes on an overall basis while having unutilized tax loss carry forwards since these losses may be applicable to one jurisdiction and/or particular line of business while earnings may be applicable to a different jurisdiction and/or line of business. Additionally, income tax loss carry forwards may expire before we have the ability to utilize such losses in a particular jurisdiction and there is no certainty that current income tax rates will remain in effect at the time when we have the opportunity to utilize reported tax loss carry forwards. Thus, any net operating loss arising in a taxable year ending before January 1, 2018 may only be carried forward for 20 taxable years following the taxable year of such loss. Any net operating loss arising in a taxable year ending on or after January 1, 2018 can be carried forward indefinitely. In addition, any net operating loss deduction with respect to a net operating loss arising in a taxable year beginning after December 31, 2017 is limited to 80% of our taxable income in the year in which deduction is taken.

We have not declared any dividends on our common stock to date and have no expectation of doing so in the foreseeable future.

The payment of cash dividends on our common stock rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, unencumbered cash, capital requirements and our financial condition, as well as other relevant factors. To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2019, we do not have any preferred stock outstanding that has any preferential dividends.

Our executive officers, directors and their affiliates hold a large percentage of our common stock and their interests may differ from other stockholders.

Our executive officers, directors and their affiliates beneficially own, in the aggregate, 34.7% of our common stock as of March 1, 2020. If they were to act together, these stockholders would have significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our Articles of Incorporation and certain significant corporate transactions, including potential merger or acquisition transactions. In addition, without the consent of these stockholders, we could be delayed or prevented from entering into transactions that could be beneficial to us or our other investors. These stockholders may take these actions even if they are opposed by our other investors.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties.

We lease or rent office space in several locations in the United States. The principal locations are San Diego, CA and Burlingame, CA, which are related to HGP’s operations, and Edwardsville, IL, which is related to NLEX’s operations. The Edwardsville office is leased from a related party, as discussed in Note 16 to our consolidated financial statements.

Item 3. Legal Proceedings.

We are involved in various legal matters arising out of our operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on us.

Item 4. Mine Safety Disclosures.

Not Applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Shares of our common stock, $0.01 par value per share, are quoted under the symbol “HGBL” in the OTC market (“OTCQB”), and under the symbol “HGP” on the Canadian Securities Exchange (“CSE”). Price quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

Holders

As of March 1, 2020, we had approximately 368 holders of common stock of record.

Dividends

To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2019, we do not have any preferred stock outstanding which has any preferential dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth, as of December 31, 2019, information with respect to equity compensation plans (including individual compensation arrangements) under which our securities are authorized for issuance.

Plan Category (1)	Number of Securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved    by security holders:
2003 Stock Option and Appreciation    Rights Plan		20,000	$	1.00		—
Heritage Global Inc. 2016 Stock Option Plan		2,351,850	$	0.49		593,744
Equity compensation plans not    approved by security holders:
2010 Non-Qualified Stock Option Plan		975,000	$	0.46		275,000
Accredited Personnel Stock Option Plan		265,000	$	0.80
Total		3,611,850	$	0.51		868,744

(1) For a description of the material terms of these plans, see Note 18 to our consolidated financial statements included in “Item 15. Exhibits and Financial Statement Schedules” of this Report.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

In connection with an agreement entered on November 25, 2019, we issued 75,000 shares of our common stock to Maxim Group LLC for services rendered. These securities were issued in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities.

None.

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Item 6. Selected Financial Data.

As a Smaller Reporting Company, we are electing scaled reporting obligations and therefore are not required to provide the information requested by this Item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Business Overview, Recent Developments and Outlook

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

Equity Partners Separation

On September 13, 2019, we 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 current 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”).

Equity Partners agreed to provide Mr. Mann with his current annual salary of $375,000, potential bonus in an amount equal to $50,000 paid in regular payroll, and continued benefits. In addition, Equity Partners agreed to pay to the personnel of Equity Partners (including Mr. Mann) an aggregate bonus equal to the sum of 50% of Equity Partners’ 2019 net operating income (if any), plus $25,000. Mr. Mann agreed to surrender, and to cause an entity controlled by him to surrender, at the Resignation Time certain options to purchase our common stock possessed by either Mr. Mann or the entity controlled by Mr. Mann.

On January 1, 2020 Equity Partners transferred to Mr. Mann certain assets of Equity Partners (the “Transferred Assets”), free and clear of all liens. The Mann Amendment provided Mr. Mann the right to choose, in his sole discretion, to accept assignment from Equity Partners of any of the liabilities and obligations of Equity Partners listed in the Mann Amendment by providing written notice to Equity Partners by November 29, 2019. Other than the Transferred Assets, Equity Partners retained all of the assets and rights held by Equity Partners.

Following September 13, 2019, Mr. Mann agreed to pay, or to cause a buyer to pay, to Equity Partners a percentage of all revenue received with respect to each engagement for which we were engaged or retained as of December 31, 2019 but that was closed or completed following December 31, 2019, subject to certain exclusions. The percentage to be paid is determined by multiplying the revenue by the percentage of the engagement completed prior to December 31, 2019, as determined in good faith by Mr. Mann and a representative of Equity Partners on or before December 31, 2019. Equity Partners maintains a right to audit Mr. Mann’s and a buyer’s records for up to one year following the final payment for all such engagements.

We recorded a non-cash goodwill impairment charge on December 31, 2019 of $0.6 million as a result of this separation transaction.

Liquidity and Capital Resources

Liquidity

At December 31, 2019, we had a working capital deficit of $2.3 million, as compared to a working capital deficit of $2.5 million at December 31, 2018, a decrease of $0.2 million.

Our current assets decreased to $6.8 million at December 31, 2019 compared to $7.7 million at December 31, 2018. Within current assets, the most significant change was an approximate $2.3 million decrease in equipment inventory, primarily as a result of asset sales in 2019 related to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the

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fourth quarter of 2018.The decrease was offset by an increase inthe current portion of notes receivableof approximately $1.3 million due tolending activity within our new specialty financing division.

Our current liabilities decreased to $9.1 million at December 31, 2019 as compared to $10.2 million at December 31, 2018.  The most significant change was a decrease of $0.8 million in third party debt, primarily due to repayments made on the credit facility we entered into with a third party bank on September 27, 2018 (the “Credit Facility”) and a decrease of deferred revenue related to the timing of cash receipts on asset sales recorded in 2019, offset by an increase in lease liabilities due to the application of newly adopted accounting guidance as outlined in ASC Topic 840, “Leases.”

We believe we can fund our operations, our working capital deficit, and our debt service obligations during 2020 and beyond through a combination of cash flows from our on-going asset liquidation operations and accessing financing from our existing line of credit.  

Our indebtedness consists of a promissory note dated January 30, 2018 (the “Note”) issued in the amount of $1,260,000, as well as any amounts borrowed under our Credit Facility. We are required to pay off the Note in 36 equal installments of $35,000, and any remaining outstanding balance hereunder shall be due and payable in full on January 30, 2021. On September 27, 2018 we entered into the Credit Facility with First Choice Bank, for a $1.5 million revolving line of credit. On March 29, 2019 we amended our Credit Facility with First Choice Bank, for a $3.0 million revolving line of credit. As of December 31, 2019, we had no outstanding balance on the line of credit. On February 10, 2020, we entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “C3bank Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit. The C3bank Credit Facility matures on February 5, 2021 and replaces a secured promissory note, as amended, totaling $3.0 million. We are permitted to use the proceeds of the loan solely for our business operations.

During 2019, our primary sources of cash were the operations of our asset liquidation business.  Cash disbursements during 2019 consisted primarily of lending activity of $2.7 million under our new specialty finance unit of HGC, debt repayment including interest of $2.4 million, purchases of inventory and payment of operating expenses.  

We expect that our asset liquidation business will continue to be the primary source of cash required for ongoing operations for the foreseeable future.

Ownership Structure and Capital Resources

At December 31, 2019 and 2018, we had stockholders’ equity of $11.8 million and $7.6 million, respectively.

We determine our future capital and operating requirements based upon our current and projected operating performance and the extent of our contractual commitments.  We expect to be able to finance our future operations through a combination of our asset liquidation business, our C3bank Credit Facility with an available line of credit of $5.0 million and securing additional debt financing if needed. Our contractual requirements are limited to the outstanding debt and lease commitments with related and unrelated parties. Additionally, in connection with an acquisition with partners of a pharmaceutical campus in Huntsville, Alabama, we have a remaining contractual obligation as of December 31, 2019 to make minimum guaranteed distribution payments to a partner totaling approximately $0.9 million by no later than May 26, 2020. Capital requirements are generally limited to our purchases of surplus and distressed assets.  We believe that our current capital resources, including available borrowing capacity from our Credit Facility, are sufficient for these requirements.  In the event additional capital is needed, we believe we can obtain additional debt financing through either capital partners or a new credit facility.      

Cash Position and Cash Flows

Cash and cash equivalents at December 31, 2019 were $2.7 million compared to $4.3 million at December 31, 2018.

Cash provided by operating activities. Cash provided by operating activities was $0.8 million during 2019 as compared to cash provided by operating activities of $7.5 million during 2018. The approximate $6.7 million change was primarily attributable to a $0.8 million unfavorable change in the net income adjusted for noncash items plus a net unfavorable change of $4.9 million in the operating assets and liabilities in 2019 compared to 2018. The net unfavorable change of $4.9 million in the operating assets and liabilities in 2019 compared to 2018 was due primarily to the effects of a purchase with partners of a pharmaceutical campus in Huntsville, Alabama in 2018, which included approximately $2.9 million in guaranteed minimum payments by us to a partner to reduce the liability established in 2018, our recognition of approximately $0.8 million of deferred revenue related to sales proceeds collected in 2018, and our recognition of revenue for a sales-type lease of approximately $1.2 million for which we expect to receive cash distributions in 2020.

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The significant changes in operating assets and liabilities during 2019 as compared to 2018 are primarily due to the nature of our operations. We earn revenue from discrete asset liquidation deals that vary considerably with respect to their magnitude and timing, and that can consist of fees, commissions, asset sale proceeds, or a combination of all. The operating assets and liabilities associated with these deals are therefore subject to the same variability and can be quite different at the end of any given period.

Cash used in investing activities. Cash used in investing activities during 2019 was $1.2 million, as compared to cash used in investing activities of $2.9 million during 2018. The approximate $1.7 million change was primarily attributable to our $2.8 million investment in notes receivable related to our newly formed specialty financing division, offset by an equity method real estate investment related to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018 and subsequently paid cash distributions in the amount of $2.2 million during 2019.

Cash used in financing activities. Cash used in financing activities was $1.2 million during 2019, as compared to $2.5 million during 2018. The 2019 activity consisted primarily of a $1.3 million draw offset by $2.1 million of repayments on our Credit Facility, and $0.3 million of repayments on third party debt. The 2018 activity consisted primarily of a $1.3 million draw on our Credit Facility, offset by $1.2 million of repayments on other debt and $2.6 million of contingent consideration paid to the former owner (and current president) of NLEX.

Management’s Discussion of Results of Operations

The following table summarizes our consolidated results of operations for 2019 and 2018 (in thousands).

	Year ended December 31,
	2019			2018
Revenues:
Services revenue	$	20,100		$	21,658
Asset sales		6,068			2,006
Total revenue		26,168			23,664
Operating costs and expenses:
Cost of services revenue		3,374			2,904
Cost of asset sales		4,365			1,144
Selling, general and administrative		15,874			15,219
Impairment of goodwill		573			—
Depreciation and amortization		305			319
Total operating costs and expenses		24,491			19,586
Earnings of equity method investments		1,373			—
Operating income		3,050			4,078
Fair value adjustment of contingent consideration		—			157
Interest and other expense, net		(64	)		(214	)
Income before income tax (benefit) expense		2,986			4,021
Income tax (benefit) expense		(913	)		270
Net income	$	3,899		$	3,751

Our asset liquidation revenue has several components:  (1) traditional fee based asset disposition services, such as commissions from on-line and webcast auctions, liquidations and negotiated sales, and commissions from the NLEX charged-off receivables business, (2) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment and real estate, and (3) fees earned for appraisal, management advisory services and specialty financing services.

2019 Compared to 2018

Revenues and cost of revenues – Revenues were $26.2 million in 2019 compared to $23.7 million in 2018 and costs of services revenue and asset sales were $7.7 million in 2019 compared to $4.0 million in 2018. The gross profits were therefore $18.4 million in 2019 compared to $19.6 million in 2018, a decrease of approximately $1.2 million or approximately 6%. The cost of services revenue increased during 2019 as compared to 2018, and services revenue decreased during 2019 as compared to 2018, based on a higher volume of deals for the HGP division, which has higher direct costs as compared to deals for NLEX. Because we conduct our asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period and the mix of services revenue and asset sales will vary from period to period, the operations should be considered as a

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whole rather than on a line-by-line basis. The gross profit is a function of the volume, size and timing of asset liquidation transactions conducted during the year.    

Selling, general and administrative expense – Selling, general and administrative expense was $15.9 million in 2019 as compared to $15.2 million in 2018, an increase of $0.7 million or 5%. Expenses increased overall primarily due to the following: an increase in the annual performance bonus for the NLEX division based on changes to the incentive compensation plan and an increase in compensation for new employees within our HGC division.

Impairment of goodwill – We recorded an impairment charge of $0.6 million to reduce the carrying value of goodwill in connection with the Equity Partners separation transaction at the end of 2019. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Partners Separation” for more information.

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

	Year ended December 31,
	2019		2018		% change
Compensation:
HGP	$	4,652	$	4,433		5	%
NLEX		4,151		3,683		13	%
Equity Partners		1,621		1,980		-18	%
HGI		677		496		36	%
HGC		147		—		100	%
Stock-based compensation		283		289		-2	%
Consulting		228		303		-25	%
Board of Directors fees		258		264		-2	%
Accounting, tax and legal professional fees		749		479		56	%
Insurance		361		354		2	%
Occupancy		860		824		4	%
Travel and entertainment		772		926		-17	%
Advertising and promotion		609		807		-25	%
Other		506		381		33	%
Total selling, general and administrative expense	$	15,874	$	15,219

Depreciation and amortization expense – Depreciation and amortization expense was $0.3 million in 2019 and 2018, and consisted almost entirely of amortization expense related to intangible assets.  In both years the depreciation of property and equipment was not material.

Off-Balance Sheet Arrangements – We had no off-balance sheet arrangements during the years ended December 31, 2019 and 2018.

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Non-GAAP Financial Measure – Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

We prepared our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). We use the non-GAAP financial measure “Adjusted EBITDA” in assessing our results. Adjusted EBITDA reflects the standard definition of EBITDA (net income plus depreciation and amortization, interest and other expense, and provision for income taxes), adjusted further to reflect the effects of goodwill impairment, plus or minus fair value adjustments of contingent consideration and plus stock-based compensation.  We believe that Adjusted EBITDA is relevant and useful supplemental information for our investors. Management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete understanding of the factors and trends affecting us than could be obtained absent these disclosures. Management uses Adjusted EBITDA to make operating and strategic decisions and to evaluate our performance. We have disclosed this non-GAAP financial measure so that our investors have the same financial data that management uses, with the intention of assisting investors to make comparisons to our historical operating results and analyze our underlying performance. Management believes that Adjusted EBITDA is a useful supplemental tool to evaluate our underlying operating performance on an ongoing basis. Our use of Adjusted EBITDA is not meant to be, and should not be, considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the financial information, below, which reconciles our GAAP reported net income to Adjusted EBITDA for the periods presented (in thousands).

	Year ended December 31,
	2019			2018
Net income	$	3,899		$	3,751
Add back:
Depreciation and amortization		305			319
Interest and other expense, net		64			214
Income tax (benefit) expense		(913	)		270
EBITDA		3,355			4,554
Management add back:
Stock based compensation		283			289
Impairment of goodwill		573			—
Fair value adjustment of contingent consideration		—			(157	)
Adjusted EBITDA	$	4,211		$	4,686

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”). ASU 2016-02 changes the accounting for leases previously classified as operating leases under GAAP by, among other things, requiring a company to recognize the lease on the balance sheet with a right-of-use asset and a lease liability. Effective January 1, 2019, we adopted ASU 2016-02. This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. We adopted the ASU using a modified retrospective adoption method at January 1, 2019. Under this method of adoption, there is no impact to the comparative condensed consolidated income statement and consolidated balance sheet. We determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in ASC Topic 840, “Leases.” In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

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 our consolidated financial statements.  

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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 are currently evaluating the impact of the new guidance on our consolidated financial statements.

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 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 our notes receivable. With respect to smaller reporting companies, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

Critical Accounting Policies

Use of estimates

The preparation of our 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, contingent consideration, 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.

Revenue recognition

On January 1, 2018, we adopted the new accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method. Based on our analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of our accumulated deficit as a result of the adoption of this new standard. We expect the impact of the adoption of the new standard to be immaterial to our consolidated financial statements on an ongoing basis.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions 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,

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(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 one reporting segment — the asset liquidation business. Although we provide various services within the asset liquidation business, it does not disaggregate revenue streams further than as reported in its income statement, services revenue and asset sales. 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 this point in time occurs when certain contracts provide for advance payments recognized over a period of time. Services revenue recognized over a period of time is not material in comparison to total revenues (2% of total revenues for the year ended December 31, 2019), and therefore not reported on a disaggregated basis. Further, as certain contracts stipulate that the customer make advance payments, amounts not recognized within the reporting period are considered deferred revenue and our “contract liability”. As of December 31, 2019, the deferred revenue balance was $2,500. We record 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 we satisfy the performance obligation and cash is collected. We do 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.  

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

In 2019, we 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.

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 us.

Cost of services revenue and asset sales

Cost of services revenue generally includes the direct costs associated with generating commissions and fees from our auction and appraisal services, merger and acquisition advisory services, and brokering of charged-off receivable portfolios.  We generally recognize 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.  We recognize 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.

Accounts receivable

Our accounts receivable primarily relate to the operations of our asset liquidation business. They generally consist of three major categories:  fees, commissions and retainers relating to appraisals and auctions, receivables from asset sales, and 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 11 to our consolidated financial statements for more detail regarding our accounts receivable.  

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Notes receivable, net

Our notes receivable balance consists of loans to buyers of charged-off receivable portfolios, which is considered the only loan category or segment to be reported under the applicable accounting guidance. These loans are measured at historical costs and reported at their outstanding principal balances net of any unamortized deferred fees and costs on originated loans. 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, 2019, we have 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, we perform a review of all outstanding loan receivables on a quarterly basis to determine if any indicators exist that suggest the loan will not be fully recoverable.

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Inventory

Our inventory consists of assets acquired for resale. Machinery and equipment inventory is classified as current, and historically is sold within a one-year operating cycle. Real estate inventory is generally classified as non-current due to uncertainties relating to the timing of resale. All inventory is recorded at the lower of cost or net realizable value. There is a risk that assets acquired for resale may be subsequently sold for less than their cost, or may remain unsold.  Historically, the assets’ selling prices have generally been in excess of their cost. See Note 4 to our consolidated financial statements for further detail.      

Equity Method Investments

As noted above, we conduct a portion of our asset liquidation business through Joint Ventures. Transactions in which our ownership share meets the criteria for the equity method investments under ASC 323 are accounted for using the equity method of accounting whereby our proportionate share of the Joint Venture’s net income (loss) is reported in the consolidated income statement as earnings of equity method investments. At the balance sheet date, our investments in these Joint Ventures are reported in the consolidated balance sheet as other assets. 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 6 to our consolidated financial statements for further detail.  

Intangible assets and goodwill

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, we monitor 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.  We assess 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 our identifiable intangible assets at December 31, 2019 have been acquired as part of the acquisitions of HGP in 2012 and NLEX in 2014, and are discussed in more detail in Note 10 to our consolidated financial statements. No impairment charges were necessary during 2019.  

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 is tested at least annually for impairment. We perform our annual impairment test on October 1.  Testing goodwill is a two-step process, in which the carrying amount of the reporting unit associated with the goodwill is first compared to the reporting unit’s estimated fair value. If the carrying amount of the reporting unit exceeds its estimated fair value, the fair values of the reporting unit’s assets and liabilities are analyzed to determine whether the goodwill of the reporting unit has been impaired. An impairment loss is recognized to the extent that our recorded goodwill exceeds its implied fair value as determined by this two-step process. ASU 2011-08, Testing Goodwill for Impairment, provides the option to perform a qualitative assessment prior to performing the two-step process, which may eliminate the need for further testing. 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.  

In testing goodwill, we initially use a qualitative approach and analyze 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, we then apply 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.  All of our goodwill relates to our acquisitions of Equity Partners in 2011, HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 10 to our consolidated financial statements. As a result of the Equity Partners separation transaction at the end of 2019, we recorded an impairment charge of $0.6 million to reduce the carrying value of goodwill related to the acquisition of Equity Partners in 2011. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Partners Separation” for more information.

Future impairment of our intangible assets and goodwill could result from changes in assumptions, estimates or circumstances, some of which are beyond our control. The most significant items that could impact our business and result in an impairment charge are outlined in “Item 1A. Risk Factors” of this Report.

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Deferred income taxes

We recognize deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. We periodically assess the value of our deferred tax assets, which have been generated by a history of net operating and net capital losses, and determine the necessity for a valuation allowance that will reduce deferred tax assets to the amount expected to be realized. We evaluate which portion of the deferred tax assets, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on our use of our net operating and net capital loss carryforwards. In 2019 we recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million as we believe that it is more likely than not that some of its net operating loss carryforwards will be utilized.  For further discussion of our income taxes, see Note 15 to our consolidated financial statements.

Contingent consideration

As of December 31, 2018 we had fully satisfied the previously recorded contingent consideration balance. We previously recorded contingent consideration related to an earn-out provision payable to the former owner and current president of NLEX David Ludwig that was part of the consideration for the acquisition of NLEX in 2014. The estimated fair value assigned to the contingent consideration at the acquisition date was determined using a discounted cash flow analysis. Its fair value was assessed quarterly, and any adjustments, together with the accretion of the present value discount, were reported as a fair value adjustment on our consolidated income statement. We adjusted its contingent consideration liability to the fair value of the remaining earn-out payment to David Ludwig, and subsequently made the final payment, resulting in a contingent consideration balance of zero during 2018. See Note 13 to our consolidated financial statements for more discussion of the contingent consideration.

Liabilities and contingencies

We are involved from time to time in various legal matters arising out of our operations in the normal course of business. On a case by case basis, we evaluate the likelihood of possible outcomes for these contingent matters. Based on this evaluation, we determine whether a loss accrual is appropriate. If the likelihood of a negative outcome is probable, and the amount can be estimated, we accrue the estimated loss in the current period.  Refer to Note 17 to our consolidated financial statements for further detail.  

Stock-based compensation

Our stock-based compensation is primarily in the form of options to purchase common shares. The fair value of stock options is calculated using the Black-Scholes option pricing model.  The determination of the fair value of our stock options is based on a variety of factors including, but not limited to, the price of our common stock, the expected volatility of the stock price over the expected life of the award, and expected exercise behavior.  The fair value of the awards is subsequently expensed over the vesting period, net of estimated forfeitures. The provisions of our stock-based compensation plans do not require that we settle any options by transferring cash or other assets, and therefore we classify the option awards as equity. See Note 18 to our consolidated financial statements for further discussion of our stock-based compensation.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

As a Smaller Reporting Company, we are electing scaled reporting obligations and therefore are not required to provide the information requested by this Item.

Item 8. Financial Statements and Supplementary Data.

Our consolidated financial statements required by this Item are included herein, commencing on page F-1.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

During the years ended December 31, 2019 and 2018, respectively, we had no disagreements with our auditors and no reportable events.

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Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), we conducted an evaluation of our disclosure controls and procedures. As 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, 2019.

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, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth fiscal quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Under our Articles of Incorporation, the Board is divided into three classes, with the total number of directors to be not less than five and not more than nine. Each director is to serve a term of three years or until his or her successor is duly elected and qualified. As of the date hereof, the Board consists of seven members: three Class I directors (Messrs. Dove, Perlis and Shimer), two Class II directors (Messrs. Hexner and Silber) and two Class III directors (Messrs. Ryan and DeMoss). The following table sets forth the names, ages and positions with us of our current directors and executive officers. With the exception of Ross Dove and Kirk Dove, who are brothers, there are no family relationships between any present executive officers and directors.

Name	Age (1)	Title
Ross Dove	67	Director, Chief Executive Officer
Emmett DeMoss	83	Director (2), (3)
Michael Hexner	66	Director (2), (3)
Morris Perlis	71	Director (2), (4)
Samuel L. Shimer	56	Director (2), (3), (4)
Allan C. Silber	71	Chairman of the Board (2)
J. Brendan Ryan	77	Director (2), (4)
Kirk Dove	64	Chief Operating Officer and President
Scott A. West	50	Chief Financial Officer
James Sklar	54	Executive Vice President, General Counsel, and Corporate Secretary
Kenneth Mann	52	Senior Managing Director, Equity Partners HG LLC (5)
David Ludwig	62	President, National Loan Exchange

(1) As of December 31, 2019

(2) Independent Director

(3) Member of the Audit Committee

(4) Member of the Compensation Committee

(5) Mr. Mann is no longer with the Company, effective January 1, 2020.

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

Allan C. Silber, Chairman of the Board.  Mr. Silber was elected to the Board as a Class II director in September 2001. He was appointed as Chairman of the Board in November 2001, a position he held until October 2004, and was again appointed as Chairman of the Board in March 2005. In January 2011, Mr. Silber resigned the position of Chief Executive Officer and assumed the position of President. In May 2015 in connection with the appointment of Ross Dove as Chief Executive Officer and Kirk Dove as Chief Operating Officer and President, Mr. Silber resigned the position of President.  Through December 2018 Mr. Silber was the Chairman of Street Capital, which he founded in 1979.  Mr. Silber sits on one public and several private and not for profit boards. Mr. Silber attended McMaster University and received a Bachelor of Science from the University of Toronto.

Michael Hexner, Director. Mr. Hexner was appointed by the Board as a Class II director in August 2016 to fill a Board vacancy. Mr. Hexner has expertise and extensive experience in executive leadership with growing businesses.  Mr. Hexner co-founded Wheel Works in 1976, and grew the business, as its Chief Executive Officer, to become the largest independent tire chain in the United States.  Mr. Hexner was the co-founder of Pacific Leadership Group in 2001, and has served as the Chairman and Chief Executive Officer of both SmartPillars and DealerFusion.  Mr. Hexner currently serves as an operating partner of Fundamental Capital, a private equity firm, and as the Chairman of Zoomvy.com.  Mr. Hexner received a Bachelor of Arts in political philosophy from Williams College, a master’s degree in negotiation and dispute resolution from Creighton University, and has completed an executive management program at The Haas School of Business of the University of California.

Samuel L. Shimer, Director.  Mr. Shimer was appointed by the Board as a Class I director in April 2001. Mr. Shimer has extensive expertise in mergers and acquisitions, including those transactions that occurred while he was an officer of our company and Street Capital, where he was initially employed as a Senior Vice President, Mergers & Acquisitions and Business Development in July 1997. He was appointed Managing Director in February 2000 and he terminated his employment with the Company in February 2004. Mr. Shimer is currently Managing Director of SLC Capital Partners, LLC, a private equity fund management company that he co-founded in 2010.  Mr. Shimer serves as Chairman and CEO of Salon Professional Education Company, LLC, a franchisor of cosmetology schools, and on the board of two other private companies. Mr. Shimer earned a Bachelor of Science in economics from The Wharton School of the University of Pennsylvania, and a Master of Business Administration degree from Harvard Business School.

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J. Brendan Ryan, Director.  Mr. Ryan was appointed by the Board as a Class III director in August 2011 to fill a Board vacancy. Mr. Ryan has had a distinguished career in the advertising industry, most recently serving as the global CEO of Foote Cone & Belding Worldwide (now FCB), and as the Chairman and Chairman Emeritus from June 2005 to December 2010. He has served on the boards of several public companies and currently serves as a board member of several non-profit corporations. Mr. Ryan has extensive experience at the board level with respect to the workings of public companies as well as an extensive network of contacts that could be of benefit to us. Mr. Ryan received his Bachelor of Arts in history from Fordham College and his Master of Business Administration in marketing from the Wharton Graduate School of the University of Pennsylvania.

Morris Perlis, Director.  Mr. Perlis was appointed by the Board as a Class I director in May 2015.  Mr. Perlis previously served as President of Street Capital from 1992 until 2001, a period of tremendous success that included guiding our health care strategy, resulting in superior growth of three investee companies.  In addition to his past experience at Street Capital, Mr. Perlis brings a wealth of expertise gained in senior strategic and management roles with other leading organizations.  He spent 13 years with American Express Inc., including five years as President of American Express Canada.  During that time he obtained approval for, and directed the launch of, the AMEX Bank of Canada, for which he served as CEO.  Among his other responsibilities with American Express, Mr. Perlis served as Executive Vice President, responsible for that company’s U.S. personal card division, and was a key member of numerous senior level U.S. executive committees.  Mr. Perlis also spent four years as President and CEO of Mad Catz Interactive, during which time he completely re-engineered the company, leading it to become the largest third party manufacturer in its industry.  Mr. Perlis is currently the President and CEO of Morris Perlis and Associates, and is active on one public and several private and not for profit boards. Mr. Perlis earned a Bachelor of Arts in economics and history from Sir George Williams University in Montreal, and a Master of Business Administration degree from York University in Toronto.

Emmett DeMoss, Director.  Mr. DeMoss was appointed by the Board as a Class III director in August 2017.  He worked in the business sector as a Corporate Finance Officer for Dean Witter and for Hambrecht & Quist, where he managed the initial public offerings (“IPO”) of several companies. He later served as Chief Operating Officer of Grubb & Ellis (“G&E”), a commercial real estate brokerage and advisory firm, where he helped foster significant growth and led the reverse IPO of G&E. Mr. DeMoss has extensive executive leadership experience with growing businesses and was the founder, director and senior officer of Rackwise and Real Bid, the first on-line Company to offer indicative bidding for commercial real estate, which eventually merged with CoStar (Nasdaq: CSGP). He also held positions as a director and senior officer of Docutel. Mr. DeMoss received his Bachelor of Science in Mechanical Engineering from Princeton University and a Master of Business Administration in Finance from Stanford University.

Ross Dove, Chief Executive Officer and Director.  Mr. Ross Dove was appointed by the Board as a Class I director in May 2015. Mr. Ross Dove was appointed our Chief Executive Officer in May 2015 and has served as Co-Managing Partner of Heritage Global Partners, Inc. since its founding in October 2009.  Together with his brother, Kirk Dove, Mr. Ross Dove joined our company when HGI acquired HGP in February 2012. Mr. Dove began his career in the auction business over thirty years ago, beginning with a small family-owned auction house and helping to expand it into a global firm, DoveBid, which was sold to a third party in 2008. The Messrs. Dove remained as global presidents of the business until September 2009, and then formed HGP in October 2009. During his career, Mr. Dove has been actively involved with advances in the auction industry such as theatre-style auctions, which was a first step in migrating auction events onto the Internet. Mr. Dove has been a member of the National Auctioneers Association since 1985, and a founding member of the Industrial Auctioneers Association. He served as a director of Critical Path from January 2002 to January 2005 and has served on the boards of several venture funded companies.

Kirk Dove, Chief Operating Officer and President.  Mr. Kirk Dove was appointed our Chief Operating Officer and President in May 2015 and has served as Co-Managing Partner of HGP since its founding in October 2009.  Together with his brother, Ross Dove, Mr. Kirk Dove joined our company when HGI acquired HGP in February 2012. Mr. Dove began his career in the auction business over thirty years ago, including, along with his brother, the position of global president of DoveBid, which was sold to a third party in 2008. The Messrs. Dove remained as global presidents of the business until September 2009, and then formed HGP in October 2009. In addition to his experience with the auction business, Mr. Dove was employed at Merrill Lynch for several years as a Senior Account Executive. Mr. Dove received a Bachelor of Science in business from Northern Illinois University. He has been a member of the National Auctioneers Association since 1985.

Scott A. West, Chief Financial Officer.  Mr. West became the Chief Financial Officer of HGP in March 2014 and was appointed the Chief Financial Officer of HGI in May 2015.  Mr. West has over 25 years of multi-national executive financial accounting and business management experience serving various public and private equity funded companies, including a Fortune 500 company. He has expertise managing financial, technical, M&A and international accounting teams and has deep knowledge of SEC financial reporting, compliance with the Sarbanes Oxley Act and international accounting matters.  Mr. West is responsible for all of the Company’s financial and treasury functions including financial reporting, bank relationships, conducting internal and industry analysis to support the Company’s goals for growth, investor relations, and M&A activity.  Mr. West received a Bachelor of Science in accounting from Arizona State University.

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James Sklar, Executive Vice President, General Counsel, and Corporate Secretary.  Mr. Sklar became the Executive Vice President and General Counsel of HGP in June 2013 and was appointed the Executive Vice President, General Counsel and Corporate Secretary of HGI in May 2015.  Mr. Sklar has over two decades of relevant legal expertise serving leading worldwide asset advisory and auction services firms.  Throughout his career, he has played a key role in establishing relationships with global alliance partners and implementing international contracts as well as expanding the adoption of the auction sale process in North America, Europe, Asia and Latin America.  Mr. Sklar is responsible for all of the Company’s legal matters including negotiating global transactional business alliance documents, managing relationships and contracts with worldwide clients and business partners, and providing legal representation for all of the Heritage Global companies.  Mr. Sklar received a Bachelor of Science in economics from the Wharton School of the University of Pennsylvania and a Juris Doctorate from Wayne State University Law School.

Kenneth Mann, Senior Managing Director, Equity Partners HG LLC.  Mr. Mann had been employed by us since March 2011, when he joined our company in connection with our acquisition of Equity Partners. Prior to the acquisition, Mr. Mann was a Partner at Equity Partners since 1995, and a Managing Partner since September 2002. During his career, Mr. Mann has had extensive experience handling investment banking services for distressed businesses operating in a wide variety of industries. Mr. Mann received a Bachelor of Science in business administration from Salisbury University. He began sponsoring events with the American Bankruptcy Institute in 1995, became a member in March 2003, and has served on its Asset Sales Committee since 2003. As of January 1, 2020, Mr. Mann is no longer with the Company (Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Equity Partners Separation” for more information).

David Ludwig, President, National Loan Exchange Inc. (“NLEX”).  Mr. Ludwig joined our company when HGI acquired NLEX in June 2014. Mr. Ludwig has worked in the financial industry for over twenty-five years, and he developed NLEX from its start as a post-Resolution Trust Corporation (RTC) sales outlet to the nation’s leading broker of charged-off credit card and consumer debt accounts. He is considered a leading pioneer in the debt sales industry, and has been a featured speaker at many industry conferences, as well as quoted in numerous publications including the New York Times, LA Times, Collections and Credit Risk, and Collector Magazine. Mr. Ludwig also serves as consultant and expert witness within the industry.  Mr. Ludwig received a Bachelor of Science in economics from the University of Illinois.

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

No director or officer of our company has, during the last ten years: (i) been subject to or involved in any legal proceedings described under Item 401(f) of Regulation S-K, including, without limitation, any criminal proceeding (excluding traffic violations or similar misdemeanors), (ii) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities, or (iii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities or commodities laws and regulations, or finding any violations with respect to such laws and regulations.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership of equity securities of HGI with the SEC. Officers, directors, and greater than ten percent stockholders are required by the SEC regulation to furnish us with copies of all Section 16(a) forms that they file.

Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant to Rule 16a-3 under the Exchange Act during our most recent fiscal year, and Forms 5 with respect to our most recent fiscal year, we believe that all such forms required to be filed pursuant to Section 16(a) were timely filed by the executive officers, directors and security holders required to file same during the fiscal year ended December 31, 2019, except for (i) a Form 4 inadvertently filed late by the Company on behalf of Mr. Michael Hexner, reporting eight transactions during 2019, (ii) a Form 4 inadvertently filed late by the Company on behalf of Mr. David Ludwig, reporting three transactions during 2019, (iii) a Form 4 inadvertently filed a day late by the Company on behalf Mr. Emmett DeMoss, reporting one transaction, (iv) a Form 5 inadvertently filed late by the Company on behalf of Mr. Emmet DeMoss, reporting six transactions during 2018.

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

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http://www.heritageglobalinc.com (follow Corporate Governance link to Governance Documents tab). We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any amendments to, or waivers from, a provision of the Code that applies to our principal executive, financial and accounting officers or persons performing similar functions by posting such information on its website at the website address set forth above. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.

Corporate Governance

Board Leadership and Risk Oversight

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

Our operations, even following the acquisitions of HGP in 2012 and NLEX in 2014, remain relatively modest, with only 46 employees, as detailed in “Item 1. Business” of this Report. Given the current size and scale of our operations, we believe that the Board does not require a lead independent director in order to effectively oversee our strategic priorities. The Board meets quarterly to review our operating results. It meets annually to review and approve our strategy and budget. Material matters such as acquisitions and dispositions, investments and business initiatives are approved by the full Board.

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

Board Meetings and Committees

The Board held four meetings during the fiscal year ended December 31, 2019. The Board has designated two standing committees: the Audit Committee and the Compensation Committee. HGI does not have a nominating or a corporate governance committee. However, corporate governance functions are included in the Audit Committee Charter, and Board nominations are considered by the full Board. There are no specific criteria for Director nominees, and we do not specifically consider diversity with respect to the selection of our Board nominees. Given our limited operations, we believe that we would have difficulty identifying and attracting a diverse selection of candidates. To date, it has been deemed most effective to nominate and appoint individuals who are either former employees with detailed knowledge of the business, such as Mr. Shimer, or individuals with expertise that will be of value as we expand our market presence, such as Mr. Hexner, Mr. DeMoss, Mr. Ryan and Mr. Perlis. There has been no material change in the procedures by which our stockholders may recommend nominees to our Board since such procedures were adopted and implemented.

Audit Committee

The Audit Committee is responsible for making recommendations to the Board concerning the selection and engagement of independent accountants and for reviewing the scope of the annual audit, audit fees, results of the audit and independent registered public accounting firm’s independence. The Audit Committee is also responsible for corporate governance, and reviews and discusses with management and the Board such matters as accounting policies, internal accounting controls and procedures for preparation of financial statements. Its membership is currently comprised of Mr. Shimer (Chairman), Mr. DeMoss, and Mr. Hexner, all three of whom are independent directors. The Audit Committee held four meetings during the fiscal year ended December 31, 2019. In 2000, the Board approved HGI’s Audit Committee Charter, which was subsequently revised and amended in 2001 and again in 2003 in order to incorporate certain updates in light of regulatory developments, including the Sarbanes-Oxley Act of 2002. A copy of the current Audit Committee Charter is available on our website www.heritageglobalinc.com.

Audit Committee Financial Expert

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

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Item 11. Executive Compensation.

Compensation Discussion and Analysis

Summary

The following sections provide an explanation and analysis of our executive compensation program and the material elements of total compensation paid to each of our named executive officers. Included in the discussion is an overview and description of:

• our compensation philosophy and program;

• the objectives of our compensation program;

• what our compensation program is designed to reward;

• each element of compensation;

• why we choose to pay each element;

• how we determine the amount for each element; and

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

In reviewing our executive compensation program, we considered issues pertaining to policies and practices for allocating between long-term and currently paid compensation and those policies for allocating between cash and non-cash compensation. We also considered the determinations for granting awards, performance factors for our company and our named executive officers, and how specific elements of compensation are structured and taken into account in making compensation decisions. Questions related to the benchmarking of total compensation or any material element of compensation, the tax and accounting treatment of particular forms of compensation and the role of executive officers (if any) in the total compensation process also are addressed where appropriate. In addition to the named executive officers discussed below, we have only 44 salaried employees.

General Executive Compensation Philosophy

We compensate our executive management through a combination of base salaries, merit-based performance bonuses, and long-term equity compensation. We adhere to the following compensation policies, which are designed to support the achievement of our business strategies:

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

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

• An appropriately balanced mix of at-risk incentive cash and equity-based compensation aligns the interests of our executives with that of our stockholders. The equity-based component promotes a continuing focus on building profitability and shareowner value.

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

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

A core principle of our executive compensation program is the belief that compensation paid to executive officers should be closely aligned with our near- and long-term success, while simultaneously giving us the flexibility to recruit and retain the most qualified key executives. Our compensation program is structured so that it is related to our stock performance and other factors, direct and indirect, all of which may influence long-term stockholder value and our success.

We utilize each element of executive compensation to ensure proper balance between our short- and long-term success as well as between our financial performance and stockholder return. In this regard, we believe that the executive compensation program for our named executive officers is consistent with our financial performance and the performance of each named executive officer. We do not utilize the services of compensation consultants in determining or recommending executive or director compensation.

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Our Named Executive Officers

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

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

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

During 2019, our named executive officers were:

Ross Dove — Chief Executive Officer. Mr. Dove (and his brother, Kirk Dove) co-founded HGP, which we acquired in 2012.  Effective May 2015, Mr. Dove became our Chief Executive Officer.

Kenneth Mann — Senior Managing Director, Equity Partners. Mr. Mann has held this position prior to and since our acquisition of Equity Partners in 2011. As of January 1, 2020, Mr. Mann’s employment with Equity Partners was terminated (Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Equity Partners Separation” for more information).

David Ludwig — President, National Loan Exchange. Mr. Ludwig has held this position prior to and since our acquisition of National Loan Exchange in 2014.

Elements of Compensation

Base Salaries

Unless specified otherwise in their employment agreements, the base salaries of our named executive officers are evaluated annually. In evaluating appropriate pay levels and salary increases for such officers, the Compensation Committee uses a subjective analysis, considering achievement of our strategic goals, level of responsibility, individual performance, and internal equity and external pay practices. In addition, the Committee considers the scope of the executives’ responsibilities, taking into account competitive market compensation for similar positions where available, as well as seniority of the individual, our ability to replace the individual and other primarily judgmental factors deemed relevant by our Board and Compensation Committee. The Compensation Committee does not use any specific benchmark in the determination of base salaries.

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

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

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

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

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

Bonuses

Bonus awards are designed to focus management attention on key operational goals for the current fiscal year. Our executives may earn a bonus based upon achievement of their specific operational goals and achievement by us or our business unit of financial targets. Cash bonus awards are distributed based upon the Company and the individual meeting performance criteria objectives. The final determination for all bonus payments is made by our Compensation Committee based on a subjective analysis of the foregoing elements.

We set bonuses based on a subjective analysis of certain performance measures in order to maximize and align the interests of our officers with those of our stockholders. Although performance goals are generally standard for determining bonus awards, we have and will consider additional performance rating goals when evaluating the bonus compensation structure of our executive management. In addition, in instances where the employee has responsibility over a specific area, performance goals may be directly tied to the overall performance of that particular area.

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For 2019, Mr. Mann was eligible for a performance bonus calculated as follows: the first $50,000 of net operating income generated by Equity Partners (“EP NOI”) is allocated to Mr. Mann as a bonus. After the first $50,000 of EP NOI, the Equity Partners team is entitled to receive 50% of the remaining EP NOI. In addition, we make available annually a bonus in the amount of $25,000 to be allocated to a member or members of the Equity Partners team. The allocation among the Equity Partners team is determined by Mr. Mann and our Chief Executive Officer, Mr. Ross Dove. In 2019 Mr. Mann earned a bonus of $50,000, and in 2018 he earned a bonus of $287,736.  

For 2019, Mr. Dove was eligible to receive a performance bonus calculated as follows: after we achieve the consolidated net operating income target and the Heritage Global Partners auction division achieves the net operating income target, Mr. Dove may share in a potential bonus pool of 5% of consolidated net operating income (to be shared also with the Executive Management Group). In 2019 Mr. Dove earned a bonus of $40,250. Pursuant to an agreement reached between Mr. Dove and board member Mr. Emmett DeMoss, and further approved by the remaining board members, one-half of Mr. Dove’s 2019 bonus is to be paid to Mr. Dove and the other half is to be paid directly to Mr. Emmett DeMoss from the Companyin consideration of Mr. DeMoss’ ongoing strategic consulting services. In 2018 Mr. Dove did not earn a bonus as the bonus criteria were not met. For 2020, Mr. Dove will be eligible for a performance bonus consistent with the calculation for 2019.

For 2019, Mr. Ludwig was eligible to receive a performance bonus calculated in accordance with an Addendum to the Employment Agreements of David and Tom Ludwig (the “Addendum”), effective on June 1, 2018.Pursuant to the Addendum, for each calendar year, NLEX will allocate 30% of its Net Operating Income in the aggregate for cash incentive awards.Also pursuant to the Addendum, for each calendar year, NLEX will allocate 20% of its Principal Net Operating Income for cash incentive awards. Each year David Ludwig will recommend to our Board of Directors the NLEX employees (including David Ludwig) entitled to receive a portion, as well as the portion to be received by Mr. Ludwig. In 2019 Mr. Ludwig earned a bonus of $689,490, and in 2018 he earned a bonus of $386,544. For 2020, Mr. Ludwig will be eligible for a performance bonus consistent with the calculation for 2019.

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

Equity Incentive Grants

In keeping with our philosophy of providing a total compensation package that favors at-risk components of pay, long-term incentives can comprise a significant component of our executives’ total compensation package. These incentives are designed to motivate and reward executives for maximizing shareholder value and encourage the long-term employment of key employees. Our objective is to provide executives with above-average, long-term incentive award opportunities.

We view stock options as our primary long-term compensation vehicle for our executive officers. Stock options generally are granted at slightly above the prevailing market price on the date of grant and will have value only if our stock price increases. Grants of stock options generally are based upon our performance, the level of the executive’s position, and an evaluation of the executive’s past and expected future performance. We do not time or plan the release of material, non-public information for the purpose of affecting the value of executive compensation.

We believe that stock options will continue to be used as the predominant form of stock-based compensation. In 2016, our named executives participated in a Company-wide stock option grant.  As part of the grant the named executives received options to purchase an aggregate 825,000 shares of our common stock at a strike price of $0.45 per share.  On June 1, 2018, the Company granted 300,000 shares of Company restricted common stock, and on May 2, 2019, the Company granted 42,500 options to purchase common stock; both grants being in connection with an addendum to the Employment Agreement of David Ludwig (see “— Executive and Director Compensation – Tabular Disclosure — Grants of Plan-Based Awards,” below, for details). No other options were granted to any of our named executive officers during 2018 and 2019.

Other Benefits

In connection with the terms of the related party line of credit as more fully described in “Item 13. Certain Relationships and Related Transaction, and Director Independence” of this Report and Note 12 to our consolidated financial statements, the Company paid approximately $87,000 to Mr. Dove based on the profit share provision for principal and guarantee transactions that occurred in 2017 and the first three quarters of 2018.

Additional benefits provided to the named executive officers during 2019 and 2018 were the payment of an automobile allowance to Mr. Ross Dove ($14,029 in 2019 and $14,879 in 2018) and the payment of club membership dues for Mr. Ludwig ($9,513 in 2019 and $10,117 in 2018).  There were no pension or change in control benefits in either 2019 or 2018.

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Upon termination of employment by us without cause, Mr. Dove is entitled to 12 months base salary and a pro rata share of the bonus payable in the fiscal year of termination. Any bonus payable is based on the termination date (provided that, as of the termination date, the performance criteria established with respect to the bonus for the fiscal year have been met), subject to certain conditions.

Upon termination of employment by us without cause, Mr. Ludwig is entitled to receipt of his base salary, payable in equal monthly installments that would have been received through the last day of the term of the Employment Agreement of David Ludwig.

Executive Compensation Process

Compensation Committee

Our Compensation Committee oversees and approves all compensation and awards made to the Chief Executive Officer, Chief Operating Officer/President, Chief Financial Officer and General Counsel. The Compensation Committee reviews the performance and compensation of the executive officers, without their participation, and establishes their compensation accordingly, with consultation from others when appropriate.

Executive and Director Compensation – Tabular Disclosure

Summary Compensation Table

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

Name and Principal Position	Year	Salary ($)		Bonus ($)			Stock Awards ($)3			All Other Compensation ($)			Total ($)
Ross Dove	2019		350,000		40,250	(1)		—			14,029	(2)		404,279
Chief Executive Officer	2018		350,000		—			—			102,072	(2)		452,072
Kenneth Mann	2019		375,000		—			—			—			375,000
Senior Managing Director, Equity Partners	2018		375,000		287,736			—			—			662,736
David Ludwig	2019		400,000		689,490			29,750	(3)		9,513	(4)		1,128,753
President, National Loan Exchange	2018		400,000		386,544			129,000	(3)		2,627,799	(4)		3,543,343

(1) This amount represents Mr. Dove’s full 2019 bonus, however one-half of Mr. Dove’s 2019 bonus is to be paid to Mr. Dove and the other half is to be paid directly to Mr. Emmett DeMoss from the Company in consideration of Mr. DeMoss’ ongoing strategic consulting services. Refer to the “Bonuses” section above for more information.

(2) This amount represents payment for the profit share provision for principal and guarantee transactions of approximately $87,000 during 2018. The remaining amounts represent an automobile allowance.

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

(4) This amount includes the final contingent consideration payment in 2018 to David Ludwig in connection with the acquisition of NLEX in 2014, and membership dues. Membership dues paid on behalf of Mr. Ludwig were $9,513 and $10,117, for 2019 and 2018, respectively.  

Grants of Plan-Based Awards

On June 1, 2018, the Company granted 300,000 shares of Company restricted common stock in connection with an addendum to the Employment Agreement of David Ludwig. The shares are subject to certain restrictions on transfer and a right of repurchase over five years, ending May 31, 2023, and require a continued term of service to the Company. All restricted common stock was issued with grant date fair value of $0.43 per share and an exercise price of zero. On May 2, 2019, the Company granted 42,500 options to purchase common stock at an exercise price of $0.70 per share in connection with an addendum to the Employment Agreement of David Ludwig. No other option grants were made to our named executive officers noted above during 2018 and 2019.

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Outstanding Equity Awards at Fiscal Year-End

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

Name	Number of Securities Underlying Unexercised Options:  Exercisable			Number of Securities Underlying Unexercised Options: Unexercisable			Option Exercise Price($/Sh)		Option Expiration Date	Equity Incentive Plan Awards: Number of Unearned Units of Stock That Have Not Vested			Equity Incentive Plan Awards: Market Value of Unearned Units of Stock That Have Not Vested
David Ludwig		150,000	(1)		50,000	(1)	$	0.45	December 9, 2026	N/A			N/A
Ross Dove		243,750	(1)		81,250	(1)	$	0.45	December 9, 2026	N/A			N/A
David Ludwig		—			—		N/A		N/A		300,000	(2)	$	0.43
David Ludwig		—			42,500	(3)	$	0.70	May 1, 2029	N/A			N/A

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

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

(3) The Company granted 42,500 options to purchase common stock in connection with an addendum to the Employment Agreement of David Ludwig (as described previously in “Grants of Plan-Based Awards”). The options vest 25% annually beginning on June 1, 2020.

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

Compensation of Directors

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

Name	Fees Earned or Paid in Cash ($)			Option Awards ($)(1)		Total ($)
Allan C. Silber		101,000			3,676		104,676
Samuel L. Shimer		39,000			3,676		42,676
Morris Perlis		27,000			3,676		30,676
J. Brendan Ryan		25,000			3,676		28,676
Michael Hexner		33,000			3,676		36,676
Emmett DeMoss		53,125	(2)		3,676		56,801
Ross Dove (3)		—			—		—

(1) The value included in this column represents the grant date fair value of the option award computed in accordance with FASB ASC Topic 718. The number of shares underlying stock options granted during 2019 for each of the directors listed in the table was as follows:  Mr. Silber — 10,000; Mr. Perlis — 10,000; Mr. Ryan — 10,000; Mr. Shimer — 10,000; Mr. Hexner — 10,000; Mr. DeMoss — 10,000.

(2) Mr. DeMoss earned board fees of $33,000. In addition, Mr. DeMoss earned $20,125 in consideration of Mr. DeMoss’ ongoing strategic consulting services. Refer to the “Bonuses” section above for more information.

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

Each director who is not an employee receives a $20,000 per year cash retainer, $1,000 per meeting attended in person or by telephone, and an annual grant of stock options to purchase 10,000 shares of common stock, which is awarded in March of each year. In addition, the Chairman of the Board receives a cash retainer of $75,000 per year, the Chairman of the Audit Committee receives a cash retainer of $10,000 per year, Audit Committee members who are not the chair receive a cash retainer of $5,000 per year, and

30

other committee chairpersons receive an annual cash retainer of $2,000 per year. The directors are also eligible to receive options under our stock option plans at the discretion of the Board.

Stock Option Plans

At December 31, 2019, we had four stock-based employee compensation plans, which are described in Note 18 of our consolidated financial statements included in “Item 15. Exhibits and Financial Statement Schedules” of this Report.

Anti-Hedging Policy

The Company maintains an anti-hedging policy in its Code of Conduct. The Company’s policy prohibits directors, officers and employees, with respect to the Company’s stock, from trading on a short-term basis, engaging in short sales, or buying or selling puts or calls. Moreover, all transactions in the Company’s stock by directors and officers must be cleared by the Corporation’s secretary. The Company believes that it is improper and inappropriate for its directors, officers and employees to engage in short-term or speculative transactions involving the Company’s stock.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information regarding the ownership of our common stock as of March 1, 2020, except as otherwise footnoted, by: (i) each director; (ii) each of the Named Executive Officers in the Summary Compensation Table; (iii) all of our executive officers and directors as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock. As of March 1, 2020, there are 29,352,837 shares of common stock and 569 shares of Series N preferred stock issued and outstanding. Each share of Series N preferred stock is entitled to 40 votes.

Name and Address of Beneficial Owner (1)	Number of Shares Beneficially Owned (2)			Percentage of Common Stock Beneficially Owned
Allan C. Silber		4,457,395	(3)		15.2	%
Topline Capital Partners, LP		2,925,327	(4)		10.0	%
Ross Dove		2,025,540	(5)		6.8	%
Zachary Capital L.P.		1,613,454	(6)		5.5	%
Kirk Dove		1,336,950	(7)		4.5	%
David Ludwig		967,605	(8)		3.3	%
Morris Perlis		396,389	(9)		1.4	%
Kenneth Mann		131,967	(10)	*%
Samuel L. Shimer		177,139	(11)	*%
J. Brendan Ryan		163,750	(12)	*%
Emmett DeMoss		50,000	(13)	*%
Michael Hexner		59,776	(14)	*%
All Executive Officers and Directors as a    Group (12 people)		10,642,871			34.8	%

* Indicates less than one percent.

(1) Unless otherwise noted, all listed shares of common stock are owned of record by each person or entity named as beneficial owner and that person or entity has sole voting and dispositive power with respect to the shares of common stock owned by each of them. All addresses are c/o Heritage Global Inc. unless otherwise indicated.

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

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

(4) Unrelated third party with beneficial ownership greater than 5.0%, based solely upon a Schedule 13G/A filed on February 13, 2020 with the SEC.  Topline Capital Partners, LP’s address is 2913 3rd Street, Unit 201, Santa Monica, CA 90405.

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

(6) Unrelated third party with beneficial ownership greater than 5.0%, based solely upon a Schedule 13G filed on July 21, 2015 with the SEC.  Zachary Capital L.P.’s address is 12 Castle Street, Helier, Jersey, JE2 3RT.  

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

(8) Includes 150,000 shares of common stock issuable pursuant to options. Mr. Ludwig’s address is c/o National Loan Exchange Inc., 10 Sunset Hills Professional Center, Floor 1, Edwardsville, IL 62025.

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

(10)   Mr. Mann’s address is c/o Equity Partners HG LLC, 16 N. Washington St, Easton, MD 21601.

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

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

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

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

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

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Item 13. Certain Relationships and Related Transactions, and Director Independence.

Transactions with Management and Others

Pursuant to an agreement reached between Mr. Dove and board member Mr. Emmett DeMoss, and further approved by the remaining board members, one-half of Mr. Dove’s 2019 bonus is to be paid to Mr. Dove and the other half is to be paid directly to Mr. Emmett DeMoss from the Companyin consideration of Mr. DeMoss’ ongoing strategic consulting services.

As part of the operations of NLEX, we lease office space in Edwardsville, IL that is owned by the President of NLEX, David Ludwig. The total amount paid for the lease in both 2019 and 2018 was $0.1 million, which was paid in its entirety directly to David Ludwig.

In the fourth quarter of 2016, we entered into a related party secured promissory note with an entity owned by certain executive officers of our company (the “Entity”) for a revolving line of credit (the “Line of Credit”).  Under the terms of the Line of Credit, we received a revolving line of credit with an aggregate borrowing capacity of $1.5 million.  Interest under the Line of Credit is charged at a variable rate.  Aggregate loans under the Line of Credit up to $1.0 million incur interest at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%.  Amounts outstanding at any time in excess of $1.0 million incur interest at a rate of 8.0% per annum.  We are required to pay the Entity an annual commitment fee of $15,000, payable on a monthly basis, and due regardless of amounts drawn against the line.  Further, the Entity is eligible to participate in the net profits and net losses of certain industrial auction principal and guarantee transactions entered into by us on or after January 1, 2017, and consummated on or prior to the maturity date.  Principal transactions are those in which we purchase assets for resale. Guarantee transactions are those in which we guarantee our client a minimum amount of proceeds from the auction.  The Line of Credit matures at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following the date we close a new credit facility with a financial institution. Ross Dove and Kirk Dove each have an equal 50% share in the payments made to the Entity. For additional information on the Line of Credit refer to the Form 8-K filed with the SEC on December 27, 2016.  During the year ended December 31, 2018, the Company made aggregate payments of approximately $179,000 to the respective parties based on the profit share provision for principal and guarantee transactions that occurred in 2017 and the first three quarters of 2018. In connection with the Company entering into the Credit Facility with a third party bank on September 27, 2018, the Company terminated the Line of Credit.

Director Independence

Our securities are quoted on the OTC market and the Canadian Securities Exchange. Our Board applies “independence” requirements and standards under the Nasdaq Marketplace Rules. Pursuant to the requirements, the Board annually undertakes a review of director independence. During this review, the Board considers transactions and relationships between each director or any member of his or her immediate family and HGI and its subsidiaries and affiliates. The purpose of this review is to determine whether any such relationships or transactions exist that are inconsistent with a determination that the director is independent. As a result of this review in 2019, the Board affirmatively determined that during 2019 Messrs. Silber, Hexner, Ryan, Shimer, Perlis and DeMoss were deemed “independent” as defined under the Nasdaq Marketplace Rules. The Board further determined that during 2019 each of the foregoing directors met the independence and other requirements, including the Audit Committee membership independence requirements, needed to serve on the Board committees for which they serve.

Item 14. Principal Accountant Fees and Services.

The Audit Committee has selected Squar Milner LLP (“Squar Milner”) as our independent registered public accounting firm for the fiscal year ended December 31, 2018 and 2019. Squar Milner has served as our independent registered public accounting firm since the fiscal year ended December 31, 2014.  All fees paid to independent registered public accounting firms were pre-approved by the Audit Committee.

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

	Year Ended December 31,
	2019		2018
Audit fees	$	130	$	126
Audit-related fees, tax fees, and all other fees		—		—
Total	$	130	$	126

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Audit Fees

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

Audit-Related Fees

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

Tax Fees

Tax fees are for services related to tax compliance, consulting and planning services and include preparation of tax returns, review of restrictions on net operating loss carry forwards and other general tax services. For 2019 and 2018, these services were provided by an independent accounting firm other than Squar Milner.

All Other Fees

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

Audit and Non-Audit Service Pre-Approval Policy

In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, the Audit Committee has adopted an informal approval policy to pre-approve services performed by the independent registered public accounting firm. All proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the Chairman of the Audit Committee and the Chief Financial Officer. The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee. If there is any question as to whether a proposed service fits within a pre-approved service, the Audit Committee chair is consulted for a determination. The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent registered public accounting firm that the request or application is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its Chairman or any of its other members pursuant to delegated authority) for approval.  All fees related to audit services during 2018 and 2019 were pre-approved by the Audit Committee.  

Audit Services. Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent registered public accounting firm to be able to form an opinion on our financial statements. The Audit Committee pre-approves specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically pre-approved by the Audit Committee. The Audit Committee monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope or other items.  

Audit-Related Services. Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements which historically have been provided to us by the independent registered public accounting firm and are consistent with the SEC’s rules on auditor independence. The Audit Committee pre-approves specified audit-related services within pre-approved fee levels. All other audit-related services must be pre-approved by the Audit Committee.

Tax Services. The Audit Committee pre-approves specified tax services that the Audit Committee believes would not impair the independence of the independent registered public accounting firm and that are consistent with SEC rules and guidance. All other tax services must be specifically approved by the Audit Committee.

All Other Services. Other services are services provided by the independent registered public accounting firm that do not fall within the established audit, audit-related and tax services categories. The Audit Committee pre-approves specified other services that do not fall within any of the specified prohibited categories of services.

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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, 2019 and 2018

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

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018

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)
3.2	Bylaws as amended (incorporated by reference to the Company’s Quarterly Report on Form 10-Q (File No. 000-17973) filed on November 19, 1998).
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).
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).

35

Exhibit Number	Title of Exhibit
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).
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).

36

Exhibit Number	Title of Exhibit
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).
21	List of subsidiaries.
23.1	Consent of Squar Milner 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

The following Schedules are included in our Financial Statements:

None.

Item 16. Form 10-K Summary

None.

37

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 9, 2020	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 9, 2020
Ross Dove
/s/ Michael Hexner	Director	March 9, 2020
Michael Hexner
/s/ Morris Perlis	Director	March 9, 2020
Morris Perlis
/s/ J. Brendan Ryan	Director	March 9, 2020
J. Brendan Ryan
/s/ Samuel L. Shimer	Director	March 9, 2020
Samuel L. Shimer
/s/ Emmett DeMoss	Director	March 9, 2020
Emmett DeMoss
/s/ Allan C. Silber	Chairman of the Board of Directors	March 9, 2020
Allan C. Silber

38

INDEX OF FINANCIAL STATEMENTS

Title of Document

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2019 and 2018	F-3
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2019 and 2018	F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018	F-6
Notes to Consolidated Financial Statements	F-7

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, 2019 and 2018, the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for 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, 2019 and 2018, 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.

/s/ SQUAR MILNER LLP

We have served as the Company’s auditor since 2014.

San Diego, California

March 9, 2020

F-2

HERITAGE GLOBAL INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of US dollars, except share amounts)

	December 31,
	2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	2,728		$	4,268
Accounts receivable		1,859			400
Current portion of notes receivable, net		1,295			—
Inventory – equipment		104			2,405
Other current assets		784			607
Total current assets		6,770			7,680
Property and equipment, net		221			175
Non-current portion of notes receivable, net		1,366			—
Equity method investments		2,516			2,767
Right-of-use asset		1,483			—
Intangible assets, net		3,392			3,627
Goodwill		5,585			6,158
Deferred tax assets		372			—
Other assets		212			224
Total assets	$	21,917		$	20,631
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	8,110		$	8,101
Current portion of third party debt		403			1,178
Lease liabilities		577			—
Other current liabilities		3			892
Total current liabilities		9,093			10,171
Non-current portion of third party debt		35			438
Non-current portion of lease liabilities		942			—
Other non-current liabilities		—			1,838
Deferred tax liabilities		—			584
Total liabilities		10,070			13,031
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and    outstanding 569 Series N shares at December 31, 2019 and December 31, 2018		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and    outstanding 29,339,061 shares at December 31, 2019 and 29,253,278 shares    at December 31, 2018		293			293
Additional paid-in capital		285,099			284,751
Accumulated deficit		(273,474	)		(277,373	)
Accumulated other comprehensive loss		(77	)		(77	)
Total stockholders’ equity		11,847			7,600
Total liabilities and stockholders’ equity	$	21,917		$	20,631

The accompanying notes are an integral part of these consolidated financial statements.

F-3

HERITAGE GLOBAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands of US dollars, except share and per share amounts)

	Year Ended December 31,
	2019			2018
Revenues:
Services revenue	$	20,100		$	21,658
Asset sales		6,068			2,006
Total revenues		26,168			23,664
Operating costs and expenses:
Cost of services revenue		3,374			2,904
Cost of asset sales		4,365			1,144
Selling, general and administrative		15,874			15,219
Impairment of goodwill		573			—
Depreciation and amortization		305			319
Total operating costs and expenses		24,491			19,586
Earnings of equity method investments		1,373			—
Operating income		3,050			4,078
Fair value adjustment of contingent consideration		—			157
Interest and other expense, net		(64	)		(214	)
Income before income tax (benefit) expense		2,986			4,021
Income tax (benefit) expense		(913	)		270
Net income	$	3,899		$	3,751
Weighted average common shares outstanding – basic		28,662,297			28,581,654
Weighted average common shares outstanding – diluted		29,271,375			28,894,927
Net income per share – basic	$	0.14		$	0.13
Net income per share – diluted	$	0.13		$	0.13
Comprehensive income:
Net income	$	3,899		$	3,751
Other comprehensive loss:
Foreign currency translation adjustment		—			(2	)
Comprehensive income	$	3,899		$	3,749

The accompanying notes are an integral part of these consolidated financial statements.

F-4

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, 2017		569	$	6		28,480,148	$	285	$	284,396		$	(281,124	)	$	(75	)	$	3,488
Issuance of common stock from    stock option awards		—		—		173,130		2		72			—			—			74
Issuance of restricted common stock						600,000		6		(6	)		—			—			—
Stock-based compensation expense		—		—		—		—		289			—			—			289
Net income		—		—		—		—		—			3,751			—			3,751
Foreign currency translation    adjustments		—		—		—		—		—			—			(2	)		(2	)
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						75,000		—		65			—			—			65
Stock-based compensation expense		—		—		—		—		283			—			—			283
Net income		—		—		—		—		—			3,899			—			3,899
Balance at December 31, 2019		569	$	6		29,339,061	$	293	$	285,099		$	(273,474	)	$	(77	)	$	11,847

The accompanying notes are an integral part of these consolidated financial statements.

F-5

HERITAGE GLOBAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of US dollars)

	Year Ended December 31,
	2019			2018
Cash flows provided by operating activities:
Net income	$	3,899		$	3,751
Adjustments to reconcile net income to net cash provided by operating    activities:
Earnings of equity method investments		(1,373	)		—
Noncash lease expense		(262	)		—
Depreciation and amortization		305			319
Impairment of goodwill		573			—
Fair value adjustment of contingent consideration		—			(157	)
Deferred taxes		(956	)		72
Stock-based compensation expense		283			289
Changes in operating assets and liabilities:
Accounts receivable		(1,459	)		(16	)
Inventory – equipment		2,301			(2,235	)
Other assets		(100	)		(238	)
Accounts payable and accrued liabilities		9			3,847
Lease liabilities		235			—
Other non-current liabilities		(2,661	)		1,838
Net cash provided by operating activities		794			7,470
Cash flows used in investing activities:
Purchase of property and equipment		(116	)		(99	)
Investment in notes receivable		(2,827	)		—
Payments received on notes receivable		166			—
Investment in equity method investments		(604	)		(2,753	)
Cash distributions from equity method investments		2,225			—
Net cash used in investing activities		(1,156	)		(2,852	)
Cash flows used in financing activities:
Proceeds from debt payable to third parties		1,250			1,300
Repayment of debt payable to third parties		(2,428	)		(826	)
Repayment of debt payable to related party		—			(390	)
Payment of contingent consideration		—			(2,617	)
Proceeds from exercise of options to purchase common shares		—			74
Net cash used in financing activities		(1,178	)		(2,459	)
Net (decrease) increase in cash and cash equivalents		(1,540	)		2,159
Cash and cash equivalents at beginning of year		4,268			2,109
Cash and cash equivalents at end of year	$	2,728		$	4,268

Supplemental cash flow information:
Cash paid for income taxes	$	290		$	56
Cash paid for interest		74			249
Noncash change in right-of-use assets		1,220			-
Noncash change in deferred rent		(64	)		-
Noncash change in lease liabilities		1,284			-
Issuance of common stock for services rendered		65			-

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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’s sole operating segment is its asset liquidation business, which began 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.

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, contingent consideration, 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

F-7

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.

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 11 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 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, 2019, 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.

F-8

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 other assets. 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 6 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, 2019 and 2018, 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.  

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. The Company employed fair value accounting for only the contingent consideration recorded as part of the acquisition of NLEX. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market and therefore fall within Level 3.  See Note 13 for more discussion of this contingent consideration.

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, 2019 have been acquired as part of the acquisitions of HGP in 2012 and NLEX in 2014, and are discussed in more detail in Note 10. No impairment charges were necessary during 2019.

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.  Testing goodwill is a two-step process, in which the carrying amount of the reporting unit associated with the goodwill is first compared to the reporting unit’s estimated fair value. If the carrying amount of the reporting unit exceeds its estimated fair value, the fair values of the reporting unit’s assets and liabilities are analyzed to determine whether the goodwill of the reporting unit has been impaired. An impairment loss is recognized to the extent that the Company’s recorded goodwill exceeds its implied fair value as determined by this two-step process. FASB Accounting

F-9

Standards Update 2011-08, Testing Goodwill for Impairment, provides the option to perform a qualitative assessment prior to performing the two-step process, which may eliminate the need for further testing. 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.  

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.  All of the Company’s goodwill relates to its acquisitions of Equity Partners in 2011, HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 10. 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 the Company recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million as the Company believes that it is more likely than not that some of its net operating loss carryforwards will be utilized. For further discussion of our income taxes, see Note 15.

Contingent consideration

At December 31, 2018 the Company no longer carries a contingent consideration balance. We previously had an earn-out provision payable to the former owner and current president of NLEX (“David Ludwig”) that was part of the consideration for the acquisition of NLEX in 2014. The estimated fair value assigned to the contingent consideration at the acquisition date was determined using a discounted cash flow analysis. Its fair value was assessed quarterly, and any adjustments, together with the accretion of the present value discount, were reported as a fair value adjustment on the Company’s consolidated income statement. The Company adjusted its contingent consideration liability each reporting period to the fair value of the estimated remaining earn-out liability owed to David Ludwig. During 2018 the Company made the final contingent consideration payments to David Ludwig in the aggregate amount of $2.6 million, resulting in a contingent consideration of zero at December 31, 2018 and 2019. See Note 13 for more discussion of the contingent consideration.

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 17 for further discussion.

Revenue recognition

On January 1, 2018, the Company adopted the new accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method. Based on the Company’s analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of the Company’s accumulated deficit as a result of the adoption of this new standard. We expect the impact of the adoption of the new standard to be immaterial to the consolidated financial statements on an ongoing basis.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions 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,

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(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 one reporting segment — the asset liquidation business. Although the Company provides various services within the asset liquidation business, it does not disaggregate revenue streams further than as reported in its income statement, services revenue and asset sales. 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 (2% of total revenues for the year ended December 31, 2019), 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, 2019, the deferred revenue balance was approximately $2,500. 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.

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.

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-

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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 18 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, 2019 and 2018, was $0.6 million and $0.8 million, respectively.

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”). ASU 2016-02 changes the accounting for leases previously classified as operating leases under GAAP by, among other things, requiring a Company to recognize the lease on the balance sheet with a right-of-use asset and a lease liability. Effective January 1, 2019, the Company adopted ASU 2016-02. This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a modified retrospective adoption method at January 1, 2019. Under this method of adoption, there is no impact to the comparative condensed consolidated income statement and consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in ASC Topic 840, “Leases.” In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

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.  

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 are currently evaluating the impact of the new guidance on our consolidated financial statements.

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 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.  The Company anticipates that the impact will not be material to its consolidated financial statements.

F-12

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 receivable portfolios which resulted in a total outstanding principal balance of approximately $2.7 million, net of unamortized deferred fees and costs on originated loans. As of December 31, 2019, the Company has not recorded an allowance for credit losses related to notes receivable outstanding.

Note 4 – Inventory

As of December 31, 2018, the Company’s inventory balance largely consisted of machinery and equipment related to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018. The 110-acre campus includes three independent modern buildings with various pharmaceutical manufacturing and packing line assets. The Company’s interest in the purchase and carrying value for this inventory at December 31, 2018 was approximately $2.3 million. As of December 31, 2019, the Company’s inventory balance was approximately $0.1 million, a reduction in $2.2 million due primarily to asset sales during 2019 related to the machinery and equipment held in Huntsville, Alabama.

Note 5 – Lessor Arrangement

On June 27, 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 6 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 6 – Equity Method Investments

On November 14, 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%. During 2019, the Company held a 50% share in the Oak Grove Asset Acquisitions LP, an entity formed for the execution of auction deals with Napier Park. The table below details the Company’s Joint Venture revenues and net income (loss) during the years ended December 31, 2019 and 2018 (in thousands):

F-13

	2019		2018
Revenues:
Oak Grove Asset Acquisitions LP	$	522	$	—
CPFH LLC		10,985		—
Total Revenues	$	11,507	$	—
Operating income (loss):
Oak Grove Asset Acquisitions LP	$	151	$	—
CPFH LLC		5,046		(115	)
Total operating income (loss)	$	5,197	$	(115	)

The table below details the summarized components of assets and liabilities, as at December 31, 2019 and 2018, of the Company’s Joint Ventures at those dates (in thousands):

	2019		2018
Assets:
Oak Grove Asset Acquisitions LP	$	1,602	$	—
CPFH LLC		20,016		11,064
Total assets	$	21,618	$	11,064
Liabilities:
Oak Grove Asset Acquisitions LP	$	797	$	—
CPFH LLC		10,245		168
Total liabilities	$	11,042	$	168

Note 7 – 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.

The table below shows the calculation of the shares used in computing diluted EPS:

	For the Year Ended December 31,
Weighted Average Shares Calculation:	2019		2018
Basic weighted average shares outstanding		28,662,297		28,581,654
Treasury stock effect of common stock options and restricted stock awards		609,078		313,273
Diluted weighted average common shares outstanding		29,271,375		28,894,927

For the years ended December 31, 2019 and 2018 there were potential common shares totaling approximately 0.7 million and 1.0 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

F-14

Note 8 – Leases

The Company leases office and warehouse space primarily in three locations: Del Mar, CA; Burlingame, CA; and Edwardsville, IL. 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,
Right-of-use assets:	2019
Del Mar, CA	$	745
Burlingame, CA		392
Edwardsville, IL		346
	$	1,483
	December 31,
Lease liabilities:	2019
Del Mar, CA	$	745
Burlingame, CA		429
Edwardsville, IL		345
	$	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 both years ended December 31, 2019 and 2018, lease expense was approximately $0.5 million. Undiscounted future minimum lease commitments as of December 31, 2019 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2020	$	578
2021		385
2022		277
2023		218
2024		176
Thereafter		30
Total undiscounted future minimum lease payments		1,664
Less: imputed interest		145
Present value of lease liabilities	$	1,519

Note 9 – 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.

F-15

The following summarizes the components of the Company’s property and equipment (in thousands):

	December 31, 2019			December 31, 2018
Furniture, fixtures and office equipment	$	214		$	228
Software and technology assets		333			326
		547			554
Accumulated depreciation		(326	)		(379	)
Property and equipment, net	$	221		$	175

Depreciation expense related to property and equipment was $70,000 and $69,000 for the years ended December 31, 2019 and 2018, respectively.

Note 10 – Intangible Assets and Goodwill

Intangible assets

The details of identifiable intangible assets as of December 31, 2019 and 2018 are shown below (in thousands except for lives):

Amortized Intangible Assets	Original Life (years)	Remaining Life (years)		Carrying Value December 31, 2018		Amortization			Carrying Value December31, 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
Amortized Intangible Assets	Original Life (years)	Remaining Life (years)		Carrying Value December 31, 2017		Amortization			Carrying Value December 31, 2018
Customer Network (HGP)	12	5.2		$	136	$	(22	)	$	114
Trade Name (HGP)	14	7.2			850		(104	)		746
Customer Relationships (NLEX)	7.6	3.1			440		(110	)		330
Website (NLEX)	5	0			14		(14	)		—
Total					1,440		(250	)		1,190
Unamortized Intangible Assets
Trade Name (NLEX)	N/A	N/A			2,437		—			2,437
Total				$	3,877	$	(250	)	$	3,627

Amortization expense during each of 2019 and 2018 was $0.2 million and $0.3 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, 2019, in the fourth quarter, and determined that no impairment charges were necessary.  

F-16

The estimated amortization expense during the next five fiscal years and thereafter is shown below (in thousands):

Year	Amount
2020	$	268
2021		270
2022		159
2023		129
2024		129
Total	$	955

Goodwill

As part of its acquisitions, the Company recognized goodwill of $0.6 million related to Equity Partners in 2011, $4.7 million related to HGP in 2012, and $3.5 million related to NLEX in 2014.

Goodwill consisted of the following at December 31, 2019 and 2018 (in thousands):

Acquisition	December 31, 2019		December 31, 2018
Equity Partners	$	—	$	573
HGP		2,040		2,040
NLEX		3,545		3,545
Total goodwill	$	5,585	$	6,158

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, 2019, in the fourth quarter, and determined that no additional impairment charges were necessary.

Note 11 – 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, 2019 and 2018.

F-17

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consisted of the following at December 31, 2019 and 2018 (in thousands):

	2019		2018
Due to auction clients	$	2,776	$	3,113
Remuneration and benefits		2,484		2,112
Due to Joint Venture partners		2,067		1,367
Accrued asset liquidation expenses		212		191
Accounting, auditing and tax consulting		187		140
Sales and other taxes		113		293
Customer deposits		—		600
Other		271		285
Total accounts payable and accrued liabilities	$	8,110	$	8,101

Note 12 – Debt

Outstanding debt is summarized as follows (in thousands):

	December 31,		December 31,
	2019		2018
Third party debt:
Current portion	$	403	$	1,178
Non-current portion		35		438
Total third party debt	$	438	$	1,616

In 2016, the Company entered into a related party secured promissory note with an entity owned by certain executive officers of the Company (the “Entity”) for a revolving line of credit (the “Line of Credit”).  Under the terms of the Line of Credit, the Company received a revolving line of credit with an aggregate borrowing capacity of $1.5 million.  Interest under the Line of Credit was charged at a variable rate.  Aggregate loans under the Line of Credit up to $1.0 million incurred interest at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%.  Amounts outstanding at any time in excess of $1.0 million incurred interest at a rate of 8.0% per annum.  The Company was required to pay the Entity an annual commitment fee of $15,000, payable on a monthly basis, and due regardless of amounts drawn against the line.  Further, the Entity was eligible to participate in the net profits and net losses of certain industrial auction principal and guarantee transactions entered into by the Company on or after January 1, 2017, and consummated on or prior to the maturity date.  Principal transactions are those in which the Company purchases assets for resale.  Guarantee transactions are those in which the Company guarantees its client a minimum amount of proceeds from the auction.  The Line of Credit matured at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following the date the Company closes a new credit facility with a financial institution. During 2018, the Company did not draw on the Line of Credit. The Company also incurred approximately $179,000 in expense based on the profit share provision for principal and guarantee transactions, as noted above. In connection with the Company entering into a new credit facility with a third party bank on September 27, 2018, the Company terminated the related party secured promissory note with the Entity.

In September 2018, Heritage Global Inc. entered into a secured promissory note and business loan agreement (the “Credit Facility”) with First Choice Bank, for a $1.5 million revolving line of credit. The 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 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. The Company began paying interest on the Credit Facility in regular monthly payments in November 2018. The Company may prepay the Credit Facility without penalty, subject to the minimum monthly interest charge. The Company is the borrower, with certain of the subsidiaries of the Company as guarantors under the Credit Facility. The Credit Facility is secured by a first priority security interest in all 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 draws under the Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including the preparation of timely financial statements, payment of taxes and disclosure of all material legal or administrative proceedings. The agreement governing the Credit Facility also contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with governmental requirements, timely submission of all filings with the Securities and Exchange Commission and payment of taxes. The Credit Facility

F-18

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.

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 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 Credit Facility to April 5, 2020, and (iii) raised the floor interest rate under the 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.

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 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 2019 the Company made the scheduled payments on the Note totaling $420,000. The outstanding balance on the Note as of December 31, 2019 was $438,000.

Note 13 – Fair Value Measurements

In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis, the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions:

• Level 1 – Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

• Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 – Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instruments valuation.

As of December 31, 2019 and 2018, the Company had no Level 1, Level 2 or Level 3 assets or liabilities measured at fair value.  As of December 31, 2017, the Company’s contingent consideration from the acquisition of NLEX in 2014 of $2.8 million, was the only financial asset or liability measured at fair value on a recurring basis, and was classified as Level 3 within the fair value hierarchy.  The final payment on the contingent consideration was paid during 2018. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market.

When valuing its Level 3 liabilities, the Company gives consideration to operating results, financial condition, economic and/or market events, and other pertinent information that would impact its estimate of the expected contingent consideration payment.  The valuation of the liability was primarily based on management’s estimate of the Net Profits of NLEX (as defined in the NLEX stock purchase agreement).  Given the short term nature of the contingent consideration periods, changes in the discount rate were not expected to have a material impact on the fair value of the liability.

F-19

The following table summarizes the changes in the fair value of the contingent consideration liability during 2018 (in thousands):

Balance at December 31, 2017	$	2,774
Payment of contingent consideration		(2,617	)
Fair value adjustment of contingent consideration		(157	)
Balance at December 31, 2018	$	—

Note 14 – 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 has a contractual obligation to make remaining guaranteed distribution payments to a partner totaling approximately $3.8 million by no later than May 26, 2020. As of December 31, 2019, the remaining guaranteed distribution payments the Company is obligated to make was approximately $0.8 million.

At December 31, 2019 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 15 – 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, 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 2018 and 2019 (in thousands):

Balance at December 31, 2017	$	29,932
Change during 2018		(999	)
Balance at December 31, 2018		28,933
Change during 2019		(11,294	)
Balance at December 31, 2019	$	17,639

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, 2019, in part because in the current year we have achieved three years of cumulative taxable income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred taxes of $1.8 million are realizable. It therefore reduced the valuation allowance accordingly.

At December 31, 2019 the Company has aggregate tax net operating loss carry forwards of approximately $83.2 million ($61.6 million of unrestricted net operating tax losses and approximately $21.6 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.

The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income before income tax expense for the following reasons in each of the years ending December 31 (in thousands):

	2019			2018
Expected federal statutory tax expense	$	625		$	963
Increase (reduction) in taxes resulting from:
State income taxes recoverable		258			198
Non-deductible expenses (permanent differences)		(15	)		42
Change in valuation allowance		(11,294	)		(999	)
Tax rate changes		9,522			(256	)
Other		(9	)		322
Income tax (benefit) expense	$	(913	)	$	270

F-20

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. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Street Capital and disposition of business interests by the Company. 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 2016 through 2018 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 deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows in (thousands):

	2019			2018
Net operating loss carry forwards	$	18,535		$	28,573
Stock based compensation		921			763
Trade names		(817	)		(763	)
Customer relationships		(59	)		(106	)
Equity method investments		(497	)		—
Other		(72	)		(118	)
Gross deferred tax assets		18,011			28,349
Less: valuation allowance		(17,639	)		(28,933	)
Deferred tax assets (liabilities), net of valuation allowance	$	372		$	(584	)

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 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% for our tax years beginning in 2018, which resulted in the re-measurement of the federal portion of our deferred tax liabilities as of December 31, 2017 from 35% to the new 21% tax rate; a reduction of approximately $1.5 million.

Under the guidance set forth in the SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”), the Company may record provisional amounts for the impact of the Tax Act. As of the third quarter of 2018, the Company had finalized its 2017 federal income tax return and as such, completed the accounting for the income tax effects of the Tax Act. Any future adjustments required due to additional guidance or changes in the interpretations of the Tax Act will be recorded as discrete adjustments to the income tax expense in the period in which such change occur.

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

F-21

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, 2019, 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 16 – Related Party Transactions

Pursuant to an agreement reached between Mr. Dove and board member Mr. Emmett DeMoss, and further approved by the remaining board members, one-half of Mr. Dove’s 2019 bonus is to be paid to Mr. Dove and the other half is to be paid directly to Mr. Emmett DeMoss from the Companyin 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 $108,000 and $105,000 for the years ended December 31, 2019 and 2018, respectively, and is included in selling, general and administrative expenses in the consolidated income statement.  All of the payments in both 2019 and 2018 were made to David Ludwig. On June 1, 2018, the Company amended its lease agreement with David Ludwig, whereby the term of the agreement extends to May 31, 2023 and the rent amounts were agreed upon for the new term.

In 2016 the Company entered into a secured related party loan agreement with certain executive officers of the Company which is more fully described in Note 12.  Both Ross Dove and Kirk Dove, who were parties to the related party loan, share equally in all payments made by the Company to satisfy obligations under the loan agreement. During the year ended December 31, 2018, the Company made payment of approximately $179,000 to the respective parties based on the profit share provision for principal and guarantee transactions that occurred in 2017 and the first three quarters of 2018. In connection with the Company entering into a new credit facility with a third party bank on September 27, 2018, the Company terminated the related party loan agreement.

During 2018, the Company paid David Ludwig $2.6 million for his final earn-out provision payment.    

Note 17 – 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.

Note 18 – 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.  

F-22

During 2018 and 2019 the Company issued 173,130 and 10,783 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. 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 2018 and 2019, 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, 2019, 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	2019			2018
Options outstanding, beginning of year		310,000			985,000
Options expired		(140,000	)		(660,000	)
Options forfeited		(150,000	)		(15,000	)
Options outstanding, end of year		20,000			310,000

The outstanding options vested over four years at an exercise price of $1.00 per share. 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 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 2018 and 2019, options to purchase 85,000 and 60,000 shares were granted to the Company’s independent directors as part of their annual compensation.

2010 Plan	2019		2018
Options outstanding, beginning of year		915,000		830,000
Options granted		60,000		85,000
Options outstanding, end of year		975,000		915,000

The outstanding options vest over four years at exercise prices ranging from $0.24 to $0.70 per share.   

F-23

Equity Partners Stock Option Plan

In 2011, the Company’s Board approved the Equity Partners Stock Option Plan (the “Equity Partners Plan”) to allow the Company to issue options to purchase common stock as a portion of the purchase price of Equity Partners. The Company reserved 230,000 shares of common stock for issuance upon exercise of options granted under the Equity Partners Plan. During 2011, options to purchase 230,000 shares with an exercise price of $1.83, vesting immediately, were granted under the Equity Partners Plan. During 2018, options to purchase 230,000 shares expired.

Equity Partners Plan	2018
Options outstanding, beginning of year		230,000
Options expired		(230,000	)
Options outstanding, end of year		—

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.

Other Options	2019			2018
Options outstanding, beginning of year		625,000			625,000
Options issued		265,000			—
Options expired		(625,000	)		—
Options outstanding, end of year		265,000			625,000

Heritage Global Inc. 2016 Stock Option Plan

On May 5, 2016, subject to the approval received by the stockholders of the Company on September 14, 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 2018 and 2019, options to purchase a total of 441,500 and 324,850 shares, respectively, were granted to the Company’s employees under the 2016 Plan.

On June 1, 2018, the Company issued options to purchase 300,000 shares of common stock to the employees of NLEX, in connection with the Addendum to the Employment Agreements of David Ludwig and Tom Ludwig. As of December 31, 2018, 173,130 shares of common stock were issued pursuant to the exercise of these common stock options. The remaining 126,870 shares expired as of July 31, 2018.

2016 Plan	2019			2018
Options outstanding, beginning of year		2,453,900			2,370,450
Options granted		324,850			441,500
Options exercised		(31,276	)		(173,130	)
Options expired		—			(126,870	)
Options forfeited		(395,624	)		(58,050	)
Options outstanding, end of year		2,351,850			2,453,900

The outstanding options under the 2016 Plan vest over four years at exercise prices ranging from $0.45 to $0.85 per share.

Stock-Based Compensation Expense

Total compensation cost related to stock options in both 2019 and 2018 was $0.3 million. These amounts were recorded in selling, general and administrative expense in both years. During 2019, options to purchase 31,276 shares were exercised.  During 2018, options to purchase 173,130 shares were exercised.  The tax benefit recognized by the Company related to these option exercises was not material.   

F-24

In connection with the stock option grants during 2019 and 2018, 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:

	2019		2018
Risk-free interest rate	2% - 3%		2% - 3%
Expected life (years)		6.8		3.2
Expected volatility	73%		83%
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 2019 and 2018:

	2019					2018
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		4,303,900		$	0.75		5,040,450		$	0.97
Granted		649,850		$	0.74		526,500		$	0.43
Exercised		(31,276	)	$	0.45		(173,130	)	$	0.43
Expired		(765,000	)	$	2.00		(1,016,870	)	$	1.74
Forfeited		(545,624	)	$	0.61		(73,050	)	$	0.77
Outstanding at end of year		3,611,850		$	0.51		4,303,900		$	0.75
Options exercisable at year end		2,157,336		$	0.46		2,533,700		$	0.96
Weighted-average fair value of options granted    during the year				$	0.50				$	0.17

As of December 31, 2018, the Company had 1,770,200 unvested options with a weighted average grant date fair value of $0.31 per share.  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, 2019, the total unrecognized stock-based compensation expense related to unvested stock options was $0.5 million, which is expected to be recognized over a weighted-average period of 2.5 years.

The total fair value of options vesting during the years ending December 31, 2019 and 2018 was $0.3 million and $0.3 million, respectively. 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.

The following table summarizes information about all stock options outstanding at December 31, 2019:

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		7.5	$	0.34		45,000		6.9	$	0.29
$ 0.42 to $ 0.48		2,792,250		7.0	$	0.45		2,022,336		6.9	$	0.45
$ 0.48 to $ 1.00		719,600		8.5	$	0.75		90,000		1.1	$	0.76
		3,611,850		7.3	$	0.51		2,157,336		6.7	$	0.46

At December 31, 2019 and 2018, the aggregate intrinsic value of exercisable options was $1.2 million and $11,000, respectively.

F-25

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.

On June 1, 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 $30,000 for the year ended December 31, 2018 and $52,000 for the year ended December 31, 2019. The unrecognized stock-based compensation expense as of December 31, 2018 and 2019 was approximately $0.2 million.

Note 19 – Subsequent Events

The Company has evaluated events subsequent to December 31, 2019 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 February 10, 2020, the Company entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “C3bank Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit. The C3bank Credit Facility matures on February 5, 2021 and replaces a secured promissory note, as amended, totaling $3.0 million. The Company is permitted to use the proceeds of the loan solely for its business operations.

F-26

EX-3.1

Exhibit 3.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

Heritage Global Inc.

ARTICLE I

NAME

The name of this corporation is “Heritage Global Inc.”

ARTICLE II

PURPOSES

This corporation may engage in any activity or business permitted under the laws of the United States of America and of this State.

ARTICLE III

CAPITAL STOCK

The maximum number of shares at stock which this corporation is authorized to have at any time is:

(a)COMMON STOCK

(1) Three Hundred Million (300,000,000) shares of common stock, having a par value of $0.01 per share (the “Common Stock”).

(2) Effective 12:01 am on November 28, 2003 (the “Effective Date”), each one (1) share of Common Stock of the Company’s issued and outstanding shall, by virtue of this amendment of the Company’s Articles of Incorporation, be combined into one-twentieth (1/20^th) of one (1) share of fully paid and non-assessable Common Stock of the Company, subject to treatment of fractional share interests described below. Following the effectiveness of these Articles of Amendment, the Company will evidence the reverse stock split effected by this paragraph (a)(2) pursuant to the procedures of the Company.

(i)No fractional shares of Common Stock of the Company shall be issued. No Stockholder of the Company shall transfer any fractional shares of Common Stock of the Company. The Company shall not recognize on its stock records books any purported transfer of any fractional shares of Common Stock of the Company.

(ii)A holder of Common Stock, who immediately prior to the Effective Date, owns a number of shares of Common Stock of the Company which is not evenly divisible by the

Exhibit 3.1

reverse split ratio shall, with respect to the fractional interest, be issued a number of shares of new Common Stock of the Company, rounded to the nearest whole number.

(b)PREFERRED STOCK

Ten million (10,000,000) shares of preferred stock, having a par value of $10.00 per share (the “Preferred Stock”). The Preferred Stock may be issued in one or more series. The Board of Directors shall have the authority to divide the Preferred Stock into one or more series and subject to the provisions and limitations set forth herein, to determine the relative rights and preferences of the shares of any series so established with regard to the rate or manner of payment of dividends, whether such shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption, sinking fund provisions, if any, for the redemption or purchase of such shares, the terms and conditions, if any, on which such shares may be converted, and voting rights, if any. Provided, however, except as to any rights and preferences as determined by the Board of Directors as set forth above, all shares of such Preferred Stock regardless of series shall be identical.

(c)12% CUMULATIVE CONVERTIBLE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 7,500 shares of Preferred Stock shall be designated 12% Cumulative Convertible Preferred Stock, shall have a par value of $10 per share, and shall have the following rights and preferences:

1. Dividends. The holders of the shares of 12% Cumulative Convertible Preferred Stock shall be entitled to receive out of any assets at the time legally available therefor and when and as declared by the Board of Directors dividends at the rate of One Dollar and Twenty Cents ($1.20) per share per annum, and no more, payable in cash quarterly commencing on April 1, 1992, and continuing on the first day of July, October, January, and April of each year that any shares of 12% Cumulative Convertible Preferred Stock are outstanding. Such dividends are prior and in preference to any declaration or payment of any distribution (as defined below) on the Common Stock of the Company. Such dividends shall accrue on each share of 12% Cumulative Convertible Preferred Stock from day to day from the date of initial issuance thereof whether or not earned or declared, so that if such dividends with respect to any previous dividend period at the rate provided for herein have not been paid on, or declared and set apart for, all shares of 12% Cumulative Convertible Preferred Stock at the time outstanding, the deficiency shall be fully paid on, or declared and set apart for, such shares before any distribution shall be paid on, or declared and set apart for, the Common Stock.

For purposes of this Subpart (c) of Article III, unless the context otherwise requires, the term “distribution” shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock, on the repurchase or redemption of shares of capital stock of the Company (other than redemptions provided for in Subsection 3 of this Subpart (c) of Article III or repurchases of Common Stock held by employees of the Company upon termination of their employment pursuant to agreements providing for such repurchase) for cash or property.

Exhibit 3.1

2. Voting Rights.Each share of 12% Cumulative Convertible Preferred Stock shall entitle the holder thereof to 40 votes on all matters submitted to a vote of the Company’s shareholders.

3. Redemption.

(a) The Company may, at any time after issuance of the 12% Cumulative Convertible Preferred Stock, call for redemption at the Redemption Price (as defined below) any or all of the outstanding shares of 12% Cumulative Convertible Preferred Stock in accordance with this Subsection 3. If the Company redeems less than all the outstanding shares of 12% Cumulative Convertible Preferred Stock, the Company shall redeem from each holder a number of shares of 12% Cumulative Convertible Preferred Stock that bears the same proportion to all the shares of 12% Cumulative Convertible Preferred Stock to be redeemed as the shares of 12% Cumulative Convertible Preferred Stock held of record by the holder bears to all the shares of 12% Cumulative Convertible Preferred Stock at the time outstanding. However, if a fraction of a share would be redeemed from any holder, the Company may, in order to avoid the redemption of a fractional share, redeem the next higher whole number of shares from the holder or, at its option, add that fraction to the shares to be redeemed from any other holder or holders.

(b) The Company shall mail notice of any redemption by certified mail, postage prepaid, to each holder of record of the shares of the 12% Cumulative Convertible Preferred Stock to be redeemed, at his or her address registered with the Company, which notice shall be accompanied by payment in full of the Redemption Price. The date of the mailing of notice of redemption shall be the Redemption Date.

(c) If notice of redemption has been mailed and the Company has made payment of the Redemption Price, on the Redemption Date all rights of the holders of the shares, as shareholders of the Company by reason of the ownership of the shares, shall cease, and after the Redemption Dare the shares shall not be outstanding. If less than all the shares represented by any certificate are redeemed, a new certificate, representing the unredeemed shares, shall be issued to the holder thereof without cost (except for the payment of any applicable transfer taxes) to the holder.

(d) To facilitate the redemption of any shares of 12% Cumulative Convertible Preferred Stock, the Board of Directors is authorized to cause the transfer books of the Company to be closed as to such shares as of the record date for determining the holders of 12% Cumulative Convertible Preferred Stock entitled to notice of redemption.

(e) For purposes of this Subpart (c) of Article III, the term “Redemption Price” shall mean $10.50 per share of 12% Cumulative Convertible Preferred Stock.

(f) In the event that the shares of 12% Cumulative Convertible Preferred Stock are redeemed, the Board of Directors reserves the right to further amend the Company’s Articles of Incorporation to amend and re-designate the rights and preferences applicable to the shares of Preferred Stock designated herein as 12% Cumulative Convertible Preferred Stock.

Exhibit 3.1

4. Optional Conversion Into Common Stock.

(a) Subject to the provisions of Subsection 3 of Subpart (c) of Article III regarding Redemption, and subject to the terms and conditions of this Subsection 4, the holder of any share or shares of 12% Cumulative Convertible Preferred Stock has the right at any time after the expiration of six months after the issuance of the shares of 12% Cumulative Convertible Preferred Stock at its option to convert all or a portion of the shares of 12% Cumulative Convertible Preferred Stock held by it into such number of whole shares of Common Stock as is determined by multiplying the number of shares of 12% Cumulative Convertible Preferred Stock converted by 40. However, on any liquidation of the Company, the right of conversion shall terminate at the close of business on the last full business day before the date fixed for payment of the amount distributable on the 12% Cumulative Convertible Preferred Stock. The holder may exercise this right of conversion only by giving written notice that the holder elects to convert a stated number of shares of the 12% Cumulative Convertible Preferred Stock into shares of Common Stock on the date specified in the notice and surrendering to the Company a certificate or certificates for the 12% Cumulative Convertible Preferred Stock to be converted, at its principal office, at any time during its usual business hours on or before the date set forth in the notice, together with a statement of the name or names (with addresses) in which the certificate or certificates for Common Stock should be issued.

(b) Promptly after the receipt of the written notice referred to above and surrender of the share or shares of 12% Cumulative Convertible Preferred Stock to be converted, the Company shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares. No fractional shares shall be issued upon conversion of the 12% Cumulative Convertible Preferred Stock into shares of Common Stock. To the extent permitted by law, the conversion shall be deemed to have been effected as of the close of business on the date specified in the written notice, and at that time the rights of the holder of the share or shares, as such a holder, shall cease, and the holder of the 12% Cumulative Convertible Preferred Stock shalt become the holder of record of the shares of Common Stock.

5. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of shares of the 12% Cumulative Convertible Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus, or earnings, before any payment shall be made in respect of the Common Stock, an amount equal to Ten Dollars ($10.00) per share, plus all accrued and unpaid dividends thereon to the date fixed for distribution. After setting apart or paying in full the preferential amounts due the holders of the 12% Cumulative Convertible Preferred Stock, the remaining assets of the Company available for distribution to stockholders, if any, shall be distributed exclusively to the holders of Common Stock, each such issued and outstanding share of Common Stock entitling the holder thereof to receive an equal proportion of said remaining assets. If upon liquidation, dissolution, or winding up of the Company, the assets of the Company available for distribution to its shareholders shall be insufficient to pay the holders of the 12% Cumulative Convertible Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the 12% Cumulative Convertible Preferred Stock shall share ratably in any distribution of assets according to the respective amounts

Exhibit 3.1

which would be payable in respect of the shares held by themupon such distribution if all amounts payable on or with respect to said shareswere paid in full. Neither a consolidation nor merger of the Company into orwith any other corporation or corporations, nor the merger of any othercorporation into the Company, nor the sale or transfer by the Company of all orany part of its assets, nor a reorganization of the of The Company, nor the purchase orredemption of all or part of the outstanding shares of any class or classes of thecapital stock of the Company, nor a reduction of the capital stock of the Companyshall be deemed to be a liquidation, dissolution, or winding up of the Companywithin the meaning of any of the provisions of this Subsection 5.

(d) CLASS A VARIABLE RATE CUMULATIVE CONVERTIBLE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 200,000 shares of Preferred Stock shall be designated Class A Variable Rate Cumulative Convertible Preferred Stock (“Class A Preferred Stock”), shall have a par value of $10.00 per share, and shall have the following rights and preferences:

1. Dividends. The holders of the shares of Class A Preferred Stock shall be entitled to receive out of any assets at the time legally available therefor and when and as declared by the Board of Directors cumulative dividends at the rate of 5.55% per annum; provided, however, the dividend rate shall be adjusted monthly commencing on April 1, 1992, and continuing on the first day of each and every month thereafter while each share of Class A Preferred Stock is outstanding. The dividend rate for each such month shall be equal to the published rate paid by Texas Commerce Bank, National Association, Houston, Texas, on 30-day certificates of deposit in effect on the first day of each such month plus 2%. Dividends shall be payable in cash quarterly commencing on April 1, 1992, and continuing on the first day of July, October, January and April of each year that any shares of Class A Preferred Stock are outstanding. Such dividends are prior and in preference to any declaration or payment of any distribution (as defined below) on the Common Stock of the Company. Such dividends shall accrue on each share of Class A Preferred Stock from day to day from the date of initial issuance thereof whether or not there are funds legally available for payment of dividends, or such dividends are earned or declared, so that if such dividends with respect to any previous dividend period at the rate provided for herein have not been paid on, or declared and set apart for, all shares of Class A Preferred Stock at the time outstanding, the deficiency shall be fully paid on, or declared and set apart for, such shares before any distribution shall be paid on, or declared and set apart for, the Common Stock.

For purposes of this Subpart (d) of Article III, unless the context otherwise requires, the term “distribution” shall mean the transfer of cash or property without consideration, or issuance of indebtedness, whether by way of dividend or otherwise, payable other than in Common Stock, as a dividend on any class or series of capital stock of the Company on the repurchase or redemption of shares of capital stock of the Company (other than repurchases of Common Stock held by employees of the Company upon termination of their employment pursuant to agreements providing for such repurchase) for cash or property or as a payment by the Company in liquidation of all or a portion of its assets.

Exhibit 3.1

2. Voting Rights.Each share of Class A Preferred Stock shallentitle the holder thereof to the number of votes which is equal to the number ofshares of Common Stock into which the Class A Preferred Stock is convertiblepursuant to Subsection 4 at the time the vote is take, on all matters submitted to a vote of the Company’s shareholders. Except as otherwise provided herein orrequired law, holders of shares of Class A Preferred Stock shall vote with theholders of shares of Common Stock and any other class of stock entitled to voteand not as a separate class.

3. [Intentionally omitted.]

4. Optional Conversion Into Common Stock.

(a) Subject the terms and conditions of this Subsection 4, the holder of any share or shares of Class A Preferred Stock has the right at any time after the issuance of the shares of Class A Preferred Stock at its option to convert all or a portion of the shares of Class A Preferred Stock held by it into such number of whole shares of Common Stock as is determined by multiplying the number of shares of Class A Preferred Stock by a fraction, the numerator of which is $10.00 and the denominator is the Conversion Price (as hereinafter defined). However, on any liquidation of the Company, the right of conversion shall terminate at the close of business on the last full business day before the date fixed for payment of the amount distributable on the Class A Preferred Stock. The holder may exercise this right of conversion only by giving written notice that the holder elects to convert a stated number of shares of the Class A Preferred Stock into shares of Common Stock on the date specified in the notice and surrendering to the Company a certificate or certificates for the Class A Preferred Stock to be converted, at its principal office, at any time during its usual business hours on or before the date set forth in the notice, together with a statement of the name or names (with addresses) in which the certificate or certificates for Common Stock should be issued.

(b) Promptly after the receipt of the written notice referred to above and surrender of the share or shares of Class A Preferred Stock to be converted, the Company shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such shares or shares. No fractional shares shall be issued upon conversion of the Class A Preferred Stock into shares of Common Stock. To the extent permitted by law, the conversion shall be deemed to have been effected as of the close of business on the date specified in the written notice, and at that time the rights of the holder of the share or shares, as such a holder, shall cease, and the holder of Class A Proffered Stock shall the holder of record of the shares of Common Stock.

(c) The conversion price per share of Common Stock as of any date (the “Conversion Price”) shall be $.058375 (the “Initial Conversion Price”), as adjusted from time to time in accordance with paragraph (d) of this Subsection 4.

(d) (1) In the event that the Company shall make any distribution of its assets upon or with respect to its Common Stock, as a liquidating or partial liquidating dividend, each holder of a share of Class A Preferred Stock shall, upon the exercise of his right to convert after the record date for such distribution or, in the absence of a record date, after the date of such distribution, receive, in addition to the shares subscribed for, the amount of such assets (or, at the

Exhibit 3.1

option of the Company, a sum equal to the value thereof at the time of distribution as determined by the Board of Directors in its solediscretion) which would have been distributed to such holder if he had exercised his right to convert immediately prior to the record date for such distribution or,in the absence of a record date, immediately prior to the date of such distribution.

(2) If at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(3) If any capital reorganization or reclassification of the capital of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation, shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities, or assets with respect to or in exchange for their shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, each holder of a share(s) of Class A Preferred Stock shall have the right thereafter for so long as such share(s) is outstanding to convert such share(s) into the kind and amount of stock, securities, or assets receivable upon such reorganization, reclassification, consolidations, merger, or sale by a holder of the number of shares of Common Stock into which such share(s) of Class A Preferred Stock might have been converted immediately prior to such reorganization, reclassification, consolidations, merger, or sale, subject to adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for herein.

(4) Before taking any action which would cause an adjustment reducing the Conversion Price at any time in effect below the then par value of the shares of Common Stock issuable upon conversion of shares of Class A Preferred Stock, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such Conversion Price as so adjusted.

(5) Whenever the Conversion Price is adjusted, as herein provided, the Company shall send to each holder of a share of Class A Preferred Stock a certificate of a firm of independent public accountants (who may be the accountants regularly employed by the Company) selected by the Board of Directors setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring adjustment.

(6) In case:

(1) the Company shall declare a dividend (or any other distribution) on its Common Stock; or

Exhibit 3.1

(2) the Company shall authorize the granting to holders of shares of Common Stock of rights to subscribe for or purchase any shares of capital stock of any class or any other rights; or

(3) of any capital reorganization or reclassification of the capital stock of the Company or of any consolidation or merger of the Company with another corporation, or of the sale of all or substantially all of its assets to another corporation which is to be effected in such a way that holders of the Common Stock shall be entitled to receive stock, securities, or other assets with respect to or in exchange for Common Stock; or

(4) of the voluntary or involuntary dissolution, liquidation, or winding up of the Company;

then the Company shall promptly send to the holder of each share of Class A Preferred Stock, at least 30 days prior to the applicable record date hereinafter specified, a notice stating (1) the date on which a record is to be taken for the purpose of such dividend or distribution of rights, or, if a record date is not to be taken, the date as of which the holders of shares of Common Stock of record would be entitled to such dividend or distribution of rights, or (2) the date on which such capital reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up is expected to become effective, and the date as of which it is expected that the holders of shares of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other assets deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up.

5. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of shares of the Class A Convertible Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus, or earnings, before any payment shall be made in respect of the Class B Preferred Stock or Common Stock, an amount equal to Ten Dollars ($10.00) per share, plus all accrued and unpaid dividends thereon to the date fixed for distribution. After setting apart or paying in full the preferential amounts due the holders of the Class A Preferred Stock, the remaining assets of the Company available for distribution to stockholder, if any, shall be distributed exclusively to the holders of Class B Preferred Stock or Common Stock. If upon liquidation, dissolution, or winding up of the Company, the assets of the Company available for distribution to its shareholders shall be insufficient to pay the holders of the Class A Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the Class A Preferred Stock shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. Neither a consolidation nor merger of the Company into or with any other corporation or corporations, nor the merger of any other corporation into the Company, nor the sale or transfer by the Company of all or any part of its assets nor a reorganization of the Company, nor the purchase or redemption of all or part of the outstanding shares of any class or classes of the capital stock of the Company, nor a reduction of the capital stock of the Company shall be deemed to be a liquidation, dissolution, or winding up of the Company within the meaning of any of the provisions of this Subsection 5.

Exhibit 3.1

(e) CLASS B VARIABLE RATE CUMULATIVE CONVERTIBLE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 22,500 shares of Preferred Stock shall be designated Class B Variable Rate Cumulative Convertible Preferred Stock (“Class B Preferred Stock”), shall have a par value of $10.00 per share and shall have the following rights and preferences:

1. Dividends. The holders of the shares of Class B Preferred Stock shall be entitled to receive out of any assets at the time legally available therefor and when and as declared by the Board of Directors cumulative dividends at the rate of 5.55% per annum; provided, however, the dividend rate shall be adjusted monthly commencing on April 1, 1992, and continuing on the first day of each and every month thereafter while each share of Class B Preferred Stock is outstanding. The dividend rate for each such month shall be equal 10 the published rate paid by Texas Commerce Bank, National Association, Houston, Texas, on 30-day certificates of deposit in effect on the first day of each such month plus 2%. Dividends shall be payable in cash quarterly commencing on April 1, 1992, and continuing on the first day of July, October, January, and April of each year that any shares of Class B Preferred Stock are outstanding. Such dividends are prior and in preference to any declaration or payment of any distribution (as defined below) on the Common Stock of the Company. Such dividends shalt accrue on each share of Class B Preferred Stock from day to day from the date of initial issuance thereof whether or not there are funds legally available for payment of dividends, or such dividends are earned or declared, so that if such dividends with respect to any previous dividend period at the rate provided for herein have not been paid on, or declared and set apart for, all shares of Class B Preferred Stock at the time outstanding, the deficiency shall be fully paid on, or declared and set apart for, such shares before any distribution shall be paid on, or declared and set apart for, the Common Stock.

For purposes of this Subpart (e) of Article III, unless the context otherwise requires, the term “distribution” shall mean the transfer of cash or property without consideration, or issuance of indebtedness, whether by way of dividend or otherwise, payable other than in Common Stock, as a dividend on any class or series of capital stock of the Company on the repurchase or redemption of shares of capital stock of the Company (other than redemptions provided for in Subsection 3 of this Subpart (d) of Article III or repurchases of Common Stock held by employees of the Company upon termination of their employment pursuant to agreements providing for such repurchase) for cash or property or as a payment by the Company in liquidation of all or a portion of its assets.

2. Voting Rights. Except as otherwise provided by law, the shares of Class B Preferred Stock shall have no voting rights.

3. Redemption.

(a) The Company may, at any time after issuance of the Class B Preferred Stock, call for redemption at the Redemption Price (as defined below) any or all of the outstanding shares of Class B Preferred Stock in accordance with this Subsection 3. The Company shall mail notice of any redemption by certified mail, postage prepaid, to each holder of record of the shares

Exhibit 3.1

of the Class B Preferred Stock to be redeemed, at his or her address registered with the Company, which notice shall be accompanied by payment in full of the Redemption Price. The date of the mailing of notice of redemption shall be the Redemption Date.

(b) If notice of redemption has been mailed and the Company has made payment of the Redemption Price, on the Redemption Date all rights of the holders of the shares, as shareholders of the Company by reason of the ownership of the shares, shall cease, and after the Redemption Dare the shares shall not be outstanding. If less than all the shares represented by any certificate are redeemed, a new certificate, representing the unredeemed shares, shall be issued to the holders thereof without cost (except for the payment of any applicable transfer taxes) to the holder. If called for redemption, the right to convert Class B Preferred Stock to Common Stock pursuant to Subsection 4 shall terminate on the close of business on the day before the date fixed for actual payment of the Redemption Price unless the Company shall default in paying the Redemption Price.

(c) To facilitate the redemption of any shares of Class B Preferred Stock, the Board of Directors is authorized to cause the transfer books of the Company to be closed as to such shares as of the record date for determining the holders of Class B Preferred Stock entitled to notice of redemption.

(d) For purposes of this Subpart (e) of Article III, the term “Redemption Price” shall mean $10.00 per share of Class B Convertible Preferred Stock, plus the amount of any accrued and unpaid dividends on such share on the date payment of the Redemption Price is paid.

4. Optional Conversion Into Common Stock.

(a) Subject to the provisions of Subsection 3 of this Subpart (e) of Article III regarding redemption, and subject to the terms and conditions of this Subsection 4, the holder of any share or shares of Class B Preferred Stock has the right at any time after the issuance of the shares of Class B Preferred Stock at its option to convert all or a portion of the shares of Class B Preferred Stock held by it into such number of whole shares of Common Stock as is determined by multiplying the number of shares of Class B Preferred Stock by a fraction, the numerator of which is S 10.00 and the denominator is the Conversion Price (as hereinafter defined). However, on any liquidation of the Company, the right of conversion shall terminate at the close of business on the last full business day before the date fixed for payment of the amount distributable on the Class B Preferred Stock. The holder may exercise this right of conversion only by giving written notice that the holder elects to convert a stated number of shares of the Class B Preferred Stock into shares of Common Stock on the date specified in the notice and surrendering to the Company a certificate or certificates for the Class B Preferred Stock to be converted, at its principal office, at any time during its usual business hours on or before the date set forth in the notice, together with a statement of the name or names (with addresses) in which the certificate or certificates for Common Stock should be issued.

(b) Promptly after the receipt of the written notice referred to above and surrender of the share or shares of Class B Preferred Stock to be converted, the Company shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the number of whole shares of Common Stock Issuable upon the conversion of such share or

Exhibit 3.1

shares. Nofractional shares shall be issued upon conversion of the Class B Preferred Stockinto shares of Common Stock. To the extent permitted by law, the conversionshall be deemed to have been effected as of the close of business on the datespecified in the written notice, and at that time the rights of the holder of theshare or shares, as such a holder, shall cease, and the holder of the Class BPreferred Stock shall become the holder of record of the shares of CommonStock.

(c) The conversion price per share of Common Stock as of any date (the “Conversion Price”) shall be $.058375 (the “Initial Conversion Price”), as adjusted from time to time in accordance with paragraph (d) of this Subsection 4.

(d) (1) In the event that the Company shall make any distribution of its assets upon or with respect to its Common Stock, as liquidating or partial liquidating dividend, each holder of a share of Class B Preferred Stock shall, upon the exercise of his right to convert after the record date for such distribution or, in the absence of a record date, after the date of such distribution, receive, in addition to the shares subscribed for, the amount of such assets (or, at the option of the Company. a sum equal to the value thereof at the time of distribution as determined by the Board of Directors in its sole discretion) which would have been distributed to such holder if he had exercised his right to convert immediately prior to the record date for such distribution or, in the absence of a record date, immediately prior to the date of such distribution.

(2) If at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(3) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation, shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities, or assets with respect to or in exchange for their shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, each holder of a share(s) of Class B Preferred Stock shall have the right thereafter for so long as such share(s) is outstanding to convert such share(s) into the kind and amount of stock, securities, or assets receivable upon such reorganization, reclassification, consolidations, merger, or sale by a holder of the number of shares of Common Stock into which such share(s) of Class B Preferred Stock might have been converted immediately prior to such reorganization, reclassification, consolidations, merger, or sale, subject to adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for herein.

(4) Before taking any action which would cause an adjustment reducing the Conversion Price at any time in effect below the then par value of the shares of Common Stock issuable upon conversion of shares of Class B Preferred Stock, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue

Exhibit 3.1

fully paid andnonassessable shares of such Common Stock at such Conversion Price as soadjusted.

(5) Whenever the Conversion Price is adjusted, as herein provided, the Company shall send to each holder of a share of Class B Preferred Stock a certificate of a firm of independent public accountants (who may be the accountants regularly employed by the Company) selected by the Board of Directors setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring adjustment.

(6) In case:

(1) the Company shall declare a dividend (or any other distribution) on its Common Stock; or

(2) the Company shall authorize the granting to holders of shares of Common Stock of rights to subscribe for or purchase any shares of capital stock of any class or any other rights; or

(3) of any capital reorganization or reclassification of the capital stock of the Company or of any consolidation of merger of the Company with another corporation, or of the sale of all or substantially an of its assets to another corporation which is to be effected in such a way that holders of the Common Stock shall be entitled to receive stock securities, or other assets with respect to or in exchange for Common Stock; or

(4) of the voluntary or involuntary dissolution, liquidation, or winding up of the Company;

then the Company shall promptly send to the holder of each share of Class B Preferred Stock, at least 30 days prior to the applicable record date hereinafter specified, a notice stating (1) the date on which a record is to be taken for the purpose of such dividend or distribution of rights, or, if a record date is not to be taken, the date as of which the holders of shares of Common Stock of record would be entitled to such dividend or distribution of rights, or (2) the date on which such capital reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up is expected to become effective, and the date as of which it is expected that the holders of shares of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other assets deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up.

5. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of shares of the Class B Preferred Stock then outstanding shalt be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus, or earnings, before any payment shall be made in respect of the Common stock, an amount equal to Ten Dollars ($10.00) per share, plus all accrued and unpaid dividends thereon to the date fixed for distribution. After setting apart or paying in full the preferential amounts due the holders of the Class B Preferred Stock, the remaining assets of the Company available for distribution to stockholders, if any, shalt be

Exhibit 3.1

distributed exclusivelyto the holders of Common Stock, each such issued and outstanding share ofCommon Stock entitling the holder thereof to receive an equal proportion of saidremaining assets. If upon liquidation, dissolution, or winding up of the Company, the assets of the Company available for distribution to its shareholdersshall be insufficient to pay the holders of the Class B Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the Class BPreferred Stock shall share ratably in any distribution of assets according to therespective amounts which would be payable in respect of the shares held by themupon such distribution if all amounts payable on or with respect to said shareswere paid in full. Neither a consolidation nor merger of the Company into orwith any other corporation or corporations, nor the merger of any othercorporation into the Company, nor the sale or transfer by the Company of all orany part of its assets, nor a reorganization of the Company, nor the purchase orredemption of all or part of the outstanding shares of any class or classes of thecapital stock of the Company, nor a reduction of the capital stock of the Companyshall be deemed to be a liquidation, dissolution, or winding up of the Companywithin the meaning of any of the provisions of this Subsection 5

(f)CLASS C CONVERTIBLE CUMULATIVE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 240,000 shares of Preferred Stock shall be designated as Class C Convertible Cumulative Redeemable Preferred Stock (the “Class C Preferred Stock”), shall have a par value of $10.00 per share, and shall have the following rights and preferences:

1. Dividends. The holders of the Class C Preferred Stock shall be entitled to cumulative preferential dividends, when, as and if declared by the Board of Directors on a quarterly basis on November 15, February 15, May 15 and August 15 each year in an amount equal to eight percent (18%) per annum of the liquidation preference per share of $60.00. In the event the Corporation has not filed a registration statement relating to the Conversion Shares (as hereinafter defined) under the Securities Act of 1933, as amended (the “Act”), within 12 months of the final closing of the private placement of the Class C Preferred Stock by the Corporation (the “Final Closing”) and such registration statement is not declared effective under the Act within such 12-month period, the cumulative preferential dividend rate shall be increased to twelve percent (12%) per annum of the liquidation preference per share of $60.00. Dividends may be paid (to the extent permissible under the Florida Business Corporation Act) to the holders of the Class C Preferred Stock in cash or, at the option of the Company, in shares (the “Dividend Shares”) of common stock of the Corporation, par value $.007 per share (the “Common Stock”) (based upon the last sale price of a share of Common Stock (or the five (5) trading days preceding the record date for a particular dividend) provided that such Dividend Shares are covered by a registration statement which has been declared effective under the Act.

2. Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, each share of Class C Preferred Stock shall have a liquidation preference of $60.00 per share.

3. Voting Rights. Except as otherwise required by applicable law, the Class C Preferred Stock shall have no voting rights.

Exhibit 3.1

4. Redemption. The Corporation may, at its option, (a) redeem shares of Class C Preferred Stock at any time prior to the fourth anniversary of the Final Closing on not less than thirty (30) nor more than sixty (60) days’ written notice to such holders at a redemption price equal to $60.00 per share plus accrued and unpaid dividends provide that: (i) shares of Common Stock issuable upon conversion of shares of Class C Preferred Stock (the “Converted Shares”) are covered by a registration statement which has been declared effective under the Act, or the Conversion Shares are otherwise exempt from registration under the Act in the opinion of counsel to the Company, and (ii) during the immediately preceding thirty (30) consecutive trading days ending within fifteen (15) days of the date of notice of redemption to the holders, the closing bid price of the Corporation’s Common Stock in not less than $8.00 per share.

(b) redeem shares of Class C Preferred Stock at any time after the fourth anniversary of the Final Closing on not less than thirty (30) nor more than sixty (60) days’ written notice to such holders at a redemption price equal to $90.00 per share plus accrued and unpaid dividends provided that the Conversion Shares are covered by a registration statement which has been declared effective under the Act or the Conversion Shares are otherwise exempt from registration under the Act in the opinion of counsel to the Company.

5. Conversion Into Common Stock.(a) Subject to the terms and conditions of subsections (a) and (b) of this Section 5, and unless previously redeemed, issued and outstanding shares of Class C Preferred Stock may be converted, at the option of the holder, at any time after three (3) months from the first closing of the private placement of the Class C Preferred Stock by the Corporation (the “First Closing”) into such number of shares of the Corporation’s Common Stock (the “Conversion Shares” ) as shall equal $60.00 divided by the lower of (a) $2.50 or (b) the closing bid price for any five consecutive trading days during the period commencing on the Final Closing and ending eighteen months thereafter (but in no event less than $1.25) (the “Conversion Price”) subject to adjustment as set forth below.

(b) On the fifth anniversary of the Final Closing (the “Conversion Date”), and with no other action required by the Corporation or the holder of the Class C Preferred Stock, the shares of Class C Preferred Stock held by each holder thereof shall be converted into such number of whole shares of Common Stock at a Conversion Price equal to the lower of the then current Conversion Price or 50% of the average closing bid price of the Common Stock for the ten (10) trading days immediately preceding the fifth anniversary of the Final Closing.

(c) The Conversion Price shall be subject to adjustment as follows:

(i) In case the Corporation shall subdivide the number of outstanding shares of the Common Stock into a greater number of shares or shall contract the number of outstanding shares of its Common Stock into a lesser number of shares, the Conversion Price then in effect shall be adjusted, effective at the close of business on the record date for the determination of stockholders entitled to receive the same, to the price (computed to the nearest cent) determined by dividing (A) the product obtained by multiplying the Conversion Price in effect immediately prior to the close of business on such record date by the number of shares of Common Stock outstanding prior to such subdivision or contraction, by (B) the number of shares of Common Stock outstanding immediately after such subdivision or contraction;

Exhibit 3.1

(ii) In the event that the Corporation shall issue or sell shares of its Common Stock (except for shares issuable upon exercise or conversion of securities outstanding or issuable by the Company as of December 18, 1995) at a price per share less than the then current Conversion Price (the “New Issue Price”), the Conversion Price shall be reduced to the greater of the New Issue Price or $1.25 per share; and

(iii) In the event that the Corporation’s registration statement under the Act registering the Conversion Shares is not declared effective within twelve (12) months after the Final Closing, the Conversion Price shall be subject to an additional reduction of 10% for each 90-day delay in the effective date of such registration statement, provided however that in no event shall the Conversion Price be less than $1.25 per share.

(d) Promptly after the receipt of certificates representing Class C Preferred Stock and surrender of Class C Preferred Stock, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such Class C Preferred Stock. No fractional shares shall be issued upon conversion of the Class C Preferred Stock into shares of Common Stock. To the extent permitted by law, the conversion shall be deemed to have been effected as of the close of business on the Conversion Date (or on the next preceding business day if the Conversion Date is not a business day) and at that time the rights of the holder of Class C Preferred Stock, as such holder, shall cease, and the holder of the Class C Preferred Stock shall become the holder of record of shares of Common Stock.

(e) Notwithstanding anything herein to the contrary, on any liquidation of the Corporation, the right of conversion of the Class C Preferred Stock shall terminate at the close of business on the last full business day before the date fixed for payment of the amount distributable on the Class C Preferred Stock.

6. Registration Rights. The Corporation, within twelve (12) months of the Final Closing, shall file a registration statement registering the reoffer and resale of the Conversion Shares by the Holders thereof; provided, however, that in the event the Company files a registration statement prior to the expiration of twelve (12) months from the Final Closing, the Conversion Shares shall be included in such registration statement to the extent permitted by law. In the event that the registration statement is not declared effective within such 12-month period, the Conversion Price will be reduced as provided by Subsection 5(a) of this Subpart (f) of Article III, and dividends payable on the Class C Preferred Stock will be increased as provided by Subsection 1 of this Subpart (f) of Article III.

7.Lock-up. The Conversion Shares and Dividend Shares may not be publicly sold until after the first anniversary of the Final Closing without the prior written consent of Commonwealth Associates.

8.Rank.With respect to the payment of dividends and rights to redemption and upon liquidation, the shares of the Class C Preferred Stock shall be subordinate to any issued and

Exhibit 3.1

outstanding shares of Class A Preferred Stock and Class B Preferred Stock of the Corporation and shall rank senior to the shares ofCommon Stock of the Corporation.

(g)SERIES D PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 1,000 shares of Preferred Stock shall be designated as a new Series D Preferred Stock (the “Series D Preferred Stock”), which shall have a par value of $10.00 per share, and which shall have the following rights and preferences:

1. Dividends. If and when dividends are declared by the Board of Directors on the shares of Common Stock, the holders of Series D Preferred Stock shall be entitled to receive the same dividend as declared on the shares of Common Stock based on the number of shares of Common Stock which would have been held by the holder of each issued and outstanding share of Series D Preferred Stock if that share of Series D Preferred Stock had been converted in accordance with Section III(h)(3) below to shares of Common Stock immediately prior to the record date for the dividend.

2. Voting Rights. Except as otherwise required by applicable law, the Class D Preferred Stock shall have no voting rights.

3. Conversion Into Common Stock.

(i) Subject to the terms and conditions of this Section III(g)(3), each issued and outstanding share of Series D Preferred Stock may be converted, at the option of the holder at any time within the nine (9) month period beginning September 2, 1997 and ending on June 1, 1998 (the “Conversion Period”) into such number of shares of Common Stock (the “Conversion Shares”) as shall equal 6250 divided by the lower of (a) $9.25, or (b) the average closing bid price of the Common Stock for the five (5) consecutive trading days immediately preceding the Conversion Date as established in Sub-section (iii) below.

(ii) Each issued and outstanding share of Series D Preferred Stock which has not been converted to Common Stock at the election of the holder thereof during the Conversion Period pursuant to Sub-section (i) above, shall be automatically converted to Common Stock effective on the last day of the Conversion Period on the same basis as calculated and established for that date in Sub-section (i) above.

(iii) The holder may exercise this right of conversion only by delivering written notice to the Company that the holder elects to convert a stated number of shares of Series D Preferred Stock into shares of Common Stock (“Conversion Date”) and surrendering to the Company a certificate or certificates for the shares of the Series D Preferred Stock to be converted, at the principal office of the Company, at any time during its usual business hours on the Conversion Date.

(iv) Promptly after the receipt of certificates representing Series D Preferred Stock and surrender of Series D Preferred Stock, the Company shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the number of whole shares of

Exhibit 3.1

Common Stock issuable upon the conversion of such Series D Preferred Stock. No fractional shares shall be issued upon conversion of the Series D Preferred Stock into shares of Common Stock. To the extent permitted by law, the conversion shall be deemed to have been effected as ofthe close of business on the Conversion Date (or on the next preceding business day if the Conversion Date is not a business day) and at that time the rights of the holder of Series D Preferred Stock, as such holder, shall cease, and the holder of the Series D Preferred Stock shall become the holder of record of shares of Common Stock.

4. Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, each share of Series D Preferred Stock shall have a liquidation preference of $6,250.00 per share. This liquidation preference shall be subordinate to the liquidation preferences attached to any issued and outstanding shares of Class A, Class B and Class C Preferred Stock, but shall rank senior to the shares of Common Stock of the Company.

(h)5% SERIES E CONVERTIBLE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 1,000 shares of Preferred Stock shall be designated as 5% Series E Convertible Preferred Stock (the “Series E Preferred Stock”). The number of shares so designated as Series E Preferred Stock shall not be subject to increase without the consent of the holders of the Series E Preferred Stock (each, a “Holder” and collectively, the “Holders”). Each share of Series E Preferred Stock shall have a par value of $10.00 and a stated value of $10,000.00 (the “Stated Value”).

1. Dividends.

(a) Holders shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) equal to 5% per annum, payable on a quarterly basis on March 31, June 30, September 30 and December 31 of each year during the term of this Subpart (h) of Article III (each a “Dividend Payment Date”), commencing on September 30, 1998, in cash or shares of Common Stock (as defined in Section 7) at, subject to the terms and conditions set forth herein, the option of the Company. Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue daily commencing on the Original Issue Date (as defined in Section 7), and shall be deemed to accrue from such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. Any dividends not paid on any Dividend Payment Date shall continue to accrue and shall be due and payable upon conversion of the Preferred Stock. A party that holds shares of Preferred Stock on a Dividend Payment Date will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such Dividend Payment Date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date. All overdue accrued and unpaid dividends and other amounts due herewith shall entail a late fee at the rate of 15% per annum (to accrue daily, from the date such dividend is due hereunder through and including the date of payment). Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall be

Exhibit 3.1

distributed ratably among the Holders based upon the number of shares held by each Holder. Payment of dividends on the Preferred Stock is further subject to the provisions of Section 4(c)(i). The Company shall provide the Holders notice of its intention to pay dividends in cash or shares of Common Stock not less than 10 Trading Days prior to any Dividend Payment Date for so long as shares of Preferred Stock are outstanding. If dividends are paid in shares of Common Stock, the number of shares of Common Stock issuable on account of such dividend shall equal the cash amount of such dividend on such Dividend Payment Date divided by the Conversion Price (as defined below) on such date.

(b) Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of dividends on the Preferred Stock (and must deliver cash in respect thereof) if:

(i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to pay such dividends in shares of Common Stock;

(ii) such shares of Common Stock are not registered for resale pursuant to an effective registration statement that names the recipient of such dividend as a selling stockholder thereunder and may not be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent in the form and substance acceptable to the Holders and such transfer agent;

(iii) the Common Stock is not then listed or quoted on the Nasdaq SmallCap Market (“Nasdaq”) or on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market (each, a “Subsequent Market”);

(iv) the Company has failed to timely satisfy its conversion obligations hereunder; or

(v) the issuance of such shares of Common Stock would result in the recipient thereof beneficially owning, as determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), more than 4.999% of the then issued and outstanding shares of Common Stock.

(c)So long as any Preferred Stock shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (as defined in Section 7), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 4) upon, nor shall any distribution be made in respect of, any Junior Securities (as defined in Section 7), nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities or shares pari passu with the Preferred Stock, except for repurchases effected by the Company on the open market, pursuant to a direct stock purchase plan.

Exhibit 3.1

2. Voting Rights. Except as otherwise provided herein and as otherwise required by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Company shall not and shall cause its subsidiaries not to, without the affirmative vote of the Holders of all of the shares of the Preferred Stock then outstanding, alter or change adversely the powers, preferences or rights given to the Preferred Stock, (b) alter or amend this Certificate of Designation, (c) authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 3) senior to or otherwise pari passu with or senior to the Preferred Stock, (d) amend its Certificate of Incorporation, bylaws or other charter documents so as to affect adversely any rights of any Holders, (e) increase the authorized number of shares of Preferred Stock, or (f) enter into any agreement with respect to the foregoing.

3. Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), the Holders shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all due but unpaid dividends per share, whether declared or not, before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be distributed among the Holders ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 33% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 4. The Company shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record Holder.

4. Conversion.

(a) (i) Conversions at Option of Holder. Each share of Preferred Stock shall be convertible into shares of Common Stock (subject to the limitations set forth in Section 4(a)(iii) of this Subpart (h) of Article III) at the Conversion Ratio (as defined in Section 7) at the option of the Holder, at any time and from time to time, from and after the Original Issue Date. Holders shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as Exhibit A (a “Conversion Notice”). Each Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Conversion Notice by facsimile (the “Conversion Date”). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that the Conversion Notice is deemed delivered hereunder. If the Holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such Holder (in the manner and within the time set forth in Section 4(b)) a certificate for such number of shares as have not been converted.

Exhibit 3.1

(ii) Automatic Conversion. Subject to the provisions in this paragraph, alloutstanding shares of Preferred Stock for which conversion notices have not previously been received or for which redemption has not been made or required hereunder shall be automatically converted on the third anniversary of the Original Issue Date at the Conversion Price on such date. The conversion contemplated by this paragraph shall not occur so long as (a) (1) an Underlying Securities Registration Statement (as defined in Section 7) is not then effective or (2) the Holder is not permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under the Securities Act, without volume restrictions, as evidenced by an opinion letter of counsel acceptable to the Holder and the transfer agent for the Common Stock; (b) there are not sufficient shares of Common Stock authorized and reserved for issuance upon such conversion; or (c) the Company shall have defaulted on its covenants and obligations hereunder or under the Purchase Agreement or Registration Rights Agreement. Notwithstanding the foregoing, the three-year period for conversion under this Section shall be extended (on a day-for-day basis) for any Trading Days that the Purchaser is unable to resell Underlying Shares under an Underlying Securities Registration Statement due to (a) the Common Stock not being listed for trading on the Nasdaq or any Subsequent Market, (b) the failure of an Underlying Securities Registration Statement to be declared effective by the Securities and Exchange Commission (the “Commission”) by the Filing Date (as defined in the Registration Rights Agreement), or (c) if an Underlying Securities Registration Statement shall have been declared effective by the Commission, (x) the failure of such Underlying Securities Registration Statement to remain effective during the “Effectiveness Period” (as defined in the Registration Rights Agreement) as to all Underlying Shares, or (y) the suspension of the Holder’s ability to resell Underlying Shares thereunder.

(iii) Certain Conversion Restrictions.

(A)The Holder agrees not to convert shares of Preferred Stock to the extent such conversion would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of the shares of Preferred Stock held by such Holder after application of this Section. To the extent that the limitation contained in this Section applies, the determination of whether shares of Preferred Stock are convertible (in relation to other securities owned by a Holder) and of which shares of Preferred Stock are convertible shall be in the sole discretion of the Holder, and the submission of shares of Preferred Stock for conversion shall be deemed to be the Holder’s determination of whether such shares of Preferred Stock are convertible (in relation to other securities owned by the Holder) and of which portion of such shares of Preferred Stock are convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of the Holder to convert shares of Preferred Stock at such time as such conversion will not violate the provisions of this Section.

The provisions of this Section will not apply to any conversion pursuant to Section 4(a)(ii) of this Subpart (f) of Article III, and may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 75 days prior notice to the Company (in which case, the Holder shall make such filings with the Commission, including under Rule 13D or 13G, as are required by

Exhibit 3.1

applicable law), and the provisions of this Section shall continue to apply until such 75th day (or later, if stated in the notice of waiver). Other Holders shall be unaffected by any such waiver.

(B) If on any Conversion Date (A) the Common Stock is listed for trading on the Nasdaq or the Nasdaq National Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion in full of all then outstanding shares of Preferred Stock and as payment of dividends thereon in shares of Common Stock, together with any shares of the Common Stock previously issued upon conversion of shares of Preferred Stock and as payment of dividends thereon, would equal or exceed 20% of the number of shares of the Common Stock outstanding on the Original Issue Date (such number of shares as would not equal or exceed such 20% limit, the “Issuable Maximum” ), and (C) the Company shall not have previously obtained the vote of shareholders (the, “Shareholder Approval”), if any, as may be required by the applicable rules and regulations of The Nasdaq Stock Market (or any success entity) applicable to approve the issuance of shares of Common Stock in excess of the Issuable Maximum in a private placement whereby shares of Common Stock are deemed to have been issued at a price that is less than the greater of book or fair market value of the Common Stock, then the Company shall issue to the Holder so requesting a conversion a number of shares of Common Stock equa1 to the Issuable Maximum and, with respect to the remainder of the aggregate Stated Value of the shares of Preferred Stock then held by such Holder for which a conversion in accordance with the Conversion Price would result in an issuance of Common Stock in excess of the Issuable Maximum (the “Excess Stated Value”), the converting Holder shall have the option to require the Company to either (1) use its best efforts to obtain the Shareholder Approval applicable to such issuance as soon as is possible, but in any event not later than the 60th day after such request, or (2)(i) issue and deliver to such Holder a number of shares of Common Stock as equals (x) the Excess Stated Value, plus accrued dividends on all shares of Preferred Stock being converted, divided by (y) the Initial Conversion Price , and (ii) deliver to the Holder cash in an amount equal to the product of (x) the Per Share Market Value on the Conversion Date and (y) the number of shares of Common Stock in excess of such Holder’s pro rata portion of the Issuable Maximum that would have otherwise been issuable to the Holder in respect of such conversion but for the provisions of this Section (such amount of cash being hereinafter referred to as the “Discount Equivalent”), or (3) pay cash to the converting Holder in an amount equal to the Mandatory Redemption Amount (as defined in Section 7) for the Excess Stated Value. If the Company fails to pay the Discount Equivalent or the Mandatory Redemption Amount, as the Case may be, in full pursuant to this Section within seven (7) days after the date payable, the Company will pay interest thereon at a rate of 18% per annum to the converting Holder, accruing daily from the Conversion Date until such amount, plus all such interest thereon, is paid in full.

(b) (i) Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock (subject to the limitations set forth in Section 4(a)(iii) of this Subpart (h) of Article III), (ii) one or more certificates representing the number of shares of Preferred Stock not converted, (iii) a bank check in the amount of accrued and unpaid dividends (if the Company has elected to pay accrued dividends in cash), and (iv) if the Company has elected

Exhibit 3.1

and is permitted hereunder to pay accrued dividends in shares of Common Stock, certificates, which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1 (b) of the Purchase Agreement), representing such shares of Common Stock; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Preferred Stock until certificates evidencing such shares of Preferred Stock are either delivered for conversion to the Company or any transfer agent for the Preferred Stock or Common Stock, or the Holder of such Preferred Stock notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes of this Subpart (h) of Article III, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, are not delivered to or as directed by the applicable Holder by the third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion.

(ii)If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), including for purposes of this Subpart (h) of Article III, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the third (3rd) Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $5,000 for each day after such third (3rd) Trading Day until such certificates are delivered. Nothing herein shall limit a Holder’s right to pursue actual damages for the Company’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section of this Subpart (h) of Article III or under applicable law. Further, if the Company shall not have delivered any cash due in respect of conversions of Preferred Stock or as payment of dividends thereon by the third (3rd ) Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue Underlying Shares pursuant to Section 4(c), except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of such Holder demand. Any such Underlying Shares will be subject to the provision of this Section.

(iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), including for purposes of this Subpart (h) of Article III, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the third (3rd) Trading Day after the Conversion Date, and if after such third (3rd) Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in

Exhibit 3.1

satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the aggregate stated value of the shares of Preferred Stock for which such conversion was not timely honored. For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate stated value of the shares of Preferred Stock, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

(c) (i) The conversion price for each share of Preferred Stock (the “Conversion Price”) in effect on any Conversion Date shall be the lesser of (a) the Initial Conversion Price (as defined in Section 7) and (b) 90% (the “Discount Rate,”) multiplied by the average of the three (3) lowest Per Share Market Values during the twenty two (22) Trading Day period immediately preceding the applicable Conversion Date, provided, however, that such twenty two (22) Trading Day period shall be extended for the number of Trading Days, if any, during such period in which (A) trading in the Common Stock was suspended from the Nasdaq or a Subsequent Market, or (B) after the date declared effective by the Commission, the Underlying Securities Registration Statement is not effective, or (C) after the date declared effective by the Commission, the Prospectus included in the Underlying Securities Registration Statement may not be used by the Holder for the resale of Underlying Shares. If: (a) an Underlying Securities Registration Statement is not filed on or prior to the Filing Date (if the Company files such Underlying Securities Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) of the Registration Rights Agreement, the Company shall not be deemed to have satisfied this clause (a)), or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Securities Registration Statement will not be “reviewed,” or not subject to further review, or (c) the Underlying Securities Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), or (d) such Underlying Securities Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as defined in the Registration Rights Agreement) at any time prior to the expiration of the Effectiveness Period, without being succeeded within (10) days by a subsequent Underlying Securities Registration Statement filed with and declared effective by the Commission, or (e) trading in the Common Stock shall be suspended from the Nasdaq or a Subsequent Market for more than three (3) Business Days (which need not be consecutive days), (1) the conversion rights of the Holders are suspended for any reason or (g) an amendment to the Underlying Securities Registration Statement is not filed by the Company with the Commission within ten (10) days of the Commission’s notifying the Company that such amendment is required in order for the Underlying Securities Registration Statement to be declared effective (any such failure or breach being referred to as an “Event,” and for purposes of clauses (a), (c), (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) day period is exceeded, or for purposes of clauses (d) and (g) the date which such 10 day-period is exceeded, or for purposes of clause (e) the date of which such

Exhibit 3.1

three (3) Business Day-period is exceeded, being referred to as “Event Date”), then each of the Initial Conversion Price and the Discount Rate shall be decreased by 2% on the Event Date and each monthly anniversary thereof until the earlier to occur of the second month anniversary after the Event Date and such time as the applicable Event is cured (i.e., the Discount Rate would decrease to 88% as of the Event Date and 86% as of the one month anniversary of such Event Date). Commencing on the second month anniversary after the Event Date, the Holder shall have the option to either (x) require further cumulative 2% discounts to continue or (y) require the Company to pay to the Holder 2% of the aggregate Stated Values of the shares of Preferred Stock then held by such Holder, in cash, as liquidated damages and not as a penalty on the first day of each monthly anniversary of the Event Date, until such time as the applicable Event is cured. Any decrease in the Initial Conversion Price and the Discount Rate pursuant to this Section shall remain in effect notwithstanding the fact that the Event causing such decrease has been subsequently cured and further monthly decreases have ceased. The provisions of this Section are not exclusive and shall in no way limit the Company’s obligations under the Registration Rights Agreement.

(ii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities or pari passu securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 4(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

(iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights, warrants or options to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value at the record date mentioned below, then the Initial Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, warrants or options, plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock offered for subscription or purchase. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right, warrant or option to purchase shares of Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section 4(c)(iii), if any such right, warrant or option shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration shall be recomputed and effective immediately upon such expiration shall be increased to the price which it would have

Exhibit 3.1

been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section 4 upon the issuance of other rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights, warrants, or options been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights, warrants or options actually exercised.

(iv)If the Company or any subsidiary thereof, as applicable with respect to Common Stock Equivalents (as defined below), at any time while any shares of Preferred Stock are outstanding, shall issue shares of Common Stock or rights, warrants, options or other securities or debt that is convertible into or exchangeable for shares of Common Stock (“Common Stock Equivalents”) entitling any Person to acquire shares of Common Stock at a price per share less than the Conversion Price, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of shares of Common Stock or such Common Stock Equivalents plus the number of shares of Common Stock which the offering price for such shares of Common Stock or Common Stock Equivalents would purchase at the Conversion Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock so issued or issuable, provided, that for purposes of this Subpart (h) of Article III, all shares of Common Stock that are issuable upon exercise or exchange of Common Stock Equivalents shall be deemed outstanding immediately after the issuance of such Common Stock Equivalents. Such adjustment shall be made whenever such shares of Common Stock or Common Stock Equivalents are issued.

(v)If the Company, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 4(c)(ii)-(iv) above), then in each such case the Initial Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, however, that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, if the Holders of a majority in interest of the Preferred Stock dispute such valuation, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an “Appraiser”) selected in good faith by the Holders of a majority in interest of the shares of Preferred Stock then outstanding; and provided, further, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of

Exhibit 3.1

Common Stock. Such adjustment shall be made whenever any such distribution is, made and shall become effective immediately after the record date mentioned above.

(vi)All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.

(vii) Whenever the Conversion Price is adjusted pursuant to Section 4(c)(i), (ii), (iii), (iv), or (v) the Company shall promptly mail to each Holder, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(viii) In case of any reclassification of the Common Stock, or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property (other than compulsory share exchanges which constitute Change of Control Transactions), the Holders of the Preferred Stock then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as a holder of the number of shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such reclassification or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges.

(ix) If (a) the Company shall declare a dividend (or any other distribution) on its Common Stock, (b) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock, (c) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (d) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property, or (e) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be ,taken, the date, as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action

Exhibit 3.1

required to be specified in such notice. Holders are entitled to convert shares of Preferred Stock during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice.

(x) If the Company (i) makes a public announcement that it intends to enter into a Change of Control Transaction (as defined in Section 7) or (ii) any person, group or entity (including the Company, but excluding a Holder or any affiliate of a Holder) publicly announces a bona fide tender offer, exchange offer or other transaction to purchase 33% or more of the Common Stock (such announcement being referred to herein as a “Major Announcement” and the date on which a Major Announcement is made, the “Announcement Date”), then, in the event that a Holder seeks to convert shares of Preferred Stock on or following the Announcement Date, the Conversion Price shall, effective upon the Announcement Date and continuing through the earlier to occur of the consummation of the proposed transaction or tender offer, exchange offer or other transaction and the Abandonment Date (as defined below), be equal to the lower of (x) the average Per Share Market Value on the five Trading Days immediately preceding (but not including) the Announcement Date and (y) the Conversion Price that would otherwise have been in effect on the Conversion Date for such Preferred Stock but for the application of this Section. “Abandonment Date” means with respect to any proposed transaction or tender offer exchange offer or other transaction for which a public announcement as contemplated by this paragraph has been made, the date upon which the Company (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) publicly announces the termination or abandonment of the proposed transaction or tender offer, exchange offer or another transaction which caused this paragraph to become operative.

(xi) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(a) and Section 4(c)) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable, subject to the legend requirements of Section 3.1(b) of the Purchase Agreement.

(xii) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(xiii) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the Holders thereof for any

Exhibit 3.1

documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

(xiv) Shares of Preferred Stock converted into Common Stock shall be canceled. The Company may not reissue any shares of Preferred Stock.

(xv)Any and all notices or other communications or deliveries to be provided by the Holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (Eastern Standard Time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 8:00 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) upon receipt, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

5. Optional Redemption.

(a) The Company shall have the right, exercisable at any time upon 20 Trading Days’ notice (an “Optional Redemption Notice”) to the Holders of the Preferred Stock given at any time after the Original Issue Date to redeem all or any portion of the shares of Preferred Stock which have not previously been converted or redeemed, at a price equal to the Optional Redemption Price (as defined below), provided, that the Company shall not be entitled to deliver an Optional Redemption Notice to the Holders if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to satisfy the Company’s conversion obligations of all shares of Preferred Stock then outstanding, or (ii) the Underlying Shares then outstanding are not registered for resale pursuant to an effective Underlying Securities Registration Statement and may not be sold without volume restrictions pursuant to Ru1e 144 promulgated under the Securities Act, as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent in the form and substance acceptable to the Holders and such transfer agent, or (iii) the Common Stock

Exhibit 3.1

is not then listed for trading on the Nasdaq or a Subsequent Market. The entire Optional Redemption Price shall be paid in cash. Holders may convert (and the Company shall honor such conversions in accordance with the terms of this Subpart (h) of Article III) any shares of Preferred Stock, including shares subject to an Optional Redemption Notice, during the period from the date thereof through the 20th Trading Day after the receipt of an Optional Redemption Notice.

(b) If any portion of the Optional Redemption Price shall not be paid by the Company by the 20th Trading Day after the delivery of an Optional Redemption Notice, interest shall accrue thereon at the rate of 15% per annum until the Optional Redemption Price plus all such interest is paid in full. In addition, if any portion of the Optional Redemption Price remains unpaid after the date due, the Holder of the Preferred Stock subject to such redemption may elect, by written notice to the Company given at any time thereafter, to either (i) demand conversion of all or any portion of the shares of Preferred Stock for which such Optional Redemption Price, plus interest thereof, has not been paid in full (the “Unpaid Redemption Shares”), in which event the Per Share Market Value for such shares shall be the lower of the Per Share Market Value calculated on the date the Optional Redemption Price was originally due and the Per Share Market Value as of the Holder’s written demand for conversion, or (ii) invalidate ab initio such redemption, notwithstanding anything herein contained to the contrary. If the Holder elects option (i) above, the Company shall within three (3) Trading Days of its receipt of such election deliver to the Holder the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares subject to such Holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of Holder’s notice of such election, return to the Holder all of the Unpaid Redemption Shares.

(c) The “Optional Redemption Price” shall equal the sum of (i) the product of (A) the number of shares of Preferred Stock to be redeemed and (B) the product of (1) the average Per Share Market Value for the five (5) Trading Days immediately preceding (x) the date of the Optional Redemption Notice or (y) the date of payment in full by the Company of the Optional Redemption Price, whichever is greater, and (2) the Conversion Ratio calculated on the date of the Optional Redemption Notice, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such shares of Preferred Stock.

6. Redemption Upon Triggering Events.

(a)Upon the occurrence of a Triggering Event, each Holder shall (in addition to all other rights it may have hereunder or under applicable law), has the right, exercisable at the sole option of such Holder, to require the Company to redeem all or a portion of the Preferred Stock then held by such Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory Redemption Amount plus (ii) the product of (A) the number of Underlying Shares issued in respect of conversions or as payment of dividends hereunder and then held by the Holder and (B) the Per Share Market Value on the date such redemption is demanded or the date the redemption price hereunder is paid in full, whichever is greater. If the Company fails to pay the redemption price hereunder in full pursuant to this Section within seven (7) days after the date of a demand therefor, the Company will pay interest thereon at a rate of 15% per annum, accruing daily from such seventh day until the redemption price, plus all such interest thereon, is paid in

Exhibit 3.1

full. For purposes of this Section, a share of Preferred Stock is outstanding until such date as the Holder shall have received Underlying Shares upon a conversion (or attempted conversion) thereof.

(b) A “Triggering Event” means anyone or more of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgement, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

(i) the failure of an Underlying Securities Registration Statement to be declared effective by the Commission on or prior to the 180th day after the Original Issue Date;

(ii)if, during the Effectiveness Period, the effectiveness of the Underlying Securities Registration Statement lapses for any reason, or the Holder shall not be permitted to resell Registrable Securities under the Underlying Securities Registration Statement;

(iii) the failure of the Common Stock to be listed for trading on the Nasdaq or on a Subsequent Market or the suspension of the Common Stock from trading on the Nasdaq or on a Subsequent Market, in either case, for more than three (3) days (which need not be consecutive days);

(iv) the Company shall fail for any reason to deliver certificates representing Underlying Shares issuable upon a conversion hereunder that comply with the provisions of this Subpart (h) of Article III prior to the 10th day after the Conversion Date or the Company shall provide notice to any Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of any Preferred Stock in accordance with the terms of this Subpart (h) of Article III;

(v) the Company shall be a party to any Change of Control Transaction, shall agree to sell (in one or a series of related transactions) all or substantially all of its assets (whether or not such sale would constitute a Change of Control Transaction) or shall redeem more than a de minimis number of shares of Common Stock or other Junior Securities (other than redemptions of Underlying Shares);

(vi) an Event shall not have been cured to the satisfaction of the Holders prior to the expiration of thirty (30) days from the Event Date relating thereto;

(vii) the Company shall fail for any reason to deliver the certificate or certificates required pursuant to Section 4(b)(iii) or the cash pursuant to a Buy-In within seven (7) days after notice is deemed delivered hereunder; or

(viii) the Company shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder.

Exhibit 3.1

7. Definitions.For the purposes of this Subpart (h) of Article III, the following terms shall have the following meanings:

“Change of Control Transaction” means the occurrence of any of (i) an acquisition after July 7, 1998 by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in excess of 33% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company’s board of directors which is not approved by those individuals who are members of the board of directors on October 9, 1997 in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company’s securities continue to hold at least 33% of such securities following such transaction or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii).

“Common Stock” means the Company’s common stock, par value $.007 per Share, and stock of any other class into which such shares may hereafter have been reclassified or changed.

“Conversion Ratio” means, at any time, a fraction, the numerator of which is Stated Value plus accrued but unpaid dividends (including any accrued but unpaid late fees thereon) but only to the extent not paid in shares of Common Stock in accordance with the terms of this Subpart (h) of Article III, and the denominator of which is the Conversion Price at such time.

“Initial Conversion Price” means (x) for the first 80 days following the Original Issue Date, 110% of the average of the Per Share Market Values for the five (5) Trading Days immediately preceding the Original Issue Date, and (y) from and after the 181st day following the Original Issue Date (the “Record Date”), the average of the Per Share Market Values for the five (5) Trading Days immediately preceding the Record Date.

“Junior Securities” means the Common Stock and all other equity securities of the Company which are junior in rights and liquidation preference to the Preferred Stock.

“Mandatory Redemption Amount” for each share of Preferred Stock means the sum of (i) the greater of (A) 130% of the Stated Value and all accrued dividends with respect to such share, and (B) the product of (a) the Per Share Market Value on the Trading Day immediately preceding (x) the date of the Triggering Event or the Conversion Date, as the case may be, or (y) the date of payment in full by the Company of the applicable redemption price, whichever is greater, and (b) the Conversion Ratio calculated on the date of the Triggering Event, or the Conversion Date, as the case may be, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such shares of Preferred Stock.

“Original Issue Date” shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.

Exhibit 3.1

“Per Share Market Value” means on any particular date (a) the closing bid price per share of the Common Stock on such date on the Nasdaq or on such Subsequent Market on which the Common Stock is then listed or quoted, or if there is no such price on such date, then the closing bid price on the Nasdaq or on such Subsequent Market on which the Common Stock is then listed or quoted on the date nearest preceding such date, or (b) if the Common Stock is not then listed or quoted on the Nasdaq or on a Subsequent Market, the closing bid price for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the Holders of a majority of the shares of the Preferred Stock.

“Person” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.

“Purchase Agreement” means the Convertible, Preferred Stock Purchase Agreement, dated as of the Original Issue Date, among the Company and the original Holder of the Preferred Stock.

“Registration Rights Agreement” means the Registration Rights Agreement, dated as of the Original Issue Date, by and among the Company and the Original Holder of the Preferred Stock.

“Trading Day” means (a) a day on which the Common Stock is traded on the Nasdaq or on such Subsequent Market on which the Common Stock is then listed or quoted, as the case may be, or (b) if the Common Stock is not listed on the Nasdaq or on a Subsequent Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

“Underlying Securities Registration Statement” means a registration statement that meets the requirements of the Registration Rights Agreement and registers the resale of all Underlying Shares by the recipient thereof, who shall be named as a “selling stockholder” thereunder.

Exhibit 3.1

“Underlying Shares” means, collectively, the shares of Common Stock into which the Shares are convertible and the shares of Common Stock issuable upon payment of dividends thereon in accordance with the terms of this Subpart (h) of Article III.

(i)5% SERIES F CONVERTIBLE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 1,000 shares of Preferred Stock shall be designated as 5% Series F Convertible Preferred Stock (the “Series F Preferred Stock”).

Section 1. Designation, Amount and Par Value. The series of preferred stock shall be designated as 5% Series Convertible Preferred Stock (the “Preferred Stock”) and the number of shares so designated shall be 1,000 (which shall not be subject to increase without the consent of the holders of the Preferred Stock (each, a “Holder” and collectively, the “Holders”)); Each share of Preferred Stock shall have a par value of $10 and a stated value of $10,000 (the “Stated Value”).

Section 2. Dividends.

(a) Holders shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) equal to 5% per annum, payable on a quarterly basis on March 31, June 30, September 30 and December 31 of each year during the term hereof (each a “Dividend Payment Date”), commencing on September 30, 1998, in cash or shares of Common Stock (as defined in Section 8) at, subject to the terms and conditions set forth herein, the option of the Company. Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue daily commencing on the Original Issue Date (as defined in Section 8), and shall be deemed to accrue from such date whether or not earned Of declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. Any dividends not paid on any Dividend Payment Date shall continue to accrue and shall be due and payable upon conversion of the Preferred Stock. A party that holds shares of Preferred Stock on a Dividend Payment Date will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such Dividend Payment Date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date. All overdue accrued and unpaid dividends and other amounts due herewith shall entail a late fee at the rate of 15% per annum (to accrue daily, from the date such dividend is due hereunder through and including the date of payment). Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall be distributed ratably among the Holders based upon the number of shares held by each Holder. Payment of dividends on the Preferred Stock is further subject to the provisions of Section 5(c)(i). The Company shall provide the Holders notice of its intention to pay dividends in cash or shares of Common Stock not less than 10 Trading Days prior to any Dividend Payment Date for so long as shares of Preferred Stock are outstanding. If dividends are paid in shares of Common Stock, the number of shares of Common Stock issuable on account of such dividend shall equal the cash amount of such dividend on such Dividend Payment Date divided by the Conversion Price (as defined below) on such date.

Exhibit 3.1

(b)Subject to Section 5(a)(iii)(B) and notwithstanding anything to the contrarycontained herein, the Company may not issue shares of Common Stock in payment of dividends on the Preferred Stock (and must deliver cash in respect thereof) if:

(i)the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to pay such dividends in shares of Common Stock;

(ii)such shares of Common Stock are not registered for resale pursuant to an effective registration statement that names the recipient of such dividend as a selling stockholder thereunder and may not be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent in the form and substance acceptable to the Holders and such transfer agent;

(iii) the Common Stock is not then listed or quoted on the Nasdaq SmallCap Market (“NASDAQ”) or on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market (each, a “Subsequent Market”);

(iv)the Company has failed to timely satisfy its conversion obligations hereunder; or

(v) the issuance of such shares of Common Stock would result in the recipient thereof beneficially owning, as determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), more than 4.999% of the then issued and outstanding shares of Common Stock.

(c) So long as any Preferred Stock shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (as defined in Section 8), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 5) upon, nor shall any distribution be made in respect of, any Junior Securities (as defined in Section 8), nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities or shares pari passu with the Preferred Stock, except for repurchases effected by the Company on the open market, pursuant to a direct stock purchase plan.

Section 3. Voting Rights. Except as otherwise provided herein and as otherwise required by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Company shall not and shall cause its subsidiaries not to, without the affirmative vote of the Holders of all of the shares of the Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock, (b) alter or amend this Certificate of Designation, (c) authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 4) senior to or otherwise pari passu with or senior to the Preferred Stock, (d) amend its Certificate of Incorporation, bylaws or other charter documents so as to affect adversely any rights of any

Exhibit 3.1

Holders, (e) increase the authorized number of shares of Preferred Stock, or (f) enter into any agreement with respect to the foregoing.

Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), the Holders shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all due but unpaid dividends per share, whether declared or not, before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be distributed among the Holders ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 33% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record Holder.

Section 5. Conversion.

(a)(i)Conversions at Option of Holder. Each share of Preferred Stock shall be convertible into shares of Common Stock (subject to the limitations set forth in Section 5(a)(iii) of this Subpart (i) of Article III) at the Conversion Ratio (as defined in Section 8) at the option of the Holder, at any time and from time to time, from and after the Original Issue Date. Holders shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as Exhibit A (a “Conversion Notice”‘). Each Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Conversion Notice by facsimile (the “Conversion Date”). If no Conversion date is specified in a Conversion Notice, the Conversion Date shall be the date that the Conversion Notice is deemed delivered hereunder. If the Holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such Holder (in the manner and within the time set forth in Section 5(b)) a certificate for such number of shares as have not been converted.

(ii) Automatic Conversion. Subject to the provisions in this paragraph and Section 5(a)(iii)(B), all outstanding shares of Preferred Stock for which conversion notices have not previously been received or for which redemption has not been made or required hereunder shall be automatically converted on the third anniversary of the Original Issue Date at the Conversion Price oil such date. The conversion contemplated by this paragraph shall not occur at such time as (a) (1) an Underlying Securities Registration Statement (as defined in Section 8) is not then effective or (2) the Holder is not permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under the Securities Act, without volume restrictions, as evidenced by an

Exhibit 3.1

opinion letter of counsel acceptable to the Holder and the transfer agent for the Common Stock; (b) there are not sufficient shares of Common Stock authorized and reserved for issuance upon such conversion; or (c) the Company shall have defaulted on its covenants and obligations hereunder or under the Purchase Agreement or Registration Rights Agreement. Notwithstanding the foregoing, the three-year period for conversion under this Section shall be extended (on a day-for-day basis) for any Trading Days that the Purchaser is unable to resell Underlying Shares underan Underlying Securities Registration Statement due to (a) the Common Stock not being listed for trading on the NASDAQ or any Subsequent Market, (b) the failure of an Underlying Securities Registration Statement to be declared effective by the Securities and Exchange Commission (the “Commission” ) by the Filing Date (as defined in the Registration Rights Agreement), or (c) if an Underlying Securities Registration Statement shall have been declared effective by the Commission, (x) the failure of such Underlying Securities Registration Statement to remain effective during the Effectiveness Period (as defined in the Registration Rights Agreement) as to all Underlying Shares, or (y) the suspension of the Holder’s ability to resell Underlying Shares thereunder.

(iii) Certain Conversion Restrictions.

(A) The Holder agrees not to convert shares of Preferred Stock to the extent such conversion would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of the shares of Preferred Stock held by such Holder after application of this Section. To the extent that the limitation contained in this Section applies, the determination of whether shares of Preferred Stock are convertible (in relation to other securities owned by a Holder) and of which shares of Preferred Stock are convertible shall be in the sole discretion of the Holder, and the submission of shares of Preferred Stock for conversion shall be deemed to be the Holder’s determination of whether such shares of Preferred Stock are convertible (in relation to other securities owned by the Holder) and of which portion of such shares of Preferred Stock are convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of the Holder to convert shares of Preferred Stock at such time as such conversion will not violate the provisions of this Section. The provisions of this Section will not apply to any conversion pursuant to Section 4(a)(ii) of this Subpart (i) of Article III, and may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 75 days prior notice to the Company (in which case, the Holder shall make such filings with the Commission, including under Rule 13D or 13G, as are required by applicable law), and the provisions of this Section shall continue to apply until such 75th day (or later, if stated in the notice of waiver). Other Holders shall be unaffected by any such waiver.

(B) If on any Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the Nasdaq National Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon (i) conversion in full of all then outstanding shares of Preferred Stock, as payment of dividends thereon in shares of Common Stock, and (ii) exercise of the Additional Warrant (as defined in the Exchange Agreement), if the exercise price of the Additional Warrant is less than

Exhibit 3.1

the closing sales price of the Common Stock on the Original Issue Date, together with any shares of the Common Stock previously issued upon conversion of shares of Preferred Stock, as payment of dividends thereon and exercise of the Additional Warrant, if the exercise price of the Additional Warrant is less than the closing sales price of the Common Stock on the Original Issue Date, would equal or exceed 20% of the number of shares of the Common Stock outstanding on the Original Issue Date (such number of shares as would not equal or exceed such 20% limit, the “Issuable Maximum”), and (C) the Company shall not have previously obtained the vote of shareholders (the “Shareholder Approval”), if any, as may be required by the applicable rules and regulations of The Nasdaq Stock Market (or any success entity) applicable to approve the issuance of shares of Common Stock in excess of the Issuable Maximum in a private placement whereby shares of Common Stock are deemed to have been issued at a price that is less than the greater of book or fair market value of the Common Stock, then the Company shall issue to the Holder so requesting a conversion a number of shares of Common Stock equal to the Issuable Maximum and, with respect to the remainder of the aggregate Stated Value of the shares of Preferred Stock then held by such Holder for which a conversion in accordance with the Conversion Price would result in an issuance of Common Stock in excess of the Issuable Maximum (the “Excess Stated Value”), the converting Holder shall have the option to require the Company to either (1) use its best efforts to obtain the Shareholder Approval applicable to such issuance as soon as is possible, but in any event not later than the 60th day after such request or (2)(i) issue and deliver to such Holder a number of shares of Common Stock as equals (x) the Excess Stated Value, plus accrued dividends on all shares of Preferred Stock being converted, divided by (y) the closing sale price of the Common Stock on the Original Issue Date, and (ii) cash in an amount equal to the product of (x) the Per Share Market Value on the Conversion Date and (y) the number of shares of Common Stock in excess of such Holder’s pro rata portion of the Issuable Maximum that would have otherwise been issuable to the Holder in respect of such conversion but for the provisions of this Section (such amount of cash being hereinafter referred to as the “Discount Equivalent”), or (3) pay cash to the converting Holder in an amount equal to the Mandatory Redemption Amount (as defined in Section 8) for the Excess Stated Value. If the Company fails to pay the Discount Equivalent or the Mandatory Redemption Amount, as the case may be, in full pursuant to this Section within seven (7) days after the date payable, the Company will pay interest thereon at a rate of 18% per annum to the converting Holder, accruing daily from the Conversion Date until such amount, plus all such interest thereon, is paid in full.

(b) (i)Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock (subject to the limitations set forth in Section 5(a)(iii) of this Subpart (i) of Article III), (ii) one or more certificates representing the number of shares of Preferred Stock not converted, (iii) a bank check in the amount of accrued and unpaid dividends (if the Company has elected to pay accrued dividends in cash), and (iv) if the Company has elected and is permitted hereunder to pay accrued dividends in shares of Common Stock, certificates, which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement), representing such shares of Common Stock; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Preferred Stock until certificates

Exhibit 3.1

evidencing such shares of Preferred Stock are either delivered for conversion to the Company or any transfer agent for the Preferred Stock or Common Stock, or the Holder of such Preferred Stock notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, are not delivered to or as directed by the applicable Holder by the third (3^rd) Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion.

(ii) If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 5(b)(i), including for purposes of this Subpart (i) of Article III, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the third (3rd) Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $5,000 for each day after such third (3rd) Trading pay until such certificates are delivered. Nothing herein shall limit a Holder’s right to pursue actual damages for the Company’s failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section of this Subpart (i) of Article III or under applicable law. Further, if the Company shall not have delivered any cash due in respect of conversions of Preferred Stock or as payment of dividends thereon by the third (3rd) Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue Underlying Shares pursuant to Section 5(c), except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of such Holder demand. Any such Underlying Shares will be subject to the provision of this Section.

(iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 5(b)(i), including for purposes of this Subpart (i) of Article III, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the third (3^rd) Trading Day after the Conversion Date, and if after such third (3^rd) Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the aggregate stated value of the shares of Preferred Stock for

Exhibit 3.1

which such conversion was not timely honored. For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate stated value of the shares of Preferred Stock, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

(c)(i) The conversion price for each share of Preferred Stock (the “Conversion Price”) in effect on any Conversion Date shall be the lesser of (a) $4.00 (the “Initial Conversion Price”) and (b) 87% (the “Discount Rate”) multiplied by the average of the three (3) lowest Per Share Market Values during the twenty two (22) Trading Day period immediately preceding the applicable Conversion Date, provided, that such twenty two (22) Trading Day period shall be extended for the number of Trading Days, if any, during such period in which (A) trading in the Common Stock was suspended from the NASDAQ or a Subsequent Market, or (B) after the date declared effective by the Commission, the Underlying Securities Registration Statement is not effective, or (C) after the date declared effective by the Commission, the Prospectus included in the Underlying Securities Registration Statement may not be used by the Holder for the resale of Underlying Shares, provided, however, that the Conversion Price shall not be less than the Floor (as defined in Section 8). The Floor (x) shall be decreased by 2% as of any Event Date (as defined below) and on each monthly anniversary thereof in accordance with this Section, (y) shall simultaneously be adjusted by the same ratio as the adjustments to the Conversion Price as a result of the provisions of Section 5(c)(ii)-(v), and (z) shall not apply in the event that the Common Stock is no longer listed on the NASDAQ or on it Subsequent Market. If: (a) an Underlying Securities Registration Statement is not filed on or prior to the Filing Date (if the Company files such Underlying Securities Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) of the Registration Rights Agreement, the Company shall not be deemed to have satisfied this clause (a)), or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Securities Registration Statement will not be “reviewed,” or not subject to further review, or (c) the Underlying Securities Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), or (d) such

Underlying Securities Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as defined in the Registration Rights Agreement) at any time prior to the expiration of the “Effectiveness Period” (as defined in the Registration Rights Agreement), without being succeeded within ten (10) days by a subsequent Underlying Securities Registration Statement filed with and declared effective by the Commission, or (e) trading in the Common Stock shall be suspended from the NASDAQ or a Subsequent Market for more than three (3) Business Days (which need not be consecutive days), (f) the conversion rights of the Holders are suspended for any reason or (g) an amendment to the Underlying Securities Registration Statement is not filed by the Company with the Commission within ten (10) days of the Commission’s notifying the Company that such amendment is required in order for the Underlying Securities Registration Statement to be declared effective (any such failure or breach being referred to as an “Event,” and for purposes of clauses (a), (c), (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) day period is exceeded, or for purposes of clauses (d) and (g) the date which such 10 day-period is

Exhibit 3.1

exceeded, or for purposes of clause (e) the date on which such three (3) Business Day-period is exceeded, being referred to as “Event Date”), then each of the Initial Conversion Price and the Discount Rate shall be decreased by 2% on the Event Date and each monthly anniversary thereof until the earlier to occur of the second month anniversary after the Event Date and such time as the applicable Event is cured (i.e., the Discount Rate would decrease to 85% as of the Event Date and 83% as of the one month anniversary of such Event Date). Commencing on the second month anniversary after the Event Date, the Holder shall have the option to either (x) require further cumulative 2% discounts to continue or (y) require the Company to pay to the Holder 2% of the aggregate Stated Values of the shares of Preferred Stock then held by such Holder, in cash, as liquidated damages and not as a penalty, on the first day of each monthly anniversary of the Event Date, until such time as the applicable Event is cured. Any decrease in the Initial Conversion Price and the Discount Rate pursuant to this Section shall remain in effect notwithstanding the fact that the Event causing such decrease has been subsequently cured and further monthly decreases have ceased. The provisions of this Section are not exclusive and shall in no way limit the Company’s obligations under the Registration Rights Agreement.

(ii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities or pari passu securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

(iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights, warrants or options to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value at the record date mentioned below, then the Initial Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, warrants or options, plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock offered for subscription or purchase. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right, warrant or option to purchase shares of Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section 5(c)(iii), if any such right, warrant or option shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration shall be recomputed and

Exhibit 3.1

effective immediately upon such expiration shall be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section 5 upon the issuance of other rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights, warrants, or options been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights, warrants or options actually exercised.

(iv)If the Company or any subsidiary thereof, as applicable with respect to Common Stock Equivalents (as defined below), at any time while any shares of Preferred Stock are outstanding, shall issue shares of Common Stock or rights, warrants, options or other securities or debt that is convertible into or exchangeable for shares of Common Stock (“Common Stock Equivalents”) entitling any Person to acquire shares of Common Stock at a price per share less than the Conversion Price f then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of shares of Common Stock or such Common Stock Equivalents, plus the number of shares of Common Stock which the offering price for such shares of Common Stock or Common Stock Equivalents would purchase at the Conversion Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock so issued or issuable, provided, that for purposes of this Subpart (i) of Article III, all shares of Common Stock that are issuable upon exercise or exchange of Common Stock Equivalents shall be deemed outstanding immediately after the issuance of such Common Stock Equivalents. Such adjustment shall be made whenever such shares of Common Stock or Common Stock Equivalents are issued.

(v)If the Company at anytime while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 5(c)(ii)-(iv) above), then in each such case the Initial Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, however, that in the event of distribution exceeding ten percent (10%) of the net assets of the Company, if the Holders of a majority in interest of the Preferred Stock dispute such valuation, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an “Appraiser”) selected in good faith by the Holders of a majority in interest of the shares of Preferred Stock then outstanding; and provided, further, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or

Exhibit 3.1

evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

(vi)All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.

(vii) Whenever the Conversion Price is adjusted pursuant to Section 5(c)(i), (ii), (iii), (iv), or (v) the Company shall promptly mail to each Holder, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(viii) In case of any reclassification of the Common Stock, or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property (other than compulsory share exchanges which constitute Change of Control Transactions), the Holders of the Preferred Stock then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as a holder of the number of shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such reclassification or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges.

(ix) If (a) the Company shall declare a dividend (or any other distribution) on its Common Stock, (b) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock, (c) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or bf any rights, (d) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property, or (e) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any

Exhibit 3.1

defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert shares of Preferred Stock during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice.

(x) If the Company (i) makes a public announcement that it intends to enter into a Change of Contro1 Transaction (as defined in Section 8) or (ii) any person, group or entity (including the Company, but excluding a Holder or any affiliate of a Holder) publicly announces a bona fide tender offer, exchange offer or other transaction to purchase 33% or more of the Common Stock (such announcement being referred to herein as a “Major Announcement” and the date on which a Major Announcement is made, the “Announcement Date”), then, in the event that a Holder seeks to convert shares of Preferred Stock on or following the Announcement Date, the Conversion Price shall, effective upon the Announcement Date and continuing through the earlier to occur of the consummation of the proposed transaction or tender offer, exchange offer or other transaction and the Abandonment Date (as defined below), be equal to the lower of (x) the average Per Share Market Value on the five Trading Days immediately preceding (but not include ng) the Announcement Date and (y) the Conversion Price that would otherwise have been in effect on the Conversion Date for such Preferred Stock but for the application of this Section. “Abandonment Date” means with respect to any proposed transaction or tender offer, exchange offer or other transaction fur which a public announcement as contemplated by this paragraph has been made, the date upon which the Company (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) publicly announces the termination or abandonment of the proposed transaction or tender offer, exchange offer or another transaction which caused this paragraph to become operative.

(d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5(a) and Section 5(c)) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable, subject to the legend requirements of Section 3.1(b) of the Purchase Agreement.

(e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

Exhibit 3.1

(f) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

(g)Shares of Preferred Stock converted into Common Stock shall be canceled. The Company may not reissue any shares of Preferred Stock.

(h)Any and all notices or other communications or deliveries to be provided by the Holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimi1e telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 8:00 p.m. (Eastern Standard Time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 8:00 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) upon receipt, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

Section 6. Optional Redemption.

(a) The Company shall have the right, exercisable at any time upon 20 Trading Days’ notice (an “Optional Redemption Notice”) to the Holders of the Preferred Stock given at any time after the Original Issue Date to redeem all or any portion of the shares of Preferred Stock which have not previously been converted or redeemed, at a price equal to the Optional Redemption Price (as defined below), provided, that the Company shall not be entitled to deliver an Optional Redemption Notice to the Holders if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to satisfy the Company’s conversion obligations of all shares of Preferred Stock then outstanding, or (ii) the Underlying Shares then outstanding are not registered for resale pursuant to an effective Underlying Securities Registration Statement and may not be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act, as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent in the

Exhibit 3.1

form and substance acceptable to the Holders and such transfer agent, or (iii) the Common Stock is not then listed for trading on the NASDAQ or a Subsequent Market. The entire Optional Redemption Price shall be paid in cash. Holders may convert (and the Company shall honor such conversions in accordance with the terms of this Subpart (i) of Article III) any shares of Preferred Stock, including shares subject to an Optional Redemption Notice, during the period from the date thereof through the 20th Trading Day after the receipt of an Optional Redemption Notice.

(b) If any portion of the Optional Redemption Price shall not be paid by the Company by the 20th Trading Day after the delivery of an Optional Redemption Notice, interest shall accrue thereon at the rate of 15% per annum until the Optional Redemption Price plus all such interest is paid in full. In addition, if any portion of the Optional Redemption Price remains unpaid after the date due, the Holder of the Preferred Stock subject to such redemption may elect, by written notice to the Company given at any time thereafter, to either (i) demand conversion of all or any portion of the shares of Preferred Stock for which such Optional Redemption Price, plus interest thereof, has not been paid in full (the “Unpaid Redemption Shares”), in which event the Per Share Market Value for such shares shall be the lower of the Per Share Market Value calculated on the date the Optional Redemption Price was originally due and the Per Share Market Value as of the Holder’s written demand for conversion, or (ii) invalidate ab initio such redemption, notwithstanding anything herein contained to the contrary. If the Holder elects option (i) above, the Company shall within three (3) Trading Days of its receipt of such election deliver to the Holder the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares subject to such Holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of Holder’s notice of such election, return to the Holder all of the Unpaid Redemption Shares.

(c) The “Optional Redemption Price” shall equal the sum of (i) the product of (A) the number of shares of Preferred Stock to be redeemed and (B) the product of (1) the average Per Share Market Value for the five (5) Trading Days immediately preceding (x) the date of the Optional Redemption Notice or (y) the date of payment in full by the Company of the Optional Redemption Price, whichever is greater, and (2) the Conversion Ratio calculated on the date of the Optional Redemption Notice, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such shares of Preferred Stock.

Section 7. Redemption Upon Triggering Events.

(a)Upon the occurrence of a Triggering Event, each Holder shall (in addition to all other rights it may have hereunder or under applicable law), has the right exercisable at the sole option of such Holder, to require the Company to redeem all or a portion of the Preferred Stock then held by such Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory Redemption Amount plus (ii) the product of (A) the number of Underlying Shares issued in respect of conversions or as payment of dividends hereunder and then held by the Holder and (B) the Per Share Market Value on the date such redemption is demanded or the date the redemption price hereunder is paid in full, whichever is greater. If the Company fails to pay the redemption price hereunder in full pursuant to this Section within seven (7) days after the date of a demand therefor, the Company will pay interest thereon at a rate of 15% per annum, accruing

Exhibit 3.1

daily from such seventh day until the redemption price, plus all such interest thereon, is paid in full. For purposes of this Section, a share of Preferred Stock is outstanding until such date as theHolder shall have received Underlying Shares upon a conversion (or attempted conversion) thereof.

A “Triggering Event” means anyone or more of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgement, decree or order of any court, or any order, role or regulation of any administrative or governmental body):

(i) the failure of an Underlying Securities Registration Statement to be declared effective by the Commission on or prior to the 180th day after the Original Issue Date;

(ii)if, during the Effectiveness Period, the effectiveness of the Underlying Securities Registration Statement lapses for any reason, or the Holder shall not be permitted to resell Registrable Securities under the Underlying Securities Registration Statement;

(iii) the failure of the Common Stock to be listed for trading on the NASDAQ or on a Subsequent Market or the suspension of the Common Stock from trading on the NASDAQ or on a Subsequent Market, in either case, for more than three (3) days (which need not be consecutive days);

(iv) the Company shall fail for any reason to deliver certificates representing Underlying Shares issuable upon a conversion hereunder that comply with the provisions of this Subpart (i) of Article III prior to the 10th day after the Conversion Date or the Company shall provide notice to any Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of any Preferred Stock in accordance with the terms of this Subpart (i) of Article III;

(v)the Company shall be a party to any Change of Control Transaction, shall agree to sell (in one or a series of related transactions) all or substantially all of its assets (whether or not such sale would constitute a Change of Control Transaction) or shall redeem more than a de minimis number of shares of Common Stock or other Junior Securities (other than redemptions of Underlying Shares);

(vi)an Event shall not have been cured to the satisfaction of the Holders prior to the expiration of thirty (30) days from the Event Date relating thereto;

(vii)the Company shall fail for any reason to deliver the certificate or certificates required pursuant to Section 5(b)(iii) or the cash pursuant to a Buy-In within seven (7) days after notice is deemed delivered hereunder; or

(viii)the Company shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder.

Exhibit 3.1

Section 8. Definitions.For the purposes of this Subpart (i) of Article III, the following terms shall have the following meanings:

“Change of Control Transaction” means the occurrence of any of (i) an acquisition after July 30, 1998 by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in excess of 33% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company’s board of directors which is not approved by those individuals who are members of the board of directors on July 30, 1998 in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company’s securities continue to hold at least 33% of such securities following such transaction or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii).

“Common Stock” means the Company’s common stock, par value $.007 per share, and stock of any other class into which such shares may hereafter have been reclassified or changed.

“Conversion Ratio” means, at any time, a fraction, the numerator of which is Stated Value plus accrued but unpaid dividends (including any accrued but unpaid late fees thereon) but only to the extent not paid in shares of Common Stock in accordance with the terms of this Subpart (i) of Article III, and the denominator of which is the Conversion Price at such time.

“Exchange Agreement” means the Exchange Agreement, dated as of July 28, 1998, between the Company and the original Holder of the Preferred Stock.

“Floor” shall initially mean $2.50 (the “Initial Floor”), provided, that, if at any time after the Original Issue Date, the average Per Share Market Value for any five (5) consecutive Trading Days (such five Trading Day average, the “Reset Price”) is lower than the Initial Floor, the Floor shall be reset to the Reset Price. After such initial reset, if any, subsequent resets of the Floor may occur and shall be based upon the then most recent Reset Price. Notwithstanding the foregoing, subject to the adjustments contemplated in Sections 5(c)(i)-(v), the Floor shall not be less than $1.25.

“Junior Securities” means the Common Stock and all other equity securities of the Company which are junior in rights and liquidation preference to the Preferred Stock.

“Mandatory Redemption Amount” for each share of Preferred Stock means the sum of (i) the greater of (A) 130% of the Stated Value and all accrued dividends with respect to such share, and (B) the product of (a) the Per Share Market Value on the Trading Day immediately preceding (x) the date of the Triggering Event or the Conversion Date, as the case may be, or (y) the date of payment in full by the Company of the applicable redemption price, whichever is greater, and (b) the Conversion Ratio calculated on the date of the Triggering Event, or the Conversion Date, as the case may be, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such shares of Preferred Stock.

Exhibit 3.1

“Original Issue Date” shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.

“Per Share Market Value” means on any particular date (a) the closing bid price per share of the Common Stock on such date on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or if there is no such price on such date, then the closing bid price on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted on the date nearest preceding such date, or (b) if the Common Stock is not then listed or quoted on the NASDAQ or on a Subsequent Market, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the Holders of a majority of the shares of the Preferred Stock.

“Person” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.

“Purchase Agreement” means the Convertible Preferred Stock Purchase Agreement, dated as of June 30, 1998, between the Company and the original Holder of the Preferred Stock.

“Registration Rights Agreement” means the Registration Rights Agreement, dated as of June 30, 1998, between the Company and the original Holder of the Preferred Stock.

“Trading Day” means (a) a day on which the Common Stock is traded on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, as the case may be, or (b) if the Common Stock is not listed on the NASDAQ or on a Subsequent Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

“Underlying Securities Registration Statement” means a registration statement that meets the requirement of the Registration Rights Agreement and registers the resale of all Underlying Shares by the recipient thereof, who shall be named as a “selling stockholder” thereunder.

Exhibit 3.1

“Underlying Shares” means, collectively, the shares of Common Stock into which the Shares are convertible and the shares of Common Stock issuable upon payment of dividends thereon in accordance with the terms of this Subpart (i) of Article III.

(j)SERIES M PARTICIPATING CONVERTIBLE PREFERRED STOCK

Of the 10,000,000 shares of Preferred Stock authorized hereunder, 29,000 shares of Preferred Stock shall be designated as Series M Participating Convertible Preferred Stock (the “Series M Preferred Stock”), shall have a par value of $10.00 per share, and shall have the following rights and preferences:

1. Dividends.

(a) Priority of Dividends. No dividends shall be declared or set aside for the Corporation’s Common Stock, 12% Cumulative Convertible Preferred Stock, Class A Preferred stock, Class B Preferred stock, Class C Preferred stock, Series D Preferred Stock or, except as permitted pursuant to Section III(g)(3)(b), any other class of capital stock of the Corporation (such Common stock, 12% Cumulative Convertible Preferred Stock, Class A Preferred Stock, Class B Preferred stock, Class C Preferred Stock, Series D Preferred Stock or, except as permitted pursuant to Section III(g)(3)(b), other class of capital stock of the Corporation being collectively referred to as “Junior Stock”), unless at the same time or prior thereto all accrued and unpaid dividends on the Series M Preferred Stock shall be declared, set aside and paid on all the then outstanding shares of Series M Preferred Stock. In the event that funds legally available for distribution on any Dividend Payment Date (as defined as Section 1(b) are insufficient to fully pay the cash dividend due and payable on such Dividend Payment Date to all holders of outstanding Series M Preferred Stock, then all funds legally available for distribution shall be paid in cash to holders of Series M Preferred Stock pro rata in accordance with the number of shares of Series M Preferred Stock held by such holder. Any remaining dividend amount owed to holders of the Series M Preferred Stock shall be accrued in accordance with Section 1 (b). After the payment of all accrued and unpaid dividends on the Series M Preferred Stock in accordance with this Section 1, the holders of the shares of Series M Preferred Stock shall be entitled to participate with the Common Stock in the issuance of any dividends on the Common Stock on a per share basis.

(b) Dividend Rate; Dividend Payment Dates. Each holder of the Series M Preferred Stock shall be entitled to received when and as declared by the Board of Directors, out of funds legally available therefor cumulative cash dividends, in preference and priority to dividends on any Junior Stock, that shall accrue on the Liquidation Price (as defined in Section 2(a)) of each share of the Series M Preferred Stock at the rate of ten percent (10%) per annum, from and including the Original Issue Date of such share (as defined in Section 4(f)(i)(B)) to and including the date on which such share ceases to be outstanding. The accrued dividends will be adjusted for stock splits, stock dividends, combinations, recapitalizations, reclassifications and similar events (together referred to as “Recapitalization Events”) which affect the number of outstanding shares of the Series M Preferred Stock. Accrued dividends on the Series M Preferred Stock shall be payable out of funds legally available therefor on January 1, 1998 and thereafter quarterly on April 1, July 1, October 1, and January 1 of each year (each a “Dividend Payment Date”), to the holders of record of the Series M Preferred Stock as of the close of business on the

Exhibit 3.1

applicablerecord date. Dividends shall be fully cumulative and shallaccrue on a daily basis based on a 365-day or 366-day year, asthe case may be, without regard to the occurrence of a DividendPayment Date and whether or not such dividends have been declaredand whether or not there are any unrestricted funds of theCorporation legally available for the payment of dividends. Theamount of dividends “accrued” with respect to any share of SeriesM Preferred Stock as of the first Dividend Payment Date after theOriginal Issue Date, or as of any other date after the originalIssue Date that is not a Dividend Payment Date, shall becalculated on the basis of the actual number of days elapsed fromand including the original Issue Date, in the case of the firstDividend Payment Date and any date of determination prior to thefirst Dividend payment, or from and including the last precedingDividend Payment Date, in the case of any other date ofdetermination, to and including such date of determination whichis to be made, in each case based on a year of 365 or 366 days,as the case may be (the “Dividend period”). Whenever the Boardof Directors of the Corporation declares any dividend pursuant tothis Section 1, notice of the applicable record date and relatedDividend Payment Date shall be given in accordance with Section4(n).

(c) Compounding of Dividends; Addition to Conversion Value and to Liquidation Price. On each Dividend payment Date, all dividends that have accrued on each share of Series M Preferred Stock during the immediately preceding Dividend Period shall, to the extent not paid on such Dividend Payment Date for any reason (whether or not such unpaid dividends have been earned or declared or there are any unrestricted funds of the corporation legally available for the payment of dividends), be added to the Conversion Value (as defined in Section 4(b)) of such share effective as of such Dividend Payment Date and shall remain a part thereof. All dividends that have accrued on each share of Series M Preferred Stock during any Dividend Period shall, to the extent not paid in full on the first Dividend Payment Date after the end of such Dividend Period for any reason (whether or not such unpaid dividends have been earned or declared or there are any unrestricted funds of the Corporation legally available for the payment of dividends), be added to the Liquidation Price of such share effective as of the first Dividend Payment Date after the last day of such Dividend Period and shall remain a part thereof to and including the date on which the Liquidation Price or Redemption Price of such share is paid in full to the holder of such share pursuant to Sections 2 or 6, respectively. No accrued dividends (or dividends accrued thereon) which have been added to the Liquidation Price or Conversion Value of any Series H Preferred stock may be subsequently declared or, except in accordance with Section 2 or 6, paid by the Corporation without the consent of the holders of a majority of the shares of Series M Preferred Stock.

(d) Pro Rata Declaration and Payment of Dividends. All dividends paid with respect to shares of the Series M Preferred Stock pursuant to this Section 1 shall be declared and paid pro rata to all the holders of the shares of Series M Preferred Stock outstanding as of the applicable record date.

2. Liquidation, Dissolution or Winding Up.

(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the sale of all or substantially all of its assets, or the merger or consolidation of the Corporation as a result of which the then shareholders of the Corporation do not continue to hold more than a 50% interest in the successor entity or a

Exhibit 3.1

transaction or seriesof related transactions in which the Corporation’s shareholderstransfer more than 50% of the voting power of the Corporation(each such event, a “Liquidation”), except as provided in Section2(b) below, the holder of each share of Series M Preferred Stockthen outstanding shall be entitled to be paid out of the assetsof the Corporation available for distribution to its shareholdersbefore payment to the holders of Common Stock by reason of theirownership thereof, an amount (the “Liquidation Price”), payablein cash (and, to the extent sufficient cash is not available forsuch payment, property at its fair market value), equal to (1)$2,750.00 per share, plus (ii) an amount equal to all dividendsaccrued on such share of Series M Preferred Stock since theOriginal Issue Date thereof which, pursuant to Section 1(c), havebeen added to and remain part of the Liquidation Price as of suchtime of determination, whether or not such unpaid dividends havebeen earned or declared or there are any unrestricted funds ofthe corporation legally available for the payment of dividends (the “Accrued Dividend Amount”), plus (iii) the difference inamount, if any, between the Accrued Dividend Amount and theamount necessary to effect a cumulative preferred return at therate of ten percent (10%) per annum compounded annually since theoriginal Issue Date thereof.

(b) If upon any such Liquidation the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of Series M Preferred Stock and the holders of shares of the Class B Preferred Stock, Class C Preferred Stock and Series D Preferred Stock the full amount to which they shall be entitled, then the entire assets of the Corporation shall be distributed among the holders of shares of Series M Preferred Stock and the holders of shares of the Class B Preferred Stock, the Class C Preferred Stock and the Series D Preferred Stock ratably in proportion to the full amount to which such holders are entitled.

(c) After the payment of all preferential amounts required to be paid to the holders of Series M Preferred Stock and the holders of Preferred Stock, other than the Series M Preferred Stock, upon the Liquidation of the corporation, the holders of the shares of Series M Preferred Stock shall be entitled to participate with the Common Stock in the distribution of all remaining assets and funds of the corporation available for distribution to its shareholders.

3. Voting Rights.

(a) Each holder of shares of Series M Preferred Stock shall be entitled to votes equal in the aggregate to the number of votes to which the number of whole shares of Common Stock into which the shares of Series M Preferred Stock held by such holder are convertible would be entitled (as adjusted from time to time pursuant to Section 4 of this Subpart (j) of Article III), at each meeting of the shareholders of the Corporation (and for purposes of written actions of shareholders in lieu of meetings) with respect to any and all matters presented to the shareholders of the Corporation for their action or consideration. Except as otherwise provided herein or required by law, holders of shares of Series M Preferred Stock shall vote with the holders of shares of Common Stock and any other class of stock entitled to vote and not as a separate class. Any class vote pursuant to this Section 3 or required by law shall be determined by the holders of a majority of the shares of Series M Preferred Stock as of the applicable record date.

Exhibit 3.1

(b) The Corporation shall not amend, alter or repealthe preferences, privileges, special rights or other powers ofthe Series M Preferred Stock so as to affect adversely the Series M Preferred Stock, without the written consent or affirmativevote of the holders of a majority of the then outstanding sharesof Series M Preferred Stock, given in writing or by vote at ameeting, consenting or voting las the case may be) separately asa class. For this purpose, without limiting the generality ofthe foregoing, the authorization or issuance of any Preferred Stock having an equal right or a preference or priority over the Series M Preferred Stock as to the right to receive dividends oramounts distributable upon Liquidation of the Corporation shallbe deemed to affect adversely the Series M Preferred Stock. In addition, the holders of the Series M Preferred Stock shall havethe right to vote as a class on all matters requiring their voteor approval under, and in the manner set forth in, the Florida Business Corporation Act.

(c) After the original Issue Date, the Corporation shall not, and shall not permit any of its subsidiaries to, without the consent or affirmative vote of the holders a majority of the then outstanding shares of the Series M Preferred Stock given in writing or by vote at a meeting, consenting or voting (as the case may be) as a separate class:

(i) amend, modify or repeal the Articles of Incorporation or Bylaws of the Corporation or the Articles of Incorporation, Bylaws, Operating Agreement or other organizational document of any subsidiary, or take any action with respect to the creation, authorization, designation or issuance of any class or series of equity securities of the Corporation or any Subsidiary or any option, warrants or other rights to receive any class or series of equity securities of the Corporation or any subsidiary (other than pursuant to employee benefit or incentive plans in effect as of October 9, 1997 or described in the Corporation’s definitive proxy statement for its 1997 annual shareholders meeting);

(ii) effect any merger, recapitalization or consolidation with or into another entity, or enter into any binding share exchange or similar transaction with any entity;

(iii) sell, transfer, lease or dispose of all or substantially all of its assets in one transaction or a series of related transactions, or liquidate, dissolve or wind-up its affairs;

(iv) sell, transfer, dispose of, lease, pledge or encumber (a “disposition”), or engage in a series of related dispositions, of any assets (including rights) having a value, in the aggregate for such transaction or series of transactions, in excess of $250,000;

(v) lease or otherwise acquire any assets having a value, in the aggregate, in excess of $250,000;

(vi) incur or prepay any indebtedness (or guarantee obligations of others or enter into any other guarantee or credit support arrangement) other than trade debt incurred in the ordinary course of business;

(vii) pay any dividend, or make other distributions or redemption payments with respect to any of its equity interests;

Exhibit 3.1

(viii) conduct or engage in any business otherthan the business in which it is presently engaged (and suchother businesses as are reasonably ancillary thereto);

(ix) form and own, in whole or in part, one or more corporations, trusts, partnerships or other subsidiary entity;

(x) acquire, own or hold for investment any equity interests in another entity or any option, warrant, or other debt or equity interest convertible into or evidencing the right to acquire (whether or not for additional consideration) any equity interest in such entity;

(xi) enter into any transaction or agreement (or amend any agreement) with any affiliate of the Corporation or any of the Corporation’s shareholders;

(xii) adopt or amend its annual budget;

(xiii) hire, employ or discharge any of its executive officers, managers or key employees;

(xiv) engage or discharge its independent certified public accountants;

(xv) initiate or settle any litigation involving an amount in controversy in excess of $250,000;

(xvi) adopt or amend any employee benefit plan or program;

(xvii) enter into any commitment or series of related commitments involving a payment or payments of an aggregate amount in excess of $500,000;

(xviii) file for voluntary or involuntary protection under federal or state bankruptcy or insolvency laws or make any assignment for the benefit of creditors; or

(xix) take any action that would make it impossible for the Corporation or any of its subsidiaries to carry on its ordinary business or take any action that is in contravention of these Articles of Incorporation.

(d) In addition to and distinct from the matters described in Sections 3(b) and 3(c) above, holders of Series M Preferred Stock, voting as a separate class, shall have the right to elect two individuals to be members of the Corporation’s Board of Directors. Each director duly elected to the Board of Director of the Corporation in accordance with this Section 3(d) shall be subject to removal only at the request of the holders of a majority of the shares of Series M Preferred Stock.

4. Conversion at the Option of a Holder. The holders of the Series M Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

Exhibit 3.1

(a) Right to Convert. Each share of Series MPreferred Stock shall be convertible, at the option of the holderthereof, at any time and from time to time prior to the fifthanniversary of the Original Issue Date, into such number of fullypaid and non-assessable shares of Common Stock as is determinedby dividing (i) the Conversion Value (as defined below) of suchshare determined as of such time by (ii) the Conversion Price (as defined below) determined as of such time. In the event of aLiquidation of the Corporation, the Conversion Rights shallterminate at the c1ose of business on the last full day precedingthe date fixed for the payment of any amounts distributable onLiquidation to the holders of Series M Preferred Stock.

(b) Conversion Value. The “Conversion Value” measured per share of the Series M Preferred Stock shall be the sum of (A) $2,750.00, plus (B) an amount equal to all dividends accrued on such share of Series M Preferred Stock since the original Issue Date which, pursuant to Section l(c), have been added to and remain part of the Conversion Value at such time, whether or not such unpaid dividends have been earned or declared or there are any unrestricted funds of the corporation legally available for the payment of dividends, plus (C) an amount equal to all dividends accrued on such share of Series M Preferred Stock since the most recent Dividend Payment Date through and including such time, whether or not such unpaid dividends have been earned or declared or there are any unrestricted funds of the Corporation legally available for the payment of dividends.

(c) Conversion Price. The Conversion Price at which shares of Common Stock shall be deliverable upon conversion of Series M Preferred Stock without the payment of additional consideration by the holder thereof shall initially be $2.75 or, in the case of an automatic conversion pursuant to Section 5 below, the lower of $2.75 or 50% of the average closing bid price of the Common Stock for the ten trading days immediately preceding the fifth anniversary of the original Issue Date (the “Conversion Price”). Such initial Conversion Price, and the rate at which shares of Series M Preferred Stock may be converted into shares of Common stock, shall be subject to adjustment as provided in this Section 4.

(d) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series M Preferred Stock pursuant to this Section 4 or Section 5. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price.

(e) Mechanics of Conversion.

(i) In order for a holder of Series M Preferred Stock to convert shares of Series M Preferred Stock into shares of Common stock, such holder shall surrender the certificate or certificates for such shares of Series M Preferred Stock, at the office of the transfer agent for the Series M Preferred Stock (or at the principal office of the corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of Series M Preferred Stock represented by such certificate or certificates. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the corporation, duly executed by the registered holder or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or

Exhibit 3.1

by the Corporation if the Corporation servesas its own transfer agent) shall be the conversion date(“Conversion Date”). The Corporation shall, as soon aspracticable after the Conversion Date, issue and deliver at suchoffice to such holder of Series M Preferred Stock a certificateor certificates for the number of shares of Common Stock to whichsuch holder shall be entitled, together with cash in lieu of anyfraction of a share. As of the Conversion Date, the personentitled to receive certificates of Common Stock shall beregarded for all corporate purposes as the holder of the numberof shares of Common Stock to which it is entitled upon theconversion.

(ii) The Corporation shall at all times when the Series M Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series M Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series M Preferred Stock.

(iii) All shares of Series M Preferred Stock which shall have been surrendered for conversion as herein provided in this Section 4 or which shall have been automatically converted pursuant to Section 5 shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate on the Conversion Date, in the case of conversions pursuant to this Section 4, or the fifth anniversary of the Original Issue Date, in the case of automatic conversions pursuant to Section 5, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Series M Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series M Preferred Stock accordingly.

(f)Adjustments to Conversion Price for Diluting Issues.

(i) Special Definitions.For purposes of this Section 4(f), the following definitions shall apply:

(A)“Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding (I) options granted to employees or issued to consultants of the corporation or warrants which, in each such case, are outstanding as of the Original Issue Date, (II) any warrants issued in connection with or as a direct result of the issuance of Series M Preferred Stock pursuant to the Securities Purchase Agreement dated as of September 30, 1997, by and between the Corporation and winter Harbor, L.L.C. (the “Securities Purchase Agreement”), or (III) options granted to employees or consultants pursuant to stock option plans adopted by the Board of Directors and approved by the Compensation Committee of the Board of Directors after the Original Issue Date.

(B) “Original Issue Date” shall mean the date on which a share of Series M Preferred Stock was first issued.

(C)“Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock.

Exhibit 3.1

(D)“Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Section(f)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable:

(I)upon conversion of shares of Class B Preferred Stock, Class C Preferred Stock, Series D Preferred Stock or Series M Preferred Stock outstanding on the original Issue Date;

(II) upon the exercise of Warrants issued under the Securities Purchase Agreement;

(III) as a dividend or distribution on Class B Preferred Stock, Class C Preferred Stock, Series D Preferred Stock or Series M Preferred Stock;

(IV) in connection with an acquisition or other transaction by the Corporation~, in either case approved by the holders of at least a majority of the then outstanding shares of the Series M Preferred Stock, unless the corporation agrees to include such issuance in the definition of Additional Shares of Common Stock in connection with obtaining the approval of the holders of at least a majority of the then outstanding shares of the Series M Preferred Stock to such acquisition or other transaction;

(V) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (I), (II), (III) and (IV) or this clause (V); or

(VI)upon the exercise of options excluded from the definition of “Option” in Section 4(f)(i)(A).

(ii) Adjustment of Conversion Price. If the consideration per share (determined pursuant to Section 4(f)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to, the issuance of such Additional Shares of Common Stock, the Conversion Price shall be adjusted to such lower price per share at which such Additional Shares of Common Stock are being issued or deemed issued.

(iii) Issue of Securities Deemed Issue of Additional Shares of Common Stock. If the Corporation at any time or from time to time after the Original Issue Date shall issue any options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and options therefor, the conversion or exchange of such Convertible Securities and the exercise of such Options therefor, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issuance or, in case such a record date shall have been fixed, as of the close of business on

Exhibit 3.1

such record date, provided thatAdditional Shares of Common Stock shall not be deemed to havebeen issued unless the consideration per share (determined pursuant to Section 4(f)(v) of this Subpart (j) of Article III) of such Additional Shares ofCommon Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issuance, or suchrecord date, as the case may be, and provided further that in anysuch case in which Additional Shares of Common Stock are deemedto be issued:

(A)No further adjustment in the Conversion Price shall be made upon the subsequent issuance of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities;

(B) If such options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issuance thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such options or the rights of conversion or exchange under such Convertible Securities;

(C) No readjustment pursuant to clause (B) above shall have the effect of increasing the Conversion Price to an amount which exceeds the Conversion Price on the original adjustment date; and

(D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment which was made upon the issuance of such option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise or conversion of any such option or Convertible Security.

(iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(f)(iii), but excluding shares issued as a dividend or distribution as provided in Section 4(h) or upon a stock split or combination as provided in Section 4(g), without consideration or for a consideration per share (determined pursuant to Section 4(f)(v) of this Subpart (j) of Article III) less than the Conversion Price in effect on the date of and immediately prior to such issuance, then and in such event, the Conversion Price shall be reduced, concurrently with such issuance, to such lower consideration per share at which such Additional Shares of Common Stock are being issued (or deemed issued).

Exhibit 3.1

(v) Determination of Consideration.For purposes of this Section 4(f), the consideration received by the Corporation for the issuance of any Additional Shares of Common Stock shall be computed as follows:

(A)Cash and Property. Such consideration shall:

(I)insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends;

(II)insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issuance, as determined in good faith by the Corporation’s Board of Directors; and

(III) in the event Additional Shares of Common Stock are issued together with other shares of securities or other assets of the corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Corporation’s Board of Directors.

(B)Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(f)(iii), relating to Options and Convertible securities, shall be determined by dividing:

(I)the total amount, if any, received or receivable by the corporation as consideration for the issuance of such Options or Convertible securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of options for Convertible Securities, the exercise of such options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

(II)the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such options or the conversion or exchange of such Convertible Securities.

(g)Adjustments to Conversion Price for Diluting Issues. If the Corporation shall at any time or from time to time after the original Issue Date for the Series M Preferred Stock effect a subdivision of the outstanding Common Stock, the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased and the number of shares of Common Stock issuable upon conversion of a share of the Series M Preferred Stock shall be proportionately increased. If the Corporation shall at any time or from time to time after the original Issue Date for the Series M Preferred Stock combine the outstanding shares of Common Stock, the Conversion Price then in effect immediately before the combination shall be

Exhibit 3.1

proportionately increased and the number of shares of CommonStock issuable upon conversion of a share of the Series MPreferred Stock shall be proportionately decreased. Anyadjustment under this paragraph shall become effective at theclose of business on the date the subdivision or combinationbecomes effective.

(h)Adjustments for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date for the Series M Preferred Stock shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for the Series M Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for the Series M Preferred Stock then in effect by a fraction:

(i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for the Series M Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price for the Series M Preferred Stock shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.

(i) Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date for the Series M Preferred Stock shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series M Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their Series M Preferred Stock been converted on the date of such event and had thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period, under this paragraph with respect to the rights of the holders of the Series M Preferred Stock.

(j) Adjustment for Reclassification, Exchange, or Substitution. If the Common Stock issuable upon the conversion of the Series M Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for

Exhibit 3.1

below), then and ineach such event each holder of the Series M Preferred Stock shallhave the right thereafter to convert each such share of CommonStock issuable upon the conversion of the Series M PreferredStock into the kind and amount of shares of stock and othersecurities and property receivable upon such reorganization,reclassification, or other change, by holders of the number ofshares of Common Stock into which such shares of Series MPreferred Stock might have been converted immediately prior tosuch reorganization, reclassification, or change, all subject tofurther adjustment as provided herein.

(k) Adjustment for Merger or Reorganization. In case of any consolidation or merger of the Corporation with or into another corporation, each share of Series M Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series M Preferred Stock would have been entitled upon such consolidation or merger; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Series M Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series M Preferred Stock.

(l) No Impairment. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series M Preferred Stock against impairment.

(m) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms of this Subpart (j) of Article III and furnish to each holder of Series M Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Series M Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments; (ii) the Conversion Price then in effect; and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series M Preferred Stock.

(n) Notice of Record Date. In the event:

(i) that the corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation;

Exhibit 3.1

(ii) that the Corporation subdivides or combines its outstanding shares of Common Stock;

(iii)of any reclassification of the Common Stock of the corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation; or

(iv)of the Liquidation of the corporation;

then the corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Series M Preferred Stock, and shall cause to be mailed to the holders of the Series M Preferred Stock at their last addresses as shown on the records of the corporation or such transfer agent, at least ten days prior to the record date specified in (A) below or twenty days before the date specified in (B) below, a notice stating:

(A)the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or

(B) the date on which such reclassification, consolidation, merger, or Liquidation is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation merger, or Liquidation.

5. Automatic Conversion.

(a)Immediately upon the fifth anniversary of the Original Issue Date, each share of the Series M Preferred Stock then outstanding shall be automatically converted into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (i) the Conversion Value (as defined in Section 4) determined as of such time by (ii) the Conversion Price (as defined in Section 4) determined as of such time.

(b) On the date fixed tor conversion, all rights with respect to the Series M Preferred Stock so converted will terminate. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by its attorney duly authorized in writing. As soon as practicable after the date of such mandatory conversion and the surrender of the certificate or certificates for Series M Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions of this Subpart (j) of Article III and cash as provided in Section 4(d) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion.

Exhibit 3.1

(c) All certificates evidencing shares of Series M Preferred Stock which are required to be surrendered for conversion in accordance with the provisions of this Subpart (j) of Article III shall, from and after the date such certificates are so required to be surrendered, be deemed to have been retired and canceled and the shares of Series M Preferred Stock represented thereby converted into Common Stock for all purposes as of the date of conversion set forth in Section 5(a) above, notwithstanding the failure of the holder or holders thereof to surrender such certificates.

6. Optional Redemption.

(a) At any time on or after a Change in Control (as such term is defined herein), each holder of Series M Preferred Stock may tender all (but not less than all) of its shares of Series M Preferred Stock to the Corporation, and thereupon the Corporation shall pay to such holder, in cash, an amount equal to the Fair Market Value of such shares, as determined in accordance with the procedure set forth herein payable with respect to such shares. The Corporation shall provide each holder of Series M Preferred Stock with a written notice of the occurrence of a Change in Control (addressed to the holder at its address as it appears on the stock transfer books of the Corporation), not earlier than sixty nor later than twenty days before the date of such occurrence. Any holder of shares of Series M Preferred Stock that elects to have such shares redeemed shall notify the Corporation of such election in writing. Such notice shall specify a date for optional redemption payments to be made, which shall be a date not earlier than the date of the occurrence of the Change in Control (the “Redemption Date”). If on the Redemption Date sufficient funds of the corporation are not legally available to redeem all outstanding shares of Series M Preferred Stock so tendered for redemption, then funds to the extent legally available shall be used for such redemption pro rata according to the number of shares of Series M Preferred Stock so tendered (a “Partial Redemption”) as of the Redemption Date. The corporation shall make additional Partial Redemptions beginning thirty days after the Redemption Date and each thirty days thereafter until all tendered shares of Series M Preferred Stock have been redeemed.

(b) For purposes of this Section 6, a “Change in Control” shall be deemed to have occurred at such time as (i) a “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) becomes the “beneficial owner”, (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power required to elect or designate for election a majority of the corporation’s Board of Directors, or (ii) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the corporation’s Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Corporation was approved by a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or who have been elected by the holders, as of October 9, 1997, of the Corporation’s Common Stock) cease for any reason to constitute a majority of the Board of Directors then in office.

Exhibit 3.1

(c) For purposes of the provisions of this Section 6,the Fair Market Value of the shares of the Series M Preferred Stock shall be determined in accordance with the procedures set forth in this Section 6(c).

(i) The Fair Market Value of the shares of the Series M Preferred Stock shall be equal to the price that would be payable with respect to the shares if all of the assets of the Corporation were sold to a third party in a transaction structured to maximize cash sale proceeds, treating the business of the Corporation as a going concern, and the Corporation then had been dissolved and liquidated and its remaining assets distributed to its shareholders in accordance with their equity interests in the Corporation (and without any discount for a minority position or illiquidity), after first deducting from the cash proceeds resulting from such sale and any other cash on hand held by the corporation all liabilities of the Corporation (determined in accordance with generally accepted accounting principles, and giving effect to any brokerage fees that would be required to be paid in connection with any such sale). Within the thirty-day period following the delivery of the holder’s election to have its shares of Series M Preferred Stock redeemed, the Corporation and such holder shall negotiate in good faith in an effort to reach mutual agreement as to the Fair Market Value of the shares.

(ii) If the Corporation and such holder are unable to reach agreement as to the Fair Market Value of the shares within such thirty-day period, the Fair Market Value of the shares shall be determined by an appraisal process as set forth herein. Each of the Corporation and such holder shall designate, within fifteen days after the conclusion of the thirty-day negotiation period referred to above, an independent and experienced telecommunications industry appraiser (each individually an “Appraiser” and collectively the “Appraisers”). The Appraisers shall be instructed to complete their appraisals of the Fair Market Value of the shares by no later than thirty days after their appointment. If the determination of the Appraiser with the higher determination is not greater than 110% of the determination of the other Appraiser, the Fair Market Value shall be equal to the average of the determinations of the two Appraisers; provided, however, if the higher determination is greater than 110% of the lower determination, then the two Appraisers shall jointly select a third Appraiser within ten days after the first date on which both of such two Appraisers have delivered their reports. Such third Appraiser shall deliver its report of its good faith determination of the Fair Market Value of the shares within thirty days after such appointment, and in such case the Fair Market Value shall be equal to the average of the closest determinations; provided, however that if the highest and lowest of such three determinations differ from the middle determination by an equal amount, the Fair Market Value shall be equal to such middle determination. The cost of all such appraisals shall be borne by the Corporation.

7. Preemptive rights.

(a) Each holder of the Series M Preferred Stock shall be entitled to a preemptive right to purchase its pro rata share of all or any part of any New Securities (as defined below) which the Corporation may, from time to time, propose to sell and issue. Such holder’s pro share, for purposes of this preemptive right, is the ratio that the number of whole shares of Common Stock into which the shares of Series M Preferred Stock held by such holder are convertible plus the number of shares of any other class of Common Stock or Preferred Stock (on a fully diluted

Exhibit 3.1

basis) then held by the holder bears to the total numberof shares of Common Stock of the Corporation on a fully-dilutedbasis then outstanding.

(b) Except as set forth in the next succeeding sentence, “New securities” shall mean any shares of capital stock of the corporation, including Common Stock, whether now authorized or not, and rights, options or warrants to purchase said shares of capital stock, and securities of any type whatsoever that are, or may become, convertible into said shares of capital stock. Notwithstanding the foregoing, “New Securities” does not include (i) securities offered to the public generally pursuant to a registration statement filed with the Securities and Exchange Commission and declared effective under the Securities Act of 1933, as amended, (ii) securities issued in the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets or other reorganization or in a transaction governed by Rule 145 under the Exchange Act, (iii) options exercisable for Common Stock issued to employees or consultants of the corporation outstanding as of the Original Issue Date or options issued to employees pursuant to a stock option plan adopted by the Board of Directors and approved by the holders of Series M Preferred Stock after the Original Issue Date, (iv) shares of Common Stock issued on conversion of outstanding Class B Preferred Stock, Class C Preferred Stock, Series D Preferred Stock or Series M Preferred Stock; (v) shares of Common Stock issued upon exercise of warrants (A) outstanding as of the Original Issue Date or (B) issued in connection with the sale of Series M Preferred under the Securities Purchase Agreement, (vi) stock issued pursuant to any rights or agreements, including without limitation convertible securities, options and warrants, provided that the preemptive rights established by this Section 7 shall apply with respect to the initial sale or grant by the Corporation of interests in its capital stock pursuant to such rights or agreements, or (vii) stock issued in connection with any stock split, stock dividend or recapitalization by the Corporation.

(c) In the event the Corporation proposes to undertake an issuance of New Securities, it shall give the holders of the Series M Preferred Stock written notice of its intention, describing the type of New Securities, and the price and terms upon which the Corporation proposes to issue the same. Each holder of Series M Preferred Stock shall have thirty days from the date of receipt of any such notice to agree to purchase up to its respective pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Corporation and stating therein the quantity of New Securities to be purchased.

(d) If any holder fails to exercise such preemptive right within said thirty-day period, the Corporation shall have ninety days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty days from the date of said agreement) to sell the New Securities not elected to be purchased by holders of the Series M Preferred Stock at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Corporation’s notice. In the event the Corporation has not sold the New Securities or entered into an agreement to sell the New Securities within said ninety-day period (or sold and issued New Securities in accordance with the foregoing within sixty days from the date of said agreement), the Corporation shall not thereafter issue or sell any of such New Securities, without first offering such securities in the manner provided above.

Exhibit 3.1

(k)SERIES N CONVERTIBLE PREFERRED STOCK

Of the ten million (10,000,000) shares of Preferred Stock authorized hereunder, twenty thousand (20,000) shares of Preferred Stock shall be designated as Series N Convertible Preferred Stock (the “Series N Preferred Stock”), shall have a par value of $10.00 per share, and shall have the following rights and preferences:

1. Dividends. If and when dividends are declared by the Board of Directors on the shares of Common Stock, the holders of Series N Preferred Stock shall be entitled to receive the same dividend as declared on the shares of Common Stock based on the number of shares of Common Stock which would have been held by the holder of each issued and outstanding share of Series N Preferred Stock, if that share of Series N Preferred Stock had been converted in accordance with Section III(k)(4) below to shares of Common Stock immediately prior to the record date for the dividend.

2. Liquidation, Dissolution or Winding Up.

(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the sale of all or substantially all of its assets, or the merger or consolidation of the Corporation as a result of which the then shareholders of the Corporation do not continue to hold more than a 67% interest in the successor entity or a transaction or series of related transactions in which the Corporation’s shareholders transfer more than 33% of the voting power of the Corporation (each such event, a “Liquidation”), except as provided in Section III(k)(2)(b) below, the holder of each share of Series N Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders before payment to the holders of Common Stock by reason of their ownership thereof, an amount (the “Liquidation Price”), payable in cash (and, to the extent sufficient cash is not available for such payment, property at its fair market value), equal to $1,000.00 per share.

(b) If upon any such Liquidation the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of Series N Preferred Stock and the holders of shares of the Class C Preferred Stock, the Series F Preferred Stock and the Series M Preferred Stock the full amount to which they shall be entitled, then the entire assets of the Corporation shall be distributed among the holders of shares of Series N Preferred Stock and the holders of shares of the Series F Preferred Stock ratably in proportion to the full amount to which such holders are entitled, prior to any distribution to holders of Class C Preferred Stock or Series M Preferred Stock.

3. Voting Rights. Each share of Series N Preferred Stock shall entitle the holder thereof to that number of votes which is equal to the number of shares of Common Stock into which such share of Series N Preferred Stock would be convertible if that share of Series N Preferred Stock had been converted in accordance with Section III(k)(4) below to shares of Common Stock immediately prior to the record date for the vote.

4. Conversion Into Common Stock. The holder of the Series N Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

Exhibit 3.1

(a) Right to Convert. Each share of Series N Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time after January 15, 1999, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the Conversion Value (as defined below) of such share by (ii) the Conversion Price (as defined below). In the event of a liquidation of the Corporation, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any amounts distributable on Liquidation to the holders of Series N Preferred Stock.

(b) Conversion Value. The “Conversion Value” of each share of Series N Preferred Stock shall be $1,000.00.

(c) Conversion Price.

(i)The Conversion Price (the “Conversion Price”) shall be determined in the manner set forth in subsection (II)(k)(4)(c)(ii) below and without regard to the provisions of subsection (III)(k)( 4)( c )(iii) below; provided, however, that when, as and if a plurality of eligible voting shares outstanding approve the use of the provision set forth in Section (III)(k)(4)(c)(iii) in lieu of that provision set forth in subsection (III)(k)(4)(c)(ii) for purposes of determining the Conversion Price hereunder at a duly convened shareholders meeting then from and after the date of such vote, the Conversion Price shall be computed as set forth in subsection (III)(k)(4)(c)(iii) and without regard to the provisions set forth in subsection (III)(k)(4)(c)(ii).

(ii)The Conversion Price at which shares of Common Stock shall be deliverable upon conversion of Series N Preferred Stock without the payment of additional consideration by the holder thereof shall initially be $2.78. The Conversion Price shall reset (“Reset”) to the lowest of, but in no event lower than $1.25, (i) 110% of the average trading price for any 20 day period subsequent to the date any Series N Preferred Stock is first issued (the “Original Issue Date”), (ii) the price at which common stock or common stock equivalent is issued (whether by Conversion, exercise or otherwise, but excluding options granted to employees or issued to consultants of the Company or warrants which, in each such case, are outstanding as of the Original Issue Date), (iii) the exercise price or conversion rate of any new options, warrants, preferred stock or other convertible security (excluding options granted to employees, directors or consultants pursuant to stock option plans adopted by the Board of Directors and approved by the Compensation Committee or the Board of Directors after the Original Issue Date), and (iv) if at any time the “Conversion Price” set forth in Section III(j)(5)(c) for which the Series F Convertible Preferred Stock is converted into the Corporation’s Common Stock is less than the applicable Conversion Price for the Series N Preferred Stock then in effect, then and in any such event, the Conversion Price for the Series N Preferred Stock shall be reduced to equal the Conversion Price of the Series F Convertible Preferred Stock. The Conversion Price, and the rate at which shares of Series N Preferred Stock may be converted into shares of Common Stock, shall be subject to further adjustment as provided in this Section III(k)(4).

(d) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series N Preferred Stock pursuant to this Section III(k)(4). In lieu of any

Exhibit 3.1

fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cashequal to such fraction multiplied by the then effective Conversion Price.

(e) Mechanics of Conversion.

(i)In order for a holder of Series N Preferred Stock to convert shares of Series N Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series N Preferred Stock at the office of the transfer agent for the Series N Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent)) together with written notice that such holder elects to convert all or any number of the shares of Series N Preferred Stock represented by such certificate or certificates. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date (“Conversion Date”). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Series N Preferred Stock a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. As of the Conversion Date, the person entitled to receive certificates of Common Stock shall be regarded for all corporate purposes as the holder of the number of shares of Common Stock to which it is entitled upon the conversion.

(ii) The Corporation shall at all times when the Series N Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series N Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series N Preferred Stock.

(iii) All shares of Series N Preferred Stock which shall have been surrendered for conversion as herein provided in this Section III(k)(4) shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Series N Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series N Preferred Stock accordingly.

(f) [Reserved.]

(g) Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the date of first issuance of any shares of Series N Preferred Stock (the “Original Issue Date”) effect a subdivision of the outstanding Common Stock, the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased and the number of shares of Common Stock issuable upon conversion of a share of the Series N Preferred Stock shall be proportionately increased. If the Corporation shall at any time or

Exhibit 3.1

from time to time after the Original Issue Date combine the outstanding shares of Common Stock the Conversion Price then in effect immediately before the combination shall beproportionately increased and the number of shares of Common Stock issuable upon conversionof a share of the Series N Preferred Stock shall be proportionatelydecreased. Anyadjustmentunder this paragraph shall become effective at the close of business on the date the subdivision orcombination becomes effective.

(h) Adjustment for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for the Series N Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for the Series N Preferred Stock then in effect by a fraction:

(i)the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(ii) the denominator of, which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for the Series N Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price for the Series N Preferred Stock shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.

(i)Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series N Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their Series N Preferred Stock been converted on the date of such event and had thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period, under this paragraph with respect to the rights of the holders of the Series N Preferred Stock.

(j)Adjustment for Reclassification, Exchange, or Substitution. If the Common Stock issuable upon the conversion of the Series N Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization,

Exhibit 3.1

reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided forbelow), then and in each such event each holder of the Series N Preferred Stock shall have the right thereafter to convert each such share of Common Stock issuable upon the conversion of theSeries N Preferred Stock into the kind and amount of shares of stock and other securities andproperty receivable upon such reorganization, reclassification, or other change, by holders of thenumber of shares of Common Stock into which such shares of Series N Preferred Stock mighthave been converted immediately prior to such reorganization, reclassification, or change, allsubject to further adjustment as provided herein.

(k) Adjustment for Merger or Reorganization. In case of any consolidation or merger of the Corporation with or into another corporation, each share of Series N Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series N Preferred Stock would have been entitled upon such consolidation or merger; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section III(k)(4) set forth with respect to the rights and interest thereafter of the holders of the Series N Preferred Stock, to the end that the provisions set forth in this Section III(k)(4) (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series N Preferred Stock.

(l) No Impairment. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section III(k)(4) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series N Preferred Stock against impairment.

(m)Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section III(k)(4), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms of this Subpart (k) of Article III and furnish to each holder of Series N Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series N Preferred Stock, furnish or cause to refurnished to such holder a similar certificate setting forth (i) such adjustments and readjustments; (ii) the Conversion Price then in effect; and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series N Preferred Stock.

(n)Notice of Record Date. In the event:

(i)that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation;

Exhibit 3.1

(ii) that the Corporation subdivides or combines its outstanding shares of Common Stock;

(iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation; or

(iv) of the Liquidation of the Corporation;

then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Series N Preferred Stock, and shall cause to be mailed to the holders of the Series N Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least ten days prior to the record date specified in (A) below or twenty days before the date specified in (B) below, a notice stating:

(A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or

(B) the date on which such reclassification, consolidation, merger, or Liquidation is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, or Liquidation.

ARTICLE IV

VOTING RIGHTS

Each holder of Common Stock is entitled to one vote for each share of Common Stock that he holds on each matter submitted to a vote at a meeting of shareholders.

ARTICLE V

BOARD OF DIRECTORS

1. Number. The property, business, and affairs of the corporation shall be managed and controlled by the Board of Directors. The number of directors of the corporation shall not be less than five nor more than nine, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the whole Board of Directors, and such exact number shall be five until otherwise determined by resolution adopted by affirmative vote of a majority of the whole Board of Directors; provided, however, that the number of directors shall not be reduced so as to shorten the term of a director at that time in office. As used in this

Exhibit 3.1

Article V, the term“whole Board” means the total number of directors which the corporationwould have if there were no vacancies.

2. Classes. The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. Directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting, and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, may be filled by the Board of Directors acting by a majority of the directors then in office and any directors so chosen would hold office until the next election of the class for which such directors have been chosen and until their successors are elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. At each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting.

3. Removal. Any director may be removed by the vote of a majority of the whole Board of Directors, but only for cause. Except as may otherwise be provided by law, cause for removal shall be construed to exist only if: (a) the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction: or (b) such director has been adjudicated by a court of competent jurisdiction to be liable for negligence or misconduct in the performance of his duty to the corporation in a matter of substantial importance to the corporation and such adjudication is no longer subject to direct appeal. In addition, any director or the entire Board of Directors may be removed, with or without cause, by the affirmative vote of the holders of at least 67% of the outstanding shares of the corporation then entitled to vote generally in the election of directors cast at a meeting of the shareholders called for that purpose.

4. Vacancies. Any vacancies in the Board of Directors resulting from death, resignation, retirement, removal from office, the creation of a new directorship by an increase in the authorized number of directors, or otherwise shall be filled by a majority vote of the directors then in office, though less than a quorum of the entire Board of Directors. Directors so chosen to fill any vacancy shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which they have been elected expires.

5. Amendment,Alteration, Repeal, Etc. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least 67% of the outstanding shares of the corporation then entitled to vote in the election of directors shall be required to amend, alter, or repeal or to adopt any provision inconsistent with, this Article V.

ARTICLE VI

[Reserved.]

Current Registered Agent and Office: REGISTERED AGENT SOLUTIONS, INC.

Exhibit 3.1

155 OFFICE PLAZA DR.SUITE A

TALLAHASSEE, FL 32301

Exhibit 3.1

EXHIBIT A

NOTICE OF CONVERSION

(To be Executed by the Registered Holder

in order to Convert Shares of Preferred Stock)

The undersigned hereby elects to convert the number of shares of 5% Series F Convertible Preferred Stock indicated below, into shares of Common Stock, par value $.007 per share (the “Common Stock”), of Heritage Global Inc. (the “Company”) according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any.

Conversion calculations: __________________________________________

Date to Effect Conversion

__________________________________________

Number of shares of Preferred Stock to be Converted

__________________________________________

Number of shares of Common Stock to be Issued

__________________________________________

Applicable Conversion Price

__________________________________________

Signature

__________________________________________

Name

__________________________________________

Address

27891925.3

EX-4.2

Exhibit 4.2

DESCRIPTION OF THE REGISTRANT’S SECURITIES

REGISTERED PURSUANT TO SECTION 12 OF THE

SECURITIES EXCHANGE ACT OF 1934

As of December 31, 2019, Heritage Global Inc. had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: our common stock.

In this Exhibit 4.2, when we refer to the “Company,” “we,” “us” or “our” or when we otherwise refer to ourselves, we mean Heritage Global Inc., excluding, unless otherwise expressly stated, our subsidiaries and affiliates.

The following description is a summary of the material terms of our Amended and Restated Articles of Incorporation, as amended (the “Articles”), and our Bylaws, as amended (the “Bylaws”), as currently in effect. This description is subject to, and qualified in its entirety by reference to, our Articles and our Bylaws, each of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K, of which this Exhibit 4.2 is a part. We encourage you to read our Articles, our Bylaws and the applicable provisions of the Florida Business Corporation Act (“FBCA”), for additional information.

Authorized Capital

We are authorized to issue an aggregate of 300,000,000 shares of common stock, $0.01 par value per share (“Common Stock”) and 10,000,000 shares of preferred stock, par value of $10.00 per share, in one or more series and to determine the relative rights and preferences of such preferred stock. As of March 1, 2020, we had 29,352,837 shares of Common Stock issued and outstanding and 569 shares of Series N Preferred Stock (as defined below) issued and outstanding.

Common Stock

Each share of Common Stock is entitled to one vote per share. The Articles do not provide for cumulative voting in the election of directors.

The holders of our Common Stock have no preemptive, subscription, redemption or conversion rights. In the event of our liquidation, dissolution, or winding up, holders of our Common Stock are entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.

The holders of our Common Stock have no preemptive or conversion rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. The rights, preferences, and privileges of the holders of our Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock. All issued and outstanding shares of Common Stock are duly issued, fully paid and nonassessable.

Subject to any preference rights of holders of our preferred stock that the Company may issue in the future, the holders of our Common Stock are entitled to receive dividends, if any, declared from time to time by our Board of Directors out of legally available funds. We have not paid dividends on our Common Stock and do not anticipate that we will pay dividends in the foreseeable future. Dividends payable to shares of Series N Preferred Stock, if any, will be paid on an as-converted basis equal to Common Stock dividends. As of December 31, 2019, we do not have any preferred stock outstanding which has any preferential dividends.

Preferred Stock

Our Board of Directors has the authority, within the limitations and restrictions stated in our Articles, to authorize the issuance of shares of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, preemptive rights and the number of shares constituting any series or the designation of such series.

Of the 10,000,000 shares of preferred stock authorized under our Articles, the Company has designated 20,000 shares as Series N Preferred Stock with a par value of $10.00 per share (“Series N Preferred Stock ”). Each share of Series N Preferred Stock has a voting entitlement equal to 40 shares of Common Stock, votes with the Common Stock on an

Exhibit 4.2

as-converted basis and is senior to all other preferred stock of the Company.The conversion value of each share of Series N Preferred Stockis $1,000, and each share is convertible to 40 common shares at the rate of $25.00 per common share. Each share of Series N Preferred Stock is entitled to receive dividendson an as-converted basis with the Common Stock, if any. The holders of Series N Preferred Stockare entitled to liquidation preference over common stockholders equivalent to $1,000 per share As of March 1, 2020, there were 569 shares of Series N Preferred Stockissued and outstanding.

The issuance of preferred stock could have the effect of decreasing the market price of our Common Stock and could adversely affect the voting and other rights of the holders of our Common Stock.

Anti-Takeover Effects of Our Articles and Bylaws and Certain Provisions of the Florida Anti-Takeover Statute

Composition of the Board of Directors; Election and Removal of Directors

Our Articles set the number of members of the Board of Directors as not less than five nor more than nine, with the exact number to be determined by resolution adopted by the majority of the whole Board of Directors. The Board of Directors is separated into three classes, as nearly equal in number as the then total number of directors constituting the whole Board of Directors permits, with the term of office of one class expiring each year. Any vacancies in the Board of Directors for any reason, including from an increase in the number of directors, may be filled by the majority of the Board of Directors (though less than a quorum), and any directors so chosen would hold office until the next election of their class of directors and until their successors are elected and qualified. Stockholders may nominate directors at a duly convened meeting of the stockholders only if written notice of such stockholders’ intent to make such nomination has been given within five business days following the first day in which notice of the meeting was provided to the stockholders.

The classified board provision of our Articles could have the effect of making the replacement of incumbent directors more time consuming and difficult. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us, even though a tender offer or change in control might be in the best interest of our stockholders. In addition, directors may be removed only for cause by a majority of the entire Board of Directors.In addition, any director or the entire Board of Directors may be removed, with or without cause, by the affirmative vote of the holders of at least 67% of the outstanding shares of the corporation then entitled to vote generally in the election of directors cast at a meeting of the shareholders called for that purpose.

Meetings of the Stockholders

Annual meetings of the stockholders of the Company shall occur only at the designated time and place of the Board of Directors. Special meetings may be called at any time by the President or the Board of Directors. The President of the Company must call a special meeting upon written request of stockholders of records holding an aggregate of 10% of the outstanding share of capital stock of the Company entitled to vote. Our Articles and Bylaws do not provide for the right of stockholders to act by written consent without a meeting.

Our Bylaws require that advance notice must be provided by our stockholders to nominate persons for election to our Board of Directors as well as to propose actions to be taken at an annual meeting.

Amendments to our Articles and Bylaws

Under the FBCA, our Articles may not be amended by stockholder action alone. Rather, our Articles may be amended only if such amendment is declared advisable and formally adopted by our Board of Directors and then approved by the affirmative vote of the holders of a majority of the votes entitled to be cast on the matter. The affirmative vote of the holders of at least sixty-seven percent (67%) of the votes entitled to be cast on such matter is required to amend, alter, repeal or adopt provisions of our Articles relating to the number, election and removal of directors or any other matters inconsistent with Article V of our Articles.

Our Board of Directors has the power to adopt, alter or repeal any provision of our Bylaws and to make new bylaws. Pursuant to the FBCA, our stockholders also have the concurrent right to amend our Bylaws by the affirmative vote

Exhibit 4.2

of a majority of the outstanding shares of stock. Any stockholder proposal may not be voted upon at a special or annual meeting of the stockholders unless such stockholder provides the Board of Directors or Secretary of the Company notice of the intent to present a proposal for action at the forthcoming meeting of the stockholders no more than five business dates following the date on which notice of the meeting is first given the stockholders.

Florida Anti-Takeover Statute

The Company is a Florida corporation and is therefore subject to certain anti-takeover provisions that apply to public corporations under Florida law. Pursuant to Section 607.0901 of the FBCA, a publicly held Florida corporation may not engage in a broad range of extraordinary corporate transactions with an interested shareholder within three years of when the shareholder became an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder), unless, among other exceptions:

• the transaction is approved by a majority of disinterested directors;

• the interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least three years preceding the announcement date of any such extraordinary corporate transaction;

• the interested shareholder is the beneficial owner of at least 90% of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; or

• the consideration paid to the holders of the corporation’s voting stock is at least equal to certain fair price criteria.

Subject to certain exceptions, an interested shareholder is defined as a person who beneficially owns more than 15% of a corporation’s outstanding voting shares. Although permitted by the FBCA, we have not elected in our Articles to opt out of the terms of Section 607.0901. This statutory provision may prevent takeover attempts that might result in a premium over the market price for shares of our Common Stock.

Pursuant to our Bylaws, we have elected to opt out of the provisions of Section 607.0902 of the FBCA, which would prohibit the voting of shares in a publicly held Florida corporation that are acquired in a control share acquisition unless (i) the Board of Directors approved such acquisition prior to its consummation or (ii) after such acquisition, in lieu of prior approval by the Board of Directors, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control share acquisition. A “control share acquisition” is defined as an acquisition that immediately thereafter entitles the acquiring party to exercise or direct the exercise of the voting power of the corporation in an election of directors within any of the following ranges of voting power:

• one-fifth or more but less than one-third of all voting power;

• one-third or more but less than a majority of all voting power; or

• a majority or more of all voting power.

Limitations on Liability and Indemnification of Officers and Directors

Pursuant to the FBCA, our Directors are not personally liable for monetary damages to the Company or to any other person, except where such act breached such Director’s duties and such breach constituted a violation of criminal law, the director derived an improper personal benefit, and certain other circumstances involving wrongful acts. Our Bylaws contain provisions to indemnify directors, officers, employees or agents of the Company made part of a legal proceeding by reason of the fact that he or she is or was a director, officer, employee or agent of the Company. Such indemnification may only be provided upon the determination of a majority of disinterested Directors or a duly convened committee thereof, by independent legal counsel selected by the Board of Directors, or by the majority vote of a quorum consisting of stockholders who were not parties to such proceeding. The limitation of liability of directors do not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director’s fiduciary duty. These provisions will not alter the liability of directors under federal securities laws.

Exhibit 4.2

Authorized but Unissued Shares

Our authorized but unissued shares of Common Stock and preferred stock will be available for future issuance without stockholder approval, except as may be required under the listing rules of any stock exchange on which our Common Stock is then listed. We may use additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. Our Board of Directors has the authority to issue shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of our Common Stock or that a stockholder might consider in its best interest. Further, the existence of authorized but unissued shares of Common Stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Transfer Agent and Registrar

The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, LLC.

Listing 

Shares of our Common Stock are listed on the OTC Market under the symbol “HGBL” and on the Canadian Securities Exchange under the symbol “HGP”.

27879156.3

EX-21

Exhibit 21

List of Subsidiaries of the Registrant

Name	State of Incorporation
C2 Communications Technologies, Inc.	Delaware
C2 Investments Inc.	Delaware
I-Link Systems Inc.	Utah
Mibridge Inc.	Utah
Heritage Global LLC	Delaware
Equity Partners HG LLC	Delaware
Heritage Global Partners, Inc.	California
Heritage Global Partners UK Limited	N/A
Heritage Global Partners Germany GmbH	N/A
Heritage Global Partners Spain, S.L.	N/A
National Loan Exchange, Inc.	Illinois
Moving Images NY LLC	Delaware
Greystone Post Production Equipment	Delaware
FP Acquisitions LLC	Delaware
737 Gerrard Rd, LLC	Delaware
1701 Vine, LLC	Missouri
Heritage Global Capital LLC	Delaware

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (No. 333-214475) on Form S-8 of Heritage Global Inc. of our report dated March 9, 2020, relating to the consolidated financial statements appearing in this Annual Report on Form 10-K of Heritage Global Inc. for the year ended December 31, 2019.

/s/ SQUAR MILNER LLP

San Diego, California

March 9, 2020

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ross Dove, certify that:

1. I have reviewed this Annual Report on Form 10-K of Heritage Global Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2020

By:	/s/ Ross Dove
	Ross Dove
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Scott A. West, certify that:

1. I have reviewed this Annual Report on Form 10-K of Heritage Global Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March  9, 2020

By:	/s/ Scott A. West
	Scott A. West
	Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

HERITAGE GLOBAL INC.

OFFICER’S CERTIFICATION

PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned Ross Dove, duly appointed and incumbent officer of Heritage Global Inc., a Florida corporation (the “Corporation”), in connection with the Corporation’s Annual Report on Form 10-K for the annual period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), does hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1. The Report is in full compliance with reporting requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

March 9, 2020
	/s/ Ross Dove
	Ross Dove
	Chief Executive Officer
	(Principal Executive Officer)

EX-32.2

Exhibit 32.2

HERITAGE GLOBAL INC.

OFFICER’S CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned Scott A. West, duly appointed and incumbent officer of Heritage Global Inc., a Florida corporation (the “Corporation”), in connection with the Corporation’s Annual Report on Form 10-K for the annual period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), does hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1. The Report is in full compliance with reporting requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

March 9, 2020
	/s/ Scott A. West
	Scott A. West
	Chief Financial Officer
	(Principal Financial Officer)

XML

Summary of Significant Accounting Policies (Narrative) (Details)	12 Months Ended
	Dec. 31, 2019 USD ($) Segment	Dec. 31, 2018 USD ($)	Jan. 01, 2018 USD ($)
Summary Of Significant Accounting Policies [Line Items]
Allowance for credit losses related to notes receivable outstanding	$ 0
Intangible assets impairment charges	0
Goodwill impairment charges	573,000	$ 0
Deferred tax assets reduction in valuation allowance	400,000
Payment of contingent consideration	0	2,617,000
Cumulative effect adjustment to accumulated deficit	(273,474,000)	(277,373,000)
Selling, General and Administrative Expenses [Member]
Summary Of Significant Accounting Policies [Line Items]
Advertising and promotion expense	$ 600,000	800,000
ASC 606 [Member]
Summary Of Significant Accounting Policies [Line Items]
Number of reporting segment | Segment	1
Percentage of service revenue that is recognized over a period of time against total revenue	2.00%
Deferred revenue	$ 2,500
Difference Between Revenue Guidance in Effect Before and After Topic 606 [Member] | ASC 606 [Member]
Summary Of Significant Accounting Policies [Line Items]
Cumulative effect adjustment to accumulated deficit			$ 0
NLEX [Member]
Summary Of Significant Accounting Policies [Line Items]
Fair value of liabilities	$ 0	0
Payment of contingent consideration		$ 2,600,000

XML

Debt (Tables)

12 Months Ended

Dec. 31, 2019

Debt Disclosure [Abstract]

Schedule of Debt

	December 31,		December 31,
	2019		2018
Third party debt:
Current portion	$	403	$	1,178
Non-current portion		35		438
Total third party debt	$	438	$	1,616

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Cash flows provided by operating activities:
Net income	$ 3,899	$ 3,751
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings of equity method investments	(1,373)	0
Noncash lease expense	(262)	0
Depreciation and amortization	305	319
Impairment of goodwill	573	0
Fair value adjustment of contingent consideration	0	(157)
Deferred taxes	(956)	72
Stock-based compensation expense	283	289
Changes in operating assets and liabilities:
Accounts receivable	(1,459)	(16)
Inventory – equipment	2,301	(2,235)
Other assets	(100)	(238)
Accounts payable and accrued liabilities	9	3,847
Lease liabilities	235	0
Other non-current liabilities	(2,661)	1,838
Net cash provided by operating activities	794	7,470
Cash flows used in investing activities:
Purchase of property and equipment	(116)	(99)
Investment in notes receivable	(2,827)	0
Payments received on notes receivable	166	0
Investment in equity method investments	(604)	(2,753)
Cash distributions from equity method investments	2,225	0
Net cash used in investing activities	(1,156)	(2,852)
Cash flows used in financing activities:
Proceeds from debt payable to third parties	1,250	1,300
Repayment of debt payable to third parties	(2,428)	(826)
Repayment of debt payable to related party	0	(390)
Payment of contingent consideration	0	(2,617)
Proceeds from exercise of options to purchase common shares	0	74
Net cash used in financing activities	(1,178)	(2,459)
Net (decrease) increase in cash and cash equivalents	(1,540)	2,159
Cash and cash equivalents at beginning of year	4,268	2,109
Cash and cash equivalents at end of year	2,728	4,268
Supplemental cash flow information:
Cash paid for income taxes	290	56
Cash paid for interest	74	249
Noncash change in right-of-use assets	1,220	0
Noncash change in deferred rent	(64)	0
Noncash change in lease liabilities	1,284	0
Issuance of common stock for services rendered	$ 65	$ 0

XML

Debt

12 Months Ended

Dec. 31, 2019

Debt Disclosure [Abstract]

Debt

Note 12 – Debt

Outstanding debt is summarized as follows (in thousands):

	December 31,		December 31,
	2019		2018
Third party debt:
Current portion	$	403	$	1,178
Non-current portion		35		438
Total third party debt	$	438	$	1,616

In 2016, the Company entered into a related party secured promissory note with an entity owned by certain executive officers of the Company (the “Entity”) for a revolving line of credit (the “Line of Credit”).  Under the terms of the Line of Credit, the Company received a revolving line of credit with an aggregate borrowing capacity of $1.5 million.  Interest under the Line of Credit was charged at a variable rate.  Aggregate loans under the Line of Credit up to $1.0 million incurred interest at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%.  Amounts outstanding at any time in excess of $1.0 million incurred interest at a rate of 8.0% per annum.  The Company was required to pay the Entity an annual commitment fee of $15,000, payable on a monthly basis, and due regardless of amounts drawn against the line.  Further, the Entity was eligible to participate in the net profits and net losses of certain industrial auction principal and guarantee transactions entered into by the Company on or after January 1, 2017, and consummated on or prior to the maturity date.  Principal transactions are those in which the Company purchases assets for resale.  Guarantee transactions are those in which the Company guarantees its client a minimum amount of proceeds from the auction.  The Line of Credit matured at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following the date the Company closes a new credit facility with a financial institution. During 2018, the Company did not draw on the Line of Credit. The Company also incurred approximately $179,000 in expense based on the profit share provision for principal and guarantee transactions, as noted above. In connection with the Company entering into a new credit facility with a third party bank on September 27, 2018, the Company terminated the related party secured promissory note with the Entity.

In September 2018, Heritage Global Inc. entered into a secured promissory note and business loan agreement (the “Credit Facility”) with First Choice Bank, for a $1.5 million revolving line of credit. The 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 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. The Company began paying interest on the Credit Facility in regular monthly payments in November 2018. The Company may prepay the Credit Facility without penalty, subject to the minimum monthly interest charge. The Company is the borrower, with certain of the subsidiaries of the Company as guarantors under the Credit Facility. The Credit Facility is secured by a first priority security interest in all 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 draws under the Credit Facility is conditioned, among other things, on the compliance with certain customary representations and warranties, including the preparation of timely financial statements, payment of taxes and disclosure of all material legal or administrative proceedings. The agreement governing the Credit Facility also contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with governmental requirements, timely submission of all filings with the Securities and Exchange Commission and payment of taxes. 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.

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 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 Credit Facility to April 5, 2020, and (iii) raised the floor interest rate under the 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.

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 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 2019 the Company made the scheduled payments on the Note totaling $420,000. The outstanding balance on the Note as of December 31, 2019 was $438,000.

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 2,728	$ 4,268
Accounts receivable	1,859	400
Current portion of notes receivable, net	1,295
Inventory – equipment	104	2,405
Other current assets	784	607
Total current assets	6,770	7,680
Property and equipment, net	221	175
Non-current portion of notes receivable, net	1,366
Equity method investments	2,516	2,767
Right-of-use asset	1,483
Intangible assets, net	3,392	3,627
Goodwill	5,585	6,158
Deferred tax assets	372
Other assets	212	224
Total assets	21,917	20,631
Current liabilities:
Accounts payable and accrued liabilities	8,110	8,101
Current portion of third party debt	403	1,178
Lease liabilities	577
Other current liabilities	3	892
Total current liabilities	9,093	10,171
Non-current portion of third party debt	35	438
Non-current portion of lease liabilities	942
Other non-current liabilities		1,838
Deferred tax liabilities		584
Total liabilities	10,070	13,031
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 569 Series N shares at December 31, 2019 and December 31, 2018	6	6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 29,339,061 shares at December 31, 2019 and 29,253,278 shares at December 31, 2018	293	293
Additional paid-in capital	285,099	284,751
Accumulated deficit	(273,474)	(277,373)
Accumulated other comprehensive loss	(77)	(77)
Total stockholders’ equity	11,847	7,600
Total liabilities and stockholders’ equity	$ 21,917	$ 20,631

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Inventory

12 Months Ended

Dec. 31, 2019

Real Estate [Abstract]

Inventory

Note 4 – Inventory

As of December 31, 2018, the Company’s inventory balance largely consisted of machinery and equipment related to a purchase with partners of a pharmaceutical campus in Huntsville, Alabama, which was finalized in the fourth quarter of 2018. The 110-acre campus includes three independent modern buildings with various pharmaceutical manufacturing and packing line assets. The Company’s interest in the purchase and carrying value for this inventory at December 31, 2018 was approximately $2.3 million. As of December 31, 2019, the Company’s inventory balance was approximately $0.1 million, a reduction in $2.2 million due primarily to asset sales during 2019 related to the machinery and equipment held in Huntsville, Alabama.

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Leases

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Leases

Note 8 – Leases

The Company leases office and warehouse space primarily in three locations: Del Mar, CA; Burlingame, CA; and Edwardsville, IL. 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,
Right-of-use assets:	2019
Del Mar, CA	$	745
Burlingame, CA		392
Edwardsville, IL		346
	$	1,483
	December 31,
Lease liabilities:	2019
Del Mar, CA	$	745
Burlingame, CA		429
Edwardsville, IL		345
	$	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 both years ended December 31, 2019 and 2018, lease expense was approximately $0.5 million. Undiscounted future minimum lease commitments as of December 31, 2019 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2020	$	578
2021		385
2022		277
2023		218
2024		176
Thereafter		30
Total undiscounted future minimum lease payments		1,664
Less: imputed interest		145
Present value of lease liabilities	$	1,519

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Schedule of Information about All Stock Options Outstanding (Details) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options Outstanding	3,611,850	4,303,900	5,040,450
Options Outstanding, Weighted Average Remaining Life (years)	7 years 3 months 18 days
Options Outstanding, Weighted Average Exercise Price	$ 0.51	$ 0.75	$ 0.97
Number Exercisable	2,157,336	2,533,700
Number Exercisable, Weighted Average Remaining Life (years)	6 years 8 months 12 days
Number Exercisable, Weighted Average Exercise Price	$ 0.46	$ 0.96
Exercise Price $0.24 to $0.40 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options Outstanding	100,000
Options Outstanding, Weighted Average Remaining Life (years)	7 years 6 months
Options Outstanding, Weighted Average Exercise Price	$ 0.34
Number Exercisable	45,000
Number Exercisable, Weighted Average Remaining Life (years)	6 years 10 months 24 days
Number Exercisable, Weighted Average Exercise Price	$ 0.29
Exercise Price $0.42 to $0.48 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options Outstanding	2,792,250
Options Outstanding, Weighted Average Remaining Life (years)	7 years
Options Outstanding, Weighted Average Exercise Price	$ 0.45
Number Exercisable	2,022,336
Number Exercisable, Weighted Average Remaining Life (years)	6 years 10 months 24 days
Number Exercisable, Weighted Average Exercise Price	$ 0.45
Exercise Price $0.48 to $1.00 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options Outstanding	719,600
Options Outstanding, Weighted Average Remaining Life (years)	8 years 6 months
Options Outstanding, Weighted Average Exercise Price	$ 0.75
Number Exercisable	90,000
Number Exercisable, Weighted Average Remaining Life (years)	1 year 1 month 6 days
Number Exercisable, Weighted Average Exercise Price	$ 0.76

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Schedule of Other Stock Options Issued (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	4,303,900	5,040,450
Options expired	(765,000)	(1,016,870)
Options outstanding, end of year	3,611,850	4,303,900
Other Options Issued [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	625,000	625,000
Options issued	265,000	0
Options expired	(625,000)	0
Options outstanding, end of year	265,000	625,000

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Intangible Assets and Goodwill (Narrative) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2014	Dec. 31, 2012	Dec. 31, 2011
Finite Lived Intangible Assets [Line Items]
Amortization expense, intangible assets	$ 235	$ 250
Goodwill	5,585	6,158
Impairment of goodwill	573	0
Equity Partners [Member]
Finite Lived Intangible Assets [Line Items]
Goodwill		573			$ 600
HGP [Member]
Finite Lived Intangible Assets [Line Items]
Goodwill	2,040	2,040		$ 4,700
NLEX [Member]
Finite Lived Intangible Assets [Line Items]
Goodwill	$ 3,545	$ 3,545	$ 3,500

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Schedule of Accounts Payable and Accrued Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Payables And Accruals [Abstract]
Due to auction clients	$ 2,776	$ 3,113
Remuneration and benefits	2,484	2,112
Due to Joint Venture partners	2,067	1,367
Accrued asset liquidation expenses	212	191
Accounting, auditing and tax consulting	187	140
Sales and other taxes	113	293
Customer deposits		600
Other	271	285
Total accounts payable and accrued liabilities	$ 8,110	$ 8,101

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Schedule of 2003 Stock Option and Appreciation Rights Plan (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	4,303,900	5,040,450
Options expired	(765,000)	(1,016,870)
Options forfeited	(545,624)	(73,050)
Options outstanding, end of year	3,611,850	4,303,900
2003 Stock Option and Appreciation Rights Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	310,000	985,000
Options expired	(140,000)	(660,000)
Options forfeited	(150,000)	(15,000)
Options outstanding, end of year	20,000	310,000

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Fair Value Measurements - Summary of Changes in the Fair Value of the Contingent Consideration Liability (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value adjustment of contingent consideration	$ 0	$ 157
NLEX [Member] | Contingent Consideration [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Beginning balance			$ 2,774
Payment of contingent consideration			(2,617)
Fair value adjustment of contingent consideration			$ (157)

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Schedule of Components of Income Tax Expense (Benefit) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Income Tax Disclosure [Abstract]
Expected federal statutory tax expense	$ 625	$ 963
Increase (reduction) in taxes resulting from:
State income taxes recoverable	258	198
Non-deductible expenses (permanent differences)	(15)	42
Change in valuation allowance	(11,294)	(999)
Tax rate changes	9,522	(256)
Other	(9)	322
Income tax (benefit) expense	$ (913)	$ 270

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Leases - Schedule of Right-of-Use Assets and Lease Liabilities (Details) $ in Thousands	Dec. 31, 2019 USD ($)
Lessee Lease Description [Line Items]
Right-of-use asset	$ 1,483
Lease liabilities	1,519
Del Mar, CA [Member]
Lessee Lease Description [Line Items]
Right-of-use asset	745
Lease liabilities	745
Burlingame, CA [Member]
Lessee Lease Description [Line Items]
Right-of-use asset	392
Lease liabilities	429
Edwardsville, IL [Member]
Lessee Lease Description [Line Items]
Right-of-use asset	346
Lease liabilities	$ 345

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Schedule of the Components of Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Schedule Of Equity Method Investments [Line Items]
Assets	$ 21,618	$ 11,064
Liabilities	11,042	168
Oak Grove Asset Acquisitions LP [Member]
Schedule Of Equity Method Investments [Line Items]
Assets	1,602
Liabilities	797
CPFH LLC [Member]
Schedule Of Equity Method Investments [Line Items]
Assets	20,016	11,064
Liabilities	$ 10,245	$ 168

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Related Party Transactions

12 Months Ended

Dec. 31, 2019

Related Party Transactions [Abstract]

Related Party Transactions

Note 16 – Related Party Transactions

Pursuant to an agreement reached between Mr. Dove and board member Mr. Emmett DeMoss, and further approved by the remaining board members, one-half of Mr. Dove’s 2019 bonus is to be paid to Mr. Dove and the other half is to be paid directly to Mr. Emmett DeMoss from the Companyin 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 $108,000 and $105,000 for the years ended December 31, 2019 and 2018, respectively, and is included in selling, general and administrative expenses in the consolidated income statement.  All of the payments in both 2019 and 2018 were made to David Ludwig. On June 1, 2018, the Company amended its lease agreement with David Ludwig, whereby the term of the agreement extends to May 31, 2023 and the rent amounts were agreed upon for the new term.

In 2016 the Company entered into a secured related party loan agreement with certain executive officers of the Company which is more fully described in Note 12.  Both Ross Dove and Kirk Dove, who were parties to the related party loan, share equally in all payments made by the Company to satisfy obligations under the loan agreement. During the year ended December 31, 2018, the Company made payment of approximately $179,000 to the respective parties based on the profit share provision for principal and guarantee transactions that occurred in 2017 and the first three quarters of 2018. In connection with the Company entering into a new credit facility with a third party bank on September 27, 2018, the Company terminated the related party loan agreement.

During 2018, the Company paid David Ludwig $2.6 million for his final earn-out provision payment.    

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Use of estimates

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, contingent consideration, 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

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

Reclassifications

Certain prior year balances within the consolidated financial statements have been reclassified to conform to current year presentation.  

Nature of Business

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.

Cash and cash equivalents

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

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 11 for more detail regarding the Company’s accounts receivable.

Notes receivable, net

Notes receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios, which is considered the only loan category or segment to be reported under the applicable accounting guidance. These loans are measured at historical costs and reported at their outstanding principal balances net of any unamortized deferred fees and costs on originated loans. 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, 2019, 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

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

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 other assets. 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 6 for further detail.  

Fair value of financial instruments

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, 2019 and 2018, 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.  

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. The Company employed fair value accounting for only the contingent consideration recorded as part of the acquisition of NLEX. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market and therefore fall within Level 3.  See Note 13 for more discussion of this contingent consideration.

Business combinations

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

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, 2019 have been acquired as part of the acquisitions of HGP in 2012 and NLEX in 2014, and are discussed in more detail in Note 10. No impairment charges were necessary during 2019.

Goodwill

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.  Testing goodwill is a two-step process, in which the carrying amount of the reporting unit associated with the goodwill is first compared to the reporting unit’s estimated fair value. If the carrying amount of the reporting unit exceeds its estimated fair value, the fair values of the reporting unit’s assets and liabilities are analyzed to determine whether the goodwill of the reporting unit has been impaired. An impairment loss is recognized to the extent that the Company’s recorded goodwill exceeds its implied fair value as determined by this two-step process. FASB Accounting Standards Update 2011-08, Testing Goodwill for Impairment, provides the option to perform a qualitative assessment prior to performing the two-step process, which may eliminate the need for further testing. 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.  

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.  All of the Company’s goodwill relates to its acquisitions of Equity Partners in 2011, HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 10. 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

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 the Company recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million as the Company believes that it is more likely than not that some of its net operating loss carryforwards will be utilized. For further discussion of our income taxes, see Note 15.

Contingent consideration

Contingent consideration

At December 31, 2018 the Company no longer carries a contingent consideration balance. We previously had an earn-out provision payable to the former owner and current president of NLEX (“David Ludwig”) that was part of the consideration for the acquisition of NLEX in 2014. The estimated fair value assigned to the contingent consideration at the acquisition date was determined using a discounted cash flow analysis. Its fair value was assessed quarterly, and any adjustments, together with the accretion of the present value discount, were reported as a fair value adjustment on the Company’s consolidated income statement. The Company adjusted its contingent consideration liability each reporting period to the fair value of the estimated remaining earn-out liability owed to David Ludwig. During 2018 the Company made the final contingent consideration payments to David Ludwig in the aggregate amount of $2.6 million, resulting in a contingent consideration of zero at December 31, 2018 and 2019. See Note 13 for more discussion of the contingent consideration.

Liabilities and contingencies

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 17 for further discussion.

Revenue recognition

Revenue recognition

On January 1, 2018, the Company adopted the new accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method. Based on the Company’s analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of the Company’s accumulated deficit as a result of the adoption of this new standard. We expect the impact of the adoption of the new standard to be immaterial to the consolidated financial statements on an ongoing basis.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions 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 one reporting segment — the asset liquidation business. Although the Company provides various services within the asset liquidation business, it does not disaggregate revenue streams further than as reported in its income statement, services revenue and asset sales. 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 (2% of total revenues for the year ended December 31, 2019), 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, 2019, the deferred revenue balance was approximately $2,500. 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.

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.

Cost of services revenue and asset sales

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

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 18 for further discussion of the Company’s stock-based compensation.

Advertising

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, 2019 and 2018, was $0.6 million and $0.8 million, respectively.

Recently adopted accounting pronouncements

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”). ASU 2016-02 changes the accounting for leases previously classified as operating leases under GAAP by, among other things, requiring a Company to recognize the lease on the balance sheet with a right-of-use asset and a lease liability. Effective January 1, 2019, the Company adopted ASU 2016-02. This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a modified retrospective adoption method at January 1, 2019. Under this method of adoption, there is no impact to the comparative condensed consolidated income statement and consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in ASC Topic 840, “Leases.” In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

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.  

Future accounting pronouncements

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 are currently evaluating the impact of the new guidance on our consolidated financial statements.

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 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.  The Company anticipates that the impact will not be material to its 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.

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Commitments and Contingencies (Narrative) (Details) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2019
Commitment And Contingencies [Line Items]
Remaining minimum distribution payments	$ 3.8	$ 0.8
Maximum [Member]
Commitment And Contingencies [Line Items]
Purchase commitment, remaining minimum amount payment date	May 26, 2020

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Schedule of Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2014
Income Taxes [Line Items]
Net operating loss carry forwards	$ 18,535	$ 28,573
Stock based compensation	921	763
Other		(118)
Equity method investments	(497)
Other	(72)
Gross deferred tax assets	18,011	28,349
Less: valuation allowance	(17,639)	(28,933)	$ (29,932)
Deferred tax assets (liabilities), net of valuation allowance	372			$ 0
Deferred tax assets (liabilities), net of valuation allowance		(584)
Trade Names [Member]
Income Taxes [Line Items]
Deferred tax liabilities, intangible assets	(817)	(763)
Customer Relationships [Member]
Income Taxes [Line Items]
Deferred tax liabilities, intangible assets	$ (59)	$ (106)

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Schedule of 2010 Non-Qualified Stock Option Plan (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	4,303,900	5,040,450
Options granted	649,850	526,500
Options outstanding, end of year	3,611,850	4,303,900
2010 Non-Qualified Stock Option Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	915,000	830,000
Options granted	60,000	85,000
Options outstanding, end of year	975,000	915,000

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Leases (Narrative) (Details) $ in Millions	12 Months Ended
	Dec. 31, 2019 USD ($) Location	Dec. 31, 2018 USD ($)	Jan. 01, 2019
Leases [Abstract]
Number of locations | Location	3
Lessee operating lease, incremental borrowing rate			5.25%
Lease expense | $	$ 0.5	$ 0.5

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Schedule of Joint Venture Revenues and Net Income (Loss) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Schedule Of Equity Method Investments [Line Items]
Revenues	$ 11,507
Operating income (loss)	5,197	$ (115)
Oak Grove Asset Acquisitions LP [Member]
Schedule Of Equity Method Investments [Line Items]
Revenues	522
Operating income (loss)	151
CPFH LLC [Member]
Schedule Of Equity Method Investments [Line Items]
Revenues	10,985
Operating income (loss)	$ 5,046	$ (115)

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Legal Proceedings

12 Months Ended

Dec. 31, 2019

Commitments And Contingencies Disclosure [Abstract]

Legal Proceedings

Note 17 – 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.

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Equity Method Investments (Tables)

12 Months Ended

Dec. 31, 2019

Equity Method Investments And Joint Ventures [Abstract]

Schedule of Joint Venture Revenues and Net Income (Loss)

The table below details the Company’s Joint Venture revenues and net income (loss) during the years ended December 31, 2019 and 2018 (in thousands):

	2019		2018
Revenues:
Oak Grove Asset Acquisitions LP	$	522	$	—
CPFH LLC		10,985		—
Total Revenues	$	11,507	$	—
Operating income (loss):
Oak Grove Asset Acquisitions LP	$	151	$	—
CPFH LLC		5,046		(115	)
Total operating income (loss)	$	5,197	$	(115	)

Schedule of the Components of Assets and Liabilities

The table below details the summarized components of assets and liabilities, as at December 31, 2019 and 2018, of the Company’s Joint Ventures at those dates (in thousands):

	2019		2018
Assets:
Oak Grove Asset Acquisitions LP	$	1,602	$	—
CPFH LLC		20,016		11,064
Total assets	$	21,618	$	11,064
Liabilities:
Oak Grove Asset Acquisitions LP	$	797	$	—
CPFH LLC		10,245		168
Total liabilities	$	11,042	$	168

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Stockholders' Equity (Tables)

12 Months Ended

Dec. 31, 2019

Class Of Stock [Line Items]

Schedule of Assumptions for Fair Value of Option Grant

In connection with the stock option grants during 2019 and 2018, 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:

	2019		2018
Risk-free interest rate	2% - 3%		2% - 3%
Expected life (years)		6.8		3.2
Expected volatility	73%		83%
Expected dividend yield	Zero		Zero

Schedule of Changes in Common Stock Options

The following summarizes the changes in common stock options for 2019 and 2018:

	2019					2018
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		4,303,900		$	0.75		5,040,450		$	0.97
Granted		649,850		$	0.74		526,500		$	0.43
Exercised		(31,276	)	$	0.45		(173,130	)	$	0.43
Expired		(765,000	)	$	2.00		(1,016,870	)	$	1.74
Forfeited		(545,624	)	$	0.61		(73,050	)	$	0.77
Outstanding at end of year		3,611,850		$	0.51		4,303,900		$	0.75
Options exercisable at year end		2,157,336		$	0.46		2,533,700		$	0.96
Weighted-average fair value of options granted    during the year				$	0.50				$	0.17

Schedule of Information about All Stock Options Outstanding

The following table summarizes information about all stock options outstanding at December 31, 2019:

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		7.5	$	0.34		45,000		6.9	$	0.29
$ 0.42 to $ 0.48		2,792,250		7.0	$	0.45		2,022,336		6.9	$	0.45
$ 0.48 to $ 1.00		719,600		8.5	$	0.75		90,000		1.1	$	0.76
		3,611,850		7.3	$	0.51		2,157,336		6.7	$	0.46

Other Options Issued [Member]

Class Of Stock [Line Items]

Schedule of Stock Options and Other Stock Options Issued

Other Options	2019			2018
Options outstanding, beginning of year		625,000			625,000
Options issued		265,000			—
Options expired		(625,000	)		—
Options outstanding, end of year		265,000			625,000

2003 Stock Option and Appreciation Rights Plan [Member]

Class Of Stock [Line Items]

Schedule of Stock Options and Other Stock Options Issued

2003 Plan	2019			2018
Options outstanding, beginning of year		310,000			985,000
Options expired		(140,000	)		(660,000	)
Options forfeited		(150,000	)		(15,000	)
Options outstanding, end of year		20,000			310,000

2010 Non-Qualified Stock Option Plan [Member]

Class Of Stock [Line Items]

Schedule of Stock Options and Other Stock Options Issued

2010 Plan	2019		2018
Options outstanding, beginning of year		915,000		830,000
Options granted		60,000		85,000
Options outstanding, end of year		975,000		915,000

Equity Partners Stock Option Plan [Member]

Class Of Stock [Line Items]

Schedule of Stock Options and Other Stock Options Issued

Equity Partners Plan	2018
Options outstanding, beginning of year		230,000
Options expired		(230,000	)
Options outstanding, end of year		—

2016 Stock Option Plan [Member]

Class Of Stock [Line Items]

Schedule of Stock Options and Other Stock Options Issued

2016 Plan	2019			2018
Options outstanding, beginning of year		2,453,900			2,370,450
Options granted		324,850			441,500
Options exercised		(31,276	)		(173,130	)
Options expired		—			(126,870	)
Options forfeited		(395,624	)		(58,050	)
Options outstanding, end of year		2,351,850			2,453,900

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Accounts Receivable and Accounts Payable (Tables)

12 Months Ended

Dec. 31, 2019

Payables And Accruals [Abstract]

Schedule of Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following at December 31, 2019 and 2018 (in thousands):

	2019		2018
Due to auction clients	$	2,776	$	3,113
Remuneration and benefits		2,484		2,112
Due to Joint Venture partners		2,067		1,367
Accrued asset liquidation expenses		212		191
Accounting, auditing and tax consulting		187		140
Sales and other taxes		113		293
Customer deposits		—		600
Other		271		285
Total accounts payable and accrued liabilities	$	8,110	$	8,101

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Lessor Arrangement

12 Months Ended

Dec. 31, 2019

Lessor Disclosure [Abstract]

Lessor Arrangement

Note 5 – Lessor Arrangement

On June 27, 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 6 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.

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Property and Equipment, net

12 Months Ended

Dec. 31, 2019

Property Plant And Equipment [Abstract]

Property and Equipment, net

Note 9 – 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, 2019			December 31, 2018
Furniture, fixtures and office equipment	$	214		$	228
Software and technology assets		333			326
		547			554
Accumulated depreciation		(326	)		(379	)
Property and equipment, net	$	221		$	175

Depreciation expense related to property and equipment was $70,000 and $69,000 for the years ended December 31, 2019 and 2018, respectively.

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Description of Business and Principles of Consolidation

12 Months Ended

Dec. 31, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Description of Business and Principles of Consolidation

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’s sole operating segment is its asset liquidation business, which began 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.

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Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 13 – Fair Value Measurements

In accordance with the authoritative guidance for financial assets and liabilities measured at fair value on a recurring basis, the Company prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions:

• Level 1 – Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

• Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 – Inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instruments valuation.

As of December 31, 2019 and 2018, the Company had no Level 1, Level 2 or Level 3 assets or liabilities measured at fair value.  As of December 31, 2017, the Company’s contingent consideration from the acquisition of NLEX in 2014 of $2.8 million, was the only financial asset or liability measured at fair value on a recurring basis, and was classified as Level 3 within the fair value hierarchy.  The final payment on the contingent consideration was paid during 2018. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market.

When valuing its Level 3 liabilities, the Company gives consideration to operating results, financial condition, economic and/or market events, and other pertinent information that would impact its estimate of the expected contingent consideration payment.  The valuation of the liability was primarily based on management’s estimate of the Net Profits of NLEX (as defined in the NLEX stock purchase agreement).  Given the short term nature of the contingent consideration periods, changes in the discount rate were not expected to have a material impact on the fair value of the liability.

The following table summarizes the changes in the fair value of the contingent consideration liability during 2018 (in thousands):

Balance at December 31, 2017	$	2,774
Payment of contingent consideration		(2,617	)
Fair value adjustment of contingent consideration		(157	)
Balance at December 31, 2018	$	—

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Dec. 31, 2019	Dec. 31, 2018
Statement Of Financial Position [Abstract]
Preferred stock, par value (in dollars per share)	$ 10.00	$ 10.00
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	569	569
Preferred stock, shares outstanding	569	569
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	300,000,000	300,000,000
Common Stock, Shares, Issued	29,339,061	29,253,278
Common stock, shares outstanding	29,339,061	29,253,278

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Schedule of Changes in Common Stock Options (Details) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Options outstanding, beginning of year	4,303,900	5,040,450
Options, Granted	649,850	526,500
Options, Exercised	(31,276)	(173,130)
Options, Expired	(765,000)	(1,016,870)
Options, Forfeited	(545,624)	(73,050)
Options outstanding, end of year	3,611,850	4,303,900
Options exercisable at year end	2,157,336	2,533,700
Weighted Average Exercise Price, Outstanding at beginning of year	$ 0.75	$ 0.97
Weighted Average Exercise Price, Granted	0.74	0.43
Weighted Average Exercise Price, Exercised	0.45	0.43
Weighted Average Exercise Price, Expired	2.00	1.74
Weighted Average Exercise Price, Forfeited	0.61	0.77
Weighted Average Exercise Price, Outstanding at end of year	0.51	0.75
Weighted Average Exercise Price, Options exercisable at end of year	0.46	0.96
Weighted-average fair value of options granted during the year	$ 0.50	$ 0.17

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Schedule of Equity Partners Stock Option Plan (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	4,303,900	5,040,450
Options expired	(765,000)	(1,016,870)
Options outstanding, end of year	3,611,850	4,303,900
Equity Partners Stock Option Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	0	230,000
Options expired		(230,000)
Options outstanding, end of year		0

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Schedule of Estimated Amortization Expense, Intangible Assets (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Goodwill And Intangible Assets Disclosure [Abstract]
2020	$ 268
2021	270
2022	159
2023	129
2024	129
Total	$ 955	$ 1,190	$ 1,440

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Schedule of Debt (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Third party debt:
Current portion	$ 403	$ 1,178
Non-current portion	35	438
Total third party debt	$ 438	$ 1,616

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Earnings per Share (Narrative) (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Earnings Per Share [Abstract]
Convertible Preferred Stock, Shares Issuable upon Conversion	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
Series N preferred stock, each convertible to common shares	40
Anti-dilutive common shares	700,000	1,000,000

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Lessor Arrangement (Narrative) (Details) $ in Millions	Jun. 27, 2019 USD ($)
Lessor Lease Description [Line Items]
Sale leaseback transaction, date	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
Total purchase price	$ 20.0
Real Estate [Member]
Lessor Lease Description [Line Items]
Lease payments term	10 years
Total monthly lease payments	$ 13.2
Total purchase price	$ 12.0
Machinery and Equipment [Member]
Lessor Lease Description [Line Items]
Lease payments term	6 years
Total monthly lease payments	$ 9.7
Total purchase price	8.0
Derecognized lease asset	0.9
Revenue from derecognized lease asset	1.2
Interest income prior to exercise of purchase option	$ 0.5
Discount rate	5.50%

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Leases - Schedule of Undiscounted Future Minimum Lease Commitments (Details) $ in Thousands	Dec. 31, 2019 USD ($)
Operating Lease Liabilities Payments Due [Abstract]
2020	$ 578
2021	385
2022	277
2023	218
2024	176
Thereafter	30
Total undiscounted future minimum lease payments	1,664
Less: imputed interest	145
Present value of lease liabilities	$ 1,519

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Summary of Change in Valuation Allowance (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Income Tax Disclosure [Abstract]
Beginning balance	$ 28,933	$ 29,932
Change during the period	(11,294)	(999)
Ending balance	$ 17,639	$ 28,933

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Stockholders' Equity (Narrative) (Details) - USD ($)					12 Months Ended
	Nov. 25, 2019	Jul. 31, 2018	Jun. 01, 2018	Sep. 14, 2016	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2016	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2003	Dec. 31, 2017
Class Of Stock [Line Items]
Common stock, shares authorized					300,000,000	300,000,000
Common stock, par value					$ 0.01	$ 0.01
Preferred stock, shares authorized					10,000,000	10,000,000
Preferred stock, par value					$ 10.00	$ 10.00
Options, Exercised (in shares)					31,276	173,130
Convertible Preferred Stock, Shares Issuable upon Conversion					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
Series N preferred stock, each convertible to common shares					40
Series N preferred shares, conversion price per share					$ 1,000
Term of Stock-Based Compensation Plan					6 years 9 months 18 days	3 years 2 months 12 days
Exercise Price, Outstanding					$ 0.51	$ 0.75						$ 0.97
Options to purchase, Granted (in shares)					649,850	526,500
Exercise price, options granted in period					$ 0.74	$ 0.43
Options, Expired					765,000	1,016,870
Stock-based compensation expense					$ 283,000	$ 289,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares					1,454,514	1,770,200
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Weighted Average Grant Date Fair Value					$ 0.39	$ 0.31
Unrecognized stock-based compensation					$ 500,000
Unrecognized stock-based compensation, Period for recognition					2 years 6 months
Fair Value of Options Vested in Period					$ 300,000	$ 300,000
Aggregate intrinsic value of exercisable options					$ 1,200,000	$ 11,000
Other Options Issued [Member]
Class Of Stock [Line Items]
Options to purchase, Granted (in shares)					265,000			625,000
Options, Expired					625,000	0
Stock Options [Member] | Selling, General and Administrative Expenses [Member]
Class Of Stock [Line Items]
Stock-based compensation expense					$ 300,000	$ 300,000
Restricted Stock [Member]
Class Of Stock [Line Items]
Unrecognized stock-based compensation expense					$ 200,000	$ 200,000
Minimum [Member] | Other Options Issued [Member]
Class Of Stock [Line Items]
Exercise price, options granted in period					$ 0.70
Maximum [Member] | Other Options Issued [Member]
Class Of Stock [Line Items]
Exercise price, options granted in period					$ 0.85
Employees [Member] | NLEX [Member]
Class Of Stock [Line Items]
Options, Exercised (in shares)						173,130
Options to purchase, Granted (in shares)			300,000
Options, Expired		126,870
2003 Stock Option and Appreciation Rights Plan [Member]
Class Of Stock [Line Items]
Number of Shares Authorized for Stock-Based Compensation Plan											2,000,000
Term of Stock-Based Compensation Plan											10 years
Stock Option Award Vesting Period											4 years
Exercise Price, Outstanding											$ 1.00
Options to purchase, Granted (in shares)					0
Options, Expired					140,000	660,000
2010 Non-Qualified Stock Option Plan [Member]
Class Of Stock [Line Items]
Number of Shares Authorized for Stock-Based Compensation Plan										1,250,000
Stock Option Award Vesting Period										4 years
Options to purchase, Granted (in shares)					60,000	85,000
2010 Non-Qualified Stock Option Plan [Member] | Minimum [Member]
Class Of Stock [Line Items]
Exercise Price, Outstanding										$ 0.24
2010 Non-Qualified Stock Option Plan [Member] | Maximum [Member]
Class Of Stock [Line Items]
Exercise Price, Outstanding										$ 0.70
2010 Non-Qualified Stock Option Plan [Member] | Directors [Member] | Annual Compensation Plan [Member]
Class Of Stock [Line Items]
Options to purchase, Granted (in shares)					60,000	85,000
Equity Partners Stock Option Plan [Member]
Class Of Stock [Line Items]
Number of Shares Authorized for Stock-Based Compensation Plan									230,000
Options to purchase, Granted (in shares)									230,000
Exercise price, options granted in period									$ 1.83
Options, Expired						230,000
2016 Stock Option Plan [Member]
Class Of Stock [Line Items]
Options, Exercised (in shares)					31,276	173,130
Number of Shares Authorized for Stock-Based Compensation Plan				3,150,000
Stock Option Award Vesting Period				4 years
Options to purchase, Granted (in shares)					324,850	441,500	2,539,200
Options, Expired					0	126,870
2016 Stock Option Plan [Member] | Minimum [Member]
Class Of Stock [Line Items]
Exercise Price, Outstanding				$ 0.45
2016 Stock Option Plan [Member] | Maximum [Member]
Class Of Stock [Line Items]
Exercise Price, Outstanding				$ 0.85
Common Stock [Member]
Class Of Stock [Line Items]
Options, Exercised (in shares)					10,783	173,130
Issuance of restricted common stock, shares						600,000
Share price					$ 25.00
Series N preferred stockholders to liquidation preference, conversion price per share					$ 1,000
Preferred Stock [Member]
Class Of Stock [Line Items]
Convertible Preferred Stock, Shares Issuable upon Conversion					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.
Conversion of series N preferred stock to shares of common stock					0	0
Maxim Group LLC [Member]
Class Of Stock [Line Items]
Stock issued, for Services, Shares	75,000
David Ludwig And Tom Ludwig [Member]
Class Of Stock [Line Items]
Issuance of restricted common stock, shares			600,000
David Ludwig And Tom Ludwig [Member] | Restricted Stock [Member]
Class Of Stock [Line Items]
Stock-based compensation expense					$ 52,000	$ 30,000
Shares restriction term of service			5 years
Weighted average grant date fair value						$ 0.43

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Leases (Tables)

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Schedule of Right-of-Use Assets and Lease Liabilities

The right-of-use assets and lease liabilities for each location are as follows (in thousands):

	December 31,
Right-of-use assets:	2019
Del Mar, CA	$	745
Burlingame, CA		392
Edwardsville, IL		346
	$	1,483
	December 31,
Lease liabilities:	2019
Del Mar, CA	$	745
Burlingame, CA		429
Edwardsville, IL		345
	$	1,519

Schedule of Undiscounted Future Minimum Lease Commitments

Undiscounted future minimum lease commitments as of December 31, 2019 that have initial or remaining lease terms in excess of one year are as follows (in thousands):

2020	$	578
2021		385
2022		277
2023		218
2024		176
Thereafter		30
Total undiscounted future minimum lease payments		1,664
Less: imputed interest		145
Present value of lease liabilities	$	1,519

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Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 15 – 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, 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 2018 and 2019 (in thousands):

Balance at December 31, 2017	$	29,932
Change during 2018		(999	)
Balance at December 31, 2018		28,933
Change during 2019		(11,294	)
Balance at December 31, 2019	$	17,639

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, 2019, in part because in the current year we have achieved three years of cumulative taxable income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred taxes of $1.8 million are realizable. It therefore reduced the valuation allowance accordingly.

At December 31, 2019 the Company has aggregate tax net operating loss carry forwards of approximately $83.2 million ($61.6 million of unrestricted net operating tax losses and approximately $21.6 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.

The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income before income tax expense for the following reasons in each of the years ending December 31 (in thousands):

	2019			2018
Expected federal statutory tax expense	$	625		$	963
Increase (reduction) in taxes resulting from:
State income taxes recoverable		258			198
Non-deductible expenses (permanent differences)		(15	)		42
Change in valuation allowance		(11,294	)		(999	)
Tax rate changes		9,522			(256	)
Other		(9	)		322
Income tax (benefit) expense	$	(913	)	$	270

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. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Street Capital and disposition of business interests by the Company. 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 2016 through 2018 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 deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows in (thousands):

	2019			2018
Net operating loss carry forwards	$	18,535		$	28,573
Stock based compensation		921			763
Trade names		(817	)		(763	)
Customer relationships		(59	)		(106	)
Equity method investments		(497	)		—
Other		(72	)		(118	)
Gross deferred tax assets		18,011			28,349
Less: valuation allowance		(17,639	)		(28,933	)
Deferred tax assets (liabilities), net of valuation allowance	$	372		$	(584	)

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 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% for our tax years beginning in 2018, which resulted in the re-measurement of the federal portion of our deferred tax liabilities as of December 31, 2017 from 35% to the new 21% tax rate; a reduction of approximately $1.5 million.

Under the guidance set forth in the SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”), the Company may record provisional amounts for the impact of the Tax Act. As of the third quarter of 2018, the Company had finalized its 2017 federal income tax return and as such, completed the accounting for the income tax effects of the Tax Act. Any future adjustments required due to additional guidance or changes in the interpretations of the Tax Act will be recorded as discrete adjustments to the income tax expense in the period in which such change occur.

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, 2019, 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.

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Subsequent Events

12 Months Ended

Dec. 31, 2019

Subsequent Events [Abstract]

Subsequent Events

Note 19 – Subsequent Events

The Company has evaluated events subsequent to December 31, 2019 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 February 10, 2020, the Company entered into a secured promissory note, business loan agreement, commercial security agreement and agreement to provide insurance (the “C3bank Credit Facility”) with C3bank, National Association for a $5.0 million revolving line of credit. The C3bank Credit Facility matures on February 5, 2021 and replaces a secured promissory note, as amended, totaling $3.0 million. The Company is permitted to use the proceeds of the loan solely for its business operations.

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Earnings per Share

12 Months Ended

Dec. 31, 2019

Earnings Per Share [Abstract]

Earnings per Share

Note 7 – 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.

The table below shows the calculation of the shares used in computing diluted EPS:

	For the Year Ended December 31,
Weighted Average Shares Calculation:	2019		2018
Basic weighted average shares outstanding		28,662,297		28,581,654
Treasury stock effect of common stock options and restricted stock awards		609,078		313,273
Diluted weighted average common shares outstanding		29,271,375		28,894,927

For the years ended December 31, 2019 and 2018 there were potential common shares totaling approximately 0.7 million and 1.0 million, respectively, that were excluded from the computation of diluted EPS as the inclusion of such shares would have been anti-dilutive.

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Notes Receivable, Net

12 Months Ended

Dec. 31, 2019

Receivables [Abstract]

Notes Receivable, net

Note 3 – Notes Receivable, net

The Company’s notes receivable balance consists of loans to buyers of charged-off receivable portfolios which resulted in a total outstanding principal balance of approximately $2.7 million, net of unamortized deferred fees and costs on originated loans. As of December 31, 2019, the Company has not recorded an allowance for credit losses related to notes receivable outstanding.

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Accounts Receivable and Accounts Payable

12 Months Ended

Dec. 31, 2019

Accounts Receivable And Accounts Payable [Abstract]

Accounts Receivable and Accounts Payable

Note 11 – 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, 2019 and 2018.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consisted of the following at December 31, 2019 and 2018 (in thousands):

	2019		2018
Due to auction clients	$	2,776	$	3,113
Remuneration and benefits		2,484		2,112
Due to Joint Venture partners		2,067		1,367
Accrued asset liquidation expenses		212		191
Accounting, auditing and tax consulting		187		140
Sales and other taxes		113		293
Customer deposits		—		600
Other		271		285
Total accounts payable and accrued liabilities	$	8,110	$	8,101

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Total	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-In Capital [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Loss [Member]
Beginning Balance at Dec. 31, 2017	$ 3,488	$ 6	$ 285	$ 284,396	$ (281,124)	$ (75)
Balance (in shares) at Dec. 31, 2017		569	28,480,148
Issuance of common stock from stock option awards	$ 74	$ 0	$ 2	72	0	0
Issuance of common stock from stock options awards, shares	173,130		173,130
Issuance of restricted common stock	$ 0	0	$ 6	(6)	0	0
Issuance of restricted common stock, shares			600,000
Stock-based compensation expense	289	0	$ 0	289	0	0
Net income	3,751	0	0	0	3,751	0
Foreign currency translation adjustment	(2)	0	0	0	0	(2)
Ending Balance at Dec. 31, 2018	7,600	$ 6	$ 293	284,751	(277,373)	(77)
Balance (in shares) at Dec. 31, 2018		569	29,253,278
Issuance of common stock from stock option awards	$ 0	$ 0	$ 0	0	0	0
Issuance of common stock from stock options awards, shares	31,276		10,783
Issuance of common stock	$ 65	0	$ 0	65	0	0
Issuance of common stock, shares			75,000
Stock-based compensation expense	283	0	$ 0	283	0	0
Net income	3,899	0	0	0	3,899	0
Foreign currency translation adjustment	0
Ending Balance at Dec. 31, 2019	$ 11,847	$ 6	$ 293	$ 285,099	$ (273,474)	$ (77)
Balance (in shares) at Dec. 31, 2019		569	29,339,061

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Document and Entity Information - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2019	Mar. 01, 2020	Jun. 30, 2019
Cover [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2019
Entity Registrant Name	HERITAGE GLOBAL INC.
Entity Central Index Key	0000849145
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		29,352,837
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well Known Seasoned Issuer	No
Entity Public Float			$ 13.6
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	FY
Entity File Number	0-17973
Entity Tax Identification Number	59-2291344
Entity Address, Postal Zip Code	92130
City Area Code	858
Local Phone Number	847-0656
Entity Incorporation, State or Country Code	FL
Entity Address, Address Line One	12625 High Bluff Drive
Entity Address, Address Line Two	Suite 305
Entity Address, City or Town	San Diego
Entity Address, State or Province	CA
Entity Interactive Data Current	Yes
Title of 12(g) Security	Common Stock, $0.01 par value
Document Annual Report	true
No Trading Symbol Flag	true

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Summary of Changes in the Fair Value of the Contingent Consideration Liability

The following table summarizes the changes in the fair value of the contingent consideration liability during 2018 (in thousands):

Balance at December 31, 2017	$	2,774
Payment of contingent consideration		(2,617	)
Fair value adjustment of contingent consideration		(157	)
Balance at December 31, 2018	$	—

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Property and Equipment, net (Tables)

12 Months Ended

Dec. 31, 2019

Property Plant And Equipment [Abstract]

Schedule of Property and Equipment

The following summarizes the components of the Company’s property and equipment (in thousands):

	December 31, 2019			December 31, 2018
Furniture, fixtures and office equipment	$	214		$	228
Software and technology assets		333			326
		547			554
Accumulated depreciation		(326	)		(379	)
Property and equipment, net	$	221		$	175

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Notes Receivable, Net - Narrative (Details) $ in Thousands	Dec. 31, 2019 USD ($)
Receivables [Abstract]
Outstanding principal balance	$ 2,700
Allowance for credit losses	$ 0

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Fair Value Measurements (Narrative) (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
NLEX [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of liabilities	$ 0	$ 0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of liabilities	0	0
Fair value of assets	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | NLEX [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of liabilities			$ 2,800,000
Fair Value, Measurements, Recurring [Member] | Level 1 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of liabilities	0	0
Fair value of assets	0	0
Fair Value, Measurements, Recurring [Member] | Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value of liabilities	0	0
Fair value of assets	$ 0	$ 0

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Schedule of Intangible Assets (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Finite And Indefinite Lived Intangible Assets By Major Class [Line Items]
Total net amortized intangible assets	$ 1,190	$ 1,440
Amortization	(235)	(250)
Total net amortized intangible assets	955	1,190
Total net intangible assets	3,627	3,877
Total net intangible assets	3,392	3,627
NLEX [Member] | Trade Name [Member]
Finite And Indefinite Lived Intangible Assets By Major Class [Line Items]
Unamortized intangible assets	$ 2,437	$ 2,437	$ 2,437
Customer Network [Member] | HGP [Member]
Finite And Indefinite Lived Intangible Assets By Major Class [Line Items]
Finite-Lived intangible asset, useful life	12 years	12 years
Finite-Lived intangible assets, remaining amortization period	3 years	5 years 2 months 12 days
Total net amortized intangible assets	$ 114	$ 136
Amortization	(22)	(22)
Total net amortized intangible assets	$ 92	$ 114
HGP Trade Name [Member]
Finite And Indefinite Lived Intangible Assets By Major Class [Line Items]
Finite-Lived intangible asset, useful life	14 years	14 years
Finite-Lived intangible assets, remaining amortization period	5 years	7 years 2 months 12 days
Total net amortized intangible assets	$ 746	$ 850
Amortization	(104)	(104)
Total net amortized intangible assets	$ 642	$ 746
Customer Relationships [Member] | NLEX [Member]
Finite And Indefinite Lived Intangible Assets By Major Class [Line Items]
Finite-Lived intangible asset, useful life	7 years 7 months 6 days	7 years 7 months 6 days
Finite-Lived intangible assets, remaining amortization period	2 years	3 years 1 month 6 days
Total net amortized intangible assets	$ 330	$ 440
Amortization	(109)	(110)
Total net amortized intangible assets	$ 221	$ 330
Website [Member] | NLEX [Member]
Finite And Indefinite Lived Intangible Assets By Major Class [Line Items]
Finite-Lived intangible asset, useful life		5 years
Finite-Lived intangible assets, remaining amortization period		0 years
Total net amortized intangible assets		$ 14
Amortization		$ (14)

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Accounts Receivable and Accounts Payable (Narrative) (Details) - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Accounts Receivable And Accounts Payable [Abstract]
Allowance for doubtful accounts	$ 0	$ 0

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Subsequent Events - Additional Information (Details) - C3Bank Credit Facility [Member] - Subsequent Event [Member] $ in Millions	Feb. 10, 2020 USD ($)
Line of credit, drawn amount	$ 3.0
Credit facility matures	Feb. 05, 2021
Secured Promissory Note [Member] | Business Loan Agreement [Member] | Commercial Security Agreement [Member]
Line of credit, drawn amount	$ 5.0

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Schedule of Heritage Global Inc. 2016 Stock Option Plan (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2016
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	4,303,900	5,040,450
Options granted	649,850	526,500
Options exercised	(31,276)	(173,130)
Options expired	(765,000)	(1,016,870)
Options forfeited	(545,624)	(73,050)
Options outstanding, end of year	3,611,850	4,303,900
2016 Stock Option Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding, beginning of year	2,453,900	2,370,450
Options granted	324,850	441,500	2,539,200
Options exercised	(31,276)	(173,130)
Options expired	0	(126,870)
Options forfeited	(395,624)	(58,050)
Options outstanding, end of year	2,351,850	2,453,900

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Revenues:
Total revenues	$ 26,168	$ 23,664
Operating costs and expenses:
Selling, general and administrative	15,874	15,219
Impairment of goodwill	573	0
Depreciation and amortization	305	319
Total operating costs and expenses	24,491	19,586
Earnings of equity method investments	1,373	0
Operating income	3,050	4,078
Fair value adjustment of contingent consideration	0	157
Interest and other expense, net	(64)	(214)
Income before income tax (benefit) expense	2,986	4,021
Income tax (benefit) expense	(913)	270
Net income	$ 3,899	$ 3,751
Weighted average common shares outstanding – basic	28,662,297	28,581,654
Weighted average common shares outstanding – diluted	29,271,375	28,894,927
Net income per share – basic	$ 0.14	$ 0.13
Net income per share – diluted	$ 0.13	$ 0.13
Comprehensive income:
Net income	$ 3,899	$ 3,751
Other comprehensive loss:
Foreign currency translation adjustment	0	(2)
Comprehensive income	3,899	3,749
Services Revenue [Member]
Revenues:
Total revenues	20,100	21,658
Operating costs and expenses:
Cost of services revenue and assets sales	3,374	2,904
Asset Sales [Member]
Revenues:
Total revenues	6,068	2,006
Operating costs and expenses:
Cost of services revenue and assets sales	$ 4,365	$ 1,144

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Equity Method Investments

12 Months Ended

Dec. 31, 2019

Equity Method Investments And Joint Ventures [Abstract]

Equity Method Investments

Note 6 – Equity Method Investments

On November 14, 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%. During 2019, the Company held a 50% share in the Oak Grove Asset Acquisitions LP, an entity formed for the execution of auction deals with Napier Park. The table below details the Company’s Joint Venture revenues and net income (loss) during the years ended December 31, 2019 and 2018 (in thousands):

	2019		2018
Revenues:
Oak Grove Asset Acquisitions LP	$	522	$	—
CPFH LLC		10,985		—
Total Revenues	$	11,507	$	—
Operating income (loss):
Oak Grove Asset Acquisitions LP	$	151	$	—
CPFH LLC		5,046		(115	)
Total operating income (loss)	$	5,197	$	(115	)

The table below details the summarized components of assets and liabilities, as at December 31, 2019 and 2018, of the Company’s Joint Ventures at those dates (in thousands):

	2019		2018
Assets:
Oak Grove Asset Acquisitions LP	$	1,602	$	—
CPFH LLC		20,016		11,064
Total assets	$	21,618	$	11,064
Liabilities:
Oak Grove Asset Acquisitions LP	$	797	$	—
CPFH LLC		10,245		168
Total liabilities	$	11,042	$	168

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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, contingent consideration, 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.

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 11 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 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, 2019, 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 other assets. 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 6 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, 2019 and 2018, 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.  

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. The Company employed fair value accounting for only the contingent consideration recorded as part of the acquisition of NLEX. The fair value of the Company’s contingent consideration was determined using a discounted cash flow analysis, which is based on significant inputs that are not observable in the market and therefore fall within Level 3.  See Note 13 for more discussion of this contingent consideration.

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, 2019 have been acquired as part of the acquisitions of HGP in 2012 and NLEX in 2014, and are discussed in more detail in Note 10. No impairment charges were necessary during 2019.

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.  Testing goodwill is a two-step process, in which the carrying amount of the reporting unit associated with the goodwill is first compared to the reporting unit’s estimated fair value. If the carrying amount of the reporting unit exceeds its estimated fair value, the fair values of the reporting unit’s assets and liabilities are analyzed to determine whether the goodwill of the reporting unit has been impaired. An impairment loss is recognized to the extent that the Company’s recorded goodwill exceeds its implied fair value as determined by this two-step process. FASB Accounting Standards Update 2011-08, Testing Goodwill for Impairment, provides the option to perform a qualitative assessment prior to performing the two-step process, which may eliminate the need for further testing. 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.  

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.  All of the Company’s goodwill relates to its acquisitions of Equity Partners in 2011, HGP in 2012 and NLEX in 2014, and is discussed in more detail in Note 10. 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 the Company recorded a reduction to the valuation allowance resulting in a net deferred tax asset balance of approximately $0.4 million as the Company believes that it is more likely than not that some of its net operating loss carryforwards will be utilized. For further discussion of our income taxes, see Note 15.

Contingent consideration

At December 31, 2018 the Company no longer carries a contingent consideration balance. We previously had an earn-out provision payable to the former owner and current president of NLEX (“David Ludwig”) that was part of the consideration for the acquisition of NLEX in 2014. The estimated fair value assigned to the contingent consideration at the acquisition date was determined using a discounted cash flow analysis. Its fair value was assessed quarterly, and any adjustments, together with the accretion of the present value discount, were reported as a fair value adjustment on the Company’s consolidated income statement. The Company adjusted its contingent consideration liability each reporting period to the fair value of the estimated remaining earn-out liability owed to David Ludwig. During 2018 the Company made the final contingent consideration payments to David Ludwig in the aggregate amount of $2.6 million, resulting in a contingent consideration of zero at December 31, 2018 and 2019. See Note 13 for more discussion of the contingent consideration.

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 17 for further discussion.

Revenue recognition

On January 1, 2018, the Company adopted the new accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to all contracts using the modified retrospective method. Based on the Company’s analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of the Company’s accumulated deficit as a result of the adoption of this new standard. We expect the impact of the adoption of the new standard to be immaterial to the consolidated financial statements on an ongoing basis.

Services revenue generally consists of commissions and fees from providing auction services, appraisals, brokering of sales transactions 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 one reporting segment — the asset liquidation business. Although the Company provides various services within the asset liquidation business, it does not disaggregate revenue streams further than as reported in its income statement, services revenue and asset sales. 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 (2% of total revenues for the year ended December 31, 2019), 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, 2019, the deferred revenue balance was approximately $2,500. 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.

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.

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 18 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, 2019 and 2018, was $0.6 million and $0.8 million, respectively.

Recently adopted accounting pronouncements

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”). ASU 2016-02 changes the accounting for leases previously classified as operating leases under GAAP by, among other things, requiring a Company to recognize the lease on the balance sheet with a right-of-use asset and a lease liability. Effective January 1, 2019, the Company adopted ASU 2016-02. This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a modified retrospective adoption method at January 1, 2019. Under this method of adoption, there is no impact to the comparative condensed consolidated income statement and consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in ASC Topic 840, “Leases.” In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

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.  

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 are currently evaluating the impact of the new guidance on our consolidated financial statements.

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 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.  The Company anticipates that the impact will not be material to its 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.

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Intangible Assets and Goodwill

12 Months Ended

Dec. 31, 2019

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets and Goodwill

Note 10 – Intangible Assets and Goodwill

Intangible assets

The details of identifiable intangible assets as of December 31, 2019 and 2018 are shown below (in thousands except for lives):

Amortized Intangible Assets	Original Life (years)	Remaining Life (years)		Carrying Value December 31, 2018		Amortization			Carrying Value December31, 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
Amortized Intangible Assets	Original Life (years)	Remaining Life (years)		Carrying Value December 31, 2017		Amortization			Carrying Value December 31, 2018
Customer Network (HGP)	12	5.2		$	136	$	(22	)	$	114
Trade Name (HGP)	14	7.2			850		(104	)		746
Customer Relationships (NLEX)	7.6	3.1			440		(110	)		330
Website (NLEX)	5	0			14		(14	)		—
Total					1,440		(250	)		1,190
Unamortized Intangible Assets
Trade Name (NLEX)	N/A	N/A			2,437		—			2,437
Total				$	3,877	$	(250	)	$	3,627

Amortization expense during each of 2019 and 2018 was $0.2 million and $0.3 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, 2019, in the fourth quarter, and determined that no impairment charges were necessary.  

The estimated amortization expense during the next five fiscal years and thereafter is shown below (in thousands):

Year	Amount
2020	$	268
2021		270
2022		159
2023		129
2024		129
Total	$	955

Goodwill

As part of its acquisitions, the Company recognized goodwill of $0.6 million related to Equity Partners in 2011, $4.7 million related to HGP in 2012, and $3.5 million related to NLEX in 2014.

Goodwill consisted of the following at December 31, 2019 and 2018 (in thousands):

Acquisition	December 31, 2019		December 31, 2018
Equity Partners	$	—	$	573
HGP		2,040		2,040
NLEX		3,545		3,545
Total goodwill	$	5,585	$	6,158

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, 2019, in the fourth quarter, and determined that no additional impairment charges were necessary.

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Inventory (Narrative) (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($) a Building
Real Estate [Line Items]
Purchase of inventory	$ (2,301)	$ 2,235
Inventory	104	$ 2,405
Alabama [Member]
Real Estate [Line Items]
Area of campus | a		110
Number of buildings | Building		3
Purchase of inventory	2,200	$ 2,300
Inventory	$ 100

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Summary of Change in Valuation Allowance

The following table summarizes the change in the valuation allowance during 2018 and 2019 (in thousands):

Balance at December 31, 2017	$	29,932
Change during 2018		(999	)
Balance at December 31, 2018		28,933
Change during 2019		(11,294	)
Balance at December 31, 2019	$	17,639

Schedule of Components of Income Tax Expense (Benefit)

The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income before income tax expense for the following reasons in each of the years ending December 31 (in thousands):

	2019			2018
Expected federal statutory tax expense	$	625		$	963
Increase (reduction) in taxes resulting from:
State income taxes recoverable		258			198
Non-deductible expenses (permanent differences)		(15	)		42
Change in valuation allowance		(11,294	)		(999	)
Tax rate changes		9,522			(256	)
Other		(9	)		322
Income tax (benefit) expense	$	(913	)	$	270

Schedule of Deferred Tax Assets and Liabilities

The components of the deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows in (thousands):

	2019			2018
Net operating loss carry forwards	$	18,535		$	28,573
Stock based compensation		921			763
Trade names		(817	)		(763	)
Customer relationships		(59	)		(106	)
Equity method investments		(497	)		—
Other		(72	)		(118	)
Gross deferred tax assets		18,011			28,349
Less: valuation allowance		(17,639	)		(28,933	)
Deferred tax assets (liabilities), net of valuation allowance	$	372		$	(584	)

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Intangible Assets and Goodwill (Tables)

12 Months Ended

Dec. 31, 2019

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Intangible Assets

The details of identifiable intangible assets as of December 31, 2019 and 2018 are shown below (in thousands except for lives):

Amortized Intangible Assets	Original Life (years)	Remaining Life (years)		Carrying Value December 31, 2018		Amortization			Carrying Value December31, 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
Amortized Intangible Assets	Original Life (years)	Remaining Life (years)		Carrying Value December 31, 2017		Amortization			Carrying Value December 31, 2018
Customer Network (HGP)	12	5.2		$	136	$	(22	)	$	114
Trade Name (HGP)	14	7.2			850		(104	)		746
Customer Relationships (NLEX)	7.6	3.1			440		(110	)		330
Website (NLEX)	5	0			14		(14	)		—
Total					1,440		(250	)		1,190
Unamortized Intangible Assets
Trade Name (NLEX)	N/A	N/A			2,437		—			2,437
Total				$	3,877	$	(250	)	$	3,627

Schedule of Estimated Amortization Expense, Intangible Assets

The estimated amortization expense during the next five fiscal years and thereafter is shown below (in thousands):

Year	Amount
2020	$	268
2021		270
2022		159
2023		129
2024		129
Total	$	955

Schedule of Goodwill

Goodwill consisted of the following at December 31, 2019 and 2018 (in thousands):

Acquisition	December 31, 2019		December 31, 2018
Equity Partners	$	—	$	573
HGP		2,040		2,040
NLEX		3,545		3,545
Total goodwill	$	5,585	$	6,158

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Schedule of Property and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 547	$ 554
Accumulated depreciation	(326)	(379)
Property and equipment, net	221	175
Furniture, fixtures and office equipment [Member]
Property Plant And Equipment [Line Items]
Property and equipment, gross	214	228
Software and technology assets [Member]
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 333	$ 326

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Schedule of Goodwill (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2014	Dec. 31, 2012	Dec. 31, 2011
Finite Lived Intangible Assets [Line Items]
Goodwill	$ 5,585	$ 6,158
Equity Partners [Member]
Finite Lived Intangible Assets [Line Items]
Goodwill		573			$ 600
HGP [Member]
Finite Lived Intangible Assets [Line Items]
Goodwill	2,040	2,040		$ 4,700
NLEX [Member]
Finite Lived Intangible Assets [Line Items]
Goodwill	$ 3,545	$ 3,545	$ 3,500

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Debt (Narrative) (Details)	1 Months Ended			12 Months Ended
	Mar. 31, 2019 USD ($)	Sep. 30, 2018 USD ($)	Jan. 31, 2018 USD ($) Installment	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2016 USD ($)	Jan. 30, 2018 USD ($)	Dec. 31, 2017
Revolving Line of Credit [Member] | First Choice Bank [Member]
Debt Instrument [Line Items]
Line of credit aggregate borrowing capacity	$ 3,000,000
Line of credit		$ 1,500,000		$ 0
Interest rate per annum	5.50%
Debt instrument, Maturity date	Apr. 05, 2020			Oct. 05, 2019
Frequency of payment				monthly payments
Line of credit, repayment				$ 2,100,000
Line of credit, drawn amount				$ 1,300,000
Revolving Line of Credit [Member] | First Choice Bank [Member] | Minimum [Member]
Debt Instrument [Line Items]
Monthly interest payment		$ 100.00
Revolving Line of Credit [Member] | Wall Street Journal prime rate [Member] | First Choice Bank [Member] | Minimum [Member]
Debt Instrument [Line Items]
Interest rate per annum		5.25%
Affiliated Entity [Member] | Revolving Line of Credit [Member]
Debt Instrument [Line Items]
Line of credit aggregate borrowing capacity						$ 1,500,000
Interest rate description				Aggregate loans under the Line of Credit up to $1.0 million incurred interest at a variable rate per annum based on the rate charged to the Entity by its bank, plus 2.0%. Amounts outstanding at any time in excess of $1.0 million incurred interest at a rate of 8.0% per annum.
Line of credit, annual commitment fee						15,000
Line of credit, commitment fee payment description				monthly basis
Maturity description				The Line of Credit matured at the earlier of (i) three years from the date of the Agreement, (ii) the termination of the Entity’s line of credit with its bank, or (iii) forty-five (45) days following the date the Company closes a new credit facility with a financial institution.
Expense incurred based on profit share provision for principle and guarantee transaction					$ 179,000
Affiliated Entity [Member] | Revolving Line of Credit [Member] | Bank Plus 2.0% [Member]
Debt Instrument [Line Items]
Line of credit						$ 1,000,000
Interest rate per annum						2.00%
Affiliated Entity [Member] | Revolving Line of Credit [Member] | 8.0% Interest Rate [Member]
Debt Instrument [Line Items]
Line of credit						$ 1,000,000
Related party loan, Interest rate						8.00%
Heritage Global LLC [Member]
Debt Instrument [Line Items]
Litigation settlement, amount paid behalf of subsidiary			$ 1,260,000
Number of installments | Installment			36
Litigation settlement installments amount due							$ 35,000
Remaining outstanding debt balance payable date			Jan. 30, 2021
Interest rate on promissory note								6.50%
Percentage of default interest amount				12.00%
Description of event of default				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.
Debt instrument, periodic payment				$ 420,000
Outstanding note balance				$ 438,000

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Schedule of Assumptions for Fair Value of Option Grant (Details)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Risk-free interest rate (Minimum)	2.00%	2.00%
Risk-free interest rate (Maximum)	3.00%	3.00%
Expected life (years)	6 years 9 months 18 days	3 years 2 months 12 days
Expected volatility	73.00%	83.00%
Expected dividend yield	0.00%	0.00%

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Property and Equipment, net (Narrative) (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Property Plant And Equipment [Line Items]
Depreciation expense	$ 70,000	$ 69,000
Furniture, fixtures and office equipment [Member]
Property Plant And Equipment [Line Items]
Estimated service life	5 years
Software and technology assets [Member]
Property Plant And Equipment [Line Items]
Estimated service life	3 years

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Earnings per Share - Schedule of Calculation of the Shares Used in Computing Diluted EPS (Details) - shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Earnings Per Share [Abstract]
Basic weighted average shares outstanding	28,662,297	28,581,654
Treasury stock effect of common stock options and restricted stock awards	609,078	313,273
Diluted weighted average common shares outstanding	29,271,375	28,894,927

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Equity Method Investments (Narrative) (Details)	Dec. 31, 2019	Nov. 14, 2018
CPFH LLC [Member]
Schedule Of Equity Method Investments [Line Items]
Equity method investment, ownership percentage		25.00%
Oak Grove Asset Acquisitions LP [Member]
Schedule Of Equity Method Investments [Line Items]
Equity method investment, ownership percentage	50.00%

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Income Taxes (Narrative) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2014
Income Taxes [Line Items]
Carrying value of deferred tax assets	$ 372				$ 0
Additional deferred taxes realizable amount	1,800
Operating loss carryforwards	$ 83,200
Operating Loss Carryforwards, Expiration Date	Substantially all of the net operating loss carry forwards and unused minimum tax credit carry forwards expire between 2024 and 2037.
Operating Loss Carryforwards, Limitations on Use	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. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Street Capital and disposition of business interests by the Company. 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.
Open Tax Year		2018	2017	2016
Non-current deferred tax liability		$ 584
U.S. statutory corporate tax rate		21.00%	35.00%
Tax act, change in tax rate, re-measurement of federal portion of deferred tax liabilities, reduction amount			$ 1,500
Reduction in Deferred Tax Assets		$ 4,400
Unrecognized Tax Benefits	$ 4,400
NLEX [Member]
Income Taxes [Line Items]
Non-current deferred tax liability					600
Trade Names [Member] | Indefinite-Lived [Member] | NLEX [Member]
Income Taxes [Line Items]
Identifiable intangible assets					$ 2,400
Operating Loss Carryforwards Per Year After 2008 [Member]
Income Taxes [Line Items]
Operating Loss Carryforwards, Limitations on Use	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. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Street Capital and disposition of business interests by the Company.
Unrestricted [Member]
Income Taxes [Line Items]
Operating loss carryforwards	$ 61,600
Restricted [Member]
Income Taxes [Line Items]
Operating loss carryforwards	$ 21,600

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Related Party Transactions (Narrative) (Details) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Related Party Transaction [Line Items]
Payment to related party	$ 0	$ 390,000
Senior Officer of NLEX [Member] | Lease Amounts [Member] | Edwardsville, IL [Member]
Related Party Transaction [Line Items]
Related party transaction agreement end date	May 31, 2023
Senior Officer of NLEX [Member] | Lease Amounts [Member] | Edwardsville, IL [Member] | Selling, General and Administrative Expenses [Member]
Related Party Transaction [Line Items]
Payment to related party	$ 108,000	105,000
Ross Dove and Kirk Dove [Member]
Related Party Transaction [Line Items]
Payment to related party		179,000
David Ludwig [Member] | Final Earn-out Provision Payment [Member]
Related Party Transaction [Line Items]
Payment to related party		$ 2,600,000

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 14 – 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 has a contractual obligation to make remaining guaranteed distribution payments to a partner totaling approximately $3.8 million by no later than May 26, 2020. As of December 31, 2019, the remaining guaranteed distribution payments the Company is obligated to make was approximately $0.8 million.

At December 31, 2019 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.

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Stockholders' Equity

12 Months Ended

Dec. 31, 2019

Equity [Abstract]

Stockholders' Equity

Note 18 – 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.  

During 2018 and 2019 the Company issued 173,130 and 10,783 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. 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 2018 and 2019, 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, 2019, 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	2019			2018
Options outstanding, beginning of year		310,000			985,000
Options expired		(140,000	)		(660,000	)
Options forfeited		(150,000	)		(15,000	)
Options outstanding, end of year		20,000			310,000

The outstanding options vested over four years at an exercise price of $1.00 per share. 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 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 2018 and 2019, options to purchase 85,000 and 60,000 shares were granted to the Company’s independent directors as part of their annual compensation.

2010 Plan	2019		2018
Options outstanding, beginning of year		915,000		830,000
Options granted		60,000		85,000
Options outstanding, end of year		975,000		915,000

The outstanding options vest over four years at exercise prices ranging from $0.24 to $0.70 per share.   

Equity Partners Stock Option Plan

In 2011, the Company’s Board approved the Equity Partners Stock Option Plan (the “Equity Partners Plan”) to allow the Company to issue options to purchase common stock as a portion of the purchase price of Equity Partners. The Company reserved 230,000 shares of common stock for issuance upon exercise of options granted under the Equity Partners Plan. During 2011, options to purchase 230,000 shares with an exercise price of $1.83, vesting immediately, were granted under the Equity Partners Plan. During 2018, options to purchase 230,000 shares expired.

Equity Partners Plan	2018
Options outstanding, beginning of year		230,000
Options expired		(230,000	)
Options outstanding, end of year		—

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.

Other Options	2019			2018
Options outstanding, beginning of year		625,000			625,000
Options issued		265,000			—
Options expired		(625,000	)		—
Options outstanding, end of year		265,000			625,000

Heritage Global Inc. 2016 Stock Option Plan

On May 5, 2016, subject to the approval received by the stockholders of the Company on September 14, 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 2018 and 2019, options to purchase a total of 441,500 and 324,850 shares, respectively, were granted to the Company’s employees under the 2016 Plan.

On June 1, 2018, the Company issued options to purchase 300,000 shares of common stock to the employees of NLEX, in connection with the Addendum to the Employment Agreements of David Ludwig and Tom Ludwig. As of December 31, 2018, 173,130 shares of common stock were issued pursuant to the exercise of these common stock options. The remaining 126,870 shares expired as of July 31, 2018.

2016 Plan	2019			2018
Options outstanding, beginning of year		2,453,900			2,370,450
Options granted		324,850			441,500
Options exercised		(31,276	)		(173,130	)
Options expired		—			(126,870	)
Options forfeited		(395,624	)		(58,050	)
Options outstanding, end of year		2,351,850			2,453,900

The outstanding options under the 2016 Plan vest over four years at exercise prices ranging from $0.45 to $0.85 per share.

Stock-Based Compensation Expense

Total compensation cost related to stock options in both 2019 and 2018 was $0.3 million. These amounts were recorded in selling, general and administrative expense in both years. During 2019, options to purchase 31,276 shares were exercised.  During 2018, options to purchase 173,130 shares were exercised.  The tax benefit recognized by the Company related to these option exercises was not material.   

In connection with the stock option grants during 2019 and 2018, 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:

	2019		2018
Risk-free interest rate	2% - 3%		2% - 3%
Expected life (years)		6.8		3.2
Expected volatility	73%		83%
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 2019 and 2018:

	2019					2018
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		4,303,900		$	0.75		5,040,450		$	0.97
Granted		649,850		$	0.74		526,500		$	0.43
Exercised		(31,276	)	$	0.45		(173,130	)	$	0.43
Expired		(765,000	)	$	2.00		(1,016,870	)	$	1.74
Forfeited		(545,624	)	$	0.61		(73,050	)	$	0.77
Outstanding at end of year		3,611,850		$	0.51		4,303,900		$	0.75
Options exercisable at year end		2,157,336		$	0.46		2,533,700		$	0.96
Weighted-average fair value of options granted    during the year				$	0.50				$	0.17

As of December 31, 2018, the Company had 1,770,200 unvested options with a weighted average grant date fair value of $0.31 per share.  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, 2019, the total unrecognized stock-based compensation expense related to unvested stock options was $0.5 million, which is expected to be recognized over a weighted-average period of 2.5 years.

The total fair value of options vesting during the years ending December 31, 2019 and 2018 was $0.3 million and $0.3 million, respectively. 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.

The following table summarizes information about all stock options outstanding at December 31, 2019:

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		7.5	$	0.34		45,000		6.9	$	0.29
$ 0.42 to $ 0.48		2,792,250		7.0	$	0.45		2,022,336		6.9	$	0.45
$ 0.48 to $ 1.00		719,600		8.5	$	0.75		90,000		1.1	$	0.76
		3,611,850		7.3	$	0.51		2,157,336		6.7	$	0.46

At December 31, 2019 and 2018, the aggregate intrinsic value of exercisable options was $1.2 million and $11,000, 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.

On June 1, 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 $30,000 for the year ended December 31, 2018 and $52,000 for the year ended December 31, 2019. The unrecognized stock-based compensation expense as of December 31, 2018 and 2019 was approximately $0.2 million.

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Earnings per Share (Tables)

12 Months Ended

Dec. 31, 2019

Earnings Per Share [Abstract]

Schedule of Calculation of the Shares Used in Computing Diluted EPS

The table below shows the calculation of the shares used in computing diluted EPS:

	For the Year Ended December 31,
Weighted Average Shares Calculation:	2019		2018
Basic weighted average shares outstanding		28,662,297		28,581,654
Treasury stock effect of common stock options and restricted stock awards		609,078		313,273
Diluted weighted average common shares outstanding		29,271,375		28,894,927