Note 15 – 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 2016 and 2017 the Company issued 40,000 and 10,000 shares of common stock, respectively, pursuant to the exercise of stock options.

Each Class N preferred share 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 Class N preferred share is $1,000, and each share is convertible to 40 common shares at the rate of $25.00 per common share. The Class N preferred stockholders are entitled to liquidation preference over common stockholders equivalent to $1,000 per share. During 2016 and 2017, no shares of the Company’s Class N preferred stock were converted into shares of the Company’s common stock.

Stock- Based Compensation Plans

At December 31, 2017, 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	2017			2016
Options outstanding, beginning of year		995,000			1,170,000
Options forfeited		—			(115,000	)
Options exercised		(10,000	)		(40,000	)
Options expired		—			(20,000	)
Options outstanding, end of year		985,000			995,000

The outstanding options vest over four years at exercise prices ranging from $0.08 to $2.00 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 2016, options to purchase 70,000 shares were granted to the Company’s independent directors as part of the annual compensation, options to purchase 125,000 shares were granted to the Company’s independent directors as a special grant in connection with the Company’s grant of options to its employee base in the fourth quarter, and options to purchase 525,000 shares were granted to the Company’s officers as part of the Company’s grant to its employee base in the fourth quarter. During 2017, options to purchase 50,000 shares were granted to the Company’s independent directors as part of their annual compensation.

2010 Plan	2017		2016
Options outstanding, beginning of year		780,000		150,000
Options granted		50,000		720,000
Options forfeited		—		(90,000	)
Options outstanding, end of year		830,000		780,000

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.

Equity Partners Plan	2017		2016
Options outstanding, beginning of year		230,000		230,000
Options granted		—		—
Options forfeited		—		—
Options outstanding, end of year		230,000		230,000

Other Options Issued

In 2012, the Company’s Board approved the issuance of options as part of the acquisition of HGP, and reserved 625,000 shares of common stock for issuance upon option exercise. The options have an exercise price of $2.00, and vested over four years, beginning on the first anniversary of the grant date. Unlike other options issued by the Company under its stock option plans, the options issued as part of the HGP acquisition survive termination of employment. None of the option holders have terminated their employment with the Company.

Other Options	2017		2016
Options outstanding, beginning of year		625,000		625,000
Options granted		—		—
Options forfeited		—		—
Options outstanding, end of year		625,000		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.

2016 Plan	2017			2016
Options outstanding, beginning of year		2,539,200			—
Options granted		—			2,539,200
Options forfeited		(168,750	)		—
Options outstanding, end of year		2,370,450			2,539,200

The outstanding options vest over four years at an exercise price of $0.45 per share.

Stock-Based Compensation Expense

Total compensation cost related to stock options in 2017 and 2016 was $0.2 million and $0.1 million, respectively. These amounts were recorded in selling, general and administrative expense in both years. During 2017 options to purchase 10,000 shares were exercised. During 2016 options to purchase 40,000 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 2017 and 2016, 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:

	2017		2016
Risk-free interest rate	1% - 2%		1% - 2%
Expected life (years)		6.80		6.75
Expected volatility	95%		94% - 99%
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 2017 and 2016:

	2017					2016
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		5,169,200		$	0.96		2,175,000		$	1.70
Granted		50,000		$	0.48		3,259,200		$	0.45
Exercised		(10,000	)	$	0.08		(40,000	)	$	0.12
Expired		—		N/A			(20,000	)	$	0.15
Forfeited		(168,750	)	$	0.45		(205,000	)	$	0.92
Outstanding at end of year		5,040,450		$	0.97		5,169,200		$	0.96

Options exercisable at year end		2,672,337		$	1.43		1,847,500		$	1.86

Weighted-average fair value of options granted during the year				$	0.48				$	0.31

As of December 31, 2016, the Company had 3,321,700 unvested options with a weighted average grant date fair value of $0.32 per share. As of December 31, 2017, the Company had 2,368,113 unvested options with a weighted average grant date fair value of $0.31 per share.

As of December 31, 2017, the total unrecognized stock-based compensation expense related to unvested stock options was $0.7 million, which is expected to be recognized over a weighted-average period of 2.9 years.

The total fair value of options vesting during the years ending December 31, 2017 and 2016 was $0.3 million and $0.4 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, 2017:

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		40,000		8.3	$	0.24		10,000		8.3	$	0.24
$ 0.42 to $ 1.00		3,340,450		8.4	$	0.48		1,002,337		7.4	$	0.56
$ 1.83 to $ 2.00		1,660,000		0.8	$	1.97		1,660,000		0.8	$	1.97
		5,040,450		6.0	$	0.97		2,672,337		3.3	$	1.43

At December 31, 2017 and 2016, the aggregate intrinsic value of exercisable options was $1,000 and $4,000, 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.

The Company granted restricted stock awards for 300,000 shares to two key employees (150,000 each), in connection with their employment agreements in 2014.

The following summarizes the changes in restricted stock awards for the year ended December 31, 2017:

	Restricted Stock Awards			Weighted Average Grant Date Fair Value
Unvested at December 31, 2016		37,500		$	0.38
Vested		(37,500	)	$	0.38
Unvested at December 31, 2017		—		$	0.38

Vested at December 31, 2017		262,500		$	0.38

The Company recognized stock-based compensation expense related to restricted stock awards of $4,000 and $18,000 for the years ended December 31, 2017 and 2016, respectively.