Heritage Global Inc

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, 2023 and 2022, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as 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, 2023 and 2022, and the results of its operations and its cash flows for the year ended December 31, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matters communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation Allowance for Deferred Tax Assets

As described in Notes 2 and 13 to the financial statements, the Company recognizes deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. We identified the valuation allowance on deferred tax assets as a critical audit matter due to the high degree of judgment in projecting the realization of net operating losses.

The primary procedures we performed to address this critical audit matter include the following:

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Obtained an understanding of management’s estimate regarding the valuation allowance including the method, assumptions, and data used to develop the estimate by reviewing management prepared memo.

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Examined the underlying data used in determining the valuation allowance, including historical financial data and prior utilization of net operating losses.

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Evaluated the Company’s projections of future taxable income for reasonableness.

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Reviewed tax provision and other disclosures related to the tax provision

Allowance for Credit Losses over Notes Receivable

On January 1, 2023 the Company adopted Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which resulted in an adjustment to retained earnings on January 1, 2023 of $0.2 million. As described in Notes 2 and 3, the Company has recognized an allowance for credit losses for notes receivable of $0.7 million and within the Company’s portion of equity method investments of $0.9 million (together, “Receivables”). The allowance is a valuation account that is deducted from the carrying amount of Receivables to present the net amount of Receivables expected to be collected. The Company’s analysis uses a probability weighted cash flow analysis and other qualitative factors to measure the allowance for credit losses as of December 31, 2023. We identified the cash flow analysis and qualitative factors applied to the allowance for credit losses as a critical audit matter as auditing management’s determination of the qualitative factors and forecasts required significant auditor judgment.

The primary procedures we performed to address this critical audit matter include the following:

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Obtained an understanding of management’s estimate regarding the allowance for credit losses including the method, assumptions, and data used to develop the estimate by reviewing management prepared memorandum and analysis.

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Examined the underlying data used in determining the allowance for credit losses, including forecasts of future collection, as well as historical collection data compared to the related forecasts.

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Evaluated the repayment history for certain borrowers and evaluated future cash flow projections.

/s/UHY LLP

We have served as the Company's auditor since 2022.

West Des Moines, Iowa

March 14, 2024