10-Q 1 form10q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 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.)

700 – 1 Toronto St., Toronto, ON M5C 2V6
(Address of Principal Executive Offices)

(416) 866-3000
(Registrant’s Telephone Number)

Counsel RB Capital Inc.
(Registrant’s Former Name)

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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter time 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 [X] No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer | [_] | Accelerated Filer | [_]
Non-Accelerated Filer | [_] | Smaller reporting company | [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

As of November 5, 2013, there were 28,166,728 shares of common stock, $0.01 par value, outstanding.

TABLE OF CONTENTS

Part I. | Financial Information |
Item 1. | Financial Statements |
| Unaudited Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 | 3
| Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 | 4
| Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period ended September 30, 2013 | 5
| Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 | 6
| Notes to Unaudited Condensed Consolidated Financial Statements | 7
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 32
Item 4. | Controls and Procedures | 32
Part II. | Other Information |
Item 1. | Legal Proceedings | 33
Item 1A. | Risk Factors | 33
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33
Item 3. | Defaults Upon Senior Securities | 33
Item 4. | Mine Safety Disclosures | 33
Item 5. | Other Information | 33
Item 6. | Exhibits | 34

2

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share amounts)
(unaudited)

|  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |
ASSETS |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents | $ | 4,543 |  | $ | 4,314 |
Amounts receivable (net of allowance for doubtful accounts of $0; 2012 - $0) |  | 1,960 |  |  | 1,068 |
Receivable from a related party |  | — |  |  | 2,929 |
Deposits |  | 119 |  |  | 1,481 |
Inventory – equipment |  | 486 |  |  | 820 |
Other current assets |  | 740 |  |  | 312 |
Income taxes recoverable |  | 118 |  |  | 70 |
Deferred income tax assets |  | 1,953 |  |  | 1,956 |
Total current assets |  | 9,919 |  |  | 12,950 |
Non-current assets: |  |  |  |  |  |
Inventory – real estate |  | 6,078 |  |  | 6,078 |
Asset liquidation investments |  | 3,574 |  |  | 3,618 |
Investments |  | 1,757 |  |  | 2,426 |
Property, plant and equipment, net |  | 33 |  |  | 52 |
Intangible assets, net |  | 4,923 |  |  | 5,263 |
Goodwill |  | 5,301 |  |  | 5,301 |
Deferred income tax assets |  | 26,102 |  |  | 25,622 |
Total assets | $ | 57,687 |  | $ | 61,310 |
LIABILITIES AND EQUITY |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |
Accounts payable and accrued liabilities | $ | 8,353 |  | $ | 4,415 |
Debt payable to third parties |  | 1,541 |  |  | 10,883 |
Debt payable to a related party |  | 3,649 |  |  | — |
Total current liabilities |  | 13,543 |  |  | 15,298 |
Commitments and contingencies |  |  |  |  |  |
Equity: |  |  |  |  |  |
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 592 Class N shares at September 30, 2013 and December 31, 2012, liquidation preference of $592 at September 30, 2013 and December 31, 2012 |  | 6 |  |  | 6 |
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 28,166,728 shares at September 30, 2013 and 28,945,228 shares at December 31, 2012 |  | 282 |  |  | 290 |
Additional paid-in capital |  | 283,084 |  |  | 283,281 |
Accumulated deficit |  | (239,208 | ) |  | (237,558 | )
Accumulated other comprehensive loss |  | (20 | ) |  | (7 | )
Total equity |  | 44,144 |  |  | 46,012 |
Total liabilities and equity | $ | 57,687 |  | $ | 61,310 |

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

3

HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
(In thousands of US dollars, except per share amounts) |  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Revenue: |  |  |  |  |  |  |  |  |  |  |  |
Asset liquidation |  |  |  |  |  |  |  |  |  |  |  |
Asset sales | $ | 1,201 |  | $ | 1,284 |  | $ | 1,799 |  | $ | 5,175 |
Commissions and other |  | 1,064 |  |  | 1,768 |  |  | 3,790 |  |  | 4,742 |
Total asset liquidation revenue |  | 2,265 |  |  | 3,052 |  |  | 5,589 |  |  | 9,917 |
Intellectual property licensing |  | 624 |  |  | — |  |  | 824 |  |  | — |
Total revenue |  | 2,889 |  |  | 3,052 |  |  | 6,413 |  |  | 9,917 |
Operating costs and expenses: |  |  |  |  |  |  |  |  |  |  |  |
Asset liquidation |  | 819 |  |  | 1,152 |  |  | 1,401 |  |  | 4,360 |
Inventory maintenance |  | 86 |  |  | 15 |  |  | 275 |  |  | (8 | )
Patent licensing and maintenance |  | 10 |  |  | 4 |  |  | 166 |  |  | 38 |
Selling, general and administrative |  | 1,912 |  |  | 3,210 |  |  | 6,682 |  |  | 7,265 |
Expenses paid to related parties |  | 166 |  |  | 196 |  |  | 574 |  |  | 532 |
Depreciation and amortization |  | 118 |  |  | 272 |  |  | 358 |  |  | 283 |
Total operating costs and expenses |  | 3,111 |  |  | 4,849 |  |  | 9,456 |  |  | 12,470 |
|  | (222 | ) |  | (1,797 | ) |  | (3,043 | ) |  | (2,553 | )
Earnings of equity accounted asset liquidation investments |  | 456 |  |  | 222 |  |  | 1,265 |  |  | 1,449 |
Operating income (loss) |  | 234 |  |  | (1,575 | ) |  | (1,778 | ) |  | (1,104 | )
Other income (expenses): |  |  |  |  |  |  |  |  |  |  |  |
Other income (expenses) |  | — |  |  | 8 |  |  | — |  |  | (299 | )
Interest expense – third party |  | (39 | ) |  | (71 | ) |  | (308 | ) |  | (175 | )
Interest expense – related party |  | (91 | ) |  | 11 |  |  | (91 | ) |  | — |
Total other income (expenses) |  | (130 | ) |  | (52 | ) |  | (399 | ) |  | (474 | )
Income (loss) before the undernoted |  | 104 |  |  | (1,627 | ) |  | (2,177 | ) |  | (1,578 | )
Income tax expense (recovery) |  | 387 |  |  | (638 | ) |  | (466 | ) |  | (612 | )
Earnings (loss) of other equity accounted investments (net of $0 tax) |  | 23 |  |  | (11 | ) |  | 61 |  |  | (65 | )
Net income (loss) |  | (260 | ) |  | (1,000 | ) |  | (1,650 | ) |  | (1,031 | )
Other comprehensive loss: |  |  |  |  |  |  |  |  |  |  |  |
Currency translation adjustment (net of tax of $0) |  | (4 | ) |  | — |  |  | (13 | ) |  | — |
Comprehensive income (loss) | $ | (264 | ) | $ | (1,000 | ) | $ | (1,663 | ) | $ | (1,031 | )
Weighted average common shares outstanding – basic (in thousands) |  | 28,384 |  |  | 28,593 |  |  | 28,759 |  |  | 28,072 |
Weighted average common shares outstanding – diluted (in thousands) |  | 28,384 |  |  | 28,593 |  |  | 28,759 |  |  | 28,072 |
Earnings (loss) per share – basic and diluted: |  |  |  |  |  |  |  |  |  |  |  |
Common shares | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.04 | )

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

4

HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the period ended September 30, 2013
(in thousands of US dollars, except share amounts)
(unaudited)

` |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  | other |  |  |  |
|  | Preferred stock |  |  | Common stock |  |  | paid-in |  |  | Accumulated |  |  | comprehensive |  |  |  |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | capital |  |  | deficit |  |  | income (loss) |  |  | Total |
Balance at December 31, 2011 |  | 592 |  | $ | 6 |  |  | 27,117,450 |  | $ | 271 |  | $ | 278,408 |  | $ | (235,745 | ) | $ | — |  | $ | 42,940 |
Issuance of common stock |  | — |  |  | — |  |  | 1,800,000 |  |  | 19 |  |  | 3,135 |  |  | — |  |  | — |  |  | 3,154 |
Exercise of options |  | — |  |  | — |  |  | 27,778 |  |  | — |  |  | 14 |  |  | — |  |  | — |  |  | 14 |
Issuance of options |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,131 |  |  | — |  |  | — |  |  | 1,131 |
Compensation cost related to stock options |  | — |  |  | — |  |  | — |  |  | — |  |  | 593 |  |  | — |  |  | — |  |  | 593 |
Comprehensive loss |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,813 | ) |  | (7 | ) |  | (1,820 | )
Balance at December 31, 2012 |  | 592 |  |  | 6 |  |  | 28,945,228 |  |  | 290 |  |  | 283,281 |  | $ | (237,558 | ) | $ | (7 | ) |  | 46,012 |
Cancellation of shares (Note 11) |  | — |  |  | — |  |  | (800,000 | ) |  | (8 | ) |  | (616 | ) |  | — |  |  | — |  |  | (624 | )
Compensation cost related to stock options |  | — |  |  | — |  |  | — |  |  | — |  |  | 409 |  |  | — |  |  | — |  |  | 409 |
Exercise of options |  | — |  |  | — |  |  | 21,500 |  |  | — |  |  | 10 |  |  | — |  |  | — |  |  | 10 |
Comprehensive loss |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,650 | ) |  | (13 | ) |  | (1,663 | )
Balance at September 30, 2013 |  | 592 |  | $ | 6 |  |  | 28,166,728 |  | $ | 282 |  | $ | 283,084 |  | $ | (239,208 | ) | $ | (20 | ) | $ | 44,144 |

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

5

HERITAGE GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|  | Nine months ended |
(In thousands of US dollars) |  | September 30, |
|  | 2013 |  |  | 2012 |
Cash flows provided by operating activities: |  |  |  |  |  |
Net income (loss) | $ | (1,650 | ) | $ | (1,031 | )
Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |  |  |  |
Accrued interest added to principal of third party debt |  | 12 |  |  | 19 |
Accrued interest added to principal of related party debt |  | 91 |  |  | — |
Amortization of financing costs on debt payable to third party |  | — |  |  | 9 |
Stock-based compensation expense |  | 409 |  |  | 1,490 |
Loss (earnings) of other equity accounted investments |  | (61 | ) |  | 65 |
Revenue from sale of intellectual property license |  | (624 | ) |  | — |
Writedown of real estate inventory |  | — |  |  | 363 |
Depreciation and amortization |  | 358 |  |  | 283 |
Changes in operating assets and liabilities: |  |  |  |  |  |
Increase in amounts receivable |  | (892 | ) |  | (279 | )
Decrease (increase) in deposits |  | 1,362 |  |  | (3,935 | )
Decrease in inventory |  | 334 |  |  | 110 |
Decrease in asset liquidation investments |  | 44 |  |  | 1,682 |
Increase in other assets |  | (415 | ) |  | (254 | )
Increase in income taxes recoverable |  | (48 | ) |  | — |
Increase in deferred income tax assets |  | (477 | ) |  | (599 | )
Increase in accounts payable and accrued liabilities |  | 3,925 |  |  | 5,864 |
Decrease in income taxes payable |  | — |  |  | (334 | )
Net cash provided by operating activities |  | 2,368 |  |  | 3,453 |
Cash flows provided by (used in) investing activities: |  |  |  |  |  |
Net cash paid for business acquisition |  | — |  |  | (2,344 | )
Investment in other equity accounted investments |  | (56 | ) |  | (51 | )
Cash distributions from other equity accounted investments |  | 784 |  |  | 161 |
Purchase of property, plant and equipment |  | (10 | ) |  | (7 | )
Net cash provided by (used in) investing activities |  | 718 |  |  | (2,241 | )
Cash flows used in financing activities: |  |  |  |  |  |
Proceeds of debt payable to third parties |  | 1,901 |  |  | 9,863 |
Repayment of debt payable to third parties |  | (11,255 | ) |  | (8,140 | )
Proceeds of advances from a related party |  | 8,887 |  |  | 2,155 |
Repayment of debt payable to related parties |  | (2,400 | ) |  | (5,699 | )
Proceeds from exercise of options to purchase common shares |  | 10 |  |  | 14 |
Net cash used in financing activities |  | (2,857 | ) |  | (1,807 | )
Increase (decrease) in cash |  | 229 |  |  | (595 | )
Cash and cash equivalents at beginning of period |  | 4,314 |  |  | 6,672 |
Cash and cash equivalents at end of period | $ | 4,543 |  | $ | 6,077 |
Supplemental schedule of non-cash investing and financing activities: |  |  |  |  |  |
Issuance of common stock in exchange for assets of acquired business | $ | — |  | $ | 2,100 |
Issuance of options to purchase common stock in exchange for assets of acquired business |  | — |  |  | 1,131 |
Supplemental cash flow information: |  |  |  |  |  |
Taxes paid | $ | 39 |  | $ | 368 |
Interest paid |  | 354 |  |  | 163 |

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

6

HERITAGE GLOBAL INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
(in thousands, except share and per share amounts and where specifically indicated)

Note 1 –Basis of Presentation

These unaudited condensed consolidated interim financial statements include the accounts of Heritage Global Inc. (formerly known as Counsel RB Capital Inc.) together with its subsidiaries, including Heritage Global LLC (“HG LLC”, formerly known as Counsel RB Capital LLC), Equity Partners HG LLC (“Equity Partners”, formerly known as Equity Partners RB LLC), Heritage Global Partners, Inc. (“HGP”), C2 Communications Technologies Inc., and C2 Investments Inc. These entities, collectively, are referred to as “HGI”, the “Company”, “we” or “our” in these financial statements. Our unaudited condensed consolidated interim financial statements were prepared in conformity with accounting principles generally accepted 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.

We have prepared the condensed consolidated interim financial statements included herein pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In management’s opinion, these financial statements reflect all adjustments that are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate. These unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 28, 2013.

The results of operations for the three and nine-month periods ended September 30, 2013 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2013.

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 amounts receivable, inventory, investments, deferred income tax assets, goodwill and intangible assets, liabilities, 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.

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no changes to these policies in the first nine months of 2013.

7

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update 2013-02, Other Comprehensive Income (Topic 220) (“ASU 2013-02”). ASU 2013-02 requires entities to disclose additional information about items reclassified out of accumulated other comprehensive income (“AOCI”). Specifically, entities must report 1) changes in AOCI balances by component, including the income tax benefit or expense attributed to each component, and 2) significant items reclassified out of AOCI by component, either on the face of the income statement or as a separate footnote to the financial statements. ASU 2013-02 does not change the current GAAP requirement for a total for comprehensive income to be reported in condensed interim financial statements in either a single continuous statement or two separate but consecutive statements. ASU 2013-02 is effective for interim periods and fiscal years beginning after December 15, 2012, with early adoption permitted. The Company adopted ASU 2013-02 in the first quarter of 2013. As the Company’s AOCI is immaterial, and consists solely of cumulative foreign currency translation adjustments of a subsidiary, its adoption did not have a significant impact on the Company’s condensed consolidated interim financial statements.

Future Accounting Pronouncements

In March 2013, the FASB issued Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 83) (“ASU 2013-05”). ASU 2013-05 specifies that a cumulative translation adjustment (CTA) is attached to a parent company’s investment in a foreign entity and should be released in a manner consistent with derecognition guidance on investments in entities. Therefore, the entire amount of the CTA associated with a foreign entity would be released upon 1) sale of a subsidiary or group of net assets within a foreign entity, which represents the substantially complete liquidation of the investment in the entity, 2) loss of a controlling financial interest in an investment in a foreign entity, or 3) step acquisition of a foreign entity. ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. ASU 2013-05 is effective for interim periods and fiscal years beginning on or after December 15, 2013, with early adoption permitted. The Company does not expect that the adoption of ASU 2013-05 will have a significant impact on its consolidated financial statements.

In July 2013, the FASB issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires that an unrecognized tax benefit must be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. An exception to this presentation can be made when the carryforward or tax loss is not available at the reporting date under applicable tax law to settle taxes that would result from the disallowance of the tax position, or when the reporting entity does not intend to use the deferred tax asset for this purpose. In those circumstances, the unrecognized tax benefit would be presented as a liability. ASU 2013-11 does not require any additional disclosures. The ASU is effective for annual periods beginning after December 15, 2013, and interim periods within those years. Early adoption is permitted. The Company has not yet assessed the impact of ASU 2013-11 on its consolidated financial statements.

Note 3 – Acquisition of Heritage Global Partners, Inc.

On February 29, 2012 the Company expanded its asset liquidation operations by acquiring 100% of the issued and outstanding capital stock in Heritage Global Partners (“HGP”), a full-service, global auction and asset advisory firm. In connection with the acquisition, HGI entered into employment agreements with the previous owners and employees of HGP. In the third quarter of 2012, the Company finalized the valuation of all assets acquired and liabilities assumed. The following table summarizes the consideration paid for HGP and the amounts of the assets acquired and liabilities assumed, which were recognized at the acquisition date:

8

| At February 29, 2012 |  |  |
|  |  | $ |
| Consideration paid |  |  |
| Cash 1 |  | 3,000 |
| Promissory notes, net of receivable from owners 2 |  | 849 |
| Equity instruments: |  |  |
| 1,000,000 HGI common shares 3 |  | 2,100 |
| 625,000 options to purchase HGI common shares at $2.00 per share 4 |  | 1,131 |
| Fair value of total consideration |  | 7,080 |
| Acquisition related costs (included in selling, general, and administrative expenses in HGI’s consolidated statement of operations for the year ended December 31, 2012) |  | 78 |
| Recognized amounts of identifiable assets acquired and liabilities assumed |  |  |
| Cash 1 |  | 656 |
| Accounts receivable (net of $0 allowance for doubtful accounts) |  | 870 |
| Deposits |  | 20 |
| Prepaid expenses |  | 43 |
| Property, plant and equipment |  | 37 |
| Identifiable intangible assets |  | 5,640 |
| Accounts payable and accrued liabilities |  | (1,212 | )
| Client liability account |  | (1,424 | )
| Short-term note payable |  | (100 | )
| Future income taxes payable |  | (2,178 | )
| Total identifiable net assets assumed |  | 2,352 |
| Goodwill |  | 4,728 |
|  |  | 7,080 |

1 Net cash used for the acquisition was $2,344.

2 The notes (the “Promissory Notes”) were paid in full on their August 31, 2012 maturity date.

3 Value determined using the closing price of the Company’s common shares on February 29, 2012.

4 Value determined using the Black-Scholes Option Pricing Model. Inputs to the model included an expected volatility rate of 133%, a risk-free interest rate of 1.25%, an expected life of 4.75 years, and an expected dividend yield of $nil.

The fair value of the accounts receivable is the value as reported in the above table.

The goodwill and identifiable intangible assets are discussed in Note 6.

The only transactions recognized separately from the acquisition were the acquisition costs noted in the above table.

Note 4 – Stock-based Compensation

At September 30, 2013 the Company maintained six stock-based compensation plans, which are described more fully in Note 14 to the audited consolidated financial statements for the year ended December 31, 2012, contained in the Company’s most recently filed Annual Report on Form 10-K.

During the first nine months of 2013 the Company issued 150,000 options to an officer of the Company in accordance with his employment agreement, and 50,000 options to the Company’s independent directors as part of their annual compensation. During the first nine months of 2012, the Company issued a total of 990,000 options to officers and employees, including the 625,000 options issued to the former owners of HGP as part of the acquisition, and 50,000 options to the Company’s independent directors.

9

During the first nine months of 2013, primarily associated with the departure of the Co-CEOs and several employees of HG LLC, 1,530,000 options were forfeited. Additionally, 408,198 vested options that had not been exercised reached maturity and therefore expired. In 2012, employee departures resulted in the forfeiture of 250,000 options, and 1,250 options expired unexercised.

The following summarizes the changes in common stock options for the nine months ended September 30, 2013 and 2012:

|  |  |  |  | Weighted |
|  |  |  |  | Average |
|  |  |  |  | Exercise |
|  | Options |  |  | Price |
Outstanding at December 31, 2012 |  | 3,898,198 |  | $ | 1.75 |
Granted |  | 200,000 |  | $ | 1.00 |
Exercised |  | (30,000 | ) | $ | 0.51 |
Forfeited |  | (1,530,000 | ) | $ | 1.91 |
Expired |  | (408,198 | ) | $ | 0.85 |
Outstanding at September 30, 2013 |  | 2,130,000 |  | $ | 1.75 |
Options exercisable at September 30, 2013 |  | 930,000 |  | $ | 1.69 |

|  |  |  |  | Weighted |
|  |  |  |  | Average |
|  |  |  |  | Exercise |
|  | Options |  |  | Price |
Outstanding at December 31, 2011 |  | 3,141,198 |  | $ | 1.65 |
Granted |  | 1,040,000 |  | $ | 2.04 |
Exercised |  | (31,750 | ) | $ | 0.61 |
Forfeited |  | (250,000 | ) | $ | 1.83 |
Expired |  | (1,250 | ) | $ | 1.40 |
Outstanding at September 30, 2012 |  | 3,898,198 |  | $ | 1.75 |
Options exercisable at September 30, 2012 |  | 1,298,198 |  | $ | 1.39 |

Note 5 – 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 Class N preferred shares, 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, because the preferred stock does not participate in losses.

Options are included in the calculation of diluted earnings per share, since they are assumed to be exercised, except when their effect would be anti-dilutive. For the nine months ended September 30, 2013 and 2012, respectively, all of the Company’s outstanding options were excluded due to the Company’s net loss in both periods.

10

Note 6 – Composition of Certain Financial Statement Items

Amounts receivable

The Company’s amounts receivable are primarily related to the operations of its subsidiaries HG LLC, Equity Partners, and HGP. To date, the Company has not experienced any significant collectability issues with respect to any of its receivables. Given this experience, together with the ongoing business relationships between the Company and its joint venture partners, the Company has not yet been required to develop a policy for formal credit quality assessment. As the Company’s asset liquidation business continues to develop, more comprehensive credit assessments may be required.

At September 30, 2013 the Company had no interest-bearing receivables. At December 31, 2012, the Company had one interest-bearing receivable in the amount of $10, an employee advance bearing interest at 10%, which was repaid in the second quarter of 2013.

At September 30, 2013 the Company had past due non-interest bearing financing receivables of $36, as compared to none at December 31, 2012. The Company does not believe that any allowance for this receivable is required at this time.

During the first nine months of 2013, there were no changes in the Company’s accounting policies for financing receivables, and therefore no related change in the current-period provision for credit losses. During the same period, there were no purchases, sales or reclassifications of financing receivables. There were no troubled debt restructurings during the first nine months of 2013.

Amounts receivable from third parties consisted of the following at September 30, 2013 and December 31, 2012:

|  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |
Accounts receivable (net of allowance for doubtful accounts of $0; 2012 - $0) | $ | 1,960 |  | $ | 1,046 |
Notes receivable (net of allowance for doubtful accounts of $0) |  | — |  |  | 10 |
Lease receivable |  | — |  |  | 12 |
| $ | 1,960 |  | $ | 1,068 |

Intangible assets

The Company’s intangible assets are related to its asset liquidation business.

As discussed in Note 3, on February 29, 2012 the Company acquired HGP for a total purchase price of $7,080, of which $5,640 was assigned to identifiable intangible assets, as shown below. The Customer/Broker Network intangible asset is being amortized over 12 years, and the Trade Name intangible asset is being amortized over 14 years. No impairment resulted from the completion of the impairment tests at December 31, 2012, and there have been no events or circumstances in 2013 that would make it more likely than not that the carrying amount of the intangible assets may not be recoverable.

|  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |
Customer/Broker Network | $ | 4,180 |  | $ | 4,180 |
Accumulated amortization |  | (552 | ) |  | (290 | )
|  | 3,628 |  |  | 3,890 |
Trade Name |  | 1,460 |  |  | 1,460 |
Accumulated amortization |  | (165 | ) |  | (87 | )
|  | 1,295 |  |  | 1,373 |
Total net intangible assets | $ | 4,923 |  | $ | 5,263 |

11

Goodwill

The Company’s goodwill is related to its asset liquidation business.

As part of its acquisition of Equity Partners in June 2011, the Company recognized goodwill of $573. No goodwill impairment resulted from the completion of the impairment tests at December 31, 2012, and there have been no events or changes in circumstances in 2013 that make it more likely than not that the carrying amount of this goodwill may be impaired.

As part of its acquisition of HGP in February 2012, the Company recognized goodwill of $4,728. No goodwill impairment resulted from the completion of the impairment tests at December 31, 2012, and there have been no events or changes in circumstances in 2013 that make it more likely than not that the carrying amount of this goodwill may be impaired.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consisted of the following at September 30, 2013 and December 31, 2012:

|  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |
Due to auction clients | $ | 5,407 |  | $ | 2,242 |
Due to Joint Venture partners |  | 412 |  |  | 487 |
Sales and other taxes |  | 1,157 |  |  | 552 |
Customer deposits |  | 191 |  |  | — |
Remuneration and benefits |  | 336 |  |  | 373 |
Asset liquidation expenses |  | 27 |  |  | 184 |
Auction expenses |  | 271 |  |  | 134 |
Regulatory and legal fees |  | 34 |  |  | 87 |
Accounting, auditing and tax consulting |  | 193 |  |  | 170 |
Patent licensing and maintenance |  | 14 |  |  | 9 |
Other |  | 311 |  |  | 177 |
Total accounts payable and accrued liabilities | $ | 8,353 |  | $ | 4,415 |

Note 7 – Asset Liquidation Investments and Other Investments

Summarized financial information – Equity accounted asset liquidation investments

The table below details the results of operations attributable to HGI from the Joint Ventures in which it was invested.

|  | Nine months ended |
|  | September 30, |
|  | 2013 |  |  | 2012 |
Gross revenues | $ | 5,056 |  | $ | 5,976 |
Gross profit | $ | 907 |  | $ | 1,445 |
Income from continuing operations | $ | 1,265 |  | $ | 1,449 |
Net income | $ | 1,265 |  | $ | 1,449 |

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Other investments

The Company’s other investments as of September 30, 2013 and December 31, 2012 consisted of the following:

|  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC | $ | 20 |  | $ | 20 |
Polaroid |  | 1,737 |  |  | 2,406 |
Total investments | $ | 1,757 |  | $ | 2,426 |

The Company accounts for its investments under the equity method.

Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”)

In December 2007 the Company acquired a one-third interest in Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”), a private company, for a purchase price of $20. The additional two-thirds interest in Knight’s Bridge GP was acquired by parties affiliated with Counsel. Knight’s Bridge GP is the general partner of Knight’s Bridge Capital Partners Internet Fund No. 1 LP (the “Fund”). The Fund holds investments in several non-public Internet-based e-commerce businesses. Since the Company’s initial investment, the Company’s share of earnings has been almost exactly offset by cash distributions, and at September 30, 2013 the Company’s net investment was $20. Based on the Company’s analysis of Knight’s Bridge GP’s financial statements and projections as at September 30, 2013, the Company concluded that there has been no impairment in the fair value of its investment, and that its book value is the best estimate of its fair value.

Polaroid

In the second quarter of 2009, the Company indirectly acquired an approximate 5% interest in Polaroid Corporation (“Polaroid”), pursuant to a Chapter 11 reorganization in a U.S. bankruptcy court. The investment was made as part of a joint venture investor group that includes both related and non-related parties. The Company, the related parties and two of the unrelated parties formed KPL, LLC (“KPL”) to pool their individual investments in Polaroid. KPL is managed by a related party, Knight’s Bridge Capital Partners Management, L.P. (the “Management LP”), which acts as KPL’s General Partner. The Management LP is a wholly-owned subsidiary of the Company’s majority shareholder, Counsel Corporation (together with its subsidiaries, “Counsel”).

The Company’s investment in KPL has two components:

- HGI acquired Counsel’s rights and obligations as an indirect limited partner (but not Counsel’s limited partnership interest) in Knight’s Bridge Capital Partners Fund I, L.P., a related party, with respect to its investment in Class A units. HGI is also responsible for Counsel’s share of the management fees, which are approximately $40 per year. The economic interest entitles HGI to an 8% per annum preferred return. Any profits generated in addition to the preferred return, subsequent to the return of invested capital, are subject to the Management LP’s 20% carried interest.

- HGI directly acquired Class D units. These units are subject to a 2% annual management fee, payable to the General Partner, of approximately $11 per year. The units have a 10% per annum preferred return. Any profits generated in addition to the preferred return, subsequent to the return of invested capital, are subject to the Management LP’s 20% carried interest.

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The components of the Company’s investment in Polaroid at September 30, 2013 and December 31, 2012 are detailed below:

September 30, 2013 |
|  |  | Capital |  |  | Equity in |  |  | Capital |  |  | Net |
Unit type |  |  | invested |  |  | earnings |  |  | returned |  |  | investment |
Class A |  | $ | 2,492 |  | $ | 159 |  | $ | (1,259 | ) | $ | 1,392 |
Class D |  |  | 617 |  |  | 36 |  |  | (308 | ) |  | 345 |
Total |  | $ | 3,109 |  | $ | 195 |  | $ | (1,567 | ) | $ | 1,737 |

December 31, 2012 |
|  |  | Capital |  |  | Equity in |  |  | Capital |  |  | Net |
Unit type |  |  | invested |  |  | earnings |  |  | returned |  |  | investment |
Class A |  | $ | 2,447 |  | $ | 137 |  | $ | (654 | ) | $ | 1,930 |
Class D |  |  | 606 |  |  | 30 |  |  | (160 | ) |  | 476 |
Total |  | $ | 3,053 |  | $ | 167 |  | $ | (814 | ) | $ | 2,406 |

Note 8 – Debt

|  | September 30, |  |  | December 31, |
|  | 2013 |  |  | 2012 |
Credit Facility | $ | 1,541 |  | $ | 10, 883 |
Counsel Loan |  | 3,649 |  |  | — |
Total debt | $ | 5,190 |  | $ | 10,883 |

At September 30, 2013 and December 31, 2012, all of the Company’s outstanding debt was current. At September 30, 2013 it consisted of a revolving credit facility (the “Credit Facility”), which had a balance of $1,541, and debt payable to a related party (the “Counsel Loan”), which had a balance of $3,649. At December 31, 2012, the only outstanding debt was the $10,883 balance of the Credit Facility.

The Credit Facility is provided to HG LLC by a U.S. bank under the terms and provisions of a certain Loan and Security Agreement (the “Loan Agreement”) dated as of June 2, 2009 and most recently amended as of September 27, 2012 (the “Amendment Date”). It is utilized to finance the acquisition of eligible property and equipment for purposes of resale. The Credit Facility bears interest at the greater of prime rate + 1.0%, or 4.5%, and the maximum borrowing available under the Credit Facility is US $15,000, subject to HG LLC maintaining a 1:2 ratio of capital funds, i.e. the sum of HG LLC’s tangible net worth plus subordinated indebtedness, as defined in the Loan Agreement, to the outstanding balance. The amount of any advance is determined based upon the value of the eligible assets being acquired, which serve as collateral. At September 30, 2013, $6,964 of such assets served as collateral for the loan (December 31, 2012 - $13,392). A monthly fee is payable with respect to unused borrowing (“Unused Line Fee”). The Unused Line Fee is equal to the product of 0.50% per annum multiplied by the difference between $15,000 and the average loan amount outstanding during the month. Effective the Amendment Date, an annual facility fee (“Facility Fee”) of $75 was payable to the lender. Subsequent payments of $50 will be due on each anniversary of the Amendment Date. The Credit Facility also contains other terms and provisions customary for agreements of this nature, and has been guaranteed by both the Company and Counsel. At September 30, 2013 and December 31, 2012 the Company was in compliance with all covenants of the Credit Facility.

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The Counsel Loan outstanding at September 30, 2013 consisted of net advances received by the Company from Counsel under an existing loan facility, and accrued interest payable of $91. The Counsel Loan, which was originally entered into during the fourth quarter of 2003, accrues interest at 10% per annum compounded quarterly from the date funds are advanced, and is due on demand. Any outstanding balance under the Counsel Loan is secured by the assets of the Company. At December 31, 2012, the balance of the Counsel Loan was zero due to the Company having a net receivable of $2,929 from Counsel. For further discussion of transactions with Counsel, see Note 11.

Note 9 – Patent Participation Fee

In 2003, HGI acquired a VoIP patent from a third party. Consideration provided was $100 plus a 35% residual payable to the third party relating to the net proceeds from future licensing and/or enforcement actions from the HGI VoIP patent portfolio. Net proceeds are defined as amounts collected from third parties net of the direct costs associated with putting the licensing or enforcement in place and related collection costs. The vendor of the VoIP Patent was also granted a first priority security interest in the patent in order to secure HGI’s obligations under the associated purchase agreement.

In March 2013, the Company concluded a patent infringement lawsuit, which had initially been filed in August 2009, by entering into a settlement and license agreement in return for a payment of $200. No amounts were payable with respect to the residual discussed above, as the direct costs incurred since the Company last entered into settlement and licensing agreements were in excess of $200.

Note 10 – Income Taxes

In the third quarter of 2013, the Company recognized an income tax expense of $387 (2012- $638 recovery), comprised of a current income tax expense of $113 (2012 - $60 recovery) and a deferred tax expense of $274 (2012 - $578 recovery). For the nine months ended September 30, 2013, the current income tax expense is $9 (2012 - $14 recovery) and the deferred tax recovery is $475 (2012 - $598). The $28,055 net deferred income tax asset balance as at September 30, 2013 (2012 - $27,204) reflects the tax benefit of available tax loss carry forwards that are more likely than not expected to be utilized against future income.

At September 30, 2013, the Company had available federal tax loss carry-forwards of approximately $58,300 (2012 - $55,300) of unrestricted net operating tax losses and approximately $28,800 (2012 - $28,800) of restricted net operating tax losses. The net operating loss carry forwards expire between 2024 and 2033.

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 Counsel. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Counsel 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 $2,500 per annum until 2008 and $1,700 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 expiry 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. Furthermore, any such additional limitations may result in the Company having to reverse all or a portion of its deferred tax balance or set up a valuation allowance at such time.

15

The Company, until recently, has had a history of incurring annual tax losses, beginning in 1991. 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 Company applied historic tax loss carry forwards to offset income for tax purposes in 2008, 2010 and 2011, respectively. The 2009 through 2011 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.

Note 11 – Related Party Transactions

Related Party Debt with Counsel

At September 30, 2013 the Company had a balance of $3,649 owing to Counsel under the Counsel Loan, of which $91 was accrued interest, as compared to a receivable of $2,929 at December 31, 2012. For further discussion of the terms of the Counsel Loan, see Note 8.

Counsel Services Provided to Company

Since December 2004, HGI and Counsel have entered into successive annual management services agreements (the “Agreement”). Under the terms of the Agreement, HGI agrees to pay Counsel for ongoing services provided to HGI by Counsel personnel. These services include preparation of the Company’s financial statements and regulatory filings, taxation matters, stock-based compensation administration, Board administration, patent portfolio administration and litigation matters. The Counsel employees providing the services are: 1) its Executive Vice President, Secretary and Chief Financial Officer, 2) its Senior Tax Manager, 3) an Accounting Manager, and 4) its Accounts Payable Clerk. These employees have the same or similar positions with HGI, but none of them receive compensation from HGI. Rather, Counsel allocates to HGI a percentage, based on time incurred, of the employees’ base compensation paid by Counsel. The amounts due under the Agreement are payable within 30 days following the respective year end, subject to applicable restrictions. Any unpaid fee amounts bear interest at 10% per annum commencing on the day after such year end. In the event of a change of control, merger or similar event of HGI, all amounts owing, including fees incurred up to the date of the event, will become due and payable immediately upon the occurrence of such event. Counsel has continued to provide these services in 2013 on the same cost basis.

In addition to the above, beginning in the first quarter of 2011, additional amounts have been charged to HGI for the services of Counsel personnel that relate to the ongoing operations of HGI’s asset liquidation business. All amounts charged by Counsel are detailed below:

|  | Nine months ended |
Item |  | September 30, |
|  | 2013 |  |  | 2012 |
Management fees | $ | 270 |  | $ | 270 |
Other charges |  | 55 |  |  | 56 |
Total | $ | 325 |  | $ | 326 |

Transactions with Other Related Parties

On July 26, 2013, the Company and its Co-CEOs entered into an agreement by which the Co-CEOs terminated their employment with the Company and HG LLC. Under the agreement, as disclosed in the Company’s Current Report on Form 8-K filed on July 31, 2013, effective June 30, 2013 the Co-CEOs departed the Company along with the personnel in the New York and Los Angeles offices of HG LLC. In August 2012, each Co-CEO had acquired 400,000 common shares of the Company, with a total value of $1,054, in return for intellectual property licensing agreements. The $1,054 was recorded as stock-based compensation in 2012. On July 26, 2013, the Co-CEOs returned these common shares, which had a fair value of $624, in order to re-acquire the licensing agreements. The Company therefore recorded intellectual property licensing revenue of $624. The shares have been cancelled.

16

The Company, beginning in 2009, leased office space in White Plains, NY and Los Angeles, CA as part of the operations of HG LLC. Both premises are owned by entities that are controlled by a former Co-CEO of HG LLC and the Company. In connection with the departure of the Co-CEOs, these lease agreements were terminated, without penalty, effective June 30, 2013.

Additionally, the Company leases office space in Foster City, CA as part of the operations of HGP. The premises are owned by an entity that is jointly controlled by the former owners of HGP.

The lease amounts paid by the Company to the related parties are detailed below:

|  | Nine months ended |
Leased premises location |  | September 30, |
|  | 2013 |  |  | 2012 |
White Plains, NY | $ | 66 |  | $ | 95 |
Los Angeles, CA |  | 12 |  |  | 19 |
Foster City, CA |  | 171 |  |  | 92 |
Total | $ | 249 |  | $ | 206 |

As discussed in Note 3, as part of the acquisition of Heritage Global Partners in February 2012, the Company issued Promissory Notes totaling $1,000 to its two former owners, partially offset by $151 of accounts receivable from the former owners. During the third quarter of 2012, the Promissory Notes, which did not accrue interest, were repaid in full, and the accounts receivable were collected.

Note 12 – Segment Reporting

From 2005 until the second quarter of 2009, the Company operated in a single business segment, Patent Licensing. With the commencement of HG LLC’s operations in the second quarter of 2009, the Company diversified into a second segment, Asset Liquidation. For both the nine months ending September 30, 2013 and the year ending December 31, 2012, only the Asset Liquidation segment had revenues and assets sufficiently significant to require separate reporting.

There are no material inter-segment revenues or expenses. To date the Company’s business has been conducted principally in North America, but the establishment of offices in Europe in the third quarter of 2012 is expected to result in more international operations in future periods.

17

The table below presents information about the Company’s segments as of and for the three and nine months ended September 30, 2013 and 2012:

|  | For the three months ended September 30, |
|  | 2013 |  |  | 2012 |
|  | Asset |  |  | Asset |
|  | Liquidation |  |  | Liquidation |
Revenues from external customers | $ | 2,265 |  | $ | 3,052 |
Earnings from equity accounted asset liquidation investments |  | 456 |  |  | 222 |
Other income (expense) |  | — |  |  | 7 |
Interest expense |  | 39 |  |  | 70 |
Depreciation and amortization |  | 118 |  |  | 272 |
Segment loss |  | (112 | ) |  | (311 | )
Investment in equity accounted asset liquidation investees |  | 3,574 |  |  | 1,773 |
Segment assets |  | 24,685 |  |  | 27,349 |

|  | For the nine months ended September 30, |
|  | 2013 |  |  | 2012 |
|  | Asset |  |  | Asset |
|  | Liquidation |  |  | Liquidation |
Revenues from external customers | $ | 5,589 |  | $ | 9,917 |
Earnings from equity accounted asset liquidation investments |  | 1,265 |  |  | 1,449 |
Other income (expense) |  | — |  |  | (301 | )
Interest expense |  | 308 |  |  | 174 |
Depreciation and amortization |  | 358 |  |  | 283 |
Segment income (loss) |  | (1,631 | ) |  | 755 |

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The following table reconciles reportable segment information to the unaudited condensed consolidated interim financial statements of the Company:

|  | Three months |  |  | Three months |  |  | Nine months |  |  | Nine months |
|  | ended |  |  | ended |  |  | ended |  |  | ended |
|  | September 30, |  |  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Total other income (expense) for reportable segments | $ | — |  | $ | 7 |  | $ | — |  | $ | (301 | )
Unallocated other income (expense) |  | — |  |  | 1 |  |  | — |  |  | 2 |
Total other income (expense) | $ | — |  | $ | 8 |  | $ | — |  | $ | (299 | )
Total interest expense for reportable segments | $ | 39 |  | $ | 70 |  | $ | 308 |  | $ | 174 |
Unallocated interest expense from third party debt |  | — |  |  | 1 |  |  | — |  |  | 1 |
Unallocated interest expense from related party debt |  | 91 |  |  | (11 | ) |  | 91 |  |  | — |
Total interest expense | $ | 130 |  | $ | 60 |  | $ | 399 |  | $ | 175 |
Total depreciation and amortization for reportable segments | $ | 118 |  | $ | 272 |  | $ | 358 |  | $ | 283 |
Other unallocated depreciation from corporate assets |  | — |  |  | — |  |  | — |  |  | — |
Total depreciation and amortization | $ | 118 |  | $ | 272 |  | $ | 358 |  | $ | 283 |
Total segment income (loss) | $ | (112 | ) | $ | (311 | ) | $ | (1,631 | ) | $ | 755 |
Revenue not allocated to reportable segments |  | 624 |  |  | — |  |  | 824 |  |  | — |
Other income (expense) and earnings (loss) of other equity accounted investments |  | 22 |  |  | (11 | ) |  | 61 |  |  | (63 | )
Other corporate expenses (primarily corporate level interest, general and administrative expenses) |  | (407 | ) |  | (1,316 | ) |  | (1,370 | ) |  | (2,335 | )
Income tax expense (recovery) |  | 387 |  |  | (638 | ) |  | (466 | ) |  | (612 | )
Net loss from continuing operations | $ | (260 | ) | $ | (1,000 | ) | $ | (1,650 | ) | $ | (1,031 | )

|  | As at |  |  | As at |  |  |  |  |  |  |
|  | September 30, |  |  | September 30, |  |  |  |  |  |  |
|  | 2013 |  |  | 2012 |  |  |  |  |  |  |
Segment assets | $ | 24,685 |  | $ | 27,349 |  |  |  |  |  |  |
Other assets not allocated to segments(1) |  | 33,002 |  |  | 33,583 |  |  |  |  |  |  |
Total assets | $ | 57,687 |  | $ | 60,932 |  |  |  |  |  |  |

| (1) | Other assets not allocated to segments are corporate assets such as cash, non-trade accounts receivable, prepaid insurance, investments and deferred income tax assets.

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Note 13 – Commitments and Contingencies

At September 30, 2013, HGI has no commitments other than the Unused Line Fee on its third party debt and leases on the HGP offices in California and Washington. The leases expire on March 14, 2014, December 11, 2015 and July 31, 2016. The annual lease obligations are as shown below:

2013 | $ | 131 |
2014 |  | 288 |
2015 |  | 293 |
2016 |  | 145 |
| $ | 857 |

In the normal course of its business, HGI may be subject to contingent liability with respect to assets sold either directly or through Joint Ventures. At September 30, 2013 HGI does not expect any of these liabilities, individually or in the aggregate, to have a material adverse effect on its assets or results of operations.

The Company is involved in various other 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 14 – Subsequent Events

The Company has evaluated events subsequent to September 30, 2013 for disclosure. There have been no material subsequent events requiring disclosure in this Report.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(All dollar amounts are presented in thousands of U.S. dollars, unless otherwise indicated, except per share amounts)

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements of the Company and the related notes thereto for the nine months ended September 30, 2013, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“SEC”).

Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” 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, as noted in the Company’s Annual Report on Form 10-K, filed with the SEC, and as noted 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.

Overview, History and Recent Developments

Heritage Global Inc. (“HGI”, “we” or the “Company”) was incorporated in the State of Florida in 1983 under the name “MedCross, Inc.” The Company’s 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. effective August 22, 2013. The name change more closely identifies the Company with its core auction business, Heritage Global Partners Inc. (“HGP”).

21

The organization chart below outlines the basic corporate structure of the Company:

Asset liquidation

The Company’s asset liquidation business is its principal operating segment, and the Company’s objective is to be the leading resource for clients requiring capital asset solutions. The asset liquidation business began operations in 2009 with the establishment of Heritage Global LLC (“HG LLC”, formerly known as Counsel RB Capital 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.

The Company expanded its asset liquidation operations in the second quarter of 2011, when HG LLC, through its wholly-owned subsidiary Equity Partners HG LLC (formerly known as Equity Partners CRB LLC), acquired 100% of the business of EP USA, LLC (d/b/a Equity Partners) (“Equity Partners”). Equity Partners is a boutique investment banking firm and provider of financial solutions for distressed businesses and properties. It was founded in 1988, and works with financially distressed companies and properties to arrange customized financial solutions in the form of debt/refinancing or equity investments, to create joint venture relationships, or to organize going concern sales of a business or property. Its services are intended to allow distressed businesses to remain intact in order to maintain their going concern values, which typically are significantly higher than their liquidation values. HG LLC worked with Equity Partners prior to the acquisition, and the combined operations serve a variety of clients at different stages of the distressed business and surplus asset continuum.

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HGI remains focused on building a sustainable, long-term global capital asset solutions business. On February 29, 2012 the Company increased its in-house asset liquidation expertise via its acquisition of 100% of the outstanding equity of HGP, a full-service, global auction, appraisal and asset advisory firm. The acquisition and integration of HGP created additional global opportunities.

In the fourth quarter of 2012, the Company launched Heritage Global Partners Europe. Through its wholly-owned subsidiary Heritage Global Partners UK Limited (“HGP UK”), the Company opened three European-based offices, one each in the United Kingdom, Germany and Spain. Management believes that HGI’s expanded global platform will both provide its customer base with an array of value-added capital asset solutions, and achieve the Company’s long-term goal of growing its principal and fee-based revenue channels.

As discussed in Note 11 of the unaudited condensed consolidated interim financial statements, effective June 30, 2013 the Company’s Co-CEOs terminated their employment with the Company and HG LLC. Under the terms of the agreement, the Co-CEOs departed the Company along with the personnel in the New York and Los Angeles offices of HG LLC. Following their departure, the managing partners of HGP are leading HG LLC. The senior managing director of Equity Partners continues to lead HG LLC’s Equity Partners subsidiary.

As a result of this change in the Company’s asset liquidation business, the Company is now concentrating its asset liquidation operations on its auction and appraisal business, as well as its customized financial solutions business. However, the Company expects that its future operations will continue to include asset acquisition and monetization transactions.

Intellectual property licensing

In 1994, the Company began operating as an Internet service provider, and designed and built an internet protocol (“IP”) telecommunications platform. In 1997, it began offering enhanced services over a mixed IP-and-circuit-switched network platform, and in 1998 the Company deployed its real-time IP communications network platform, which represented the first nationwide, commercially viable VoIP platform of its kind. In 2001, the Company expanded its telecommunications business, through the acquisition of WXC Corp. This business was sold effective September 30, 2005.

In 2002, the U.S. Patent and Trademark Office issued U.S. patent No. 6,438,124 (the “C2 Patent”) for the Company’s Voice Internet Transmission System, which reflects foundational thinking, application, and practice in the VoIP services market. It encompasses the technology that allows two parties to converse phone-to-phone, regardless of the distance, by transmitting voice/sound via the Internet. In May 2003, shortly after the issuance of the C2 Patent, the Company disposed of its domestic U.S. VoIP network, but retained all of its intellectual property rights and patents.

Also in 2003, the Company added to its VoIP patent holdings when it acquired U.S. Patent No. 6,243,373, “Method and Apparatus for Implementing a Computer Network/Internet Telephone System” (the “VoIP Patent”), which included a corresponding foreign patent and related international patent applications. The VoIP Patent, together with the C2 Patent and related international patents and patent applications, form the Company’s international VoIP Patent Portfolio that covers the basic process and technology that enable VoIP communication as used in the market today. Telecommunications companies that enable customers to originate a phone call on a traditional handset, transmit any part of that call via IP, and then terminate the call over the traditional telephone network, are utilizing HGI’s patented technology. As part of the consideration for the acquisition of the VoIP Patent, the vendor is entitled to receive 35% of the net earnings from the VoIP Patent Portfolio.

All activities relating to the Company’s licensing of the VoIP Patent Portfolio, or its other intellectual property, constitute the Company’s Patent Licensing operating segment. HGI’s target market consists of carriers, equipment manufacturers, service providers and end users in the IP telephone market who are using HGI’s patented VoIP technologies by deploying VoIP networks for phone-to-phone communications. The Company’s objective is to obtain ongoing licensing and royalty revenue from the target market for its patents.

Until December 31, 2004, intellectual property revenue was based on the sales and deployment of the Company’s VoIP solutions, which it ceased directly marketing in 2005. In June 2006, C2 Communications Technologies Inc. (“C2 Technologies”), a wholly-owned subsidiary of the Company, filed a patent infringement lawsuit against seven major U.S. telecommunications carriers, which alleged that these companies’ VoIP services and systems infringed the VoIP Patent. The litigation resulted in the Company entering into settlement and license agreements in 2008, for which HGI was paid $17,625 in aggregate, whereby HGI granted the defendants non-exclusive, perpetual, worldwide, fully paid up, royalty-free licenses under any of HGI’s present patents and patent applications, including the VoIP Patent, to make, use, sell or otherwise dispose of any goods and services based on such patents.

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In August 2009, C2 Technologies filed a similar lawsuit against PAETEC Corporation, Matrix Telecom, Inc., Windstream Corporation, and Telephone and Data Systems, Inc., alleging that the defendants’ services and systems utilizing VoIP infringe the Company’s U.S. Patent No. 6,243,373. The complaint sought an injunction, monetary damages and costs. In the fourth quarter of 2009, the complaint against Matrix Telecom, Windstream Corporation and Telephone and Data Systems, Inc. was dismissed without prejudice. A trial date was set for March 13, 2013, but in the first quarter of 2013 the Company entered into a settlement and license agreement with the remaining defendant for a payment of $200 on similar terms to the litigation discussed above.

In July 2013, the Company recorded intellectual property licensing revenue of $624 upon the sale of a licensing agreement to the Company’s former Co-CEOs. This transaction is discussed in more detail in Note 11 of the unaudited condensed consolidated interim financial statements.

The Company’s segments are discussed in more detail in Note 12 of the unaudited condensed consolidated interim financial statements.

Industry and Competition

Asset Liquidation

Our asset liquidation business is involved primarily in the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. The market for these assets is highly fragmented. To acquire assets for resale, the Company competes with other liquidators, auction companies, dealers and brokers. It competes for potential purchasers with other liquidators and auction companies, as well as with equipment manufacturers, distributors, dealers and equipment rental companies. Some of our competitors have significantly greater financial and marketing resources and name recognition.

HG LLC’s 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 allow HG LLC to have access to more opportunities, and to mitigate some of the competition from the market’s larger participants. HGI’s 2011 and 2012 acquisitions of Equity Partners and HGP have resulted in HG LLC being able to offer a full-service industrial auction division and a valuation practice to provide equipment appraisals to companies and financial institutions. The Company’s expansion of its operations into Europe in the fourth quarter of 2012 is consistent with this strategy.

Patent Licensing

Historically, the communications services industry transmitted voice and data over separate networks using different technologies, such as circuit switching. VoIP technology can replace the traditional telephone network, and is more efficient than a dedicated circuit network, because it is not restricted by the one-call, one-line limitation of a traditional telephone network. In addition, VoIP technology enables the provision of enhanced services such as unified messaging. It has become widespread and accepted, with a variety of applications in the telecommunications and other industries.

The Company’s objective is to have telecommunications service providers (“TSPs”), equipment suppliers (“ESs”) and end users license its patents. In this regard, its competition is existing technology, outside the scope of its patents, which allows TSPs and ESs to deliver communication services to their customers. While we believe that there will be continued proliferation of VoIP technology in the coming years and that this proliferation will occur within the context of our patents, there is no certainty that this will occur, and/or that it will occur in a manner that requires organizations to license our patents.

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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, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, 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 expect to continue to incur costs, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited condensed consolidated interim financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). This requires management to make estimates and assumptions based on historical experience and various other factors that are considered to be reasonable under the circumstances. These 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. Actual results could differ from these estimates.

Significant estimates required in the preparation of the unaudited condensed consolidated interim financial statements included in this Report include the assessment of collectability of revenue recognized, and the valuation of amounts receivable, inventory, investments, deferred income tax assets, goodwill and intangible assets, liabilities and stock-based compensation. These estimates are considered significant because of the significance of the financial statement items 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.

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no changes to these policies in the first nine months of 2013.

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Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

At September 30, 2013 the Company had a working capital deficit of $3,624, as compared to a working capital deficit of $2,348 at December 31, 2012, an increase of $1,276. A significant change in the Company’s working capital during the first nine months of 2013 was the receipt of $2,929 that was receivable from a related party, Counsel Corporation (collectively, with its subsidiaries, “Counsel”), at December 31, 2012, together with additional net advances totalling $3,649 from the same party. The other significant change within current assets was a decrease of $1,362 in deposits, partially offset by an increase of $892 in accounts receivable. The most significant change within current liabilities was a decrease of $9,342 in debt payable to third parties. This was partially offset by an increase of $3,938 in accounts payable and accrued liabilities.

The Company’s debt payable to third parties consists of borrowings under HG LLC’s revolving credit facility (the “Credit Facility”), and is subject to significant fluctuation depending on the number and magnitude of asset liquidation transactions in process at any given date. The Credit Facility has a maximum of $15,000 in place to finance purchases of assets for resale, as discussed in Note 7 of the unaudited condensed consolidated interim financial statements.

During the first nine months of 2013, the Company’s primary sources of cash were the operations of its asset liquidation business, borrowings under the associated Credit Facility, and net advances of $6,578 from its parent company, Counsel. The advances from Counsel were used to partially repay the Credit Facility. The Company also received $784 of cash distributions from its equity accounted investments. Cash disbursements, other than those related to a net $9,354 repayment of third party debt, were primarily related to operating expenses.

It should be noted that GAAP requires the Company to classify both real estate inventory and asset liquidation investments as non-current, although they are expected to be converted to cash within a year. If these assets were classified as current, the Company would report working capital of $6,028 at September 30, 2013 and working capital of $7,348 at December 31, 2012.

The Company is continuing to pursue licensing and royalty agreements with respect to its patents. However, the Company expects that its asset liquidation business will continue to be the primary source of cash required for ongoing operations for the foreseeable future, and that its operations will generate sufficient cash to cover the Company’s requirements.

The Company’s portfolio investments are in companies that are not publicly traded, and therefore these investments are illiquid. The Company’s investments were made with the objective of recognizing long-term capital gains, and neither the amount nor the timing of such gains can be predicted with any certainty.

Ownership Structure and Capital Resources

- At September 30, 2013 the Company had stockholders’ equity of $44,144, as compared to $46,012 at December 31, 2012.

- At December 31, 2012, and until July 25, 2013, the Company was 71.3% owned, and therefore controlled, by Counsel. The Company’s Co-CEOs each owned 7.0%, the former owners of HGP and a single investor each owned 3.5%, and the remaining public stockholders owned 7.7%. Upon the departure of the Co-CEOs in the third quarter of 2013, and the associated return and cancellation of 800,000 shares on July 26, 2013, as discussed in Note 11 of the unaudited condensed consolidated interim financial statements, Counsel’s ownership increased to 73.3%. That of the former Co-CEOs decreased to 5.8% each, that of the former owners of HGP and the single investor increased to 3.6% each, and that of the remaining public stockholders increased to 7.9%.

- On April 1, 2013, Counsel announced that its Board of Directors had approved a plan to focus Counsel’s operations on its core business, mortgage lending, and therefore to dispose of its other operating segments, including its interest in HGI. Although Counsel expects that the disposal process will be completed within twelve months from the announcement date, at this point no formal disposal of HGI is in progress. To date, Counsel’s decision has had no impact on HGI’s operations.

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Cash Position and Cash Flows

Cash and cash equivalents at September 30, 2013 were $4,543 as compared to $4,314 at December 31, 2012, an increase of $229.

Cash provided by operating activities Cash provided by operating activities was $2,368 during the nine months ended September 30, 2013 and $3,453 during the same period in 2012. During the first nine months of 2013 the Company had a loss of $1,650, as compared to a loss of $1,031 for the same period in 2012. Gross profit from asset liquidation operations declined by approximately $1,700, earnings from asset liquidation investments declined by approximately $200, intellectual property licensing revenue increased by $824, patent licensing expenses increased by approximately $200, and operating expenses decreased by approximately $600. This net increase of approximately $700 in the Company’s operating loss was accompanied by an increase of $224 in interest expense in 2013 as compared to 2012, due to both greater interest expense on the Company’s Credit Facility and $91 of interest expense on the Counsel Loan in 2013. These items were partially offset by the Company recording a tax recovery of $466 in the first nine months of 2013, compared to a tax recovery of $612 during the same period of 2012. It should be noted that the 2013 results include the operations of HGP for a full nine months, whereas the 2012 results only include the operations for the period beginning February 29, 2012.

The most significant changes in operating activities during the first nine months of 2013 as compared to the first nine months of 2012 were in deposits, asset liquidation investments and accounts payable and accrued liabilities. Deposits decreased by $1,362 in 2013 as compared to increasing by $3,935 in 2012. Asset liquidation investments decreased by $44 in 2013 as compared to decreasing by $1,682 in 2012. Accounts payable and accrued liabilities increased by $3,925 in 2013 as compared to increasing by $5,864 in 2012. The changes in deposits and asset liquidation investments are due to the variability of the operations of HG LLC. The change in accounts payable and accrued liabilities is primarily due to the variability of all business units, combined with the initial effect of the acquisition of HGP in the first quarter of 2012.

Cash provided by or used in investing activities Cash provided by investing activities during the nine months ended September 30, 2013 was $718, as compared to $2,241 of cash used during the same period in 2012. In 2012, the most significant transaction was the net cash outflow of $2,344 in connection with the Company’s acquisition of HGP; there were no acquisitions in the first nine months of 2013. In 2013 the Company received $753 in cash distributions from its investment in Polaroid, and $31 in cash distributions from its investment in Knight’s Bridge GP, compared to total distributions of $161 in 2012, primarily from Polaroid. Additional investments in Polaroid were $56 and $51 in 2013 and 2012, respectively. In 2013 the Company invested $10 in property, plant and equipment; there were no similar transactions in 2012.

Cash used in financing activities Cash used in financing activities was $2,857 during the nine months ended September 30, 2013, as compared to $1,807 cash used during the same period in 2012. In 2013 the Company repaid net cash of $9,354 to its third party lender, compared to receiving net cash of $1,723 in 2012. In 2013, the Company received net cash of $6,487 from Counsel, compared to repaying net cash of $3,544 in 2012. In the first nine months of 2013 the Company received $10 related to the exercise of options to purchase common stock, compared to $14 in 2012.

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Management’s Discussion of Results of Operations

Asset liquidation revenue is earned from the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. Following the acquisitions of HGP and Equity Partners, it is also earned from more traditional asset disposition services, such as commissions from on-site and webcast auctions, liquidations and negotiated sales, and fees earned for management advisory services. The Company also earns income from its asset liquidation business through its earnings from equity accounted asset liquidation investments.

The revenues and expenses discussed below include the operating results of HGP for the period following its acquisition by the Company on February 29, 2012. In the near-term, the Company’s earnings have been impacted by the incremental costs associated with the acquisition and integration of HGP and the expansion of its operations into Europe, as discussed above under Overview, History and Recent Developments.

Three-Month Period Ended September 30, 2013 Compared to Three-Month Period Ended September 30, 2012

Asset liquidation revenues were $2,265 in 2013 compared to $3,052 in 2012, asset liquidation expense was $905 in 2013 compared to $1,167 in 2012, and earnings of equity accounted asset liquidation investments were $456 in 2013 compared to $222 in 2012. The net earnings of these three items were therefore $1,816 in 2013 compared to $2,107 in 2012. Because the Company conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period, the operations must be considered as a whole rather than on a line-by-line basis. The lower net earnings in the current quarter reflect the vagaries of the timing of asset liquidation transactions.

Intellectual property licensing revenue

was $624 during the three months ended September 30, 2013, compared to $0 during the same period in 2012, and consisted of revenue from the sale of an intellectual property licensing agreement to the Company’s former Co-CEOs.

Patent licensing and maintenance expense was $10 during the three months ended September 30, 2013, compared to $4 during the same period in 2012.

Selling, general and administrative expense, including expenses paid to related parties, was $2,078 during the quarter ended September 30, 2013, compared to $3,406 during the same period in 2012. The significant items included:

- Compensation expense was $1,363 in the third quarter of 2013, compared to $2,641 in the third quarter of 2012. Salary and benefits expense for HG LLC was $334 in 2013 and $645 in 2012; the decrease reflects the departure of the Co-CEOs and other HG LLC employees effective June 30, 2013. Salary and benefits expense for HGP was $911 and $751, respectively. The salary earned by the Company’s President remained unchanged at $34. Stock based compensation was $83 in the third quarter of 2013 and $158 in the third quarter of 2012. The reduced expense in 2013 reflects the reversal of $50 expense that was previously charged with respect to options that were forfeited by the Co-CEOs and other HG LLC employees who departed the Company. It should also be noted that in the third quarter of 2012, $1,053 was expensed in association with the issue of 800,000 shares to the Co-CEOs in exchange for an intellectual property license. There were no similar transactions in 2013.

- Management fee expense and allocated compensation charged by our majority stockholder, Counsel, was $109 in the third quarter of both 2013 and 2012. See Note 11 of the unaudited condensed consolidated interim financial statements included in this Report for details regarding these items.

- Consulting expense, including fees paid to our board of directors, was $88 in the third quarter of 2013, compared to $132 in the third quarter of 2012. The decrease in 2013 is related to the operations of HG LLC.

- Legal expense was $18 in the third quarter of 2013, compared to $93 in the third quarter of 2012. The decrease is primarily the result of reduced expenses related to the operations of HG LLC.

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- Accounting and tax consulting expenses were $79 in the third quarter of 2013, compared to $83 in the third quarter of 2012.

- Office rent was $57 in the third quarter of 2013 as compared to $109 in the third quarter of 2012, and related solely to the operations of the Company’s asset liquidation business. The reduction is due to the cancellation of the leases on the New York and California offices of HG LLC, associated with the departure of the Co-CEOs and HG LLC employees.

- Insurance, including directors and officers liability insurance, was $25 in the third quarter of 2013 as compared to $34 in the third quarter of 2012.

- Travel and entertainment expense was $107 in the third quarter of 2013 as compared to $142 in the third quarter of 2012. The majority of the expense relates to the Company’s asset liquidation business, and the amount fluctuates depending on the location and complexity of transactions in a given period.

- Advertising, promotion and public relations expense was $84 in the third quarter of 2013 as compared to $98 in the third quarter of 2012.

Depreciation and amortization expense

was $118 during the quarter ended September 30, 2013, compared to $272 during the same period in 2012. $113 represents amortization of the intangible assets recognized in connection with the acquisition of HGP, and the remaining $5 represents depreciation of property, plant and equipment. In 2012, $264 represents amortization of the intangible assets, and $8 represents depreciation of property, plant and equipment.

Other income (expenses) and earnings of other equity accounted investments – the significant items included:

- In the third quarter of 2013, the Company recorded other income of $0, as compared to other income of $8 in the third quarter of 2012. In 2012, the amount consisted of a $7 recovery of other expenses, and $1 of interest income.

- In the third quarter of 2013, the Company recorded income of $23 from its other equity accounted investments, as compared to a loss of $11 in the third quarter of 2012. In 2013, the amount consisted of $22 income from Polaroid, and $1 income from Knight’s Bridge GP. In 2012 the amount consisted of a $12 loss from Polaroid and $1 of income from Knight’s Bridge GP.

Nine-Month Period Ended September 30, 2013 Compared to Nine-Month Period Ended September 30, 2012

Asset liquidation revenues were $5,589 in 2013 compared to $9,917 in 2012, asset liquidation expense was $1,676 in 2013 compared to $4,352 in 2012, and earnings of equity accounted asset liquidation investments were $1,265 in 2013 compared to $1,449 in 2012. The net earnings of these three items were $5,178 in 2013 compared to $7,014 in 2012. The lower revenues and expenses in the current year reflect the vagaries of the timing of completion of asset liquidation transactions.

Intellectual property licensing revenue

was $824 during the nine months ended September 30, 2013, compared to $0 during the same period in 2012. It consisted of $200 revenue from a settlement and licensing agreement entered into with the defendant in a patent infringement lawsuit, and $624 revenue from the sale of an intellectual property licensing agreement to the Company’s former Co-CEOs.

Patent licensing and maintenance expense was $166 during the nine months ended September 30, 2013, compared to $38 during the same period in 2012. The increased expense related to the settlement and licensing agreement referenced above.

Selling, general and administrative expense, including expenses paid to related parties, was $7,256 during the nine months ended September 30, 2013, compared to $7,797 during the same period in 2012. The significant items included:

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- Compensation expense was $4,733 in the first nine months of 2013, compared to $5,378 in the first nine months of 2012. Salary and benefit expense for HG LLC was $1,641 in 2013 and $2,010 in 2012; the decrease reflects the departure of the Co-CEOs and other HG LLC employees effective June 30, 2013. Salary and benefits expense for HGP was $2,579 in 2013, as compared to $1,776 in 2012. The increase reflects the inclusion of a full nine months in 2013, as compared to only seven months in 2012 following the acquisition of HGP on February 29. With respect to HGI’s operations, the salary earned by the President remained unchanged at $69. Stock based compensation was $410 in the first nine months of 2013 as compared to $436 in 2012. The reduced expense in 2013 reflects the reversal of $50 expense that was previously charged with respect to options that were forfeited by the Co-CEOs and other HG LLC employees who departed the Company. It should also be noted that in the third quarter of 2012, $1,053 was expensed in association with the issue of 800,000 shares to the Co-CEOs in exchange for an intellectual property license. There were no similar transactions in 2013.

- Management fee expense and allocated compensation charged by our majority stockholder, Counsel, was $325 in the first nine months of 2013, compared to $326 in the first nine months of 2012. See Note 11 of the unaudited condensed consolidated interim financial statements included in this Report for details regarding these items.

- Consulting expense, including fees paid to our board of directors, was $459 in the first nine months of 2013, compared to $216 in the first nine months of 2012. The increase in 2013 is related to the operations of HGP and the inclusion of a full nine months in 2013.

- Legal expense was $139 in the first nine months of 2013, compared to $256 in the first nine months of 2012. The decrease is primarily due to reduced expenses at the Corporate level.

- Accounting and tax consulting expenses were $168 in the first nine months of 2013, compared to $195 in the first nine months of 2012. The decrease is due to the fact that in 2012 there were more expenses related to review and audit of specific asset liquidation transactions. As well, the amount for 2013 includes the reversal of $19 over accrual of Corporate expense.

- Office rent was $297 in the first nine months of 2013 as compared to $277 in the first nine months of 2012, and related solely to the operations of the Company’s asset liquidation business. Although the rent associated with the operations of HGP increased in 2013 due to the inclusion of a full nine months of HGP operations, there was a net reduction in expense due to the cancellation of the leases on the New York and California offices of HG LLC, associated with the departure of the Co-CEOs and HG LLC employees.

- Insurance, including directors and officers liability insurance, was $98 in the first nine months of 2013 as compared to $100 in the first nine months of 2012.

- Travel and entertainment expense was $421 in the first nine months of 2013, as compared to $447 in the first nine months of 2012. The majority of the expense relates to the Company’s asset liquidation business, and the amount fluctuates depending on the location and complexity of transactions in a given period.

- Advertising, promotion and public relations expense was $198 in the first nine months of 2013 as compared to $268 in the first nine months of 2012.

Depreciation and amortization expense

was $358 during the nine months ended September 30, 2013, compared to $283 during the same period in 2012. $340 represents amortization of the intangible assets recognized in connection with the acquisition of HGP, and the remaining $18 represents depreciation of property, plant and equipment. In 2012, $264 represents amortization of the intangible assets, and $19 represents depreciation of property, plant and equipment.

Other income (expenses) and earnings of other equity accounted investments – the significant items included:

- Other income was $0 in the first nine months of 2013, as compared to other expense of $299 in the first nine months of 2012. In 2012, the primary item was a $363 writedown of real estate inventory. This was partially offset by a $39 recovery of an account receivable that had been written off in 2011, a $7 recovery of other expenses, and $18 of interest income.

- In the first nine months of 2013, the Company recorded income of $61 from its other equity accounted investments, as compared to a loss of $65 in the first nine months of 2012. In 2013, the amount consisted of $30 income from Polaroid and $31 income from Knight’s Bridge GP. In 2012 the amount consisted of a $68 loss from Polaroid and $3 of income from Knight’s Bridge GP.

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Inflation. Inflation did not have a significant impact on our results during the last fiscal quarter.

Off-Balance Sheet Transactions. We have not engaged in any material off-balance sheet transactions.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our exposure to market risk is limited to interest rate sensitivity, which is affected by changes in the general level of interest rates. Due to the fact that our cash is deposited with major financial institutions, we believe that we are not subject to any material interest rate risk as it relates to interest income. As to interest expense, we have one debt instrument that has a variable interest rate. Our revolving credit facility provides that the principal amount outstanding bears interest at the greater of the lender’s prime rate + 1.0%, or 4.5% . Assuming that the debt amount on the revolving credit facility at September 30, 2013 was constant during the next twelve-month period, the impact of a one percent increase in the interest rate would be an increase in interest expense of approximately $2 for that twelve-month period. We do not believe that, in the near term, we are subject to material market risk on our debt.

We did not have any foreign currency hedges or other derivative financial instruments as of September 30, 2013. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Until the third quarter of 2012, our operations were conducted primarily in the United States and as such were not subject to material foreign currency exchange rate risk. With the expansion of our operations to Europe, we may become subject to greater foreign currency exchange rate risk. Management will monitor operations and act as required to minimize this risk.

Item 4. Controls and Procedures.

As of the end of the period covered by this Quarterly Report, our President and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (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.

Further, there were no changes in our internal control over financial reporting during the third fiscal quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 28, 2013.

Item 1A. Risk Factors

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 28, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

(a) Exhibits

Exhibit No. | Identification of Exhibit
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 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 Document
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

| Heritage Global Inc.
Date: November 14, 2013 | By: | /s/ Allan C. Silber
|  | Allan C. Silber
|  | Chairman of the Board and President
|  | (Principal Executive Officer)
| By: | /s/ Stephen A. Weintraub
|  | Stephen A. Weintraub
|  | Executive Vice President, Chief Financial Officer and Corporate Secretary
|  | (Principal Financial Officer and Principal Accounting Officer)

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