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 March 31, 2014

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)

N/A
(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 May 7, 2014, there were 28,167,408 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 March 31, 2014 and December 31, 2013 | 3
| Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2014 and 2013 | 4
| Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period ended March 31, 2014 | 5
| Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 | 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 | 29
Item 4. | Controls and Procedures | 29
Part II. | Other Information |
Item 1. | Legal Proceedings | 30
Item 1A. | Risk Factors | 30
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30
Item 3. | Defaults Upon Senior Securities | 30
Item 4. | Mine Safety Disclosures | 30
Item 5. | Other Information | 30
Item 6. | Exhibits | 31

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)

|  | March 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
ASSETS |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents | $ | 2,802 |  | $ | 3,213 |
Amounts receivable (net of allowance for doubtful accounts of $0; 2013 - $0) |  | 868 |  |  | 1,670 |
Deposits |  | 17 |  |  | 17 |
Inventory – equipment |  | 441 |  |  | 578 |
Other current assets |  | 448 |  |  | 479 |
Income taxes recoverable |  | 22 |  |  | 1 |
Deferred income tax assets |  | — |  |  | 1,366 |
Total current assets |  | 4,598 |  |  | 7,324 |
Non-current assets: |  |  |  |  |  |
Inventory – real estate |  | 6,328 |  |  | 6,078 |
Asset liquidation investments |  | 1,011 |  |  | 1,380 |
Investments |  | 1,747 |  |  | 1,769 |
Property, plant and equipment, net |  | 34 |  |  | 32 |
Intangible assets, net |  | 4,697 |  |  | 4,810 |
Goodwill |  | 5,301 |  |  | 5,301 |
Deferred income tax assets |  | — |  |  | 23,301 |
Total assets | $ | 23,716 |  | $ | 49,995 |
LIABILITIES AND EQUITY |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |
Accounts payable and accrued liabilities | $ | 5,368 |  | $ | 6,510 |
Debt payable to third parties |  | 1,248 |  |  | 1,438 |
Debt payable to a related party |  | 3,057 |  |  | 2,550 |
Total current liabilities |  | 9,673 |  |  | 10,498 |
Commitments and contingencies |  |  |  |  |  |
Equity: |  |  |  |  |  |
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 575 Class N shares at March 31, 2014 and 579 Class N shares at December 31, 2013, liquidation preference of $575 at March 31, 2014 and $579 at December 31, 2013 |  | 6 |  |  | 6 |
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 28,167,408 shares at March 31, 2014 and 28,167,248 shares at December 31, 2013 |  | 282 |  |  | 282 |
Additional paid-in capital |  | 283,330 |  |  | 283,207 |
Accumulated deficit |  | (269,525 | ) |  | (243,954 | )
Accumulated other comprehensive loss |  | (50 | ) |  | (44 | )
Total equity |  | 14,043 |  |  | 39,497 |
Total liabilities and equity | $ | 23,716 |  | $ | 49,995 |

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 (LOSS)
(unaudited)

|  | Three Months Ended |
|  | March 31, |
(In thousands of US dollars, except per share amounts) |  | 2014 |  |  | 2013 |
Revenue: |  |  |  |  |  |
Asset liquidation |  |  |  |  |  |
Asset sales | $ | 975 |  | $ | 446 |
Commissions and other |  | 1,010 |  |  | 946 |
Total asset liquidation revenue |  | 1,985 |  |  | 1,392 |
Intellectual property licensing |  | — |  |  | 200 |
Total revenue |  | 1,985 |  |  | 1,592 |
Operating costs and expenses: |  |  |  |  |  |
Asset liquidation |  | 404 |  |  | 356 |
Inventory maintenance |  | 61 |  |  | 74 |
Patent licensing and maintenance |  | 11 |  |  | 150 |
Selling, general and administrative, including expenses paid to related parties |  | 2,138 |  |  | 2,598 |
Depreciation and amortization |  | 118 |  |  | 121 |
Total operating costs and expenses |  | 2,732 |  |  | 3,299 |
|  | (747 | ) |  | (1,707 | )
Earnings (loss) of equity accounted asset liquidation investments (net of tax of $0) |  | (30 | ) |  | 802 |
Operating loss |  | (777 | ) |  | (905 | )
Other income (expenses): |  |  |  |  |  |
Interest expense – third party |  | (71 | ) |  | (95 | )
Interest expense – related party |  | (67 | ) |  | — |
Total other income (expenses) |  | (138 | ) |  | (95 | )
Loss before the undernoted |  | (915 | ) |  | (1,000 | )
Income tax expense (recovery) |  | 24,667 |  |  | (353 | )
Earnings of other equity accounted investments (net of tax of $0) |  | 11 |  |  | — |
Net loss |  | (25,571 | ) |  | (647 | )
Other comprehensive loss: |  |  |  |  |  |
Currency translation adjustment (net of tax of $0) |  | (6 | ) |  | (7 | )
Comprehensive loss | $ | (25,577 | ) | $ | (654 | )
Weighted average common shares outstanding – basic and diluted (in thousands) |  | 28,167 |  |  | 28,945 |
Net loss per share – basic and diluted | $ | (0.91 | ) | $ | (0.02 | )

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 March 31, 2014
(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, 2012 |  | 592 |  | $ | 6 |  |  | 28,945,228 |  | $ | 290 |  | $ | 283,281 |  | $ | (237,558 | ) | $ | (7 | ) | $ | 46,012 |
Cancellation of shares |  | — |  |  | — |  |  | (800,000 | ) |  | (8 | ) |  | (616 | ) |  | — |  |  | — |  |  | (624 | )
Exercise of options |  | — |  |  | — |  |  | 21,500 |  |  | — |  |  | 10 |  |  | — |  |  | — |  |  | 10 |
Conversion of Series N preferred shares |  | (13 | ) |  | — |  |  | 520 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Compensation cost related to stock options |  | — |  |  | — |  |  | — |  |  | — |  |  | 532 |  |  | — |  |  | — |  |  | 532 |
Comprehensive loss |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,396 | ) |  | (37 | ) |  | (6,433 | )
Balance at December 31, 2013 |  | 579 |  | $ | 6 |  |  | 28,167,248 |  | $ | 282 |  | $ | 283,207 |  | $ | (243,954 | ) | $ | (44 | ) | $ | 39,497 |
Conversion of Series N preferred shares |  | (4 | ) |  | — |  |  | 160 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Compensation cost related to stock options |  | — |  |  | — |  |  | — |  |  | — |  |  | 123 |  |  | — |  |  | — |  |  | 123 |
Comprehensive loss |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (25,571 | ) |  | (6 | ) |  | (25,577 | )
Balance at March 31, 2014 |  | 575 |  | $ | 6 |  |  | 28,167,408 |  | $ | 282 |  | $ | 283,330 |  | $ | (269,525 | ) | $ | (50 | ) | $ | 14,043 |

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

5

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

|  | Three months ended |
(In thousands of US dollars) |  | March 31, |
|  | 2014 |  |  | 2013 |
Cash flows provided by (used in) operating activities: |  |  |  |  |  |
Net loss | $ | (25,571 | ) | $ | (647 | )
Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |  |  |  |
Accrued interest added to principal of third party debt |  | 10 |  |  | 32 |
Accrued interest added to principal of related party debt |  | 67 |  |  | — |
Stock-based compensation expense |  | 123 |  |  | 160 |
Earnings of other equity accounted investments |  | (11 | ) |  | — |
Depreciation and amortization |  | 118 |  |  | 121 |
Changes in operating assets and liabilities: |  |  |  |  |  |
Decrease (increase) in amounts receivable |  | 802 |  |  | (247 | )
Decrease (increase) in deposits |  | — |  |  | 1,147 |
Decrease (increase) in inventory |  | (113 | ) |  | 310 |
Decrease in asset liquidation investments |  | 369 |  |  | 717 |
Decrease in other current assets |  | 32 |  |  | 29 |
Increase in income taxes recoverable |  | (21 | ) |  | (49 | )
Decrease (increase) in deferred income tax assets |  | 24,667 |  |  | (326 | )
Decrease in accounts payable and accrued liabilities |  | (1,148 | ) |  | (1,073 | )
Net cash provided by (used in) operating activities |  | (676 | ) |  | 174 |
Cash flows provided by investing activities: |  |  |  |  |  |
Investment in other equity accounted investments |  | (11 | ) |  | (56 | )
Cash distributions from other equity accounted investments |  | 44 |  |  | 753 |
Purchase of property, plant and equipment |  | (7 | ) |  | (5 | )
Net cash provided by investing activities |  | 26 |  |  | 692 |
Cash flows provided by (used in) financing activities: |  |  |  |  |  |
Proceeds of debt payable to third parties |  | — |  |  | 664 |
Repayment of debt payable to third parties |  | (200 | ) |  | (5,319 | )
Proceeds of advances from a related party |  | 439 |  |  | 2,070 |
Repayment of debt payable to related parties |  | — |  |  | (1,365 | )
Net cash provided by (used in) financing activities |  | 239 |  |  | (3,950 | )
Decrease in cash |  | (411 | ) |  | (3,084 | )
Cash and cash equivalents at beginning of period |  | 3,213 |  |  | 4,314 |
Cash and cash equivalents at end of period | $ | 2,802 |  | $ | 1,230 |
Supplemental cash flow information: |  |  |  |  |  |
Taxes paid | $ | 28 |  | $ | 22 |
Interest paid |  | 52 |  |  | 121 |

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

6

HERITAGE GLOBAL INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(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. together with its subsidiaries, including Heritage Global Partners, Inc. (“HGP”), Heritage Global LLC (“HG LLC”), Equity Partners HG LLC (“Equity Partners”), 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 audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014.

The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2014.

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, 2013. There have been no changes to these policies in the first three months of 2014.

7

Recently Adopted Accounting Pronouncements

In March 2013, the FASB issued Accounting Standards Update 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity (“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 therefore adopted ASU 2013-05 in the first quarter of 2014. The adoption had no impact on its consolidated financial statements, since there were no derecognitions or sales of the Company’s European subsidiaries during the first quarter of 2014.

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, with early adoption permitted. The Company therefore adopted ASU 2013-11 in the first quarter of 2014. The adoption had no impact on its consolidated financial statements.

Future Accounting Pronouncements

In March 2014 the Emerging Issues Task Force (“EITF”) reached a final consensus on, and the FASB ratified, Issue 13-D: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“Issue 13-D”). The EITF concluded that entities should treat performance targets that can be met after the requisite service period as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on achieving a performance target until it becomes probable that the performance target will be met. No new disclosures will be required. Issue 13-D will be effective for all entities for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. At this time the Company has not granted any share-based payment awards that include performance targets, but will be required to adopt Issue 13-D should it issue any such awards when Issue 13-D becomes effective.

In April 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. It also expands the scope of ASC 205-20 to disposals of equity method investments and acquired businesses held for sale. With respect to disclosures, ASU 2014-08 both 1) expands disclosure requirements for transactions that meet the definition of a discontinued operation, and 2) requires entities to disclose information about individually significant components that are disposed of or held for sale and do not qualify as discontinued operations. ASU 2014-08 also requires specific presentation of various items on the face of the financial statements. ASU 2014-08 is effective for interim and annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company has not yet assessed the potential impact of ASU 2014-08 on its consolidated financial statements.

8

Note 3 – Stock-based Compensation

At March 31, 2014 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, 2013, contained in the Company’s most recently filed Annual Report on Form 10-K.

During the first three months of 2014 the Company issued 50,000 options to the Company’s independent directors as part of their annual compensation. During the first three months of 2013, the Company issued 150,000 options to an officer of the Company in accordance with his employment agreement. No options were exercised, were forfeited or expired during the first three months of either 2014 or 2013.

The following summarizes the changes in common stock options for the three months ended March 31, 2014 and 2013:

|  |  |  |  | Weighted |
|  |  |  |  | Average |
|  |  |  |  | Exercise |
|  | Options |  |  | Price |
Outstanding at December 31, 2013 |  | 2,130,000 |  | $ | 1.75 |
Granted |  | 50,000 |  | $ | 0.69 |
Exercised |  | — |  |  | N/A |
Forfeited |  | — |  |  | N/A |
Expired |  | — |  |  | N/A |
Outstanding at March 31, 2014 |  | 2,180,000 |  | $ | 1.73 |
Options exercisable at March 31, 2014 |  | 1,190,000 |  | $ | 1.70 |

|  |  |  |  | Weighted |
|  |  |  |  | Average |
|  |  |  |  | Exercise |
|  | Options |  |  | Price |
Outstanding at December 31, 2012 |  | 3,898,198 |  | $ | 1.75 |
Granted |  | 150,000 |  | $ | 1.00 |
Exercised |  | — |  |  | N/A |
Forfeited |  | — |  |  | N/A |
Expired |  | — |  |  | N/A |
Outstanding at March 31, 2013 |  | 4,048,000 |  | $ | 1.72 |
Options exercisable at March 31, 2013 |  | 1,888,198 |  | $ | 1.53 |

Note 4 – 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.

9

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 three months ended March 31, 2014 and 2013, respectively, all of the Company’s outstanding options were excluded due to the Company’s net loss in both periods.

Note 5 – Composition of Certain Financial Statement Items

Amounts receivable

The Company’s amounts receivable are primarily related to the operations of its asset liquidation business. With respect to auction proceeds and asset dispositions, the goods are not released to the buyer until payment has been received, and therefore the Company has not experienced any significant collectability issues relating to these receivables. Given this experience, together with the ongoing business relationships between the Company and its joint venture partners, the Company has not yet been required to develop a policy for formal credit quality assessment. The Company has also not experienced any significant collectability issues with receivables relating to appraisal fees. As the Company’s asset liquidation business continues to develop, more comprehensive credit assessments may be required.

During the first three months of 2014, 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 three months of either 2014 or 2013.

Intangible assets

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

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, 2013, and there have been no events or circumstances in 2014 that would make it more likely than not that the carrying amount of the intangible assets may not be recoverable.

|  | March 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Customer/Broker Network | $ | 4,180 |  | $ | 4,180 |
Accumulated amortization |  | (726 | ) |  | (639 | )
|  | 3,454 |  |  | 3,541 |
Trade Name |  | 1,460 |  |  | 1,460 |
Accumulated amortization |  | (217 | ) |  | (191 | )
|  | 1,243 |  |  | 1,269 |
Total net intangible assets | $ | 4,697 |  | $ | 4,810 |

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, 2013, and there have been no events or changes in circumstances in 2014 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, 2013, and there have been no events or changes in circumstances in 2014 that make it more likely than not that the carrying amount of this goodwill may be impaired.

10

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consisted of the following at March 31, 2014 and December 31, 2013:

|  | March 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Due to auction clients | $ | 2,139 |  | $ | 3,586 |
Due to Joint Venture partners |  | 615 |  |  | 639 |
Sales and other taxes |  | 1,293 |  |  | 966 |
Customer deposits |  | 5 |  |  | 50 |
Remuneration and benefits |  | 485 |  |  | 579 |
Asset liquidation expenses |  | 60 |  |  | 76 |
Auction expenses |  | 304 |  |  | 135 |
Regulatory and legal fees |  | 57 |  |  | 45 |
Accounting, auditing and tax consulting |  | 182 |  |  | 153 |
Patent licensing and maintenance |  | 4 |  |  | 25 |
Other |  | 224 |  |  | 256 |
Total accounts payable and accrued liabilities | $ | 5,368 |  | $ | 6,510 |

Note 6 – Asset Liquidation Investments and Other Investments

Summarized financial information – Equity accounted asset liquidation investments

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

|  | Three months |
|  | ended |
|  | March 31, |
|  | 2014 |  |  | 2013 |
Gross revenues | $ | 10 |  | $ | 2,113 |
Gross profit (loss) | $ | (30 | ) | $ | 773 |
Income (loss) from continuing operations | $ | (30 | ) | $ | 802 |
Net income (loss) | $ | (30 | ) | $ | 802 |

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Other investments

The Company’s other investments as of March 31, 2014 and December 31, 2013 consisted of the following:

|  | March 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC | $ | 20 $ |  |  | 19 |
Polaroid |  | 1,727 |  |  | 1,750 |
Total investments | $ | 1,747 $ |  |  | 1,769 |

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 Corporation, the Company's former majority shareholder (together with its subsidiaries, “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 exactly offset by cash distributions, and at March 31, 2014 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 March 31, 2014, 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 (the “JV Group”) that includes both related and non-related parties. The JV Group formed two operating companies (collectively, “Polaroid”) to hold the acquired Polaroid assets. The Company, the related parties and two of the unrelated parties formed KPL, LLC (“KPL”) to pool their individual investments in Polaroid. The pooled investments totaled approximately $19,000 of the aggregate purchase price of approximately $55,000. 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 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. (“Knight’s Bridge Fund”), a related party, with respect to its investment in Class A units. The investment is held by Knight’s Bridge Fund in the name of a Canadian limited partnership (the “LP”) comprised of Counsel (95.24%) and several parties related to Counsel. 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.

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- 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.

The components of the Company’s investment in Polaroid at March 31, 2014 and December 31, 2013 are detailed below:

As at March 31, 2014 |
|  |  | Capital |  |  | Equity in |  |  | Capital |  |  | Net |
Unit type |  |  | invested |  |  | earnings |  |  | returned |  |  | investment |
Class A |  | $ | 2,492 |  | $ | 219 |  | $ | (1,335 | ) | $ | 1,376 |
Class D |  |  | 628 |  |  | 50 |  |  | (327 | ) |  | 351 |
Total |  | $ | 3,120 |  | $ | 269 |  | $ | (1,662 | ) | $ | 1,727 |

As at December 31, 2013 |
|  |  | Capital |  |  | Equity in |  |  | Capital |  |  | Net |
Unit type |  |  | invested |  |  | earnings |  |  | returned |  |  | investment |
Class A |  | $ | 2,492 |  | $ | 209 |  | $ | (1,300 | ) | $ | 1,401 |
Class D |  |  | 617 |  |  | 50 |  |  | (318 | ) |  | 349 |
Total |  | $ | 3,109 |  | $ | 259 |  | $ | (1,618 | ) | $ | 1,750 |

Note 7 – Debt

|  | March 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Credit Facility | $ | 1,248 |  | $ | 1,438 |
Counsel Loan |  | 3,057 |  |  | 2,550 |
Total debt | $ | 4,305 |  | $ | 3,988 |

At March 31, 2014 and December 31, 2013, all of the Company’s outstanding debt was current.

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 the WSJ 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 March 31, 2014, $405 of such assets served as collateral for the loan (December 31, 2013 - $606). 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, a facility fee (“Facility Fee”) of $75 was payable to the lender. Subsequent payments of a $50 Facility Fee and a $25 Agency Fee are 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 March 31, 2014 the Company was in compliance with all covenants of the Credit Facility. At December 31, 2013, the Company was in breach of one of the covenants of the Credit Facility. The breach was waived by the bank.

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The Counsel Loan outstanding at March 31, 2014 consisted of net advances received by the Company from Counsel, including accrued interest payable of $235. The advances were made under an existing loan facility that was originally entered into during the fourth quarter of 2003, accrued interest at 10% per annum compounded quarterly from the date funds were advanced, and was due on demand. Any outstanding balance under the Counsel Loan was secured by the assets of the Company.

In the second quarter of 2014, following Counsel’s distribution of its ownership interest in HGI to Counsel shareholders as a dividend in kind, this facility was replaced and the outstanding balance was transferred to the new facility. Under the new facility, payment is due within thirty days following the end of each quarter. Unpaid balances accrue interest at a rate per annum equal to the lesser of the WSJ prime rate + 2.0%, or the maximum rate allowable by law. Please see Note 10 for further discussion of transactions with Counsel.

Note 8 – 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 9 – Income Taxes

In the first quarter of 2014, as a result of incurring losses in 2012, 2013 and the first quarter of 2014, the Company recorded a valuation allowance against all of its net deferred tax assets. The Company has aggregate tax net operating loss carry forwards of approximately $74,422 ($59,560 of unrestricted net operating tax losses and approximately $14,862 of restricted net operating tax losses) and unused minimum tax credit carry forwards of $547. Substantially all of the net operating loss carry forwards and unused minimum tax credit carry forwards expire between 2024 and 2034.

The reported tax expense (benefit) varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the loss from continuing operations before taxes for the following reasons:

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|  | Three months ended |  |  | Three months ended |
|  | March 31, 2014 |  |  | March 31, 2013 |
Expected federal statutory tax expenses (benefit) | $ | (354 | ) | $ | (340 | )
Increase (reduction) in taxes resulting from: |  |  |  |  |  |
State income taxes recoverable |  | — |  |  | (28 | )
Non-deductible expenses (permanent differences) |  | 8 |  |  | 11 |
Change in temporary differences: |  |  |  |  |  |
Change in valuation allowance attributable to continuing operations |  | 24,977 |  |  | — |
Rate changes |  | 36 |  |  | — |
Other |  | — |  |  | 4 |
Income tax expense (recovery) | $ | 24,667 |  | $ | (353 | )

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.

The Company, until recently, 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.

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The components of the deferred tax asset and liability as of March 31, 2014 and December 31, 2013 are as follows:

|  | March 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Deferred tax assets: |  |  |  |  |  |
Net operating loss carry-forwards | $ | 25,303 |  | $ | 29,816 |
Minimum tax credit carry forwards |  | 186 |  |  | 186 |
Intangible assets |  | (29 | ) |  | (24 | )
Stock based compensation |  | 727 |  |  | 679 |
Start-up costs |  | (14 | ) |  | (14 | )
Depreciation and amortization |  | (1 | ) |  | (3 | )
Other |  | 201 |  |  | 210 |
Writedown of inventory |  | 452 |  |  | 452 |
Trade Name |  | (1,360 | ) |  | (1,395 | )
Customer List/Business Network |  | (489 | ) |  | (500 | )
Gross deferred tax assets |  | 24,976 |  |  | 29,407 |
Less: valuation allowance |  | (24,976 | ) |  | (4,740 | )
Net deferred tax assets | $ | — |  | $ | 24,667 |

Note 10 – Related Party Transactions

Related Party Debt with Counsel

At March 31, 2014 the Company had a balance of $3,057 owing to Counsel under the Counsel Loan, of which $235 was accrued interest, as compared to a balance owing of $2,550 at December 31, 2013. For further discussion of the terms of the Counsel Loan, see Note 7.

Counsel Services Provided to the Company

Beginning in December 2004, HGI and Counsel entered into successive annual management services agreements (collectively, the “Agreement”). Under the terms of the Agreement, HGI agreed to pay Counsel for ongoing services provided to HGI by Counsel personnel. These services included 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 were: 1) its Executive Vice President, Secretary and Chief Financial Officer, 2) its 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 received compensation from HGI. Rather, Counsel allocated to HGI a percentage, based on time incurred, of the employees’ base compensation paid by Counsel. Beginning in the first quarter of 2011, additional amounts were charged to HGI for Counsel services relating to the ongoing operations of HGI’s asset liquidation business. The amounts due under the Agreement were payable within 30 days following the respective year end, subject to applicable restrictions. Any unpaid amounts bore interest at 10% per annum commencing on the day after such year end.

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The amounts charged by Counsel are detailed below:

|  | Three months ended |
Item |  | March 31, |
|  | 2014 |  |  | 2013 |
Management fees | $ | 90 |  | $ | 90 |
Other charges |  | 19 |  |  | 18 |
Total | $ | 109 |  | $ | 108 |

On March 20, 2014, Counsel declared a dividend in kind, consisting of Counsel’s distribution of its majority interest in HGI to Counsel shareholders. The payment was made on April 30, 2014 to shareholders of record at April 1, 2014. This transaction completed Counsel’s planned disposition of its interest in HGI, as announced in the first quarter of 2013.

Following this disposition, the Company and Counsel entered into a replacement management services agreement (the “Services Agreement”). Under the terms of the Services Agreement, Counsel remains as external manager and continues to provide the same services, at similar rates. The Services Agreement has an initial term of one year, which renews automatically for successive one-year terms unless notice by either party is given within ninety days before the expiration. The Services Agreement may be terminated at any time upon mutual agreement of the Company and Counsel. The Company is currently considering the internalization of its management in the future, but expects that it will continue to avail itself of the services provided under the Services Agreement until such time. Please see Note 7 for discussion of the interest and payment terms relating to the Services Agreement.

Transactions with Other Related Parties

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. Additionally, beginning in 2009, the Company 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 in the third quarter of 2013, as discussed below, these lease agreements were terminated, without penalty, effective June 30, 2013.

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

|  | Three months |
Leased premises location |  | ended March 31, |
|  | 2014 |  |  | 2013 |
Foster City, CA | $ | 57 |  | $ | 57 |
White Plains, NY |  | — |  |  | 33 |
Los Angeles, CA |  | — |  |  | 6 |
Total | $ | 57 |  | $ | 96 |

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, 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.

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Note 11 – Segment Reporting

From 2005 until the second quarter of 2009, the Company operated in a single business segment, Patent Licensing. In the second quarter of 2009, the Company diversified into a second segment, Asset Liquidation.

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.

The table below presents information about the Company’s segments as of and for the three months ended March 31, 2014 and 2013:

|  | For the three months ended March 31, 2014 |
|  | Asset |  |  | Patent |  |  |  |
|  | Liquidation |  |  | Licensing |  |  | Total |
Revenues from external customers | $ | 1,985 |  | $ | — |  | $ | 1,985 |
Loss from equity accounted asset liquidation investments |  | (30 | ) |  | — |  |  | (30 | )
Other income |  | — |  |  | — |  |  | — |
Interest expense |  | 71 |  |  | — |  |  | 71 |
Depreciation and amortization |  | 118 |  |  | — |  |  | 118 |
Segment loss |  | (471 | ) |  | (11 | ) |  | (482 | )
Investment in equity accounted asset liquidation investees |  | 1,011 |  |  | — |  |  | 1,011 |
Segment assets |  | 19,212 |  |  | 28 |  |  | 19,240 |

|  | For the three months ended March 31, 2013 |
|  | Asset |  |  | Patent |  |  |  |
|  | Liquidation |  |  | Licensing |  |  | Total |
Revenues from external customers | $ | 1,392 |  | $ | 200 |  | $ | 1,592 |
Earnings from equity accounted asset liquidation investments |  | 802 |  |  | — |  |  | 802 |
Other income |  | — |  |  | — |  |  | — |
Interest expense |  | 95 |  |  | — |  |  | 95 |
Depreciation and amortization |  | 121 |  |  | — |  |  | 121 |
Segment income (loss) |  | (587 | ) |  | 50 |  |  | (537 | )
Investment in equity accounted asset liquidation investees |  | 2,901 |  |  | — |  |  | 2,901 |
Segment assets |  | 20,297 |  |  | 228 |  |  | 20,525 |

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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 |
|  | ended |  |  | ended |
|  | March 31, |  |  | March 31, |
|  | 2014 |  |  | 2013 |
Total interest expense for reportable segments | $ | 71 |  | $ | 95 |
Unallocated interest expense from related party debt |  | 67 |  |  | — |
| $ | 138 |  | $ | 95 |
Total depreciation and amortization for reportable segments | $ | 118 |  | $ | 121 |
Other unallocated depreciation from corporate assets |  | — |  |  | — |
| $ | 118 |  | $ | 121 |
Total segment loss | $ | (482 | ) | $ | (537 | )
Other income (expense) and earnings (loss) of other equity accounted investments |  | 11 |  |  | — |
Other corporate expenses (primarily corporate level interest, general and administrative expenses) |  | 433 |  |  | 463 |
Income tax expense (recovery) |  | 24,667 |  |  | (353 | )
Net loss from continuing operations | $ | (25,571 | ) | $ | (647 | )
Segment assets | $ | 19,240 |  | $ | 20,525 |
Other assets not allocated to segments(1) |  | 4,476 |  |  | 34,602 |
Total assets | $ | 23,716 |  | $ | 55,127 |

| (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.

Note 12 – Commitments and Contingencies

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

2014 |  | 216 |
2015 |  | 293 |
2016 |  | 145 |
| $ | 654 |

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 March 31, 2014 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.

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Note 13 – Subsequent Events

The Company has evaluated events subsequent to March 31, 2014 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 three months ended March 31, 2014, 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, 2013, 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 most recent name change more closely identifies the Company with its core auction business, Heritage Global Partners, Inc. (“HGP”).

The organization chart below outlines the basic corporate structure of the Company as of March 31, 2014. On March 20, 2014, the Company’s former majority shareholder, Counsel Corporation (together with its subsidiaries, “Counsel”), declared a dividend of all of its shares of the Company. This dividend was paid on April 30, 2014 to Counsel’s common shareholders of record on April 1, 2014.

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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”). 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 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. The combined operations of HG LLC and Equity Partners thus serve a variety of clients at different stages of the distressed business and surplus asset continuum.

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

The acquisition and integration of HGP created additional global opportunities, and in the fourth quarter of 2012, the Company launched Heritage Global Partners Europe (“HGP Europe”). Through its wholly-owned subsidiary Heritage Global Partners UK Limited, the Company opened three European-based offices, one each in the United Kingdom, Germany and Spain. The European operations began earning revenue in the third quarter of 2013, and 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 10 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. Following their departure, the managing partners of HGP are leading HG LLC. The senior managing director of Equity Partners continues to lead Equity Partners.

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HGI remains focused on building a sustainable, long-term global capital asset solutions business. Following the change in HG LLC’s management, the Company is concentrating its asset liquidation operations on HGP’s auction and appraisal business, as well as on Equity Partners’ 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 in 1998 deployed its real-time IP communications network platform, which represented the first nationwide, commercially viable VoIP platform of its kind. The Company continued operations in the telecommunications business until the third quarter of 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 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 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 (the “Portfolio”) that covers the basic process and technology that enable VoIP communication as used in the market today. 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 Portfolio. To date the Company has recognized aggregate revenue of $17,825 from settlement and licensing agreements and paid $2,630 to the vendor.

All activities relating to the Company’s licensing of the Portfolio, or its other intellectual property, constitute the Company’s Intellectual Property 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.

The Company’s segments are discussed in more detail in Note 11 of the unaudited condensed consolidated interim financial statements.

Industry and Competition

Asset Liquidation

Our asset liquidation business is involved primarily in the auction, appraisal and asset advisory services provided by HGP and HGP Europe. It also includes the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. The market for these services and assets is highly fragmented. To acquire auction or appraisal contracts, or assets for resale, 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.

The Company’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 us to have access to more opportunities, and to mitigate some of the competition from the market’s larger participants. Our objective is to be the leading resource for clients requiring capital asset solutions.

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Intellectual Property 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 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.

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. The mandatory adoption of XBRL reporting in 2011 has also increased the Company’s costs paid to third party service providers. 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 references 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 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 revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are considered to be reasonable under the circumstances. Actual results could differ from those 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, 2013. There have been no changes to these policies in the first three months of 2014.

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Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

At March 31, 2014 the Company had a working capital deficit of $5,075, as compared to a working capital deficit of $3,174 at December 31, 2013, an increase of $1,901. The most significant change within current assets was the decrease of $1,366 in deferred tax assets that resulted from the Company adjusting its total deferred tax assets to $nil, as discussed in Note 9 of the unaudited condensed consolidated interim financial statements. As well, amounts receivable and cash decreased by $802 and $411, respectively. The most significant change within current liabilities was a decrease of $1,142 in accounts payable and accrued liabilities, partially offset by an increase of $507 in debt payable to a related party.

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 three months of 2014, the Company’s primary sources of cash were the operations of its asset liquidation business, and net advances of $439 from Counsel. Cash disbursements 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 $2,264 at March 31, 2014 and working capital of $4,284 at December 31, 2013.

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.

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 March 31, 2014 the Company had stockholders’ equity of $14,043, as compared to $39,497 at December 31, 2013.

- 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 10 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. On March 20, 2014, Counsel declared a dividend of all of its shares of the Company. This dividend was paid on April 30, 2014 to Counsel’s common shareholders of record on April 1, 2014. On May 1, 2014, HGI and Counsel entered into a management services agreement (the “Services Agreement”) under which Counsel will continue to provide management and other services to HGI. For more detail regarding the Services Agreement, see Note 10 in the unaudited condensed consolidated interim financial statements.

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Cash Position and Cash Flows

Cash and cash equivalents at March 31, 2014 were $2,802 as compared to $3,213 at December 31, 2013, a decrease of $411.

Cash provided by or used in operating activities Cash used in operating activities was $676 during the three months ended March 31, 2014 as compared to $174 cash provided during the same period in 2013. During the first three months of 2014 the Company had a loss of $25,571, as compared to a loss of $647 for the same period in 2013, an increase of $24,924. The loss in 2014 was primarily due to the adjustment of the $24,667 total deferred tax assets outstanding at December 31, 2013 to $nil. With respect to operations, gross profit from asset liquidation operations, including earnings from asset liquidation investments, decreased by $274. Intellectual property licensing revenue decreased by $200, and related expenses decreased by $139, for a net decrease of $61. These items were offset by a $463 decrease in operating expenses, including depreciation and amortization. This net decrease of $128 in the Company’s operating loss was accompanied by an increase of $43 in interest expense in 2014 as compared to 2013, primarily due to interest expense on the Company’s loan from Counsel. As noted above, the Company recorded tax expense of $24,667 in the first three months of 2014, as compared to recording a tax recovery of $353 during the same period of 2013.

The most significant changes in operating activities during the first three months of 2014 as compared to the first three months of 2013 were in amounts receivable, deposits, inventory, and asset liquidation investments. Amounts receivable decreased by $802 in 2014 as compared to increasing by $247 in 2013. Deposits did not change in 2014 as compared to decreasing by $1,147 in 2013. Inventory increased by $113 in 2014 as compared to decreasing by $310 in 2013. Asset liquidation investments decreased by $369 in 2014 as compared to decreasing by $717 in 2013.

Cash provided by investing activities Cash provided by investing activities during the three months ended March 31, 2014 was $26, as compared to $692 cash provided during the same period in 2013. The primary change was that in 2013 the Company received $44 in cash distributions from its investment in Polaroid, compared to receiving $753 in 2013. Additional investments in Polaroid were $11 and $56 in 2014 and 2013, respectively. In 2014 the Company invested $7 in property, plant and equipment as compared to investing $5 in 2013.

Cash provided by or used in financing activities Cash provided by financing activities was $239 during the three months ended March 31, 2014, as compared to $3,950 cash used during the same period in 2013. In 2014 the Company repaid $200 to its third party lender, compared to repaying net cash of $4,655 in 2013. In 2014, the Company received cash of $439 from Counsel, compared to receiving net cash of $705 in 2013.

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Management’s Discussion of Results of Operations

Asset liquidation revenue has several components: 1) the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt, 2) more traditional asset disposition services, such as commissions from on-site and webcast auctions, liquidations and negotiated sales, and 3) 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. As a result of both the acquisition of HGP in the first quarter of 2012, and the departure of the former Co-CEOs in the third quarter of 2013, the Company’s revenues are increasingly earned from services rather than from acquisition and disposition of assets, or from asset liquidation investments.

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 March 31, 2014 Compared to Three-Month Period Ended March 31, 2013

Asset liquidation revenues were $1,985 in 2014 compared to $1,392 in 2013, asset liquidation expense was $465 in 2014 compared to $430 in 2013, and earnings of equity accounted asset liquidation investments were a loss of $30 in 2014 compared to earnings of $802 in 2013. The net earnings of these three items were therefore $1,490 in 2014 compared to $1,764 in 2013. 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 $0 during the three months ended March 31, 2014, compared to $200 during the same period in 2013. The 2013 revenue related a settlement and licensing agreement entered into with the defendant in a patent infringement lawsuit.

Patent licensing and maintenance expense was $11 during the three months ended March 31, 2014, compared to $150 during the same period in 2013. The costs in 2013 were associated with the revenue earned during the same period.

Selling, general and administrative expense, including expenses paid to related parties, was $2,138 during the three months ended March 31, 2014, compared to $2,598 during the same period in 2013. The significant items included:

- Compensation expense was $1,358 in 2014, compared to $1,651 in 2013. Salary and benefits expense for HGP was $950 in 2014 and $777 in 2013, and salary and benefits expense for HG LLC was $251 and $679, respectively. The decrease for HG LLC reflects the departure of the Co-CEOs and other HG LLC employees effective June 30, 2013. The salary earned by the Company’s President remained unchanged at $34. Stock based compensation was $123 in 2014 and $160 in 2013. The reduced expense in 2014 reflects the forfeiture of options by the Co-CEOs and other HG LLC employees who departed the Company.

- Management fee expense and allocated compensation charged by our majority stockholder, Counsel, was $109 in 2014 and $108 in 2013. See Note 10 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 $119 in 2014, compared to $197 in 2013. The decrease is related to the operations of HG LLC.

- Legal expense was $30 in 2014, compared to $13 in 2013. The increase is primarily due to expenses associated with HGI filing statutory reports in Canada, prior to Counsel’s distribution of its ownership in HGI as a dividend in kind.

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- Accounting and tax consulting expenses were $72 in 2014, compared to $61 in 2013.

- Office rent was $77 in 2014 as compared to $118 in 2013, 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 $32 in 2014 as compared to $38 in 2013.

- Travel and entertainment expense was $152 in 2014 as compared to $130 in 2013. 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 $80 in 2014 as compared to $54 in 2013.

Depreciation and amortization expense was $118 in 2014, compared to $121 in 2013. In both years, $113 represents amortization of the intangible assets recognized in connection with the acquisition of HGP, and the remaining expense represents depreciation of property, plant and equipment.

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

- In 2014, the Company recorded income of $11 from its other equity accounted investments, as compared to recording $0 in 2013. In 2014, the amount consisted of $10 income from Polaroid, and $1 income from Knight’s Bridge GP.

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 March 31, 2014 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 $1 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 March 31, 2014. 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 first fiscal quarter of 2014 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, 2013, as filed with the SEC on March 31, 2014.

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, 2013, as filed with the SEC on March 31, 2014.

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
10.1 | Management Services Agreement between Heritage Global Inc. and Counsel Corporation (1)
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

(1) Incorporated by reference to our Current Report on Form 8-K filed on May 1, 2014.

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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: May 14, 2014 | 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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