Heritage Global Inc. (then Counsel RB Capital Inc.) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial amounts are in thousands of U.S. dollars, except per-share data. The company’s principal business was asset liquidation, including auctions, asset advisory and customized financial solutions; it also retained VoIP patent licensing activities. The filing reports results under the name Counsel RB Capital Inc.; the approved change to Heritage Global Inc. was expected to take effect on or after August 15, 2013.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1,932 in 2013; $3,831 in 2012 | $3,524 in 2013; $6,865 in 2012 |
| Operating income (loss) | $(1,107); $(328) | $(2,012); $471 |
| Net income (loss) | $(743); $(421) | $(1,390); $(31) |
| Basic and diluted loss per share | $(0.03); $(0.01) | $(0.05); $(0.00) |
| Cash provided by operating activities | Not provided for the quarter | $2,966; $3,055 |
- Quarterly revenue fell about 50% year over year, principally reflecting the timing of asset liquidation transactions. Six-month revenue also fell about 49%. Asset liquidation revenue was $3,324 for the first half versus $6,865 a year earlier; first-half patent licensing revenue was $200, from a settlement.
- Management said first-half net operating contribution from asset liquidation revenue, related costs and equity-accounted asset liquidation earnings was $3,362, down from $4,907. Equity-accounted asset liquidation earnings were $809 versus $1,227.
- First-half selling, general and administrative expense, including related-party charges, rose to $5,178 from $4,391. Depreciation and amortization increased to $240 from $11, primarily reflecting amortization of acquired Heritage Global Partners intangibles.
- Cash and cash equivalents were $5,569 at June 30, up from $4,314 at year-end. Operating cash flow was $2,966; investing activities provided $723; financing activities used $2,434. The filing attributes operating cash flow partly to changes in working capital, including higher accrued liabilities.
Financial position and liquidity
- Total assets were $58,060 at June 30, compared with $61,310 at December 31, 2012; stockholders’ equity was $44,950 versus $46,012.
- Current liabilities were $13,110 and current assets $10,364. The company reported a $2,746 working-capital deficit, versus $2,348 at year-end. Management noted that including real estate inventory and asset liquidation investments—classified as non-current despite expected conversion to cash within a year—would result in working capital of $6,457.
- Total debt was $5,537, all current: $3,922 under a third-party revolving credit facility and $1,615 owed to related-party parent Counsel. Total debt at year-end was $10,883. The credit facility had a $15,000 maximum, was secured by eligible assets, and carried interest at the greater of prime plus 1% or 4.5%. The company reported compliance with its covenants.
- The Counsel Loan bears 10% interest, compounded quarterly, is secured by company assets and due on demand. First-half net cash advances from Counsel were $4,544; these helped repay third-party debt.
Material changes, outlook and risks
- The two Co-CEOs departed effective June 30, 2013, along with personnel in Counsel RB’s New York and Los Angeles offices. Heritage Global Partners’ managing partners took over leadership of Counsel RB. The former Co-CEOs returned 800,000 shares issued to them in 2012 for name-use licenses, and those license agreements were cancelled.
- Following the leadership change, the company said it was concentrating asset liquidation operations on auctions, appraisals and customized financial solutions, while expecting to continue asset acquisition and monetization transactions.
- Parent Counsel announced in April 2013 its intention to dispose of operating segments other than its mortgage-lending business, including its interest in the company. Counsel expected the process to take up to 12 months; no formal disposition of the company was in progress as of the filing, and management said the announcement had not affected operations.
- Management expected the asset liquidation business to remain the primary source of cash for ongoing operations and stated that it expected operations to generate sufficient cash to meet requirements. No specific financial forecast or quantified guidance was provided. Management cautioned that interim results may not indicate full-year results.
- Risks include transaction timing and competition from larger, better-resourced asset liquidators; illiquidity and uncertain timing of gains on private investments; and possible further limits on tax-loss utilization under ownership-change rules. The company reported a $28,328 net deferred tax asset and substantial tax-loss carryforwards, whose future use is not assured.
- The company disclosed ordinary-course legal matters and possible contingent liabilities relating to assets sold, but did not expect them to have a material adverse effect. It reported no material off-balance-sheet transactions, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether asset liquidation transaction volume and margins recovered after the sharp year-over-year revenue decline, and whether the new leadership structure affected operations or costs.
- The company’s ability to manage its working-capital deficit and meet demand obligations under the related-party loan, including its dependence on Counsel advances.
- The status and terms of any sale of Counsel’s controlling interest, and the effect of a potential ownership change on tax-loss carryforwards and the deferred tax asset.
- The realizability of the deferred tax asset, given historical losses and Section 382 limitations, and the valuation and liquidity of private investments and acquired goodwill and intangible assets.
- Share-count changes after June 30: the filing reported 28,966,728 common shares outstanding at quarter-end and 28,166,728 as of August 6, after the 800,000-share return.