Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012. The registrant named in the filing is Counsel RB Capital Inc. (CRBCI), which includes Heritage Global Partners (HGP), acquired on February 29, 2012. Amounts below are in U.S. dollars, in thousands unless stated otherwise. The business is focused primarily on asset liquidation and advisory services; patent licensing remains a smaller activity.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Asset liquidation revenue | $3,052 | $2,149 | $9,917 | $14,618 |
| Operating income (loss) | $(1,575) | $516 | $(1,104) | $4,697 |
| Net income (loss) | $(1,000) | $860 | $(1,031) | $4,589 |
| Basic and diluted EPS | $(0.03) | $0.03 | $(0.04) | $0.17 |
- Quarterly revenue rose about 42%, but the company reported a net loss as operating expenses increased sharply. Nine-month revenue fell about 32%, and the prior-year period included a large Fraser Paper mill sale.
- For the first nine months, operating cash flow was $3,453, down from $5,335. Investing cash outflow was $2,241, including $2,344 net cash paid for HGP; financing cash outflow was $1,807. Cash declined $595 to $6,077.
- At September 30, total assets were $60,932 and equity was $46,644. Working capital was $6,772, versus $7,626 at year-end 2011. Management notes working capital would be $8,545 if real estate inventory and asset liquidation investments expected to convert to cash within a year were classified as current.
- Third-party debt was $4,833, up from $3,091 at year-end, under a revolving facility capped at $15,000. The facility bears interest at the greater of prime plus 1% or 4.5%; the company reported covenant compliance. The HGP acquisition promissory notes were repaid in August.
- Accounts payable and accrued liabilities rose to $9,455 from $855, including $7,646 due to HGP clients. The balance sheet also shows $3,290 receivable from related parties, primarily Counsel-related.
- The company recorded $27,204 in net deferred tax assets, reflecting expected use of tax loss carryforwards; available federal NOLs included approximately $55,300 unrestricted and $28,800 restricted. Their use is subject to possible ownership-change limitations.
Material changes, outlook, and risks
- HGP was acquired for stated consideration of $7,080, including cash, notes, shares, and options. The purchase accounting included $5,640 of identifiable intangible assets and $4,728 of goodwill. HGP contributed additional amortization and operating costs; acquisition and integration expenses weighed on results.
- In August, CRBCI issued 800,000 shares to its co-CEOs, valued at $1,053, for intellectual-property licenses. This related-party transaction was expensed in the period. Common shares outstanding increased to 28,945,228.
- Management cited transaction timing as a major driver of quarterly results. It expected more asset-liquidation transactions in Q4 2012 and expected the first transaction under its Latin American alliance in that quarter. HGP Europe was launched in Q4. No quantified earnings or revenue guidance was provided.
- Management expects asset liquidation to remain the primary source of operating cash for at least the next 12 months. It expects recurring benefits from the HGP acquisition and geographic expansion, but cautions that actual results may differ and transaction timing is uneven.
- Risks include competition from larger liquidators and auction firms, execution and integration of expansion, illiquidity of private investments, potential tax-loss limitations, and increased foreign-exchange exposure as operations expand internationally. The company had no currency hedges. A 1% rise in the facility rate would increase annual interest expense by an estimated $48, assuming the September 30 balance remained constant.
- The company recorded a $363 real-estate inventory writedown in the nine-month period. It disclosed ongoing VoIP patent litigation, with a trial date set for March 13, 2013; management reported no material changes to previously disclosed legal matters and did not expect other disclosed contingencies to materially affect results.
Important facts for investors to verify
- Whether asset-liquidation transaction timing and Q4 expectations translated into completed sales, cash generation, and improved profitability.
- The composition, collectability, and settlement timing of the $9,455 accounts payable and accrued liabilities, particularly the HGP client balance, and the $3,290 related-party receivable.
- HGP integration costs, acquisition-related synergies, intangible-asset amortization, and the carrying value of goodwill and deferred tax assets.
- The terms and continuing compliance requirements of the revolving credit facility, and the restrictions that may affect utilization of tax-loss carryforwards.
- Developments in the VoIP patent litigation and the related-party intellectual-property license transaction.