Business context and reporting period
Counsel RB Capital Inc. (CRBCI) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Its principal business is asset liquidation, including auctions, asset advisory and investment activity; it also reported patent-licensing activity. Heritage Global Partners is a subsidiary acquired in February 2012. The filing identifies Counsel RB Capital Inc., not Heritage Global Inc., as the registrant.
Amounts below are in thousands of U.S. dollars, except per-share data, unless noted.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $1,592 | $3,034 |
| Operating income (loss) | $(905) | $799 |
| Net income (loss) | $(647) | $390 |
| Basic and diluted earnings (loss) per share | $(0.02) | $0.01 |
| Cash provided by operating activities | $174 | $5,672 |
| Cash and cash equivalents, quarter-end | $1,230 | $5,630 |
- Asset-liquidation revenue was $1,392, down from $3,034; patent-licensing revenue was $200 versus none in the prior-year quarter.
- Asset-liquidation costs were $430, compared with $1,536. Earnings from equity-accounted asset-liquidation investments were $802, versus $1,069.
- Total operating costs and expenses were $3,299, broadly unchanged from $3,304. Selling, general and administrative expense, including related-party expenses, rose to $2,598 from $1,739. The filing does not provide a consolidated gross-margin figure.
- Interest expense was $95, compared with $59. The company recorded an income-tax recovery of $353, versus tax expense of $313.
- Quarter-end total assets were $55,127 and equity was $45,518. Current liabilities were $9,609 against current assets of $7,964, producing a reported working-capital deficit of $1,645. Management said working capital would be $7,334 if real-estate inventory and asset-liquidation investments expected to convert to cash within a year were classified as current.
- Third-party revolving-credit-facility debt was $6,260, down from $10,883 at December 31, 2012. The facility has a $15,000 maximum, subject to borrowing-base and other terms; the company reported covenant compliance. Cash used in financing was $3,950, including $5,319 of debt repayments and $2,070 of related-party advances.
Material changes and management commentary
- Revenue fell by $1,442 year over year, while earnings from asset-liquidation investments declined by $267. Management attributed weaker asset-liquidation results primarily to the timing and variability of transactions. Q1 2013 included a full quarter of Heritage Global Partners operations; Q1 2012 included it only from its February 29 acquisition.
- Operating cash flow fell to $174 from $5,672. Management cited the period’s loss and changes in deposits, inventory, investments, deferred taxes, and payables; the prior-year comparison also included acquisition-related and working-capital effects.
- Investing activities provided $692, including $753 in distributions from the Polaroid investment; the prior-year period used $2,207, including $2,344 of net acquisition cash outflow for Heritage Global Partners.
- Cash decreased by $3,084 during the quarter. Management expected asset-liquidation operations to remain the primary cash source and stated that it expected operations to generate sufficient cash for requirements; the filing cautions that quarterly results are not necessarily indicative of full-year results.
- On April 1, 2013, majority owner Counsel Corporation announced plans to dispose of non-core operating segments, including its interest in CRBCI. It expected the process to take up to 12 months, but said no formal disposal of CRBCI was then in progress and the announcement had not affected CRBCI’s operations.
Outlook, risks, contingencies and unusual items
- In March 2013, the company settled and licensed its VoIP patent claims against PAETEC for $200, recorded as patent-licensing revenue. It said no 35% patent residual was payable because direct costs since the prior licensing settlements exceeded the payment.
- The filing describes competition from larger asset-liquidation and auction businesses, transaction timing variability, and uncertainty over whether market participants will need licenses to the company’s patents. European expansion may increase foreign-currency exposure; the company had no currency hedges or derivatives.
- The variable-rate credit facility bears interest at the greater of prime plus 1% or 4.5%. Management estimated that a one-percentage-point rate increase, assuming constant debt outstanding, would add approximately $63 of interest expense over 12 months.
- The company reported a $27,904 net deferred-tax-asset balance and federal tax-loss carryforwards, including approximately $28,800 of restricted losses. Section 382 and other ownership changes may restrict use of losses or require a deferred-tax-asset reduction or valuation allowance.
- Commitments included office leases totaling $1,339 through 2016. The company said ordinary-course legal matters and potential liabilities on assets sold were not expected to have a material adverse effect. No material subsequent events requiring disclosure were reported.
- Disclosure controls were assessed as effective, with no material first-quarter change in internal control over financial reporting. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- Confirm whether this Counsel RB Capital Inc. filing is the intended filing for Heritage Global Inc.; the registrant named in the filing is Counsel RB Capital Inc.
- Assess the sustainability and timing of asset-liquidation revenue and investment distributions, given the sharp year-over-year revenue and operating-cash-flow declines.
- Review liquidity and borrowing-base availability under the revolving facility, including the reliance on asset sales, distributions, and related-party advances.
- Monitor Counsel Corporation’s announced disposal plans and any resulting ownership or control changes.
- Evaluate the recoverability of deferred tax assets and the limits on tax-loss carryforwards, as well as the valuation and liquidity of private investments and other significant estimates.