Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2012. The filing is by Counsel RB Capital Inc., not Heritage Global Inc.; it reports Heritage Global Partners, Inc. as an acquired subsidiary, acquired on February 29, 2012. Unless noted otherwise, amounts below are in thousands of U.S. dollars.
The company’s main operating activity was asset liquidation, including asset sales, auctions and advisory services. It also held equity-accounted investments and a patent-licensing business.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Asset liquidation revenue | $3,034 | $734 |
| Operating income (loss) | $799 | ($340) |
| Income before tax and other equity-investment results | $750 | ($424) |
| Net income | $390 | $189 |
| Basic EPS, common shares | $0.01 | $0.01 |
| Operating cash flow | $5,672 | ($3,258) |
- Revenue increased about 313% year over year. Asset sales were $1,850 versus $598; commissions and other revenue were $1,184 versus $136. Reported operating costs were $3,304 versus $2,634.
- Asset-liquidation revenue less asset-liquidation costs was $1,498, about 49% of revenue; this is not the company’s reported operating margin. Earnings from equity-accounted asset-liquidation investments were $1,069, down from $1,560.
- Income tax expense was $313, compared with a $598 tax recovery in Q1 2011. The current-year deferred tax expense primarily reflected use of tax-loss carryforwards.
- Cash and cash equivalents were $5,630 at quarter-end, down $1,042 from year-end. Investing activities used $2,207, including a $2,344 net cash outflow for the Heritage Global Partners acquisition; financing activities used $4,507.
- Working capital was $7,047, down from $7,626 at December 31, 2011. Management said it would be $9,152 if real-estate inventory and asset-liquidation investments expected to convert to cash within a year were classified as current.
- Total debt was $1,459, all current: $456 under the revolving credit facility and $1,003 in related-party promissory notes. The facility had a $10,000 maximum, subject to borrowing-base and capital conditions; the company reported covenant compliance.
- Total assets were $54,779, including $8,613 of goodwill; total equity was $46,534. The balance sheet also showed $2,595 due from related parties, including $2,467 due from Counsel.
Material changes and acquisition
The February 29 acquisition of Heritage Global Partners expanded the asset-liquidation business. Consideration was reported at $6,953: $3,000 cash, $1,000 in promissory notes, 1,000,000 common shares valued at $1,950, and options valued at $1,131. Purchase-price allocation was provisional and included $8,041 of goodwill. The acquired business’s results were included only from the acquisition date.
Accounts payable and accrued liabilities rose to $6,669 from $855, substantially reflecting the acquired business, including $3,117 due to Heritage Global Partners clients. Selling, general and administrative expense, including related-party expenses, increased to $1,739 from $968; management cited acquisition-related staffing, stock compensation, travel and promotion among the drivers. Common shares outstanding increased to 28,135,228 from 27,117,450.
Outlook, commentary and risks
- Management expected the asset-liquidation business to remain the primary source of operating cash for at least the next 12 months. The filing gave no quantified earnings or revenue guidance and cautioned that first-quarter results may not indicate full-year results.
- The company was pursuing patent licensing and royalty agreements, but stated there was no certainty that market use of VoIP technology would require licenses. A patent-infringement case remained pending; preliminary hearings were scheduled for November 2012 and trial for March 2013.
- Risk factors include competition from larger asset-liquidation firms, variability in asset-sale and joint-venture activity, illiquidity and uncertain timing of returns on private investments, and possible limitations on tax-loss carryforwards. The company reported approximately $54,500 of unrestricted and $28,000 of restricted federal net operating loss carryforwards, subject to restrictions and potential further limitations.
- The acquisition notes were due August 31, 2012 and bore interest at prime rate. Management reported no material change to previously disclosed risk factors or legal proceedings, no material subsequent event, and no material off-balance-sheet transactions. Disclosure controls were reported effective.
- The revolving facility carried a variable rate; management estimated a 1 percentage-point increase would add about $5 of interest expense over 12 months, assuming the March 31 balance remained constant. No foreign-currency hedges or derivatives were reported.
Important facts for investors to verify
- Confirm the issuer and reporting entity: this filing is for Counsel RB Capital Inc.; Heritage Global Partners is the acquired subsidiary, not the filer.
- Review the final purchase-price allocation, goodwill valuation and acquired business performance after its February 29 consolidation.
- Assess cash generation quality: Q1 operating cash flow benefited from working-capital movements, including a $3,100 increase in accounts payable and accrued liabilities.
- Track the $1,003 acquisition-related notes due August 31, 2012, available revolving-credit capacity, borrowing-base collateral and covenant compliance.
- Evaluate the collectability and terms of the $2,595 related-party receivable, including the amount due from Counsel, and the company’s related-party transactions.
- Monitor the pending patent litigation, tax-loss carryforward restrictions, and the timing and value of illiquid investments and asset-liquidation opportunities.