Heritage Global Inc. (filing registrant: Counsel RB Capital Inc.) — Q3 2011 Form 10-Q
The filing covers the quarter and nine months ended September 30, 2011; financial amounts are in thousands of U.S. dollars except per-share data. The registrant says its name became Counsel RB Capital Inc. in January 2011. The supplied company name differs from the name on the filing.
Business context
The company’s main reported operating activity was asset liquidation, alongside legacy patent licensing and investments. It acquired distressed-business advisory firm Equity Partners on June 23, 2011, aiming to broaden Counsel RB’s services.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Asset liquidation revenue | $2,149 | $340 | $14,618 | $3,061 |
| Equity-accounted asset liquidation investment earnings | $478 | $1,370 | $2,195 | $4,408 |
| Operating income | $516 | $810 | $4,697 | $3,506 |
| Net income | $860 | $932 | $4,589 | $3,011 |
| Net income attributable to controlling interest | $860 | $649 | $4,589 | $2,021 |
| Basic and diluted EPS, common shares | $0.03 | $0.03 | $0.17 | $0.09 |
For the nine months, management reported $8,230 of combined earnings from asset liquidation revenue, related costs and equity-accounted asset liquidation investments, versus $5,422 a year earlier. The increase was driven partly by one large transaction with $3,528 gross profit. For Q3, the comparable combined amount was $1,733 versus $1,483.
Nine-month operating cash flow was $5,335, compared with $4,664 in 2010. Investing used $214; financing provided $188. Cash rose to $7,917 from $2,608 at year-end 2010. Working capital was $11,180, up from $1,621. Total liabilities were $3,394, including $2,454 of current debt, versus $7,238 of liabilities and $4,485 of debt at year-end. The $10,000 revolving facility bears interest at the greater of prime plus 1% or 4.5%; the company reported compliance with its covenants.
Total assets were $20,090 and equity $16,696 at September 30. The balance sheet included a $2,488 deferred tax asset, $2,758 of investments and provisional acquisition goodwill of $505. The filing does not present a conventional gross-margin percentage; management’s combined asset-liquidation earnings measure includes equity-investment earnings.
Changes, outlook and risks
- Nine-month revenue rose substantially year over year, while Q3 revenue also increased. Equity-accounted asset liquidation earnings fell in both comparisons. Q3 net income declined from $932 to $860, while nine-month net income increased from $3,011 to $4,589.
- Equity Partners was acquired for $819 of total consideration: $175 cash, shares valued at $184 and options valued at $460. It contributed $155 revenue and a $253 net loss for the period after acquisition. Goodwill valuation remained provisional.
- Management expected operating cash generation to cover ongoing cash needs for at least the next 12 months even if no patent licensing agreements were secured. No earnings or revenue guidance was provided; management cautioned interim results may not indicate full-year results.
- Risks include dependence on asset-sale opportunities and a large transaction, competition from better-resourced firms, illiquid private investments, and uncertainty over patent licensing and enforcement. A patent infringement action remained pending, and the company cited costs related to re-examination of a patent.
- The company disclosed $12,059 of unrecognized tax benefits and said the amount could change significantly; it could not estimate a reasonable range. Tax-loss availability and possible ownership-change restrictions are relevant uncertainties.
- Related-party matters include a 10% demand loan from parent Counsel, allocated management costs and office leases with entities connected to company co-CEOs. Management reported no material legal contingencies expected, no material subsequent events, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the relationship between the supplied Heritage Global Inc. company label and the filing’s registrant, Counsel RB Capital Inc.
- Assess how repeatable the $3,528 gross profit from the large transaction is, and how much reported earnings and cash flow depend on asset dispositions and investment distributions.
- Review the Equity Partners acquisition’s post-close performance and the final valuation of its acquired assets and goodwill.
- Evaluate collectability of receivables, valuation and liquidity of investments, and the assumptions supporting the deferred tax asset and tax-loss carryforwards.
- Monitor the pending patent litigation, patent re-examination, revolving-credit terms and related-party balances and charges.