Heritage Global Inc. quarterly report, Q2 FY2011

Heritage Global Inc. — 2011 Q2 Form 10-Q summary

Filing identity: The supplied filing is for Counsel RB Capital Inc., not Heritage Global Inc. The filing says the registrant changed its name to Counsel RB Capital Inc. effective January 20, 2011; the text does not establish a connection to Heritage Global Inc. This summary therefore describes Counsel RB Capital Inc. and its subsidiaries.

Business context and reporting period

The unaudited report covers the quarter and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods. Amounts below are in thousands of U.S. dollars, except per-share data. The business focused principally on asset liquidation, including acquiring and monetizing distressed and surplus assets, alongside patent licensing and investments. On June 23, the company acquired Equity Partners, a boutique investment banking firm serving distressed businesses and properties.

Financial results and position

Metric	Three months ended June 30	Six months ended June 30
Asset liquidation revenue	2011: $11,735; 2010: $488	2011: $12,469; 2010: $2,721
Operating income	2011: $4,521; 2010: $2,198	2011: $4,181; 2010: $2,696
Net income attributable to controlling interest	2011: $3,540; 2010: $1,149	2011: $3,729; 2010: $1,372
Basic and diluted EPS, common shares	2011: $0.13; 2010: $0.05	2011: $0.14; 2010: $0.06
Operating cash flow	Not presented by quarter	2011: $6,260; 2010: $3,598

• Management reported combined earnings from asset liquidation revenue, related asset liquidation costs, inventory maintenance, and equity-accounted liquidation investments of $5,812 for Q2 2011 versus $2,808 in Q2 2010, and $6,497 for the first half versus $3,939. Management attributed the increase primarily to one transaction generating $3,528 in gross profit and to business growth.
• Equity-accounted asset liquidation investment earnings were $157 in Q2 2011 versus $2,601 a year earlier, and $1,717 for the half versus $3,038. Thus, direct asset-sale activity drove the reported revenue surge while investment earnings declined.
• At June 30, cash was $7,374, current assets $12,548, current liabilities $2,413, and working capital $10,135 (versus $1,621 at year-end 2010). Management said working capital would be $12,679 if real estate inventory and asset liquidation investments expected to convert to cash within a year were classified as current.
• Total debt was $988, all current: $921 under the third-party revolving facility and $67 owed to related party Counsel. Third-party debt fell from $4,485 at December 31, 2010. The revolving facility provides up to $10,000, subject to borrowing-base and covenant terms; the company reported covenant compliance.
• Total assets were $18,122 and stockholders’ equity $15,709 at June 30. Net cash increased by $4,766 during the first half. Financing cash flow was negative $1,289, including net repayment of third-party debt and proceeds from a private placement.
• Reported margins are not separately stated in a way that clearly isolates consolidated gross margin; the filing text does not provide a clear comparable margin measure.

Material changes versus the prior comparable period

• Asset liquidation revenue and earnings rose sharply, chiefly due to the large transaction noted above. Operating expenses also increased: first-half operating costs and expenses were $10,005 versus $3,063, including higher compensation, consulting, travel, and other costs as Counsel RB expanded.
• The June acquisition had total consideration of $819: $175 cash, 122,950 shares valued at $184, and options valued at $460. The filing recorded provisional goodwill of $226 and $41 of acquisition-related expenses. Equity Partners contributed no revenue during the period because it was acquired near quarter-end.
• The company issued 1,122,950 common shares during the half, including 1 million shares in a March private placement that generated $1,823 net proceeds. Shares outstanding were 27,083,030 at June 30.
• Income tax expense was $978 in Q2 2011 versus $314 in Q2 2010. The company attributed the second-quarter deferred tax expense primarily to realization of tax effects of previously recorded deferred tax assets.

Outlook, commentary, risks, and unusual items

• Management said Counsel RB’s operations should provide sufficient cash for ongoing operating needs for at least 12 months, even if no patent licensing agreements are reached during that period. The filing gives no earnings or revenue guidance.
• The company was pursuing expansion of Counsel RB’s services, including industrial auctions, asset-based debtor-in-possession financing, valuation work, and the newly acquired Equity Partners business. Management cited potential synergies, but the filing provides no quantified outlook.
• The Equity Partners acquisition included a $150 put option, expiring September 12, 2011, allowing a former owner to sell shares and cancel a related option. Management did not expect exercise. The company also noted customary potential liabilities associated with assets sold, but did not expect them to have a material adverse effect.
• Unrecognized tax benefits were $12,059. Management said the balance could significantly increase or decrease within 12 months, including due to audits, tax-loss restrictions, or changes in business activity; it could not estimate a reasonable range of outcomes. Tax-loss availability and audits remain relevant uncertainties.
• A $225 interest-bearing note was in default and on non-accrual status; after a further $40 allowance, its recorded value was $39. The company did not expect to collect interest. Polaroid and other private investments were described as illiquid; their value and realization timing are uncertain.
• Patent licensing prospects depend on whether businesses’ use of VoIP technology requires a license. The company reported costs related to re-examination of a key patent and a pending patent infringement case; no trial date had been set. It reported no material changes to previously disclosed legal proceedings or risk factors.
• Other unusual items include option grants and stock-based compensation, and a $182 first-half legal expense credit from negotiated reductions in previously billed fees. Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2.

Important facts for investors to verify

• Confirm the registrant’s identity and whether this Counsel RB Capital filing is relevant to Heritage Global Inc.; the supplied filing itself identifies Counsel RB Capital Inc.
• Assess the recurrence and cash realization of the $3,528 gross profit transaction, and distinguish direct liquidation results from equity-accounted investment earnings.
• Review the Equity Partners acquisition terms, including the $150 put option, dilution from shares and options, and the provisional goodwill valuation.
• Check the status and borrowing-base availability of the revolving credit facility, related-party funding, and the company’s ability to sustain liquidity as asset-sale cash flows fluctuate.
• Evaluate tax-loss carryforwards, the $12,059 unrecognized tax benefits, patent re-examination and litigation, and the valuation and liquidity of private investments.