Heritage Global Inc. — Filing Summary
Filing identity: The supplied filing is a Form 10-K for Counsel RB Capital Inc. (CRBCI), not Heritage Global Inc. It covers the fiscal year ended December 31, 2012, and was filed March 28, 2013. The filing reports annual results; it does not provide a clear standalone fourth-quarter income statement. Unless noted otherwise, financial amounts below are in thousands of U.S. dollars.
Business context and reporting period
CRBCI’s principal business was asset liquidation: acquiring and reselling distressed or surplus assets, and providing auction, appraisal, advisory and financial services. Its other segment was patent licensing, focused principally on VoIP patents. The 2012 acquisition of Heritage Global Partners (HGP) expanded auction and advisory capabilities; the company also entered Latin America through a strategic alliance and opened offices in the UK, Germany and Spain. HGP’s results are included from its February 29, 2012 acquisition date.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $14,128 | $17,238 |
| Operating income (loss) | $(2,453) | $4,583 |
| Net income (loss) | $(1,813) | $30,713 |
| Basic/diluted earnings (loss) per share | $(0.06) | $1.14 / $1.13 |
| Cash from (used in) operating activities | $(4,802) | $4,051 |
| Cash and cash equivalents at year-end | $4,314 | $6,672 |
| Third-party debt at year-end | $10,883 | $3,091 |
| Total assets / stockholders’ equity | $61,310 / $46,012 | $47,147 / $42,940 |
Asset liquidation revenue comprised $7,901 of asset sales and $6,227 of commissions and other revenue. Asset liquidation expenses were $7,090, and earnings from equity-accounted asset liquidation investments were $2,023. Selling, general and administrative expense rose to $11,057 from $4,986; depreciation and amortization increased to $407 from $2. The filing does not provide a clear consolidated gross-margin figure.
Working capital was a deficit of $2,348, versus positive working capital of $7,626 a year earlier. Management notes that GAAP classifies real estate inventory and asset-liquidation investments as non-current even though they are generally expected to convert to cash within a year; including those assets as current would produce working capital of $7,348. The $15,000 revolving credit facility was drawn to $10,883, secured by eligible assets, and CRBCI was in compliance with its covenants at year-end. The facility bears interest at the greater of prime plus 1% or 4.5%.
Material changes versus 2011
- Revenue fell about 18%, reflecting transaction timing and the absence of the large 2011 paper-mill sale; commissions and other revenue rose as acquired fee-based services contributed.
- Operating results turned to a loss as expenses increased, including higher compensation, integration and expansion costs, and $573 of inventory write-downs.
- Net income fell sharply from 2011, when a $26,317 income-tax recovery was recorded, to a $978 tax recovery in 2012. The 2011 comparison is therefore substantially affected by a one-time deferred-tax benefit.
- Operating cash flow shifted from a $4,051 inflow to a $4,802 outflow. Cash declined by $2,358, while year-end third-party debt increased by $7,792, mainly in connection with asset transactions and inventory acquired late in 2012.
- HGP was acquired for stated consideration of $7,080, including cash, notes, shares and options. The acquisition added $5,640 of identifiable intangible assets and $4,728 of goodwill; neither goodwill nor the intangible assets was considered impaired at year-end.
Outlook, risks and unusual items
Management expected asset liquidation to remain the primary source of operating cash and stated that operations were expected to generate sufficient cash for requirements. It anticipated that international expansion and integration costs would affect near-term earnings. No quantified financial guidance was provided.
- Results are inherently uneven because revenue depends on discrete transactions of varying size. When buying assets for resale, the company bears inventory and resale-price risk; joint ventures also help it participate in larger transactions.
- Management cited growth-related staffing and systems costs, foreign-currency exposure, auction and export-control regulation, FCPA compliance, environmental exposure, key-person dependence, and possible future financing needs.
- CRBCI held $2,406 in Polaroid investment at year-end, approximately 4% of total assets. It is a private, illiquid investment valued using significant unobservable inputs; management concluded it was not impaired.
- Deferred tax assets were $27,578, including tax-loss carryforwards subject to potential ownership-change limitations, expiry and other restrictions. Management warned that future restrictions could reduce tax benefits or require tax expense.
- Related-party items included a $2,929 receivable from parent Counsel, $435 of Counsel management and other charges, and $282 in rent paid to related parties. Counsel controlled approximately 71.3% of CRBCI at year-end.
- In August 2012, CRBCI issued 800,000 shares to its Co-CEOs for perpetual, exclusive licenses to use their names; $1,054 was recognized as stock-based compensation. Common shares outstanding rose to 28,945,228 from 27,117,450.
- A patent-infringement case against the remaining defendant was settled in the first quarter of 2013 for $200. The filing states that other ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Counsel RB Capital Inc., despite the request metadata naming Heritage Global Inc.
- Assess the sustainability of cash generation and the availability and terms of the revolving credit facility, particularly given negative operating cash flow and the working-capital deficit.
- Review asset inventory, transaction pipeline and resale values, including the $573 write-down and late-year inventory-related borrowing.
- Evaluate the recoverability of the $27,578 deferred tax asset and the valuation of goodwill, acquired intangibles and private-company investments.
- Review related-party balances, services, leases and control arrangements, as well as potential dilution from outstanding options and future share issuance.
- Note that the auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting, but the auditor did not provide an internal-control attestation.