UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to

 

Commission file number: 0-17973

Counsel RB Capital Inc.

 

(Exact name of registrant as specified in its charter)

FLORIDA (State or other jurisdiction of Incorporation or Organization)		59-2291344 (I.R.S. Employer Identification No.)

700 – 1 Toronto St., Toronto, ON M5C 2V6

 

(Address of Principal Executive Offices)

 

(416) 866-3000
(Registrant’s Telephone Number)

 

N/A

(Registrant’s Former Name)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter time period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

Large Accelerated Filer £	Accelerated Filer £
Non-Accelerated Filer £	Smaller reporting company R

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

 

As of May 8, 2012, there were 28,135,228 shares of common stock, $0.01 par value, outstanding.

 

TABLE OF CONTENTS

 

Part I.	Financial Information
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011	4
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period ended March 31, 2012	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
Part II.	Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

COUNSEL RB CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars, except share and per share amounts)

(unaudited)

 

		As of March 31, 2012				As of December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	5,630			$	6,672
Amounts receivable (net of allowance for doubtful accounts of $186; 2011 - $186)			1,660				917
Receivables from related parties			2,595				595
Deposits			2,029				69
Inventory – equipment			763				1,013
Other current assets			200				148
Deferred income tax assets			2,415				2,419
Total current assets			15,292				11,833
Other assets:
Inventory – real estate			1,073				2,131
Asset liquidation investments			1,032				3,455
Investments			2,588				2,772
Property, plant and equipment			52				19
Goodwill			8,613				573
Deferred income tax assets			26,129				26,364
Total assets		$	54,779			$	47,147
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	6,669			$	855
Income taxes payable			117				261
Debt payable to third parties			456				3,091
Debt payable to related parties			1,003				—
Total liabilities			8,245				4,207
Commitments and contingencies (Note 13)
Equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 592 Class N shares at March 31, 2012 and December 31, 2011, liquidation preference of $592 at March 31, 2012 and December 31, 2011			6				6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 28,135,228 shares at March 31, 2012 and 27,117,450 shares at December 31, 2011			281				271
Additional paid-in capital			281,602				278,408
Accumulated deficit			(235,355	)			(235,745	)
Total equity			46,534				42,940
Total liabilities and equity		$	54,779			$	47,147

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

COUNSEL RB CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(unaudited)

 

		Three months ended
(In thousands of US dollars, except share and per share amounts)		March 31,
		2012				2011
Revenue:
Asset liquidation
Asset sales		$	1,850			$	598
Commissions and other			1,184				136
Total asset liquidation revenue			3,034				734
Operating costs and expenses:
Asset liquidation			1,533				439
Inventory maintenance			3				1,170
Patent licensing and maintenance			26				57
Selling, general and administrative			1,582				823
Expenses paid to related parties			157				145
Depreciation			3				—
Total operating costs and expenses			3,304				2,634
			(270	)			(1,900	)
Earnings of equity accounted asset liquidation investments			1,069				1,560
Operating income (loss)			799				(340	)
Other income (expenses):
Other income			10				—
Interest expense			(59	)			(84	)
Total other income (expenses)			(49	)			(84	)
Income (loss) before the undernoted			750				(424	)
Income tax expense (recovery)			313				(598	)
Earnings (loss) of other equity accounted investments (net of $0 tax)			(47	)			15
Net income and comprehensive income		$	390			$	189
Weighted average common shares outstanding (in thousands):
Basic			27,484				26,149
Diluted			27,844				26,182
Weighted average preferred shares outstanding (in thousands):
Basic and diluted			1				1
Earnings per share – basic:
Common shares		$	0.01			$	0.01
Preferred shares		$	0.57			$	0.29
Earnings per share –diluted:
Common shares		$	0.01			$	0.01
Preferred shares		$	0.56			$	0.29

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

COUNSEL RB CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the period ended March 31, 2012

 

(in thousands of US dollars, except share amounts)
(unaudited)

 

 

`		Preferred stock								Common stock								Additional paid-in				Accumulated Earnings
		Shares				Amount				Shares				Amount				capital				(Deficit)				Total
Balance at December 31, 2010			592			$	6				25,960,080			$	259			$	275,641			$	(266,458	)		$	9,448
Issuance of common stock			—				—				1,122,950				12				1,995				—				2,007
Exercise of options			—				—				34,420				—				16				—				16
Issuance of options			—				—				—				—				460				—				460
Compensation cost related to stock options			—				—				—				—				296				—				296
Net income			—				—				—				—				—				30,713				30,713
Balance at December 31, 2011			592				6				27,117,450				271				278,408				(235,745	)			42,940
Issuance of common stock			—				—				1,000,000				10				1,940				—				1,950
Exercise of options			—				—				17,778				—				8				—				8
Issuance of options			—				—				—				—				1,131				—				1,131
Compensation cost related to stock options			—				—				—				—				115				—				115
Net income			—				—				—				—				—				390				390
Balance at March 31, 2012			592			$	6				28,135,228			$	281			$	281,602			$	(235,355	)		$	46,534

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

COUNSEL RB CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

(In thousands of US dollars)		Three months ended March 31,
		2012				2011
Cash flows from operating activities:
Net income		$	390			$	189
Adjustments to reconcile net income to net cash used in operating activities:
Accrued interest added to principal of third party debt			8				11
Amortization of financing costs on debt payable to third party			9				4
Accrued interest added to principal of related party debt			3				—
Stock-based compensation expense			115				18
Loss (earnings) of other equity accounted investments			47				(15	)
Deferred income tax assets			235				—
Depreciation and amortization			3				—
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable			102				(235	)
Decrease (increase) in lease receivable			34				(248	)
Decrease (increase) in deposits			(1,960	)			6
Decrease (increase) in inventory			1,308				(2,032	)
Decrease (increase) in asset liquidation investments			2,423				981
Decrease (increase) in other assets			(5	)			193
Decrease (increase) in deferred income tax assets			4				(563	)
Increase (decrease) in accounts payable and accrued liabilities			3,100				(1,457	)
Decrease in income taxes payable			(144	)			(110	)
Net cash provided by (used in) operating activities			5,672				(3,258	)
Cash flows from investing activities:
Net cash paid for business acquisition			(2,344	)			—
Investment in other equity accounted investments			(20	)			(21	)
Cash distributions from other equity accounted investments			157				1
Net cash used in investing activities			(2,207	)			(20	)
Cash flows from financing activities:
Proceeds of debt payable to third parties			2,158				1,898
Repayment of debt payable to third parties			(4,801	)			(922	)
Proceeds of debt payable to a related party			178				—
Repayment of debt payable to a related party			(2,050	)			—
Proceeds from exercise of options to purchase common shares			8				—
Proceeds from issuance of common shares, net of share issuance costs			—				1,803
Net cash provided by (used in) financing activities			(4,507	)			2,779
Decrease in cash			(1,042	)			(499	)
Cash and cash equivalents at beginning of period			6,672				2,608
Cash and cash equivalents at end of period		$	5,630			$	2,109
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock in exchange for assets of acquired business		$	1,950			$	—
Issuance of options to purchase common stock in exchange for assets of acquired business			1,131				—
Supplemental cash flow information:
Taxes paid		$	218			$	108
Interest paid			56				38

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

COUNSEL RB CAPITAL INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(in thousands, except share and per share amounts and where specifically indicated)

 

 

 

Note 1 –Basis of Presentation

 

These unaudited condensed consolidated financial statements include the accounts of Counsel RB Capital Inc. together with its subsidiaries, including Counsel RB Capital LLC (“Counsel RB”), Equity Partners CRB LLC, Heritage Global Partners, Inc., C2 Communications Technologies Inc., and C2 Investments Inc. These entities, collectively, are referred to as “CRBCI”, the “Company”, “we” or “our” in these financial statements. Our unaudited condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and include the assets, liabilities, revenues, and expenses of all subsidiaries over which CRBCI exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation.

 

We have prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In our opinion, these financial statements reflect all adjustments that are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 22, 2012.

 

Certain items in the condensed consolidated statement of operations and comprehensive income for the three months ended March 31, 2011 have been reclassified to conform to current year presentation. These changes had no effect on previously reported net income or stockholders’ equity.

 

The results of operations for the three-month period ended March 31, 2012 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2012.

 

 

 

Note 2 – Summary of Significant Accounting Policies

 

Use of estimates

 

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

 

Significant estimates include the assessment of collectability of revenue recognized, and the valuation of amounts receivable, inventory, investments, assets acquired, deferred income tax assets, goodwill and intangible assets, liabilities, and stock-based compensation. These estimates have the potential to significantly impact our consolidated financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

 

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no changes to these policies in the first quarter of 2012.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 results from joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. Although ASU 2011-04 is largely consistent with the existing US GAAP fair value measurement principles, it expands existing disclosure requirements and makes other amendments. ASU 2011-04 is effective for interim or annual reporting periods beginning after December 15, 2011, with early adoption not permitted. The Company adopted ASU 2011-04 in the first quarter of 2012; its adoption did not have a material effect on the Company’s consolidated financial statements.

 

In September 2011, the FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amends the goodwill impairment testing guidance in ASC 350-20, by providing the option to perform a qualitative assessment before calculating the fair value of the reporting unit (i.e.: before performing Step 1 of the goodwill impairment test). If it is determined, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the existing two-step impairment test would be required. If it is determined that the fair value more likely than not exceeds the carrying value, further testing would not be required. ASU 2011-08 does not change the calculation of goodwill or its assignment to reporting units. It also does not change the requirement to test goodwill annually for impairment, or to test for impairment between annual tests if warranted by events or circumstances. However, it does revise the examples of events and circumstances that should be considered. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 in the fourth quarter of 2011.

 

In December 2011, the FASB issued Accounting Standards Update 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 defers certain provisions of ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated OCI. Both ASU 2011-05 and 2011-12 are effective for interim or annual reporting periods beginning after December 15, 2011, with early adoption permitted. The guidance must be applied retrospectively for all periods presented in the financial statements. The Company adopted ASU 2011-05 and ASU 2011-12 in the first quarter of 2012. However, because the Company has no OCI in any of the periods presented, the adoptions had no effect on the Company’s consolidated financial statements.

 

The FASB, the Emerging Issues Task Force and the SEC have issued other accounting pronouncements and regulations during 2011 and 2012 that will become effective in subsequent periods. The Company’s management does not believe that these pronouncements will have a significant impact on the Company’s consolidated financial statements at the time they become effective.

 

 

 

Note 3 – Acquisition of Heritage Global Partners, Inc.

 

On February 29, 2012 the Company acquired all of the issued and outstanding capital stock in Heritage Global Partners, Inc. (“Heritage Global Partners”), a full-service, global auction and asset advisory firm. The acquisition of Heritage Global Partners is consistent with CRBCI’s strategy to expand the services provided by its asset liquidation business. In connection with the acquisition, CRBCI entered into employment agreements with the previous owners and employees of Heritage Global Partners.

 

The cost of the acquisition was satisfied by the payment of $3,000 in cash, the issuance of promissory notes (the “Promissory Notes”) totaling $1,000, the issuance of 1,000,000 CRBCI common shares valued at $1.95 per share and the granting of options to purchase 625,000 CRBCI common shares with a fair value of $1.8092 per option. The acquisition included other terms and conditions that are customary for agreements of this nature. A copy of the asset purchase agreement is attached as an exhibit to this Quarterly Report on Form 10-Q.

 

The following table summarizes the consideration paid for Heritage Global Partners and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:

 

At February 29, 2012
			$
Consideration
Cash			3,000
Promissory Notes, net of receivable from owners			872
Equity instruments:
1,000,000 CRBCI common shares			1,950
625,000 options to purchase CRBCI common shares at $2.00 per share			1,131
Fair value of total consideration			6,953
Acquisition related costs (included in selling, general, and administrative expenses in CRBCI’s condensed consolidated statement of operations for the three months ended March 31, 2012)			81
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash			656
Accounts receivable			878
Deposits			20
Prepaid expenses			35
Property, plant and equipment			37
Goodwill			8,041
Accounts payable and accrued liabilities			(1,190	)
Client liability account			(1,424	)
Short-term note payable			(100	)
Total identifiable net assets			6,953

 

The fair value of the 1,000,000 CRBCI common shares issued as part of the consideration was determined using the closing price of the shares on February 28, 2012. The fair value of the 625,000 options to purchase CRBCI common shares was determined using the Black-Scholes Option Pricing Model. Inputs to the model included an expected volatility of 133%, a risk-free interest rate of 1.25%, an expected life of 4.75 years, and an expected dividend yield of zero.

 

The Promissory Notes are due in full on August 31, 2012, and bear interest at the U.S. Prime Rate.

 

The fair value of the accounts receivable is the value as reported in the above table, and includes an allowance of $0.

 

The allocation of the purchase price, as reported above, is provisional pending final determination, within a year of the acquisition date, of the valuation of all of the assets and liabilities, with the exception of cash.

 

The only transactions recognized separately from the acquisition were approximately $81 of professional fees incurred by the Company, which were expensed in the period.

 

 

 

Note 4 – Stock-based Compensation

 

At March 31, 2012 the Company had seven stock-based compensation plans. Six of these are described more fully in Note 14 to the audited consolidated financial statements contained in the Company’s most recently filed Annual Report on Form 10-K. A new plan, the Heritage Global Partners Plan (the “HGP Plan”) was set up to facilitate the issue of options as part of the acquisition of Heritage Global Partners. It is similar to the Company’s 2003 Stock Option and Appreciation Rights Plan, except that options issued under the HGP Plan survive termination of employment.

 

The Company’s total compensation cost related to stock options is $115 and $18 for the three months ended March 31, 2012 and 2011, respectively. The fair value compensation costs of unvested stock options in the first three months of 2012 and 2011 were determined using the Black-Scholes Option Pricing Model for grant dates between 2007 and 2012. Historical inputs to the model included expected volatility between 133% and 323%, risk-free interest rates between 0.94% and 1.93%, expected lives of 4.75 or 6.25 years, and an expected dividend yield of zero. The Company’s estimated forfeiture rate of its stock options is nil.

 

During the first three months of 2012, the Company recognized a tax benefit of $16, related to the exercise of options to purchase common stock. No tax benefit from stock-based compensation was recognized in the first three months of 2011, as no options were exercised. The Company’s stock-based compensation provided $8 in financing cash flows during the first three months of 2012, due to the exercise of 21,750 options, and had no effect on its cash flows during the first three months of 2011.

 

On February 29, 2012, 625,000 options, having an exercise price of $2.00 and a fair value of $1.8092, were granted to the former owners of Heritage Global Partners, as part of the Company’s acquisition of Heritage Global Partners. The inputs to the Black-Scholes Option Pricing Model were an expected volatility of 133%, a risk-free interest rate of 1.25%, an expected term of 4.75 years, and an expected dividend yield of zero. No similar grants were made during the first three months of 2011.

 

On March 28, 2012, 265,000 options, having an exercise price of $2.00 and a fair value of $1.7251, were granted to employees. These options are part of the 2003 Stock Option and Appreciation Rights Plan. The inputs to the Black-Scholes Option Pricing Model were an expected volatility of 135%, a risk-free interest rate of 1.32%, an expected term of 4.75 years, and an expected dividend yield of zero. During the first three months of 2011, similar grants of 1,540,000 options were made to employees, officers and directors of the Company, and to a consultant.

 

The following summarizes the changes in common stock options for the three months ended March 31, 2012 and 2011, respectively:

 

		Options				Weighted Average Exercise Price
Outstanding at December 31, 2011			3,141,198			$	1.65
Granted			890,000			$	2.00
Exercised			(21,750	)		$	0.63
Forfeited			(250,000	)		$	1.83
Expired			(1,250	)		$	1.40
Outstanding at March 31, 2012			3,758,198			$	1.72
Options exercisable at March 31, 2012			1,120,698			$	1.28

 

 

		Options				Weighted Average Exercise Price
Outstanding at December 31, 2010			728,246			$	0.89
Granted			1,540,000			$	1.81
Expired			(6,215	)		$	8.29
Outstanding at March 31, 2011			2,262,031			$	1.49
Options exercisable at March 31, 2011			654,531			$	0.88

 

 

Note 5 – Earnings Per Share

 

The Company is required, in periods in which it has net income, to calculate basic earnings per share (“EPS”) using the two-class method. The two-class method is required because the Company’s Class N preferred shares, each of which is convertible to 40 common shares, have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock. Under the two-class method, earnings for the period are allocated on a pro-rata basis to the common and preferred stockholders. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares.

 

In periods in which the Company has a net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the preferred stock does not participate in losses.

 

Options are included in the calculation of diluted earnings per share, since they are assumed to be exercised, except when their effect would be anti-dilutive. For the three months ending March 31, 2012, the net effect of including 635,000 potential common shares did not change the EPS amount for each common share, and reduced EPS by $0.01 for each preferred share. For the three months ended March 31, 2011, the net effect of including 80,000 potential common shares did not change the EPS amount, and therefore diluted EPS equals basic EPS.

 

Potential common shares that were not included in the computation of diluted earnings per share because they would have been anti-dilutive are as follows:

 

		March 31,
		2012				2011
Assumed exercise of options to purchase shares of common stock			3,123,198				2,182,031

 

 

Note 6 – Composition of Certain Financial Statement Items

 

Amounts receivable

 

The Company’s amounts receivable are primarily related to the operations of Counsel RB, its subsidiary, Equity Partners, and Heritage Global Partners. They consist of three major categories: receivables from Joint Venture partners, receivables from asset sales, and fees and retainers relating to the businesses of Equity Partners and Heritage Global Partners. To date, the Company has not experienced any significant collectability issues with respect to either the receivables from Joint Venture partners or the receivables from asset sales. Given this experience, together with the ongoing business relationships between the Company and its partners, the Company has not yet been required to develop a policy for formal credit quality assessment. The Equity Partners and Heritage Global Partners businesses have similarly not required formal credit quality assessments. As the Company’s asset liquidation business continues to develop, more comprehensive credit assessments may be required.

 

To date the Company has recorded only one interest-bearing note receivable, in the amount of $225. This note was acquired when Counsel RB commenced operations in the second quarter of 2009. It is in default and on non-accrual status. An allowance of $146 was recorded in the fourth quarter of 2010, and a further allowance of $40 was recorded in the second quarter of 2011. Therefore the Company’s recorded investment in financing receivables on non-accrual status is $39 at March 31, 2012. At this time, the Company does not expect to collect interest on this note.

 

In the first quarter of 2011, the Company acquired a lease receivable in the amount of $248, which is being reduced by monthly payments of $12 that began in April 2011. The lease receivable began accruing interest beginning April 1, 2011.

 

At March 31, 2012 the Company had no investment in non-interest bearing financing receivables that are past due.

 

During the first quarter of 2012, there were no changes in the Company’s accounting policies for financing receivables, and therefore no related change in the current-period provision for credit losses. During the same period, there were no purchases, sales or reclassifications of financing receivables. There were no troubled debt restructurings during the first quarter of 2012.

 

Amounts receivable from third parties consisted of the following at March 31, 2012 and December 31, 2011:

 

		March 31, 2012				December 31, 2011
Accounts receivable (net of allowance for doubtful accounts of $0; 2011 - $0)		$	1,507			$	730
Notes receivable (net of allowance for doubtful accounts of $186; 2011 - $186)			39				39
Lease receivable			114				148
		$	1,660			$	917

 

 

 

Accounts payable and accrued liabilities

 

Accounts payable and accrued liabilities consisted of the following at March 31, 2012 and December 31, 2011:

 

		March 31, 2012				December 31, 2011
Due to Heritage Global Partners clients		$	3,117			$	—
Due to Joint Venture partners			1,677				89
Sales and other taxes			605				66
Remuneration and benefits			438				402
Asset liquidation expenses			37				—
Regulatory and legal fees			222				49
Accounting, auditing and tax consulting			122				169
Patent licensing and maintenance			29				8
Other			422				72
Total accounts payable and accrued liabilities		$	6,669			$	855

 

 

 

Note 7 – Investments

 

The Company’s investments as of March 31, 2012 and December 31, 2011 consisted of the following:

 

 

		March 31, 2012				December 31, 2011
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC		$	19			$	19
Polaroid			2,569				2,753
Total investments		$	2,588			$	2,772

 

 

The Company accounts for its investments under the equity method.

 

 

Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”)

 

For the year ended December 31, 2011, the Company recorded $5 as its share of Knight’s Bridge GP’s earnings, and received cash distributions of $4. During the first quarter of 2012, the Company recorded $1 as its share of Knight’s Bridge GP’s earnings, and received $1 of cash distributions. Based on the Company’s analysis of Knight’s Bridge GP’s financial statements and projections as at March 31, 2012, the Company concluded that there has been no other than temporary impairment in the fair value of its investment, and that its book value is the best estimate of its fair value.

 

Polaroid

 

In the second quarter of 2009, the Company invested $2,621 to indirectly acquire an approximate 5% interest in Polaroid Corporation, pursuant to a Chapter 11 reorganization in a U.S. bankruptcy court. The investment was made as part of a joint venture investor group (the “JV Group”) that includes both related parties and non-related parties. The JV Group formed two operating companies (collectively, “Polaroid”) to hold the acquired Polaroid assets. The Company, the related parties and two of the unrelated parties formed KPL, LLC (“KPL” or the “LLC”) to pool their individual investments in Polaroid. The pooled investments totalled approximately $19 million of the aggregate purchase price of approximately $55 million. KPL is managed by a related party, Knight’s Bridge Capital Partners Management, L.P. (the “Management LP”), which acts as the General Partner of the LLC. The Management LP is a wholly-owned subsidiary of the Company’s majority shareholder, Counsel Corporation (together with its subsidiaries, “Counsel”).

 

The Company’s investment in the LLC has two components:

 

·

CRBCI invested $530 to acquire Class D units. These units are subject to a 2% annual management fee, payable to the General Partner. The units have a 10% per annum preferred return; any profits generated in addition to the preferred return, subsequent to the return of invested capital, are subject to the Management LP’s 20% carried interest. Following cash distributions of $46 in 2009, $56 in 2010, and $31 in the first quarter of 2012, and additional investments of $54 in 2010 and $11 in 2011, the Company’s cumulative cash investment totals $462.

 

·

CRBCI invested $2,091 to acquire Counsel’s rights and obligations as an indirect limited partner (but not Counsel’s limited partnership interest) in Knight’s Bridge Capital Partners Fund I, L.P. (“Knight’s Bridge Fund”), a related party, with respect to the Polaroid investment. The investment in these units is held by Knight’s Bridge Fund in the name of a Canadian limited partnership (the “LP”) comprised of Counsel (95.24%) and several parties related to Counsel. The $2,091 was Counsel’s share of the LP’s investment and was funded by Counsel. Subsequent to making the investment in the LP, Counsel sold, to CRBCI, the economic benefit of its indirect investment in Polaroid in return for a loan (under a pre-existing loan facility that is discussed in more detail in Note 11) bearing interest at 10% per annum. CRBCI is also responsible for reimbursing Counsel for its share of the management fees, which are 2% of the investment. The economic interest entitles CRBCI to an 8% per annum preferred return; any profits generated in addition to the preferred return, subsequent to the return of invested capital, are subject to the Management LP’s 20% carried interest. Following additional investments of $11 in 2009, $263 in 2010, $31 in 2011, and $20 in 2012, and cash distributions of $186 in 2009, $233 in 2010, and $125 in the first quarter of 2012, the Company’s cumulative cash investment totals $1,872.

 

For the years ended December 31, 2010 and 2011, the Company recorded $14 and $23, respectively, as its share of earnings. During the first three months of 2012, the Company recorded a loss of $48 as its share of the LLC’s operations (2011 - $14).

 

Summarized financial information – Equity accounted asset liquidation investments

 

The table below details the results of operations, for the three months ended March 31, 2012 and 2011, attributable to CRBCI from the Joint Ventures in which it was invested during those periods.

 

		2012				2011
Gross revenues		$	4,071			$	1,929
Gross profit		$	1,066			$	1,522
Income from continuing operations		$	1,069			$	1,560
Net income		$	1,069			$	1,560
Net income after non-controlling interest		$	1,069			$	1,560

 

 

Note 8 – Debt

 

The Company’s debt as at March 31, 2012 and December 31, 2011 consisted of the following:

 

 

 

		March 31, 2012				December 31, 2011
Revolving credit facility		$	456			$	3,091
Promissory notes payable to related parties			1,003				—
			1,459				3,091
Less current portion			1,459				3,091
Long-term debt, less current portion		$	—			$	—

 

 

 

The revolving credit facility (“Credit Facility”) is provided to Counsel RB by a U.S. bank under the terms and provisions of a certain Loan and Security Agreement dated as of June 2, 2009 and most recently amended as of April 27, 2012 (the “Loan Agreement”). It is utilized to finance the acquisition of eligible property and equipment for purposes of resale. The Credit Facility bears interest at the greater of prime rate + 1.0%, or 4.5%, and the maximum borrowing available under the Credit Facility is US $10,000, subject to Counsel RB maintaining a 1:2 ratio of capital funds, i.e. the sum of Counsel RB’s tangible net worth plus subordinated indebtedness, as defined in the Loan Agreement, to the outstanding balance. The amount of any advance is determined based upon the value of the eligible assets being acquired, which serve as collateral. At March 31, 2012, $568 of such assets served as collateral for the loan (December 31, 2011 - $4,303). Effective March 1, 2011, a monthly fee is payable with respect to unused borrowing (“Unused Line Fee”). The Unused Line Fee is equal to the product of 0.50% per annum multiplied by the difference between $10,000 and the average loan amount outstanding during the month. The Credit Facility also contains other terms and provisions customary for agreements of this nature, and has been guaranteed by both the Company and Counsel. At March 31, 2012 and December 31, 2011 the Company was in compliance with all covenants of the facility.

 

The promissory notes payable to related parties (“Promissory Notes”) are related to the acquisition of Heritage Global Partners and are payable to the former owners of Heritage Global Partners. The notes bear interest at the prime rate and are due in full, plus accrued interest, on August 31, 2012 (the “Maturity Date”). Under the terms of the loan agreement, the Company may make prepayments at any time prior to the Maturity Date without premium or penalty. During the three months ended March 31, 2012, interest of $3 was accrued, and no prepayments were made.

 

Note 9 – Patent Participation Fee

 

In the fourth quarter of 2003, CRBCI acquired a VoIP patent from a third party. Consideration provided was $100 plus a 35% residual payable to the third party relating to the net proceeds from future licensing and/or enforcement actions from the CRBCI VoIP patent portfolio. Net proceeds are defined as amounts collected from third parties net of the direct costs associated with putting the licensing or enforcement in place and related collection costs.

 

 

 

Note 10 – Income Taxes

 

In the first quarter of 2012, the Company recognized a current income tax expense of $74 and a deferred income tax expense of $239. The deferred income tax expense for the first quarter of 2012 is primarily due to a change in available tax loss carry forwards as a result of utilization of tax losses against current year income. The $28,544 net deferred income tax asset balance as at March 31, 2012 reflects the tax benefit of available tax loss carry forwards more likely than not expected to be utilized against future income. The Company recognized a current income tax recovery of $35 and a deferred income tax recovery of $563 in the three months ended March 31, 2011.

 

At March 31, 2012, the Company had available federal tax loss carryforwards of approximately $54,500 of unrestricted net operating tax losses and approximately $28,000 of restricted net operating tax losses. The net operating loss carryforwards expire between 2024 and 2032.

 

The Company’s utilization of restricted net operating tax loss carryforwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code. These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years.

 

Restrictions in net operating loss carryforwards occurred in 2001 as a result of the acquisition of the Company by Counsel. Further restrictions may have occurred as a result of subsequent changes in the share ownership and capital structure of the Company and Counsel and disposition of business interests by the Company. Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carryforwards was limited to approximately $2,500 per annum until 2008 and $1,700 per annum thereafter. There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time. In addition, further restrictions, reductions in, or expiry of net operating loss and net capital loss carryforwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities. Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carryforwards. Furthermore, any such additional limitations may result in the Company having to reverse all or a portion of its deferred tax balance or set up a valuation allowance at such time.

 

The Company, until recently, has had a history of incurring annual tax losses, beginning in1991. All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carryforwards against income for tax purposes in the later year. The Company applied historic tax loss carryforwards to offset income for tax purposes in 2008, 2010 and 2011, respectively. The 2008 through 2011 taxation years remain open for audit.

 

The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carryforwards available to shield income attributable to a particular state from being subject to tax in that particular state.

 

 

Note 11 – Related Party Transactions

 

Transactions with Counsel

 

At March 31, 2012 the Company had a receivable from Counsel in the amount of $2,467, as compared to a receivable of $595 at December 31, 2011. In the course of its operations, the Company may receive advances from Counsel under an existing loan facility (the “Counsel Loan”). The Counsel Loan, which was originally entered into during the fourth quarter of 2003, accrues interest at 10% per annum compounded quarterly from the date funds are advanced, and is due on demand. The Counsel Loan is secured by the assets of the Company and is subject to certain events of default.

 

Counsel Management Services

 

Since December 2004, CRBCI and Counsel have entered into successive annual management services agreements (the “Agreement”). Under the terms of the Agreement, CRBCI agrees to pay Counsel for ongoing services provided to CRBCI by Counsel personnel. The basis for such services charged is an allocation, based on time incurred, of the cost of the base compensation paid by Counsel to those employees providing services to CRBCI. The amounts due under the Agreement are payable within 30 days following the respective year end, subject to applicable restrictions. Any unpaid fee amounts bear interest at 10% per annum commencing on the day after such year end. In the event of a change of control, merger or similar event of CRBCI, all amounts owing, including fees incurred up to the date of the event, will become due and payable immediately upon the occurrence of such event. For the three months ended March 31, 2012 and 2011, the amount charged to the Company pursuant to the Agreement was $90.

 

In addition to the above, during the three months ended March 31, 2012 and 2011, $17 was charged to the Company for Counsel services relating to the operations of Counsel RB.

 

Transactions with Other Related Parties

 

The Company leases office space in White Plains, NY and Los Angeles, CA as part of the operations of Counsel RB. The premises in White Plains are owned by an entity that is controlled by a Co-CEO of Counsel RB and the Company. During the first three months of 2012 and 2011, the Company paid rent of $32 and $31, respectively, to the entity. The premises in Los Angeles are owned by an entity that is controlled by a Co-CEO of Counsel RB and the Company. During the first three months of both 2012 and 2011, the Company paid rent of $6 to the entity.

 

The Company leases office space in Foster City, CA as part of the operations of Heritage Global Partners. The premises in Foster City are owned by an entity that is jointly controlled by the former owners of Heritage Global Partners. During the first quarter of 2012, following the acquisition of Heritage Global Partners, the Company paid rent of $11 to the entity

 

As discussed in Note 3 of this report, as part of the acquisition of Heritage Global Partners during the first quarter of 2012, the Company issued Promissory Notes totaling $1,000 to its two former owners. The Promissory Notes are partially offset by $128 of accounts receivable from the former owners.

 

 

 

Note 12 – Segment Reporting

 

From 2005 until the second quarter of 2009, the Company operated in a single business segment, Patent Licensing. With the commencement of Counsel RB’s operations in the second quarter of 2009, the Company diversified into a second segment, Asset Liquidation. For the three months ending March 31, 2012 and 2011, only the Asset Liquidation segment had revenues and assets sufficiently significant to require separate reporting.

 

There are no material inter-segment revenues. The Company’s business is conducted principally in the U.S. and Canada. The table below presents information about the Asset Liquidation segment of the Company as of and for the three months ended March 31, 2012 and 2011:

 

		For the Three Months Ended March 31, 2012
		Asset Liquidation
Revenues from external customers		$	3,034
Earnings from equity accounted asset liquidation investments			1,069
Other income			10
Interest expense			56
Depreciation and amortization			3
Segment income			1,225
Investment in equity accounted asset liquidation investees			1,032
Segment assets			19,401

 

 

		For the Three Months Ended March 31, 2011
		Asset Liquidation
Revenues from external customers		$	734
Earnings from equity accounted asset liquidation investments			1,560
Other income			—
Interest expense			84
Depreciation and amortization			—
Segment loss			(362	)
Investment in equity accounted asset liquidation investees			2,567
Segment assets			10,673

 

 

 

The following table reconciles reportable segment information to the unaudited condensed consolidated financial statements of the Company:

		Three months ended March 31, 2012				Three months ended March 31, 2011
Total other income and earnings from equity accounted investments for reportable segments		$	1,079			$	1,560
Unallocated other income (loss) and earnings (loss) from equity investments from corporate accounts			(47	)			15
		$	1,032			$	1,575
Total interest expense for reportable segments		$	56			$	84
Unallocated interest expense from related party debt			3				—
		$	59			$	84
Total depreciation and amortization for reportable segments		$	3			$	—
Other unallocated depreciation from corporate assets			—				—
		$	3			$	—
Total segment income (loss)		$	1,225			$	(362	)
Other income (loss)			(47	)			15
Other corporate expenses (primarily corporate level interest, general and administrative expenses)			(475	)			(62	)
Income tax expense (recovery)			313				(598	)
Net income from continuing operations		$	390			$	189
Segment assets		$	19,401			$	10,673
Other assets not allocated to segments(1)			35,378				7,443
		$	54,779			$	18,116

 

(1)

Other assets not allocated to segments are corporate assets such as cash, non-trade accounts receivable, prepaid insurance, investments and deferred income tax assets.

 

Note 13 – Commitments and Contingencies

 

At March 31, 2012, CRBCI has no commitments other than its accounts payable and accrued liabilities, the Unused Line Fee on its third party debt, and the leases on its offices in New York and Maryland, and on three offices in California. The leases on the New York and Maryland offices expire on December 31, 2015 and April 30, 2012, respectively. The leases on the California offices expire on October 11, 2012, December 31, 2012 and September 30, 2013. The annual lease obligations are as shown below:

 

 

2012		$	243
2013		$	154
2014		$	141
2015		$	148

 

In the normal course of its business, CRBCI may be subject to contingent liability with respect to assets sold either directly or through Joint Ventures. At March 31, 2012 CRBCI does not expect any of these liabilities, individually or in the aggregate, to have a material adverse effect on its assets or operations.

 

The Company is involved in various other legal matters arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on the Company.

 

 

 

Note 14 – Subsequent Events

 

The Company has evaluated events subsequent to March 31, 2012 for disclosure. There have been no material events requiring disclosure in this Report.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

(All dollar amounts are presented in thousands of U.S. dollars, unless otherwise indicated, except per share amounts)

 

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated financial statements of the Company and the related notes thereto for the three months ended March 31, 2012, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (“SEC”).

 

Forward Looking Information

 

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may”, "will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties, as noted in the Company’s Annual Report on Form 10-K, filed with the SEC, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

 

Overview, History and Recent Developments

 

Counsel RB Capital Inc. (“CRBCI”, “we” or the “Company”) was incorporated in the State of Florida in 1983 under the name “MedCross, Inc.” The Company’s name was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, to “C2 Global Technologies Inc.” in 2005, and to “Counsel RB Capital Inc.” in 2011. The most recent name change reflects the significance of the asset liquidation business carried out by the Company’s wholly-owned subsidiary, Counsel RB Capital LLC (“Counsel RB”), which commenced operations in the second quarter of 2009.

 

Asset liquidation

 

In February 2009 the Company established Counsel RB, which commenced operations in the second quarter of 2009, allowing the Company to diversify into a new operating segment. Counsel RB has become a leader in capital asset solutions, which involve finding, acquiring and monetizing distressed and surplus assets. In addition to acquiring turnkey manufacturing facilities and used industrial machinery and equipment, Counsel RB arranges traditional asset disposition sales, including liquidation and auction sales, and its objective is to be the leading resource for clients requiring capital asset solutions. Counsel RB was originally owned 75% by the Company and 25% by Counsel RB’s Co-CEOs. In November 2010, the Company acquired the Co-CEOs’ 25% interest in exchange for approximately 3.2 million shares of the Company.

 

On June 23, 2011 Counsel RB, through its wholly-owned subsidiary Equity Partners CRB LLC, acquired 100% of the business of EP USA, LLC (d/b/a Equity Partners) (“Equity Partners”), a boutique investment banking firm and provider of financial solutions for distressed businesses and properties. The purchase price consisted of $175 in cash, 122,950 CRBCI common shares valued at $1.50 per share, and options to purchase 230,000 CRBCI common shares with a Black-Scholes fair value of $1.9992 per option. Equity Partners was founded in 1988, and works with financially distressed companies and properties to arrange customized financial solutions in the form of debt/refinancing or equity investments, to create joint venture relationships, or to organize going concern sales of a business or property. Its services are intended to allow distressed businesses to remain intact in order to maintain their going concern values, which typically are significantly higher than their liquidation values. The acquisition is consistent with CRBCI’s strategy to expand and diversify the services provided by Counsel RB. The Company worked with Equity Partners prior to the acquisition, and has begun to realize synergies and added value, since both businesses serve a variety of clients at different stages of the distressed business and surplus asset continuum. As part of the acquisition, CRBCI entered into employment and consulting agreements with the previous owners and employees of Equity Partners.

 

 

On February 29, 2012 the Company acquired 100% of the outstanding equity of Heritage Global Partners Inc. (“Heritage Global Partners”), a full-service, global auction and asset advisory firm. As with the Equity Partners transaction, the acquisition is consistent with CRBCI’s strategy to expand and diversify the services provided by Counsel RB. The purchase price consisted of $3,000 in cash, $1,000 in notes payable, 1,000,000 CRBCI common shares valued at $1.95 per share, and options to purchase 625,000 CRBCI common shares with a Black-Scholes fair value of $1.8092 per option. This transaction is also discussed in Note 3 of the unaudited condensed consolidated financial statements.

 

Patent licensing

 

In 1994, we began operating as an Internet service provider, and designed and built an internet protocol (“IP”) telecommunications platform consisting of proprietary software and hardware, and leased telecommunications lines. In 1997, we began offering enhanced services over a mixed IP-and-circuit-switched network platform and acquired MiBridge, Inc., a communications technology company engaged in the design, development, integration and marketing of software telecommunications products that support multimedia communications over the Public Switched Telephone Network (“PSTN”), local area networks (“LANs”) and IP networks. The acquisition permitted us to accelerate the development and deployment of IP technology across our network platform. In 1998, we deployed our real-time IP communications network platform, which represented the first nationwide, commercially viable VoIP platform of its kind. In 2001, the Company expanded its telecommunications business, through the acquisition of a wholly-owned subsidiary, WXC Corp. This business was sold effective September 30, 2005.

 

In 2002, the U.S. Patent and Trademark Office issued U.S. patent No. 6,438,124 (the “C2 Patent”) for the Company’s Voice Internet Transmission System. Filed in 1996, the C2 Patent reflects foundational thinking, application, and practice in the VoIP services market. It encompasses the technology that allows two parties to converse phone-to-phone, regardless of the distance, by transmitting voice/sound via the Internet. No special telephone or computer is required at either end of the call. The apparatus that makes this technically possible is a system of Internet access nodes, or voice engines, which provide digitized, compressed, and encrypted duplex or simplex Internet voice/sound. The end result is a high-quality calling experience whereby the Internet serves only as the transport medium and, as such, can lead to reduced toll charges. In May 2003, shortly after the issuance of the C2 Patent, we disposed of our domestic U.S. VoIP network. The sale included the physical assets required to operate our nationwide network using our patented VoIP technology, included a fully paid non-exclusive perpetual license to our proprietary software-based network convergence solution for voice and data, and removed essentially all operations that did not pertain to this convergence solution. As part of the sale, we retained all of our intellectual property rights and patents.

 

Also in 2003, we added to our VoIP patent holdings when we acquired U.S. Patent No. 6,243,373, “Method and Apparatus for Implementing a Computer Network/Internet Telephone System” (the “VoIP Patent”), which included a corresponding foreign patent and related international patent applications. The vendor of the VoIP Patent was granted a first priority security interest in the patent in order to secure CRBCI’s obligations under the associated purchase agreement. The VoIP Patent, together with the C2 Patent and related international patents and patent applications, form our international VoIP Patent Portfolio that covers the basic process and technology that enable VoIP communication as it is used in the market today. Telecommunications companies that enable their customers to originate a phone call on a traditional handset, transmit any part of that call via IP, and then terminate the call over the traditional telephone network, are utilizing CRBCI’s patented technology. The comprehensive nature of the VoIP Patent is summarized in the patent’s abstract, which describes the technology as follows: “A method and apparatus are provided for communicating audio information over a computer network. A standard telephone connected to the PSTN may be used to communicate with any other PSTN-connected telephone, where a computer network, such as the Internet, is the transmission facility instead of conventional telephone transmission facilities.” As part of the consideration for the acquisition of the VoIP Patent, the vendor is entitled to receive 35% of the net earnings from our VoIP Patent Portfolio.

 

 

The Company’s objective is to obtain ongoing licensing and royalty revenue from the target market for its patents. All activities relating to the Company’s licensing of the VoIP Patent Portfolio, or its other intellectual property, constitute the Company’s Patent Licensing operating segment. CRBCI’s target market consists of carriers, equipment manufacturers, service providers and end users in the IP telephone market who are using CRBCI’s patented VoIP technologies by deploying VoIP networks for phone-to-phone communications.

 

Until December 31, 2004, revenue related to our intellectual property was based on the sales and deployment of our VoIP solutions, which we ceased directly marketing in 2005. No revenue was due to the receipt of licensing fees and royalties. In the third quarter of 2005, the Company retained legal counsel with expertise in the enforcement of intellectual property rights, and in June 2006, C2 Communications Technologies Inc. (“C2 Technologies”), a wholly-owned subsidiary of the Company, filed a patent infringement lawsuit against seven major U.S. telecommunications carriers, which alleged that these companies’ VoIP services and systems infringed the VoIP Patent. The complaint sought an injunction, monetary damages, and costs. The litigation resulted in the Company entering into settlement and license agreements in 2008, for which CRBCI was paid $17,625 in aggregate, whereby CRBCI granted the defendants non-exclusive, perpetual, worldwide, fully paid up, royalty-free licenses under any of CRBCI’s present patents and patent applications, including the VoIP Patent, to make, use, sell or otherwise dispose of any goods and services based on such patents.

 

In August 2009, C2 Technologies filed a similar lawsuit against PAETEC Corporation, Matrix Telecom, Inc., Windstream Corporation, and Telephone and Data Systems, Inc. The complaint was filed in the United States District Court for the Eastern District of Oklahoma and also alleges that the defendants’ services and systems utilizing VoIP infringe the Company’s U.S. Patent No. 6,243,373. The complaint seeks an injunction, monetary damages and costs. In the fourth quarter of 2009, the complaint against Matrix Telecom, Windstream Corporation and Telephone and Data Systems, Inc. was dismissed without prejudice. Also in the fourth quarter of 2009, the case was transferred to the Eastern District of Texas. Preliminary hearings are scheduled to begin on November 29, 2012, with the trial date set as March 13, 2013.

 

The Company’s segments are discussed in more detail in Note 12 of the unaudited condensed consolidated financial statements.

 

Industry and Competition

 

Asset Liquidation

 

Our asset liquidation business, Counsel RB, is involved primarily in the purchase and sale, including at auction, of industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. The market for these assets is highly fragmented. In acquiring assets for resale, Counsel RB competes with other liquidators, auction companies, dealers and brokers. It competes for potential purchasers with other liquidators and auction companies, as well as with equipment manufacturers, distributors, dealers and equipment rental companies. Some of Counsel RB’s competitors have significantly greater financial and marketing resources and name recognition.

 

Counsel RB’s business strategy includes the option of partnering with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). These Joint Ventures allow Counsel RB to have access to more opportunities, and to mitigate some of the competition from the market’s larger participants. Counsel RB’s objective is to be the leading resource for clients requiring capital asset solutions. To achieve this objective, it continues to strengthen its core competencies. The recent acquisitions of Equity Partners and Heritage Global Partners have resulted in Counsel RB being able to offer a full-service industrial auction division, an asset-based debtor in possession (“DIP”) facility and a valuation practice to provide equipment appraisals to companies and financial institutions.

 

Patent Licensing

 

The communications services industry continues to evolve, both domestically and internationally, providing significant opportunities and risks to the participants in these markets. Technological advances, along with the growing deregulation of communications services markets in the United States and in other countries around the world, have resulted in a proliferation of new services and products and rapid increases in network capacity. There is also significant price competition.

 

Historically, the communications services industry transmitted voice and data over separate networks using different technologies, such as circuit switching. VoIP technology can replace the traditional telephone network, and is more efficient than a dedicated circuit network, because it is not restricted by the one-call, one-line limitation of a traditional telephone network. In addition, VoIP technology enables the provision of enhanced services such as unified messaging.

 

Our objective is to have telecommunications service providers (“TSPs”), equipment suppliers (“ESs”) and end users license our patents. In this regard, our competition is existing technology, outside the scope of our patents, which allows TSPs and ESs to deliver communication services to their customers.

 

VoIP has become a widespread and accepted telecommunications technology, with a variety of applications in the telecommunications and other industries. While we believe that there will be continued proliferation of this technology in the coming years and that this proliferation will occur within the context of our patents, there is no certainty that this will occur, and/or that it will occur in a manner that requires organizations to license our patents.

 

Government Regulation

 

Recent legislation in the United States, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, has increased public companies’ regulatory and compliance costs as well as the scope and cost of work provided by independent registered public accountants and legal advisors. The Company became subject to Sarbanes-Oxley Section 404 reporting as of December 31, 2007. As implementation guidelines continue to evolve, we expect to continue to incur costs, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies.

 

Critical Accounting Policies

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. This requires management to make estimates and assumptions based on historical experience and various other factors that are considered to be reasonable under the circumstances. These affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

Significant estimates required in the preparation of the unaudited condensed consolidated financial statements included in this Report include the assessment of collectability of revenue recognized, and the valuation of amounts receivable, inventory valuation, investments, assets acquired, deferred income tax assets, goodwill and intangible assets, liabilities and stock-based compensation. These estimates are considered significant because of the significance of the financial statement items to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

 

The critical accounting policies used in the preparation of our audited consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no changes to these policies in the first three months of 2012.

 

Management’s Discussion of Financial Condition

 

Liquidity and Capital Resources

 

 

Liquidity

 

At March 31, 2012 the Company’s working capital was $7,047, as compared to working capital of $7,626 at December 31, 2011. The most significant changes in the Company’s current assets were increases of $743 in amounts receivable, $2,000 in receivables from related parties, and $1,960 in deposits, partially offset by decreases of $1,042 in cash and $250 in inventory. The most significant changes to current liabilities were increases of $5,814 in accounts payable and accrued liabilities, and $1,003 in debt payable to related parties, partially offset by a decrease of $2,635 in debt payable to third parties. The Company’s acquisition of Heritage Global Partners during the first quarter of 2012 had a significant effect on its consolidated current assets and liabilities. In particular, cash and accounts receivable associated with Heritage Global Partners at March 31, 2012 were $3,121 and $917, respectively, and accounts payable and accrued liabilities were $4,254.

 

During the first three months of 2012, the Company’s primary source of cash, exclusive of borrowings under Counsel RB’s revolving credit facility, was the operations of its asset liquidation business. Cash disbursements, other than those related to repayment of debt, and the $3,000 related to the acquisition of Heritage Global Partners, as discussed in Note 3 of the unaudited condensed consolidated financial statements, were primarily related to operating expenses.

 

It should be noted that GAAP requires the Company to classify both real estate inventory and asset liquidation investments as non-current, although they are expected to be converted to cash within a year. If these assets were classified as current, the Company would report working capital of $9,152 at March 31, 2012 and working capital of $13,212 at December 31, 2011.

 

Counsel RB has a revolving credit facility in the amount of up to $10,000 in place to finance its purchases of assets for resale, as discussed in Note 8 of the unaudited condensed consolidated financial statements.

 

The Company is continuing to pursue licensing and royalty agreements with respect to its patents. However, the Company expects that its asset liquidation business will continue to be the primary source of cash required for ongoing operations for, at minimum, the next twelve months.

 

The Company’s portfolio investments are in companies that are not publicly traded, and therefore these investments are illiquid. Although the Company’s investments were made with the objective of recognizing long-term capital gains, neither the amount nor the timing of such gains can be predicted with any certainty. To date the Company has realized capital gains on its investments in MyTrade.com, LIMOS.com and Buddy Media, Inc., and has not sold any investments at a loss.

 

Ownership Structure and Capital Resources

 

	·	At March 31, 2012 the Company had stockholders’ equity of $46,534, as compared to $42,940 at December 31, 2011.

·

At March 31, 2012 the Company is 73.4% owned, and therefore controlled by, Counsel. At December 31, 2011 the Company was 76.1% owned by Counsel. The Co-CEOs of Counsel RB each owned 5.98% of the Company. One million shares, or 3.7%, were held by a single investor, who obtained the shares in a private placement on March 15, 2011. The remaining 8.2% was owned by public stockholders. On February 29, 2012, as discussed in Note 3 of the unaudited condensed consolidated financial statements, the Company issued one million common shares as part of its acquisition of Heritage Global Partners, representing 3.69% of the outstanding common shares. Counsel’s ownership thereby decreased to 73.4%, that of the Co-CEOs to 5.8% each, that of the single investor referenced above to 3.6% and that of the remaining public stockholders to 7.8%.

 

 

Cash Position and Cash Flows

 

Cash and cash equivalents at March 31, 2012 were $5,630 as compared to cash of $6,672 at December 31, 2011, a decrease of $1,042.

 

Cash provided by (used in) operating activities Cash provided by operating activities during the three months ended March 31, 2012 was $5,672, as compared to $3,258 of cash used during the same period in 2011. During the first three months of 2012 the Company had income of $390 from continuing operations, as compared to income of $189 for the same period in 2011. The increase was primarily due to the expanded operations of the Company’s asset liquidation business, including the acquisition of Equity Partners in the second quarter of 2011 and Heritage Global Partners in the first quarter of 2012. In both periods, the operations of the Company’s asset liquidation business were the primary source of operating cash receipts and disbursements.

 

The most significant changes in operating activities during the first three months of 2012 as compared to the first three months of 2011 were in deposits, inventory, asset liquidation investments, and accounts payable and accrued liabilities. Deposits increased by $1,960 in 2012 as compared to decreasing by $6 in 2011. Inventory decreased by $1,308 in 2012, as compared to increasing by $2,032 in the same period of 2011. Asset liquidation investments decreased by $2,423 in 2012 and by $981 in 2011. Accounts payable increased by $3,100 in 2012 as compared to decreasing by $1,457 in 2011. The changes in deposits, inventory and asset liquidation investments were due to the variability of the operations of Counsel RB and Equity Partners. The change in accounts payable and accrued liabilities is primarily due to the operations of Counsel RB and Heritage Global Partners.

 

Cash flows used in investing activities Cash used in investing activities during the three months ended March 31, 2012 was $2,207, as compared to $20 of cash used during the same period in 2011. In 2012, the most significant transaction was the net cash outflow of $2,344 in connection with the Company’s acquisition of Heritage Global Partners. In 2012 the Company received $156 in cash distributions from its investment in Polaroid. Additional investments in Polaroid were virtually identical in 2012 and 2011, being $20 and $21, respectively. In the first three months of both 2012 and 2011, $1 of cash distributions was received from Knight’s Bridge GP.

 

Cash flows provided by (used in) financing activities Cash used in financing activities was $4,507 during the three months ended March 31, 2012, as compared to $2,779 cash provided during the same period in 2011. In 2012 the Company repaid net cash of $2,643 to its third party lender, as opposed to receiving net cash of $976 in 2011. Also in 2012, the Company advanced net cash of $1,872 to Counsel; there were no similar transactions in the first three months of 2011. In 2012 the Company received $8 related to the exercise of 21,750 options to purchase common stock; there were no option exercises in the first three months of 2011. In 2011, the Company received $1,803 cash, net of share issuance costs, from a private placement of 1,000,000 common shares; there were no similar transactions in the first three months of 2012.

 

 

 

Management’s Discussion of Results of Operations

 

Asset liquidation revenue is earned from the acquisition and subsequent disposition of distressed and surplus assets, including industrial machinery and equipment, real estate, inventories, accounts receivable and distressed debt. It is also earned from more traditional asset disposition services, such as on-site and webcast auctions, liquidations and negotiated sales, and from fees earned for management advisory services. The Company also earns income from its asset liquidation business through its earnings from equity accounted asset liquidation investments.

 

The revenues and expenses discussed below include the operating results of Heritage Global Partners for the period following its acquisition by the Company on February 29, 2012.

 

Three-Month Period Ended March 31, 2012 Compared to Three-Month Period Ended March 31, 2011

 

Asset liquidation revenues were $3,034 in 2012 compared to $734 in 2011, asset liquidation expense was $1,536 in 2012 compared to $1,609 in 2011, and earnings of equity accounted asset liquidation investments were $1,069 in 2012 compared to $1,560 in 2011. The net earnings of these three items were $2,567 in 2012 compared to $685 in 2011. Because Counsel RB conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant in each period, the operations must be considered as a whole rather than on a line-by-line basis. As the Company’s asset liquidation business has become more established, its operations have expanded. This expansion has included the acquisition of Equity Partners in the second quarter of 2011 and the acquisition of Heritage Global Partners in the first quarter of 2012.

 

Patent licensing and maintenance expense was $26 during the quarter ended March 31, 2012, compared to $57 during the same period in 2011. The greater 2011 expense was primarily due to costs associated with a re-examination of U.S. Patent No. 6,243,373.

 

Selling, general and administrative expense, including expenses paid to related parties, was $1,739 during the quarter ended March 31, 2012, compared to $968 during the same period in 2011. The significant items included:

 

·

Compensation expense was $1,078 in the first quarter of 2012, compared to $730 in the first quarter of 2011. The primary expense in both years was salary and benefits related to Counsel RB, which were $686 in 2012 and $678 in 2011. In the first quarter of 2012, salary and benefits expense for Heritage Global Partners was $242; there was no comparable expense in 2011. With respect to CRBCI’s operations, the salary earned by the President remained unchanged at $34. Stock based compensation was $115 in the first quarter of 2012 and $18 in the first quarter of 2011. The increase is primarily due to ongoing expense relating to 2,040,000 options that were issued during 2011.

 

·

Legal expense was $90 in the first quarter of 2012, compared to a credit of $252 in the first quarter of 2011. The credit in 2011 was due to negotiated reductions in fees that were billed during 2010.

 

·

Consulting expense was $3 in the first quarter of 2012 as compared to $96 in the first quarter of 2011, and related solely to the operations of Counsel RB. Counsel RB hired a consultant to provide certain services in 2011. These services were not required in the first quarter of 2012.

 

·

Advertising, promotion and public relations expense was $71 in the first quarter of 2012 as compared to $8 in the first quarter of 2011. The increase is due to the growth of the Company’s asset liquidation business.

 

·

Travel expense was $111 in the first quarter of 2012, as compared to $47 in the first quarter of 2011. The majority of the travel relates to the Company’s asset liquidation business, and has increased as the operations have expanded.

 

·

Office rent was $63 in the first quarter of 2012 as compared to $47 in the first quarter of 2011, and related solely to the operations of the Company’s asset liquidation business. The increase is due to the growth of the asset liquidation business, in particular to the acquisition of Equity Partners and Heritage Global Partners.

 

Other income (expenses) and earnings of other equity accounted investments – the significant items included:

 

·

Third party interest expense was $56 in the first quarter of 2012, as compared to $84 in the first quarter of 2011. All of the expense related to the third party debt owed by Counsel RB.

 

·

Related party interest expense was $3 in the first quarter of 2012, as compared to $0 in the first quarter of 2011. The 2012 expense relates to the Promissory Notes issued to the former owners of Heritage Global Partners, in connection with the acquisition of Heritage Global Partners in the first quarter of 2012.

 

·

In the first quarter of 2012, the Company recorded a loss of $47 from its other equity accounted investments, as compared to income of $15 in the first quarter of 2011. In 2012 the amount consisted of a $48 loss related to the operations of Polaroid and $1 income from Knight’s Bridge GP. In 2011 the amount consisted of $14 income from Polaroid and $1 income from Knight’s Bridge GP.

 

 

Inflation. Inflation did not have a significant impact on our results during the last fiscal quarter.

 

Off-Balance Sheet Transactions. We have not engaged in any material off-balance sheet transactions.

 

 Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Our exposure to market risk is limited to interest rate sensitivity, which is affected by changes in the general level of interest rates. Due to the fact that our cash is deposited with major financial institutions, we believe that we are not subject to any material interest rate risk as it relates to interest income. As to interest expense, we have one debt instrument that has a variable interest rate. Our revolving credit facility provides that the principal amount outstanding bears interest at the greater of the lender’s prime rate + 1.0%, or 4.5%. Assuming that the debt amount on the revolving credit facility at March 31, 2012 was constant during the next twelve-month period, the impact of a one percent increase in the interest rate would be an increase in interest expense of approximately $5 for that twelve-month period. We do not believe that, in the near term, we are subject to material market risk on our debt.

 

We did not have any foreign currency hedges or other derivative financial instruments as of March 31, 2012. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.

 

Item 4. Controls and Procedures.

 

As of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective.

 

Further, there were no changes in our internal control over financial reporting during the first fiscal quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

There have been no material changes to the legal proceedings discussed in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 22, 2012.

 

 

Item 1A.  Risk Factors

 

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 22, 2012.

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the first quarter of 2012, 20,000 options having an exercise price of $0.56, and 1,750 options having an exercise price of $1.40, were exercised. There were no other sales of unregistered securities other than those reported in the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2012.

 

During the first quarter of 2012, the Company made the following stock repurchase in connection with the cashless exercise of 10,000 options in January 2012. The Company has no plans or programs regarding purchases of its equity securities.

 

 

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs

January 1 - 31

3,972

$

1.41

—

N/A

 

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

Item 5.  Other Information.

 

None.

 

Item 6. Exhibits.

 

(a) Exhibits

 

Exhibit No.	Identification of Exhibit
10.1	Share Purchase Agreement among Heritage Global Partners, Inc., Kirk Dove and Ross Dove, and the Company, dated February 29, 2012 (filed as an Exhibit to the Company’s March 6, 2012 Current Report on Form 8-K and incorporated by reference herein).
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase
101.DEF**	XBRL Taxonomy Extension Definition Linkbase
101.LAB**	XBRL Taxonomy Extension Label Linkbase
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

 

SIGNATURES

 

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

		Counsel RB Capital Inc.
Date: May 14, 2012		By:		/s/ Allan C. Silber
				Allan C. Silber
				Chairman of the Board and President
				(Principal Executive Officer)
		By:		/s/ Stephen A. Weintraub
				Stephen A. Weintraub
				Chief Financial Officer and Corporate Secretary
				(Principal Financial Officer)