Heritage Global Inc. - Quarter Report: 2011 March (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

o TRANSITION REPORT UNDER 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 x 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 o No o

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

Large Accelerated Filer £ Accelerated Filer £

Non-Accelerated Filer x Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No x

As of May 10, 2011, there were 26,960,080 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, 2011 and December 31, 2010	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2011 and 2010	4

	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period ended March 31, 2011	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

Part II.	Other Information

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Removed and Reserved	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

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, 2011			As of December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	2,109		$	2,608
Amounts receivable (net of allowance for doubtful accounts of $146; 2010 - $168)		686			203
Receivable from a related party		129			392
Deposits		765			771
Inventory – equipment		4,626			2,594
Other current assets		129			63
Deferred income tax		2,791			2,228
Total current assets		11,235			8,859
Other assets:
Inventory – real estate		1,573			1,573
Asset liquidation investments		2,567			3,548
Investments		2,741			2,706
Total assets	$	18,116		$	16,686

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	1,098		$	2,555
Income taxes payable		88			198
Debt payable		5,472			4,485
Total liabilities		6,658			7,238

Commitments and contingencies

Equity:
Preferred stock, $10.00 par value, authorized 10,000,000 shares; issued and outstanding 592 Class N shares at March 31, 2011 and December 31, 2010, liquidation preference of $592 at March 31, 2011 and December 31, 2010		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares; issued and outstanding 26,960,080 shares at March 31, 2011 and 25,960,080 shares at December 31, 2010		269			259
Additional paid-in capital		277,452			275,641
Accumulated deficit		(266,269	)		(266,458	)
Total equity		11,458			9,448
Total liabilities and equity	$	18,116		$	16,686

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)

(In thousands of US dollars, except per share amounts)	Three months ended March 31,
	2011			2010
Revenue:
Asset liquidation
Asset sale proceeds	$	598		$	2,159
Commissions and other		136			74
Total asset liquidation revenue		734			2,233

Operating costs and expenses:
Asset liquidation		439			1,538
Inventory maintenance		1,170			1
Patent licensing and maintenance		57			7
Selling, general and administrative		839			515
Expenses paid to related parties		129			111
Total operating costs and expenses		2,634			2,172
		(1,900	)		61
Earnings of equity accounted asset liquidation investments		1,560			437
Operating income (loss)		(340	)		498
Other income (expenses):
Interest expense – third party		(84	)		(101	)
Interest expense – related party		—			(29	)
Total other income (expense)		(84	)		(130	)
Income (loss) from continuing operations before the undernoted		(424	)		368
Income tax expense (recovery)		(598	)		67
Earnings of other equity accounted investments (net of $0 tax)		15			78

Net income and comprehensive income		189			379
Net income and comprehensive income attributable to non-controlling interest		—			(156	)
Net income and comprehensive income attributable to controlling interest	$	189		$	223

Weighted average common shares outstanding		26,149			22,718
Weighted average preferred shares outstanding		1			1

Earnings per share – basic and diluted:
Common shares	$	0.01		$	0.01
Preferred shares	$	0.29		$	0.39

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, 2011

(in thousands of US dollars, except share amounts)

(unaudited)

	Preferred stock					Common stock					Additional paid-in			Accumulated			Non-controlling
	Shares			Amount		Shares			Amount		capital			(Deficit)			interest			Total
Balance at December 31, 2008		594		$	6		22,745,536		$	227	$	274,761		$	(270,023	)	$	—		$	4,971
Capital contribution		—			—		—			—		—			—			237			237
Purchase and cancellation of preferred and common stock		(2	)		—		(27,456	)		—		(126	)		—			—			(126	)
Compensation cost related to stock options		—			—		—			—		71			—			—			71
Net loss		—			—		—			—		—			(1,264	)		65			(1,199	)
Balance at December 31, 2009		592			6		22,718,080			227		274,706			(271,287	)		302			3,954
Issuance of common stock		—			—		3,242,000			32		—			—			(32	)		—
Distribution to non-controlling interest		—			—		—			—		—			—			(766	)		(766	)
Transfer from non-controlling interest to controlling interest		—			—		—			—		889			—			(889	)		—
Compensation cost related to stock options		—			—		—			—		46			—			—			46
Net income		—			—		—			—		—			4,829			1,385			6,214
Balance at December 31, 2010		592			6		25,960,080			259		275,641			(266,458	)		—			9,448
Issuance of common stock		—			—		1,000,000			10		1,793			—			—			1,803
Compensation cost related to stock options		—			—		—			—		18			—			—			18
Net income		—			—		—			—		—			189			—			189
Balance at March 31, 2011		592		$	6		26,960,080		$	269	$	277,452		$	(266,269	)	$	—		$	11,458

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,
	2011			2010
Cash flows from operating activities:
Net income	$	189		$	379
Adjustments to reconcile net income to net cash used in operating activities:
Accrued interest added to principal of third party debt		11			17
Amortization of financing costs on debt payable to third party		4			48
Accrued interest added to principal of related party debt		—			29
Stock-based compensation expense		18			18
Earnings of equity accounted investments		(15	)		(78	)

Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		(235	)		824
Decrease (increase) in note receivable		—			(10	)
Increase in lease receivable		(248	)		—
Decrease in deposits		6			275
Increase in inventory - equipment		(2,032	)		(80	)
Decrease (increase) in asset liquidation investments		981			(2,369	)
Decrease in other assets		193			5
Decrease (increase) in deferred income tax assets		(563	)		65
Increase (decrease) in accounts payable and accrued liabilities		(1,457	)		47
Decrease in income taxes payable		(110	)		(3	)
Net cash used in operating activities		(3,258	)		(833	)

Cash flows from investing activities:
Investment in other equity accounted investments		(21	)		(11	)
Cash distributions from other equity accounted investments		1			241
Net cash provided by (used in) investing activities		(20	)		230

Cash flows from financing activities:
Proceeds from issuance of common shares, net of share issuance costs		1,803			—
Proceeds from issuance of debt payable to third parties		1,898			5,228
Repayment of debt payable to third parties		(922	)		(4,146	)
Proceeds from issuance of debt payable to a related party		—			917
Repayment of note payable to a related party		—			(1,149	)
Net cash provided by financing activities		2,779			850
Increase (decrease) in cash		(499	)		247
Cash at beginning of period		2,608			93
Cash and cash equivalents at end of period	$	2,109		$	340


Supplemental cash flow information:
Taxes paid	108	7
Interest paid	38	34

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, 2011

(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”), C2 Communications Technologies Inc., and C2 Investments Inc. These entities, on a combined basis, 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 majority-owned 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 Securities and Exchange Commission (“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, 2010, filed with the Securities and Exchange Commission on March 31, 2011.

Certain items in the condensed consolidated statement of operations and comprehensive income for the three months ended March 31, 2010 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, 2011 are not necessarily indicative of those operating results to be expected for any subsequent interim period or for the entire year ending December 31, 2011.

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, amounts receivable valuation, inventory valuation, investment valuation, valuation of deferred income tax 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, 2010. There have been no changes to these policies in the first quarter of 2011.

Recent Accounting Pronouncements

In July 2010, the FASB issued Accounting Standards Update 2010-20, Receivables (“ASU 2010-20”). ASU 2010-20 amends an entity’s disclosures about its receivables by requiring more detailed and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. Financing receivables are defined as contractual rights to receive money on demand or on fixed or determinable dates, which rights are recognized as an asset in the entity’s statement of financial position. The objective is to improve financial statement users’ understanding of 1) the nature of the credit risk associated with an entity’s financing receivables, and 2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. For information as of the end of a reporting period, ASU 2010-20 is effective for the first interim or annual reporting period ending on or after December 15, 2010. For information about activity during a reporting period, ASU 2010-20 is effective for the first interim or annual reporting period beginning after December 15, 2010. The Company has therefore included the disclosures required by ASU 2010-20 in Note 3.

Note 3 – Amounts Receivable

The Company’s amounts receivable are primarily related to the operations of Counsel RB. They are composed of both amounts receivable assumed by Counsel RB as a component of an asset acquisition, and amounts receivable resulting from asset sales or from services provided by Counsel RB personnel. The initial value of an amount receivable corresponds to the fair value of the underlying goods or services. To date all receivables have been classified as current, and due to their short-term nature, any decline in fair value would be due to issues involving collectability. At each financial statement date the collectability of each outstanding amount receivable is evaluated, and an allowance is recorded if the book value exceeds the amount that is deemed collectable. Collectability is determined on the basis of payment history.

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, and an allowance of $146 was recorded in the fourth quarter of 2010, which the Company believes is adequate at March 31, 2011. Therefore the Company’s recorded investment in financing receivables on non-accrual status is $79 at March 31, 2011. The Company will resume accruing interest when regular payments are being received and the collectability of the interest is reasonably assured.

In the first quarter of 2011, the Company acquired a lease receivable in the amount of $248. The lease receivable will accrue interest beginning April 1, 2011.

At March 31, 2011 the Company’s recorded investment in non-interest bearing financing receivables that are past due is $5. The initial amount of this receivable was $37, and it was acquired at the same time as the note receivable described above. An allowance of $22 was recorded in the fourth quarter of 2010. During the first quarter of 2011, a settlement was negotiated with the payee and the receivable was written down to $15, thereby reducing the allowance to zero. Payments totalling $10 were received in the first quarter of 2011.

Counsel RB conducts a portion of its asset liquidation business by acting jointly with one or more additional purchasers, pursuant to a partnership, joint venture or limited liability company agreement (collectively, “Joint Ventures”). The majority of its amounts receivable are from its partners in these Joint Ventures, and the Company has not experienced any collectability issues with respect to these receivables. Given this experience, together with the ongoing business relationships between the Company and its partners, these receivables do not require a formal assessment of their credit quality. If the Company were to record a material amount receivable from an unrelated third party, a more comprehensive credit assessment would be considered.

During the first quarter of 2011, there were no changes in the Company’s accounting policies for financing receivables, and therefore no 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 2011.

Note 4 – Stock-based Compensation

At March 31, 2011 the Company had six stock-based compensation plans, which 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.

The Company’s total compensation cost related to stock options is $18 for the three months ended both March 31, 2011 and 2010. The fair value compensation costs of unvested stock options in the first three months of 2011 and 2010 were determined using the Black-Scholes Option Pricing Model for grant dates between 2006 and 2011. Historical inputs to the model for 2011 included expected volatility between 79% and 319%, risk-free interest rates between 1.28% and 5.07%, 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.

No tax benefit from stock-based compensation was recognized in the first three months of either 2011 or 2010, as no options were exercised. The Company’s stock-based compensation had no effect on its cash flows during either period.

On January 19, 2011, 625,000 options, having an exercise price of $1.83 and a fair value of $0.15, were granted to each of the Company’s two Co-CEOs, for a total grant of 1,250,000 options. These options are part of the 2010 Non-Qualified Stock Option Plan. The inputs to the Black-Scholes Option Pricing Model were an expected volatility of 262%, a risk-free interest rate of 1.93%, an expected term of 6.25 years, and an expected dividend yield of zero. No similar grants were made during the first three months of 2010.

On January 28, 2011, 200,000 options, having an exercise price of $1.83 and a fair value of $0.16, were granted to a consultant currently under contract to the Company. On March 10, 2011, 50,000 options, having an exercise price of $1.83 and a fair value of $0.35, were granted to an employee of the Company. These options are part of the 2003 Stock Options and Appreciation Rights Plan. The inputs to the Black-Scholes Option Pricing Model were expected volatilities of 296% and 317%, respectively, risk-free interest rates of 1.93% and 2.26%, respectively, expected terms of 4.75 years, and expected dividend yields of zero. No similar grants were made during the first three months of 2010.

On March 31, 2011, 40,000 options, having an exercise price of $0.92 and a fair value of $0.92, were granted to the Company’s independent directors in accordance with their compensation plan, which includes a grant of 10,000 options annually to each independent director on March 31 or the next business day. These options are part of the 2003 Stock Options and Appreciation Rights Plan. The inputs to the Black-Scholes Option Pricing Model were an expected volatility of 319%, a risk-free interest rate of 1.28%, an expected term of 4.75 years, and an expected dividend yield of zero. A similar grant of 40,000 options was made during the first three months of 2010.

The following summarizes the changes in common stock options for the three months ended March 31, 2011 and 2010, respectively:

	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

	Options			Weighted Average Exercise Price
Outstanding at December 31, 2009		994,027		$	6.02
Granted		40,000		$	0.08
Expired		(79,833	)	$	58.63
Outstanding at March 31, 2010		954,194		$	1.37

Options exercisable at March 31, 2010		735,444		$	1.60

Note 5 – Earning (Loss) Per Share

The Company is required, in periods in which it has net income, to calculate basic earnings per share (“basic 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, net of any deductions for contractual preferred stock dividends and any earnings actually distributed during 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, warrants and convertible debt are included in the calculation of diluted earnings per share, since the instruments are assumed to be exercised or converted, except when their effect would be anti-dilutive. For the three months ended March 31, 2011, the net effect of including the Company’s potential common shares did not change the EPS amount, and therefore diluted EPS equals basic EPS. For the three months ended March 31, 2010, the net effect of including the Company’s potential common shares is anti-dilutive, and therefore diluted EPS equals basic EPS.

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

	March 31,
	2011		2010
Assumed exercise of options to purchase shares of common stock		2,182,031		954,194

Note 6 – Composition of Certain Financial Statement Items

Amounts receivable

Amounts receivable consisted of the following at March 31, 2011 and December 31, 2010:

	March 31, 2011		December 31, 2010
Accounts receivable (net of allowance for doubtful accounts of $0; 2010 - $22)	$	359	$	124
Notes receivable (net of allowance for doubtful accounts of $146; 2010 - $146)		79		79
Lease receivable		248		—
	$	686	$	203

The lease receivable is a financing receivable that was acquired by the Company’s Asset Liquidation operating segment in the first quarter of 2011. It is expected to be reduced at a rate of $12/month over a period of twenty-two months, beginning in April 2011.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consisted of the following at March 31, 2011 and December 31, 2010:

	March 31, 2011		December 31, 2010
Regulatory and legal fees	$	216	$	612
Distributions payable to former non-controlling interest		20		766
Accounting, auditing and tax consulting		142		118
Due to Joint Venture partners		13		178
Asset liquidation expense		217		—
Customer deposits		—		313
Patent licensing and maintenance		63		118
Sales and other taxes		72		81
Remuneration and benefits		270		228
Other		85		141

Total accounts payable and accrued liabilities	$	1,098	$	2,555

Summarized financial information – Equity accounted asset liquidation investments

The table below details the results of operations, for the three months ended March 31, 2011 and 2010, attributable to CRBCI from the Joint Ventures in which it was invested during those periods.

	2011		2010
Gross revenues	$	1,929	$	1,694

Gross profit	$	1,522	$	446

Income from continuing operations	$	1,560	$	437

Net income	$	1,560	$	437

Net income after non-controlling interest	$	1,560	$	328

Note 7 – Investments

The Company’s investments as at March 31, 2011 and December 31, 2010 consisted of the following:

	March 31, 2011		December 31, 2010
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC	$	18	$	18
Polaroid		2,723		2,688

Total investments	$	2,741	$	2,706

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

The Company accounts for its investment under the equity method. For the year ended December 31, 2010, the Company recorded $17 as its share of Knight’s Bridge GP’s earnings, and received cash distributions of $17. During the first three months of 2011, the Company recorded $1 as its share of Knight’s Bridge GP’s earnings, and accrued $1 as a cash distribution receivable. Based on the Company’s analysis of Knight’s Bridge GP’s financial statements and projections as at March 31, 2011, 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 intellectual property (PLR IP Holdings, LLC) and inventory (PLR Acquisition, LLC). 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”), who 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 and $56 in 2010, and additional investments of $54 in 2010 and $11 in 2011, the Company’s cumulative cash investment totals $493.

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 8 and 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 general partner of the Knight’s Bridge Fund’s 20% carried interest. Following additional investments of $11 in 2009, $263 in 2010, and $10 in the first three months of 2011, and cash distributions of $186 and $233 in 2009 and 2010, respectively, the Company’s cumulative cash investment totals $1,956.

The Company accounts for its investments in the LLC under the equity method. For the years ended December 31, 2009 and 2010, the Company recorded $246 and $14, respectively, as its share of earnings. During the first three months of 2011, the Company recorded $14 as its share of the LLC’s earnings (2010 - $76).

At December 31, 2010, the Company used a discounted cash flow methodology to estimate that its investment in Polaroid had a fair value of approximately $3,348. The Company has concluded, based on Polaroid’s operating results for the first quarter of 2011, and projections for future quarters, that there has been no material change to the estimated fair value.

Note 8 – Debt

At March 31, 2011 and December 31, 2010 the Company’s outstanding debt was $5,472 and $4,485, respectively. At both dates, the debt consisted solely of a revolving credit facility (the “Credit Facility”) provided to Counsel RB. Counsel RB has the Credit Facility with a U.S. bank under the terms and provisions of a certain Loan and Security Agreement, dated as of June 2, 2009 (the “Loan Agreement”) and most recently amended as of March 1, 2011, in order to finance the acquisition of eligible 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. 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, 2011 and December 31, 2010 the Company was in compliance with all covenants of the Facility.

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 2011, the Company recognized a current income tax recovery of $35 and a deferred income tax recovery of $563. The net deferred income tax recovery in the first quarter of 2011 is primarily due to a change in estimate of the tax effect of available tax loss carryforwards expected to be utilized. The remaining $2,791 net deferred income tax asset balance at March 31, 2011 reflects the tax benefit of available tax losses considered “more likely than not” to be utilized during the remainder of 2011 and first quarter of 2012. The Company recognized a current income tax expense of $2 and a deferred income tax expense of $65 in the three months ended March 31, 2010.

As at March 31, 2011, the unrecognized tax benefit determined pursuant to the Income Taxes Topic of the ASC is $12,059. There has been no change in the first quarter of 2011 in the estimate of the balance of unrecognized tax benefits previously determined.

In the unlikely event that these tax benefits are recognized in the future, there should be no impact on the Company’s effective tax rate, unless recognition occurs at a time when all of the Company’s historic tax loss carryforwards have been utilized and the associated valuation allowance against the Company’s deferred tax assets has been reversed. In such circumstances, the amount recognized at that time should result in a reduction in the Company’s effective tax rate.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Because the Company has tax loss carryforwards in excess of the unrecognized tax benefits, the Company did not accrue for interest and penalties related to unrecognized tax benefits either upon the initial derecognition of uncertain tax positions or in the current period.

It is possible that the total amount of the Company’s unrecognized tax benefits will significantly increase or decrease within the next 12 months. These changes may be the result of future audits, the application of “change in ownership” rules leading to further restrictions in tax losses arising from changes in the capital structure of the Company and/or that of its parent company Counsel, reductions in available tax loss carryforwards through future merger, acquisition and/or disposition transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time. At this time, an estimate of the range of reasonably possible outcomes cannot be made.

The Company incurred annual tax losses from 1991 through 2005. 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 debt forgiveness in 2006 and income for tax purposes in 2008 and in 2010, respectively. The 2007 through 2010 taxation years remain open for audit.

The Company’s estimated remaining federal tax loss carryforwards at March 31, 2011 are comprised of approximately $55,500 of unrestricted net operating tax losses, $31,300 of restricted net operating tax losses subject to an annual usage restriction of $2,500 per annum until 2008 and $1,700 per annum thereafter, and $400 of unrestricted capital losses, all of which will expire at the end of 2011.

The Company is subject to state income tax in multiple jurisdictions. While the Company had net operating loss carryforwards for state income tax purposes in certain states where it previously conducted business, its available state tax loss carryforwards may differ substantially by jurisdiction and, in general, are subject to the same or similar restrictions as to expiry and usage described above. In addition, in certain states the Company’s state tax loss carryforwards that were attributable to certain legacy businesses sold in recent years ceased to be available to the Company following their sale. Therefore, it is possible that the Company may not have tax loss carryforwards available to shield future income which is 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, 2011 the Company had a receivable from Counsel in the amount of $129, as compared to a receivable of $392 at December 31, 2010. This receivable is due on demand and is non-interest bearing. When the Company has a net amount payable to Counsel, the payable is recorded under an existing demand 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. The Counsel Loan has been amended several times, most recently during the second quarter of 2009 when it was converted into a demand loan. 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, 2011 and 2010, the amount charged to the Company pursuant to the Agreement was $90.

Transactions with Other Related Parties

The Company leases office space in White Plains, NY, as part of the operations of Counsel RB. The building is owned by an entity that is owned by a Co-CEO of Counsel RB and the Company. During the first three months of 2011 and 2010, the Company paid rent of $39 and $21, respectively, to the entity.

Note 12 – Segment Reporting

Beginning in 2005, 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, 2011 and 2010, 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. The table below presents information about the Asset Liquidation segment of the Company as of and for the three months ended March 31, 2011 and 2010:

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

	For the Three Months Ended March 31, 2010
	Asset Liquidation
Revenues from external customers	$	2,233
Earnings from equity accounted asset liquidation investments		437
Interest expense		(101	)
Segment income from continuing operations		647
Investment in equity accounted asset liquidation investees		6,312
Segment assets		9,449

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

	Three months ended March 31, 2011			Three months ended March 31, 2010
Total other income and earnings from equity accounted investments for reportable segments	$	1,560		$	437
Unallocated other income and earnings from equity investments from corporate accounts		15			78
	$	1,575		$	515

Total interest expense for reportable segments	$	84		$	101
Unallocated interest expense from related party debt		—			29
	$	84		$	130

Total depreciation and amortization for reportable segments	$	—		$	—
Other unallocated depreciation from corporate assets		—			—
	$	—		$	—

Total segment income (loss)	$	(362	)	$	647
Other income		15			78
Other corporate expenses (primarily corporate level interest, general and administrative expenses)		(62	)		(279	)
Income tax expense (recovery)		(598	)		67
Net income (loss) from continuing operations	$	189		$	379


Segment assets	$	10,673		$	9,449
Other assets not allocated to segments(1)		7,443			3,515
	$	18,116		$	12,964

(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, 2011, 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 California, which expire on December 31, 2015 and September 30, 2013, respectively. The annual lease obligations are as shown below:

2011	$	114
2012	$	156
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, 2011 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 13 – Subsequent Events

The Company has evaluated events subsequent to March 31, 2011 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, 2011, 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, 2010, 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.” effective January 20, 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.

In 1994, we began operating as an Internet service provider, and soon turned to designing and building 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. (“MiBridge”), a communications technology company engaged in the design, development, integration and marketing of a range of software telecommunications products that support multimedia communications over the Public Switched Telephone Network (“PSTN”), local area networks (“LANs”) and IP networks. The acquisition of MiBridge permitted us to accelerate the development and deployment of IP technology across our network platform. In 1998, we first deployed our real-time IP communications network platform, which represented the first nationwide, commercially viable VoIP platform of its kind. In 2001, the Company entered the Telecommunications business, through 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. On May 1, 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.

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, in pertinent part, 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.

Up to 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., 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.

On August 27, 2009 C2 Communications Technologies Inc. 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. A trial date has not been set.

In the third quarter of 2007, the Company began investing in Internet-based e-commerce businesses by acquiring minority positions in several companies. It has since sold several of those interests, realizing gains in each case. The Company’s most significant investment took place in the second quarter of 2009, when it 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. CRBCI’s interest is managed by Knight’s Bridge Capital Management L.P., an affiliate of the Company’s majority shareholder and parent, Counsel Corporation (together with its subsidiaries, “Counsel”). The Company’s objective with respect to its investments is to realize long-term capital appreciation as the value of the underlying businesses is developed and recognized. The Company’s investments are discussed in more detail in Note 7 of the unaudited consolidated financial statements included in Item 1 of this Report.

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’s operations constitute the Company’s Asset Liquidation operating segment and are discussed in more detail in Note 2 of the audited consolidated financial statements filed with the SEC. 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 common shares of the Company.

On March 16, 2011 the Company completed a private placement of 1.0 million common shares at an issue price of $1.83 per share, and incurred related share issue costs of approximately $27. The shares were purchased by an institutional investor. The Company plans to use the proceeds of the private placement to fund growth opportunities.

The Company’s segments are discussed in more detail in Note 12 of the unaudited 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 plans to strengthen its core competencies, create a full-service industrial auction division, develop an asset-based debtor in possession (“DIP”) facility and build out a valuation practice to provide equipment appraisals to companies and financial institutions. As part of this process, Counsel RB has recently hired several key employees with equipment and real estate expertise as well as experience in business development and client relations.

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 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 for the preparation of the unaudited condensed consolidated financial statements included in this Report were those related to revenue recognition, amounts receivable valuation, allowance for doubtful accounts, inventory valuation, investment valuation, deferred income tax 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.

Management’s Discussion of Financial Condition

Liquidity and Capital Resources

Liquidity

At March 31, 2011 the Company’s working capital was $4,577, as compared to working capital of $1,621 at December 31, 2010. The primary contributors to the increase were an increase of $2,032 in inventory and a $1,457 decrease in accounts payable and accrued liabilities. These were partially offset by a decrease of $499 in cash and an increase of $987 in debt payable to third parties. During the first three months of 2011, the Company’s primary sources of cash, exclusive of borrowings under Counsel RB’s revolving credit facility, were Counsel RB’s gross profit of $1,855, and net $1,803 received as proceeds on the private placement of 1.0 million common shares. Cash disbursements, other than those related to repayment of debt, 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 $8,717 at March 31, 2011 and working capital of $6,742 at December 31, 2010.

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. Even if the Company does not enter into such agreements within the next twelve months, it expects to generate sufficient cash from Counsel RB’s operations to meet its ongoing operating cash requirements for at least that period of time.

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, 2011 the Company had stockholders’ equity of $11,458, as compared to $9,448 at December 31, 2010.

The Company is 76.6% owned by Counsel. At December 31, 2010 the Company was 79.5% owned by Counsel. The Co-CEOs of Counsel RB each owned 6.25% of the Company, and the remaining 8.0% was owned by public stockholders. On March 15, 2011 the Company issued one million common shares through a private placement, representing 3.7% of the outstanding common shares. Counsel’s ownership thereby decreased to 76.6%, that of the Co-CEOs to 6.0% each, and that of the remaining public stockholders to 7.7%.

Cash Position and Cash Flows

Cash and cash equivalents at March 31, 2011 were $2,109 as compared to cash of $2,608 at December 31, 2010, a decrease of $499.

Cash used in operating activities Cash used in operating activities during the three months ended March 31, 2011 was $3,258, as compared to $833 cash used during the same period in 2010. During the first three months of 2011 the Company had income of $189 from continuing operations, as compared to income of $379 for the same period in 2010. In both periods, the operations of Counsel RB were the primary source of cash receipts and disbursements.

The most significant changes in operating activities during the first three months of 2011 as compared to the first three months of 2010 were in inventory, asset liquidation investments, accounts payable, deferred income tax assets, and accounts receivable. Inventory increased by $2,032 in 2011, as compared to increasing by $80 in the same period of 2010. Asset liquidation investments decreased by $981 in 2011, as compared to increasing by $2,369 in 2010. Deferred income tax assets increased by $563 in 2011 as compared to decreasing by $65 in 2010. Accounts payable decreased by $1,457 in 2011 as compared to increasing by $47 in 2010. Amounts receivable increased by $483 in 2011 as compared to decreasing by $814 in 2010.

Cash flows from investing activities Cash used in investing activities during the three months ended March 31, 2011 was $20, as compared to $230 of cash provided during the same period in 2010. In 2011, $21 was invested in Polaroid, and $1 of cash distributions was receivable from the Knight’s Bridge GP. In 2010, $11 was invested in Polaroid and $241 of cash distributions were received from Polaroid.

Cash flows from financing activities Cash provided by financing activities was $2,779 during the three months ended March 31, 2011, as compared to $850 cash provided during the same period in 2010. In 2011, the Company received $1,803 cash, net of share issuance costs, from a private placement of 1,000,000 common shares. During the same period, in connection with the operations of Counsel RB, the Company borrowed net $976 from its third party lender. In 2010, the Company borrowed net $1,082 from its third party lenders. During the same period, the Company paid net $232 to its parent, Counsel.

Contractual Obligations

The following table summarizes the amounts of payments due, including interest accrued to March 31, 2011 and estimated interest to maturity, under specified contractual obligations outstanding at March 31, 2011. Aside from the estimated taxes payable, as reported in the unaudited condensed consolidated statements, we have no liabilities associated with income taxes that require disclosure.

	Payment due by period
Contractual obligations:	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Revolving credit facility	$	5,718	$	5,718	$	—	$	—	$	—
Operating leases		713		153		306		254		—
Total	$	6,431	$	5,871	$	306	$	254	$	—

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. The Company also earns income from its asset liquidation business through its earnings from equity accounted asset liquidation investments. The Company began operating in the asset liquidation segment in the second quarter of 2009 when Counsel RB, which was established in the first quarter of 2009, commenced operations.

Patent licensing revenue is derived from licensing our intellectual property. Our VoIP Patent Portfolio is an international patent portfolio covering the basic process and technology that enable VoIP communications.

Three-Month Period Ended March 31, 2011 Compared to Three-Month Period Ended March 31, 2010

Asset liquidation revenues were $734 in 2011 compared to $2,233 in 2010, asset liquidation expense was $439 in 2011 compared to $1,538 in 2010, inventory maintenance expense was $1,170 in 2011 compared to $1 in 2010, and earnings of equity accounted asset liquidation investments were $1,560 in 2011 compared to $437 in 2010. The net earnings of these four items were $685 in 2011 compared to $1,131 in 2010. Because Counsel RB conducts its asset liquidation operations both independently and through partnerships, and the ratio of the two is unlikely to remain constant year over year, the operations must be considered as a whole rather than on a line-by-line basis. The earnings in 2011 decreased compared to those in 2010 due to inventory maintenance costs incurred for certain property and equipment that was acquired in the fourth quarter of 2010 and remained unsold at March 31, 2011. Exclusive of these costs, net earnings were $1,855 in 2011 compared to $1,132 in 2010. As Counsel RB has become more established, its operations have expanded.

Patent licensing revenues were $0 during the quarters ended March 31, 2011 and 2010.

Patent licensing and maintenance expense was $57 during the quarter ended March 31, 2011, compared to $7 during the same period in 2010. The increase is due to 2011 costs associated with the re-examination of U.S. Patent No. 6,243,373.

Selling, general and administrative expense, including expenses paid to related parties,was $968 during the quarter ended March 31, 2011, compared to $626 during the same period in 2010. The significant items included:

Compensation expense was $730 in the first quarter of 2011, compared to $352 in the first quarter of 2010. The primary expense in both years was salary and benefits related to Counsel RB, which were $678 in 2011 and $300 in 2010. The increase is due to the growth of Counsel RB’s operations over the past year. With respect to CRBCI’s operations, the salary earned by the President remained unchanged at $34. Stock based compensation was $18 in the first quarter of both 2011 and 2010. During the first quarter of 2011, 1,250,000 options were issued to the Co-CEOs of CRBCI, 200,000 options were issued to a consultant under contract to Counsel RB, and 50,000 options were issued to an employee of Counsel RB. There were no similar issuances during the first quarter of 2010.

Legal expense was a credit of $252 in the first quarter of 2011, due to negotiated reductions in fees that were billed during 2010. Legal expense was $10 in the first quarter of 2010.

Accounting and tax consulting expenses were $46 in the first quarter of 2011, compared to $32 in the first quarter of 2010.

Directors’ fees were unchanged at $34 in the first quarter of both 2011and 2010.

Consulting expense was $96 in the first quarter of 2011 as compared to $6 in the first quarter of 2010, and related solely to the operations of Counsel RB. The increase of $90 is due to the growth of Counsel RB’s operations.

Management fees charged by our controlling stockholder, Counsel, were $90 in the first quarter of both 2011 and 2010.

Directors and officers liability insurance expense was $13 in the first quarter of both 2011 and 2010.

Office rent was $47 in the first quarter of 2011 as compared to $22 in the first quarter of 2010, and related solely to the operations of Counsel RB. The increase of $25 is due to the growth of Counsel RB’s operations.

Franchise tax was $22 in the first quarter of 2011 as compared to $18 in the first quarter of 2010.

Other insurance expense was $9 in the first quarter of 2011 as compared to $7 in the first quarter of 2010.

Travel expense was $47 in the first quarter of 2011, as compared to $7 in the first quarter of 2010. The majority of the travel related to Counsel RB’s operations, and the increase of $40 is due to the growth of those operations.

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

Third party interest expense was $84 in the first quarter of 2011, as compared to $101 in the first quarter of 2010. All of the expense related to the third party debt owed by Counsel RB.

Related party interest expense was $0 in the first quarter of 2011, as compared to $29 in the first quarter of 2010. All of the 2010 expense related to the Company’s loan from its parent, Counsel, which was repaid in full during the third quarter of 2010. Throughout the first quarter of 2011 the Company had a net receivable from Counsel, and therefore did not incur any interest expense.

In the first quarter of 2011, the Company recorded income of $15 from its other equity accounted investments, as compared to income of $78 in the first quarter of 2010. In 2011 the amount consisted of $14 income from Polaroid and $1 income from Knight’s Bridge GP. In 2010 the amount consisted of $76 income from Polaroid and $2 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 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 lender’s prime rate + 1.0%, or a minimum of 4.5%. Assuming that the debt amount on the revolving credit facility at March 31, 2011 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 $55 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, 2011. 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 2011 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, 2010, as filed with the SEC on March 31, 2011.

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, 2010, as filed with the SEC on March 31, 2011.

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

Except as set forth in the Company’s Current Report on Form 8-K filed with the SEC on March 18, 2011, there were no sales of unregistered securities in the first quarter of 2011. There were no repurchases of the Company’s equity securities during the same period.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Removed and Reserved.

Item 5. Other Information.

None.

Item 6. Exhibits.

(a) Exhibits

Exhibit No.		Identification of Exhibit
10.1		Share Purchase Agreement between the Company and Werklund Capital Corporation, dated March 15, 2011 (filed as an Exhibit to the Company’s March 18, 2011 Current Report on Form 8-K and incorporated by reference herein).

31.1		Certification of Chief 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 Chief 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 Chief 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 16, 2011	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)