You should carefully consider and evaluate these risk factors, as any of them could materially and adversely affect our business, financial condition and results of operations, which, in turn, can adversely affect the price of our securities.
We face significant competition in our asset liquidation business.
Our asset liquidation business depends on our ability to successfully obtain a continuous supply of distressed and surplus assets for profitable resale to third parties. In this regard, we compete with numerous other organizations, some of which are much larger and better-capitalized, with greater resources available for both asset acquisition and associated marketing to potential customers. Additionally, some competitors have a longer history of activity in the asset liquidation business, and may have advantages with respect to accessing both deals and capital.
Our asset liquidation business is subject to inventory risk and credit risk.
Under our business model, we assume the general and physical inventory and credit risks associated with purchasing assets for subsequent resale. Although we do enter into transactions for which a subsequent purchaser has already been identified, in most cases we purchase assets and assume the risk that they may sell for less than our forecasted price. As well, we may miscalculate demand or resale value, and subsequently sell the assets for less than their original purchase price. Either situation could have a material adverse effect upon our use of working capital and our results of operations.
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A significant portion of our asset liquidation business is conducted through Joint Ventures.
Conducting business through Joint Ventures, as described above under “Industry and Competition”, allows us to participate in significantly larger deals than those we could fund independently. If we ceased entering into Joint Ventures, the pool of potential transactions would be reduced. This could negatively impact our ability to obtain a continuous supply of assets for resale, and could have a material adverse effect upon our use of working capital and our results of operations.
Our operating results are subject to significant fluctuation.
Our revenue and operating results are subject to fluctuation from quarter to quarter and from year to year due to the nature of the asset liquidation business, which involves discrete deals of varying size that are very difficult to predict. The timing of revenue recognition related to significant transactions can materially affect quarterly operating results. Despite the accompanying variability of asset liquidation costs, quarterly fixed costs that are largely composed of salaries and benefits could exceed operating margins. There can therefore be no assurance the we can sustain profitability on a quarterly or annual basis.
We are subject to the risks associated with managing growth.
Since the establishment of our asset liquidation business in 2009, we have experienced significant growth, most recently through the acquisition of Equity Partners in the second quarter of 2011. This growth requires increased investment in personnel, systems and facilities. In the absence of continued revenue growth, the Company’s operating margins could decline from current levels. Additional acquisitions will be accompanied by such risks as exposure to unknown liabilities of acquired businesses, unexpected acquisition expenses, greater than anticipated investments in personnel, systems and facilities, the expense of integrating new and existing operations, diversion of senior management resources, and dilution to existing shareholders. Failure to anticipate and manage these risks could have a material adverse effect upon our business and results of operations.
Our asset liquidation business is subject to environmental risk.
Our asset liquidation business at times includes the purchase and resale of buildings and land. Although our purchase process includes due diligence to determine that there are no adverse environmental issues, it is possible that such issues could be discovered subsequent to a completed purchase. Any remediation and related costs could have a material adverse effect upon our business and results of operations.
We are dependent upon key personnel.
Our operations, particularly those of our asset liquidation business, are substantially dependent on the knowledge, skills and performance of our executive officers. The loss of any one of these officers could damage key relationships, and result in the loss of essential information and expertise. As our operations expand we will be required to hire additional employees, and may face competition for them. Therefore, either the loss of the services of our existing officers, or the inability to attract and retain appropriately skilled new employees, could have a material adverse effect upon our business and results of operations.
We may require additional financing in the future, which may not be available, or may not be available on favourable terms.
We may need additional funds to finance our operations, particularly our asset liquidation business, to make additional investments, or to acquire complementary businesses or assets. We may be unable to generate these funds from our operations. If funds are not available, or not available on acceptable terms, we could experience a material adverse effect upon our business.
We have a significant investment in non-publicly traded equity.
The Company’s investment in Polaroid, which was initially made during 2009, represents approximately 6% of its total assets at December 31, 2011. The investment is in a private company and therefore not easily liquidated. Although the Company’s analysis of this investment opportunity concluded that it will generate positive returns, there can be no assurance that the Company will either recover the entire value of its initial investment or earn a positive return to the extent predicted.
We are subject to litigation.
We are, from time to time, involved in various claims, legal proceedings and complaints arising in the ordinary course of business. The significant litigation matters in which we are involved at this time are detailed in Item 3 of this Report.
We may fail to either adequately protect our proprietary technology and processes, or enforce our intellectual property rights.
The Company’s VoIP Patent Portfolio consists of United States Patents No. 6,243,373 and No. 6,438,124. The ultimate value of these patents has yet to be determined. If we fail to obtain or maintain adequate protections, or are unsuccessful in enforcing our patent rights, we may not be able to either realize additional value from our patents, or prevent third parties from benefiting from those patents without benefit to the Company. Any currently pending or future patent applications may not result in issued patents. In addition, any issued patents may not have priority over any patent applications of others or may not contain claims sufficiently broad to protect us against third parties with similar technologies, products or processes. In addition, the Company’s existing patents have finite lives (although they may be extended by filing continuations and/or divisional applications), most of which expire over the next four to six years. There is no guarantee that they will be fully exploited or commercialized before expiry.
The telecommunications market is volatile.
The telecommunications industry has become very volatile as a result of overcapacity, which has led to price erosion and bankruptcies. These negative trends may become even more significant during the current economic downturn. Our potential licensees may experience increased customer attrition, may have difficulty generating and collecting revenue, or may even be forced into bankruptcy. Our potential revenue could therefore decrease significantly as the licensees become unable to meet their financial obligations.
Our principal stockholder, Counsel, has voting control of the Company and certain of our executive officers are employees of Counsel.
Counsel owns approximately 76% of our outstanding common stock. As a result, Counsel controls all matters requiring approval by the stockholders, including the election of the Board of Directors and significant corporate transactions. Our Board of Directors has six members, five of whom are not employees or otherwise affiliated with Counsel. The Board establishes corporate policies and has the sole authority to nominate and elect officers to carry out those policies. Our President, Chief Financial Officer, and Corporate Secretary are all employees of Counsel. Counsel’s control over CRBCI could delay or prevent a change in control of the Company, impede a merger, consolidation, takeover or other business combination, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
Provisions in our Articles of Incorporation, as amended, could prevent or delay stockholders' attempts to replace or remove current management.
Our Articles of Incorporation, as amended, provide for staggered terms for the members of our Board. The Board is divided into three staggered classes, and each director serves a term of three years. At each annual stockholders’ meeting only those directors comprising one of the three classes will have completed their term and stand for re-election or replacement. These provisions may be beneficial to our management and the Board in a hostile tender offer, and may have an adverse impact on stockholders who may want to participate in such a tender offer, or who may want to replace some or all of the members of the Board.
Our Board of Directors may issue additional shares of preferred stock without stockholder approval.
Our Articles of Incorporation, as amended, authorize the issuance of up to 10,000,000 shares of preferred stock, $10.00 par value per share. The Board is authorized to determine the rights and preferences of any additional series or class of preferred stock. The Board may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights that are senior to our shares of common stock or that could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or common stock. The issuance of additional shares of preferred stock may also hamper or discourage an acquisition or change in control of CRBCI.
We may conduct future offerings of our common stock and preferred stock and pay debt obligations with our common and preferred stock that may diminish our investors’ pro rata ownership and depress our stock price.
We reserve the right to make future offers and sales, either public or private, of our securities including shares of our preferred stock, common stock or securities convertible into common stock at prices differing from the price of the common stock previously issued. In the event that any such future sales of securities are effected or we use our common or preferred stock to pay principal or interest on our debt obligations, an investor’s pro rata ownership interest may be reduced to the extent of any such issuances and, to the extent that any such sales are effected at consideration which is less than that paid by the investor, the investor may experience dilution and a diminution in the market price of the common stock.
There is a limited public trading market for our common stock; the market price of our common stock has been volatile and could experience substantial fluctuations.
Our common stock is currently traded in the OTC market and has a limited public trading market. Without an active trading market, there can be no assurance regarding the liquidity or resale value of the common stock. In addition, the market price of our common stock has been, and may continue to be, volatile. Such price fluctuations may be affected by general market price movements or by reasons unrelated to our operating performance or prospects such as, among other things, announcements concerning us or our competitors, technological innovations, government regulations, and litigation concerning proprietary rights or other matters.
We may not be able to utilize income tax loss carryforwards.
Restrictions in our ability to utilize income tax loss carry forwards have occurred in the past due to the application of certain changes in ownership tax rules in the United States. There is no certainty that the application of these rules may not recur. In addition, further restrictions of, reductions in, or expiry of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or through failure to continue a significant level of business activities. Any such additional limitations could require us to pay income taxes in the future and record an income tax expense to the extent of such liability. We could be liable for income taxes on an overall basis while having unutilized tax loss carry forwards since these losses may be applicable to one jurisdiction and/or particular line of business while earnings may be applicable to a different jurisdiction and/or line of business. Additionally, income tax loss carry forwards may expire before we have the ability to utilize such losses in a particular jurisdiction and there is no certainty that current income tax rates will remain in effect at the time when we have the opportunity to utilize reported tax loss carry forwards.
We have not declared any dividends on our common stock to date and have no expectation of doing so in the foreseeable future.
The payment of cash dividends on our common stock rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, unencumbered cash, capital requirements and our financial condition, as well as other relevant factors. To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2011, we do not have any preferred stock outstanding that has any preferential dividends.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties.
The Company, in connection with its asset liquidation business, leases office space in White Plains, NY, Los Angeles, CA, and Easton, MD. The White Plains space is approximately 3,500 square feet and its lease is in effect until December 31, 2015. The Los Angeles space is approximately 300 square feet and its lease is in effect until September 30, 2013. The Easton space is approximately 1,000 square feet and its lease is in effect until April 30, 2012.
The Company, in connection with its intellectual property licensing business, rents approximately 200 square feet of office space in Marshall, TX on a month to month basis for a nominal amount. Should the Company be required to vacate these premises, ample alternative space is available.
All accounting and reporting functions are carried out from the corporate office of the Company’s majority stockholder, Counsel, located in Toronto, Ontario, Canada. The Company is not required to pay rent or other occupancy costs to Counsel.
Item 3. Legal Proceedings.
Intellectual Property Enforcement Litigation
On August 27, 2009 the Company’s wholly-owned subsidiary, C2 Communications Technologies Inc., filed a patent infringement 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 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.
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.
Item 4. [Removed and Reserved]
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Shares of our common stock, $0.01 par value per share, are quoted in the OTC market (“OTCQB”) under the symbol “CRBN.OB”.
The following table sets forth the high and low prices for our common stock, as quoted on the OTCQB, for the calendar quarters from January 1, 2010 through December 31, 2011, based on inter-dealer quotations, without retail mark-up, mark-down or commissions. These prices may not represent actual transactions:
On March 15, 2012, the closing price for a share of the Company’s common stock was $2.50.
Holders
As of March 15, 2012, the Company had approximately 236 holders of common stock of record.
Dividends
To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2011, we do not have any preferred stock outstanding which has any preferential dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth, as of December 31, 2011, information with respect to equity compensation plans (including individual compensation arrangements) under which the Company’s securities are authorized for issuance.
(1) For a description of the material terms of these plans, see Note 14 in the Company’s audited financial statements included in Item 15 of this Report.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.
During the third quarter of 2011, 30,000 options having an exercise price of $0.83 were exercised. During the fourth quarter of 2011, 20,000 options having an exercise price of $1.01 were exercised. There were no other sales of unregistered securities other than those previously reported in a Current Report on Form 8-K or in a Current Report on Form 10-Q.
During 2011, the Company made the following stock repurchases in connection with the cashless exercise of 10,000 options in September and 20,000 options in November. The Company has no plans or programs regarding purchases of its equity securities.
Item 6. Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(All dollar amounts are presented in thousands of USD, unless otherwise indicated, except per share amounts)
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto, included in Item 15 of this Report. Our accounting policies have the potential to have a significant impact on our 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 which are continuous in nature.
Business Overview, Recent Developments and Outlook
Please see Item 1, above, of this Report for an overview of the Company’s business and recent developments. Please see Item 1A, above, for a discussion of the risk factors that may impact the Company’s current and future operations, and financial condition.
Liquidity and Capital Resources
At December 31, 2011 the Company’s working capital was $7,626, as compared to $1,621 at December 31, 2010. The primary contributors to the increase of $6,005 were an increase of $4,064 in cash, a decrease of $1,700 in accounts payable and accrued liabilities, and a decrease of $1,394 in debt payable to third parties, partially offset by a decrease of $1,581 in equipment inventory. During 2011, the Company’s primary source of cash, exclusive of borrowings under Counsel RB’s revolving credit facility, was Counsel RB’s gross profit of $9,655. Cash disbursements, other than those related to repayment of debt, were primarily related to operating expenses of $5,070 and the reduction of $1,700 in accounts payable and accrued liabilities.
It should be noted that accounting principles generally accepted in the United States of America (“GAAP”) require 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 $13,212 at December 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. In March 2011, the facility was increased from its original $7,500, due to the expansion of Counsel RB’s operations. It is discussed further in Note 7 of the audited 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 cash requirements for at least that period of time.