Great American Group, Inc. — FY2013 Form 10-K
Entity note: The supplied filing is for Great American Group, Inc., not BRC Group Holdings, Inc. It covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars.
Business context
The company provides auction and liquidation, valuation and appraisal, capital advisory, and real estate services. Its principal segments are auction and liquidation and valuation and appraisal. Shoon, a U.K. footwear retailer previously consolidated as a third segment, was deconsolidated after July 31, 2013; it was sold in January 2014, and the company says its loans to Shoon were repaid.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $76.1 million | $83.9 million |
| Operating income | $4.1 million; 5.4% margin | $7.4 million; 8.9% margin |
| Consolidated net income | $0.6 million | $4.3 million |
| Net income attributable to Great American Group, Inc. | $1.1 million; $0.04 per diluted share | $3.5 million; $0.12 per diluted share |
| Operating cash flow | $(2.5) million | $16.2 million |
| Cash and cash equivalents at year-end | $18.9 million | $18.7 million |
Revenue fell 9.3% year over year, while operating income declined 44.9%. The company reported a 55.0% effective tax rate, compared with 30.8% in 2012. Cash from investing activities was $5.5 million, largely reflecting a $7.6 million reduction in restricted cash; financing activities used $3.1 million. Cash-flow performance was weaker than earnings: operating cash use included the sales-type financing associated with four oil rigs.
At December 31, 2013, total assets were $73.7 million, total liabilities $77.8 million, and equity was negative $4.2 million. Current assets were $56.7 million versus current liabilities of $29.1 million, including $0.3 million of restricted cash. The company had $5.7 million outstanding under its $100 million asset-based credit facility and $0.3 million under its accounts-receivable line. It also owed $50.5 million on subordinated notes issued in the acquisition, primarily to former owners; $48.8 million was due July 2018, subject to cash-flow-based prepayments and other conditions. A separate equipment-related note had a $6.9 million balance and a June 2015 maturity.
Changes, unusual items, and outlook
- Auction and liquidation revenue declined 12.2% to $42.4 million, and segment income eased to $11.2 million from $11.4 million. Valuation and appraisal revenue rose 8.1% to $27.6 million, but segment income declined to $5.7 million from $6.8 million. Shoon contributed $6.2 million of revenue through July 31 and recorded a segment loss of $1.2 million.
- Four oil rigs generated $9.3 million of 2013 sale revenue and $7.4 million of cost of goods sold after a lease amendment changed its accounting classification. The company reported an $8.1 million lease finance receivable at year-end; remaining gross lease payments, including a $4.2 million purchase option, were scheduled through December 2014, and negotiations to modify the lease were ongoing.
- Revenue reductions included lower U.K. financing activity and fewer or smaller European liquidation and real estate engagements. European revenue from services and fees and goods sales fell to $16.0 million from $33.5 million. Management cited fewer and smaller auction and liquidation engagements as the main cause.
- Management said existing cash, credit availability, and expected operating cash generation should meet working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided. The $100 million facility is subject to lender discretion and covenants; a separate U.K. facility of up to £50 million was entered into in March 2014, with borrowings reducing availability under the U.S. facility.
- In January 2014, the company paid off $0.7 million of Phantom Equityholder notes carrying 12% interest. Shoon’s sale led to a $0.1 million impairment of the investment in 2013; its $1.2 million outstanding loans were repaid in January 2014.
Risks and contingencies
- Results are volatile and depend on the timing, size, and mix of engagements. Guarantee-based liquidations and outright asset purchases expose the company to losses if proceeds or asset values fall short of estimates.
- Customer and engagement concentration is material: one liquidation contract and the oil-rig sale represented 10.7% and 12.2% of 2013 revenue, respectively. The company also cites reliance on financial institutions for appraisal work and competition, including online auction platforms.
- High leverage, related-party debt, facility covenants, lender-controlled advances, and the need for letters of credit may constrain liquidity or the ability to bid on large engagements. Negative stockholders’ equity and negative 2013 operating cash flow heighten the importance of liquidity monitoring.
- A 2013 lawsuit asserts breach-of-contract and other claims seeking up to $2.85 million. The company is defending the matter and states its financial impact cannot be estimated. It considers other ordinary-course claims not likely to have a material effect.
- Other stated exposures include appraisal liability, inventory markdowns, foreign currency movements, key-personnel retention, and business-cycle sensitivity. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Confirm the registrant identity: the filing names Great American Group, Inc., not BRC Group Holdings, Inc.
- Review the audited financial statements and cash-flow details, particularly the causes and sustainability of operating cash use and the unusually large 2012 operating cash inflow.
- Verify available borrowing capacity, lender discretion, covenant compliance, facility terms, and the effect of U.K. borrowings on the U.S. facility.
- Assess repayment terms and related-party implications of the $50.5 million acquisition notes, along with the collateral, collection, and modification status of the oil-rig lease receivable.
- Track the lawsuit, customer concentration, and whether post-year-end Shoon sale proceeds and loan repayment were completed as described.