Business Context and Reporting Period
Company: Great American Group, Inc. (GAG, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: GAG, Inc. is a leading provider of asset disposition, valuation, and appraisal services. The company operates in two primary segments: Auction and Liquidation Solutions (retail, wholesale, and industrial asset disposition) and Valuation and Appraisal Services (independent appraisals for lenders and investors).
Key Event: On July 31, 2009, the company completed a reverse merger with Alternative Asset Management Acquisition Corp. (AAMAC). This transaction was accounted for as a recapitalization, with GAG, LLC treated as the accounting acquirer. The company changed its tax status from a partnership to a C-Corporation effective July 31, 2009.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 (in thousands) | 2008 (in thousands) |
|---|---|---|
| Total Revenues | $83,421 | $53,169 |
| Operating Income | $17,518 | $6,142 |
| Net Income | $16,956 | $263 |
| Operating Margin | 21.0% | 11.6% |
| Cash and Cash Equivalents | $37,989 | $16,965 |
| Total Assets | $78,673 | $55,831 |
| Total Liabilities | $79,673 | $41,330 |
| Long-Term Debt (Principal) | $55,617 | $4,276 |
| Stockholders' Equity | $(1,000) | $14,501 |
Note: The 2009 Net Income includes a significant non-cash income tax benefit of $11.664 million resulting from the change in tax status to a C-Corporation. Excluding this benefit, income from continuing operations was $5.434 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 56.9% to $83.4 million, driven by a $25.3 million increase in the Auction and Liquidation segment (due to two large bankruptcy liquidation engagements) and a $5.0 million increase in the Valuation and Appraisal segment.
- Profitability: Net income surged from $0.3 million in 2008 to $17.0 million in 2009. This was primarily due to operational improvements and the $11.7 million income tax benefit recognized upon the tax status change.
- Debt Structure: Long-term debt increased significantly to $55.6 million due to the issuance of subordinated unsecured promissory notes to Great American Members and Phantom Equityholders as part of the Acquisition consideration.
- Equity Position: Stockholders' equity turned negative to $(1.0) million, largely due to the accounting treatment of the reverse merger, warrant redemption liability, and distributions to stockholders.
- Discontinued Operations: Losses from discontinued operations (retail furniture liquidation) decreased significantly to $0.1 million in 2009 from $2.1 million in 2008 following the segment's closure in 2008.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Expansion: The company expanded into Europe (UK office opened April 2009) and launched a joint venture, Great American Real Estate, LLC, for residential real estate auctions and loan sales.
- Contingent Consideration: The company did not meet the Adjusted EBITDA target for the year ended December 31, 2009, which would have triggered the issuance of 2 million shares of contingent stock. Future issuance depends on meeting targets in 2010 and 2011.
- Liquidity: Management anticipates that cash from operations and existing credit facilities will be sufficient to meet requirements for the next 12 months.
Risks and Contingencies
- Debt Obligations: The company carries substantial indebtedness ($55.6 million notes payable at 12% interest), which restricts cash flow and ability to obtain additional financing.
- Guarantee Risk: The company bears risk on "guarantee" based engagements where it must cover shortfalls if liquidation proceeds do not meet guaranteed amounts.
- Inventory Valuation: A $1.4 million inventory valuation charge was recorded in Q4 2009 to write down goods held for sale to lower of cost or market.
- Concentration: Two liquidation service contracts represented 30.9% of total revenues in 2009.
- Stock Liquidity: Common stock trades on the OTC Bulletin Board with limited liquidity and is subject to "penny stock" regulations.
Investor Verification Checklist
- Tax Benefit Sustainability: Verify the sustainability of the $11.7 million income tax benefit, which was a one-time item driven by the change in tax status.
- Debt Service Capacity: Assess the company's ability to service the $55.6 million in notes payable (12% interest) and the $11.1 million annual principal payments starting July 2010.
- Inventory Realization: Confirm the valuation and saleability of the $15.0 million in "Goods held for sale or auction" on the balance sheet.
- Contingent Stock Targets: Monitor the company's progress toward the Adjusted EBITDA targets required to trigger the issuance of up to 6 million additional shares.
- Revenue Concentration: Evaluate the risk associated with the high concentration of revenue from a small number of large liquidation contracts.