Business context and reporting period
The supplied filing is Great American Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011; it does not identify BRC Group Holdings, Inc. as the registrant. Great American provides auction and liquidation services and valuation and appraisal services. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Revenue | $9.831 | $23.647 |
| Operating loss | $(2.213) | $(1.908) |
| Net loss | $(2.249) | $(2.775) |
| Loss per share, basic and diluted | $(0.08) | $(0.10) |
Six-month revenue rose 36.8% year over year; the quarterly increase was 88.5%. Services and fees drove growth, while revenue from sale of goods declined. For the six months, Auction and Liquidation revenue was $12.195 million and Valuation and Appraisal revenue was $11.452 million. Reported segment income was $0.887 million and $3.117 million, respectively.
Consolidated operating margin was approximately (22.5)% for the quarter and (8.1)% for the six-month period. Six-month Auction and Liquidation gross margin was 59.5%, versus (33.8)% in the prior year; Valuation and Appraisal gross margin was 59.3%, versus 56.6%. The filing attributes much of the improvement to higher service revenue, including UK retail liquidations and capital advisory, and to the prior-year accrual of estimated losses on guaranteed engagements.
Six-month operating cash flow was negative $3.143 million, compared with negative $12.296 million in 2010. Investing cash flow was negative $0.092 million and financing cash flow was positive $0.557 million. Cash decreased $2.690 million to $17.390 million. At June 30, current assets were $45.876 million and current liabilities $27.373 million; stockholders’ deficit was $11.495 million.
At June 30, long-term debt was $53.893 million, including $1.724 million current and $52.169 million long-term; a separate secured note payable was $11.705 million. The company also had $2.290 million outstanding under its accounts-receivable line. The $100 million asset-based facility had no borrowings or letters of credit outstanding at June 30. Interest expense for the first half was $0.953 million. Goods held for sale or auction totaled $12.839 million, including oil-rig-related machinery and equipment pledged as collateral for the $11.705 million note.
Changes versus the prior comparable period
- Six-month net loss improved to $2.775 million from $9.587 million; the quarterly net loss narrowed to $2.249 million from $6.607 million.
- Six-month SG&A declined 3.9% to $15.951 million, reflecting lower corporate and valuation/appraisal expenses, partly offset by higher Auction and Liquidation costs, including European legal and professional fees and costs of the newly formed GA Keen Realty Advisors division.
- Six-month interest expense fell to $0.953 million from $1.792 million, largely due to reduced rates on certain member notes and a $0.309 million reversal of previously accrued interest on the equipment-backed note.
- The 2010 comparison includes unusually weak Auction and Liquidation results from estimated losses on guaranteed retail liquidation contracts. Sale-of-goods revenue also fell substantially year over year.
Outlook, commentary, risks and unusual items
Management said available cash, expected operating cash flow, and facility availability should be sufficient for working capital and capital expenditures for at least 12 months. This outlook should be considered alongside the company’s operating cash outflow, substantial debt, and subsequent borrowing activity. Management described revenue and results as volatile and dependent on the number, size, timing, and structure of liquidation engagements; no quantitative earnings guidance was provided.
After quarter-end, the company reported approximately $41 million drawn under its asset-based facility to fund new liquidation transactions. On July 21, 2011, GAG, LLC obtained a $7 million loan with a stated maturity value of $7.609 million, maturing July 31, 2013; 14% interest begins after November 1, 2011, and the lenders may receive profit participation. The filing also reports extensions of some July 31 principal payments on member and Phantom Equityholder notes, capitalization of $1.762 million of accrued interest into notes held by two executive officers/directors, and total note principal of approximately $53.7 million after these changes.
Management cited fewer large retail liquidation engagements as economic and credit conditions improved for retailers. Key risks include volatile engagement-driven revenue, losses on guaranteed or purchased assets, substantial indebtedness and liquidity needs, reliance on lender discretion for facility advances, client concentration in financial institutions, international execution, and potential inventory markdowns. The company reported legal claims arising in the ordinary course that it did not expect to have a material effect. It also reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the post-quarter $41 million facility draw, subsequent facility availability, and the funding and repayment economics of the liquidation engagements it supports.
- Review the full terms, priority, fees, profit participation, and effective cost of the Dialectic loan, including its stated maturity value versus cash proceeds.
- Confirm the timing and amounts of member-note principal and interest payments after the waivers and amendments, and assess related-party governance given the noteholders’ executive and director roles.
- Assess the recoverability and sale value of the $12.839 million inventory balance, particularly pledged oil-rig equipment, and the exposure from guaranteed liquidation contracts.
- Track operating cash flow, sustained profitability, and liquidity against management’s 12-month sufficiency statement; results remain sensitive to engagement timing and mix.