Great American Group, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for Great American Group, Inc., not BRC Group Holdings, Inc. It covers the quarter and nine months ended September 30, 2011; the financial statements are unaudited. Unless noted otherwise, dollar amounts below are in millions.
Business context and reporting period
Great American provides auction and liquidation, capital advisory, and valuation and appraisal services. Its two reportable segments are Auction and Liquidation and Valuation and Appraisal. The filing attributes much of the 2011 activity increase to TJ Hughes and Borders liquidation engagements, including the company’s participation in the Borders joint venture, and to GA Capital advisory work.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $28.5 | $13.9 | $52.2 | $31.1 |
| Operating income (loss) | $9.0 | $2.4 | $7.1 | $(10.5) |
| Net income (loss) | $4.0 | $0.5 | $1.3 | $(9.1) |
| Basic and diluted EPS | $0.14 | $0.02 | $0.04 | $(0.33) |
| Operating margin | 31.7% | 17.5% | 13.6% | (33.8%) |
- Q3 revenue more than doubled year over year. Nine-month revenue rose 67.5%. Services and fees drove growth; sale-of-goods revenue declined for the nine-month period, to $2.0 million from $4.7 million.
- Q3 segment income was $12.5 million for Auction and Liquidation and $1.5 million for Valuation and Appraisal, before corporate and other expenses. Nine-month segment income was $13.4 million and $4.6 million, respectively.
- Auction and Liquidation gross margin improved to 68.9% for the first nine months from 34.3%; Valuation and Appraisal gross margin was 57.5%, versus 56.4%. For Q3, Valuation and Appraisal gross margin decreased to 54.1% from 56.0% due to service mix.
- Interest expense rose to $2.9 million in Q3 from $0.8 million, and to $3.9 million for nine months from $2.6 million. The filing cites facility success fees and borrowing used to fund liquidation activity, including the Dialectic note.
- Cash and cash equivalents were $16.4 million at September 30, down from $20.1 million at December 31, 2010; restricted cash was $5.4 million. Working capital was $27.2 million, based on current assets of $74.1 million and current liabilities of $46.9 million.
- Operating cash flow was negative $5.7 million for nine months, similar to negative $5.7 million in 2010. The company reported a $22.1 million cash use from the combined increase in receivables and customer-contract advances. Investing cash flow was negative $3.2 million; financing cash flow was positive $5.3 million. Cash declined by $3.7 million overall.
- At quarter-end, the balance sheet showed $55.3 million of long-term debt, including $3.1 million current; $19.3 million of notes payable; and $1.7 million drawn on the receivables line. The company disclosed $24.2 million in current long-term debt, notes payable, and receivables-line borrowings. Stockholders’ deficit was $7.4 million.
Material changes versus the prior comparable period
- Q3 gains were led by Auction and Liquidation: segment revenue increased to $22.7 million from $8.9 million. Valuation and Appraisal revenue rose to $5.9 million from $4.9 million.
- For nine months, Auction and Liquidation revenue rose to $34.8 million from $15.7 million; Valuation and Appraisal revenue increased to $17.3 million from $15.5 million. Management cited UK retail liquidations and GA Capital fees as key drivers.
- Nine-month operating results moved from a $10.5 million loss to $7.1 million income, while net results improved from a $9.1 million loss to $1.3 million income. The 2010 comparison included substantially higher cost of goods sold and share-based compensation.
- Receivables and customer-contract advances increased materially from year-end, reflecting engagement activity and contributing to operating cash use. Total assets rose to $91.7 million from $72.3 million.
Outlook, risks, contingencies, and unusual items
- Management expected available cash, asset-based facility capacity, and operating cash generation to cover working capital and capital expenditure needs for at least 12 months. This is management’s assessment, not earnings guidance; no numerical revenue or profit forecast is provided.
- Management emphasized that liquidation engagements and results are volatile and depend on the timing and size of projects. It noted that improved retailer and credit-market conditions had reduced large US liquidation activity, while 2011 growth was concentrated in several engagements.
- The $100 million asset-based facility expires in July 2013; advances and letters of credit are subject to lender discretion. At September 30, the note disclosures report no cash borrowings under that facility and one outstanding letter of credit of $4.6 million. The MD&A elsewhere says no letters of credit were outstanding at that date; this apparent inconsistency warrants checking.
- The Dialectic loan provided $7.0 million of proceeds with a stated maturity value of $7.6 million, 14% interest beginning after November 1, 2011, and profit participation. The note and related profit participation were paid in October 2011. Separately, $11.7 million of equipment-secured notes were due December 31, 2011 under the financial-statement note; the MD&A describes a different maturity date, November 19, 2011.
- Subordinated notes payable to former Great American members and Phantom Equityholders totaled $55.3 million. Certain notes carry 3.75% interest and extended maturities, with cash-flow-based prepayments subject to a minimum adjusted cash balance condition. Accrued interest of $1.8 million was added to related-party note principal in July 2011; deferred Phantom Equityholder principal payments were made by November 4, 2011.
- Other notable exposures include guarantee-based liquidation engagements, goods held for sale or auction of $12.9 million (including oil-rig equipment), and a $3.2 million related-party note receivable from GARE, extended to October 1, 2011 and described in the MD&A as due on demand. The company’s stated maximum exposure to the GARE variable-interest entities is the carrying value of its related notes and accrued interest.
- The nine-month income-tax provision was $1.9 million despite pretax income of $3.1 million; the reported effective tax rate was 59.8%, including a tax differential related to restricted-stock vesting. Management reported no valuation allowance against deferred tax assets.
- The company reported ordinary-course legal claims but did not expect them to materially affect financial position or results. Management concluded disclosure controls were effective and reported no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the supplied request names BRC Group Holdings, Inc., but the filing identifies Great American Group, Inc.
- Reconcile the asset-based facility’s quarter-end letter-of-credit disclosure and the conflicting maturity dates cited for the equipment-secured note.
- Track collection of the $3.2 million related-party receivable and accrued interest, and confirm repayment of the Dialectic note and other amounts reported paid after quarter-end.
- Assess whether engagement-driven earnings can persist, given the concentration of Q3 revenue in two liquidation contracts and the company’s stated quarterly volatility.
- Monitor cash conversion, customer advances, debt-service needs, facility availability and the minimum-cash condition on subordinated notes.