RILY

Business Context and Reporting Period

Company: Great American Group, Inc. (Note: Input metadata referenced "BRC Group Holdings," but the filing text identifies the registrant as Great American Group, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company operates in two segments: Auction and Liquidation (disposition of assets for distressed companies) and Valuation and Appraisal (independent appraisals for lenders and investors). The Company completed a reverse merger with Alternative Asset Management Acquisition Corp. (AAMAC) in July 2009.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Debt includes $53.9 million in subordinated promissory notes and $1.7 million in other notes payable.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues for the nine months ended September 30, 2010, decreased by $40.8 million (56.7%) compared to the same period in 2009. This was primarily driven by a $39.9 million drop in the Auction and Liquidation segment due to fewer large retail liquidation engagements as economic conditions improved.
• Profitability Shift: The Company reported a net loss of $9.1 million for the nine months ended September 30, 2010, compared to net income of $21.5 million in the prior year period. The prior year included a significant tax benefit ($7.6 million) related to the change in tax status to a C-Corporation.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased by $1.5 million year-over-year for the nine-month period, largely due to a reduction in deferred compensation plan expenses and acquisition-related legal fees in 2009.
• Cash Flow: Net cash used in operating activities was $6.9 million for the nine months ended September 30, 2010, a reversal from the $25.0 million provided by operations in the prior year period.

Guidance, Outlook, and Risks

• Liquidity and Debt Management: The Company amended its subordinated promissory notes in May 2010, reducing the interest rate from 12.0% to 3.75% and extending the maturity date for $47.0 million of the debt to July 2018. In October 2010, the Company obtained waivers to defer interest payments due in late 2010 and early 2011 until July 2011.
• Cost Reduction: Management implemented cost-cutting measures in September 2010, including a 7% reduction in employee headcount and salary reductions for senior executives, expected to save approximately $2.2 million annually.
• Outlook: Management believes current cash, available credit facilities ($100 million asset-based facility with no outstanding balance), and operating cash flows are sufficient to meet requirements for the next 12 months.
• Risks: Key risks include volatility in revenues due to the cyclical nature of liquidation engagements, substantial indebtedness, potential losses from "guarantee" based engagements where the Company guarantees a minimum recovery value, and reliance on financial institutions for valuation services.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the minimum adjusted cash balance covenant ($20 million) required for the amended promissory notes.
• Revenue Concentration: Review the impact of the single liquidation contract that represented 45.4% of Q3 2010 revenues, which was driven by the reversal of a previously accrued loss reserve.
• Inventory Valuation: Assess the $14.0 million in "Goods held for sale or auction" and the $1.3 million impairment charge recorded in the nine-month period.
• Related Party Loans: Confirm the status of the $6.2 million in notes receivable from related parties (GAHA Fund I and GARE) and their repayment schedules.
• Contingent Stock: Monitor the achievement of Adjusted EBITDA targets required to trigger the issuance of up to 6 million shares of contingent stock consideration.