Business context and reporting period
This is Great American Group, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012, comparing results with the three months ended March 31, 2011. The company provides auction and liquidation, real estate advisory, capital advisory, and valuation and appraisal services. The filing registrant is Great American Group, Inc.; the request metadata names BRC Group Holdings, Inc., so the entity identity should be verified.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars. Revenue increased 39.8% to $19.320, from $13.816. Services and fees were $16.900 and goods sales were $2.420. Operating income rose to $2.400 from $0.305; operating margin was 12.4%, versus 2.2%. Net income was $1.067, compared with a $0.526 loss; diluted EPS was $0.04, versus a loss of $0.02 per share.
- Auction and liquidation revenue grew to $13.160 from $8.637; segment income increased to $3.619 from $2.303. Segment gross margin eased to 57.1% from 58.1%.
- Valuation and appraisal revenue rose to $6.160 from $5.179; segment income increased to $1.610 from $1.194. Gross margin declined to 55.3% from 59.4%, which management attributed to higher staffing costs.
- Cash provided by operating activities was $7.508, compared with $0.162 used in the prior-year quarter. Investing activities used $0.401; financing activities used $1.479. Cash and cash equivalents ended at $20.806, up from $15.034 at year-end.
- At March 31, current assets were $61.506 and current liabilities $33.581, implying working capital of $27.925 and a current ratio of about 1.83. Total liabilities were $85.794 against assets of $78.816; stockholders’ deficit was $6.978.
- Debt and credit balances included $53.931 of subordinated long-term notes, $11.449 of notes payable secured by equipment, and $1.615 drawn on the accounts-receivable line. The company reported no borrowings under its $100 million asset-based facility. Long-term note interest expense was $0.538 for the quarter; total interest expense was $0.627.
Material changes, outlook, and risks
Growth was driven in part by $3.0 million of revenue from GA Keen Realty Advisors, which began operations in 2011, and stronger U.K. liquidation activity. Goods-sale revenue also increased. These gains were partly offset by a $1.7 million decline in capital advisory fees. SG&A increased 9.3% to $8.519, including higher profit-sharing and payroll costs in auction and liquidation; lower corporate share-based compensation partly offset the increase. Interest expense rose from $0.328 to $0.627, partly because the prior-year quarter included a $0.309 reversal of accrued interest on an equipment-backed note.
Management stated that cash, expected operating cash flow, and available asset-based credit should be sufficient for working capital and capital expenditures for at least 12 months. This is management’s assessment, not formal earnings guidance. The filing highlights volatile engagement volume, dependence on liquidation proceeds and accurate asset valuations, potential losses on guaranteed or purchased engagements and lending, substantial debt service, reliance on financial-institution clients and credit facilities, competition, and international expansion risks. Management also noted that improved economic and credit conditions can reduce large retail liquidation opportunities. The company reported ordinary-course legal claims that it did not expect to materially affect its financial position or results.
Subsequent event: on May 4, 2012, the company invested $65,000 for a 40% interest in U.K. shoe retailer Shoon and loaned it approximately $1.3 million, secured by inventory. The company said its board appointment rights make it the primary beneficiary and require consolidation from the investment date.
Important facts for investors to verify
- Confirm the correct issuer: the filing is for Great American Group, Inc., despite the BRC Group Holdings, Inc. request metadata.
- Review the $53.931 million related-party subordinated notes, their payment terms and cash-balance condition, and the separate $11.449 million equipment-secured note, whose maturity was extended to December 31, 2012.
- Reconcile inconsistent debt-rate wording in MD&A: it states that $52.0 million bears 3.75% interest and $1.9 million bears 12%, although the note detail identifies $48.759 million payable to former members and $5.172 million to Phantom Equityholders.
- Assess whether the strong operating cash flow is repeatable; the quarter’s cash flow included a $3.279 million reduction in loan receivable and changes in payables and other working-capital items.
- Evaluate the quality and concentration of revenue, including the filing’s disclosure that one real estate services contract accounted for 10.1% of quarterly revenue, and the volatility of liquidation engagements.
- Track Shoon’s post-quarter consolidation, funding, performance, and related exposure, as well as the company’s ability to maintain liquidity and service debt.