Business context and reporting period
Great American Group, Inc. (the registrant named in the filing; metadata identifies BRC Group Holdings, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2014. It provides auction and liquidation, valuation and appraisal, and capital markets services. On June 18, 2014, it acquired B. Riley and Co. Inc. (BRC); BRC’s results are included only from that date through quarter-end. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2014: $14.9; 2013: $15.2 | 2014: $36.6; 2013: $36.2 |
| Operating income (loss) | 2014: $(1.1); 2013: $(1.9) | 2014: $(2.3); 2013: $0.4 |
| Net loss attributable to Great American Group, Inc. | 2014: $(0.8); 2013: $(1.5) | 2014: $(2.1); 2013: $(0.2) |
| Basic and diluted loss per share | 2014: $(0.16); 2013: $(1.07) | 2014: $(0.66); 2013: $(0.17) |
| Operating margin | 2014: -7.1%; 2013: -12.7% | 2014: -6.3%; 2013: 1.1% |
- Six-month direct cost of services was $11.3 million, or 30.8% of revenue, versus $11.8 million, or 32.6%, in 2013. Selling, general and administrative expense was $18.6 million, down 11.5%; the filing cites lower auction and liquidation expenses and the absence of Shoon retail-store costs, partly offset by higher valuation and appraisal and acquisition-related costs.
- Cash from operating activities was $5.9 million for the first half, versus $0.1 million in 2013. Investing activities provided $3.9 million; financing activities provided $14.4 million, including private-placement proceeds and debt repayments. Cash and cash equivalents rose to $43.0 million from $18.9 million at year-end.
- At June 30, current assets were $78.8 million and current liabilities $30.6 million. The company reported $0.1 million of restricted cash, $1.4 million outstanding on its receivables line, no borrowings under its asset-based facility, and no long-term debt. Current debt also included $1.1 million of notes subsequently paid in July and $6.6 million of secured notes payable related to equipment financing.
- On June 5, the company raised approximately $51.4 million gross through a private placement of 10.29 million shares at $5 per share. It paid $30.2 million to retire $48.8 million face value of related-party debt owed to two executive officers/directors; the $18.8 million discount was recorded as a capital contribution. The remaining $1.1 million of notes was paid July 31; the filing says no principal or interest remained on those notes as of August 1.
- The $100 million asset-based facility had no outstanding borrowings or letters of credit at June 30; availability is subject to lender discretion, facility terms and UK facility offsets. Management believed cash, available facilities and expected operating cash flow would meet working-capital and capital-expenditure needs for at least 12 months.
Material changes versus the prior comparable period
- Second-quarter revenue declined 1.9%, while first-half revenue rose 1.1%. First-half service and fee revenue fell 11.4%, mainly because 2013 included a large Fashion Bug liquidation engagement; goods-sale revenue increased with a first-quarter 2014 industrial asset sale.
- First-half operating results moved from $0.4 million income to a $2.3 million loss, and the company-attributable net loss widened to $2.1 million. Management attributed the deterioration principally to lower auction and liquidation segment income and the absence of the prior-year large retail liquidation engagement.
- In the second quarter, the company-attributable loss narrowed to $0.8 million from $1.5 million, with improved auction and liquidation and valuation and appraisal results and lower interest expense. The quarter included $1.0 million of BRC acquisition-related costs, according to management.
- The BRC acquisition added the capital markets segment and $22.1 million of preliminary goodwill; the purchase price was $26.4 million in stock. BRC contributed $0.4 million revenue and a $0.2 million pretax loss during its short post-acquisition reporting period. Goodwill was preliminary and expected to be nondeductible for tax purposes.
- Shares outstanding increased substantially following the reverse split and equity transactions: the filing reports 15,977,482 issued and outstanding at June 30, versus 1,500,107 at December 31, 2013, with share and per-share data adjusted for the June 3 one-for-20 reverse split.
Outlook, risks, contingencies and unusual items
- After a strategic review, the board approved cost reductions and European restructuring on August 13, 2014. The company expected a $2.0 million third-quarter charge and $2.0 million of third-quarter cash expenditures, including approximately $1.3 million payroll and severance and $0.7 million other corporate costs. Management warned that a reduced European focus may lower European revenue. No quantified ongoing earnings guidance is provided.
- The acquisitions of B. Riley & Co. Holdings, LLC and Riley Investment Management LLC closed August 1, 2014, after quarter-end. The company cited expected synergies from the BRC transaction; its pro forma combined results are expressly informational and not a forecast.
- A lease customer for four oil rigs was in default and $2.6 million in arrears; the lessee demanded arbitration in June. Management believed minimum lease payments were collectible and recorded no reserve. Remaining gross lease payments were $8.5 million, including a $4.2 million purchase option due December 15, 2014.
- The June equity offering triggered an ownership shift under Internal Revenue Code Section 382 that may limit use of net operating loss carryforwards. The company had approximately $20.9 million federal and $22.0 million state NOL carryforwards and recorded no valuation allowance, believing they would be realized.
- Key stated risks include volatile engagement-driven revenue, losses on guaranteed or outright-purchase liquidation contracts, valuation and inventory write-downs, investment-banking and trading market exposure, credit and liquidity risks, dependence on financial-institution clients and key personnel, regulatory and litigation exposure, and potential limits on financing availability. The broker-dealer reported $15.0 million net capital and $14.7 million excess net capital at June 30; its net capital ratio was 0.22 to 1.
- Ordinary-course legal claims were not believed likely to materially affect financial position or results. Disclosure controls were assessed as effective at the reasonable-assurance level; no material quarterly change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Reconcile post-placement share count, reverse-split-adjusted per-share results and dilution from the BRC stock consideration; verify the ownership and governance implications of Bryant Riley’s reported 24.7% stake.
- Review the final BRC purchase-price allocation, acquired businesses’ post-close performance, and whether expected synergies offset acquisition and integration costs.
- Track the third-quarter $2.0 million restructuring charge and cash cost, progress of the UK appraisal alliance, and the effect of the European strategic shift on revenue.
- Monitor the oil-rig lessee arbitration, collection of arrears and the December 2014 purchase option, including any change to management’s no-reserve assessment.
- Confirm the status and terms of credit-facility availability, the remaining $6.6 million equipment-related notes, and the usability of NOLs after the Section 382 ownership change.
- Assess the sustainability of operating cash flow, given engagement timing and the large working-capital movements that contributed to first-half cash generation.