BRC Group Holdings, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. We periodically use derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain loans receivable and Auction and Liquidation engagements with operations outside the United States. As of March 31, 2022, there were no forward exchange contracts outstanding. As of December 31, 2021, 6€ million forward exchange contracts were outstanding. The forward exchange contracts were entered into to improve the predictability of cash flows related to a retail store liquidation engagement and a loan receivable. The net gain from forward exchange contracts was $0.1 million and $0.3 million during the three months ended March 31, 2022 and 2021, respectively. This amount is reported as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. We transact business in various foreign currencies. In countries where the functional currency of the underlying operations has been determined to be the local country’s currency, revenues and expenses of operations outside the United States are translated into United States dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive 54 income in the accompanying condensed consolidated balance sheets. Transaction gains (losses) are included in selling, general and administrative expenses in our condensed consolidated statements of operations. Interest Rate Risk Our primary exposure to market risk consists of risk related to changes in interest rates. We utilize borrowings under our senior notes payable and credit facilities to fund costs and expenses incurred in connection with our acquisitions and retail liquidation engagements. Borrowings under our senior notes payable are at fixed interest rates and borrowings under our credit facilities bear interest at a floating rate of interest. We invest in loans receivable that primarily bear interest at floating rates of interest. If floating rates of interest had increased by 1% during the three months ended March 31, 2022 , the rate increase would have resulted in an increase in interest expense of $1.1 million. The primary objective of our investment activities is to preserve capital for the purpose of funding operations while at the same time maximizing the income that we receive from investments without significantly increasing risk. To achieve these objectives, our investments allow us to maintain a portfolio of cash equivalents, short-term investments through a variety of securities owned that primarily includes common stocks, corporate bonds and investments in partnership interests, and loans receivable. Our cash and cash equivalents through March 31, 2022 included amounts in bank checking and liquid money market accounts. We may be exposed to interest rate risk through trading activities in convertible and fixed income securities as well as U.S. Treasury securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to interest rate risk in these activities. Foreign Currency Risk The majority of our operating activities are conducted in U.S. dollars. Revenues generated from our foreign subsidiaries totaled $2.0 million during the three months ended March 31, 2022 or 0.9% of our total revenues of $205.6 million during the three months ended March 31, 2022 . The financial statements of our foreign subsidiaries are translated into U.S. dollars at period-end rates, with the exception of revenues, costs, and expenses, which are translated at average rates during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and include them as a component of accumulated other comprehensive income (loss). Transaction gains (losses), which were included in our condensed consolidated statements of operations, amounted to a gain of $0.3 million and $0.6 million during the three months ended March 31, 2022 and 2021, respectively. We may be exposed to foreign currency risk; however, our operating results during the three months ended March 31, 2022 included $2.0 million of revenues and $1.7 million of operating expenses from our foreign subsidiaries and a 10% appreciation or depreciation of the U.S. dollar relative to the local currency exchange rates would result in an approximately $0.2 million change in our operating income during the three months ended March 31, 2022 .