10-K 1 v372433_10k.htm FORM 10-K

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

FORM 10-K

 

(Mark One)  
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended December 31, 2013
   
Or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ______________ to _____________

 Commission File Number 000-54010

 

 

 

GREAT AMERICAN GROUP, INC.
(Exact name of registrant as specified in its charter)

 

Delaware 27-0223495

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)
   

21860 Burbank Boulevard, Suite 300 South

Woodland Hills, CA

91367
(Address of Principal Executive Offices) (Zip Code)

 

(818) 884-3737
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.0001 per share

(Title of Class)

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes:   ¨     No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes: x   No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes:  ¨    No  x

 

The aggregate market value of the registrant’s common stock held by non-affiliates, based on the closing price of the registrant’s common stock as reported on the OTC Bulletin Board on June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.8 million. For purposes of this calculation, it has been assumed that all shares of the registrant's common stock held by directors, executive officers and shareholders beneficially owning ten percent or more of the registrant's common stock are held by affiliates. The treatment of these persons as affiliates for purposes of this calculation is not conclusive as to whether such persons are, in fact, affiliates of the registrant.

 

The number of shares outstanding of the registrant’s common stock as of March 21, 2014 was 30,002,975.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement relating to the registrant’s 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report.

  

 

 

 
 

 

GREAT AMERICAN GROUP, INC.

 

INDEX TO ANNUAL REPORT ON FORM 10-K

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

 

    Page
     
PART I    
     
Item 1. Business 4
     
Item 1A. Risk Factors 11
     
Item 1B. Unresolved Staff Comments 16
     
Item 2. Properties 17
     
Item 3. Legal Proceedings 17
     
Item 4. Mine Safety Disclosures 17
     
PART II    
     
Item 5.

Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities

18
     
Item 6. Selected Financial Data 19
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43
     
Item 8. Financial Statements and Supplementary Data 43
     
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure 43
     
Item 9A. Controls and Procedures 44
     
Item 9B. Other Information 44
     
PART III    
     
Item 10. Directors, Executive Officers and Corporate Governance 45
     
Item 11. Executive Compensation 45
     
Item 12.

Securities Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters

45
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 45
     
Item 14. Principal Accounting Fees and Services 45
     
PART IV    
     
Item 15. Exhibits and Financial Statement Schedules 46
     
  Signatures 49

 

TRADEMARKS

 

We have registered U.S. trademarks for Great American Group and the Great American logo. Each trademark, trade name or service mark of another company appearing in this Annual Report on Form 10-K belongs to its holder, and does not belong to us.

 

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PART I

 

This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are generally intended to identify forward-looking statements, but are not exclusive means of identifying forward-looking statements in this Annual Report. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed in “Part I—Item 1A. Risk Factors” contained in this Annual Report. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of the date on which this Annual Report was filed with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Except as otherwise required by the context, references in this Annual Report to:

 

“Great American,” “the “Company,” “we,” “us” or “our” refer to the combined business of Great American Group, Inc. and all of its subsidiaries after giving effect to (i) the contribution to Great American Group, Inc. of all of the membership interests of Great American Group, LLC by the members of Great American, which transaction is referred to herein as the “Contribution”, and (ii) the merger of Alternative Asset Management Acquisition Corp. (“AAMAC”) with and into its wholly-owned subsidiary, AAMAC Merger Sub, Inc., referred to herein as “Merger Sub”, in each case, which occurred on July 31, 2009, referred to herein as the “Merger”. The Contribution and Merger are referred to herein collectively as the “Acquisition”;

 

“GAG, LLC” refers to Great American Group, LLC;

 

“the Great American Members” refers to the members of Great American Group, LLC prior to the Acquisition;

 

“Phantom Equityholders” refers to certain members of senior management of Great American Group, LLC prior to the Acquisition that were participants in a deferred compensation plan.

 

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Item 1. BUSINESS

 

General

 

We are a leading provider of asset disposition, valuation and appraisal, and real estate consulting services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional service firms throughout the United States, Canada and Europe. We operate our business in two segments: auction and liquidation solutions and valuation and appraisal services. The divisions in our auction and liquidation segment assist clients in maximizing return and recovery rates through the efficient disposition of assets and provide clients with capital advisory, financing and real estate services. Such assets include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property. Our valuation and appraisal services segment provides our clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business needs. We previously had a third segment relating to UK retail stores. This segment was created from our investment in Shoon Trading Limited (“Shoon”) on May 4, 2012, the date of investment, through July 31, 2013. The operating results of our UK retail stores segment include the operations of ten retail shoe stores in the United Kingdom. In August 2013, the Shoon shareholder agreement was amended and restated to eliminate the Company’s super majority voting rights which enabled the Company to control the board of directors of Shoon. As a result of this amendment, the Company no longer controlled Shoon and the operating results of Shoon are not consolidated for any periods after July 31, 2013. As such, the Company no longer operates in the UK retail stores segment. In January 2014, Shoon was sold to a third party, and we no longer have a financial interest in the operations of Shoon. The financial statements in this Annual Report are presented in a manner consistent with our operating structure. For additional information regarding our operating segments, see Note 19 of the Notes to our Consolidated Financial Statements.

 

Our significant industry experience, network of highly skilled employees and scalable network of independent contractors and industry-specific advisors allow us to tailor our auction and liquidation solutions to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. We have established appraisal and valuation methodologies and practices in a broad array of asset categories which have made us a recognized industry leader. Furthermore, our scale and pool of resources allow us to offer our services on a nationwide basis. As a result of this market expertise and flexibility, our proven track record and our ability to offer cost-attractive services, we believe that we are well positioned to generate revenue growth and increase our market share across all of our service offerings.

 

Great American, together with our predecessors, has been in business since 1973. For over 40 years, Great American and its predecessors have provided retail, wholesale and industrial auction and liquidation solutions to clients. Past clients include Boeing, Apple Computers, Blockbuster Video, Borders Group, Circuit City, Comet, Fashion Bug, Friedman’s Jewelers, Orchard Supply Hardware, Mervyns, Tower Records, TJ Hughes, Promarkt, Eaton’s, Hancock Fabrics, Movie Gallery, Linens N Things, Kmart, Sears, Montgomery Ward, Whitehall Jewelers, Gottschalks, Fortunoff, and Ritz Camera. Since 1995, we have participated in liquidations involving over $25 billion in aggregate asset value and auctioned assets with an estimated aggregate value of over $6 billion.

 

Our valuation and appraisal services division provides valuation and appraisal services to financial institutions, lenders, private equity investors and other providers of capital. These services primarily include the valuation of assets (i) for purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii) in connection with potential business combinations. Our valuation and appraisal services divisions operate through limited liability companies that are majority owned by us. Our clients include major financial institutions such as Bank of America, Credit Suisse, GE Capital, JPMorgan Chase, Union Bank of California, and Wells Fargo. Our clients also include private equity firms such as Apollo Management, Goldman Sachs Capital Partners, Laurus Funds, Sun Capital Partners and UBS Capital.

 

We were incorporated in Delaware in May 2009 as a subsidiary of AAMAC. On July 31, 2009, we closed the Acquisition, pursuant to which (i) the Great American Members contributed all of their membership interests in GAG, LLC to us in exchange for 10,560,000 shares of our common stock and a subordinated unsecured promissory note in an initial principal amount of $60.0 million issued in favor of the Great American Members and the Phantom Equityholders and (ii) AAMAC merged with and into Merger Sub, our wholly owned subsidiary. As a result of the Acquisition, GAG, LLC and AAMAC became our wholly-owned subsidiaries. The Acquisition has been accounted for as a reverse merger accompanied by a recapitalization as more fully described in Note 1 of our Consolidated Financial Statements.

 

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Recent Developments

 

On May 4, 2012, we invested $0.1 million to acquire 44.4% of the common stock of Shoon, a shoe retailer with operations in the United Kingdom. Shoon purchased the rights to operate the former Shoon internet business and ten retail stores that were in administration in the United Kingdom. As part of the investment, we also loaned Shoon approximately $1.3 million collateralized by retail inventory. The loan bore interest at an annual rate of LIBOR plus 6.0%, payable monthly and had a maturity date of May 3, 2014. We exercised our right to appoint the Chairman of Shoon. Together with our 44.4% ownership of the common stock of Shoon and control of the majority of the board of directors, we had a controlling interest in Shoon and therefore consolidated Shoon’s operating results with ours. In August 2013, the Shoon shareholder agreement was amended and restated to eliminate our control rights. As a result of this amendment, Shoon’s operating results are not consolidated with the Company’s for any periods after July 31, 2013. Accordingly we have consolidated the operations of Shoon and included the results of operations of Shoon from May 4, 2012, the date of investment, through July 31, 2013 in our consolidated statements of operations. Our operating results for periods subsequent to July 31, 2013, include the income (loss) from our 44.4% equity investment in the common stock of Shoon. On August 2, 2013, an additional loan in the amount of $847 (net of $40 discount) was extended to Shoon with a maturity date of August 3, 2015. This increased the outstanding principal from both loans to $1,371. Interest on the new loan was payable monthly at 6.5%. Both of the loans are collateralized by the inventory of Shoon. In January 2014, Shoon was sold to a third party and our loans to Shoon were repaid to us. As a result, we no longer have a financial interest in the operations of Shoon. Revenues from the operation of the Shoon stores in the United Kingdom were $6.2 million for the seven months ended July 31, 2013 and $10.2 million for the period from May 4, 2012 to December 31, 2012. Other income during the year ended December 31, 2013 included a loss of $0.2 million from our equity investment in Shoon. Other income during the year ended December 31, 2012 includes a $1.4 million gain from bargain purchase as a result of the acquisition of Shoon. The gain resulted from the amount in which the net assets Shoon that were acquired exceeded the consideration paid, as more fully described in Note 18 of our Consolidated Financial Statements.

 

In August 2012, we were engaged to participate in a joint venture involving the liquidation of inventory for the going-out-of-business sale of 568 stores of women’s clothing retailer Fashion Bug in the United States, a subsidiary of Ascena Retail Group, Inc. (“Ascena”). The joint venture provided Fashion Bug with a minimum guarantee of amounts to be realized from the liquidation of inventory. In connection with our portion of the guarantee, we provided a letter of credit to Fashion Bug in the amount of $6.7 million. In January 2013, the liquidation sale of inventory was completed and the amounts realized from the liquidation of inventory exceeded the minimum guarantee. In March 2013, the letter of credit provided to Fashion Bug was returned to us. During the year ended December 31, 2013, revenues from services and fees as a result of our participation in the joint venture were $8.1 million.

 

In July 2013, we were engaged to liquidate the inventory of eight Orchard Supply Hardware stores. In August 2013, our engagement was expanded to include the liquidation of an additional nine Orchard Supply Hardware stores. We provided a minimum guarantee of amounts to be realized from the liquidation of inventory for the first eight stores and additional nine stores. We completed the liquidation of the first eight stores in the third quarter of 2013 and the additional nine stores in October 2013.

 

On July 24, 2013, the lease purchase agreement for four oil rigs that were included in goods held for sale or auction at December 31, 2012 was amended to, among other things, eliminate the right of the lessor to return the oil rigs to us. This amendment to the lease purchase agreement resulted in a change in the accounting for the lease from an operating lease to a sales-type lease. As a result, we recorded revenues from sale of goods of $9.3 million and costs of goods sold of $7.4 million in accordance with the sales-type lease during the year ended December 31, 2013.

 

On March 19, 2014, the Company entered into a separate credit agreement (the “UK Credit Agreement”) with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom. We are permitted to borrow up to £50 million under the UK Credit Agreement. The interest rate for borrowings under this credit agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of borrowings. Any borrowings on the UK Credit Agreement reduce the availability on the $100 million Wells Fargo asset based credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the $100 million Wells Fargo asset based credit facility.

 

Generation of Revenue

 

We provide services to clients on a guarantee, fee or outright purchase basis.

 

Guarantee. When providing services on a guarantee basis, we guarantee the client a specific recovery often expressed as a percentage of retail inventory value or wholesale inventory cost or, in the case of machinery or equipment, a set dollar amount. This guarantee is often required to be supported by a letter of credit, a cash deposit or a combination thereof. Cash deposits are typically funded in part with available cash together with short term borrowings under our credit facilities. Often when we provide auction or liquidation services on a guarantee basis, we do so through a collaborative arrangement with other service providers. In this situation, each collaborator agrees to provide a certain percentage of the guaranteed amount to the client through a combination of letters of credit, cash and financing. If we are engaged individually, we receive 100% of the net profit, less debt financing fees, sale related expenses (if any) and any share of the profits due to the client as a result of any profit sharing arrangement entered into based on a pre-negotiated formula. If the engagement was conducted through a collaborative arrangement, the profits or losses are divided among us and our partner or partners as set forth in the agreement governing the collaborative arrangement. If the net sales proceeds after expenses are less than the guarantee, we, together with our partners if the engagement was conducted through a collaborative arrangement, are responsible for the shortfall and will recognize a loss on the engagement.

 

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Fee. When we provide services on a fee basis, clients pay a pre-negotiated flat fee for the services provided, a percentage of asset sales generated or a combination of both.

 

Outright Purchase. When providing services on an outright purchase basis, we purchase the assets from the client and typically sell them at auction, orderly liquidation, through a third-party broker or, less frequently, as augmented inventory in conjunction with another liquidation that we are conducting. In an outright purchase, we take, together with any collaboration partners, title to the assets and absorb the profit or loss associated with the asset disposition.

 

Services

 

We provide a wide variety of services to clients seeking auction and liquidation solutions or valuation and appraisal services.

 

Auction and Liquidation Solutions

 

Retail

 

We enable our clients to quickly and efficiently dispose of under-performing assets and generate cash from excess inventory by conducting or assisting in store closings, going out of business sales, bankruptcy sales and fixture sales. With the goal of providing a single-source solution to our retail clients, we also provide merger and acquisition due diligence through our auction and liquidation segment and reverse logistics and appraisal services through our valuation and appraisal services segment. Financial institution and other capital providers rely on us to maximize recovery rates in distressed asset sales and in retail bankruptcy situations. Additionally, healthy, mature retailers utilize our proven inventory management and strategic disposition solutions, relying on our extensive network of retail professionals, to close unproductive stores and dispose of surplus inventory and fixtures as existing stores are updated.

 

For example, in a potential bankruptcy engagement, the debtor provides potential disposition firms with a snapshot of inventory and other assets available for sale. The disposition firms must analyze the inventory data and generate an estimate of potential recovery based on their valuation expertise and past liquidation experience. Typically, this process takes one to four weeks. The disposition firms then submit bids that guarantee a minimum recovery based on a percentage of retail value or cost. The successful bidder assumes management of the debtor’s stores on a contract basis and conducts the orderly disposition of the inventory and assets in these stores. Profits are generated by efficiently merchandizing inventory, managing the orderly closing of store locations and pricing remaining products to balance margin with speed of sale and liquidation expenses. Unlike merchandisers who employ a “top down” approach by focusing only on driving total sales (because overhead costs are fixed), disposition firms take a “bottom up” approach by focusing on balancing cost savings with maximizing proceeds. A typical retail disposition process spans eight to twelve weeks from the bankruptcy court’s approval of the successful bid to the final store closure.

 

We often conduct large retail liquidations that entail significant capital requirements through collaborative arrangements with other liquidators. By entering into an agreement with one or more collaborators, we are able to bid on larger engagements that we couldn’t conduct on our own due to the significant capital outlay involved, number of independent contractors required or financial risk associated with the particular engagement. We act as the lead partner in many of the collaborative arrangements that we enter into, meaning that we have primary responsibility for the due diligence, contract negotiation and execution of the engagement.

 

In April 2009, we expanded our operations into Europe by opening an office in the United Kingdom. We provide services to help retailers downsize through inventory liquidation and store closures in addition to providing appraisal and valuation services. In 2010, we hired a number of key employees to increase our presence and expand the operations of our retail liquidations solutions business throughout Europe. Revenues from services and fees from auction and liquidation services engagements, financing activities and valuation and appraisal engagements in Europe decreased to $9.8 million during the year ended December 31, 2013 from $23.5 million during the year ended December 31, 2012 and $11.6 million during the year ended December 31, 2011. The decrease in revenues in Europe in 2013 was primarily due to a decrease in the number and size of auction and liquidation engagements we conducted.

 

During the year ended December 31, 2013, revenues and fees as a result of our participation in the joint venture related to the liquidation of inventory for the going-out-of-business sale of Fashion Bug described above were $8.1 million. During the year ended December 31, 2012, revenues from services and fees for one retail liquidation engagement were $12.1 million from the liquidation engagement for Comet, a 236 store electronics chain, conducted in the United Kingdom. During the year ended December 31, 2011, revenues from services and fees were $17.1 million from the liquidation engagement for TJ Hughes Limited, a 57 store discount department chain in the United Kingdom, and our participation in a joint venture involving the liquidation of Borders Group, Inc., a going-out-of-business sale for all 399 remaining Borders bookstore locations.  

 

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We provide retail auction and liquidation services on a fee and guarantee basis. In guarantee retail liquidation engagements, we take title to any unsold inventory. In these rare instances, we typically utilize the unsold inventory as augmented inventory in other liquidations we conduct.

 

Wholesale and Industrial

 

We design and implement customized disposition programs for our clients seeking to convert excess wholesale and industrial inventory and operational assets into capital. We manage projects of all sizes and scopes across a variety of asset categories. We believe that our databases of information regarding potential buyers that we have collected from past transactions and engagements, our nationwide name recognition and experience with alternative distribution channels allow us to provide superior wholesale and industrial disposition services. We offer clients the following wholesale and industrial disposition strategies:

 

Orderly Liquidations. Assets in an orderly liquidation are available for sale on a privately negotiated basis over a period of months. Orderly liquidations work well for assets in large and repetitive quantities. This sale method is often employed to dispose of furniture, fixtures and equipment in connection with retail liquidations as well as wholesale inventory or industrial equipment for which a short term public auction sale is not feasible due to limited market demand or specialized application of the equipment.

 

Live Auctions. The live public auction is the most traditional sales technique for wholesale and industrial asset dispositions and one of our most frequently utilized services. In live auctions, bidders gather at a specified date and time to competitively bid against one another, with each item selling to the highest bidder. We believe that our auctioneers are recognized throughout the industry for their auctioneering skills, project experience, engaging personalities and ability to extract top prices. Our live auctions can cover single sites or multiple locations, and we utilize point-of-sale software to generate customized sales reports and invoices and to track assets.

 

Webcast Auctions. Increasingly, we have been webcasting our live auctions over the Internet. This auction format allows online bidders to compete in real time against bidders at the live auction. Bidders can log onto the auction from personal computers, view and bid on lots as they come up for sale, hear the auctioneers as the sale is being conducted and, in some cases, view live streaming video of the auctioneer calling the bids on-site. We believe that this auction format maximizes proceeds by providing access to otherwise unavailable potential bidders, including international participants, thereby increasing competition. In some cases, particularly when assets are located in remote areas that are not easily accessible to bidders, we may determine, in consultation with the client, that a webcast only auction is the most appropriate format.

 

Online Auctions. In the online auction format, the sale of assets takes place exclusively online, without a live auctioneer calling the sale. Similar to the timed auctions popularized by online auction sites such as eBay, assets are posted for sale online and buyers can bid on lots and items for a set period of time, usually one week. The online auction format is optimal for clients that have idle assets in quantities insufficient to justify the cost of a live auction.

 

Wind Down Services. When businesses or manufacturers discontinue operations in whole or in part, they are often faced with the challenge of converting large quantities of raw materials, work-in-process inventory and equipment into cash. We have the resources and expertise to analyze the cost effectiveness of continuing production to deplete inventory on hand as an alternative to conducting an auction of the inventory. We also provides advisory services relating to the wind down process from beginning to end, including negotiation of early lease terminations, sale of intellectual property and sale of completed inventory through the client’s historical distribution channels.

 

Reverse Logistics. We assist clients with managing the disposition of customer returns, obsolete inventory, extraneous fixtures and dated equipment. We serve as a broker, providing assistance in reaching target markets and potential buyers or marketing to our extensive database of buyers and end users. Alternatively, we can conduct a liquidation or auction sale to dispose of these assets.

 

Private Sales. In private sales, we step into the shoes of the seller and handle all negotiations with a single buyer, based upon terms provided by the seller. This type of sale is tailored to a specific target market when specialized assets are involved. This type of sale may be required by certain legal rulings or mediation between multiple parties.

 

Sealed Bid Sales. We perform sealed bid sales in situations where asset disposition requires anonymity of the buyer or seller or involves other confidentiality concerns. In this process, potential buyers submit bids without knowledge of the amount bid by other participants. At the conclusion of the bidding timeframe, the highest bidder wins the right to purchase the asset.

 

We provide wholesale and industrial services on a fee, guarantee and an outright purchase basis.

 

Capital Advisory Services

 

We provide capital advisory services to clients with a concentration and focus in the retail industry that are in need of junior secured loans for growth capital, working capital, and turnaround financing. We advise borrowers and source loans between $10 million and $100 million to be secured by collateral assets of the borrowers, including inventory, accounts receivable, real estate and intellectual property.

 

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Financing Activities

 

We provide financing activities to clients in the United Kingdom with a focus in the retail industry that are in need of junior secured loans for growth capital, working capital, and turnaround financing. Because of the difference in the legal regime in which retailers operate in the United Kingdom, our business activities in the United Kingdom may frequently involve lending activities that includes the acquisition of debt of distressed retailers from banks and finance companies at a discount to face value. These loans are serviced by us and are generally secured by assets of the retailer, including inventory, accounts receivable, real estate and intellectual property. These financing activities may result in the liquidation of a retailer where we are also engaged to perform liquidation services on a fee basis.

 

Real Estate Services

 

We provide real estate services to clients to property owners, tenants, secured and unsecured creditors, attorneys and financial advisors through our GA Keen Realty Advisors division. Our real estate services include real estate analysis, valuation and strategic planning services, brokerage, mergers and acquisition, auction services, lease restructuring services and real estate capital market services. During the years ended December 31, 2013, 2012 and 2011, revenues from real estate services were $3.1 million, $6.7 million and $1.4 million, respectively. The decrease in real estate services in 2013 is primarily due to a decrease in the size and the number of real estate engagements performed in 2013 as compared to 2012.

 

Valuation and Appraisal Services

 

Our valuation and appraisal teams provide independent appraisals to financial institutions, lenders and other providers of capital and other professional service firms for estimated liquidation values of assets. These teams include experts specializing in particular industry niches and asset classes. We provide valuation and appraisal services across five general categories:

 

Consumer and Retail Inventory. Representative types of appraisals and valuations include inventory of specialty apparel retailers, department stores, jewelry retailers, sporting goods retailers, mass and discount merchants, home furnishing retailers and footwear retailers.

 

Wholesale and Industrial Inventory. Representative types of appraisals and valuations include inventory held by manufacturers or distributors of automotive parts, chemicals, food and beverage products, wine and spirits, building and construction products, industrial products, metals, paper and packaging.

 

Machinery and Equipment. Representative types of asset appraisals and valuations include a broad range of equipment utilized in manufacturing, construction, transportation and healthcare.

 

Intangible Assets. Representative types of asset appraisals and valuations include intellectual property, goodwill, brands, logos, trademarks and customer lists.

 

Real Estate. Representative types of asset appraisals and valuations include owned and leased manufacturing and distribution facilities, retail locations and corporate offices. We do not perform appraisals of residential properties.

 

We provide valuation and appraisal services on a pre-negotiated flat fee basis.

 

UK Retail Stores

 

We previously operated ten retail footwear stores in the United Kingdom as a result of our acquisition of Shoon on May 4, 2012. Revenues from the sale of goods in our UK retail stores segment were recognized as revenue upon the sale of product to retail customers. Our net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances and are recorded net of sales or value added tax. Allowances provided for these items are presented in the consolidated financial statements primarily as reductions to sales and cost of sales. In August 2013, the Shoon shareholder agreement was amended and restated to eliminate our control rights. As a result of this amendment, Shoon’s operating results are not consolidated with the Company’s for any periods after July 31, 2013. Notwithstanding the deconsolidation, our operating results for periods subsequent to July 31, 2013 include the income (loss) from our 44.4% equity investment in the common stock of Shoon. In January 2014, Shoon was sold to a third party, and we no longer have a financial interest in the operations of Shoon.

 

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Sales and Marketing

 

Our sales and marketing efforts benefit from dedicated business development officers focused on each of our primary service offerings. We actively promote the cross-selling of our services and market our single-source solution services to existing and potential clients.

 

Our marketing programs incorporate a range of strategies as a result of our diverse universe of potential referral sources, clients and buyers. Key marketing programs include public relations initiatives and news releases, industry trade journal advertising, local television, newspaper and radio advertising, participation in industry trade shows and conferences, speaking engagements, direct marketing, email blasts and Internet based advertising.

 

As of December 31, 2013, we employed 18 business development officers located throughout the United States and in Europe.

 

Our retail business development efforts target accounting and consulting firms, bankruptcy professionals, attorneys and financial institution restructuring groups focused on the retail industry as sources for referrals.

 

Our business development officers who are tasked with identifying and obtaining wholesale and industrial auction and liquidation engagements are industry experts and market directly to management at companies in their specific areas of expertise. These individuals also develop and maintain relationships with secondary market participants, such as equipment dealers, who are often sources of referrals for disposition opportunities. The business development officers leverage our years of experience in the auction business, valuation expertise and database of historical auction results to provide potential clients with accurate estimates of asset values.

 

Our valuation and appraisal business development efforts target lenders, private equity groups, other debt and equity providers, turnaround and crisis management firms, restructuring firms, investment banks and large financial institutions. We focus on developing and managing relationships with clients to produce ongoing valuation and appraisal opportunities, but will also pursue single opportunities as they arise.

 

Our real estate services business development efforts target clients primarily in the retail and real estate industries. We focus on providing lease consulting services that include lease restructuring and mitigation services to retail companies. We also provide real estate analysis, valuation, strategic planning, brokerage, and auction services to companies that own real estate.

 

Our capital advisory business development efforts target clients primarily in the retail industry that are in need of junior secured loans for growth capital, working capital, and turnaround financing. We advise borrowers and source loans between $10 million and $100 million to be secured by collateral assets of the borrowers, including inventory, accounts receivable, real estate and intellectual property.

 

Customers

 

We serve retail, corporate, capital provider and individual customers across our services lines. Revenues from one liquidation service contract and the sale of four oil rigs to one customer represented 10.7% and 12.2% of total revenues during the year ended December 31, 2013. Revenues from one liquidation service contract and financing activities to another retailer represented 14.4% and 6.0% of total revenues during the year ended December 31, 2012. Revenues from liquidation service contracts and financing activities to two retailers represented 15.2% and 11.5% of total revenues during the year ended December 31, 2011. The services provided to these customers were under short-term liquidation contracts that generally do not exceed a period of six months. There were no recurring revenues from year-to-year in connection with the services we performed under these contracts.

 

Auction and Liquidation Solutions

 

Retail

 

Our retail auction and liquidation solution clients include financially healthy retailers as well as distressed retailers, bankruptcy professionals, financial institution workout groups and a wide range of professional service providers. Some retail segments in which we specialize include apparel, arts and crafts, department stores, discount stores, drug / health and beauty, electronics, footwear, grocery stores, hardware / home improvement, home goods and linens, jewelry, office / party supplies, specialty stores, and sporting goods. Recent clients include Blockbuster Video, Borders Group, Comet, Circuit City, Friedman’s Jewelers, Mervyns, Orchard Supply Hardware, Tower Records, TJ Hughes, Hancock Fabrics, Movie Gallery, Linens N Things, Kmart, Sears, Whitehall Jewelers and Fortunoff.

 

Wholesale and Industrial

 

We provide auction services and customized disposition programs to a wide range of clients. Specifically, we have experience in providing auction and liquidation solutions to the following industries: aircraft / aerospace, casino / hospitality, construction / mining / earthmoving, food and beverage processing, hospital / medical, machine tools / metalworking, material handling, packaging / bottling, plastics and rubber processing, printing / bindery, pulp processing / paper converting, restaurant / bar / bakery, retail / trade fixtures, stadium / arena, textile / apparel, transportation / rolling stock, warehouse / distribution centers, and woodworking / lumber. Representative recent clients include the Stardust Hotel & Casino, Boeing, Midas International, Callaway Golf, Lillian Vernon, Saint Vincent Medical Center of New York and Dreyer’s Ice Cream.

 

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Valuation and Appraisal Services

 

We are engaged by financial institutions, lenders, private equity investors and other capital providers, as well as professional service providers, to provide valuation and advisory services. We have extensive experience in the appraisal and valuation of retail and consumer inventories, wholesale and industrial inventories, machinery and equipment, intellectual property and real estate. We maintain ongoing client relationships with major asset based lenders including Bank of America, Citibank, Deutsche Bank, GE Capital, HSBC, JPMorgan Chase, SunTrust Bank, Union Bank of California, US Bank, Wells Fargo Foothill and Wells Fargo Retail Finance. In addition, our clients include private equity firms such as Apollo Management, Goldman Sachs Capital Partners, H.I.G. Capital, Sun Capital Partners and UBS Capital.

 

Competition

 

We face competition in each of our primary service areas. While some competitors are unique to specific service offerings, some competitors cross multiple service offerings. A number of companies provide services or products to the auction and liquidation and valuation and appraisal markets, and existing and potential clients can, or will be able to, choose from a variety of qualified service providers. Competition in certain of our service offerings is intense. Some of our competitors may even be able to offer discounts or other preferred pricing arrangements. In a cost-sensitive environment, such arrangements may prevent us from acquiring new clients or new engagements with existing clients. Some of our competitors may be able to negotiate secure alliances with clients and affiliates on more favorable terms, devote greater resources to marketing and promotional campaigns or to the development of technology systems than us. In addition, new technologies and the expansion of existing technologies with respect to the online auction business may increase the competitive pressures on us. We must also compete for the services of skilled professionals. There can be no assurance that we will be able to compete successfully against current or future competitors, and competitive pressures we face could harm our business, operating results and financial condition.

 

We face competition for our retail services from traditional liquidators as well as Internet-based liquidators such as overstock.com and eBay. Our wholesale and industrial services competitors include traditional auctioneers and fixed site auction houses that may specialize in particular industries or geographic regions as well as other large, prestigious or well-recognized auctioneers. We also face competition and pricing pressure from the internal remarketing groups of our clients and potential clients and from companies that may choose to liquidate or auction assets and/or excess inventory without assistance from service providers like us. We face competition for our home auction services from established real estate auctioneers, foreclosure/courthouse auctions, short sales and traditional real estate services. We face competition for our valuation and appraisal services from large accounting, consulting and other professional service firms as well as other valuation, appraisal and advisory firms.

 

Regulation

 

We are subject to federal and state consumer protection laws, including regulations prohibiting unfair and deceptive trade practices. In addition, numerous states and municipalities regulate the conduct of auctions and the liability of auctioneers. We and/or our auctioneers are licensed or bonded in the following states where we conduct, or have conducted, retail, wholesale or industrial asset auctions: California, Florida, Georgia, Illinois, Massachusetts, Ohio, South Carolina, Texas, Virginia and Washington. In addition, we are licensed or obtain permits in cities and/or counties where we conduct auctions, as required. If we conduct an auction in a state where we are not licensed or where reciprocity laws do not exist, we will work with an auctioneer of record in such state.

 

Employees

 

As of December 31, 2013, we had 171 full time employees and five part time employees. We are not a party to any collective bargaining agreements. We have never experienced a work stoppage or strike and believe that relations with our employees are good.

 

We rely significantly on the expertise of independent contractors whom we engage in connection with specific transactions. As of December 31, 2013, we maintained a network of approximately 160 independent contractors who we engage from time to time to provide services pursuant to the terms of independent contractor agreements.

 

Available Information

 

We maintain a website at www.greatamerican.com. We file reports with the Securities and Exchange Commission ("SEC"), and make available, free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on our website is not a part of, or incorporated in, this Annual Report.

 

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Item 1A. RISK FACTORS

 

Given the nature of our operations and services we provide, a wide range of factors could materially affect our operations and profitability. Changes in competitive, market and economic conditions also affect our operations. The risks and uncertainties described below are not the only risks and uncertainties facing us. Additional risks and uncertainties not presently known or that are currently considered to be immaterial may also materially and adversely affect our business operations or stock price. If any of the following risks or uncertainties occurs, our business, financial condition or operating results could materially suffer.

 

Our revenues and results of operations are volatile and difficult to predict.

 

Our revenues and results of operations fluctuate significantly from quarter to quarter, due to a number of factors. These factors include, but are not limited to, the following:

 

our ability to attract new clients and obtain additional business from our existing client base;

 

the number, size and timing of our engagements;

 

the extent to which we acquire assets for resale, or guarantee a minimum return thereon, and our ability to resell those assets at favorable prices;

 

variability in the mix of revenues from the auction and liquidation solutions business and the valuation and appraisal services business;

 

the rate of growth of new service areas, including the new real estate services division and international expansion;

 

the types of fees we charge clients, or other financial arrangements we enter into with clients; and

 

changes in general economic and market conditions.

 

We have limited or no control over some of the factors set forth above and, as a result, may be unable to forecast our revenues accurately. We rely on projections of revenues in developing our operating plans for the future and will base our expectations regarding expenses on these projections and plans. If we inaccurately forecast revenues and/or earnings, or fail to accurately project expenses, we may be unable to adjust our spending in a timely manner to compensate for these inaccuracies and, as a result, may suffer operating losses and such losses could have a negative impact on our financial condition and results of operations. If, for any reason, we fail to meet company, investor or analyst projections of revenue, growth or earnings, the market price of the common stock could decline and you may lose all or part of your investment.

 

We have experienced losses and may not maintain profitability.

 

Our profitability in each reporting period is impacted by the number and size of retail liquidation engagements we perform on a quarterly or annual basis. It is possible that we will experience losses with respect to our current operations as we continue to expand our operations. In addition, we expect that our operating expenses will increase to the extent that we grow our business. We may not be able to generate sufficient revenues to maintain profitability.

 

Our substantial level of indebtedness may make it difficult for us to satisfy our debt obligations and may adversely affect our ability to obtain financing for working capital, capitalize on business opportunities or respond to adverse changes in our industry.

 

In connection with the consummation of the Acquisition on July 31, 2009, we issued subordinated unsecured promissory notes in the principal amount of $55.6 million payable to the Great American Members and the Phantom Equityholders, which includes our President and CEO who own or control, in the aggregate, 10,560,000 shares of our common stock or 35.2% of our outstanding common stock as of December 31, 2013. As of December 31, 2013, an aggregate principal amount of $50.5 million remains outstanding on the promissory notes. We have entered into amendments and waivers with the Great American Members and certain of the Phantom Equityholders that reduce the interest rate of the notes, defer interest payments and, with respect to the Great American Members, extend the maturity date of the notes and increase the principal amount payable by the amount of accrued but unpaid interest under the notes. As of December 31, 2013, an aggregate principal amount of $48.8 million remains in notes outstanding to the Great American Members. These notes have an interest rate of 3.75% and a maturity date of July 31, 2018 (subject to annual principal payments based upon our cash flow, with certain limitations). As of December 31, 2013, there is an aggregate principal amount of $1.7 million in notes outstanding payable to the Phantom Equityholders. Of this amount, $1.0 million has an interest rate of 3.75% and $0.7 million has an interest rate of 12.0%. On January 31, 2014, the Company paid in full the $0.7 million of principal balance for the notes to the Phantom Equityholders that had the 12.0% interest rate.

 

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However, despite these amendments to the promissory notes and the waivers of our obligation to make interest payments, we may not have sufficient funds available to make payments of interest or principal on the promissory notes in the future, and we may be unable to obtain further waivers or amendments from the noteholders. If we are required to make such payments, we may be required to use funds that would otherwise be required to operate our business, which could have a material impact on our business and financial results. This indebtedness could have material consequences for our business, operations and liquidity position, including the following:

 

it may be more difficult for us to satisfy our other debt obligations;

 

our ability to obtain additional financing for working capital, debt service requirements, general corporate or other purposes may be impaired;

 

a substantial portion of our cash flow will be used to pay interest and principal on our indebtedness, which will reduce the funds available for other purposes; and

 

our ability to refinance indebtedness may be limited.

 

Because of their significant stock ownership, some of our existing stockholders will be able to exert control over us and our significant corporate decisions.

 

Our executive officers, directors and their affiliates own or control, in the aggregate, approximately 37.9% of our outstanding common stock as of December 31, 2013. In particular, our President and Chief Executive Officer own or control, in the aggregate, 10,560,000 shares of our common stock or 35.2% of our outstanding common stock as of December 31, 2013. These stockholders are able to exercise influence over matters requiring stockholder approval, such as the election of directors and the approval of significant corporate transactions, including transactions involving an actual or potential change of control of the company or other transactions that non-controlling stockholders may not deem to be in their best interests. This concentration of ownership may harm the market price of our common stock by, among other things:

 

delaying, deferring, or preventing a change in control of our company;

 

impeding a merger, consolidation, takeover, or other business combination involving our company;

 

causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or

 

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

 

We may incur losses as a result of “guarantee” based engagements that we enter into in connection with our auction and liquidation solutions business.

 

In many instances, in order to secure an engagement, we are required to bid for that engagement by guaranteeing to the client a minimum amount that such client will receive from the sale of inventory or assets. Our bid is based on a variety of factors, including: our experience, expertise, perceived value added by engagement, valuation of the inventory or assets and the prices we believe potential buyers would be willing to pay for such inventory or assets. An inaccurate estimate of any of the above or inaccurate valuation of the assets or inventory could result in us submitting a bid that exceeds the realizable proceeds from any engagement. If the liquidation proceeds, net of direct operating expenses, are less than the amount we guaranteed in our bid, we will incur a loss. Therefore, in the event that the proceeds, net of direct operating expenses, from an engagement are less than the bid, the value of the assets or inventory decline in value prior to the disposition or liquidation, or the assets are overvalued for any reason, we may suffer a loss and our financial condition and results of operations could be adversely affected.

 

We may incur losses as a result of activities in the United Kingdom that include the operation of retail liquidation engagements and the acquisition of distressed debt from banks and finance or investment companies in connection with our auction and liquidation solutions business.

 

In some instances, we may provide financing to clients in the United Kingdom with a focus in the retail industry that are in need of junior secured loans for growth capital, working capital, and turnaround financing. Because of the difference in the legal regime in which retailers operate in the United Kingdom, our business activities in the United Kingdom may frequently involve lending activities that include the acquisition of debt of distressed retailers from banks and finance companies at a discount to face value. These loans are serviced by us and are generally secured by assets of the retailer, including inventory, accounts receivable, real estate and intellectual property. The determination of the amount we may lend or the purchase price we pay to acquire the distressed debt is based on a variety of factors, including: our evaluation of the estimated realized value of the inventory of the retailer and collateral of the debt in the event the retailer would need to be liquidated. An inaccurate estimate of any of the above or inaccurate valuation of the assets or inventory could result in us lending amounts or purchasing debt for an amount that may not be realizable in the event the retailer would need to be liquidated. Therefore, we may suffer credit losses from these financing activities and our financial condition and results of operations could be adversely affected.

 

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Losses due to any auction or liquidation engagement may cause us to become unable to make payments due to our creditors and may cause us to default on our debt obligations.

 

We have three engagement structures: (i) a “fee” based structure under which we are compensated for our role in an engagement on a commission basis, (ii) purchase on an outright basis (and take title to) the assets or inventory of the client, and (iii) “guarantee” to the client that a certain amount will be realized by the client upon the sale of the assets or inventory based on contractually defined terms in the auction or liquidation contract. We bear the risk of loss under the purchase and guarantee structures of auction and liquidation contracts. If the amount realized from the sale or disposition of assets, net of direct operating expenses, does not equal or exceed the purchase price (in purchase transaction), we will recognize a loss on the engagement, or should the amount realized, net of direct operating expenses, not equal or exceed the “guarantee,” we are still required to pay the guaranteed amount to the client.

 

We could incur losses in connection with outright purchase transactions in which we engage as part of our auction and liquidation solutions business.

 

When we conduct an asset disposition or liquidation on an outright purchase basis, we purchase from the client the assets or inventory to be sold or liquidated and therefore, we hold title to any assets or inventory that we are not able to sell. In other situations, we may acquire assets from our clients if we believe that we can identify a potential buyer and sell the assets at a premium to the price paid. We store these unsold or acquired assets and inventory until they can be sold or, alternatively, transported to the site of a liquidation of comparable assets or inventory that we are conducting. If we are forced to sell these assets for less than we paid, or are required to transport and store assets multiple times, the related expenses could have a material adverse effect on our results of operations.

 

We depend on financial institutions as primary clients for our valuation and appraisal services business. Consequently, the loss of any financial institutions as clients may have an adverse impact on our business.

 

A majority of the revenue from our valuation and appraisal services business is derived from engagements by financial institutions. As a result, any loss of financial institutions as clients of our valuation and advisory services, whether due to changing preferences in service providers, failures of financial institutions or mergers and consolidations within the finance industry, could significantly reduce the number of existing, repeat and potential clients, thereby adversely affecting our revenues. In addition, any larger financial institutions that result from mergers or consolidations in the financial services industry could have greater leverage in negotiating terms of engagements with us, or could decide to internally perform some or all of the valuation and appraisal services which we currently provide to one of the constituent institutions involved in the merger or consolidation or which we could provide in the future. Any of these developments could have a material adverse effect on our valuation and appraisal services business.

 

Our business may be impacted by changing economic and market conditions.

 

Certain aspects of our business are cyclical in nature and changes in the current economic environment may require us to adjust our sales and marketing practices and react to different business opportunities and modes of competition. For example, we are more likely to conduct auctions and liquidations in connection with insolvencies and store closures during periods of economic downturn relative to periods of economic expansion. In addition, during an economic downturn, financial institutions that provide asset-based loans typically reduce the number of loans made, which reduces their need for our valuation and appraisal services. If we are not successful in reacting to changing economic conditions, we may lose business opportunities which could harm our financial condition.

 

We may face liability or harm to our reputation as a result of a claim that we provided an inaccurate appraisal or valuation and our insurance coverage may not be sufficient to cover the liability.

 

We could face liability in connection with a claim by a client that we provided an inaccurate appraisal or valuation on which the client relied. Any claim of this type, whether with or without merit, could result in costly litigation, which could divert management’s attention and company resources and harm our reputation. Furthermore, if we are found to be liable, we may be required to pay damages. While our appraisals and valuations are typically provided only for the benefit of our clients, if a third party relies on an appraisal or valuation and suffers harm as a result, we may become subject to a legal claim, even if the claim is without merit. We carry insurance for liability resulting from errors or omissions in connection with our appraisals and valuations; however, the coverage may not be sufficient if we are found to be liable in connection with a claim by a client or third party.

 

We could be forced to mark down the value of certain assets acquired in connection with outright purchase transactions.

 

In most instances, inventory is reported on the balance sheet at its historical cost; however, according to U.S. Generally Accepted Accounting Principles, inventory whose historical cost exceeds its market value should be valued conservatively, which dictates a lower value should apply. Accordingly, should the replacement cost (due to technological obsolescence or otherwise), or the net realizable value of any inventory we hold be less than the cost paid to acquire such inventory (purchase price), we will be required to “mark down” the value of such inventory held. If the value of any inventory held on our balance sheet, including, but not limited to, oil rigs and other equipment related to the oil exploration business and airplane parts, is required to be written down, such write down could have a material adverse effect on our financial position and results of operations.

 

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We operate in highly competitive industries. Some of our competitors may have certain competitive advantages, which may cause us to be unable to effectively compete with or gain market share from our competitors.

 

We face competition with respect to all of our service areas. The level of competition depends on the particular service area and category of assets being liquidated or appraised. We compete with other companies in bidding for assets and inventory to be liquidated. In addition, we compete with online services for liquidating assets and inventory, the demand for which are rapidly growing. These online competitors include other e-commerce providers, auction websites such as eBay, as well as government agencies and traditional liquidators and auctioneers that have created websites to further enhance their product offerings and more efficiently liquidate assets. We expect the market to become even more competitive as the demand for such services continues to increase and traditional and online liquidators and auctioneers continue to develop online and offline services for disposition, redeployment and remarketing of wholesale surplus and salvage assets. In addition, manufacturers, retailers and government agencies may decide to create their own websites to sell their own surplus assets and inventory and those of third parties.

 

We also compete with other providers of valuation and advisory services. Competitive pressures within the valuation and appraisal services market, including a decrease in the number of engagements and/or a decrease in the fees which can be charged for these services, could affect revenues from our valuation and appraisal services as well as our ability to engage new or repeat clients. We believe that given the relatively low barriers to entry in the valuation and appraisal services market, this market may become more competitive as the demand for such services increases.

 

Some of our competitors may be able to devote greater financial resources to marketing and promotional campaigns, secure merchandise from sellers on more favorable terms, adopt more aggressive pricing or inventory availability policies and devote more resources to website and systems development than we are able to do. Any inability on our part to effectively compete could have a material adverse effect on our financial condition, growth potential and results of operations.

 

If we are unable to attract and retain qualified personnel, we may not be able to compete successfully in our industry.

 

Our future success depends to a significant degree upon the continued contributions of senior management and the ability to attract and retain other highly qualified management personnel. We face competition for management from other companies and organizations; therefore, we may not be able to retain our existing personnel or fill new positions or vacancies created by expansion or turnover at existing compensation levels. Although we have entered into employment agreements with key members of the senior management team, there can be no assurances such key individuals will remain with us. The loss of any of our executive officers or other key management personnel would disrupt our operations and divert the time and attention of our remaining officers and management personnel which could have an adverse effect on our results of operations and potential for growth.

 

We also face competition for highly skilled employees with experience in our industry, which requires a unique knowledge base. We may be unable to recruit or retain other existing technical, sales and client support personnel that are critical to our ability to execute our business plan.

 

Expanding our services internationally exposes us to additional operational challenges, and if we fail to meet these challenges, our growth will be limited and our results of operations may be harmed.

 

We recently expanded our operations into the United Kingdom and plan to enter other European and Asian markets, either through acquisition, partnership, joint venture or by expansion. Our management has limited experience in operating a business at the international level. As a result, we may be unsuccessful in carrying out any of our plans for expansion in a timely fashion, if at all, obtaining the necessary licensing, permits or market saturation, or in successfully navigating other challenges posed by operating an international business. Such international expansion is expected to require a significant amount of start up costs, as well. If we fail to execute this strategy, our growth will be limited and our results of operations may be harmed.

 

We frequently use borrowings under credit facilities in connection with our guaranty engagements, in which we guarantee a minimum recovery to the client, and outright purchase transactions.

 

In engagements where we operate on a guaranty or purchase basis, we are typically required to make an upfront payment to the client. If the upfront payment is less than 100% of the guarantee or the purchase price in a “purchase” transaction, we may be required to make successive cash payments until the guarantee is met or we may issue a letter of credit in favor of the client. Depending on the size and structure of the engagement, we may borrow under our credit facilities and may be required to issue a letter of credit in favor of the client for these additional amounts. If we lose any availability under our credit facilities, are unable to borrow under credit facilities and/or issue letters of credit in favor of clients, or borrow under credit facilities and/or issue letters of credit on commercially reasonable terms, we may be unable to pursue large liquidation and disposition engagements, engage in multiple concurrent engagements, pursue new engagements or expand our operations. We are required to obtain approval from the lenders under our existing credit facilities prior to making any borrowings thereunder in connection with a particular engagement. Any inability to borrow under our credit facilities, or enter into one or more other credit facilities on commercially reasonable terms may have a material adverse effect on our financial condition, results of operations and growth.

 

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Defaults under our credit agreements could have an adverse impact on our ability to finance potential engagements.

 

The terms of our credit agreements contain a number of events of default. Should we default under any of our credit agreements in the future, lenders may take any or all remedial actions set forth in such credit agreement, including, but not limited to, accelerating payment and/or charging us a default rate of interest on all outstanding amounts, refusing to make any further advances or issue letters of credit, or terminating the line of credit. As a result of our reliance on lines of credit and letters of credit, any default under a credit agreement, or remedial actions pursued by lenders following any default under a credit agreement, may require us to immediately repay all outstanding amounts, which may preclude us from pursuing new liquidation and disposition engagements and may increase our cost of capital, each of which may have a material adverse effect on our financial condition and results of operations.

 

If we cannot meet our future capital requirements, we may be unable to develop and enhance our services, take advantage of business opportunities and respond to competitive pressures.

 

We may need to raise additional funds in the future to grow our business internally, invest in new businesses, expand through acquisitions, enhance our current services or respond to changes in our target markets. If we raise additional capital through the sale of equity or equity derivative securities, the issuance of these securities could result in dilution to our existing stockholders. If additional funds are raised through the issuance of debt securities, the terms of that debt could impose additional restrictions on our operations or harm our financial condition. Additional financing may be unavailable on acceptable terms.

 

Our common stock price may fluctuate substantially, and your investment could suffer a decline in value.

 

The market price of our common stock may be volatile and could fluctuate substantially due to many factors, including, among other things:

 

actual or anticipated fluctuations in our results of operations;

 

announcements of significant contracts and transactions by us or our competitors;

 

sale of common stock or other securities in the future;

 

the trading volume of our common stock;

 

changes in our pricing policies or the pricing policies of our competitors; and

 

general economic conditions.

 

In addition, the stock market in general and the market for shares traded on the OTCBB in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market factors may materially harm the market price of our common stock, regardless of our operating performance.

 

There is a limited market for our common shares and the trading price of our common shares is subject to volatility.

 

Our common shares began trading on the OTCBB in August 2009, following the completion of the Acquisition. The trading market for our common shares is limited and an active trading market may not develop. Selling our common shares may be difficult because the limited trading market for our shares on the OTCBB could result in lower prices and larger spreads in the bid and ask prices of our shares, as well as lower trading volume.

 

In addition, our stock may be defined as a “penny stock” under Rule 3a51-1 under the Exchange Act. “Penny stocks” are subject to Rule 15g-9, which imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. To the extent our common stock is subject to the penny stock regulations, the market liquidity for the shares will be adversely affected.

 

Our certificate of incorporation authorizes our board of directors to issue new series of preferred stock that may have the effect of delaying or preventing a change of control, which could adversely affect the value of your shares.

 

Our certificate of incorporation, as amended, provides that our board of directors will be authorized to issue from time to time, without further stockholder approval, up to 10,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stock in ways which may delay, defer or prevent a change of control of our company without further action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights.

 

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Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

 

Our certificate of incorporation, as amended, and our bylaws, as amended, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. For example, our certificate of incorporation and bylaws provide that our board of directors is classified into three classes of directors, with each class elected at a separate election. The existence of a staggered board could delay or prevent a potential acquirer from obtaining majority control of our board, and thus defer potential acquisitions. We are also governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, our bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest or other change of control transaction involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

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Item 2. PROPERTIES

 

Our headquarters are located in Woodland Hills, California in a leased facility. The following table sets forth the location and use of each of our properties, all of which are leased as of December 31, 2013.

 

Location   Use
     
Woodland Hills, California   Headquarters; Accounting, Information Technology and Human Resources offices; Appraisal and Auction offices
     
Norwalk, Connecticut   Capital Advisory Services offices
     
Atlanta, Georgia   Marketing offices
     
Chicago, Illinois   Appraisal and Marketing offices
     
Deerfield, Illinois   Executive offices; Marketing and Legal offices
     
Boston, Massachusetts   Appraisal and Marketing offices
     
Needham, Massachusetts   Appraisal offices
     
Bohemia, New York   Marketing office
     
Melville, New York   Real Estate Services offices
     
New York, New York   Real Estate Services, Appraisal and Marketing offices
     
Charlotte, North Carolina   Marketing offices
     
Winston-Salem, North Carolina   Marketing office
     
Toledo, Ohio   Marketing office
     
Dallas, Texas   Appraisal offices
     
Milwaukee, Wisconsin   Marketing office
     
London, England   Appraisal and Marketing offices
     
Birmingham, England   Appraisal and Marketing offices
     
Milan, Italy   Marketing office
     
Munich, Germany   Marketing office

 

We believe that our existing facilities are suitable and adequate for the business conducted therein, appropriately used and have sufficient capacity for their intended purpose.

 

Item 3. LEGAL PROCEEDINGS

 

From time to time, we are involved in litigation which arises in the normal course of our business operations. We believe that we are not currently a party to any proceedings the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on our financial position or results of operations.

 

Item 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

17
 

 

Item 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Stock Market and Other Information

 

Our common stock is traded on the OTC Bulletin Board under the symbol: “GAMR”.

 

The following table sets forth the high and low closing sale prices of a share of our Common Stock as reported by the OTC Bulletin Board on a quarterly basis for the years ended December 31, 2012 and 2013.

 

   High   Low 
         
2012:          
Quarter ended March 31, 2012  $0.14   $0.11 
Quarter ended June 30, 2012   0.45    0.12 
Quarter ended September 30, 2012   0.55    0.33 
Quarter ended December 31, 2012   0.45    0.24 
           
2013:          
Quarter ended March 31, 2013  $0.39   $0.30 
Quarter ended June 30, 2013   0.50    0.31 
Quarter ended September 30, 2013   0.38    0.24 
Quarter ended December 31, 2013   0.30    0.15 

 

As of March 17, 2014, there were approximately 24 holders of record of our Common Stock. This number does not include beneficial owners holding shares through nominees or in “street” name.

 

Dividend Policy

 

We have not paid any cash dividends since the consummation of the Acquisition on July 31, 2009 and anticipate that we will retain any available funds for use in the operation of our business. We do not currently intend to pay any cash dividends in the foreseeable future. Our board of directors will determine the payment of future cash dividends, if any. Certain of our current bank credit facilities restrict the payment of cash dividends and future borrowings may contain similar restrictions.

 

18
 

 

Item 6.SELECTED FINANCIAL DATA

 

The following table sets forth our selected consolidated financial data as of and for each of the five fiscal years ended December 31, 2013, and is derived from our Consolidated Financial Statements. The Consolidated Financial Statements as of December 31, 2013 and 2012, and for each of the years in the three-year period ended December 31, 2013, are included elsewhere in this report. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.

 

Consolidated Statement of Operations Data:

(Dollars in thousands)

 

    Year Ended December 31, 
    2013    2012    2011    2010    2009 
Revenues:                         
Services and fees  $59,967   $65,624   $60,627   $37,026   $70,810 
Sale of goods   16,165    18,312    2,899    5,119    12,611 
Total revenues   76,132    83,936    63,526    42,145    83,421 
Operating expenses:                         
Direct cost of services   24,146    23,911    19,749    15,417    17,491 
Cost of goods sold   11,506    12,750    3,391    6,674    12,669 
Selling, general and administrative   36,382    39,834    32,946    31,413    35,743 
Total operating expenses   72,034    76,495    56,086    53,504    65,903 
Operating income (loss)   4,098    7,441    7,440    (11,359)   17,518 
Other income (expense):                         
Interest income   26    201    476    522    32 
Other income (expense)                   18 
Loss from equity investment in Great American Group Real Estate, LLC and Shoon Trading Limited   (177)   (120)   (369)   (1,640)   (861)
Gain from bargain purchase       1,366             
Interest expense   (2,667)   (2,612)   (4,885)   (3,667)   (11,273)
Income (loss) from continuing operations before benefit for income taxes   1,280    6,276    2,662    (16,144)   5,434 
(Provision) benefit for income taxes   (704)   (1,936)   (2,060)   5,106    11,664 
Income (loss) from continuing operations   576    4,340    602    (11,038)   17,098 
Loss from discontinued operations, net of tax                   (142)
Net income (loss)   576    4,340    602    (11,038)   16,956 
Net income (loss) attributable to noncontrolling interests   (482)   819             
Net income (loss) attributable to Great American Group, Inc.  $1,058   $3,521   $602   $(11,038)  $16,956 
                          
Basic earnings (loss) per share, continuing operations  $0.04   $0.12   $0.02   $(0.39)  $0.96 
Basic loss per share, discontinued operations   0.00    0.00    0.00    0.00    (0.01)
Basic earnings (loss) per share  $0.04   $0.12   $0.02   $(0.39)  $0.95 
                          
Diluted earnings (loss) per share, continuing operations  $0.04   $0.12   $0.02   $(0.39)  $0.92 
Diluted loss per share, discontinued operations   0.00    0.00    0.00    0.00    (0.01)
Diluted earnings (loss) per share  $0.04   $0.12   $0.02   $(0.39)  $0.91 
                          
Weighted average basic shares outstanding   28,682,975    28,682,975    28,539,651    28,075,758    17,786,686 
Weighted average diluted shares outstanding   29,907,402    29,614,252    29,408,466    28,075,758    18,664,049 
                          
PRO FORMA COMPUTATION RELATED TO CONVERSION TO C CORPORATION FOR INCOME TAX PURPOSES (unaudited):                         
Historical income from continuing operations before income taxes                      $5,434 
Pro forma provision for income taxes                       (2,141)
Pro forma income from continuing operations                       3,293 
Pro forma loss from discontinued operations, net of tax                      (116)
Pro forma net income                      3,177 
                          
Pro forma basic earnings per share, continuing operations                      $0.19 
Pro forma basic loss per share, discontinued operations                       (0.01)
Pro forma basic earnings per share                      $0.18 
                          
Pro forma diluted earnings per share, continuing operations                      $0.18 
Pro forma diluted loss per share, discontinued operations                       (0.01)
Pro forma diluted earnings per share                      $0.17 
                          
Pro forma weighted average basic shares outstanding                       17,786,686 
Pro forma weighted average diluted shares outstanding                       18,664,049 

 

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Consolidated Balance Sheet Data:

(Dollars in thousands)

 

   Year Ended December 31, 
   2013   2012   2011   2010   2009 
                     
Cash and cash equivalents  $18,867   $18,721   $15,034   $20,080   $37,989 
Restricted cash   325    7,923            459 
Total assets   73,677    80,583    76,358    72,274    78,673 
Total current liabilities   29,069    34,275    32,394    28,966    35,110 
Total long-term liabilities   48,759    50,483    52,220    52,211    44,563 
Total equity (deficit)   (4,151)   (4,175)   (8,256)   (8,903)   (1,000)

 

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Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Annual Report to conform such statements to actual results or to changes in our expectations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part I of this Annual Report under the caption “Risk Factors”.

 

Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to: volatility in our revenues and results of operations; our ability to generate sufficient revenues to achieve and maintain profitability; our substantial level of indebtedness; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; potential losses related to our auction or liquidation engagements; potential losses related to purchase transactions in our auction and liquidations business; the potential loss of financial institution clients; our ability to successfully implement cost savings measures; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete; loss of key personnel; the international expansion of our business; our ability to borrow under our credit facilities as necessary; failure to comply with the terms of our credit agreements; and our ability to meet future capital requirements.

 

Except as otherwise required by the context, references in this Annual Report to:

 

“Great American,” “the “Company,” “we,” “us” or “our” refer to the combined business of Great American Group, Inc. and all of its subsidiaries after giving effect to (i) the contribution to Great American Group, Inc. of all of the membership interests of Great American Group, LLC by the members of Great American, which transaction is referred to herein as the “Contribution”, and (ii) the merger of Alternative Asset Management Acquisition Corp. (“AAMAC”) with and into its wholly-owned subsidiary, AAMAC Merger Sub, Inc., referred to herein as “Merger Sub”, in each case, which occurred on July 31, 2009, referred to herein as the “Merger”. The Contribution and Merger are referred to herein collectively as the “Acquisition”;

 

“GAG, LLC” refers to Great American Group, LLC;
the “Great American Members” refers to the members of Great American Group, LLC prior to the Acquisition;
“Phantom Equityholders” refers to certain members of senior management of Great American Group, LLC prior to the Acquisition that were participants in a deferred compensation plan.

 

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The Acquisition

 

On July 31, 2009, the Company, GAG, LLC and AAMAC completed the Acquisition. As a result of the Acquisition, GAG, LLC and AAMAC became subsidiaries of the Company. Immediately following the consummation of the Acquisition, the former shareholders of AAMAC had an approximate 63% voting interest in the Company and the Great American Members had an approximate 37% voting interest in the Company. We received net proceeds of $69.3 million from AAMAC as a result of the Acquisition and issued 19,346,626 shares of our common stock to AAMAC shareholders. Upon the closing of the Acquisition, the Great American Members received 10,560,000 shares of our common stock and $82.4 million consisting of (i) cash distributions totaling $31.7 million from GAG, LLC and (ii) an aggregate of $50.7 million in unsecured subordinated promissory notes. Unsecured subordinated promissory notes amounting to an aggregate of $9.3 million were issued to the Phantom Equityholders in settlement of accrued compensation payable pursuant to a deferred compensation plan.

 

Notes Payable

 

We have entered into multiple amendments to and waivers of our obligations under the unsecured subordinated promissory notes issued in connection with the Acquisition. As a result of these amendments and waivers, in 2010 the interest rate was reduced to 3.75% with respect to an aggregate of $52.4 million of the then-outstanding $55.6 million in promissory notes. In addition, the maturity date for the then-outstanding $47.0 million in notes payable to the Great American Members was extended to July 31, 2018, subject to annual prepayments based upon our cash flow, provided that we are not obligated to make such prepayments if our minimum adjusted cash balance is below $20.0 million.  The 2010 amendments and waivers also permitted us to defer the payment of interest owed under $52.4 million of the notes until July 31, 2011.

 

Effective July 31, 2011, we entered into individual amendments with the Great American Members that increased the principal amount of the promissory notes for the $1.8 million of accrued interest that was due to them on July 31, 2011. The addition to the principal amount will accrue interest at the note rate of 3.75% and continue to be subject to annual prepayments based upon our cash flow and the maintenance of a minimum adjusted cash balance as provided in the notes prior to the capitalization of the accrued interest. We are not required to make any principal prepayments under these notes for the fiscal years ended December 31, 2010 and 2011. Also effective July 31, 2011, we entered into agreements permitting us to defer payment of $1.4 million in interest owed to the Phantom Equityholders from July 31, 2011 to the fourth quarter of 2011. As of December 31, 2013, there was $48.8 million in aggregate principal amount outstanding under the notes payable to the Great American Members and $1.7 million in aggregate principal amount outstanding under the notes payable to the Phantom Equityholders. Of this amount, $49.8 million accrues interest at 3.75% and $0.7 million accrues interest at 12.0%. On January 31, 2014, the Company paid in full the $0.7 million of principal balance for the notes to the Phantom Equityholders that had the 12.0% interest rate.

 

Overview

 

We are a leading provider of asset disposition, valuation and appraisal, and real estate consulting services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional service firms throughout the United States, Canada and Europe. We operate our business in two segments: auction and liquidation solutions and valuation and appraisal services. Our auction and liquidation segment seeks to assist clients in maximizing return and recovery rates through the efficient disposition of assets and provide clients with capital advisory, financing and real estate services. Such assets include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property. Our valuation and appraisal services segment provides our clients with independent appraisals in connection with asset-based loans, acquisitions, divestitures and other business needs. These services are provided to a wide range of retail, wholesale and industrial companies, as well as lenders, capital providers, private equity investors and professional service firms throughout the United States, Canada and Europe. We previously had a third segment relating to UK retail stores. This segment was created from our investment in Shoon Trading Limited (“Shoon”) on May 4, 2012, the date of investment, through July 31, 2013. The operating results of our UK retail stores segment include the operations of ten retail shoe stores in the United Kingdom. In August 2013, the Shoon shareholder agreement was amended and restated to eliminate the Company’s super majority voting rights which enabled the Company to control the board of directors of Shoon. As a result of this amendment, the Company no longer controlled Shoon and the operating results of Shoon are not consolidated for any periods after July 31, 2013. As such, the Company no longer operates in the UK retail stores segment. In January 2014, Shoon was sold to a third party, and we no longer have a financial interest in the operations of Shoon. The financial statements in this Annual Report are presented in a manner consistent with our operating structure. For additional information regarding our operating segments, see Note 19 of the Notes to our Consolidated Financial Statements.

 

Our significant industry experience and network of highly skilled employees and independent contractors allow us to tailor our auction and liquidation solutions to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. We have established appraisal and valuation methodologies and practices in a broad array of asset categories which have made us a recognized industry leader. Furthermore, our scale and pool of resources allow us to offer our services on a nationwide basis.

 

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Together with our predecessors, we have been in business since 1973. For over 40 years, we and our predecessors have provided retail, wholesale and industrial auction and liquidation solutions to clients. Past clients include Boeing, Apple Computers, Blockbuster Video, Borders Group, Circuit City, Comet, Friedman’s Jewelers, Mervyns, Tower Records, TJ Hughes, Hancock Fabrics, Movie Gallery, Linens N Things, Kmart, Sears, Whitehall Jewelers and Fortunoff. Since 1995, we have participated in liquidations involving over $25 billion in aggregate asset value and auctioned assets with an estimated aggregate value of over $6 billion.

 

Historically, revenues from our auction and liquidation segment have comprised a significant amount of our total revenues and operating profits. During the years ended December 31, 2013, 2012 and 2011, revenues from our auction and liquidation segment were 55.7%, 57.5% and 64.1% of total revenues. Our profitability in each reporting period is impacted by the number and size of retail liquidation engagements we perform on a quarterly or annual basis. Revenues from liquidation service contracts and financing activities to one retailer and the sale of four oil rigs to one customer represented 10.7% and 12.2% of our total revenues during the year ended December 31, 2013. Revenues from liquidation service contracts and financing activities to two retailers represented 20.4% of our total revenues during the year ended December 31, 2012. Revenues from two liquidation contracts represented 26.9% of our total revenues during the year ended December 31, 2011.

 

Our valuation and appraisal services division provides valuation and appraisal services to financial institutions, lenders, private equity investors and other providers of capital. These services primarily include the valuation of assets (i) for purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii) in connection with potential business combinations. Our valuation and appraisal services divisions operate through limited liability companies that are majority owned by us. Our clients include major financial institutions such as Bank of America, Credit Suisse, GE Capital, JPMorgan Chase, Union Bank of California, and Wells Fargo. Our clients also include private equity firms such as Apollo Management, Goldman Sachs Capital Partners, Laurus Funds, Sun Capital Partners and UBS Capital.

 

In September 2008, we partnered with Kelly Capital to launch Great American Real Estate, LLC through which we and Kelly Capital conduct public auctions of foreclosed residential real estate and market residential and commercial loan sales to third parties on behalf of financial institutions and other private parties. We commenced auctions for foreclosed residential real estate properties in the fourth quarter of 2009 and we commenced residential and commercial loan sales to third parties on behalf of financial institutions and other private parties in the first quarter of 2010. During 2010, the flow of new inventory of residential home foreclosures into the market was impacted by legislation at the state and federal levels which impacted our ability to establish new relationships as the auction broker with major financial institutions, lenders, portfolio managers and investment firms, which hold title to foreclosed homes. During the fourth quarter of 2010, we limited operations of the joint venture with Kelly Capital to the sale of certain residential and commercial loan sales that the joint venture purchased through an investment with a third party and we ceased operations in the joint venture in 2013.

 

In April 2009, we expanded our operations into Europe by opening an office in the United Kingdom. In 2010, we hired a number of key employees to increase our presence and expand the operations of our retail liquidations solutions business throughout Europe. Because of the difference in the legal regime in which retailers operate in the United Kingdom, our business activities in the United Kingdom may frequently involve lending activities that includes the acquisition of debt of distressed retailers from banks and finance companies at a discount to face value. Revenues from services, fees and financing activities from our auction and liquidation segment and valuation and appraisal services segment in Europe decreased to $9.8 million during the year ended December 31, 2103 from $23.5 million during the year ended December 31, 2012 and $11.6 million during the year ended December 31, 2011. The decrease in revenues in Europe in 2013 was primarily due to a decrease in the number and size of auction and liquidation engagements we conducted. During 2012, revenues of $17.1 million in Europe were generated from lending activities to one retailer and liquidation services we provided to another retailer in the United Kingdom. During 2011, revenues of $8.1 million in Europe were generated from two retail liquidation service engagements conducted in the United Kingdom.

 

In October 2009, we formed GA Capital, LLC (“GA Capital”), a majority owned subsidiary of the Company. GA Capital focuses on services to retailers that are in need of junior secured loans for growth capital, working capital, and turnaround financing as part of our auction and liquidation segment. GA Capital advises borrowers and sources loans between $10 million and $100 million secured by collateral assets of the borrowers, including inventory, accounts receivable, real estate and intellectual property. During the years ended December 31, 2013, 2012 and 2011, revenues from capital advisory services performed by our GA Capital operations were $1.1 million, $0.4 million and $7.3 million, respectively. The decrease in revenues from capital advisory services in 2013 and 2012 was primarily due to a decrease in fees earned from loan origination activity and contingent fees that were earned in 2011 from the prepayment of previously originated loans where we acted as an advisor.

 

23
 

 

In January 2011, the Keen Consultants’ real estate team joined us and is operating as GA Keen Realty Advisors. This newly formed division provides real estate analysis, valuation and strategic planning services, brokerage, mergers and acquisition, auction services, lease restructuring services, and real estate capital market services as part of our auction and liquidation segment. GA Keen Realty Advisors offers services to property owners, tenants, secured and unsecured creditors, attorneys, and financial advisors. During the year ended December 31, 2013, 2012 and 2011, revenues from real estate services were $3.1 million, $6.7 million and $1.4 million, respectively. The decrease in real estate services in 2013 is primarily due to a decrease in the size and the number of real estate engagements performed in 2013 as compared to 2012.

 

During the year ended December 31, 2012, we generated $17.1 million revenues from lending activities to TJ Hughes Limited, a 57 store department chain, and revenues from liquidation services provided to Comet, a 236 store electronics chain, both in the United Kingdom. During the year ended December 31, 2011, we generated $17.1 million of revenues from the liquidation engagement for TJ Hughes Limited and our participation in a joint venture involving the liquidation of Borders Group, Inc., a going-out-of-business sale for all 399 remaining Borders bookstore locations.

 

In August 2012, we were engaged to participate in a joint venture involving the liquidation of inventory for the going-out-of-business sale of 568 stores of women’s clothing retailer Fashion Bug in the United States, a subsidiary of Ascena Retail Group, Inc. (“Ascena”). The joint venture provided Fashion Bug with a minimum guarantee of amounts to be realized from the liquidation of inventory. In connection with our portion of the guarantee, we provided a letter of credit to Fashion Bug in the amount of $6.7 million. In January 2013, the liquidation sale of inventory was completed and the amounts realized from the liquidation of inventory exceeded the minimum guarantee. In March 2013, the letter of credit provided to Fashion Bug was returned to us. During the year ended December 31, 2013, revenues from services and fees as a result of our participation in the joint venture were $8.1 million.

 

In July 2013, we were engaged to liquidate the inventory of eight Orchard Supply Hardware stores. In August 2013, our engagement was expanded to include the liquidation of an additional nine Orchard Supply Hardware stores. We provided a minimum guarantee of amounts to be realized from the liquidation of inventory for the first eight stores and additional nine stores. We completed the liquidation of the first eight stores in the third quarter of 2013 and the additional nine stores in October 2013.

 

On July 24, 2013, the lease purchase agreement for four oil rigs that were included in goods held for sale or auction at December 31, 2012 was amended, among other things, to eliminate the right of the lessor to return the oil rigs to us and stop making lease payments in the event the oil rigs were not in use for sixty consecutive days. This amendment to the lease purchase agreement resulted in a change in the accounting for the lease from an operating lease to a sales-type lease. As a result, we recorded revenues from sale of goods of $9.3 million and costs of goods sold of $7.4 million in accordance with the sales-type lease during the year ended December 31, 2013.

 

On March 19, 2014, the Company entered into the UK Credit Agreement with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom. We are permitted to borrow up to £50 million under the UK Credit Agreement. The interest rate for borrowings under this credit agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of borrowings. Any borrowings on the UK Credit Agreement reduce the availability on the $100 million Wells Fargo asset based credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the $100 million Wells Fargo asset based credit facility.

 

24
 

 

Results of Operations

 

The following period to period comparisons of our financial results are not necessarily indicative of future results.

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

Consolidated Statements of Operations

(Dollars in thousands)

 

   Year Ended
December 31, 2013
   Year Ended
December 31, 2012
 
   Amount   %   Amount   % 
Revenues:                    
Services and fees  $59,967    78.8%  $65,624    78.2%
Sale of goods   16,165    21.2%   18,312    21.8%
Total revenues   76,132    100.0%   83,936    100.0%
                     
Operating expenses:                    
Direct cost of services   24,146    31.7%   23,911    28.5%
Cost of goods sold   11,506    15.1%   12,750    15.2%
Selling, general and administrative expenses   36,382    47.8%   39,834    47.5%
Total operating expenses   72,034    94.6%   76,495    91.1%
Operating income   4,098    5.4%   7,441    8.9%
Other income (expense):                    
Interest income   26    0.0%   201    0.2%
Loss from equity investment in Great American                    
Real Estate, LLC and Shoon Trading Limited   (177)   -0.2%   (120)   -0.1%
Gain from bargain purchase   -    0.0%   1,366    1.6%
Interest expense   (2,667)   -3.5%   (2,612)   -3.1%
Income before provision for income taxes   1,280    1.7%   6,276    7.5%
Provision for income taxes   (704)   -0.9%   (1,936)   -2.3%
Net income   576    0.8%   4,340    5.2%
Net income (loss) attributable to noncontrolling interests   (482)   -0.6%   819    1.1%
Net income attributable to Great American Group, Inc.  $1,058    1.4%  $3,521    4.2%

 

Revenues. Total revenues decreased $7.8 million to $76.1 million during the year ended December 31, 2013 from $83.9 million during the year ended December 31, 2012. The decrease in revenues was primarily due to a (a) $5.9 million decrease in revenues in the auction and liquidation segment and (b) $4.0 million decrease in revenues in the UK retail stores segment from the operations of the ten retail stores of Shoon. These decreases were offset by an increase in revenues of $2.1 million in the valuation and appraisal services segment. The decrease in revenues in the auction and liquidation segment in 2013 was primarily due to a decrease in revenues (a) from lending activities of $5.0 million and (b) of $3.6 million from real estate consulting services from our GA Keen Realty Advisors division. These decreases were offset by an increase in revenues of (a) $0.7 million from capital advisory services provided by our GA Capital division and (b) $1.9 million from services and fees earned on retail liquidation and consulting engagements. The decrease in revenues from financing activities was primarily due to interest income, amortization of discount, and monitoring fees earned and collected in 2012 on a loan to a retailer in the United Kingdom. There were no lending activities that generated financing revenues during the year ended December 31, 2013. The decrease in revenues from our GA Keen Realty Advisors division in 2013 was due to a decrease in the size and number of engagements where we provided real estate consulting services as compared to the same period in 2012. The increase in revenues from capital advisory fees was primarily due to an increase in the number of capital advisory engagements in 2013 as compared to the same period in 2012. Revenues from services and fees during 2013 for retail liquidation engagements included revenues of $8.1 million from our participation in the joint venture involving the liquidation of inventory for the going-out-of-business sale of 568 stores of women’s clothing retailer Fashion Bug. The decrease in revenues in the UK retail store segment in 2013 was primarily due to the operation of Shoon for seven months in 2013. In August 2013, the shareholder agreement of Shoon was amended and restated to eliminate our control rights which resulted in the deconsolidation of Shoon. As such, the operating results of Shoon are not consolidated with the Company’s for any periods after July 31, 2013. During 2012, the operations of Shoon included eight months of operating results for the period from our acquisition of Shoon on May 4, 2012 through December 31, 2012. The increase in revenues of $2.1 million in the valuation and appraisal services segment was primarily due to an increase in revenues of $0.2 million related to appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors, an increase in revenues of $0.9 million for appraisals for machinery and equipment and intellectual property, and an increase in revenues of $1.0 million as a result of the expansion of the appraisal operations in the United Kingdom.

 

25
 

 

Revenue and Gross Margin by Segment

(Dollars in thousands)

Auction and Liquidation Segment:  

   Year Ended
December 31, 2013
   Year Ended
December 31, 2012
 
   Amount   %   Amount   % 
Revenues:                    
Services and fees  $32,409    76.5%  $40,132    83.2%
Sale of goods   9,963    23.5%   8,106    16.8%
Total revenues   42,372    100.0%   48,238    100.0%
Direct cost of services   11,120    26.2%   12,327    25.6%
Cost of goods sold   7,940    18.7%   7,275    15.1%
Total operating expenses   19,060    44.9%   19,602    40.7%
Gross margin  $23,312    55.1%  $28,636    59.3%
                     
Gross margin services and fees   65.7%        69.3%     
Gross margin sales of goods   20.3%        10.3%     

 

Revenues in the auction and liquidation segment decreased $5.9 million, or 12.2%, to $42.4 million during the year ended December 31, 2013 from $48.2 million during the year ended December 31, 2012. Revenues from services and fees decreased to $32.4 million during the year ended December 31, 2013, a decrease of $7.7 million from $40.1 million during the year ended December 31, 2012.

 

The decrease in revenues from services and fees of $7.7 million during the year ended December 31, 2013 was primarily due to a decrease in revenues (a) from lending activities of $5.0 million, (b) from services and fees of $3.6 million from real estate consulting services from our GA Keen Realty Advisors division and (c) of $1.7 million from services and fees in our wholesale and industrial auction division. These decreases were offset by an increase in revenues (a) from services and fees of $0.7 million from capital advisory services provided by our GA Capital division and (b) of $1.9 million from services and fees earned on retail liquidation and consulting engagements. The revenues from lending activities during year ended December 31, 2012 included interest income and monitoring fees of $0.9 million and amortization of discount of $4.1 million on a loan receivable related to lending activities in the United Kingdom. There were no lending activities in the United Kingdom that generated financing revenues during the year ended December 31, 2013. The decrease in services and fees revenue in the wholesale and industrial auction business was primarily due to a decrease in number of engagements during 2013 as compared to the same period in 2012. The decrease in revenues from our GA Keen Realty Advisors division in 2013 was primarily due to a decrease in the number and size of real estate consulting engagements during 2013 as compared to the same period in 2012. Revenues from services and fees during 2013 for retail liquidation engagements included revenues of $8.1 million from our participation in the joint venture involving the liquidation of inventory for the going-out-of-business sale of 568 stores of women’s clothing retailer Fashion Bug. The increase in revenues from our GA Capital division was primarily due to an increase in fees earned on capital advisory engagements in 2013 as compared to the same period in 2012.

 

Revenues from the sale of goods increased $1.9 million, to $10.0 million during the year ended December 31, 2013, from $8.1 million during the year ended December 31, 2012. In 2013, revenues from sale of goods included $9.3 million of revenues related to the sale of four oil rigs in the third quarter of 2013 that was included in goods held for sale or auction at December 31, 2012 as more fully discussed above and in note 2 to the consolidated financial statements.

 

Gross margin in the auction and liquidation segment for services and fees decreased to 65.7% of revenues during the year ended December 31, 2013, as compared to 69.3% of revenues during the year ended December 31, 2012. The decrease in the gross margin during the year ended December 31, 2013 was primarily due to an increase in revenues earned from lower-margin cost plus fee based liquidation engagements in 2013 as compared to higher margin liquidation engagements where we provided a minimum recovery value for goods sold at bankruptcy liquidation sales. We typically earn higher margins on these types of engagements where we provide a minimum recovery value for goods sold as compared to fee and commission engagements.

 

Gross margin from the sales of goods where we held title improved to 20.3% during the year ended December 31, 2013 as compared to a gross margin of 10.3% during the year ended December 31, 2012. The gross margin in 2013 was favorably impacted by the sale of four oil rigs under a sales-type lease. The gross margins from the sales of goods fluctuates widely from period to period based upon the volume and mix of goods that we take title to in our wholesale auction and liquidation business. These fluctuations make predictions regarding the expected trends in gross margin from the sales of goods inherently uncertain.

 

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Valuation and Appraisal Segment:

   Year Ended
 December 31, 2013
   Year Ended
 December 31, 2012
 
   Amount   %   Amount   % 
                 
Revenues - Services and fees  $27,558    100.0%  $25,492    100.0%
Direct cost of services   13,026    47.3%   11,584    45.4%
Gross margin  $14,532    52.7%  $13,908    54.6%

 

Revenues in the valuation and appraisal segment increased $2.1 million, or 8.1%, to $27.6 million during the year ended December 31, 2013 from $25.5 million during the year ended December 31, 2012. The increase in revenues was primarily due to an increase in revenues of (a) $0.2 million related to appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors; (b) $0.9 million for appraisals for machinery and equipment and intellectual property; and (c) $1.0 million as a result of the expansion of the appraisal operations in the United Kingdom.

 

Gross margins in the valuation and appraisal segment decreased to 52.7% of revenues during the year ended December 31, 2013 as compared to 54.6% of revenues during the year ended December 31, 2012. Gross margins in 2013 were unfavorably impacted by an increase in headcount that resulted in an increase in salaries, wages and benefits in 2013 as compared to the same period in 2012.

 

UK Retail Stores Segment:

   Year Ended
 December 31, 2013
   Year Ended
 December 31, 2012
 
   Amount   %   Amount   % 
                 
Revenues - Sale of retail goods  $6,202    100.0%  $10,206    100.0%
Cost of goods sold   3,566    57.5%   5,475    53.6%
Gross margin  $2,636    42.5%  $4,731    46.4%

 

Revenues and cost of goods sold in the UK retail stores segment are from the operation of ten retail stores and internet operations of Shoon in the United Kingdom. Revenues from the sale of retail goods from the Shoon stores in 2013 included sales for seven months for the period from January 1, 2013 through July 31, 2013. In August 2013, the shareholder agreement of Shoon was amended and restated to eliminate our control rights which resulted in the deconsolidation of Shoon. As such, the operating results of Shoon are not consolidated with the Company’s for any periods after July 31, 2013. In 2012, revenues from the sale of retail goods from the Shoon included approximately eight months of sales for the period from May 4, 2012 to December 31, 2012, as a result of our acquisition of Shoon on May 4, 2012. The decrease in revenues from the sale of retail goods is primarily due to fewer operating days of the Shoon stores in 2013 as compared to the prior year. The decrease in revenues in 2013 was also due to an increase in promotions that resulted in a decrease in average selling prices as compared to the prior year. The decrease in average selling prices from the increase in promotions in 2013 resulted in a decrease in the gross margin to 42.5% in 2013, from the 46.4% gross margin during 2012.

 

Operating Expenses

 

Direct Costs of Services. Total direct costs of services increased $0.2 million, to $24.1 million during the year ended December 31, 2013 from $23.9 million during the year ended December 31, 2012. Direct costs of services in the auction and liquidation segment decreased $1.2 million to $11.1 million during the year ended December 31, 2013 from $12.3 million during the year ended December 31, 2012. The decrease in expenses was primarily due to a decrease in 2013 in the number of fee and commission type engagements where we contractually bill fees, commissions and reimbursable expenses as compared to the same period in 2012. Direct costs of services in the valuation and appraisal services segment increased $1.4 million, or 12.4%, to $13.0 million during the year ended December 31, 2013 from $11.6 million during the year ended December 31, 2012. The increase was primarily due to an increase in headcount which resulted in an increase in salaries, wages and benefits in 2013 as compared to the same period in 2012.

 

Cost of Goods Sold. Cost of goods sold decreased $1.3 million to $11.5 million during the year ended December 31, 2013 from $12.8 million during the year ended December 31, 2012. Costs of goods sold in the auction and liquidation segment increased $0.6 million, to $7.9 million during the year ended December 31, 2013 from $7.3 million during the year ended December 31, 2012. As a percentage of gross sales of goods where we hold title to the goods in the auction and liquidation segment, costs of goods sold was 79.7% during the year ended December 31, 2013 as compared to 89.7% during the year ended December 31, 2012. This increase in the gross margin in 2013 was primarily due to the sale of four oil rigs under a sales-type lease. Cost of goods sold in the UK retail stores segment decreased $1.9 million to $3.6 million during the year ended December 31, 2013, from $5.5 million during the year ended December 31, 2012. The decrease in costs of goods sold in the UK retail store segment was primarily due to the inclusion of one fewer month of expenses for the UK retail store segment in the period ended December 31, 2013 versus the period ended December 31, 2012 as a result of the deconsolidation discussed above.

 

27
 

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the years ended December 31, 2013 and 2012 were comprised of the following:

 

Selling, General and Administrative Expenses by Segment

(Dollars in thousands)

 

   Year Ended
December 31, 2013
   Year Ended
December 31, 2012
      Change 
   Amount   %   Amount   %   Amount   % 
                         
Auction and liquidation  $12,065    33.2%  $17,257    43.3%  $(5,192)   -30.1%
Valuation and appraisal   8,861    24.4%   7,095    17.8%   1,766    24.9%
UK retail stores   3,818    10.5%   4,480    11.3%   (662)   -14.8%
Corporate and other   11,638    31.9%   11,002    27.6%   636    5.8%
Total selling, general & administrative expenses  $36,382    100.0%  $39,834    100.0%  $(3,452)   -8.7%

 

Total selling, general and administrative expenses decreased $3.5 million, or 8.7%, to $36.3 million during the year ended December 31, 2013 from $39.8 million for the year ended December 31, 2012. The decrease was primarily due to a decrease in selling, general and administrative expenses of (a) $5.2 million in the auction and liquidation segment and (b) $0.7 million in the UK retail stores segment. These decreases were offset by an increase in (a) selling, general and administrative expenses of $1.8 million in the valuation and appraisal segment and (b) selling, general and administrative expenses of $0.7 million in corporate and other.

 

Selling, general and administrative expenses in the auction and liquidation segment decreased $5.2 million, to $12.1 million during the year ended December 31, 2013 from $17.3 million for the year ended December 31, 2012. The $5.2 million decrease in selling, general and administrative expenses in the auction and liquidation segment was primarily due to a decrease in profit sharing and bonus expense related to our operations in Europe in 2013.

 

Selling, general and administrative expenses in the valuation and appraisal services segment increased $1.8 million, or 24.9%, to $8.9 million during the year ended December 31, 2013 from $7.1 million for the year ended December 31, 2012. The increase was primarily due to an increase in headcount in administrative functions in the valuation and appraisal segment that resulted in an increase in payroll and related expenses of $0.4 million and an increase in operating expenses of $1.3 million from the expansion of our appraisal operations in the United Kingdom. Selling, general and administrative expenses for the UK retail store segment decreased $0.7 million to $3.8 million in 2013 from $4.5 million during the prior year. The decrease in selling general and administrative expenses in the UK retail store segment was primarily due to the inclusion of one fewer month of expenses for the UK retail store segment in the period ended December 31, 2013 versus the period ended December 31, 2012 as a result of the deconsolidation discussed above.

 

Selling, general and administrative expenses for corporate and other increased $0.6 million, or 5.8%, to $11.6 million during the year ended December 31, 2013 from $11.0 million for the year ended December 31, 2012. The increase was primarily due to an increase in payroll and related expenses related to contractually required severance costs incurred in April 2013 as a result of the departure of our former chief financial officer.

 

Other Income (Expense). Other expense was $0.2 million during the year ended December 31, 2013 as compared to other income of $1.4 million during the year ended December 31, 2012. Other expense in 2013 was primarily comprised of $0.2 million of losses from our equity investments in Shoon and Great American Real Estate, LLC. Other income during the year ended December 31, 2012 was primarily comprised of (a) $0.2 million of interest income on our note receivable – related party as described in Note 10 to our consolidated financial statements; (b) $1.4 million of gain from bargain purchase as a result of the Shoon acquisition on May 4, 2012, where the net assets acquired exceeded the consideration paid, offset by $0.1 million from our loss from our equity investment in Great American Group Real Estate, LLC.

 

28
 

 

Interest Expense. Interest expense was $2.7 million during the year ended December 31, 2013 as compared to $2.6 million during the year ended December 31, 2012. Interest expense during the year ended December 31, 2013 was primarily comprised of interest expense on the notes payable to the Great American Members and Phantom Equityholders of $2.0 million, interest expense and amortization of deferred loan fees on our $100.0 million asset based credit facility of $0.2 million, interest expense and fees of $0.3 million incurred for the asset based credit facility that was used to fund some of our retail liquidation engagements, and interest expense on our accounts receivable revolving line of credit of $0.1 million. Interest expense during the year ended December 31, 2012 was primarily comprised of interest expense on the notes payable to the Great American Members and Phantom Equityholders of $2.1 million, amortization of deferred loan fees on our $100.0 million asset based credit facility of $0.3 million, and $0.2 million of interest expense we incurred on our accounts receivable revolving line of credit and amounts outstanding under of asset based credit facility for letters of credit.

 

Income Before Provision for Income Taxes. Income before provision for income taxes was $1.3 million during year ended December 31, 2013 compared to income before provision for income taxes of $6.3 million during the year ended December 31, 2012. The decrease in income before provision for income taxes during the year ended December 31, 2013 was primarily due to (a) a $1.4 million decrease in operating income earned from the operations of Shoon which are included in our UK retail stores segment; (b) a $1.3 million decrease in operating income earned from the our Valuation and Appraisal segment and our Auction and Liquidation segment; (c) the gain from bargain purchase of $1.4 million related to the acquisition of Shoon in 2012; (d) a decrease in interest income of $0.2 million; and (e) an increase in corporate overhead of $0.6 million that primarily related to contractually required severance costs from the departure of our former chief financial officer in April 2013.

 

Provision For Income Taxes. Provision for income taxes was $0.7 million during the year ended December 31, 2013 compared to a provision for income taxes of $1.9 million during the year ended December 31, 2012. The effective income tax rate was 55.0% during the year ended December 31, 2013 compared to an effective income tax rate of 30.8% during the year ended December 31, 2012. The effective income tax rate on our provision for income taxes in 2013 was negatively impacted by the tax differential related to the tax benefit from foreign losses reported in our financial statements during 2013. During 2012, our provision for income taxes was favorably impacted by lower income taxes from our foreign operations which included the operating results from our acquisition of Shoon on May 4, 2012 and the gain on bargain purchase of Shoon.

 

Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests represents the proportionate share of net income generated by Shoon and Great American Group Global Partners, LLC that we do not wholly-own. During the year ended December 31, 2013, net loss attributable to noncontrolling interests was $0.5 million compared to net income attributable to noncontrolling interests of $0.8 million during the year ended December 31, 2012.

 

Net Income Attributable to the Company. Net income attributable to the Company for the year ended December 31, 2013 was $1.1 million compared to net income of $3.5 million during the year ended December 31, 2012. The decrease in net income during the year ended December 31, 2013 as compared to the same period in 2012 was primarily due to (a) a $1.4 million decrease in operating income earned from the operations of Shoon which are included in our UK retail stores segment; (b) the gain from bargain purchase of $1.4 million related to the acquisition of Shoon in 2012; (c) an increase in corporate overhead of $0.6 million that primarily related to contractually required severance costs from the departure of our former chief financial officer in April 2013; and (d) the amount reported for the net income (loss) attributable to noncontrolling interests.

 

29
 

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Consolidated Statements of Operations

(Dollars in thousands)

 

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
 
   Amount   %   Amount   % 
Revenues:                    
Services and fees  $65,624    78.2%  $60,627    95.4%
Sale of goods   18,312    21.8%   2,899    4.6%
Total revenues   83,936    100.0%   63,526    100.0%
                     
Operating expenses:                    
Direct cost of services   23,911    28.5%   19,749    31.1%
Cost of goods sold   12,750    15.2%   3,391    5.3%
Selling, general and administrative expenses   39,834    47.5%   32,946    51.9%
Total operating expenses   76,495    91.1%   56,086    88.3%
Operating income   7,441    8.9%   7,440    11.7%
Other income (expense):                    
Interest income   201    0.2%   476    0.8%
Loss from equity investment in Great American                    
Real Estate, LLC   (120)   -0.1%   (369)   -0.6%
Gain from bargain purchase   1,366    1.6%   -    n/a 
Interest expense   (2,612)   -3.1%   (4,885)   -7.7%
Income before provision for income taxes   6,276    7.5%   2,662    4.2%
Provision for income taxes   (1,936)   -2.3%   (2,060)   -3.3%
Net income   4,340    5.2%   602    0.9%
Net income attributable to noncontrolling interests   819    1.1%   -    n/a 
Net income attributable to Great American Group, Inc.  $3,521    4.2%  $602    0.9%

 

Revenues. Total revenues increased $20.4 million to $83.9 million during the year ended December 31, 2012 from $63.5 million during the year ended December 31, 2011. The increase in revenues was primarily due to a $7.5 million increase in revenues in the auction and liquidation segment, a $2.7 million increase in revenues in the valuation and appraisal services segment and an increase in revenues of $10.2 million in the UK retail stores segment as a result of our acquisition of Shoon on May 4, 2012 as more fully described below. The increase in revenues in the auction and liquidation segment in 2012 was primarily due to an increase in revenues of (a) $5.2 million from the auction of wholesale and industrial equipment, which included revenues of $1.7 million from the sale of one oil rig from the exercise of a lease purchase option, (b) $3.5 million from financing activities to a retailer in the United Kingdom, (c) $5.3 million from our GA Keen Realty Advisors division, and (d) $0.3 million from retail liquidation engagements. These increases were offset by a decrease in revenues of $6.8 million from capital advisory fees earned by our GA Capital operations. The increase in revenues from financing activities was primarily due to interest income, amortization of discount, and monitoring fees earned and collected in 2012 on a loan to a retailer in the United Kingdom. The increase in revenues from our GA Keen Realty Advisors division in 2012 was due to an increase in the size and number of engagements where we provided real estate consulting services as compared to the same period in 2011. The decrease in revenues from capital advisory fees was primarily due to a decrease in fees earned from loan origination activity in 2012 and contingent fees earned in 2011 from the prepayment of previously originated loans where we acted as an advisor. The increase in revenues of $2.7 million in the valuation and appraisal services segment was primarily due to an increase in revenues of $0.9 million related to appraisals for machinery and equipment and an increase in revenues of $1.8 million for appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors.  Revenues from gross sales of goods increased to $18.3 million during the year ended December 31, 2012 from $2.9 million during the year ended December 31, 2011, primarily due to an increase in revenues in our UK retail stores segment as a result of the acquisition of Shoon on May 4, 2012 as more fully discussed below.

 

30
 

 

Revenue and Gross Margin by Segment

(Dollars in thousands)

 

Auction and Liquidation Segment:

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
 
   Amount   %   Amount   % 
Revenues:                    
Services and fees  $40,132    83.2%  $37,830    92.9%
Sale of goods   8,106    16.8%   2,899    7.1%
Total revenues   48,238    100.0%   40,729    100.0%
Direct cost of services   12,327    25.6%   10,097    24.8%
Cost of goods sold   7,275    15.1%   3,391    8.3%
Total operating expenses   19,602    40.7%   13,488    33.1%
Gross margin  $28,636    59.3%  $27,241    66.9%
                     
Gross margin services and fees   69.3%        73.3%     
Gross margin sales of goods   10.3%        -17.0%     

 

Revenues in the auction and liquidation segment increased $7.5 million to $48.2 million during the year ended December 31, 2012 from $40.7 million during the year ended December 31, 2011. The increase in revenues in the auction and liquidation segment in 2012 was primarily due to an increase in revenues of (a) $5.2 million from the auction of wholesale and industrial equipment, which included revenues of $1.7 million from the sale of one oil rig from the exercise of the lease purchase option, (b) $3.5 million from financing activities to a retailer in the United Kingdom, (c) $5.3 million from our GA Keen Realty Advisors division, and (d) $0.3 million from retail liquidation engagements. These increases were offset by a decrease in revenues of $6.8 million from capital advisory fees earned by our GA Capital operations. Revenues from retail liquidation engagements were $20.5 million during the year ended December 31, 2012, an increase of $0.3 million, from $20.2 million during the year ended December 31, 2011. During the year ended December 31, 2012, revenues from one liquidation engagement in Europe accounted for $12.1 million or 24.9% of our total revenues in the auction and liquidation segment. During the year ended December 31, 2011, the TJ Hughes Limited liquidation engagement in Europe and our participation in the joint venture involving the liquidation of Borders Group, Inc. accounted for $17.1 million or 42.0% of our total revenues in the auction and liquidation segment. Revenues from gross sales of goods where we held title to the goods increased $5.2 million to $8.1 million during the year ended December 31, 2012 from $2.9 million during the year ended December 31, 2011. The increase in revenues was primarily due to the sale of one oil rig from the exercise of the lease purchase option in the amount of $1.7 million and an increase in auction engagements where we sell assets in 2012.

 

Gross margin in the auction and liquidation segment decreased to 69.3% of revenues during the year ended December 31, 2012, as compared to 73.3% of revenues during the year ended December 31, 2011. The decrease in the gross margin during the year ended December 31, 2012 was primarily due to an increase in revenues earned from lower-margin cost plus fee based liquidation engagements in 2012 as compared to higher margin liquidation engagements where we provided a minimum recovery value for goods sold at bankruptcy liquidation sales. In addition, the decrease in the gross margin during the year ended December 31, 2012 was impacted by the decrease in revenues we earned from capital advisory services in 2012 as compared to the same period in 2011.

 

Gross margin from the sales of goods where we held title improved to 10.3% during the year ended December 31, 2012 as compared to a gross margin of (17.0%) during the year ended December 31, 2011. The gross margin in 2012 was favorably impacted by the increase in business activity and increase in auction and liquidation sales of equipment that had higher profit margins in 2012 as compared to the same period in 2011. The gross margins in 2012 and 2011 were negatively impacted by a $0.2 million inventory valuation charge during each of the periods. The inventory valuation charge in both periods was to write down the carrying value of certain goods held for sale or auction to lower of cost or market.

 

Valuation and Appraisal Segment:

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
 
   Amount   %   Amount   % 
                 
Revenues - Services and fees  $25,492    100.0%  $22,797    100.0%
Direct cost of services   11,584    45.4%   9,652    42.3%
Gross margin  $13,908    54.6%  $13,145    57.7%

 

31
 

 

Revenues in the valuation and appraisal segment increased $2.7 million, or 11.8%, to $25.5 million during the year ended December 31, 2012 from $22.8 million during the year ended December 31, 2011. The increase in revenues in 2012 was primarily due to an increase in revenues of $0.9 million related to appraisals for machinery and equipment and an increase in revenues of $1.8 million for appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors.

 

Gross margins in the valuation and appraisal segment decreased to 54.6% of revenues during the year ended December 31, 2012 as compared to 57.7% of revenues during the year ended December 31, 2011. Gross margins in 2012 were unfavorably impacted by an increase in headcount that resulted in an increase in salaries, wages and benefits in 2012 as compared to the same period in 2011.

 

UK Retail Stores Segment:

 

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
   Amount   %   Amount   %
                
Revenues - Sale of retail goods  $10,206    100.0%  $-   n/a
Cost of goods sold   5,475    53.6%   -   n/a
Gross margin  $4,731    46.4%  $-   n/a

 

Revenues and cost of goods sold in the UK retail stores segment are from the operation of ten retail stores and internet operations of Shoon in the United Kingdom for the period from our acquisition of Shoon on May 4, 2012 through December 31, 2012. The gross margin was 46.4% for the period from May 4, 2012 through December 31, 2012.

 

Operating Expenses

 

Direct Costs of Services. Total direct costs of services increased $4.2 million, to $23.9 million during the year ended December 31, 2012 from $19.7 million during the year ended December 31, 2011. Direct costs of services in the auction and liquidation segment increased $2.2 million to $12.3 million during the year ended December 31, 2012 from $10.1 million during the year ended December 31, 2011. The increase in expenses was primarily due an increase in the number of fee and commission type of engagements where we contractually bill fees, commissions and reimbursable expenses in 2012 as compared to the same period in 2011. Direct costs of services in the valuation and appraisal services segment increased $1.9 million, or 20.0%, to $11.6 million during the year ended December 31, 2012 from $9.7 million during the year ended December 31, 2011. The increase was primarily due to an increase in headcount which resulted in an increase in salaries, wages and benefits in 2012 as compared to the same period in 2011.

 

Cost of Goods Sold. Cost of goods sold increased $9.4 million to $12.8 million during the year ended December 31, 2012 from $3.4 million during the year ended December 31, 2011. Costs of goods sold in the auction and liquidation segment increased $3.9 million, to $7.3 million during the year ended December 31, 2012 from $3.4 million during the year ended December 31, 2011. As a percentage of gross sales of goods where we hold title to the goods in the auction and liquidation segment, costs of goods sold was 89.7% during the year ended December 31, 2012 as compared to 117.0% during the year ended December 31, 2011. The increase in the gross margin in 2012 was primarily due to the sale of one oil rig where the lessee exercised the option to purchase the oil rig and the sale of machinery and equipment with higher gross margins at our wholesale and industrial auctions during the year ended December 31, 2012 as compared to the same period in 2011. Cost of goods sold in the UK retail stores segment was $5.5 million during the year ended December 31, 2012. Our gross margin in the UK retail stores segment was 46.4% for the period from our acquisition of Shoon on May 4, 2012 through December 31, 2012.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the year ended December 31, 2012 and 2011 were comprised of the following:

 

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Selling, General and Administrative Expenses by Segment

(Dollars in thousands)

 

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
   Change 
   Amount   %   Amount   %   Amount   % 
                         
Auction and liquidation  $17,257    43.3%  $13,528    41.1%  $3,729    27.6%
Valuation and appraisal   7,095    17.8%   7,319    22.2%   (224)   -3.1%
UK retail stores   4,480    11.3%   -    n/a    4,480    n/a 
Corporate and other   11,002    27.6%   12,099    36.7%   (1,097)   -9.1%
Total selling, general & administrative expenses  $39,834    100.0%  $32,946    100.0%  $6,888    20.9%

 

Total selling, general and administrative expenses increased $6.9 million, or 21.0%, to $39.9 million during the year ended December 31, 2012 from $33.0 million for the year ended December 31, 2011. Selling, general and administrative expenses in the auction and liquidation segment increased $3.7 million, to $17.2 million during the year ended December 31, 2012 from $13.5 million for the year ended December 31, 2011. The $3.7 million increase in selling, general and administrative expenses in the auction and liquidation segment was primarily due to an increase in (a) payroll and benefits expenses of $1.1 million due to the continued expansion of our operations in the United Kingdom in 2012, and (b) profit sharing and bonus expense of $4.7 million primarily related to our operations in the United Kingdom and increase in profitability of our GA Keen Realty division in 2012. These increases were offset by a decrease in professional and consulting fees of $1.0 million, $0.6 million decrease in bad debt expense, and a decrease in other operating expenses of $0.5 million which was primarily due to the favorable impact of foreign currency exchange rates from our United Kingdom operations in 2012. Bad debt expense was $(0.2) million in 2012, which represented recoveries of bad debts written off in 2011, as compared to bad debt expense of $0.4 million in 2011. These bad debt expense amounts primarily related to our wholesale and industrial operations in the auction and liquidation segment.

 

Selling, general and administrative expenses in the valuation and appraisal services segment decreased $0.2 million, or 3.1%, to $7.1 million during the year ended December 31, 2012 from $7.3 million for the year ended December 31, 2011. The decrease was primarily due to a decrease in headcount in administrative functions. Selling, general and administrative expenses in the UK retail stores segment of $4.5 million during the year ended December 31, 2012 relates to our acquisition of Shoon on May 4, 2012. These expenses include the operating expense of ten retail stores and the internet operations of Shoon in the United Kingdom and the corporate expenses of Shoon.

 

Selling, general and administrative expenses for corporate and other decreased $1.1 million, or 9.1%, to $11.0 million during the year ended December 31, 2012 from $12.1 million for the year ended December 31, 2011. The decrease was primarily due to (a) a decrease in compensation expense of $1.9 million for noncontrolling interests that primarily related to our majority owned subsidiary GA Capital, LLC, (b) a decrease of $0.3 million in share based compensation expense related to consideration paid to the Phantom Equityholders in connection with the Acquisition on July 31, 2009 that was incurred during the year ended December 31, 2011, where no corresponding expense was incurred during the year ended December 31, 2012. These decreases were offset by an increase in payroll and related expenses of $1.1 million that was primarily comprised of an increase in wages for additional hires and an increase in bonus expense in 2012.

 

Other Income. Other income was $1.4 million during the year ended December 31, 2012 as compared to other income of $0.1 million during the year ended December 31, 2011. Other income during the year ended December 31, 2012 was primarily comprised of (a) $0.2 million of interest income on our note receivable – related party as described in Note 10 to our consolidated financial statements; (b) $1.4 million of gain from bargain purchase as a result of the Shoon acquisition on May 4, 2012, where the net assets acquired exceeded the consideration paid, offset by $0.2 million from our loss from our 50% equity investment in Great American Group Real Estate, LLC.

 

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Interest Expense. Interest expense was $2.6 million during the year ended December 31, 2012 as compared to $4.9 million during the year ended December 31, 2011. Interest expense during the year ended December 31, 2012 was primarily comprised of interest expense on the notes payable to the Great American Members and Phantom Equityholders of $2.1 million, amortization of deferred loan fees on our $100.0 million asset based credit facility of $0.3 million, and $0.2 million of interest expense we incurred on our accounts receivable revolving line of credit and amounts outstanding under of asset based credit facility for letters of credit. Interest expenses during the year ended December 31, 2011 was primarily comprised of interest expense on the notes payable to the Great American Members and Phantom Equityholders of $2.2 million, interest expense and amortization of deferred loan fees on our $100.0 million asset based credit facility of $1.8 million, interest expense and fees of $1.1 incurred for a note payable that was used to fund a portion of a retail liquidation engagement, interest expense on our accounts receivable revolving line of credit of $0.1 million, offset by the reversal of interest expense of $0.3 million that was accrued at December 31, 2010 on the note payable that is collateralized by machinery and equipment as more fully described in Note 8 to the accompanying consolidated financial statements. The reversal of interest expense was the result of the execution of the Second Amendment to Credit Agreement on the note payable that is collateralized by machinery and equipment during the first quarter of 2011.

 

Income Before Provision for Income Taxes. Income before provision for income taxes was $6.3 million during year ended December 31, 2012 compared to income before provision for income taxes of $2.7 million during the year ended December 31, 2011. The increase in income before provision for income taxes during the year ended December 31, 2012 was primarily due to a decrease in interest expense of $2.3 million and the gain from bargain purchase of $1.4 million as a result of the acquisition of Shoon on May 4, 2012.

 

Provision (Benefit) For Income Taxes. Provision for income taxes was $1.9 million during the year ended December 31, 2012 compared to a provision for income taxes of $2.1 million during the year ended December 31, 2011. The effective income tax rate was 30.8% during the year ended December 31, 2012 compared to an effective income tax rate of 77.4% during the year ended December 30, 2011. The effective rate for our provision for income taxes in 2012 was favorably impacted by lower income taxes from our foreign operations which included the operating results from our acquisition of Shoon on May 4, 2012 and the gain on bargain purchase of Shoon. The effective income tax rate on our provision for income taxes in 2011 was negatively impacted by the tax differential from the vesting of restricted stock.

 

Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests represents the proportionate share of net income generated by Shoon that we do not wholly-own. During the year ended December 31, 2012, net income attributable to noncontrolling interests was $0.8 million.

 

Net Income (Loss) Attributable to the Company. Net income attributable to the Company for the year ended December 31, 2012 was $3.5 million compared to net income of $0.6 million during the year ended December 31, 2011. The increase in net income during the year ended December 31, 2012 as compared to the same period in 2011 was primarily due to a decrease in interest expense of $2.3 million and the gain from bargain purchase of $1.4 million as a result of the acquisition of Shoon on May 4, 2012, offset by net income attributable to noncontrolling interests of $0.8 million.

 

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Liquidity and Capital Resources

 

Our operations have been funded through a combination of our existing cash on hand, operating profits generated from operations, borrowings under our revolving credit facility, and special purpose financing arrangements. During the years ended December 31, 2013, 2012 and 2011 we generated net income of $1.1 million, $3.5 million and $0.6 million, respectively. Our cash flows and profitability are impacted by the number and size of retail liquidation engagements we perform on a quarterly or annual basis. Our cash flows are also impacted by our lending activities and interest expense on the $50.5 million of subordinated, unsecured promissory notes payable to the Great American Members and Phantom Equityholders. These factors have resulted in net cash used in operating activities of $3.2 million during the year ended December 31, 2013, net cash provided by operating activities of $16.2 million during the year ended December 31, 2012 and net cash used in operating activities of $2.0 million during the year ended December 31, 2011.

 

As of December 31, 2013, we had $18.9 million in unrestricted cash, $0.3 million of restricted cash, $0.3 million of borrowings outstanding on our accounts receivable revolving credit facility and $5.7 million of borrowing outstanding under our $100.0 million asset based credit facility. We believe that our current cash and cash equivalents, funds available under our asset based credit facilities and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations.

 

Our principal sources of liquidity to finance our business is our existing cash on hand, cash flows generated from operating activities, funds available under revolving credit facilities and special purpose financing arrangements.

 

   Year Ended December 31, 
   2013   2012   2011 
   (Dollars in thousands) 
Net cash provided by (used in):               
Operating activities  $(2,492)  $16,210   $(2,045)
Investing activities   5,482    (6,764)   1,240 
Financing activities   (3,075)   (5,888)   (4,001)
Effect of foreign currecy on cash   231    129    (240)
Net (decrease) increase in cash and cash equivalents  $146   $3,687   $(5,046)

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

Cash used in operating activities was $2.5 million for the year ended December 31, 2013 compared to cash provided by operating activities of $16.2 million in 2012. Cash used in operating activities in 2013 includes net income adjusted for noncash items and changes in operating assets and liabilities. The decrease in cash provided by operating activities in 2013 was primarily due to a decrease in net income during the year ended December 31, 2013 to $0.6 million from net income of $4.4 million during the year ended December 31, 2012 and the impact of the sales-type financing we provided on the sale of four oil rigs. Cash provided by operating activities in 2012 was favorably impacted by the increase in cash flows from our lending activities in the United Kingdom related to the cash collections on our loan receivable in the amount of $8.5 million. There were no similar lending activities during the year ended December 31, 2013.

 

Cash provided by investing activities was $5.5 million for the year ended December 31, 2013 compared to cash used in investing activities of $6.8 million during the year ended December 31, 2012. During the year ended December 31, 2013, cash provided by investing activities was primarily comprised of (a) a $7.6 million decrease in restricted cash and (b) $0.6 million of cash collected from the note receivable – related party, offset by $1.2 million of cash used to purchase property and equipment.

 

Cash used in financing activities was $3.1 million for the year ended December 31, 2013 compared to cash used in financing activities of $5.9 million in 2012. During the year ended December 31, 2013, cash used in financing activities primarily consisted of $2.8 million for the repayment of borrowings under our notes payable, $2.0 million of repayments on our accounts receivable revolving line of credit, $1.7 million of principal payments on the notes payable to the Phantom Equityholders, $1.9 million of distributions to noncontrolling interests, offset by borrowings of $5.7 million on our asset based credit facility that was utilized to purchase goods held for sale or auction in our wholesale and industrial operations. Cash used in financing activities was $5.9 million for the year ended December 31, 2012. During the year ended December 31, 2012, cash used in financing activities primarily consisted of $2.1 million for the repayment of borrowings under our notes payable, $1.7 million of principal payments on the notes payable to the Phantom Equityholders, $2.5 million of distributions to noncontrolling interests, offset by an increase of $0.4 million on the accounts receivable revolving line of credit.

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Cash provided by operating activities was $16.2 million for the year ended December 31, 2012 compared to cash used in operating activities of $2.0 million in 2011. Cash provided by operating activities in 2012 includes net income adjusted for noncash items and changes in operating assets and liabilities. The increase in cash provided by operating activities in 2012 was primarily due to an increase in net income during the year ended December 31, 2012 to $4.4 million from net income of $0.6 million during the year ended December 31, 2011. Cash provided by operating activities in 2012 was favorably impacted by the increase in cash flows from our lending activities in the United Kingdom related to the cash collections on our loan receivable in the amount of $8.5 million and cash received from the sale of one oil rig for $1.7 million that was included in goods held for sale or auction at December 31, 2011.

 

Cash used in investing activities was $6.8 million for the year ended December 31, 2012 compared to cash provided by investing activities of $1.2 million during the year ended December 31, 2011. During the year ended December 31, 2012, cash used in investing activities was primarily comprised of (a) $7.9 million increase in restricted cash of which $6.7 million was used to collateralize letters of credit that were issued in September 2012 for a retail liquidation engagement; (b) $1.2 million of cash used to acquire the retail operations of Shoon in the United Kingdom; (c) $0.6 million for the purchase of property and equipment; and (d) $0.2 million of cash used to fund our equity investment in Great American Real Estate, LLC, offset by $3.2 million of cash generated from investing activities from collections of our note receivable – related party.

 

Cash used in financing activities was $5.9 million for the year ended December 31, 2012 compared to cash used in financing activities of $4.0 million in 2011. During the year ended December 31, 2012, cash used in financing activities primarily consisted of $2.1 million for the repayment of borrowings under our notes payable, $1.7 million of principal payments on the notes payable to the phantom equityholders, $2.5 million of distributions to noncontrolling interests, offset by an increase of $0.4 million on the accounts receivable revolving line of credit. During the year ended December 31, 2011, cash used in financing activities included $1.7 million of principal payments on our notes payable to the Phantom Equityholders, $3.3 million of distributions to noncontrolling interests and $0.1 million for the payment of employment taxes on the vesting of restricted stock that was awarded to the Phantom Equityholders in connection with the Acquisition, offset by cash generated from financing activities of $1.9 million from our new accounts receivable revolving line of credit. Cash used in financing activities during the year ended December 31, 2011 also included borrowings of $7.0 million from a note payable and the repayment of the face amount of the note payable in the amount of $7.6 million that was used to finance one of our retail liquidation engagements.

 

Credit Agreements

 

From time to time, we utilize our asset based credit facility to fund costs and expenses incurred in connection with liquidation engagements. We also utilize this credit facility in order to issue letters of credit in connection with liquidation engagements conducted on a guaranteed basis. Subject to certain limitations and offsets, we are permitted to borrow up to $100.0 million under the credit facility, less the aggregate principal amount borrowed under the UK Credit Agreement (if in effect), and the maturity date has been extended from July 16, 2013 to July 15, 2018. Borrowings under the credit facility are only made at the discretion of the lender and are generally required to be repaid within 180 days. The interest rate for each revolving credit advance under the related credit agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided. On March 19, 2014, the Company entered into the UK Credit Agreement with an affiliate of Wells Fargo Bank, National Association which provides for the financing of transactions in the United Kingdom. The UK Credit Agreement allows the Company to borrow up to £50 million. Any borrowings on the UK Credit Agreement reduce the availability on the asset based $100.0 million credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. The credit facility is secured by the proceeds received for services rendered in connection with the liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract, if any. The credit facility also provides for success fees in the amount of 5% to 20% of the net profits, if any, earned on liquidation engagements that are financed under the credit facility as set forth in the related credit agreement. We typically seek borrowings on an engagement-by-engagement basis. The credit agreements governing the credit facility contains certain covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. At December 31, 2013 and December 31, 2012, the outstanding balance under the credit facility for borrowings was $5.7 million and $0, respectively. At December 31, 2013, there were no outstanding letters of credit under the credit facility. At December 31, 2012, there were letters of credits outstanding for a retail liquidation engagement in the amount of 6.7 million that were returned to us during the first quarter of 2013.

 

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On May 29, 2008, Great American Group Energy Equipment, LLC (“GAGEE”) entered into a credit agreement to finance the purchase of oil rigs and other equipment related to the oil exploration business to be sold at auction or liquidation. Under the original credit agreement, the principal amount of the loan was $12.0 million and borrowings bear interest at a rate of 20% per annum. The loan is collateralized by the oil rigs and other equipment related to the oil exploration business that was purchased with the proceeds from the loan. GAGEE is required to make principal and interest payments from proceeds from the sale of the oil rigs and other equipment related to the oil exploration business. GAGEE is a special purpose entity created to purchase the oil rigs and other equipment related to the oil exploration business, whose assets consist only of the oil rigs and other equipment related to the oil exploration business in question and whose liabilities are limited to the lenders’ note and certain operational expenses related to this transaction. Under the Third Amendment to the Credit Agreement dated March 19, 2012, the maturity date of the note payable was extended to December 31, 2012 with an interest rate of 0% through maturity. GAGEE entered into a Fourth Amendment to the Credit Agreement effective December 31, 2012 which extended the maturity date of the note payable to December 31, 2013 and the interest rate remained at 0% through maturity. GAGEE entered into a Fifth Amendment to the Credit Agreement effective December 31, 2013 which extended the maturity date of the note payable to June 30, 2015 and the interest rate remained at 0% through maturity. The Third, Fourth and Fifth Amendments to the Credit Agreement also provided for the lender to reimburse GAGEE for certain expenses from proceeds of the sale or lease of the assets that collateralize the note payable. During the year ended December 31, 2013, the lease payments collected from the lease of four oil rigs was used to reduce the outstanding note payable balance by $2.7 million, to $6.9 million at December 31, 2013 from $9.6 million at December 31, 2012. GAG, LLC guaranteed GAGEE’s liabilities to the lenders up to a maximum of $1.2 million. GAG, LLC made a payment of $1.2 million on October 9, 2009 in full satisfaction of its guaranty under the credit agreement, which reduced the principal amount of borrowings and interest due under the credit agreement. The credit agreement does not provide for other recourse against us, GAG, LLC or any of our other subsidiaries.

 

Accounts Receivable Line of Credit

 

On May 17, 2011, one of our majority owned subsidiaries entered into an Accounts Receivable Line of Credit with a finance company. Proceeds from the Accounts Receivable Line of Credit were used to pay off borrowings under the factoring agreement.  The Accounts Receivable Line of Credit is collateralized by the accounts receivable of our majority owned subsidiary and allows for borrowings in the amount of 85% of the net face amount of prime accounts, as defined in the Accounts Receivable Line of Credit, with maximum borrowings not to exceed $2.0 million. The interest rate under the Accounts Receivable Line of Credit is the prime rate plus 2%, payable monthly in arrears. The Accounts Receivable Line of Credit was amended effective February 3, 2012 and the maximum borrowings allowed increased from $2.0 million to $3.0 million. The maturity date of the Accounts Receivable Line of Credit is February 3, 2015 and the maturity date may be extended for successive periods equal to one year, unless our majority owned subsidiary gives the finance company written notice of its intent to terminate the Accounts Receivable Line of Credit at least thirty days prior to the maturity date of the Accounts Receivable Line of Credit. The finance company has the right to terminate the Accounts Receivable Line of Credit at its sole discretion upon giving sixty days’ prior written notice. In connection with the Accounts Receivable Line of Credit, GAG, LLC entered into a limited continuing guaranty of our majority owned subsidiary’s obligations under the Accounts Receivable Line of Credit. Borrowings outstanding under the Accounts Receivable Line of Credit were $0.3 million and $2.3 million at December 31, 2013 and 2012, respectively.

 

Promissory Notes

 

In connection with the Acquisition, we issued certain subordinated unsecured promissory notes to the Great American Members and the Phantom Equityholders. In 2010 we amended an aggregate of $52.4 million of the $55.6 million principal amount then outstanding of the subordinated, unsecured promissory notes payable to the Great American Members and Phantom Equityholders, which reduced the interest rate on these notes from 12.0% per annum to 3.75% per annum. In addition, the maturity date for $47.0 million of the $55.6 million principal amount outstanding of the subordinated, unsecured promissory notes payable to the Great American Members was extended to July 31, 2018, subject to annual prepayments based upon our cash flow, provided that we are not obligated to make such prepayments if our minimum adjusted cash balance is below $20.0 million.  Each prepayment, if any, is due within 30 days of the filing of our Annual Report on Form 10-K, beginning with the Form 10-K for the fiscal year ended December 31, 2010. There were no prepayments due on the notes payable under this prepayment provision on April 30, 2013, April 30, 2012 and April 30, 2011 and no prepayment is due for the fiscal year ended December 31, 2013. In addition, we entered into individual waivers for an aggregate of $51.3 million of the $55.3 million principal amount then outstanding, whereby the noteholders permitted us to defer interest payments due on each of October 31, 2010, January 31, 2011, and April 30, 2011 until July 31, 2011. Effective July 31, 2011, we entered into further individual amendments with the Great American Members that increased the principal amount of the promissory notes from $47.0 million to $48.8 million, for the $1.8 million of accrued interest that was due on July 31, 2011. The addition to the principal amount accrues interest at the note rate of 3.75% and continues to be subject to annual prepayments based upon our cash flow and the maintenance of a minimum adjusted cash balance as provided in the notes prior to the capitalization of the accrued interest. On July 26, 2011 and August 3, 2011, we received waivers from certain of the Phantom Equityholders that permitted us to extend the payment date for $1.4 million of the $1.7 million of principal amount originally due and payable on July 31, 2011 until the fourth quarter of 2011. Of the $1.4 million principal amount originally due on July 31, 2011, $0.6 million of principal amount was paid to two of the Phantom Equityholders on October 1, 2011, $0.3 million of principal amount was paid to one of the Phantom Equityholders on October 15, 2011, and $0.5 million of principal amount was paid to the remaining two Phantom Equityholders on November 4, 2011.

 

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As of December 31, 2013, there was $48.8 million in aggregate principal amount outstanding owed to the Great American Members, all of which accrues interest at 3.75%. As of December 31, 2013, there was $1.7 million in aggregate principal amount outstanding payable to the Phantom Equityholders. Of this amount, $1.0 million accrues interest at 3.75% and $0.7 million accrues interest at 12.0%. On January 31, 2014, the Company paid in full the $0.7 million of principal balance for the notes to the Phantom Equityholders that had the 12.0% interest rate.

 

Dialectic Loan Agreement

 

On July 21, 2011, GAG, LLC entered into a loan agreement with Dialectic Capital Partners, LP, Dialectic Offshore Ltd., Dialectic Antithesis Partners, LP and Dialectic Antithesis Offshore Fund, Ltd. (collectively, the “Dialectic Lenders”) and Dialectic Capital Management, LLC as collateral agent. The loan agreement provided for the loan of $7.0 million to GAG, LLC pursuant to a promissory note with a stated principal amount of $7.6 million. No interest was due on the loan until after November 1, 2011.  The loan was used to fund a portion of GAG, LLC’s obligations in connection with its participation in a liquidation transaction. The loan agreement also provided for profit participation payments to the Dialectic Lenders up to a maximum of 5% of the maturity value of the note. The stated principal amount of the note payable and the profit participation payment were paid in full in October 2011. The Dialectic Lenders received $0.4 million in profit participation payments under the note.

 

Off Balance Sheet Arrangements

 

On July 8, 2010, the Company loaned $3.2 million to GARE for the purposes of investing in GAHA Fund II, LLC, a newly formed joint venture which is 50% owned by GARE. GAHA Fund II, LLC is a special purpose entity created to purchase non-performing distressed real estate loans at a discount to par from a financial institution and market the loans and real estate to third parties. The note receivable bears interest at a rate of 15% per annum and all unpaid principal and interest was originally due on July 8, 2011. In July 2011, the maturity date of the loan was extended and the interest rate was reduced to 8% per annum.  On December 29, 2011, additional funds in the amount of $0.6 million were loaned to GARE and the note receivable was amended to increase the outstanding balance to $3.8 million and extend the maturity date to July 31, 2012. On February 20, 2013, the third amendment to the note receivable extended the maturity date to December 31, 2013. During the year ended December 31, 2012, the Company received principal payments on the note receivable totaling $3.2 million and recorded impairment charge of $0.1 million to write down the note receivable to its estimated net realizable value at December 31, 2012. There was no interest income recorded on the note receivable during the year ended December 31, 2013 and interest income was $0.2 million for the year ended December 31, 2012. The note receivable in the amount of $0.6 million is included in note-receivable – related party as of December 31, 2012. The note receivable in the amount of $0.6 million was paid to the Company in August 2013.

 

Other than with respect to our arrangements with GAHA Fund II, LLC, as further described in Note 17 “Related Party Transactions” to our consolidated financial statements, we have no obligations, assets or liabilities which would be considered off-balance sheet arrangements and do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, established for the purpose of facilitating off-balance sheet arrangements. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

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Contractual Obligations

 

The following table sets forth aggregate information about our contractual obligations as of December 31, 2013 and the periods in which payments are due:

 

   Payments due by period 
   Total   Less Than
One Year
   1-3 Years   4-5 Years   More Than
5 years
 
   (Dollars in thousands) 
Contractual Obligations                         
Revolving credit facility, including interest  $333   $333   $   $   $ 
Asset based credit facility, including interest   5,710    5,710             
Long-term debt, including interest   58,970    3,620    3,686    51,664     
Notes payable, including interest   6,856    6,856             
Operating lease obligations   7,862    1,590    3,029    2,803    440 
Total  $79,731   $18,109   $6,715   $54,467   $440 

 

We anticipate that cash generated from operations and existing borrowing arrangements under our credit facilities to fund costs and expenses incurred in connection with liquidation engagements should be sufficient to meet our cash requirements for at least the next twelve months. However, our future capital requirements will depend on many factors, including the success of our businesses in generating cash from operations, continued compliance with financial covenants contained in our credit facilities, the timing of principal payments on our long-term debt and the capital markets in general, among other factors.

 

Critical Accounting Policies

 

Our financial statements and the notes thereto contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, management’s estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to be critical if:

 

    it requires assumptions to be made that were uncertain at the time the estimate was made; and

 

    changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on results of operations or financial condition.

 

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as reserves for slow moving goods held for sale or auction, the fair value of mandatorily redeemable noncontrolling interests and accounting for income tax valuation allowances. Estimates are based on historical experience, where applicable, and assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

Our significant accounting policies are described in Note 2 to the consolidated financial statements included elsewhere in this Annual Report. Management believes that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our financial statements.

 

Revenue Recognition. Revenues are recognized in accordance with the accounting guidance when persuasive evidence of an arrangement exists, the related services have been provided, the fee is fixed or determinable, and collection is reasonably assured.

 

Revenues in the Company’s Valuation and Appraisal segment are primarily comprised of fees for valuation and appraisal services. Revenues are recognized upon the delivery of the completed services to the related customers and collection of the fee is reasonably assured. Revenues in the Valuation and Appraisal segment also include contractual reimbursable costs.

 

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Revenues in the Company’s Auction and Liquidation segment are comprised of (i) commissions and fees earned on the sale of goods at auctions and liquidations; (ii) revenues from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation; (iii) revenue from the sale of goods that are purchased by the Company for sale at auction or liquidation sales events; (iv) fees earned from real estate services and the origination of loans; (v) revenues from financing activities is recorded over the lives of related loans receivable using the interest method and (vi) revenues from contractual reimbursable expenses incurred in connection with auction and liquidation contracts.

 

Commission and fees earned on the sale of goods at auction and liquidation sales are recognized when evidence of an arrangement exists, the sales price has been determined, title has passed to the buyer and the buyer has assumed the risks of ownership, and collection is reasonably assured. The commission and fees earned for these services are included in revenues.

 

Revenues earned from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation are recognized based on proceeds received. The Company records proceeds received from these types of engagements first as a reduction of contractual reimbursable expenses, second as a recovery of its guarantee and thereafter as revenue, subject to such revenue meeting the criteria of having been fixed or determinable. Contractual reimbursable expenses and amounts advanced to customers for minimum guarantees are initially recorded as advances against customer contracts in the accompanying consolidated balance sheets. If, during the auction or liquidation sale, the Company determines that the proceeds from the sale will not meet the minimum guaranteed recovery value as defined in the auction or liquidation services contract, the Company accrues a loss on the contract in the period that the loss becomes known.

 

The Company also evaluates revenue from auction and liquidation engagements in accordance with the accounting guidance to determine whether to report auction and liquidation segment revenue on a gross or net basis. The Company has determined that it acts as an agent in a substantial majority of its auction and liquidation services engagements and therefore reports the auction and liquidation revenues on a net basis.

 

Revenues from the sale of goods are recorded gross and are recognized in the period in which the sale of goods held for sale or auction are completed, title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the transaction. These revenues are primarily the result of the Company acquiring title to merchandise with the intent of selling the items at auction or for augmenting liquidation sales.

 

Revenues from the sale of goods in our UK retail stores segment are recognized as revenue upon the sale of product to retail customers. Our net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances and are recorded net of sales or value added tax. Allowances provided for these items are presented in the consolidated financial statements primarily as reductions to sales and cost of sales.

 

Revenues from sales-type leases are recorded as an asset at lease inception. The asset is recorded at the aggregate future minimum lease payments, estimated residual value of the leased equipment, and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. During the year ended December 31, 2013, the terms of the lease agreement for four oil rigs that was included in leased equipment at December 31, 2012 was amended to, among other things, eliminate the right of the lessor to return the oil rigs to the Company. This amendment changed the classification of the lease from an operating lease to a sales-type lease and resulted in the Company recording revenues from the sale of the oil rigs.

 

In the normal course of business, the Company will enter into collaborative arrangements with other merchandise liquidators to collaboratively execute auction and liquidation contracts. The Company’s collaborative arrangements specifically include contractual agreements with other liquidation agents in which the Company and such other liquidation agents actively participate in the performance of the liquidation services and are exposed to the risks and rewards of the liquidation engagement. The Company’s participation in collaborative arrangements including its rights and obligations under each collaborative arrangement can vary. Revenues from collaborative arrangements are recorded net based on the proceeds received from the liquidation engagement. Amounts paid to participants in the collaborative arrangements are reported separately as direct costs of revenues. Revenue from collaborative arrangements in which the Company is not the majority participant is recorded net based on the Company’s share of proceeds received.

 

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses inherent in our accounts receivable portfolio. In establishing the required allowance, management utilizes a specific customer identification methodology. Management also considers historical losses adjusted for current market conditions and the customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The bad debt expense is included as a component of selling, general and administrative expenses in the accompanying consolidated statement of operations.

 

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Inventory. Merchandise inventories are stated at the lower of average cost or market. The Company identifies potentially excess and slow-moving inventories and shrinkage by evaluating turn rates, inventory levels, historical results of inventory counts and other factors at its retail and warehouse locations. At December 31, 2012, the Company had a lower of cost or market reserves for excess and slow-moving inventories and shrinkage that related to Shoon in the amounts of $26.

 

We have evaluated the current level of inventories considering historical sales, shrinkage and other factors and, based on this evaluation, we record adjustments to cost of goods sold to reflect inventories at net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, customer demand or competition differ from expectations.

 

Goods Held for Sale or Auction. Goods held for sale or auction are stated at the lower of cost or market, determined by the specific-identification method. We write down slow-moving and obsolete goods held for sale or auction based on assessments of market conditions, demand for the goods to be sold at auction, comparable industry sales of similar types of goods, and in part on information obtained from appraisal reports prepared by outside specialists. If these factors were to become less favorable than those projected, additional write-downs of goods held for sale or auction could be required.

 

Goodwill and Other Intangible Assets. We account for goodwill and intangible assets in accordance with the accounting guidance which requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

 

Goodwill includes (i) the excess of the purchase price over the fair value of net assets acquired in a business combination described in Note 6 and (ii) an increase for the subsequent acquisition of noncontrolling interests during the year ended December 31, 2007 (also see Note 6). The Codification requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment). Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. The Company operates two reporting units, which are the same as its reporting segments described in Note 17. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

 

When testing goodwill for impairment, we may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment for some or all of our reporting units and perform a detailed qualitative test of impairment (step 1). If we perform the detailed qualitative impairment test and the carrying amount of the reporting unit exceeds its fair value, we would perform an analysis (step 2) to measure such impairment. In 2013, we elected to proceed to the qualitative assessment of the recoverability of our goodwill balances for each of our reporting units in performing our annual impairment test. Based on our qualitative assessments, we concluded that the fair values of each of our reporting units exceeded their carrying values and no impairments were identified.

 

In accordance with the Codification, the Company reviews the carrying value of its intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the asset or asset group, if any, exceeds its fair market value. No impairment was deemed to exist as of December 31, 2013.

 

Fair Value Measurements. On January 1, 2009, the Company adopted the new accounting guidance and all other guidance related to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

 

We record mandatorily redeemable noncontrolling interests that were issued after November 5, 2003 at fair value with fair value determined in accordance with the Codification. Our mandatorily redeemable noncontrolling interests are measured at fair value on a recurring basis and are categorized using the three levels of fair value hierarchy. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

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We determined the fair value of mandatorily redeemable noncontrolling interests described above based on the issuance of similar interest for cash, references to industry comparables, and relied, in part, on information obtained from appraisal reports prepared by outside specialists.

 

The carrying amounts reported in the consolidated financial statements for cash, restricted cash, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair value based on the short-term maturity of these instruments. The carrying amounts of the notes payable (including credit lines used to finance liquidation engagements), long-term debt and capital lease obligations approximate fair value because the contractual interest rates or effective yields of such instruments are consistent with current market rates of interest for instruments of comparable credit risk. The adoption of the new accounting guidance on fair value did not have a material impact on our consolidated financial statements.

 

Share-Based Compensation. The Company’s share based payment awards principally consist of grants of restricted stock and restricted stock units. Share based payment awards also include grants of membership interests in the Company’s majority owned subsidiaries. The grants of membership interests consist of percentage interests in the Company’s majority owned subsidiaries as determined at the date of grant. In accordance with the accounting guidance share based payment awards are classified as either equity or a liability. For equity-classified awards, the Company measures compensation cost for the grant of membership interests at fair value on the date of grant and recognizes compensation expense in the consolidated statement of operations over the requisite service or performance period the award is expected to vest. The fair value of the liability-classified award will be subsequently remeasured at each reporting date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation cost over that period.

 

Income Taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.

 

New Accounting Standards

 

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Other Comprehensive Income”. ASU 2013-02 finalized the reporting for reclassifications out of accumulated other comprehensive income, which was previously deferred, as discussed below. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, they do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is also required to present on the face of the financials where net income is reported or in the footnotes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. Other amounts need only be cross-referenced to other disclosures required that provide additional detail of these amounts. The amendments in this update are effective for reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

The FASB has issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force”. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows.  To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  Early adoption is permitted.  The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date.  Retrospective application is permitted.

 

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Great American’s primary exposure to market risk consists of risk related to changes in interest rates. Great American has not used derivative financial instruments for speculation or trading purposes.

 

Interest Rate Risk

 

Our primary exposure to market risk consists of risk related to changes in interest rates. We utilize borrowings under our credit facilities to fund costs and expenses incurred in connection with liquidation contracts. Borrowings under our credit facilities bear interest at a floating rate of interest.

 

The primary objective of the our investment activities is to preserve capital for the purpose of funding operations while at the same time maximizing the income it receives from its investments without significantly increasing risk. To achieve these objectives, our investments allow it to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including commercial paper, money market funds and certificates of deposit. Our cash and cash equivalents through December 31, 2013 included amounts in bank checking, certificates of deposit and liquid money market accounts. The Company believes it has minimal interest rate risk. A one percentage point decrease in the average interest rate on our portfolio would have reduced its interest income for the year ended December 31, 2013 by an immaterial amount.

 

Foreign Currency Risk

 

The majority of our operating activities are conducted in U.S. dollars. Approximately 21.0% of our net sales for the year ended December 31, 2013 were denominated in other currencies such as British Pounds and Euros. The financial statements of our foreign subsidiaries are translated into U.S. dollars at fiscal year-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. Transaction gains included in our consolidated statement of operations, amounted to approximately $0.3 million during the year ended December 31, 2013, a gain of approximately $0.9 million for the year ended December 31, 2012 and a loss of approximately $0.2 million for the year ended December 31, 2011. Furthermore, a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net increase in our operating income of approximately $0.1 million for the year ended December 31, 2013. Conversely, a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating income of approximately $0.1 million for the year ended December 31, 2013.

 

 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The information required by this Item 8 is submitted as a separate section on page F-1 of this Annual Report on Form 10-K.

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

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Item 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures. Based upon the foregoing evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of December 31, 2013 our disclosure controls and procedures were effective at the reasonable assurance level.

 

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.

 

Changes in Our Controls

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Report of Management on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 

Item 9B. OTHER INFORMATION

 

None.

 

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PART III

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information called for by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2014 Annual Meeting of Shareholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December 31, 2013.

 

Item 11. EXECUTIVE COMPENSATION

 

The information called for by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2014 Annual Meeting of Shareholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December 31, 2013.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information called for by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2014 Annual Meeting of Shareholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December 31, 2013.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information called for by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2014 Annual Meeting of Shareholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December 31, 2013.

 

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information called for by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2014 Annual Meeting of Shareholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December 31, 2013.

 

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PART IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  (a) The following documents are filed as part of this report:

 

  1. Financial Statements. The Company’s Consolidated Financial Statements as of December 31, 2013 and 2012 and for each of the three years in the year ended December 31, 2013 and the notes thereto, together with the report of the independent auditors on those Consolidated Financial Statements are hereby filed as part of this report, beginning on page F-1.

 

  2. Financial Statement Schedules.

 

    Financial Statement Schedules other than those listed above have been omitted because they are either not applicable or the information is otherwise included in the consolidated financial statements or the notes thereto.

 

  (b) Exhibits and Index to Exhibits, below.

 

Exhibit Index

 

Exhibit
No.

 

Description

   
  2.1(1)+   Agreement and Plan of Reorganization, dated May 14, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc., AAMAC Merger Sub, Inc., Great American Group, LLC, the Members of Great American Group, LLC and the Member Representative
   
  2.2(1)   Amendment No. 1 to Agreement and Plan of Reorganization, dated May 29, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc., AAMAC Merger Sub, Inc., Great American Group, LLC, the Members of Great American Group, LLC and the Member Representative
   
  2.3(1)   Amendment No. 2 to Agreement and Plan of Reorganization, dated July 8, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc. AAMAC Merger Sub, Inc., Great American Group, LLC, the Members of Great American Group, LLC and the Member Representative
   
  2.4(2)   Amendment No. 3 to Agreement and Plan of Reorganization, dated July 28, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc. AAMAC Merger Sub, Inc., Great American Group, LLC, the Members of Great American Group, LLC and the Member Representative
   
  3.1(1)   Certificate of Incorporation of Great American Group, Inc.
   
  3.2(1)   Bylaws of Great American Group, Inc.
   
  4.1(1)   Form of common stock certificate
   
10.1(4)   Credit Agreement, dated as of May 29, 2008, by and among Great American Group Energy Equipment, LLC, Garrison Loan Agency Services LLC and the lender parties thereto
   
10.2(4)   Great American Group, LLC Guaranty, dated as of May 29, 2008, by Great American Group, LLC in favor of Garrison Special Opportunities Fund LP., Gage Investment Group, LLC and Garrison Loan Agency Services LLC
   
10.3(5)   Forbearance Agreement, dated as of October 8, 2009, by and among Great American Group Energy Equipment, LLC, Great American Group, LLC, Garrison Special Opportunities Fund LP, Gage Investment Group LLC and Garrison Loan Agency Services LLC
   
10.4(4)   Security Agreement, dated as of May 29, 2008, by and among Great American Group Energy Equipment, LLC, Great American Group, LLC and Garrison Loan Agency Services LLC
   
10.5(9)   Amended and Restated Credit Agreement, dated as of December 8, 2010, by and between Great American Group WF, LLC as US Borrower, GA Asset Advisors Limited, as English Borrower, and Wells Fargo Bank, National Association
     
10.6(9)   Amended and Restated Guaranty, dated as of December 8, 2010, by Great American Group, Inc. and Great American Group, LLC, in favor of Wells Fargo Bank, National Association

 

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10.7(4)   Security Agreement, dated as of October 21, 2008, by and between Great American Group WF, LLC and Wells Fargo Bank, National Association (Successor to Wells Fargo Retail Finance, LLC)
   
10.8(4)   Form of promissory note issued by Great American Group, Inc. in favor of each Contribution Consideration Recipient
   
10.9(3)   Registration Rights Agreement, dated as of July 31, 2009, by and among Great American Group, Inc. and the stockholders of Great American Group, Inc. named therein
   
10.10(3)   Escrow Agreement, dated as of July 31, 2009, by and among Great American Group, Inc., the Member Representative and Continental Stock Transfer & Trust Company
   
10.11(1)   Letter Agreement, dated May 14, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc., Great American Group, LLC and the stockholders of Alternative Asset Management Acquisition Corp. named therein
   
10.12(1)   Amendment to Letter Agreement, dated as of July 8, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc., Great American Group, LLC and the stockholders of Alternative Asset Management Acquisition Corp. named therein
   
10.13(3)   Amendment to Letter Agreement, dated as of July 28, 2009, by and among Alternative Asset Management Acquisition Corp., Great American Group, Inc., Great American Group, LLC and the stockholders of Alternative Asset Management Acquisition Corp. named therein
   
10.14(3)#   Form of Director and Officer Indemnification Agreement
   
10.15(3)#   Employment Agreement, dated July 31, 2009, by and between Great American Group, Inc. and Harvey M. Yellen
   
10.16(3)#   Employment Agreement, dated July 31, 2009, by and between Great American Group, Inc. and Andrew Gumaer
   
10.17(3)#   Employment Agreement, dated July 31, 2009, by and between Great American Group, Inc. and Scott Carpenter
   
10.18(4)   Form of Phantom Equityholder Amendment Agreement and Release
   
10.19(4)   Form of Phantom Equityholder Acknowledgement to Amendment No. 3 to Agreement and Plan of Reorganization
   
10.20(4)#   Great American Group, Inc. Amended and Restated 2009 Stock Incentive Plan
   
10.21(4)   Sixth Amended and Restated Operating Agreement for Great American Group Advisory & Valuation Services, LLC, dated as of January 1, 2008, by and among Great American Group, LLC, Lester Friedman, John Bankert, Michael Marchlik, and Ken Bloore
   
10.22(4)   Operating Agreement for Great American Group Machinery & Equipment, LLC, dated as of April 10, 2007, by and among Great American Group, LLC, Marc Swirsky, Lester Friedman, Paul Erickson and John Bankert
   

10.23(6)   Amendment to Credit Agreement, dated as of December 18, 2009, by and among Great American Group Energy Equipment, LLC, Garrison Special Opportunities Fund LP and Garrison Loan Agency Services LLC
     
10.24(7)   Form of Amendment No. 1 to Subordinated Unsecured Promissory Note, dated as of April 30, 2010, by and between the Company and each of the Great American Members
     
10.25(7)   Form of Amendment No. 1 to Subordinated Unsecured Promissory Note, dated as of April 30, 2010, by and between the Company and certain of the Phantom Equityholders

 

10.26(8)   Second Amendment to and Extension of Credit Agreement and Omnibus Ratification of Loan Documents, dated as of July 16, 2010, by and between Great American Group WF, LLC and Wells Fargo Retail Finance, LLC
     
10.27(9)   Form of Waiver to Subordinated Unsecured Promissory Note, dated as of October 27, 2010
     
10.28(10)   Waiver and Second Amendment to Credit Agreement, dated as of May 9, 2011, by and among Great American Group Energy Equipment, LLC, Great American Group, LLC and Garrison Loan Agency Services LLC

 

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10.29(11)   Loan and Security Agreement (Accounts Receivable & Inventory Line of Credit), dated as of May 17, 2011, by and between BFI Business Finance and Great American Group Advisory & Valuation Services, LLC
     
10.30(12)   Form of Waiver to Subordinated Unsecured Promissory Note with Phantom Equityholders
     
10.31(12)   Form of Amendment No. 2 to Subordinated Unsecured Promissory Note, dated as of July 31, 2011, by and between the Company and each of the Great American Members
     
10.32(13)   Second Amended and Restated Credit Agreement, dated as of July 15, 2013, by and between Great American Group WF, LLC and Wells Fargo Bank, National Association
     
10.33(13)   Third Amended and Restated Guaranty, dated as of July 15, 2013, by and between Great American Group, Inc. and Great American Group, LLC, in favor of Wells Fargo Bank, National Association
     
10.34(14)  Uncommitted Liquidation Finance Agreement, dated as of March 19, 2014, by and among GA Asset Advisors Limited, each special purpose vehicle affiliated to GA Asset Advisors Limited which accedes to such agreement, and Burdale Financial Limited.
    
10.35(14)  Master Guarantee and Indemnity, dated as of March 19, 2014, by and among GA Asset Advisors Limited, the Company, Great American Group, LLC, Great American Group WF, LLC, Burdale Financial Limited and Wells Fargo Bank, National Association.
    
21(4)   Subsidiary List
     
31.1*   Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
     
31.2*   Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
     
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.
+ Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.
# Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the registrant’s Registration Statement on Form S-4 (File No. 333-159644) declared effective by the Commission on July 17, 2009.
(2) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on July 30, 2009.
(3) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2009.
(4) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 31, 2009.
(5) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on October 15, 2009.
(6) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on January 7, 2010.
(7) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on May 7, 2010.
(8) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 15, 2010.
(9) Incorporated by reference to the registrant’s Annual Report on Form 10-K filed with the SEC on March 31, 2011.
(10) Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 16, 2011.
(11) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on May 26, 2011.
(12) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on August 4, 2011.
(13) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on July 19, 2013.
(14)Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on March 25, 2014.

 

48
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Great American Group, Inc.
   
Date: March 31, 2014 /s/  PHILLIP J. AHN
  (Phillip J. Ahn, Chief Operating Officer and Chief Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:

 

Signature   Title   Date
         
/s/ ANDREW GUMAER   Chief Executive Officer and Director   March 31, 2014
(Andrew Gumaer)   (Principal Executive Officer)    
         
/s/ PHILLIP J. AHN   Chief Operating Officer and Chief Financial Officer   March 31, 2014
(Phillip J. Ahn)   (Principal Financial Officer)    
         
/s/ HOWARD E. WEITZMAN   Chief Accounting Officer   March 31, 2014
(Howard E. Weitzman)   (Principal Accounting Officer)    
         
/s/ HARVEY M. YELLEN   President, Vice Chairman and Director   March 31, 2014
(Harvey M. Yellen)        
         
/s/ MATTHEW J. HART   Director   March 31, 2014
(Matthew J. Hart)        
         
/s/ HUGH G. HILTON   Director   March 31, 2014
(Hugh G. Hilton)        
         
/s/ MARK D. KLEIN   Director   March 31, 2014
(Mark D. Klein)        
         
/s/ BRYANT R. RILEY   Director   March 31, 2014
(Bryant R. Riley)      

 

49
 

 

GREAT AMERICAN GROUP, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Operations F-4
   
Consolidated Statements of Comprehensive Income (Loss) F-5
   
Consolidated Statements of Equity (Deficit) F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to Consolidated Financial Statements F-9

 

F-1
 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors of

Great American Group, Inc.

 

We have audited the accompanying consolidated balance sheets of Great American Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), equity (deficit) and cash flows for each of the years in the three year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Great American Group, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Marcum  LLP
Marcum  LLP
 
Melville, New York
March 31, 2014

 

F-2
 

 

GREAT AMERICAN GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

 

   December 31,   December 31, 
   2013   2012 
           
Assets          
Current assets:          
Cash and cash equivalents  $18,867   $18,721 
Restricted cash   325    7,923 
Accounts receivable, net   8,858    16,591 
Lease finance receivable   8,099     
Advances against customer contracts   1,058    2,441 
Inventory       2,216 
Goods held for sale or auction   13,964    10,196 
Note receivable related party - current portion   703    611 
Deferred income taxes   3,870    4,114 
Prepaid expenses and other current assets   948    1,145 
Total current assets   56,692    63,958 
Note receivable related party - net of current portion   497     
Property and equipment, net   1,090    970 
Goodwill   5,688    5,688 
Other intangible assets, net   140    140 
Deferred income taxes   8,739    9,484 
Other assets   831    343 
Total assets  $73,677   $80,583 
Liabilities and Equity (Deficit)          
Current liabilities:          
Accounts payable and accrued liabilities  $11,578   $16,886 
Due to related parties   45     
Auction and liquidation proceeds payable       864 
Mandatorily redeemable noncontrolling interests   2,823    2,856 
Asset based credit facility   5,710     
Revolving credit facility   333    2,304 
Current portion of long-term debt   1,724    1,724 
Notes payable   6,856    9,628 
Current portion of capital lease obligation       13 
Total current liabilities   29,069    34,275 
Long-term debt, net of current portion   48,759    50,483 
Total liabilities   77,828    84,758 
Commitments and contingencies          
Great American Group, Inc. stockholders' equity (deficit):          
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued        
Common stock, $0.0001 par value; 135,000,000 shares authorized; 30,002,975  issued and outstanding as of December 31, 2013 and 2012, respectively   4    4 
Additional paid-in capital   3,082    3,082 
Retained earnings (deficit)   (6,611)   (7,669)
Accumulated other comprehensive income (loss)   (638)   (520)
Total Great American Group, Inc. stockholders' equity (deficit)   (4,163)   (5,103)
Noncontrolling interests   12    928 
Total equity (deficit)   (4,151)   (4,175)
Total liabilities and equity (deficit)  $73,677   $80,583 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

GREAT AMERICAN GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

 

   Year Ended December 31, 
   2013   2012   2011 
Revenues:               
Services and fees  $59,967   $65,624   $60,627 
Sale of goods   16,165    18,312    2,899 
Total revenues   76,132    83,936    63,526 
Operating expenses:               
Direct cost of services   24,146    23,911    19,749 
Cost of goods sold   11,506    12,750    3,391 
Selling, general and administrative   36,382    39,834    32,946 
Total operating expenses   72,034    76,495    56,086 
Operating income   4,098    7,441    7,440 
Other income (expense):               
Interest income   26    201    476 
Loss from equity investment in Great American Real Estate, LLC   (21)   (120)   (369)
Loss from equity investment in Shoon Trading Limited   (156)        
Gain from bargain purchase       1,366     
Interest expense   (2,667)   (2,612)   (4,885)
Income before provision for income taxes   1,280    6,276    2,662 
Provision for income taxes   (704)   (1,936)   (2,060)
Net income   576    4,340    602 
Net income (loss) attributable to noncontrolling interests   (482)   819     
Net income attributable to Great American Group, Inc.  $1,058   $3,521   $602 
                
Basic earnings per share  $0.04   $0.12   $0.02 
Diluted earnings per share  $0.04   $0.12   $0.02 
Weighted average basic shares outstanding   28,682,975    28,682,975    28,539,651 
Weighted average diluted shares outstanding   29,907,402    29,614,252    29,408,466 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

GREAT AMERICAN GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPHREHENSIVE INCOME (LOSS)

(Dollars in thousands)

 

   Year Ended December 31, 
   2013   2012   2011 
             
Net income  $576   $4,340   $602 
Other comprehensive income:               
Change in cumulative translation adjustment   (118)   (273)   (254)
Other comprehensive loss, net of tax   (118)   (273)   (254)
Total comprehensive income   458    4,067    348 
Comprehensive income (loss) attributable to noncontrolling interests   (482)   819     
Comprehensive income attributable to Great American Group, Inc.  $940   $3,248   $348 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

GREAT AMERICAN GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

(Dollars in thousands)

 

                   Accumulated         
                   Additional   Retained   Other       Total 
   Preferred Stock   Common Stock   Paid-in   Earnings   Comprehensive   Noncontrolling   Equity 
   Shares   Amount   Shares   Amount   Capital   (Deficit)   Loss   Interests   (Deficit) 
Balance, January 1, 2011      $    30,559,036   $4   $2,878   $(11,792)  $7   $   $(8,903)
Net income                       602            602 
Foreign currency translation adjustment                           (254)       (254)
Vesting of restricted stock, net of shares withheld for employee taxes           442,573        (132)               (132)
Share based compensation                   431                431 
Balance, December 31, 2011           31,001,609    4    3,177    (11,190)   (247)       (8,256)
Net income                       3,521        819    4,340 
Foreign currency translation adjustment                           (273)       (273)
Formation of noncontrolling interests                               78    78 
Cancellation of founders contingent shares held in escrow           (1,000,000)                        
Purchase of noncontrolling interest in subsidiary                   (95)               (95)
Changes in noncontrolling interests                               31    31 
Adjustments for restricted stock awards           1,366                         
Balance, December 31, 2012           30,002,975    4    3,082    (7,669)   (520)   928    (4,175)
Net income                       1,058        (482   576 
Change in noncontrolling interest from deconsolidation of Shoon Trading Limited                               (434)   (434)
Foreign currency translation adjustment                           (118)       (118)
Balance, December 31, 2013      $    30,002,975   $4   $3,082   $(6,611)  $(638)  $12   $(4,151)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

GREAT AMERICAN GROUP, INC. AND SUBSIDIARIES

 

CONSOLDIATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

   Year ended December 31, 
   2013   2012   2011 
Cash flows from operating activities:               
Net income  $576   $4,340   $602 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:               
Depreciation and amortization   1,863    835    981 
Provision for doubtful accounts   (12)   108    424 
Impairment of goods held for sale or auction   428    194    159 
Share-based payments           431 
Effect of foreign currency on operations   226    (98)   (14)
Noncash interest expense           1,083 
Amortization of discount on note payable           609 
Loss from equity investment in Great American Real Estate, LLC and Shoon Trading Limited   177    120    369 
Gain from bargain purchase       (1,366)    
Loss on disposal of assets       3    4 
Deferred income taxes   989    1,366    1,871 
Change in fair value of mandatorily redeemable noncontrolling interests           (83)
Income allocated to mandatorily redeemable noncontrolling interests   1,897    1,928    3,934 
Change in operating assets and liabilities:               
Accounts receivable and advances against customer contracts   5,145    (6,172)   (7,032)
Lease finance receivable   (8,099)        
Income taxes receivable            
Inventory   455    1,618     
Goods held for sale or auction   (1,625)   2,361    224 
Loan receivable   156    8,519    (8,306)
Prepaid expenses and other assets   167    (33)   1,093 
Accounts payable and accrued expenses   (3,971)   1,641    3,300 
Auction and liquidation proceeds payable   (864)   846    (1,694)
Net cash (used in) provided by operating activities   (2,492)   16,210    (2,045)
Cash flows from investing activities:               
Acquisition of business       (1,246)    
Deconsolidation of Shoon Trading Limited   (1,564)        
Purchase of noncontrolling interest in subsidiary       (95)    
Purchases of property and equipment   (1,142)   (634)   (264)
Proceeds from sale of property and equipment       21     
Decrease in notes receivable - related party   611    3,233    2,706 
Equity investment in Great American Real Estate, LLC   (21)   (120)   (1,202)
Decrease (increase) in restricted cash   7,598    (7,923)    
Net cash provided by (used in) investing activities   5,482    (6,764)   1,240 
Cash flows from financing activities:               
Proceeds from (repayments of) revolving line of credit   (1,971)   362    1,942 
Proceeds from asset based credit facility   5,710         
Proceeds from note payable        &