United States Securities and Exchange Commission
FORM 10-Q
[ x ] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
OR | |
For the quarterly period ended | |
[ ] | 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 001-09014 | |
ChyronHego Corporation | |
(Exact name of registrant as specified in its charter) | |
New York | 11-2117385 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5 Hub Drive, Melville, New York | 11747 | |
(Address of principal executive offices) | (Zip Code) | |
(631) 845-2000 | ||
(Registrant's telephone number, including area code) | ||
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.
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [x] Yes [ ] No
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer [ ] ( | 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 number of shares outstanding of the issuer's common stock, par value $.01 per share, on November 11, 2013August 6, 2014 was 30,761,434.
CHYRONHEGO CORPORATION
INDEX
PART I | FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | ||
Consolidated Balance Sheets as of | |||
December 31, 2013 | 3 | ||
Consolidated Statements of Operations for the Three and | 4 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended | 5 | ||
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2014 and | |||
Notes to Consolidated Financial Statements (unaudited) | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | 19 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 24 | |
Item 4. | Controls and Procedures | ||
24 | |||
| |||
| PART II | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 25 | |
Item 1A. | Risk Factors | 25 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 25 | |
Item 3. | Defaults Upon Senior Securities | 25 | |
Item 4. | Mine Safety Disclosures | 25 | |
Item 5. | Other Information | 25 | |
Item 6. | Exhibits | 26 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHYRONHEGO CORPORATION
| Unaudited | ||||||||
| September 30, | December 31, | |||||||
| Assets | 2013 | 2012 | ||||||
| Current assets: | ||||||||
Cash and cash equivalents | $ | 2,701 | $ | 2,483 | ||||
Accounts receivable, net | 10,203 | 5,630 | ||||||
Inventories, net | 3,019 | 2,285 | ||||||
| Prepaid expenses and other current assets | 2,498 | 626 | ||||||
Total current assets | 18,421 | 11,024 | ||||||
Property and equipment, net | 4,333 | 1,347 | ||||||
Intangible assets, net | 9,603 | 559 | ||||||
Goodwill | 17,118 | 2,066 | ||||||
Deferred tax asset | 309 | - | ||||||
| Other assets | 178 | 119 | ||||||
TOTAL ASSETS | $ | 49,962 | $ | 15,115 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 9,369 | $ | 3,100 | ||||
Deferred revenue | 4,717 | 3,637 | ||||||
Due to related parties | 712 | - | ||||||
Current portion of pension liability | 377 | 278 | ||||||
Short-term debt | 1,673 | 280 | ||||||
Capital lease obligations | 227 | 20 | ||||||
Total current liabilities | 17,075 | 7,315 | ||||||
Contingent consideration | 8,433 | - | ||||||
Pension liability | 4,076 | 3,873 | ||||||
Deferred revenue | 888 | 1,198 | ||||||
Long-term debt | 1,508 | 397 | ||||||
Other liabilities | 654 | 351 | ||||||
Total liabilities | 32,634 | 13,134 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders' equity: | ||||||||
| Preferred stock, par value $1.00, without designation | ||||||||
| Authorized - 1,000,000 shares, Issued - none | ||||||||
| Common stock, par value $.01 | ||||||||
| Authorized - 150,000,000 shares | ||||||||
| Issued and outstanding - 30,334,263 at September 30, 2013 | ||||||||
and 17,135,239 at December 31, 2012 | 303 | 171 | ||||||
Additional paid-in capital | 103,494 | 84,539 | ||||||
Accumulated deficit | (84,483 | ) | (80,404 | ) | ||||
Accumulated other comprehensive loss | (2,163 | ) | (2,325 | ) | ||||
Total ChyronHego Corporation shareholders' equity | 17,151 | 1,981 | ||||||
Non controlling interests | 177 | - | ||||||
Total shareholders' equity | 17,328 | 1,981 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 49,962 | $ | 15,115 | ||||
Unaudited | ||||||||
June 30, | December 31, | |||||||
| 2014 | 2013 | ||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,972 | $ | 5,266 | ||||
Accounts receivable, net | 10,077 | 7,781 | ||||||
Inventories, net | 1,587 | 2,816 | ||||||
Prepaid expenses and other current assets | 2,810 | 2,525 | ||||||
Total current assets | 19,446 | 18,388 | ||||||
Property and equipment, net | 4,255 | 4,145 | ||||||
Intangible assets, net | 10,905 | 8,968 | ||||||
Goodwill | 21,973 | 18,948 | ||||||
Deferred tax asset | 76 | 56 | ||||||
Other assets | 136 | 147 | ||||||
TOTAL ASSETS | $ | 56,791 | $ | 50,652 | ||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 6,981 | $ | 9,240 | ||||
Deferred revenue | 5,618 | 4,660 | ||||||
Short-term debt | 1,189 | 1,532 | ||||||
Due to related parties | 738 | 716 | ||||||
Current portion of pension liability | 377 | 518 | ||||||
Deferred tax liability | 296 | 271 | ||||||
Capital lease obligations | 164 | 215 | ||||||
Total current liabilities | 15,363 | 17,152 | ||||||
Contingent consideration | 7,714 | 12,260 | ||||||
Pension liability | 2,418 | 2,197 | ||||||
Deferred revenue | 797 | 923 | ||||||
Long-term debt | 792 | 772 | ||||||
Deferred tax liability | 1,626 | 1,195 | ||||||
Other liabilities | 591 | 686 | ||||||
Total liabilities | 29,301 | 35,185 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, par value $1.00, without designationAuthorized - 1,000,000 shares, Issued - none | ||||||||
Common stock, par value $.01Authorized - 150,000,000 sharesIssued and outstanding - 35,567,299 at June 30, 2014and 30,788,251 at December 31, 2013 | 356 | 308 | ||||||
Additional paid-in capital | 115,941 | 103,642 | ||||||
Accumulated deficit | (88,538 | ) | (88,243 | ) | ||||
Accumulated other comprehensive loss | (449 | ) | (421 | ) | ||||
Total ChyronHego Corporation shareholders' equity | 27,310 | 15,286 | ||||||
Non controlling interests | 180 | 181 | ||||||
Total shareholders' equity | 27,490 | 15,467 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 56,791 | $ | 50,652 | ||||
See Notes to Consolidated Financial Statements (unaudited)
CHYRONHEGO CORPORATION
THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(In thousands, except per share amounts)
(Unaudited)
| Three Months | Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
Product revenues | $ | 7,697 | $ | 4,861 | $ | 20,415 | $ | 16,434 | ||||||||
Service revenues | 6,262 | 2,387 | 12,277 | 6,375 | ||||||||||||
Total revenues | 13,959 | 7,248 | 32,692 | 22,809 | ||||||||||||
Cost of sales | 5,210 | 2,325 | 10,890 | 7,025 | ||||||||||||
Gross profit | 8,749 | 4,923 | 21,802 | 15,784 | ||||||||||||
| Operating expenses: | ||||||||||||||||
Selling, general and administrative | 6,487 | 4,114 | 18,074 | 13,278 | ||||||||||||
Research and development | 2,399 | 1,822 | 6,524 | 5,682 | ||||||||||||
| Change in fair value of contingent | ||||||||||||||||
consideration | 878 | - | 933 | - | ||||||||||||
Total operating expenses | 9,764 | 5,936 | 25,531 | 18,960 | ||||||||||||
Operating loss | (1,015 | ) | (1,013 | ) | (3,729 | ) | (3,176 | ) | ||||||||
Interest expense, net | (94 | ) | (7 | ) | (203 | ) | (16 | ) | ||||||||
Other income (loss), net | 30 | 18 | (37 | ) | 12 | |||||||||||
Loss before taxes | (1,079 | ) | (1,002 | ) | (3,969 | ) | (3,180 | ) | ||||||||
Income tax benefit (expense), net | 32 | 302 | (72 | ) | 899 | |||||||||||
Net loss | (1,047 | ) | (700 | ) | (4,041 | ) | (2,281 | ) | ||||||||
| Less: Net income attributable to non | ||||||||||||||||
controlling interests | 30 | - | 38 | - | ||||||||||||
| Net loss attributable to ChyronHego | ||||||||||||||||
shareholders | $ | (1,077 | ) | $ | (700 | ) | $ | (4,079 | ) | $ | (2,281 | ) | ||||
| Net loss per share attributable to | ||||||||||||||||
ChyronHego shareholders - basic | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.17 | ) | $ | (0.13 | ) | ||||
| Net loss per share attributable to | ||||||||||||||||
ChyronHego shareholders - diluted | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.17 | ) | $ | (0.13 | ) | ||||
| Weighted average shares outstanding: | ||||||||||||||||
Basic | 30,236 | 17,023 | 23,576 | 16,910 | ||||||||||||
Diluted | 30,236 | 17,023 | 23,576 | 16,910 | ||||||||||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Product revenues | $ | 7,654 | $ | 6,744 | $ | 13,435 | $ | 12,718 | ||||||||
Service revenues | 7,050 | 3,972 | 13,890 | 6,015 | ||||||||||||
Total revenues | 14,704 | 10,716 | 27,325 | 18,733 | ||||||||||||
Cost of sales | 5,628 | 3,385 | 10,513 | 5,680 | ||||||||||||
Gross profit | 9,076 | 7,331 | 16,812 | 13,053 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 6,139 | 6,836 | 12,250 | 11,587 | ||||||||||||
Research and development | 2,128 | 2,345 | 4,306 | 4,125 | ||||||||||||
Change in fair value of contingent consideration | (2,156 | ) | 400 | |||||||||||||
Total operating expenses | 6,111 | 9,181 | 16,956 | 15,712 | ||||||||||||
Operating income (loss) | 2,965 | (1,850 | ) | (144 | ) | (2,659 | ) | |||||||||
Interest expense, net | (117 | ) | (95 | ) | (244 | ) | (109 | ) | ||||||||
Other income (loss), net | 68 | (39 | ) | (1 | ) | (122 | ) | |||||||||
Income (loss) before taxes | 2,916 | (1,984 | ) | (389 | ) | (2,890 | ) | |||||||||
Income tax benefit (expense), net | 37 | (93 | ) | 125 | (104 | ) | ||||||||||
Net income (loss) | 2,953 | (2,077 | ) | (264 | ) | (2,994 | ) | |||||||||
Less: Net income attributable toNon-controlling interests | 6 | 8 | 31 | 8 | ||||||||||||
Net income (loss) attributable to ChyronHegoshareholders | $ | 2,947 | $ | (2,085 | ) | $ | (295 | ) | $ | (3,002 | ) | |||||
Net income (loss) per share attributable toChyronHego shareholders - basic | $ | 0.08 | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.15 | ) | |||||
Net income (loss) per share attributable toChyronHego shareholders - diluted | $ | 0.08 | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.15 | ) | |||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 35,089 | 22,989 | 33,114 | 20,191 | ||||||||||||
Diluted | 36,090 | 22,989 | 33,114 | 20,191 | ||||||||||||
See Notes to Consolidated Financial Statements (unaudited)
CHYRONHEGO CORPORATION
THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(In thousands)
(Unaudited)
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
Net loss | $ | (1,047 | ) | $ | (700 | ) | $ | (4,041 | ) | $ | (2,281 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment | 92 | 9 | 162 | 12 | ||||||||||||
Comprehensive loss | (955 | ) | (691 | ) | (3,879 | ) | (2,269 | ) | ||||||||
| Less: Comprehensive income attributable | ||||||||||||||||
to non controlling interests | 30 | - | 38 | - | ||||||||||||
| Comprehensive loss attributable to | ||||||||||||||||
ChyronHego Corporation | $ | (985 | ) | $ | (691 | ) | $ | (3,917 | ) | $ | (2,269 | ) | ||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income (loss) | $ | 2,953 | $ | (2,077 | ) | $ | (264 | ) | $ | (2,994 | ) | |||||
Other comprehensive income (loss): | ||||||||||||||||
Cumulative translation adjustment | (44 | ) | 90 | (28 | ) | 70 | ||||||||||
Comprehensive income (loss) | 2,909 | (1,987 | ) | (292 | ) | (2,924 | ) | |||||||||
Less: Comprehensive income attributable tonon-controlling interest | 6 | 8 | 31 | 8 | ||||||||||||
Comprehensive income (loss) attributable toChyronHego Corporation | $ | 2,903 | $ | (1,995 | ) | $ | (323 | ) | $ | (2,932 | ) | |||||
See Notes to Consolidated Financial Statements (unaudited)
CHYRONHEGO CORPORATION
SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| Cash Flows from Operating Activities | ||||||||
Net loss | $ | (4,041 | ) | $ | (2,281 | ) | ||
| Adjustments to reconcile net loss to net cash from | ||||||||
| operating activities: | ||||||||
Depreciation and amortization | 1,755 | 687 | ||||||
Deferred tax allowance | 885 | - | ||||||
Deferred income tax benefit | (858 | ) | (926 | ) | ||||
Inventory provisions | 50 | 10 | ||||||
Share-based payment arrangements | 2,641 | 719 | ||||||
Shares issued for 401(k) match | 179 | 220 | ||||||
Change in fair value of contingent consideration | 933 | - | ||||||
Other | 427 | (41 | ) | |||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (1,649 | ) | 793 | |||||
Inventories | (784 | ) | (661 | ) | ||||
Prepaid expenses and other assets | (472 | ) | 46 | |||||
Accounts payable and accrued expenses | 1,828 | (202 | ) | |||||
Deferred revenue | 432 | 623 | ||||||
Other liabilities | 410 | (352 | ) | |||||
Net cash provided by (used in) operating activities | 1,736 | (1,365 | ) | |||||
| Cash Flows from Investing Activities | ||||||||
Acquisitions of property and equipment | (1,648 | ) | (534 | ) | ||||
Purchase of businesses, net of cash acquired | 14 | - | ||||||
Net cash used in investing activities | (1,634 | ) | (534 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
Proceeds from borrowings | 280 | - | ||||||
Proceeds from revolving credit facilities, net | 315 | - | ||||||
Proceeds from exercise of stock options | 6 | 1 | ||||||
Payments on capital lease obligations | (134 | ) | (28 | ) | ||||
Repayments on debt | (399 | ) | (135 | ) | ||||
Net cash provided by (used in) financing activities | 68 | (162 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 48 | - | ||||||
Change in cash and cash equivalents | 218 | (2,061 | ) | |||||
Cash and cash equivalents at beginning of period | 2,483 | 4,216 | ||||||
Cash and cash equivalents at end of period | $ | 2,701 | $ | 2,155 | ||||
| Supplemental Cash Flow Information: | ||||||||
Common stock issued for acquisition | $ | 16,591 | - | |||||
Contingent consideration for acquisition | 7,500 | - | ||||||
Debt incurred for acquisition | 1,044 | - | ||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (264 | ) | $ | (2,994 | ) | ||
Adjustments to reconcile net loss to net cash provided byoperating activities: | ||||||||
Depreciation and amortization | 1,384 | 768 | ||||||
Deferred income taxes | (276 | ) | 56 | |||||
Share-based payment arrangements | 602 | 2,384 | ||||||
Shares issued for 401(k) match | 105 | 128 | ||||||
Change in fair value of contingent consideration | 400 | |||||||
Other | 139 | 55 | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (2,385 | ) | (1,631 | ) | ||||
Inventories | 1,241 | (401 | ) | |||||
Prepaid expenses and other assets | (74 | ) | (69 | ) | ||||
Accounts payable and accrued expenses | (1,396 | ) | 1,837 | |||||
Deferred revenue | 760 | 52 | ||||||
Other liabilities | 83 | 339 | ||||||
Net cash provided by operating activities | 319 | 524 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Acquisitions of property and equipment, net | (904 | ) | (714 | ) | ||||
Acquisition of business, net of cash acquired | 537 | (28 | ) | |||||
Net cash used in investing activities | (367 | ) | (742 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayments on revolving credit facilities, net | (67 | ) | ||||||
Repayments on debt | (359 | ) | (213 | ) | ||||
Proceeds from borrowings | 54 | 222 | ||||||
Payments on capital lease obligations | (128 | ) | (102 | ) | ||||
Proceeds from exercise of stock options | 289 | 2 | ||||||
Net cash used in financing activities | (211 | ) | (91 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (35 | ) | 15 | |||||
Change in cash and cash equivalents | (294 | ) | (294 | ) | ||||
Cash and cash equivalents at beginning of period | 5,266 | 2,483 | ||||||
Cash and cash equivalents at end of period | $ | 4,972 | $ | 2,189 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Common stock issued for acquisition | $ | 3,299 | $ | 16,591 | ||||
Contingent consideration for acquisition | $ | 1,543 | $ | 7,500 | ||||
Common stock issued in settlement of contingent consideration | $ | 6,488 | ||||||
Common stock issued in settlement of awards under theManagement Incentive Compensation Plan andSeverance Agreements | $ | 846 | ||||||
See Notes to Consolidated Financial Statements (unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Nature of Business
On May 22, 2013 Chyron Corporation ("Chyron") acquired the outstanding stock of Hego Aktiebolag ("Hego" or "Hego AB"), and changed its name to ChyronHego Corporation (the "Company" or "ChyronHego"). Hego is a global graphics services company based in Stockholm, Sweden that develops real-time graphics products for the broadcast and sports industries. The companies combined in a cash and stock-for-stock transaction and the Company has continued to trade on the NASDAQ under the symbol "CHYR." The combination of these two companies, which is referred to in these consolidated financial statements as the "Business Combination," forms a leading global provider of broadcast graphics creation, playout and real-time data visualization.
General
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts have been eliminated. The results of operations include the operating results of Hego since the completion of the Business Combination on May 22, 2013. See Note 8 of these consolidated financial statements.
In the opinion of management of the Company, the unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company as of SeptemberJune 30, 20132014 and the consolidated results of its operations, its comprehensive income (loss) and its cash flows for the periods ended SeptemberJune 30, 20132014 and 2012.2013. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2013.2014. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates made by management include inventory valuations, stock and bonus compensation, allowances for doubtful accounts, income taxes, pension assumptions, allocations of purchase price, contingent consideration, valuation of intangible assets and reserves for warranty and incurred but not reported health insurance claims. Estimates, by their nature, are based on judgment and available information. Also, during interim periods, certain costs and expenses are allocated among periods based on an estimate of time expired, benefit received, or other activity associated with the periods. Accordingly, actual results could differ from those estimates. The Company has not segregated its cost of sales between costs of products and costs of services as it is not practicable to segregate such costs. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.2013. The December 31, 20122013 figures included herein were derived from such audited consolidated financial statements.
Recent Accounting Pronouncements
In February 2013,June 2014, the Financial Accounting Standards Board ("FASB") issued amendments to disclosure requirementsAccounting Standards Update No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for presentationShare-Based Payments When the Terms of comprehensive income. The standardan Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU No. 2014-12"). ASU No. 2014-12 requires presentation (eitherthat a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performancecondition. As such, the performance target should not be reflected in a single note or parenthetically onestimating the facegrant date fair value of the financial statements) of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its sourceaward. ASU No. 2014-12 is effective for interim and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, a cross reference to the related footnote for additional information will be required. The amendments are effective prospectively for reportingannual periods beginning after December 15, 2012.2015, with early adoption permitted. The implementationadoption of the amended accounting guidance hasprovisions of ASU No. 2014-12 is not hadexpected to have a material impact on the Company's consolidated financial position or results of operations.statements.
In February 2013,June 2014, the FASB issued newAccounting Standards Update No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures ("ASU No. 2014-11"). ASU No. 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings, rather than as sales with forward repurchase agreements. In addition, the ASU eliminates accounting guidance clarifying the accountingon linked repurchase financing transactions. ASU No. 2014-11 also expands disclosure requirements related to certain transfers of financial assets that are accounted for obligations resulting from jointas sales and several liability arrangementscertain transfers accounted for which the total amount under the arrangement is fixed at the reporting date. The new standardas secured borrowings. ASU No. 2014-11 is effective for fiscal years,interim and interimannual periods within those fiscal years, beginning on or after December 15, 2013.2014, with early application prohibited. The adoption of the provisions of ASU No. 2014-11 is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, ASU No. 2014-09 supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts . Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 is effective for interim and annual periods beginning after December 15, 2016, with early application prohibited. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. The Company is evaluating the transition method that will be elected and the potential effects of adopting the provisions of ASU No. 2014-09.
In April 2014, the FASB issued Accounting Standards Update ("ASU") 2014-08, which includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. This update is effective for periods beginning after December 15, 2014. The implementation of the new accountingamended guidance is not expected to have a material impact on the Company's consolidated financial positionstatements.
In July 2013, the FASB issued ASU 2013-11, which provides that an unrecognized tax benefit, or resultsa portion thereof, 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 to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of operations.
In March 2013, the FASB issued amendments to addressASU 2013-05, which addresses the accounting for thea cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longernolonger holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The amendments arestandard is effective prospectively for fiscal years, and interim periods within those fiscal years beginning after December 15, 2013 (early2013. The Company's adoption is permitted). The implementation of the amended accounting guidance isthis standard did not expected to have a materialsignificant impact on the Company'sits consolidated financial position or results of operations.
Earnings (Loss) Per Share
Basic earnings (loss) per share isare computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and restricted stock units are reflected in diluted net income (loss) per share by applying the treasury stock method.
The Company recorded net losses for the three and nine months ended SeptemberJune 30, 2013 and 2012.the six months ended June 30, 2014 and 2013. Potential common shares are anti-dilutive in periods in which the Company records a net loss because they would reduce the respective period's net loss per share. Anti-dilutive potential common shares are excluded from the calculation of diluted earnings per share. As a result, net diluted loss per share was equal to basic net loss per share in all periods presented.
Shares used to calculate net lossincome (loss) per share are as follows (in thousands):
| Three Months | Nine Months | ||||
| Ended | Ended | ||||
| September 30, | September 30, | ||||
| 2013 | 2012 | 2013 | 2012 | ||
| Basic weighted average shares outstanding | 30,236 | 17,023 | 23,576 | 16,910 | |
| Effect of dilutive stock options | - | - | - | - | |
| Effect of dilutive restricted stock units | - | - | - | - | |
| Diluted weighted average shares outstanding | 30,236 | 17,023 | 23,576 | 16,910 | |
| Weighted average shares which are not included | |||||
| in the calculation of diluted earnings (loss) | |||||
| per share because their impact is anti-dilutive: | |||||
| Stock options | 2,409 | 3,444 | 2,918 | 3,301 | |
| Restricted stock units | - | 379 | 40 | 475 | |
| 2,409 | 3,823 | 2,958 | 3,776 | ||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic weighted average shares outstanding | 35,089 | 22,989 | 33,114 | 20,191 | ||||||||||||
Effect of dilutive stock options | 946 | - | - | - | ||||||||||||
Effect of dilutive restricted stock units | 55 | - | - | - | ||||||||||||
Diluted weighted average shares outstanding | 36,090 | 22,989 | 33,114 | 20,191 | ||||||||||||
Weighted average shares which are not includedin the calculation of diluted earnings (loss) pershare because their impact is anti-dilutive: | ||||||||||||||||
Stock options | 459 | 3,340 | 2,365 | 3,172 | ||||||||||||
Restricted stock units | - | - | - | 60 | ||||||||||||
| 459 | 3,340 | 2,365 | 3,232 | |||||||||||||
2. 2. LONG-TERM INCENTIVE PLANS
Pursuant to the 2008 Long-term Incentive Plan, as amended (the "Plan"), the Company may grant stock options (non-qualified or incentive), stock appreciation rights, restricted stock, restricted stock units and other share-based awards to employees, directors and other persons who serve the Company. The Plan is overseen by the Compensation Committee of the Board of Directors, which approves the timing and circumstances under which share-based awards may be granted. At SeptemberJune 30, 20132014 there were 3.53.2 million shares available to be granted under the Plan, which includes 3.0 million shares that were approved for issuance under the Plan by the Company's stockholders in May 2013.Plan. The Company issues new shares to satisfy the exercise or release of share-based awards. Under the provisionsprovision of FASB Accounting Standards Codification ("ASC") Topic 718,Stock Compensation, all share-based payments are required to be recognized in the statement of operations based on their fair values at the date of grant.
The fair value of each option award is estimated using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company's stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. Options generally have a life of 10 years and have either time-based or performance-based vesting features. Time-based awards generally vest over a three year period, while the performance-based awards vest upon the achievement of specific performance targets. There were no options granted during the three months ended SeptemberJune 30, 2013. The fair values of the options granted during the three months ended SeptemberJune 30, 20122014 and the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, were estimated based on the following weighted average assumptions:
| Three Months | Nine Months | |||||||||||
| Ended | Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2012 | 2013 | 2012 | ||||||||||
| Expected volatility | 73.18 | % | 76.23 | % | 71.46 | % | ||||||
| Risk-free interest rate | 0.52 | % | 1.06 | % | 0.56 | % | ||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
| Expected life (in years) | 6.0 | 6.0 | 6.0 | |||||||||
| Estimated fair value per option granted | $ | 0.55 | $ | 0.87 | $ | 0.70 | ||||||
Three Months | Six Months | ||||||||
Ended June 30, | Ended June 30, | ||||||||
2014 | 2014 | 2013 | |||||||
Expected volatility | 79.30% | 78.78% | 76.23% | ||||||
Risk-free interest rate | 1.79% | 1.91% | 1.06% | ||||||
Expected dividend yield | 0.00% | 0.00% | 0.00% | ||||||
Expected life (in years) | 6.0 | 6.0 | 6.0 | ||||||
Estimated fair value per option granted | $1.49 | $1.70 | $0.87 | ||||||
The following table presents a summary of the Company's stock option activity for the ninesix months ended SeptemberJune 30, 2013:
Number of Options | ||||
Outstanding at January 1, | 5,994,788 | |||
Granted | 866,250 | |||
Exercised | (473,789 | ) | ||
Forfeited and cancelled | | (47,870 | ) | |
Outstanding at | | 6,339,379 | ||
The Company also grants restricted stock units, or RSUs, that entitleeach of which entitles the holder to a share of Company common stock. The fair value of an RSU is equal to the market value of a share of common stock on the date of grant.
Shares | ||||
Nonvested at January 1, | - | |||
Granted | 125,803 | |||
Forfeited and Cancelled | (27,956 | ) | ||
Nonvested at | | 97,847 | ||
The Company amortizes share-based compensation expense over the vesting period on a straight line basis. The impact on the Company's results of operations of recording share-based compensation expense is as follows (in thousands):
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cost of sales | $ | 25 | $ | 11 | $ | 49 | $ | 28 | ||||||||
Research and development | 105 | 67 | 203 | 154 | ||||||||||||
Selling, general and administrative | 181 | 1,966 | 350 | 2,202 | ||||||||||||
| $ | 311 | $ | 2,044 | $ | 602 | $ | 2,384 | |||||||||
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Cost of sales | $ | 2 | $ | 19 | $ | 30 | $ | 57 | ||||||||
| Research and development | 35 | 82 | 189 | 247 | ||||||||||||
| Selling, general and administrative | 220 | 139 | 2,422 | 415 | ||||||||||||
| $ | 257 | $ | 240 | $ | 2,641 | $ | 719 | |||||||||
3. INVENTORIES
Inventories, net are comprised of the following (in thousands):
| September 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Finished goods | $ | 300 | $ | 465 | ||||
| Work-in-progress | 480 | 468 | ||||||
| Raw material | 2,239 | 1,352 | ||||||
| $ | 3,019 | $ | 2,285 | |||||
| June30, | December 31, | |||||||
| 2014 | 2013 | |||||||
Finished goods | $ | 292 | $ | 539 | ||||
Work-in-progress | 254 | 310 | ||||||
Raw material | 1,041 | 1,967 | ||||||
| $ | 1,587 | $ | 2,816 |
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| September 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Revolving credit facilities - Europe | $ | 1,193 | $ | - | ||||
| Note payable - Europe | 1,010 | - | ||||||
| Term loans - Europe | 399 | - | ||||||
| Term loan - US | 467 | 677 | ||||||
| Other | 112 | - | ||||||
| 3,181 | 677 | |||||||
| Less: portion due within one year | 1,673 | 280 | ||||||
| $ | 1,508 | $ | 397 | |||||
June30, | December 31, | |||||||
2014 | 2013 | |||||||
Revolving credit facilities - Europe | $ | 864 | $ | 933 | ||||
Note payable - Europe | 919 | 921 | ||||||
Term loans - Europe | 58 | 355 | ||||||
Other | 140 | 95 | ||||||
| 1,981 | 2,304 | |||||||
Less: portion due within one year | 1,189 | 1,532 | ||||||
| $ | 792 | $ | 772 | |||||
Revolving credit facilities - Europe
We have revolving credit facilities in Europeassociated with our European operations that total $1.3 million of which $1.2$0.9 million is outstanding at SeptemberJune 30, 2013.2014. The revolving credit facilities have expiration dates of December 31, 20132014 and automatically renew for twelve month periods, unless notified by the lender ninety days prior to expiration. The interest rate on these revolving credit facilities is 5.95%. The revolving credit agreements are collateralized by the assets of certain European subsidiaries of the Company.
Note payable - Europe
In connection with the acquisition of Granvideo AB by the Company's 51% owned subsidiary Sportsground AB (see Note 8 of these consolidated financial statements),in 2013, the Company issued a note to the previous shareholder of Granvideo in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. The Company made a principal paymentpayments of $0.06 million on September 1, 2013 and the note requires principal payments of $0.1 million due on November 15, 2013, and is required to make four equal annual payments of $0.26 million on December 31 of each year from 2014 to 2017. The principal balance at SeptemberJune 30, 20132014 was $1.01$0.9 million.
Term loans - Europe
In addition, we have two term loans related to itswith European operationslenders that total $0.4$0.1 million. Three of theThese term loans require principal payments totaling $10$8 thousand per month and bear interest at rates that range between 7.45% and 7.75% and will mature in 2014 and 2015. The fourth term loan, which has an outstanding balance of $0.2 million, bears interest that is payable quarterly at 15%, requires no principal payments and will be due on December 31, 2014.
Term loan and revolvingRevolving line of credit - US
In November 2013, the Company entered into a two-year $4 million revolving line of credit (the "Revolver") with SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. At June 30, 2014, available borrowings under the Revolver were $3.9 million but no borrowings were outstanding. The Company is also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if the Company's AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections from the Company's SVB collateral account (for receipts by wire) and SVB lockbox account (for receipts by check) to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, the Company will maintain a static loan balance and all collections will be deposited into the Company's operating account.
The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If the Company's AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%. In connection with the Revolver, the Company was required to pay the outstanding balance on its previously outstanding term loan which was $0.4 million on the closing date. The original term loan was being repaid over 30 months and was subject to interest at Prime + 2.25% (which was 5.75% at September 30, 2013).
As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts the Company's ability to pay dividends without the bank's consent.
The Revolver is collateralized by the assets of the U.S. subsidiaries of the Company, except for (i) its intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.
5. BENEFIT PLANS
The net periodic benefit cost relating to the Company's U.S. Pension Plan is as follows (in thousands):
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Service cost | $ | 140 | $ | 130 | $ | 421 | $ | 390 | ||||||||
| Interest cost | 94 | 88 | 282 | 264 | ||||||||||||
| Expected return on plan assets | (99 | ) | (87 | ) | (297 | ) | (261 | ) | ||||||||
| Amortization of net loss | 62 | 41 | 185 | 123 | ||||||||||||
| Amortization of prior service cost | (2 | ) | (2 | ) | (6 | ) | (6 | ) | ||||||||
| $ | 195 | $ | 170 | $ | 585 | $ | 510 | |||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost | $ | 82 | $ | 135 | $ | 164 | $ | 281 | ||||||||
Interest cost | 101 | 98 | 202 | 188 | ||||||||||||
Expected return on plan assets | (107 | ) | (98 | ) | (214 | ) | (198 | ) | ||||||||
Amortization of net loss | 14 | 57 | 28 | 123 | ||||||||||||
Amortization of prior service cost | (2 | ) | (2 | ) | (4 | ) | (4 | ) | ||||||||
| $ | 88 | $ | 190 | $ | 176 | $ | 390 | |||||||||
The Company's policy is to fund the minimum contributions required under the Employee Retirement Income Security Act (ERISA) and, subject to cash flow levels, the Company may choose to make a discretionary contribution to its pension plan to reduce the unfunded liability. In the thirdsecond quarter of 20132014, the Company made a required contributionscontribution of $0.2 million to its pension plan bringing the total contribution for the nine months ended September 30, 2013 to $0.3$0.1 million. Based on current assumptions, the Company expects to make required contributions of $0.4 million in the next twelve months.
The Company has adopted a 401(k) Plan exclusively for the benefit of participants and their beneficiaries. All U.S. employees of the Company are eligible to participate in the 401(k) Plan. The Company may make discretionary matching contributions of the compensation contributed by the participant.theparticipant. The Company has the option of making the matching contributions in cash or through shares of Company common stock. During the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, the Company issued 17443 thousand and 175139 thousand shares of common stock in connection with the Company match for the Company's 401(k) Plan in lieu of an aggregate cash match of $179$105 thousand and $220$128 thousand, respectively.
Substantially all employees of the Company's foreign subsidiaries receive pension coverage,retirement benefits, at least to the extent required by law, through plansfunds that are governed by local statutory requirements. Contributions to these plans are typically based on specified percentages of the employees' salaries.
6. PRODUCT WARRANTY
The Company provides product warranties for its various products, typically for one year. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the sale is recognized. The Company established its reserve based on historical data, taking into consideration specific product information. The following table sets forth the movementchanges in the warranty reserve (in thousands):
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Balance at beginning of period | $ | 65 | $ | 50 | $ | 50 | $ | 50 | ||||||||
| Provisions | 55 | - | 125 | 25 | ||||||||||||
| Warranty services provided, net | (25 | ) | - | (80 | ) | (25 | ) | |||||||||
| $ | 95 | $ | 50 | $ | 95 | $ | 50 | |||||||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Balance at beginning of period | $ | 168 | $ | 55 | $ | 118 | $ | 50 | ||||||||
Provisions | 81 | 41 | 194 | 70 | ||||||||||||
Warranty services provided, net | (123 | ) | (31 | ) | (186 | ) | (55 | ) | ||||||||
| $ | 126 | $ | 65 | $ | 126 | $ | 65 | |||||||||
7.INCOME TAXES
The components of deferred income taxes are as follows (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 11,551 | $ | 12,074 | ||||
Inventory | 1,866 | 1,856 | ||||||
Other liabilities | 3,195 | 3,051 | ||||||
Fixed assets | 2,274 | 2,069 | ||||||
Other temporary differences | 845 | 751 | ||||||
| 19,731 | 19,801 | |||||||
Less: valuation allowance | (19,655 | ) | (19,745 | ) | ||||
Total deferred tax assets | 76 | 56 | ||||||
Deferred tax liability: | ||||||||
Intangibles | (2,019 | ) | (1,453 | ) | ||||
Other temporary differences | 97 | (13 | ) | |||||
Net deferred tax liability | $ | (1,846 | ) | $ | (1,410 | ) | ||
As reported: | ||||||||
Non-current deferred tax assets | $ | 76 | $ | 56 | ||||
Current deferred tax liability | $ | (296 | ) | $ | (271 | ) | ||
Non-current deferred tax liability | $ | (1,626 | ) | $ | (1,195 | ) | ||
| September 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 13,431 | $ | 14,491 | ||||
| Inventory | 1,795 | 1,769 | ||||||
| Other liabilities | 3,569 | 3,055 | ||||||
| Fixed assets and other capitalized assets | 2,061 | 440 | ||||||
| Other temporary differences | 682 | 589 | ||||||
| 21,538 | 20,344 | |||||||
| Deferred tax valuation allowance | (21,229 | ) | (20,344 | ) | ||||
| $ | 309 | $ | - | |||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In accordance with accounting standardsAt June 30, 2014, the gross deferred tax balance was $19.7 million and includes the $11 million tax effect of $32 million in U.S. Federal net operating loss carryforwards ("NOLs") expiring between 2018 and 2032. The Company has not recorded a deferred tax asset of approximately $1.0$1.3 million related to the net operating losses that resultedNOLs resulting from the exercise of disqualifying stock options. If the Company is able to utilize this benefit in the future it would result inoptions and restricted stock units which will be accounted for as a credit to additional paid in capital.
Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the net operating loss and tax credit carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the net operating loss carryforwards that the Company may utilize in any one year may be limited.
There are no undistributed net earnings for the Company's foreign subsidiaries, and accordingly no related deferred taxes.
Accounting standards require that the Company continually assess the likelihood that its deferred taxes will be realizable. All available evidence, both positive and negative, must be considered in determining whether it is more likely than not that the deferred tax assets will be realized. In making such assessments, significant weight is given to evidence that can be objectively verified. A company's current or previous losses are given more weight than its future outlook. As of SeptemberJune 30, 20132014 and December 31, 2012,2013, using that standard, the Company concluded that a full valuation allowance was required for its U.S. and state deferred tax assets. As of SeptemberJune 30, 20132014 the unreserved balance of $0.3 million$76 thousand relates to certain foreign deferred tax assets. The Company will continue to assess the likelihood that its deferred tax assets will be realizable, and its valuation allowance will be adjusted accordingly, which could materially impact its financial position and results of operations in future periods.
The components of the provision for income tax benefit (expense), net are as follows for the periods ended are as follows (in thousands):
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Current: | ||||||||||||||||
| State and foreign | $ | 3 | $ | (4 | ) | $ | (45 | ) | $ | (27 | ) | |||||
| Deferred: | ||||||||||||||||
| State | (5 | ) | 13 | 5 | 44 | |||||||||||
| Federal | 502 | 293 | 841 | 882 | ||||||||||||
| Foreign | 45 | - | 12 | - | ||||||||||||
| 542 | 306 | 858 | 926 | |||||||||||||
| Valuation allowance | (513 | ) | - | (885 | ) | - | ||||||||||
| Income tax benefit (expense), net | $ | 32 | $ | 302 | $ | (72 | ) | $ | 899 | |||||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Current: | ||||||||||||||||
State and foreign | $ | 25 | $ | (37 | ) | $ | (151 | ) | $ | (48 | ) | |||||
Deferred: | ||||||||||||||||
Federal | (11 | ) | (23 | ) | (23 | ) | (23 | ) | ||||||||
Foreign | 23 | (33 | ) | 299 | (33 | ) | ||||||||||
| 12 | (56 | ) | 276 | (56 | ) | |||||||||||
Income tax benefit (expense), net | $ | 37 | $ | (93 | ) | $ | 125 | $ | (104 | ) | ||||||
The difference between the Company's effective income tax rate and the federal statutory rate is primarily due to the transaction costs associated with the Business Combinationmark to market adjustment for our contingent liability that will not be deductible for tax purposes, and the amount of expense associated with the Company's share-based payment arrangements which is also not deductible and the portion thereof that will give rise tointernational tax deductions. Furthermore, share-based payments may result in tax deductions that do not result in a tax benefit in the accompanying financial statements because it will not result in the reduction of income taxes payable, due to the existence of net operating loss carryforwards.
8. BUSINESS COMBINATION
On May 22, 2013, Chyron and Hego completed the Business Combination which was structured as a share purchase transaction, pursuant to the terms of a stock purchase agreement (the "Stock Purchase Agreement") whereby a wholly-owned subsidiary of Chyron acquired all of the issued and outstanding shares of Hego. Pursuant to the terms of the Stock Purchase Agreement, Chyron issued 12,199,431 shares of Chyron's common stock to the former Hego stockholders. The number of shares issued was equal to 40% of thefor a total of (i) the issued and outstanding shares of Chyron's common stock as of May 10, 2013, (ii) the shares of Chyron's common stock issuable upon the exercise of all outstanding options and restricted stock units that had an exercisepurchase price of less than or equal to $1.25 per share as of May 10, 2013, and (iii) the shares issued at the closing, which are collectively referred to as the "Outstanding Closing Shares." In addition, upon Hego achieving certain revenue milestones during the fiscal years 2013, 2014 and 2015, the Company may issue additional shares, which are referred to as the "Earn-Out Shares" to the former Hego stockholders, such that the aggregate amount of shares of the Company's common stock issued in the transaction would equal up to 18,299,147 shares, or 50% of the total Outstanding Closing Shares and Earn-Out Shares.$24.6 million. The Company and Hego entered into the Business Combination to create a market leading company in the fields of TV graphics, data visualization and production services for 'Live' and on line news and sports production. The Company intends to broaden its range of sophisticated products and services offerings to grow in international markets.
The total purchase price of $24.6 million is comprised of 12.2 million shares of Chyronthe Company's common stock (the Closing Shares) valued at $16.6 million, contingent consideration of shares of Chyronthe Company's common stock (the Earn-Out Shares) valued at an estimated $7.5 million and $0.5 million in cash and other consideration. The $7.5 million represents the value of the Earn-Out Shares based on a probability-based model measuring the likelihood of achieving certain revenue milestones as detailed below, and has been recorded as a liability in the balance sheet. In connection with FASB ASC 805,Business Combinations, the fair value of anythe contingent consideration iswas established at the date of the Business Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period which could haveperiod. This adjustment has had a material impact on the Company's financial position orand results of operations.operations and will continue to impact the Company until all contingencies have been settled. In the three and nine month periodssix months ended SeptemberJune 30, 2013 charges2014 a benefit of $0.88$2.2 million and $0.93a charge of $0.4 million, respectively, have been recorded in order to adjust the contingent consideration to $8.4$6.2 million, its current fair value at SeptemberJune 30, 2013,2014, in the level 3 category. Based on the revenue milestones, additional shares could be issued as follows:
Revenue milestones | Additional shares | |||
$15.5 million in 2013 | 2,772,598 | |||
$16.0 million in 2014 | 1,584,342 | |||
$16.5 million in 2015 | 1,742,776 | |||
Total | 6,099,716 | |||
Or, alternatively, if $33.0 | ||||
| combined | 6,099,716 | |||
At December 31, 2013, the 2013 revenue milestone was achieved and 2,772,598 additional shares were issued in March 2014 at a stock price of $2.34 per share.
The following table summarizes the allocation of the purchase price (in thousands):
Net fair value of assets acquired | $ | 107 | ||
Intangible assets | 9,930 | |||
Goodwill | 16,321 | |||
| 26,358 | ||||
Deferred tax liability | (1,766 | ) | ||
| $ | 24,592 |
The components of the intangible assets acquired are stated below (in thousands):
Definite-lived intangibles: | ||||
Customer relationships | $ | 6,400 | ||
Proprietary technology | 800 | |||
Other intangibles | 830 | |||
Indefinite-lived intangibles: | ||||
Tradename | 1,900 | |||
| $ | 9,930 |
On April 30, 2014 the Company completed its acquisition of Norway-based Zxy Sport Tracking AS (“Zxy”). Pursuant to the terms of the Share Purchase Agreement (“SPA”), the Company acquired 67% of the issued and outstanding shares of Zxy for a total purchase price of $5.5 million. Pursuant to the terms of the SPA, the Company issued 1,374,545 shares of ChyronHego Common Stock (“Common Stock”) at a value of $3.3 million and issued 549,818 warrants at a value of $0.7 million, based on a Black Scholes valuation model. The warrants give the holders the right to purchase one share of Common Stock at a price of $2.75 for a three year period from closing.
In addition, stockholders of Zxy will be entitled to a 15% earn-out, payable in cash, based on net revenues from all sales of Zxy products and services from the closing date through December 31, 2018 up to $3.0 million. If and when $3.0 million in earn-out has been achieved, the rate shall be reduced to 7.5% for the remainder of the earn-out period. The stockholders are entitled to a guaranteed minimum of earn-out of $110,000 in each of 2014, 2015 and 2016. The earn-out was valued at $1.5 million based on a discounted model measuring the likelihood of achieving certain revenue levels.
The following table summarizes the estimated allocation of the purchase price which is preliminary and subject to adjustment following the completion of the valuation process (in( in thousands):
| Net fair value of assets acquired | $ | 107 | ||
| Intangible assets | 9,930 | |||
| Goodwill | 14,555 | |||
| $ | 24,592 |
Net fair value of assets acquired | $ | 628 | ||
Intangible assets | 2,600 | |||
Goodwill | 3,025 | |||
| 6,253 | ||||
Deferred tax liability | (702 | ) | ||
| $ | 5,551 |
The Company believes that the goodwill resulting from the Business CombinationZxy acquisition reflects the unique proprietary image and playera transponder-based sports tracking technology that strengthenswill strengthen our productposition in the sports analysis market across both the sports broadcast and services offerings internationally and provides access to new and existing customers.professional sports markets. The Company believes that this preliminary estimate of goodwill will not be deductible for tax purposes.
The components and estimated useful lives of intangible assets acquired as of SeptemberJune 30, 20132014 are stated below. Amortization is provided on a straight line method or in the case of customer relationships, on an accelerated method, over the following estimated useful lives (dollars( in thousands):
| Estimated | ||||||||
| useful life | ||||||||
| Definite-lived intangibles: | ||||||||
| Customer relationships | $ | 6,400 | 10 | |||||
| Proprietary technology | 800 | 15 | ||||||
| Other intangibles | 830 | 15 | ||||||
| Indefinite-lived intangibles: | ||||||||
| Tradename | 1,900 | - | ||||||
| $ | 9,930 | |||||||
| Estimated Useful Life | |||||||
| Definite-lived intangibles: | ||||||||
Proprietary technology | $ | 2,300 | 15 | |||||
Tradename | 300 | 15 | ||||||
| $ | 2,600 | |||||||
Below are the unaudited proforma results of operations for the ninesix months ended SeptemberJune 30, 20132014 and 20122013 as if the Business CombinationCompany had occurredacquired Zxy on January 1, 2012.2013. Such proforma results are not necessarily indicative of the annual results of operations that would have been achieved if the Business Combinationacquisition occurred on the date assumed, nor are they necessarily indicative of future consolidated results of operations (in thousands except per share data):
2014 | 2013 | |||||||
Net revenues | $ | 27,645 | $ | 18,837 | ||||
Net loss | (331 | ) | (3,227 | ) | ||||
Net loss per share - basic and diluted | $ | (0.01 | ) | $ | (0.15 | ) | ||
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| Net sales | $ | 38,566 | $ | 34,449 | ||||
| Net loss | (5,583 | ) | (3,926 | ) | ||||
| Net loss per share - basic and diluted | $ | (0.19 | ) | $ | (0.13 | ) | ||
In future periods, the combined business may incur charges to operations to reflect costs associated with integrating the two businesses that the Company cannot reasonably estimate at this time.9. INTANGIBLE ASSETS
The following is a 51% owned subsidiaryschedule of the Company, purchased 100% of the equity of Granvideo AB ("Granvideo"). Granvideo is based in Swedenintangible assets, net (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Definite-lived intangibles: | ||||||||
Customer relationships | $ | 4,493 | $ | 5,058 | ||||
Tradenames | 1,214 | 951 | ||||||
Proprietary technology | 3,259 | 1,017 | ||||||
Domain name and related website | 39 | 42 | ||||||
| 9,005 | 7,068 | |||||||
Indefinite-lived intangibles: | ||||||||
Tradename | 1,900 | 1,900 | ||||||
| $ | 10,905 | $ | 8,968 | |||||
Amortization expense was $0.3 million and operates in the high quality video broadcast market for web and TV. The purchase price was $1.04$0.7 million consisting of a note payable to the former shareholder of Granvideo with a principal amount of $1.2 million, recorded at a discounted value of $1.04 million to account for the fact thatthree and six months ended June 30, 2014, respectively. Amortization expense was $0.2 million and $0.3 million for the note is not interest bearing. The Company made a principal payment on the note of $0.06 million on September 1, 2013,three and is required to make principal payments of $0.1 million due on November 15, 2013 and four equal annual payments of $0.26 million on December 31 from 2014 to 2017. The principal balance at Septembersix months ended June 30, 2013, was $1.01 million. The cost of the acquisition was allocatedrespectively.
10. OTHER COMPREHENSIVE INCOME
Components and activity related to the assets acquired and liabilities assumed based on their estimated fair values which totaled $0.5 million, resulting in $0.5 million of goodwill. This allocationaccumulated other comprehensive income (loss) is subject to adjustment following the completion of the valuation process. Proforma information is not included because the results of the acquired operations would not have materially impacted the Company's consolidated operating results.
Foreign | Accumulated | |||||||||||
Currency | Pension | Other | ||||||||||
Translation | Benefit | Comprehensive | ||||||||||
Adjustment | Costs | Income (Loss) | ||||||||||
January 1, 2014 | $ | 131 | $ | (552 | ) | $ | (421 | ) | ||||
Change for period | (28 | ) | - | (28 | ) | |||||||
Amounts reclassed from accumulatedother comprehensive income (loss) | - | - | - | |||||||||
June 30, 2014 | $ | 103 | $ | (552 | ) | $ | (449 | ) | ||||
9.11. DUE TO RELATED PARTIES
The balance due to related parties represents amounts that are due to certain former shareholders or employees of Hego AB that are now shareholders or employees of the Company. The balance resulted from loans to Hego AB, and dividends declared but not paid by Hego AB, prior to its merger with Chyron. Interest is accrued on the outstanding balance at the annual rate of 5.95%.
10. RESTRUCTURING
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| North America | $ | 6,725 | $ | 5,181 | $ | 18,477 | $ | 16,001 | ||||||||
| Europe, Middle East and Africa (EMEA) | 5,745 | 671 | 10,617 | 2,480 | ||||||||||||
| Latin America | 1,355 | 794 | 2,320 | 2,276 | ||||||||||||
| Asia | 134 | 602 | 1,278 | 2,052 | ||||||||||||
| $ | 13,959 | $ | 7,248 | $ | 32,692 | $ | 22,809 | |||||||||
Prior to the Business Combination, with Hego, the Company operated as one reporting unit.segment. As a result of the Business Combination, the Company will be organized, managedmanages its business primarily on a geographic basis. The Company's two reportable operating segments consist of the Americas and internally reportedEMEA (Europe, Middle East and Africa). The Americas segment includes both North and Latin America, as two segments. Becausewell as Asia. The Company's chief operating decision maker evaluates performance of the segments based on revenues and operating income (loss). Unallocated corporate amounts are deemed by the Company willas administrative, oversight costs, not evaluatemanaged by the segment managers. The Company does not allocate assets by segment because the chief operating decision maker does not review the assets by segment to assess the segments' performance, based upon return on assets atas the operating segment level, assets are not tracked internally by segment, and therefore, segment asset information is not presented at this time. In addition, due to the preliminary status of the purchase price allocation, goodwill has not been allocated to reporting segments.
Operating segment data is as follows (in thousands):
Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | |||||||
Revenues: | ||||||||
Americas | $ | 8,763 | $ | 16,815 | ||||
EMEA | 5,941 | 10,510 | ||||||
| $ | 14,704 | $ | 27,325 | |||||
Operating income (loss): | ||||||||
Americas | $ | 1,433 | $ | 2,513 | ||||
EMEA | 343 | (371 | ) | |||||
Unallocated corporate expense | 1,189 | (2,286 | ) | |||||
| $ | 2,965 | $ | (144 | ) | ||||
13. SUBSEQUENT EVENTS
On April 5, 2014, the Company entered into a share purchase agreement ("Share Purchase Agreement") with Metaphor AS ("Metaphor") and the stockholders of Metaphor, pursuant to which the Company will acquire all of the issued and outstanding shares of Metaphor and its wholly owned subsidiaries WeatherOne AS and WeatherOne Limited (collectively referred to as "WeatherOne"). WeatherOne is a leading provider of weather forecast solutions for broadcast and digital media based in Oslo, Norway. The acquisition of Metaphor and WeatherOne is referred to as the WeatherOne Transaction.
The closing of the WeatherOne Transaction took place on July 1, 2014. In accordance with the Share Purchase Agreement, we issued 1,126,288 shares of ChyronHego common stock ("common stock"), 337,870 warrants to purchase common stock at $2.78 per share for a three year period from closing, and $0.7 million in cash.
| Three Months | Nine Months | |||||||
| Ended | Ended | |||||||
| September 30, 2013 | September 30, 2013 | |||||||
| Revenues: | ||||||||
| Hego | $ | 5,076 | $ | 7,383 | ||||
| Chyron | 8,883 | 25,309 | ||||||
| $ | 13,959 | $ | 32,692 | |||||
| Operating income (loss): | ||||||||
| Hego | $ | (218 | ) | $ | 22 | |||
| Chyron | 2,004 | 3,350 | ||||||
| Unallocated corporate expense | (2,801 | ) | (7,101 | ) | ||||
| $ | (1,015 | ) | $ | (3,729 | ) | |||
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
This Quarterly Report on Form 10-Q, including, without limitation, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as "believe," "anticipate,"could," "plan," "seek,"may," "expect," "intend""intend," "continue," "estimate," "likely," "will," "target," "strategy," "goal" and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including, but not limited to: current and future economic conditions that may adversely affect our business and customers; our revenues and profitability may fluctuate from period to period and therefore may fail to meet expectations, which could have a material adverse effect on our business, financial condition and results of operations; our ability to maintain adequate levels of working capital; our ability to successfully maintain the level of operating costs; our ability to obtain financing for our future needs should there be a need; our ability to incentivize and retain our current senior management team and continue to attract and retain qualified scientific, technical and business personnel; our ability to expand our Axis online graphics creation solution or to develop other new products and services; our ability to generate sales and profits from our Axis online graphics services, workflow and asset management solutions; our ability to integrate the business of Chyron and Hego; our ability to grow sales and profits from our Hego products and services; our ability to develop new Hego products and services; rapid technological changes and new technologies that could render certain of our products and services to be obsolete; competitors with significantly greater financial resources; new product and service introductions by competitors; challenges associated with expansion into new markets; our ability to integrate Zxy's business and WeatherOne's business into our business; and other factors set forth in Part I, Item 1A, entitled "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 20122013 (the "2012"2013 Form 10-K"), as well as any updates or modifications to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. Those factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statementswherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law.
Overview
On May 22, 2013 we acquired the outstanding stock of Hego AB, or Hego, and changed our name to ChyronHego Corporation. The acquisition of the Hego business provides us with very strong sports products and service offerings that address the needs of both sports broadcasters and sports leagues and rights holders. The Chyron and Hego product lines are complementary with very little overlap. Hego's solutions and services predominantly address the needs of live sports production, while Chyron has recently been more focused on graphics solutions for live and near-live news production workflows. There are significant budgets available in the sports TV space for those companies who offer an improved viewer experience, and we believe that we will be positioned to benefit from these kinds of expenditures. Ultimately, we believe that the business combination of Chyron and Hego has placed us in the position of a global leader in broadcast graphics creation, playout and real-time data visualization.
The results of operations include the operating results of Hego since completion of the business combination on May 22, 2013.
Results of Operations for the Threeand Nine SixMonths Ended SeptemberJune 30, 20132014 and 2012
Net sales. Revenues for the quarter ended SeptemberJune 30, 20132014 were $14.0$14.7 million, an increase of $6.8$4.0 million, or 94%37%, from the $7.2$10.7 million reported in the quarter ended SeptemberJune 30, 2012. Of these amounts, North American revenues were $6.7 million in the quarter ended September 30, 2013 and $5.2 million in the quarter ended September 30, 2012. Revenues derived from other international regions were $7.3 million in the quarter ended September 30, 2013 as compared to $2.0 million in the quarter ended September 30, 2012.
Revenues by type, for the three and ninesix month periods are as follows (dollars in thousands):
| Three Months | Nine Months | |||||||||||||||||||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||||||||||||||||||
| % of | % of | % of | % of | |||||||||||||||||||||||||||||
| 2013 | Total | 2012 | Total | 2013 | Total | 2012 | Total | |||||||||||||||||||||||||
| Product | $ | 7,697 | 55 | % | $ | 4,861 | 67 | % | $ | 20,415 | 62 | % | $ | 16,434 | 72 | % | ||||||||||||||||
| Services | 6,262 | 45 | % | 2,387 | 33 | % | 12,277 | 38 | % | 6,375 | 28 | % | ||||||||||||||||||||
| $ | 13,959 | $ | 7,248 | $ | 32,692 | $ | 22,809 | |||||||||||||||||||||||||
Three Months | Six Months | |||||||||||||||||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
2014 | Total | 2013 | Total | 2014 | Total | 2013 | Total | |||||||||||||||||||||||||
Product | $ | 7,654 | 52% | $ | 6,744 | 63% | $ | 13,435 | 49% | $ | 12,718 | 68% | ||||||||||||||||||||
Services | 7,050 | 48% | 3,972 | 37% | 13,890 | 51% | 6,015 | 32% | ||||||||||||||||||||||||
| $ | 14,704 | $ | 10,716 | $ | 27,325 | $ | 18,733 | |||||||||||||||||||||||||
In the quarter and six months ended June 30, 2014 our product revenue stream in bothsales grew 13% and 6%, respectively, compared to the threequarter and nine month periodssix months ended SeptemberJune 30, 2013 as comparedprimarily due to priorthe sale of tracking systems to a European soccer league. In the same periods as a result of customer purchases for the upcoming winter Olympics in Sochi, Russia, a substantial implementation at a new customer facility in North America, a major graphics overhaul at a customer headquarters in Latin America, and incremental product sales of $1.4our services revenues grew $3.1 million and $1.8$7.9 million, inrespectively, primarily due to the three and nine month periods ended September 30, 2013, respectively, from our business combination with Hego.
Gross profit. Gross margins for the quarters ended SeptemberJune 30, 2014 and 2013 and 2012 were 63%62% and 68%, respectively. Gross margins for the six months ended June 30, 2014 and 2013 were 62% and 70%, respectively. The decrease in the gross margin percentage is primarily attributable to product mix. As services become a greater component of revenues, we expect our margins to decline because our products carry a higher gross margin than our services. Gross margins in the nine month periods ended September 30, 2013 and 2012 were 67% and 69%, respectively. Absent the effect of this product mix, we have been able to obtain reasonable and consistent pricing for our materials.
Selling, general and administrative expenses. Selling, general and administrative expenses are as follows (in thousands):
| Three Months | Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Sales and marketing | $ | 3,518 | $ | 3,125 | $ | 9,670 | $ | 10,125 | ||||||||
| General and administrative | 2,969 | 989 | 8,404 | 3,153 | ||||||||||||
| $ | 6,487 | $ | 4,114 | $ | 18,074 | $ | 13,278 | |||||||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales and marketing | $ | 4,778 | $ | 3,272 | $ | 9,561 | $ | 6,152 | ||||||||
General and administrative | 1,361 | 3,564 | 2,689 | 5,435 | ||||||||||||
| $ | 6,139 | $ | 6,836 | $ | 12,250 | $ | 11,587 | |||||||||
The increaseincreases in sales and marketing expenses (S&M") in the three and six month periodperiods ended SeptemberJune 30, 2013,2014, as compared to the same periodperiods in 2012, is2013, are primarily attributable to the incremental sales and marketing costs of $1.2 million from our business combinationBusiness Combination with Hego, offset by reductions of $0.8 million in personnel and the related direct costs. During the second half of 2012, we reduced costs in this area by redeploying our resources to growth markets and eliminating positions in non growth areas that resulted in savings realized in both the three and nine months ended September 30, 2013. Hego.
The decrease in S&M expenses in the nine month period ended September 30, 2013 as compared to the same period in 2012 is primarily attributable to the incremental costs of $1.6 million from our business combination with Hego offset by the savings in personnel and the related direct costs of $2.1 million as discussed above.
Research and development expenses. Research and development ("R&D") expenses were $2.4$2.1 million in the quarter ended SeptemberJune 30, 20132014 compared to $1.8$2.3 million in the quarter ended SeptemberJune 30, 2012.2013. The net decrease was a result of the additional R&D costs resulting from the Business Combination of approximately $0.7 million, offset by the cost savings from the 2013 workforce reduction. R&D expenses were $6.5 million and $5.7increased $0.2 million in the nine month periods Septembersix months ended June 30, 2013 and 2012, respectively. The increases in both periods in 2013, as2014 compared to the respective prior periods, aresix months ended June 30, 2013 due primarily to the incremental R&D costs of $1.0 million and $1.4 million, respectively, infrom the three and nine month periods ended September 30, 2013 incurred as part of the Hego transaction, offset by other expense decreases as projects are completed.Business Combination.
Change in fair value of contingent consideration. In connection with the business combination ofBusiness Combination with Hego, a portion of the purchase price consisted of contingent consideration of shares of ChyronChyronHego common stock. The fair value of any contingent consideration iswas established at the date of the business combinationBusiness Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. In the three and nine month periodsmonths ended SeptemberJune 30, 2013 charges2014 a net increase to earnings of $0.88$2.2 million and $0.93 million, respectively, havehas been recorded in order to adjust the contingent consideration to $8.4$6.2 million, its current fair value at SeptemberJune 30, 2013.2014.
Interest expense, net. Interest expense, net increased in the three and ninesix months ended SeptemberJune 30, 20132014 as compared to the same periods in 2012. This is2013 due to the advances that we took on the U.S. term loan in the fourth quarter of 2012 and the addition of interest expense associated with the additional long-term debt that wewas assumed from Hego in the business combination.Business Combination.
Other income (loss)(loss), net. The components of other income (loss), net are as follows (in thousands):
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Foreign exchange transaction gain (loss) | $ | 80 | $ | 3 | $ | 83 | $ | (78 | ) | |||||||
Loss on disposal of fixed assets | - | - | (74 | ) | - | |||||||||||
Other | (12 | ) | (42 | ) | (10 | ) | (44 | ) | ||||||||
| $ | 68 | $ | (39 | ) | $ | (1 | ) | $ | (122 | ) | ||||||
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Foreign exchange transaction gain (loss) | $ | 30 | $ | 16 | $ | (48 | ) | $ | 10 | |||||||
| Other | - | 2 | 11 | 2 | ||||||||||||
| $ | 30 | $ | 18 | $ | (37 | ) | $ | 12 | ||||||||
We continue to be exposed to foreign currency and exchange risk in the normal course of business due to international transactions. However, we believe that itthis risk is not material to our near-term financial position or results of operations. This exposure will possibly increase in the futurehas increased due to our business combinationBusiness Combination with Hego, as a result of which a larger percentage of the Company's business is expected to be transacted in foreign currencies.
Income tax benefit (expense), net.In the three and six months ended SeptemberJune 30, 2013 and 2012,2014 we recorded an income tax benefitbenefits of $0.03 million and $0.3$0.1 million, respectively. In the ninethree and six months ended SeptemberJune 30, 2013 and 2012 we recorded an income tax expense of $0.07 million$0.09 and an income tax benefit of $0.9$0.1 million, respectively. The difference between our effective income tax rate and the federal statutory rate is primarily due to transaction coststhe mark to market adjustment for the contingent liability associated with our business combination with Hegothe Business Combination that will not be deductible for tax purposes, and the amount of expense associated with our share-based payment arrangements which is also not deductible and the portion thereof that will give rise tointernational tax deductions. Furthermore, share-based payments may result in tax deductions that do not result in a tax benefit in the accompanying financial statements because it will not result in the reduction of income taxes payable, due to the existence of net operating loss carryforwards.rate differences.
Liquidity and Capital Resources
At SeptemberJune 30, 2013,2014, we had cash and cash equivalents on hand of $2.7$5.0 million and working capital of $1.3$4.1 million. In the first ninesix months of 20132014 our cash from operations was used primarily to fund acquisitions of property and equipment of $1.6$0.9 million primarily in orderconnection with our services to serviceprovide several European soccer leagues with real-time digital sports data systems.
During the first nine monthssecond quarter of 20132014 we made a required contributions of $0.3 millioncontribution to our pension plan andof $0.1 million. Based on current assumptions, we expect to make contributions of $0.4 million over the next twelve months as required under ERISA. Our pension plan assets were valued at $5.9 million and $5.3$6.0 million at SeptemberJune 30, 20132014 and $5.7 million at December 31, 2012, respectively.2013. Our investment strategy has been consistent in recent years and we believe that the pension plan's assets are more than adequate to meet pension plan obligations for the next twelve months.
In November 2013, we entered into a new two-year $4 million revolving line of credit (the "Revolver") with Silicon Valley Bank, or SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. We are also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if our AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections from our SVB collateral account (for receipts by wire) and SVB lockbox account (for receipts by check) to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, we will maintain a static loan balance and all collections will be deposited into our operating account.
As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts our ability to pay dividends without the bank's consent.
The Revolver is collateralized by ourthe assets of theour U.S. subsidiaries, except for (i) our intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.
We also have revolving credit facilities associated with our European operations that total $1.3 million of which $1.2$0.9 million is outstanding at SeptemberJune 30, 2013.2014. The revolving credit facilities have expiration dates of December 31, 20132014 and automatically renew for twelve month periods unless notified by the lender ninety days prior to expiration. In addition, we have fourtwo outstanding term loans in Europe that total $0.4$0.1 million at SeptemberJune 30, 2013. Three of the2014. These term loans require principal payments that total $10$8 thousand per month and the third term loan, which has an outstanding balance of $0.2 million, requires no principal paymentswill mature in 2014 and will be due December 31, 2014.
In connection with the acquisition of Granvideo AB by our 51% owned subsidiary Sportsground AB,in 2013, we issued a note payable to the previous shareholder of Granvideo AB in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. We made a principal paymentpayments of $0.06 million on September 1, 2013 and are required to make principal payments of $0.1 million due on November 15, 2013 and are required to make four equal annual payments of $0.26 million on December 31 of each year from 2014 to 2017. The principal balance at SeptemberJune 30, 20132014 was $1.01$0.9 million.
Our long-term success will depend on our ability to achieve and sustain profitable operating results and our ability to raise additional capital on acceptable terms should such additional capital be required. In the event that we are unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.
Based on our plan for continuing to combine the operating activities of both Chyron and Hego, and provided that we are able to achieve our planned results of operations and retain the availability under our credit facilities, we believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facilities, will be sufficient to meet our cash requirements for at least the next twelve months.
If these sources of funds are not sufficient, we may need to reduce, delay or terminate our existing or planned products and services. We may also need to raise additional funds through one or more capital financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products, or grant licenses on terms that are not favorable to us.
There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate development activities for one or more of our products or services; or delay, limit, reduce or terminate our sales and marketing capabilities or other activities that may be necessary to commercialize one or more of our products or services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
The information called for by this Item is omitted in reliance upon Item 305(e) of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared.
On May 22, 2013, the Company completed the Business Combination with Hego business combination for a purchase price of $24.6 million represented substantially by goodwill and identifiable intangible assets. Hego's operations contributed approximately $7.4$6.0 million in revenues to our consolidated financial results for the ninethree months ended SeptemberJune 30, 2013.2014. We continue to evaluate the internal control over financial reporting of the acquired business. As permitted by SEC Staff interpretive guidanceInterpretive Guidance for newly acquired businesses, the internal control over financial reporting of Hego was excluded from a formal evaluation of the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2013 but we2014. A report will include an assessment within onebe included in our annual report on Form 10-K for the year from the date of the business combination.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control, that occurred during our most recent completed quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to our legal proceedings as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our 2012Annual Report on Form 10-K and Part II, Item 1A in our Quarterly Reports on Form 10-Q for the quartersyear ended MarchDecember 31, 2013, and June 30, 2013 (the "2013 First and Second Quarter Form 10-Qs"), which could materially affect our business, financial condition or results of operations. The risks described in our 2012Annual Report on Form 10-K 2013 First and Second Quarter Form 10-Qs and this Quarterly Report on Form 10-Q are not the only risks that we face. In addition, risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations. There have been no material changes in or additions to the risk factors describedincluded in our 2012Annual Report on Form 10-K and 2013 First and Second Quarter Form 10-Qs, other thanfor the addition of the following risk factor, which replaces and supersedes the corresponding risk factor in the 2013 First and Second Quarter Form 10-Qs:
Our common stock is currently listed on the NASDAQ Global Market. We have previously received notifications from NASDAQ informing us of certain listing deficiencies, including failure to satisfy the minimum bid price and the minimum stockholders’ equity requirements. Although we have since cured these deficiencies, it is possible that we could fall out of compliance again in the future. If we fail to maintain compliance with any listing requirements, we could be delisted and our common stock would be considered a penny stock under regulations of the Securities and Exchange Commission, or SEC, and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and your ability to sell our securities in the secondary market.
In April and July of 2014, we issued 1,374,545 and 1,126,288 shares, respectively, of our common stock in private transactions in connection with our acquisitions of Zxy sport Tracking AS (“Zxy”) and Metaphor AS (“Metaphor”). These issuances of shares of common stock were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
In connection with the acquisition of Zxy, the Company also issued 549,818 warrants that give the holders the right to purchase one share of our common stock at a price of $2.75 for a three year period from closing.
Also, in connection with the acquisition of Metaphor, the Company issued 337,870 warrants to purchase our common stock at $2.78 per share for a three year period from closing.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
None.
ITEM 5.OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) | Exhibits: |
Exhibit No. | Description of Exhibit |
31.1** | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2** | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1** | Certification of Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101** | Interactive Data Files formatted in XBRL (Extensible Business Reporting Language) from (a) our Consolidated Balance Sheets as of |
**Filed herewith. |
SIGNATURES
Pursuant to the requirements 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.
CHYRONHEGO CORPORATION | ||
(Registrant) | ||
August 14, | /s/ Johan Apel | |
(Date) | Johan Apel | |
Chief Executive Officer | ||
(Principal Executive Officer) | ||
August 14, | /s/ Dawn Johnston | |
(Date) | Dawn Johnston | |
Interim Chief Financial Officer | ||
(Principal Financial Officer) |
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