United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
| [ x ] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| |
| For the Quarterly Period Ended September 30, 2010 |
| |
| [ ] | 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 |
Chyron 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.
Yes [x] No [ ]
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). [ ] 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 definition 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 [ ] (do not check if a smaller reporting company) | | Smaller reporting company [x] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
The number of shares outstanding of the issuer's common stock, par value $.01 per share, on November 8, 2010 was 16,035,290.
CHYRON CORPORATION
INDEX
| PART I | FINANCIAL INFORMATION | Page |
| | | |
| Item 1. | Financial Statements | |
| | Consolidated Balance Sheets as of September 30, 2010 (unaudited) and | |
| | December 31, 2009 | 3 |
| | | |
| | Consolidated Statements of Operations (unaudited) for the Three | |
| | Months ended September 30, 2010 and 2009 | 4 |
| | | |
| | Consolidated Statements of Operations (unaudited) for the Nine | |
| | Months ended September 30, 2010 and 2009 | 5 |
| | | |
| | Consolidated Statements of Cash Flows (unaudited) for the Nine | |
| | Months ended September 30, 2010 and 2009 | 6 |
| | | |
| | Notes to Consolidated Financial Statements (unaudited) | 7 |
| | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition | |
| | and Results of Operations | 15 |
| | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 |
| | | |
| Item 4T. | Controls and Procedures | 21 |
| | | |
| PART II | OTHER INFORMATION | |
| | | |
| Item 1. | Legal Proceedings | 22 |
| | | |
| Item 1A. | Risk Factors | 22 |
| | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| | | |
| Item 3. | Defaults Upon Senior Securities | 22 |
| | | |
| Item 4. | (Removed and Reserved) | 22 |
| | | |
| Item 5. | Other Information | 22 |
| | | |
| Item 6. | Exhibits | 23 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHYRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | Unaudited | |
| | September 30, | December 31, |
| Assets | 2010 | 2009 |
| Current assets: | | |
Cash and cash equivalents | $ 4,525 | $ 5,238 |
Accounts receivable, net | 4,854 | 3,477 |
Inventories, net | 2,583 | 2,515 |
Deferred taxes | 2,548 | 2,490 |
| Prepaid expenses and other current assets | 667 | 943 |
Total current assets | 15,177 | 14,663 |
| | | |
Property and equipment, net | 1,785 | 2,106 |
Intangible assets, net | 794 | 885 |
Goodwill | 2,066 | 2,066 |
Deferred taxes | 17,683 | 17,705 |
| Other assets | 120 | 148 |
TOTAL ASSETS | $37,625 | $37,573 |
| |
| Liabilities and Shareholders' Equity |
| Current liabilities: | | |
Accounts payable and accrued expenses | $ 3,230 | $ 3,059 |
Deferred revenue | 2,796 | 2,442 |
Current portion of term loan | 326 | 326 |
Pension liability | 100 | - |
Capital lease obligations | 33 | 35 |
Total current liabilities | 6,485 | 5,862 |
| | | |
Pension liability | 2,489 | 2,327 |
Deferred revenue | 679 | 634 |
Term loan | 217 | 461 |
Other liabilities | 297 | 205 |
Total liabilities | 10,167 | 9,489 |
| | | |
| 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 - 16,004,183 at September 30, 2010 | | |
and 15,864,205 at December 31, 2009 | 160 | 159 |
Additional paid-in capital | 81,314 | 80,087 |
Accumulated deficit | (53,308) | (51,461) |
Accumulated other comprehensive loss | (708) | (701) |
Total shareholders' equity | 27,458 | 28,084 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $37,625 | $37,573 |
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(In thousands, except per share amounts)
(Unaudited)
| | 2010 | 2009 |
| | | |
Product revenues | $ 5,309 | $ 5,113 |
Service revenues | 1,575 | 1,268 |
Total revenues | 6,884 | 6,381 |
| | | |
Cost of sales | 2,124 | 2,007 |
Gross profit | 4,760 | 4,374 |
| | | |
| Operating expenses: | | |
Selling, general and administrative | 3,754 | 3,603 |
Research and development | 1,676 | 1,874 |
| | | |
Total operating expenses | 5,430 | 5,477 |
| | | |
Operating loss | (670) | (1,103) |
| | | |
Interest expense | (14) | (24) |
| | | |
Interest income | - | 1 |
| | | |
Other income (expense), net | 74 | (9) |
| | | |
Loss before taxes | (610) | (1,135) |
| | | |
Income tax benefit, net | 128 | 295 |
| | | |
Net loss | $ (482) | $ (840) |
| | | |
| Net loss per share: | | |
Basic | $ (0.03) | $ (0.05) |
Diluted | $ (0.03) | $ (0.05) |
| | | |
| Weighted average shares outstanding: | | |
Basic | 15,994 | 15,788 |
Diluted | 15,994 | 15,788 |
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(In thousands, except per share amounts)
(Unaudited)
| | 2010 | 2009 |
| | | |
Product revenues | $16,071 | $14,840 |
Service revenues | 4,621 | 3,592 |
Total revenues | 20,692 | 18,432 |
| | | |
Cost of sales | 6,284 | 5,860 |
Gross profit | 14,408 | 12,572 |
| | | |
| Operating expenses: | | |
Selling, general and administrative | 11,220 | 10,629 |
Research and development | 4,998 | 5,544 |
| | | |
Total operating expenses | 16,218 | 16,173 |
| | | |
Operating loss | (1,810) | (3,601) |
| | | |
Interest expense | (45) | (38) |
| | | |
Interest income | - | 1 |
| | | |
Other expense, net | (10) | (8) |
| | | |
Loss before taxes | (1,865) | (3,646) |
| | | |
Income tax benefit, net | 18 | 841 |
| | | |
Net loss | $(1,847) | $(2,805) |
| | | |
| Net loss per share: | | |
Basic | $ (0.12) | $ (0.18) |
Diluted | $ (0.12) | $ (0.18) |
| | | |
| Weighted average shares outstanding: | | |
Basic | 15,946 | 15,736 |
Diluted | 15,946 | 15,736 |
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(In thousands)
(Unaudited)
| | 2010 | 2009 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | |
Net loss | $ (1,847) | $ (2,805) |
| Adjustments to reconcile net loss to net cash from | | |
| operating activities: | | |
Depreciation and amortization | 782 | 720 |
Deferred tax asset allowance | 136 | - |
Deferred income tax benefit | (175) | (864) |
Inventory provisions | 140 | 154 |
Share-based compensation expense | 1,302 | 1,196 |
Other | 211 | 207 |
| Changes in operating assets and liabilities: | | |
Accounts receivable | (1,377) | (667) |
Inventories | (208) | 152 |
Prepaid expenses and other assets | 296 | (348) |
Accounts payable and accrued expenses | (64) | 636 |
Deferred revenue | 399 | 474 |
Other liabilities | 325 | 390 |
Net cash used in operating activities | (80) | (755) |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Acquisitions of property and equipment | (365) | (1,475) |
Disposal of property and equipment | - | 11 |
Net cash used in investing activities | (365) | (1,464) |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Proceeds from term loan | - | 977 |
| Proceeds from exercise of stock options | 1 | 35 |
| Payments on term loan | (244) | (109) |
Payments on capital lease obligations | (25) | (35) |
Net cash (used in) provided by financing activities | (268) | 868 |
| | | |
Change in cash and cash equivalents | (713) | (1,351) |
Cash and cash equivalents at beginning of period | 5,238 | 5,322 |
Cash and cash equivalents at end of period | $ 4,525 | $ 3,971 |
| | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | |
Interest paid during the period | $ 46 | $ 27 |
Stock issued for 401(k) match | 161 | 185 |
Assets acquired under capital lease | 54 | 84 |
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Nature of Business
Chyron provides sophisticated graphics offerings that include Chyron's AXIS Graphics online content creation software, HD/SD switchable on-air graphics systems, clip servers, channel branding and telestration systems, graphic asset management and XMP integration solutions, and the WAPSTR mobile phone newsgathering application. As a pioneer of Graphics as a Service for digital video media, Chyron aims to address the world of digital and broadcast graphics with Web, Mobile, HD, 3D and newsroom integration solutions.
General
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant intercompany amounts have been eliminated.
In the opinion of management of Chyron Corporation (the "Company" or "Chyron"), the accompanying 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 September 30, 2010 and the consolidated results of its operations and its cash flows for the periods ended September 30, 2010 and 2009. 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, 2010. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates made by management include inventory valuatio ns, stock and bonus compensation, allowances for doubtful accounts, income taxes, pension assumptions 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, 2009. The December 31, 2009 figures included herein were derived from such audited consolidated financial statements.
Recent Accounting Pronouncements
Effective January 1, 2010, we adopted the amendment to authoritative literature that modifies the revenue recognition guidance for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable in the arrangement based on the fair value of the elements. The fair value for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE nor TPE is available. BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis.
Also on January 1, 2010, we adopted the amendment to authoritative literature that modifies the revenue recognition guidance for the sale of tangible products that contain software that is more than incidental to the functionality of the product as a whole. More specifically, the revised accounting guidance indicates that when a product has tangible and software components that function together to deliver the essential functionality of the product as a whole, that product should be excluded from the scope of software revenue accounting guidance, as opposed to the previous accounting guidance where such an instrument would be subject to the rules detailed in the software revenue guidance.
We adopted both of these amendments to the revenue recognition guidance on a prospective basis. The adoption of these amendments did not have a significant impact on our financial position, results of operations or cash flows for the three or nine month periods ended September 30, 2010.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. Potentially dilutive shares are excluded from the computation of diluted earnings per share when their effect is anti-dilutive. Shares excluded from the calculation are as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Weighted average shares which are not | | | | | |
| included in the calculation of diluted | | | | | |
| earnings (loss) per share because their | | | | | |
| impact is anti-dilutive: | | | | | |
| Stock options | 3,345 | 3,763 | | 3,324 | 3,393 |
| Restricted stock units | 2,073 | - | | 1,121 | - |
2. LONG-TERM INCENTIVE PLANS
Pursuant to the 2008 Long-Term Incentive Plan, as amended (the "Plan"), we 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. We issue new shares of common stock to satisfy the exercise or release of share-based awards.
The fair value of each stock option award is estimated on the date of grant 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 the 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. During the three and nine months ended September 30, 2010, the Company granted options which totaled 68,060 and 112,060, respectively. The fair value of the options granted during 2010 and 2009 were estimated based on the following weighted average assumptions:
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Expected volatility | 73.24% | 89.13% | | 75.52% | 92.18% |
| Risk-free interest rate | 1.64% | 2.86% | | 1.95% | 2.36% |
| Expected dividend yield | 0.00% | 0.00% | | 0.00% | 0.00% |
| Expected life (in years) | 5.3 | 6.0 | | 5.6 | 6.0 |
| Estimated fair value per | | | | | |
| option granted | $1.71 | $0.97 | | $1.14 | $0.99 |
During the three and nine month periods ended September 30, 2010, the Company granted restricted stock units, or RSUs, totaling 100,000 and 1,948,115, respectively, which have either time or performance-based vesting features. RSUs are equity awards that are granted to individuals entitling 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. Time-based RSUs vest over a one to three year period, while performance-based RSUs vest based upon the achievement of specific performance targets. Unless forfeited, all RSUs are required to be settled in shares. The RSUs granted in the three and nine month periods ended September 30, 2010 had a weighted average fair value of $1.66 and $1.91, respectivel y. In the three and nine months ended September 30, 2010 we recorded an expense of $124 thousand and $309 thousand, respectively, relating to outstanding RSUs. Included in these RSU grants are 1,644,375 RSUs that were awarded under the Company's Key Management Medium-Term Incentive program that provides for the award of up to 1,750,000 RSUs if certain financial performance conditions are achieved in 2012, or if not in 2012, then in 2013. No expense was recorded in 2010 to date for this program. If in the future it is probable that these awards will be earned, we will commence recording an expense for them.
In addition, the Company also has a 2010 Management Incentive Compensation Plan ("the 2010 Incentive Plan") that entitles recipients to a combination of cash and equity awards based on achievement of certain performance and service conditions in fiscal 2010. During the nine months ended September 30, 2010 we recorded approximately $236 thousand associated with the equity portion of these awards. No expense was recorded in the quarter ended September 30, 2010.
We amortize share-based compensation expense over the vesting period on a straight line basis. The impact on our results of operations of recording expense from share-based payment arrangements is as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Cost of sales | $ 40 | $ 42 | | $ 120 | $ 131 |
| Research and development | 130 | 147 | | 407 | 455 |
| Selling, general and administrative | 185 | 194 | | 775 | 610 |
| | $355 | $383 | | $1,302 | $1,196 |
As of September 30, 2010, there was approximately $1.5 million of total unrecognized share-based compensation cost related to stock options or RSUs granted under our plans to employees or for services performed by non-employees that will be recognized over the next three years.
3. INVENTORIES
Inventories, net are comprised of the following (in thousands):
| | September 30, | | December 31, |
| | 2010 | | 2009 |
| Finished goods | $ 309 | | $ 492 |
| Work-in-progress | 200 | | 308 |
| Raw material | 2,074 | | 1,715 |
| | $2,583 | | $2,515 |
4. CREDIT FACILITY
On March 24, 2010 the Company entered into an amendment to its credit facility with a U.S. bank which extends its terms until March 30, 2011. The credit facility continues to provide for a $1.5 million revolving line of credit ("revolver") with an advance rate of up to 80% of eligible accounts receivable. At September 30, 2010 available borrowings were approximately $1.5 million based on this formula. The revolver bears interest at Prime +1.75%. The credit facility also provides for a $0.5 million equipment line of credit to finance eligible equipment purchases. Advances under the equipment line of credit will become a term loan ("term loan") bearing interest at Prime +2%. Advances on the equipment line of credit shall be made within 120 days of purchase in minimum draws of $100,000 thro ugh December 31, 2010. A term loan
from advances on the line will be repaid in thirty-six equal monthly installments of principal plus interest.
The credit facility is collateralized by the Company's assets, except for its intellectual property rights which are subject to a negative pledge arrangement with the bank. The Company is required to maintain financial covenants based on an adjusted quick ratio of at least 1.5 to 1.0, measured at month end, and minimum tangible net worth of $22 million, increased by 60% of the sum of the gross proceeds received by the Company from any sale of its equity or incurrence of subordinated debt and any positive quarterly net income earned, measured at quarter end (as defined in the credit facility). As is usual and customary in such lending agreements, the agreements also contain certain nonfinancial requirements, such as required periodic reporting to the bank and various representations and w arranties. The lending agreement also restricts our ability to pay dividends without the bank's consent. The Company has been in compliance with all debt covenants since inception of the credit facility.
On May 29, 2009, the Company received an advance, under the then existing equipment line of credit, which resulted in a term loan of $977 thousand payable over 36 months in equal monthly installments of principal plus accrued interest. The balance outstanding at September 30, 2010 is $543 thousand. Interest expense related to the term loan was $9 thousand and $30 thousand for the three and nine months ended September 30, 2010, respectively.
5. BENEFIT PLANS
The net periodic benefit cost relating to the Company's Pension Plan is as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Service cost | $ 51 | $ 97 | | $ 253 | $ 303 |
| Interest cost | 88 | 96 | | 252 | 246 |
| Expected return on plan assets | (97) | (50) | | (225) | (192) |
| Amortization of prior service cost | (52) | (6) | | (20) | (18) |
| Amortization of prior loss | 12 | 51 | | - | 51 |
| | $ 2 | $ 188 | | $ 260 | $ 390 |
Our policy is to fund the minimum contributions required under the Employee Retirement Income Security Act (ERISA), and, subject to cash flow levels, it is the Company's intention to make additional contributions to the Pension Plan to reduce the unfunded liability. The Company anticipates that no contribution will be required in 2010 in order to comply with ERISA. However, an additional discretionary contribution of $100,000 was made in October 2010 and it is anticipated that contributions will be required under ERISA in 2011.
6. PRODUCT WARRANTY
We provide product warranties for our 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. We establish our reserve based on historical data, taking into consideration specific product information. The following table sets forth the movement in the warranty reserve (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Balance at beginning of period | $ 50 | $ 50 | | $ 50 | $ 50 |
| Provisions | 26 | 51 | | 30 | 90 |
| Warranty services provided, net | (26) | (51) | | (30) | (90) |
| | $ 50 | $ 50 | | $ 50 | $ 50 |
7. SHAREHOLDERS' EQUITY
Components and activity related to accumulated other comprehensive income is as follows (in thousands):
| | Foreign | | | | Accumulated |
| | Currency | | Pension | | Other |
| | Translation | | Benefit | | Comprehensive |
| | Adjustments | | Costs | | Loss |
| January 1, 2010 | $ (13) | | $(688) | | $(701) |
| Change for period | (13) | | - | | (13) |
| March 31, 2010 | (26) | | (688) | | (714) |
| Change for period | (4) | | - | | (4) |
| June 30, 2010 | (30) | | (688) | | (718) |
| Change for period | 10 | | - | | 10 |
| September 30, 2010 | $ (20) | | $(688) | | $(708) |
During the nine months ended September 30, 2010, we issued 83,206 shares of common stock in connection with the Company match for our 401(k) plan in lieu of an aggregate cash match of $161 thousand.
8. INCOME TAXES
The components of deferred income taxes are as follows (in thousands):
| | September 30, | | December 31, |
| | 2010 | | 2009 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $17,412 | | $17,366 |
| Temporary differences | 3,708 | | 3,582 |
| | 21,120 | | 20,948 |
| Deferred tax valuation allowance | 889 | | 753 |
| | $20,231 | | $20,195 |
In accordance with accounting standards, the Company has not recorded a deferred tax asset related to the settlement of share-based awards 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. The cumulative amount of unrecognized tax benefits associated with these awards was approximately $0.6 million at September 30, 2010, and if the Company is able to utilize this benefit in the future it would result in a credit to additional paid in capital.
During the quarter ended September 30, 2010 the Company recorded a valuation allowance of $136 thousand against certain net operating loss carryforwards as the Company believes it is more likely than not that these assets will not be realized.
The components of the provision for income tax benefit (expense) for the periods ended September 30, are as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Current: | | | | | |
| State and foreign | $ (1) | $ 3 | | $ (21) | $ (23) |
| | | | | | |
| Deferred: | | | | | |
| State | 14 | 20 | | 10 | 45 |
| Federal | 251 | 272 | | 165 | 819 |
| | 265 | 292 | | 175 | 864 |
| Valuation allowance | (136) | - | | (136) | - |
| Income tax benefit | $ 128 | $ 295 | | $ 18 | $ 841 |
At September 30, 2010, we had U.S. federal net operating loss carryforwards ("NOLs") of approximately $50 million expiring between the years 2012 through 2027. We file U.S. federal income tax returns as well as income tax returns in various states and one foreign jurisdiction. We may be subject to examination by the Internal Revenue Service ("IRS") for calendar years 2006 through 2009 under the normal statute of limitations. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. Generally, for state tax purposes, the Company's 2005 through 2009 tax years remain open for examination by the tax authorities under a four year statute of limitations, however, certain states may have a statute of limi tations of six to ten years.
9. CONTINGENCIES
On December 1, 2009, one of our customers, International Broadcast Consultants, Inc., or IBC, filed a lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, which was subsequently removed to the United States District Court for the Central District of California on January 4, 2010. IBC's second amended complaint, which was filed on May 17, 2010, asserts claims for defamation, intentional interference with contractual relationship, intentional interference with prospective business advantage, negligent interference with prospective business advantage, and unfair business practices relating to an email that one of our employees sent to a customer of IBC that expressed the employee's belief that IBC may have ceased operations, which IBC alleges ca used it to lose business from that customer and other damages. IBC seeks exemplary damages in an amount up to $30 million, plus punitive damages. On July 27, 2010, the court set a trial date of March 15, 2011. Because the case and discovery are in the early stages, we cannot predict the possible outcome of the litigation, but we believe IBC's claims lack merit and we intend to defend against them vigorously. As such, we have not recorded any loss accrual in the results presented for 2010.
We are not a party to any other legal proceedings that we believe will have a material impact on our business, financial condition or results of operations.
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates and evaluates its business as one reporting unit.
The details of the Company's geographic sales are as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| United States | $5,080 | $4,550 | | $15,448 | $13,977 |
| Europe | 1,000 | 1,266 | | 3,216 | 3,006 |
| Rest of world | 804 | 565 | | 2,028 | 1,449 |
| | $6,884 | $6,381 | | $20,692 | $18,432 |
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. The forward-looking information is based on various factors and was derived using numerous assumptions. 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," "plan," "seek," "expect," "intend" 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 those set forth in Part I, Item 1A, entitled "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2009. 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 statements wherever 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 descrip tions 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. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, "Chyron," the "Company," "we," "us," and "our" refer to Chyron Corporation.
Overview
We provide sophisticated graphics offerings for broadcast and other media companies that include our AXIS Graphics online content creation software, HD/SD switchable on-air graphics systems, clip servers, channel branding and telestration systems, graphic asset management and XMP integration solutions, and the WAPSTR mobile phone newsgathering application. As a pioneer of Graphics as a Service for digital video media, Chyron aims to address the world of digital and broadcast graphics with Web, Mobile, HD, 3D and newsroom integration solutions.
In the first nine months of 2010 we experienced some recovery in our traditional broadcast graphics products business, including areas outside of the United States, and growing interest in our services offerings. However, we believe that a guarded outlook for the short-term is prudent given the fragile and patchy nature of this recovery and our focus will remain on cost containment and cash generation. We believe that the overall economic recovery remains weak and our traditional broadcast media customers will find it hard to make capital expenditures. That is why we are working to reinvent our core business by transitioning from a products company to a services company, including offering our services in the "cloud" through our AXIS online graphics creation platform.
Our mission is to offer visionary, responsive and cost-effective solutions to the community of professionals involved in the creation, management and distribution of media content. By uniting creativity, business and technology, our focus is to reduce our clients' operating costs. We are dedicated to developing solutions that achieve these goals by transitioning our customers' business models from high fixed costs to lower, variable costs that can be scaled up or down as required. One of our primary goals is to leverage our experience and expertise in our traditional hardware product offerings for television stations and networks into becoming a leading provider of web-based software solutions, or a Cloud Services Provider, to the multimedia industry. In addition, our recent focus has be en on building a world class sales and marketing infrastructure to drive additional sales of our product and service offerings. We have successfully recruited senior sales and marketing executives with proven track records and extensive experience across the media/technology space. We plan to selectively add incremental sales resources as needed in 2011.
Results of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
Net Sales. Revenues for the quarter ended September 30, 2010 were $6.9 million, an increase of $0.5 million, or 8% from the $6.4 million reported for the quarter ended September 30, 2009. Revenues derived from U.S. customers were $5.1 million in the quarter ended September 30, 2010 as compared to $4.6 million in the quarter ended September 30, 2009. Revenues derived from international customers were $1.8 million in the quarters ended September 30, 2010 and 2009.
Revenues for the nine months ended September 30, 2010, were $20.7 million, an increase of $2.3 million, or 12% from the $18.4 million reported for the nine months ended September 30, 2009. Revenues derived from U.S. customers were $15.4 million in the nine month period ended September 30, 2010 as compared to $14.0 million in the nine months ended September 30, 2009. Revenues derived from international customers in the nine months ended September 30, 2010 and 2009 were $5.3 million and $4.4 million, respectively.
Revenues, by type, for the three and nine month periods are as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | | % of | | % of | | | % of | | % of |
| | 2010 | Total | 2009 | Total | | 2010 | Total | 2009 | Total |
| Product | $5,309 | 77% | $5,113 | 80% | | $16,071 | 78% | $14,840 | 81% |
| Services | 1,575 | 23% | 1,268 | 20% | | 4,621 | 22% | 3,592 | 19% |
| | $6,884 | | $6,381 | | | $20,692 | | $18,432 | |
The improvement in our product revenues in terms of total dollars in all periods presented is a result of increased capital spending by broadcasters as they begin to resume their capital expenditures that were previously put on hold due to economic uncertainty. Much of this growth was experienced in our international markets during the nine month period ended September 30, 2010. If the economy continues to improve, we anticipate that our new business opportunities will continue to grow during the remainder of 2010 over the prior year periods.
Our service revenues have increased in both total dollars and as a percentage of total revenues in all periods presented due to increased sales of software and hardware maintenance contracts for our broadcast graphics products as well as new revenues generated from sales of our AXIS online graphics creation platform. We believe that AXIS provides a variable cost business model that is an appealing alternative to our broadcast customers' current up-front fixed cost business model for graphics creation. If the economy continues to improve we anticipate that our service revenues will continue to grow during the remainder of 2010 over the prior year periods.
Gross Profit. Gross margins for the quarter ended September 30, 2010 and 2009 were 69% for each quarter. Gross margins for the nine month periods ended September 30, 2010 and 2009 were 70% and 68%, respectively. Gross margins in the nine month period in 2009 were negatively impacted by our inability to completely absorb fixed overhead costs at our lower revenue level.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses were $3.8 million in the quarter ended September 30, 2010 compared to $3.6 million in the quarter ended September 30, 2009. The increase in spending is primarily due to higher costs related to sales and marketing, particularly higher sales commissions on higher revenue and additional sales and marketing personnel, as we focus on building and improving the sales and marketing infrastructure.
SG&A in the nine months ended September 30, 2010 and 2009 were $11.2 million and $10.6 million, respectively. The increase in spending is primarily due to higher sales commissions of $0.2 million on higher revenues, higher compensation costs associated with performance based compensation arrangements of $0.4 million, additional service costs to support our customers and products in the amount of $0.1 million and $0.1 million in legal fees relating to a lawsuit filed against us as discussed in the notes to the consolidated financial statements. These increases were partially offset by $0.2 million in lower costs associated with the management of our international operations.
We anticipate SG&A expenses to increase during the remainder of 2010 and into 2011 due to our continued focus on sales and marketing efforts, including our recent hiring of senior sales and marketing executives with proven track records and extensive experience across the media/technology space. In addition, we plan to selectively add incremental sales resources as needed in 2011.
Research and Development Expenses. Research and development ("R&D") expenses decreased $0.2 million in the third quarter of 2010 to $1.7 million as compared to $1.9 million in the third quarter of 2009. R&D decreased $0.5 million in the nine month period ended September 30, 2010 to $5.0 million as compared to $5.5 million in the nine month period ended September 30, 2009. The primary reason for the decrease in all periods presented is lower costs associated with consultants as we assume development in-house and lower project material costs as we transition towards our service offerings, which generally have lower development costs.
Interest income and expense. Interest expense decreased marginally in the three month period ended September 30, 2010, as compared to 2009, due to lower interest incurred on our term loan as the outstanding principal balance has declined as a result of monthly principal payments.
Interest expense increased marginally in the nine months ended September 30, 2010 as compared to September 30, 2009 due to the term loan that was outstanding during nine months of 2010 as opposed to outstanding for only four months in the comparable nine month period in 2009.
Other income and expense, net. The components of other income and expense, net are as follows (in thousands):
| | Three Months | | Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | 2009 | | 2010 | 2009 |
| Foreign exchange transaction gain (loss) | $74 | $ (9) | | $ 31 | $(13) |
| Other | - | 0 | | (41) | 5 |
| | $74 | $ (9) | | $(10) | $ (8) |
We continue to be exposed to foreign currency and exchange risk in the normal course of business due to our revenues that are negotiated in British Pounds Sterling. However, we believe that it is not material to our near-term financial position or results of operations.
Income tax (expense) benefit, net. In the third quarter of 2010 and 2009, we recorded an income tax benefit of $0.1 million and $0.3 million, respectively. In the nine month period ended September 30, 2010 and 2009, we recorded an income tax benefit of $0.02 million and $0.8 million, respectively. The reduction in tax benefits in all periods presented is impacted by the amount of expense associated with our share-based payment arrangements as we utilize our common stock, in lieu of cash, for management incentive programs. This does 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.
In addition, during the quarter ended September 30, 2010, the Company recorded a valuation allowance of $136 thousand against certain net operating loss carryforwards as the Company believes it is more likely than not that these assets will not be realized.
Liquidity and Capital Resources
At September 30, 2010, we had cash and cash equivalents on hand of $4.5 million and working capital of $8.7 million. In the first nine months of 2010, the Company used approximately $0.1 million in cash for operations. The Company also invested approximately $0.4 million in 2010 for new equipment and used $0.2 million in cash for payments on its term loan.
On March 24, 2010 the Company entered into an amendment to its credit facility with a U.S. bank to extend its terms until March 30, 2011. The credit facility continues to provide for a $1.5 million revolving line of credit ("revolver"), with an advance rate of up to 80% of eligible accounts receivable. At September 30, 2010 available borrowings were approximately $1.5 million based on this formula. The credit facility also provides for a $0.5 million equipment line of credit to finance eligible equipment purchases through December 31, 2010. In the second quarter of 2009 the Company borrowed $0.98 million to finance capital equipment under the then existing credit facility, of which $0.5 million remains outstanding at September 30, 2010. The equipment term loan will be repaid in thirty-si x equal installments of principal plus interest, and is scheduled to be repaid in full by May 2012. The Company is required to maintain financial covenants based on an adjusted quick ratio of at least 1.5 to 1.0, measured at month-end, and minimum tangible net worth of $22 million, increased by 60% of the sum of the gross proceeds received by the Company from any sale of its equity or incurrence of subordinated debt and any positive quarterly net income earned, measured at quarter-end (as defined in the credit facility). As is usual and customary in such lending agreements, the agreements also contain certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The lending agreement also restricts our ability to pay dividends without the bank's consent. The Company has been in compliance with all debt covenants since inception of the credit facility.
We anticipate that no contribution to our pension plan will be required under ERISA in 2010. However, an additional discretionary contribution of $100,000 was made in October 2010. We expect that contributions will be required under ERISA in 2011. Our pension plan investments were valued at $3.5 million at September 30, 2010. Our investment strategy remains the same and we believe that the plan's investments are adequate to meet plan obligations for the next twelve months.
In the first nine months of 2010, we experienced some recovery in our products business, including areas outside of the United States, and growing interest in our services offerings. However, we believe that a guarded outlook for the short-term is prudent, given the fragile and patchy nature of this recovery, and our focus will remain on cost containment and cash generation. Our strategy is to seek to gain market share in broadcast and online graphics content workflow solutions and expand the use and penetration of our services offerings, including our AXIS online graphics creation platform. Our recent focus has been on building a world class sales and marketing infrastructure to drive additional sales of our product and service offerings, and we plan to selectively add incremental sales resources as needed in 2011. We believe that AXIS provides a variable cost business model that is an appealing alternative to our broadcast customers' current up-front fixed cost business model for graphics creation. We also believe that because our addressable market opportunity is no longer restricted to broadcast television, we have additional opportunities for growth. However, our future growth and success will depend to a significant degree on our ability to generate sales of our newer, non-broadcast products in our existing and new markets. We operate in a rapidly changing environment and must remain responsive to changes as they occur. In the event that our revenues are significantly below our forecasted revenues, we believe we have the ability to reduce or delay discretionary expenditures, including capital purchases, and reduce headcount, so that we will have sufficient cash resources. However, there can be no assurance that we will be able to adjust our costs in sufficient time to respond to reven ue and cash shortfalls, should that occur.
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.
We believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facility, will be sufficient to meet our cash needs for at least the next 12 months if we are able to achieve our planned results of operations and retain the availability of credit under our lending agreement.
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 l icensing 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 development, 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 MARKET RISK
As a smaller reporting company, we are not required to provide information required by this item.
ITEM 4T. 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 Securities Exchange Act of 1934, as amended, or 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 chief financial off icer, 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.
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
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, on December 1, 2009, one of our customers, International Broadcast Consultants, Inc., or IBC, filed a lawsuit against us in the Superior Court of the State of California for the County of Los Angeles, which was subsequently removed to the United States District Court for the Central District of California on January 4, 2010. IBC's second amended complaint, which was filed on May 17, 2010, asserts claims for defamation, intentional interference with contractual relationship, intentional interference with prospective business advantage, negligent interference with prospective business advantage, and unfair business practices relating to an email that one of our employees sent to a customer of IB C that expressed the employee's belief that IBC may have ceased operations, which IBC alleges caused it to lose business from that customer and other damages. IBC seeks exemplary damages in an amount up to $30 million, plus punitive damages. On July 27, 2010, the court set a trial date of March 15, 2011. Because the case and discovery are in the early stages, we cannot predict the possible outcome of the litigation, but we believe IBC's claims lack merit and we intend to defend against them vigorously.
We are not a party to any other legal proceedings that we believe will have a material impact on our business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits:
| Exhibit No. | Description of Exhibit |
| 10.1 | Amended and Restated Employment Agreement by and between Chyron Corporation and Michael Wellesley-Wesley, effective as of September 1, 2010 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 9, 2010 (File No. 001-09014) and incorporated herein by reference.) |
| | |
| 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. |
| |
| *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.
| | | CHYRON CORPORATION |
| | | (Registrant) |
| | | |
| November 10, 2010 | | /s/ Michael Wellesley-Wesley |
| (Date) | | Michael Wellesley-Wesley |
| | | President and Chief Executive Officer |
| | | |
| November 10, 2010 | | /s/ Jerry Kieliszak |
| (Date) | | Jerry Kieliszak |
| | | Chief Financial Officer and Sr. Vice President |
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