Exhibit 99.2
GemGroup Inc. and Subsidiaries
Consolidated Financial Report
June 30, 2014
Contents
| Financial Statements | |
| | |
| Consolidated Balance Sheets | 1 |
| Consolidated Statements of Income | 3 |
| Consolidated Statements of Stockholders’ Equity | 4 |
| Consolidated Statements of Cash Flows | 5 |
| | |
| Notes to Consolidated Financial Statements | 6 |
GemGroup Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2014 and December 31, 2013
| | | (unaudited) | | | | |
| | | Jun-14 | | | Dec-13 | |
| Assets | | | | | | | | |
| Current Assets: | | | | | | | | |
| Cash | | $ | 108,365 | | | $ | 91,542 | |
| Accounts receivable, less allowance for uncollectible accounts of $52,101 and $60,614 | | | 2,608,255 | | | | 2,282,622 | |
| Inventories (Note 2) | | | 2,123,949 | | | | 2,606,822 | |
| Prepaid expenses | | | 500,902 | | | | 398,303 | |
| | | | 5,341,471 | | | | 5,379,289 | |
| | | | | | | | | |
| Property and Equipment: | | | | | | | | |
| Land and building | | | 3,330,069 | | | | 3,342,840 | |
| Machinery and equipment | | | 7,862,703 | | | | 8,853,865 | |
| Office furniture and fixtures | | | 494,874 | | | | 501,518 | |
| | | | 11,687,646 | | | | 12,698,223 | |
| Less accumulated depreciation | | | 5,977,344 | | | | 6,750,839 | |
| | | | 5,710,302 | | | | 5,947,384 | |
| | | | | | | | | |
| Other Assets: | | | | | | | | |
| Goodwill | | | 1,940,514 | | | | 1,940,514 | |
| Deposits | | | 56,281 | | | | 339,113 | |
| | | | 1,996,795 | | | | 2,279,627 | |
| | | $ | 13,048,568 | | | $ | 13,606,300 | |
(Continued)
GemGroup Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
June 30, 2014 and December 31, 2013
| | | (unaudited) | | | | |
| Liabilities and Stockholders' Equity | | Jun-14 | | | Dec-13 | |
| Current Liabilities: | | | | | | | | |
| Current maturities of long-term debt (Note 3) | | $ | 832,310 | | | $ | 808,978 | |
| Line of credit (Note 3) | | | 353,260 | | | | 529,270 | |
| Current portion of deferred compensation (Note 6) | | | 25,525 | | | | 24,286 | |
| Accounts payable (Note 5) | | | 1,723,568 | | | | 2,270,301 | |
| Accrued expenses | | | 780,261 | | | | 827,111 | |
| | | | 3,714,924 | | | | 4,459,946 | |
| | | | | | | | | |
| Long-Term Debt, less current maturities (Note 3) | | | 2,533,534 | | | | 2,697,017 | |
| | | | | | | | | |
| Deferred Compensation, less current portion (Note 6) | | | 50,650 | | | | 55,010 | |
| | | | | | | | | |
| Deferred Taxes | | | 362,000 | | | | 362,000 | |
| | | | | | | | | |
| Stockholders' Equity: | | | | | | | | |
| Common stock, $.01 par value; 100,000 shares authorized; 11,177 shares issued and outstanding | | | 112 | | | | 112 | |
| Additional paid-in capital | | | 3,571,747 | | | | 3,571,747 | |
| Retained earnings | | | 2,815,601 | | | | 2,460,468 | |
| | | | 6,387,460 | | | | 6,032,327 | |
| | | $ | 13,048,568 | | | $ | 13,606,300 | |
See Notes to Consolidated Financial Statements.
GemGroup Inc. and Subsidiaries
Consolidated Statements of Income
Six Months Ended June 30, 2014 and 2013
(unaudited)
| | | 2014 | | | 2013 | |
| Net sales | | $ | 12,973,637 | | | $ | 12,141,388 | |
| Cost of goods sold | | | 8,878,966 | | | | 8,766,470 | |
| Gross profit | | | 4,094,671 | | | | 3,374,918 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling expenses | | | 905,237 | | | | 909,659 | |
| General and administrative expenses | | | 1,533,400 | | | | 1,205,597 | |
| | | | 2,438,637 | | | | 2,115,256 | |
| Operating income | | | 1,656,034 | | | | 1,259,662 | |
| | | | | | | | | |
| Financial income (expense): | | | | | | | | |
| Interest income | | | - | | | | 11 | |
| Interest expense | | | (79,068 | ) | | | (103,139 | ) |
| | | | (79,068 | ) | | | (103,128 | ) |
| Net Income | | $ | 1,576,966 | | | $ | 1,156,534 | |
See Notes to Consolidated Financial Statements.
GemGroup Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 2014 and 2013
(unaudited)
| | | | | | Additional | | | | | | Total | |
| | | Common | | | Paid-in | | | Retained | | | Stockholders' | |
| | | Stock | | | Capital | | | Earnings | | | Equity | |
| Balance at December 31, 2012 | | $ | 112 | | | $ | 3,550,693 | | | $ | 1,577,462 | | | $ | 5,128,267 | |
| | | | | | | | | | | | | | | | | |
| Accrued issuance of stock under restricted stock agreement (Note 4) | | | | | | | 21,054 | | | | | | | | 21,054 | |
| | | | | | | | | | | | | | | | | |
| Distributions - stockholders | | | | | | | | | | | (1,296,489 | ) | | | (1,296,489 | ) |
| | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 1,156,534 | | | | 1,156,534 | |
| Balance at June 30, 2013 | | $ | 112 | | | $ | 3,571,747 | | | $ | 1,437,507 | | | $ | 5,009,366 | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2013 | | $ | 112 | | | $ | 3,571,747 | | | $ | 2,460,468 | | | $ | 6,032,327 | |
| | | | | | | | | | | | | | | | | |
| Distributions - stockholders | | | | | | | | | | | (1,221,833 | ) | | | (1,221,833 | ) |
| | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 1,576,966 | | | | 1,576,966 | |
| Balance at June 30, 2014 | | $ | 112 | | | $ | 3,571,747 | | | $ | 2,815,601 | | | $ | 6,387,460 | |
See Notes to Consolidated Financial Statements.
GemGroup Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2014 and 2013
(unaudited)
| | | 2014 | | | 2013 | |
| Cash Flows from Operating Activities: | | | | | | | | |
| Net income | | $ | 1,576,966 | | | $ | 1,156,534 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation | | | 543,027 | | | | 496,326 | |
| Amortization | | | - | | | | 33,275 | |
| (Gain) on disposal of building and equipment | | | - | | | | (9,750 | ) |
| Compensation related to restricted stock agreement | | | - | | | | 21,054 | |
| (Increase) decrease in: | | | | | | | | |
| Accounts receivable | | | (325,633 | ) | | | 242,723 | |
| Inventories | | | 482,873 | | | | 149,674 | |
| Prepaid expenses | | | (102,599 | ) | | | (138,532 | ) |
| Other assets | | | 282,832 | | | | (19,499 | ) |
| Increase (decrease) in: | | | | | | | | |
| Accounts payable | | | (546,733 | ) | | | (352,491 | ) |
| Accrued expenses | | | (46,850 | ) | | | (76,887 | ) |
| Deferred compensation | | | (3,121 | ) | | | 1,565 | |
| Net cash provided by operating activities | | | 1,860,762 | | | | 1,503,992 | |
| | | | | | | | | |
| Cash Flows from Investing Activities: | | | | | | | | |
| Purchase of property and equipment | | | (305,945 | ) | | | (643,258 | ) |
| Note receivable issued to stockholder | | | - | | | | 180,000 | |
| Net cash (used in) investing activities | | | (305,945 | ) | | | (463,258 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities: | | | | | | | | |
| Net (principal payments) on line of credit | | | (176,010 | ) | | | 741,991 | |
| Proceeds from long-term debt borrowings | | | 213,758 | | | | - | |
| Principal payments on long-term debt | | | (329,028 | ) | | | (395,353 | ) |
| Payments on deferred purchase obligatoins | | | (24,881 | ) | | | (20,693 | ) |
| Distributions to stockholders | | | (1,221,833 | ) | | | (1,296,489 | ) |
| Net cash (used in) financing activities | | | (1,537,994 | ) | | | (970,544 | ) |
| | | | | | | | | |
| Net increase in cash | | | 16,823 | | | | 70,190 | |
| | | | | | | | | |
| Cash: | | | | | | | | |
| Beginning | | $ | 91,542 | | | $ | 138,900 | |
| Ending | | $ | 108,365 | | | $ | 209,090 | |
| | | | | | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
| Cash payments for interest | | $ | 83,492 | | | $ | 108,210 | |
See Notes to Consolidated Financial Statements.
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: GemGroup Inc. is a holding company. Its wholly owned subsidiary, Gemaco Inc. (Gemaco), is a manufacturer of GEMACO playing cards, calendar, information and game cards, gaming table layouts and gaming chips. Gemaco Inc. sells primarily to three industries — retailers, advertising specialty distributors, and casinos — all on an international basis. GemTech LLC is a manufacturer of custom injection molded products. In prior years, GemTech was a division of Gemaco and not a separate entity. On January 3, 2012, GemGroup Inc. formed a new Kansas one-member limited liability company under the name GemTech LLC and transferred all of the assets and liabilities of the custom injection molding business to GemTech LLC. GemAsia, LLC is a single member Missouri limited liability company which is wholly owned by GemGroup. GemAsia conducts business in Macau, China where it produces and installs gaming table layouts for the casino market and also sells table layouts, playing cards and gaming accessories to the gaming industry throughout Asia. GemGroup DISC, LLC is a single member Missouri limited liability company which is wholly owned by GemGroup. The DISC is qualified as a domestic international sales corporation which arranges for the sale of Gemaco Inc.’s products for use outside of the United States. It was formed in 2013.
A summary of the Company’s significant accounting policies follows:
Principles of consolidation: The accompanying consolidated financial statements include the accounts of GemGroup Inc. and its wholly owned subsidiaries, Gemaco Inc., GemTech LLC, GemAsia LLC and GemGroup DISC, LLC (collectively referred to as “the Company”). All significant intercompany balances and transactions have been eliminated.
Revenue recognition: Sales are recognized upon shipment of goods at the time title transfers.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts receivable: Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are past due after 30 days and are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Interest is not charged on trade receivables.
Inventories: Inventories of Gemaco and GemTech, consisting of raw materials, work-in-progress and finished goods, are valued at the lower of cost, determined using the last-in, first-out (LIFO) method, or market. Inventories of GemAsia, consisting of raw materials, work-in-progress and finished goods, are valued at the lower of cost, determined using the first-in, first-out (FIFO) method, or market.
Subsequent event:Management has evaluated and disclosed subsequent events up to and including September 15, 2014, which is the date the financial statements were available to be issued.
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Property and equipment: Property and equipment are carried at cost. Depreciation is provided on the straight-line method over the following estimated useful lives:
| Building | 15-39 years |
| Machinery and equipment | 5-10 years |
| Office furniture and fixtures | 5-10 years |
Goodwill and other intangible assets: The Company follows FASB ASC Topic 350 with regards to accounting for goodwill and other intangible assets. Goodwill is subject to an impairment test if events or changes in circumstances indicate that impairment may have occurred. Impairment losses are recognized to the extent that the carrying amount exceeds the assets' estimated fair value.
For the year ended December 31, 2013, the Company assessed qualitative factors in determining whether it is more likely than not that the fair value of the Company is less than its carrying amount. The Company is privately held and thus has no separate public market price for its units. The fair value of the reporting unit was estimated based on a discounted cash flow method which was derived using forecasts prepared by the Company. Based on the qualitative assessment and the results of the Company's valuation performed for each year end period, no goodwill impairment charge was required for the year ended December 31, 2013.
Intangible assets consist of a customer list and a trade name. These amounts were amortized over their estimated life of 120 months by the straight-line method and were fully amortized in 2013.
Impairment of long-lived assets: Management of the Company periodically reviews the carrying value of the long-lived assets owned by the Company by comparing the carrying value of those assets with their related expected future net cash flows. Should the sum of the related expected future cash flows be less than the carrying value, management will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the assets exceeds the fair value of assets. To date, management has determined that no impairment of these assets exists.
Income taxes: Effective January 1, 2004, the Company’s stockholders elected to be taxed under sections of federal and state income tax law which provide that, in lieu of corporate income taxes, the stockholders separately account for their pro rata shares of the Company’s items of income, deductions, credits and losses. As a result of this election, no income taxes have been recognized in the accompanying financial statements except for writing off deferred taxes and estimated prior-year income tax refunds and credits not realized.
The remaining deferred tax liability relates to the difference in the financial reporting and income tax basis of buildings and equipment for possible built-in gains tax liability.
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company follows the Financial Accounting Standards Board (FASB) guidance for uncertainty in income taxes. Management has evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state, or local tax authorities for years before 2010.
Advertising: The Company expenses the costs of advertising as incurred. Advertising expense for the 6 months ended June 30, 2014 and 2013 was $23,836 and $66,413, respectively.
Stock compensation: The Company has a stock compensation plan with a key employee. Stock-based compensation expense includes all stock-based compensation awards granted after January 1, 2006, and is based on the grant date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.
Note 2. Inventories
The components of inventories at June 30, 2014 and December 31, 2013 are as follows:
| | | Jun-14 | | | Dec-13 | |
| Raw materials | | $ | 1,598,873 | | | $ | 1,977,576 | |
| Work-in-progress | | | 290,737 | | | | 397,608 | |
| Finished goods | | | 952,098 | | | | 925,117 | |
| | | | 2,841,708 | | | | 3,300,301 | |
| LIFO reserve | | | (520,267 | ) | | | (561,835 | ) |
| Reserve for obsolescence | | | (197,492 | ) | | | (131,644 | ) |
| | | $ | 2,123,949 | | | $ | 2,606,822 | |
At June 30, 2014 and December 31, 2013, inventory subject to the LIFO method reserve was $2,698,678 and $3,134,664, respectively.
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 3. Pledged Assets, Line of Credit, and Long-Term Debt
The line of credit at June 30, 2014 and December 31, 2013 consists of the following:
The following line of credit is payable to a bank and secured by substantially all the assets of the Company and personal guarantees of the principal stockholders of the Company. At June 30, 2014 and December 31, 2013, the prime rate was 3.25%.
| June 30, 2014 |
| | | Original | | | | | | | | | | | | | |
| Maturity | | Principal | | Interest | | | | | | | | Monthly | | Outstanding | |
| Date | | Amount | | Rate | | Floor | | | Ceiling | | | Payments | | Balance | |
| May 24, 2014 | | $3,600,000 (max) | | Prime + 0.5% | | | 4.0 | % | | | 8.50 | % | | Interest | | $ | 353,260 | |
| | | (line of credit) | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| | | Original | | | | | | | | | | | | | |
| Maturity | | Principal | | Interest | | | | | | | | Monthly | | Outstanding | |
| Date | | Amount | | Rate | | Floor | | | Ceiling | | | Payments | | Balance | |
| May 24, 2014 | | $3,600,000 (max) | | Prime + 0.5% | | | 4.0 | % | | | 8.50 | % | | Interest | | $ | 529,270 | |
| | | (line of credit) | | | | | | | | | | | | | | | | |
Long-term debt at June 30, 2014 and December 31, 2013 consists of the following:
| (a) | The following notes are payable to a bank and secured by substantially all the assets of the Company or specific assets referred to in the loan documents and personal guarantees of the principal stockholders of the Company. At June 30, 2014 and December 31, 2013, the prime rate was 3.25%. |
| Maturity | | Interest | | | | | | | | | Monthly | | | Outstanding Balance | |
| Date | | Rate | | | Floor | | | Ceiling | | | Payments | | | Jun-14 | | | Dec-13 | |
| January 2014 | | | Prime + 0.5 | % | | | 4.00 | % | | | 8.00 | % | | | 9,844 | | | | - | | | | 9,791 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| April 2015 | | | Prime + 0.5 | % | | | 4.00 | % | | | 8.00 | % | | | 2,723 | | | | 25,542 | | | | 40,253 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| February 2016 | | | Prime + 0.5 | % | | | 4.00 | % | | | 8.00 | % | | | 25,900 | | | | 488,363 | | | | 627,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| October 2016 | | | Prime + 0.5 | % | | | 4.00 | % | | | 8.00 | % | | | 14,707 | | | | 364,152 | | | | 437,473 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| May 2017 | | | 4.00 | % | | | 4.00 | % | | | 8.00 | % | | | 6,979 | | | | 203,987 | | | | 240,232 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| February 2019 | | | 4.00 | % | | | N/A | | | | N/A | | | | 6,117 | | | | 610,873 | | | | 426,028 | |
| | | | | | | | | | | | | | | | | | | | 1,692,917 | | | | 1,781,404 | |
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 3. Pledged Assets, Line of Credit, and Long-Term Debt (Continued)
| (b) | The following notes are payable to banks and secured by real property and personal guarantees of the principal stockholder of the Company: |
| Maturity | | Interest | | | | | | | | | Monthly | | | Outstanding Balance | |
| Date | | Rate | | | Floor | | | Ceiling | | | Payments | | | Jun-14 | | | Dec-13 | |
| October 2017 | | | 4.00 | % | | | N/A | | | | N/A | | | | 7,217 | | | $ | 890,144 | | | $ | 915,147 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| October 2017 | | | 4.00 | % | | | N/A | | | | N/A | | | | 5,896 | | | | 727,284 | | | | 747,712 | |
| | | | | | | | | | | | | | | | | | | | 1,617,428 | | | | 1,662,859 | |
| (c) | The following items are also included in long-term debt: |
| Maturity | | | | | Interest | | | | | Monthly | | | Outstanding Balance | |
| Date | | Payable to | | | Rate | | | Secured by | | Payments | | | Jun-14 | | | Dec-13 | |
| October 2017 | | | Lender | | | | 0.90 | % | | Vehicle | | | 616 | | | | 24,223 | | | | 27,768 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| January 2018 | | | Lender | | | | 1.90 | % | | Vehicle | | | 594 | | | | 31,276 | | | | 33,964 | |
| | | | | | | | | | | | | | | | | | 55,499 | | | | 61,732 | |
| Total of all long-term debt | | | | | | | | | | | | | | | | | 3,365,845 | | | | 3,505,995 | |
| Less current maturities | | | | | | | | | | | | | | | | | 832,310 | | | | 808,978 | |
| | | | | | | | | | | | | | | | | $ | 2,533,535 | | | $ | 2,697,017 | |
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 4. Stock Incentive Plan
The Company has a stock incentive agreement under which it has awarded restricted stock to a key employee of the Company. The plan provides restricted stock grants for shares of common stock at a value which is generally equal to the fair value of the underlying stock at the date of grant as determined by the Board of Directors. The vesting period is determined at the date of grant and generally does not exceed five years. The shares are subject to forfeiture if certain vesting requirements are not met.
Pursuant to the Plan, the Company had a restricted stock agreement with a key employee whereby the key employee received 556 shares of common stock. The stock vested in 20% increments on an annual basis as long as the employee was employed by the Company. The Company recorded $21,054 of expenses related to this agreement for the 6 months ended June 30, 2013. As of December 31, 2013, all shares were vested and there was no remaining unrecognized compensation expense.
Pursuant to the Plan, the Company has a restricted stock agreement with a key employee whereby the key employee received 621 shares of common stock. The stock vests in 20% increments on an annual basis as long as the employee is employed by the Company. The Company recorded $0 of expense related to this agreement for the 6 month periods ended June 30, 2014 and 2013. As of June 30, 2014, there is no unrecognized compensation expense related to the nonvested shares to be recognized over 0.5 years. At June 30, 2014, the employee has become vested in 559 shares.
Note 5. Major Supplier
Purchases from one supplier were 17% and 22% of net revenues for the 6 months ended June 30, 2014 and 2013, respectively. Accounts payable to this supplier at June 30, 2014 and December 31, 2013, were $555,444 and $812,126, respectively.
GemGroup Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 6. Deferred Compensation
The Company has a deferred compensation agreement with a key employee that provides for a base amount of deferred compensation each year, and an additional amount based on the previous year’s revenues, excluding any sales on which the employee receives a commission. The deferred compensation vests 20% a year over a period of five years from the start of the year in which the compensation is granted. Vested amounts will be paid out within 30 days after the date of vesting. Upon termination of employment, all non-vested amounts will be cancelled. The Company has recorded a liability of $76,175 and $79,296 related to deferred compensation as of June 30, 2014 and December 31, 2013, respectively. The Company recognized compensation expense of $12,763 and $14,460 related to this agreement for the 6 month ended June 30, 2014 and 2013, respectively.
Note 7. Subsequent Events
On July 1, 2014, we sold substantially all of our net gaming assets of GemGroup, for $19.75 million subject to certain post-closing working capital adjustments.
