UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2010
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-24592
Tix Corporation
(Exact name of small business issuer as specified in its charter)
Delaware | 95-4417467 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
12711 Ventura Blvd, Suite 340, Studio City, California 91604
(Address of principal executive offices)
(818) 761-1002
(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 check mark 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 during the proceeding 12 months (or for such shorter period that the Registrant was required to submit and post such reports). 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 x | Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ¨ No x
Number of shares of Tix Corporation common stock, $.08 par value, issued and outstanding as of July 15, 2010: 31,123,357, exclusive of treasury shares.
Special Note Regarding Forward-Looking Statements:
This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that include the words “believes”, “expects”, “anticipates”, “intends”, “plans”, “may”, “will” or similar expressions that are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements may include, among others, statements concerning the Company's expectations regarding its business, growth prospects, revenue trends, operating costs, working capital requirements, facility expansion plans, competition, results of operations and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein.
Each forward-looking statement should be read in context with, and with an understanding of, the various disclosures concerning the Company and its business made throughout this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, as well as other public reports filed with the United States Securities and Exchange Commission. Investors should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. Except as required by applicable law or regulation, the Company undertakes no obligation to update or revise any forward-looking statement contained in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, whether as a result of new information, future events or otherwise.
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Tix Corporation and Subsidiaries
Index
Page No. | |||
PART I. FINANCIAL INFORMATION | |||
Item 1. Financial Statements | |||
Condensed Consolidated Balance Sheets – June 30, 2010 (Unaudited) and December 31, 2009 | 4 | ||
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - Three months ended June 30, 2010 and 2009 | 5 | ||
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - Six months ended June 30, 2010 and 2009 | 6 | ||
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) – Six months ended June 30, 2010 | 7 | ||
Condensed Consolidated Statements of Cash Flows (Unaudited) – Six months ended June 30, 2010 and 2009 | 8 | ||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 9 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 39 | ||
Item 4. Controls and Procedures | 39 | ||
PART II. OTHER INFORMATION | |||
Item 1. Legal Proceedings | 41 | ||
Item 1A. Risk Factors | 41 | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 41 | ||
Item 3. Defaults upon Senior Securities | 41 | ||
Item 4. Reserved | 41 | ||
Item 5. Other Information | 41 | ||
Item 6. Exhibits | 41 | ||
SIGNATURES | 42 |
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TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 8,453,000 | $ | 9,885,000 | ||||
Accounts receivable, including show revenues earned but not billed | 423,000 | 1,911,000 | ||||||
Advances to vendors, net | - | 964,000 | ||||||
Inventory, net | 1,921,000 | 2,172,000 | ||||||
Prepaid expenses and other current assets | 1,486,000 | 1,350,000 | ||||||
Total current assets | 12,283,000 | 16,282,000 | ||||||
Property and equipment, net | 1,558,000 | 1,308,000 | ||||||
Other assets: | ||||||||
Intangible assets: | ||||||||
Goodwill | 7,104,000 | 5,895,000 | ||||||
Intangibles, net | 4,675,000 | 4,499,000 | ||||||
Total intangible assets | 11,779,000 | 10,394,000 | ||||||
Investments in and advances to nonconsolidated affiliates | 713,000 | 1,052,000 | ||||||
Capitalized theatrical costs | 344,000 | 368,000 | ||||||
Deposits and other assets | 161,000 | 158,000 | ||||||
Total other assets | 12,997,000 | 11,972,000 | ||||||
Total assets | $ | 26,838,000 | $ | 29,562,000 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,938,000 | $ | 6,357,000 | ||||
Accrued expenses | 1,096,000 | 1,797,000 | ||||||
Deferred revenue | 545,000 | 160,000 | ||||||
Other current liabilities | 132,000 | 120,000 | ||||||
Convertible note payable | 1,000,000 | - | ||||||
Total current liabilities | 6,711,000 | 8,434,000 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $.01 par value; 500,000 shares authorized; none issued | ||||||||
Common Stock, $.08 par value; 100,000,000 shares authorized; 31,123,357 shares net of 2,340,103 treasury shares, issued at June 30, 2010 and December 31, 2009 respectively | 2,678,000 | 2,678,000 | ||||||
Additional paid-in capital | 90,192,000 | 89,955,000 | ||||||
Cost of shares held in treasury | (4,610,000 | ) | (4,610,000 | ) | ||||
Accumulated deficit | (68,156,000 | ) | (66,902,000 | ) | ||||
Accumulated other comprehensive income | 23,000 | 7,000 | ||||||
Total stockholders' equity | 20,127,000 | 21,128,000 | ||||||
Total liabilities and stockholders' equity | $ | 26,838,000 | $ | 29,562,000 |
See accompanying notes to the condensed consolidated financial statements
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TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Revenues | $ | 14,806,000 | $ | 26,584,000 | ||||
Operating expenses: | ||||||||
Direct costs of revenues | 10,261,000 | 21,410,000 | ||||||
Selling and marketing expenses | 376,000 | 581,000 | ||||||
General and administrative expenses, including non-cash equity-based costs of $202,000 and $438,000 in 2010 and 2009, respectively (including $202,000 and $303,000 for officers, directors and employees in 2010 and 2009, respectively) | 4,811,000 | 3,337,000 | ||||||
Depreciation and amortization | 665,000 | 626,000 | ||||||
Total costs and expenses | 16,113,000 | 25,954,000 | ||||||
Operating income (loss) | (1,307,000 | ) | 630,000 | |||||
Other: | ||||||||
Other income | 71,000 | 129,000 | ||||||
Interest income | 18,000 | 9,000 | ||||||
Interest expense | (2,000 | ) | (3,000 | ) | ||||
Other income, net | 87,000 | 135,000 | ||||||
Net income (loss) before income tax expense | (1,220,000 | ) | 765,000 | |||||
Current income tax expense | 111,000 | 106,000 | ||||||
Net income (loss) | (1,331,000 | ) | 659,000 | |||||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustments | (5,000 | ) | 9,000 | |||||
Comprehensive income (loss) | $ | (1,336,000 | ) | $ | 668,000 | |||
Net income (loss) per common share - | ||||||||
Basic | $ | (0.04 | ) | $ | 0.02 | |||
Diluted | $ | (0.04 | ) | $ | 0.02 | |||
Weighted average common shares outstanding - | ||||||||
Basic | 31,123,357 | 32,361,325 | ||||||
Diluted | 31,123,357 | 32,645,364 |
See accompanying notes to the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Revenues | $ | 31,556,000 | $ | 46,754,000 | ||||
Operating expenses: | ||||||||
Direct costs of revenues | 22,090,000 | 36,336,000 | ||||||
Selling and marketing expenses | 776,000 | 1,187,000 | ||||||
General and administrative expenses, including non-cash equity-based costs of $237,000 and $851,000 in 2010 and 2009, respectively (including $237,000 and $693,000 for officers, directors and employees in 2010 and 2009, respectively) | 8,646,000 | 7,093,000 | ||||||
Depreciation and amortization | 1,286,000 | 1,247,000 | ||||||
Total costs and expenses | 32,798,000 | 45,863,000 | ||||||
Operating income (loss) | (1,242,000 | ) | 891,000 | |||||
Other: | ||||||||
Other income | 78,000 | 154,000 | ||||||
Interest income | 25,000 | 22,000 | ||||||
Interest expense | (4,000 | ) | (7,000 | ) | ||||
Other income, net | 99,000 | 169,000 | ||||||
Net income (loss) before income tax expense | (1,143,000 | ) | 1,060,000 | |||||
Current income tax expense | 111,000 | 106,000 | ||||||
Net income (loss) | (1,254,000 | ) | 954,000 | |||||
Other comprehensive income | ||||||||
Foreign currency translation adjustments | 16,000 | 14,000 | ||||||
Comprehensive income (loss) | $ | (1,238,000 | ) | $ | 968,000 | |||
Net income (loss) per common share - | ||||||||
Basic | $ | (0.04 | ) | $ | 0.03 | |||
Diluted | $ | (0.04 | ) | $ | 0.03 | |||
Weighted average common shares outstanding - | ||||||||
Basic | 31,123,357 | 32,332,963 | ||||||
Diluted | 31,123,357 | 32,592,125 |
See accompanying notes to the condensed consolidated financial statements.
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TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid In | Accumulated | Treasury | Comprehensive | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | Income | Equity | ||||||||||||||||||||||
Balance, December 31, 2009 | 31,123,357 | $ | 2,678,000 | $ | 89,955,000 | $ | (66,902,000 | ) | $ | (4,610,000 | ) | $ | 7,000 | $ | 21,128,000 | |||||||||||||
Fair value of options issued to employees and directors | 237,000 | 237,000 | ||||||||||||||||||||||||||
Foreign currency translation adjustment | 16,000 | 16,000 | ||||||||||||||||||||||||||
Net loss | (1,254,000) | (1,254,000) | ||||||||||||||||||||||||||
Balance, June 30, 2010 | 31,123,357 | $ | 2,678,000 | $ | 90,192,000 | $ | (68,156,000 | ) | $ | (4,610,000 | ) | $ | 23,000 | $ | 20,127,000 |
See accompanying notes to the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (1,254,000) | $ | 954,000 | ||||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | ||||||||
Depreciation | 291,000 | 264,000 | ||||||
Amortization of intangible assets | 995,000 | 983,000 | ||||||
Fair value of common stock issued for services to employees | - | 8,000 | ||||||
Fair value of common stock issued for services to consultants | - | 50,000 | ||||||
Fair value of options issued to employees and directors | 237,000 | 685,000 | ||||||
Fair value of warrants issued to consultants | - | 108,000 | ||||||
Loss on advance to vendors | 991,000 | - | ||||||
Change in allowance of inventory | 2,000 | (2,000 | ) | |||||
(Increase) decrease in: | ||||||||
Accounts receivable | 1,488,000 | 66,000 | ||||||
Advances to vendors | (27,000 | ) | - | |||||
Advances to non consolidated affiliates | 37,000 | - | ||||||
Inventory | 249,000 | 1,073,000 | ||||||
Prepaid expenses and other current assets | (136,000 | ) | 243,000 | |||||
Capitalized theatrical costs, deposits and other assets | 24,000 | (456,000 | ) | |||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued expenses | (2,850,000 | ) | 324,000 | |||||
Income taxes payable | - | 106,000 | ||||||
Deferred revenue | 385,000 | (20,000 | ) | |||||
Deferred rent | 52,000 | (33,000 | ) | |||||
Net cash provided by operating activities | 484,000 | 4,353,000 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (394,000 | ) | (98,000 | ) | ||||
Purchase of All Access Entertainment | (1,500,000 | ) | - | |||||
Net cash used in investing activities | (1,894,000 | ) | (98,000 | ) | ||||
Cash flows from financing activities: | ||||||||
Cost of treasury stock | - | (443,000 | ) | |||||
Payments on capital lease obligations | (38,000 | ) | (28,000 | ) | ||||
Net proceeds from exercise of options and warrants | - | (46,000) | ||||||
Net cash used in financing activities | (38,000 | ) | (517,000 | ) | ||||
Effect of exchange rate changes on cash | 16,000 | 14,000 | ||||||
Change in Cash: | ||||||||
Net increase (decrease) | (1,432,000 | ) | 3,752,000 | |||||
Balance at beginning of period | 9,885,000 | 9,192,000 | ||||||
Balance at end of period | $ | 8,453,000 | $ | 12,944,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Income taxes | $ | 111,000 | $ | - | ||||
Interest | $ | 4,000 | $ | 7,000 | ||||
Non-cash operating activities | ||||||||
At December 31, 2009, the Company accrued $474,000 for future losses, wind down costs and reserves against the remaining investments related to “101 Dalmatians the Musical” (See Note 3). During the six months ended June 30, 2010, the actual costs incurred approximated $200,000 which amount was offset against the original accrual of $474,000. The remaining balance of $274,000 is offset against the “Investment in and advances to nonconsolidated affiliates” on the June 30, 2010 condensed consolidated balance sheets | $ | 274,000 | $ | - | ||||
Non-cash investing activities | ||||||||
Issuance of secured convertible note payable related to the acquisition of All Access Entertainment | $ | 1,000,000 | $ | - | ||||
Issuance of 190,476 earn-out shares of common stock in conjunction with the acquisition of Magic Arts & Entertainment - Florida, Inc. in 2009 | $ | - | $ | 256,000 |
See accompanying notes to the condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
Note 1 - Nature of Business
Tix Corporation (the “Company”) was incorporated in Delaware in April 1993. The Company is a diversified integrated entertainment company providing ticketing services, event merchandising, and the production and promotion of live entertainment. It operates three complementary business segments: Ticketing Services provides discount and premium ticket sales; Exhibit Merchandising provides event and branded merchandising; and Live Entertainment provides the production and promotion of live entertainment.
Preparation of Interim Financial Statements:
The consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to present fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that its disclosures are sufficiently presented to prevent this information from being misleading. Due to seasonality and other factors, the results for the interim periods are not necessarily indicative of results for a full year. The financial statements contained herein should be read in conjunction with the consolidated and combined financial statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K and interim financial statements and information reported on Forms 8-K and 10-Q.
Accounting 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.
Consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.
Note 2 - Summary of Significant Accounting Policies
Revenue Recognition, Presentation and Concentrations:
The Company has several streams of income, each of which is required under Generally Accepted Accounting Principles (GAAP) to be recognized in varying ways. The following is a summary of our revenue recognition policies.
The Company’s Las Vegas discount show ticketing business recognizes as revenue the commissions and related transaction fees earned from the sale of Las Vegas show tickets at the time the tickets are paid for and delivered to the customers. The Company’s commissions are calculated based on the face value of the show tickets sold. The Company’s transaction fees are charged on a per-ticket basis. With certain exceptions, ticket sales are generally non-refundable, although same-day exchanges of previously sold tickets are permitted. Claims for ticket refunds, which are generally received and paid the day after the show date, are charged back to the respective shows and are recorded as a reduction to the Company’s commissions and fees at the time that such refunds are processed. The Company does not have accounts receivable associated with its sales transactions, as payment is collected at the time of sale.
Tix4Dinner offers reservations for discounted dinners at various restaurants on and surrounding the Las Vegas strip and downtown, with dining at specific times on the same day or in some cases as much as seven days after the day of the sale. Tix4Dinner recognizes as revenue the transaction fees earned from the purchaser of the dinner reservations at the time the reservations are made and a subsequent nominal fee from the restaurant at the time the reservation is used. At this time, the Company has immaterial amounts of accounts receivable and does not have any accounts payable associated with the Tix4Dinner operations, as the Company collects the transaction fee at the time the reservation is made, and the dinner payment is collected directly from the restaurant.
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Tix4AnyEvent (AnyEvent) recognizes as revenue the gross amount of ticket sales from the sale of its ticket inventory. AnyEvent bears the risk of economic loss if the tickets are not sold by the date the event is scheduled to occur. Revenue is considered earned when the related event has occurred. Refunds are only issued if the event is canceled or postponed. Payments for such ticket sales received prior to the event are recorded as deferred revenue. AnyEvent does not have any accounts receivable associated with sales transactions to retail customers because payment is collected at the time of sale. However, sales transactions to other ticket brokers may be conducted on a credit basis, which would generate accounts receivable.
Exhibit Merchandising recognizes retail store sales at the time the customer takes possession of the merchandise. Sales are recorded net of discounts and returns and exclude sales tax. Discounts are estimated based upon historical experience. For online sales, revenue is recognized free on board (“FOB”) origin where title and risk of loss pass to the buyer when the merchandise leaves the Company's distribution facility at the time of shipment, which we refer to as the date of purchase by the customer. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. Shipping and handling revenues from sales are included as a component of net sales. Conversely, shipping and handling costs are a component of direct cost of revenues. The Company does not have any accounts receivable associated with this business as transactions are done by cash or credit card.
The Company generates revenue from its live entertainment business. Revenue from the presentation and production of an event is recognized after the performance occurs. Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue collected from sponsorship and other revenue, which is not related to any single event, is classified as deferred revenue and generally amortized over the tour’s season or the term of the contract. We account for taxes that are externally imposed on revenue producing transactions on a net basis, as a reduction to revenue.
Tix Productions Inc.’s operating units, Magic Arts & Entertainment and NewSpace Entertainment, act as both presenters and promoters of productions, as well as agents. Tix Productions Inc.’s revenues from live entertainment where it is acting as the producer or promoter are a function of a number of elements; revenue is a direct reflection of tickets sold times ticket prices plus ancillary revenue streams including sponsorships and revenues generated through premium ticketing opportunities. In instances where the Company acts as the presenter or promoter, it:
· | selects the suppliers or approves the selection of the supplier, |
· | is the primary obligor with suppliers, |
· | assumes credit risk, |
· | directs the pricing of the tickets, and |
· | purchases the advertising. |
The above are indicators of ownership and would be evidence that revenues and related expenses should be recorded at gross. As the Company is acting as the principal in the transaction, i.e., it has the risks and rewards of ownership and has recorded the related revenues and expenses at gross. In other instances where we only receive a fee and are not the principal obligors to vendors, we record these revenues at net.
Stock-Based Compensation:
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB). The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.
Intangible Assets and Goodwill:
The Company accounts for intangible assets and goodwill in accordance with the authoritative guidance issued by the FASB. Intangibles are valued at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
Impairment of Long-Lived Assets:
Authoritative guidance issued by the FASB established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized, and how impairment losses should be measured. Authoritative guidance from the FASB also provided a single accounting model for long-lived assets to be disposed of and significantly changed the criteria that would have to be met to classify an asset as held-for-sale.
10
Management regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, then management prepares an estimate of the future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Management believes that the accounting estimate related to impairment of its property and equipment is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on the Company’s balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so. There were no indications of impairment based on management’s assessment at June 30, 2010. As of June 30, 2010, we have $11.8 million of remaining goodwill and intangible assets related to our acquisitions of Exhibit Merchandising LLC, Magic Arts and Entertainment, NewSpace Entertainment, and All Access. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased revenues and increased costs, we may have further goodwill impairments.
Income Taxes:
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax basis of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies, in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determines that the deferred tax assets which were written down would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.
The Company prescribes a recognition threshold and a measurement attributable for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likelihood of being realized.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash, accounts and other receivables, accounts payable and accrued liabilities, and short-term loans approximate fair value because of their short maturity. The carrying amounts of capital lease obligations approximate fair value because the related effective interest rates on these instruments approximate the rates currently available to the Company.
The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
· | Level 1 – quoted prices in active markets for identical investments |
· | Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.) |
· | Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments) |
As of June 30, 2010 and December 31, 2009, respectively, the Company’s financial assets subject to measurement included Level 1 items of cash and short term investments. The fair value of these financial assets was equal to their recorded value. There were no unrealized gains or losses included in earnings resulting from long-term investments associated with Level 2 or 3 financial assets during the six month period ended June 30, 2010.
Cash Concentrations:
The Company's cash balances on deposit with banks in accounts in the United States (US) are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation (the “FDIC”). The Company may periodically be exposed to risk for the amount of funds held in one bank in excess of the insurance limit. In order to control the risk, the Company's policy is to maintain cash balances with high quality financial institutions. At June 30, 2010, the Company’s aggregate cash in excess of the FDIC insured amount was $7.0 million. In addition, the Company had aggregate cash balances in Canada of $31,000, which is below the Canadian equivalent of the US FDIC guarantee.
11
Foreign Currency:
Results of foreign operations are translated into U.S. dollars using the average exchange rates during the year. The assets and liabilities of those operations are translated into U.S. dollars using the exchange rates at the balance sheet date. The realized and unrealized exchange losses and gains were minor in the six months ending June 30, 2010. The related translation adjustments are recorded in a separate component of stockholders’ equity in accumulated other comprehensive income. Foreign currency transaction gains and losses are included in the results of operations.
Advertising Costs:
Advertising costs are charged to operations as selling and marketing expenses at the time the costs are incurred. For the three and six months ended June 30, 2010 and 2009, advertising costs were $376,000, $581,000, $776,000 and $1.2 million, respectively.
Recently Issued Accounting Guidance:
In April 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This standard is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require the Company to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As the Company plans to implement this standard prospectively, the effect of this guidance will be limited to future transactions. The Company does not expect adoption of this standard to have a material impact on its financial position or results of operations as it has no material research and development arrangements which will be accounted for under the milestone method.
In January 2010, the FASB issued new accounting guidance which requires new disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring presentation on a gross basis of information about purchases, sales, issuances and settlements in Level 3 fair value measurements. The guidance also clarifies existing disclosures regarding level of disaggregation, inputs and valuation techniques. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010. As this guidance requires only additional disclosure, there should be no impact on the consolidated financial statements of the Company upon adoption.
In October 2009, a new accounting consensus was issued for multiple-deliverable revenue arrangements. This consensus amends existing revenue recognition accounting standards. This consensus provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously the existing accounting consensus required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under the existing accounting consensus, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is in the process of evaluating whether the adoption of this standard will have a material effect on its financial position, results of operations or cash flows.
In June 2009, the FASB issued authoritative guidance on consolidation of variable interest entities. The new guidance is intended to improve financial reporting by requiring additional disclosures about a company’s involvement in variable interest entities. This new guidance is effective for fiscal years and interim periods beginning after November 15, 2009. The Company adopted this guidance effective January 3, 2010, and it had no impact on the consolidated financial statements of the Company.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
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Note 3 - Investments
The Company in 2008 acquired the rights from the estate of Dodie Smith to develop, promote and tour the production “101 Dalmatians the Musical,” for $400,000. These rights were estimated to have a seven year life, and as of June 30, 2010 had a remaining unamortized balance of $271,000. As part of an amendment to the original rights with the estate of Dodie Smith, future rights to the show “101 Dalmatians the Musical” would vest for a twenty-four year period once the show was performed sixteen times in New York. Separately, the Company invested $2.2 million, resulting in a 40% interest in the limited liability company that was formed to produce, promote and tour “101 Dalmatians the Musical.” In addition, the Company advanced $820,000 to the limited liability company during the development period of the show, of which $730,000 remains outstanding at June 30, 2010. The advance is expected to be repaid from the projected future licensing revenues of the show over a four year or five year period.
The touring event associated with the affiliate ended in April 2010, which included a sixteen performance run in New York. During 2009, the Company’s share of losses from the tour including advertising costs that were expensed when incurred or first performed was $1.3 million. In addition, the Company had recorded a $1.3 million charge to write off its investment and the estimated expenses related to its proportionate share of losses that were expected to be incurred in 2010 to secure the future rights to the show. At December 31, 2009, the Company accrued $474,000 for future losses, wind down costs and reserves against the remaining investments related to this production. During the six months ended June 30, 2010, the actual costs incurred approximated $200,000 which amount was offset against the original accrual of $474,000. The remaining balance of $274,000 is offset against the “Investment in and advances to nonconsolidated affiliates” on the June 30, 2010 condensed consolidated balance sheets.
The rights to the show have now been extended to 24 years as the Company met its commitment for the sixteen performances run in New York. The remaining balance of the note receivable and the show rights totaling $713,000 related to the show are recoverable from future show rights. The Company expects future recoveries from royalties will exceed the note and intangible values.
Note 4 - Acquisitions
All Access Entertainment, LLC:
On February 10, 2010, the Company entered into an Asset Purchase Agreement with All Access Entertainment, LLC (All Access) with an effective date of March 1, 2010. Pursuant to the Asset Purchase Agreement, the Company paid the owner of All Access $1.5 million in cash and issued a six month secured convertible promissory note in the principal amount of $1.0 million at no interest due on August 10, 2010. The secured convertible promissory note is secured by the assets purchased. The secured convertible promissory note is convertible at the option of the owner or the Company into the aggregate number of shares of the Company’s common stock equal to the quotient determined by dividing $1.0 million by the daily average closing sale price of the Company’s common stock as reported on the NASDAQ Capital Market for the thirty (30) day period prior to conversion but in no event less than $3.00 per share.
The Company additionally entered into a two-year Consulting Agreement with the former owner of All Access. The Consulting Agreement requires the former owner of All Access to maintain former business relationships of All Access and to pursue additional strategic alliances on behalf of the Company. The Consulting Agreement provides an annual compensation of $200,000.
The assets of All Access Entertainment consisted primarily of a small amount of property and equipment and operating lease agreements. The All Access business was immediately absorbed and integrated into our existing Las Vegas discount ticketing business. The acquisition of All Access has been accounted for as a purchase in accordance with authoritative guidance issued by the FASB and the operations of the company have been consolidated commencing with the closing of the transaction. The $2.5 million purchase price was allocated and based upon the fair value of the acquired assets, as determined by management with the assistance of an independent valuation firm.
Allocation of the Purchase Price of All Access:
Tangible assets, net of liabilities assumed: | $ | 150,000 | ||
Intangible assets: | ||||
Contract commitments | 922,000 | |||
Employment Agreements | 219,000 | |||
Goodwill | 1,209,000 | |||
Purchase price | $ | 2,500,000 |
No pro forma results of operations of All Access combined with the operations of the Company as of the beginning of the periods presented are being provided as the results were not significant.
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Note 5 - Property and Equipment
The table below displays our property and equipment balances as of June 30, 2010 and December 31, 2009.
June 30, 2010 | December 31, 2009 | |||||||
Office equipment and furniture | $ | 2,754,000 | $ | 2,191,000 | ||||
Equipment under capital lease | 386,000 | 408,000 | ||||||
Leasehold improvements | 395,000 | 394,000 | ||||||
Property and equipment | 3,535,000 | 2,993,000 | ||||||
Less accumulated depreciation | (1,977,000 | ) | (1,685,000 | ) | ||||
Total property and equipment, net | $ | 1,558,000 | $ | 1,308,000 |
Depreciation expense was $154,000, $291,000, $133,000 and $264,000 for the three and six months ended June 30, 2010 and 2009, respectively.
Note 6 - Intangible Assets
The following tables summarize the original cost, the related accumulated amortization, impairment adjustment, and the net carrying amounts for the Company’s intangible assets at June 30, 2010 in total and by segment.
Estimated | Net Carrying | Net Carrying | ||||||||||||||||
Useful | Amount At | Addition/ | Amortization | Amount At | ||||||||||||||
Lives | 12/31/2009 | Adjustment | Expense | 6/30/2010 | ||||||||||||||
Marketing Based | 3-6 years | $ | 1,969,000 | $ | $ | (233,000 | ) | $ | 1,736,000 | |||||||||
Contract commitments | 3-7 years | 2,375,000 | 1,141,000 | (673,000 | ) | 2,843,000 | ||||||||||||
Customer relationships | 3 years | 38,000 | (38,000 | ) | - | |||||||||||||
Technology Based | 3 years | 11,000 | (8,000 | ) | 3,000 | |||||||||||||
Intellectual property (e.g. domain names) | 5 years | 106,000 | (13,000 | ) | 93,000 | |||||||||||||
Goodwill | indefinite | 5,895,000 | 1,209,000 | 7,104,000 | ||||||||||||||
Total | $ | 10,394,000 | $ | 2,350,000 | $ | (965,000 | ) | $ | 11,779,000 |
Ticketing Services
Net Carrying | Net Carrying | |||||||||||||||
Amount At | Addition/ | Amortization | Amount At | |||||||||||||
12/31/2009 | Adjustment | Expense | 6/30/2010 | |||||||||||||
Marketing based | $ | 5,000 | $ | - | $ | (5,000 | ) | $ | - | |||||||
Contract commitments | 75,000 | 1,141,000 | (94,000 | ) | 1,122,000 | |||||||||||
Customer relationships | 38,000 | (38,000 | ) | - | ||||||||||||
Technology based | 7,000 | (7,000 | ) | - | ||||||||||||
Intellectual property (e.g. domain names) | 106,000 | (13,000 | ) | 93,000 | ||||||||||||
Goodwill | - | 1,209,000 | 1,209,000 | |||||||||||||
Total | $ | 231,000 | $ | 2,350,000 | $ | (157,000 | ) | $ | 2,424,000 |
Merchandising
Net Carrying | Net Carrying | |||||||||||||||
Amount At | Addition/ | Amortization | Amount At | |||||||||||||
12/31/2009 | Adjustment | Expense | 6/30/2010 | |||||||||||||
Marketing based | $ | 1,964,000 | $ | - | $ | (274,000 | ) | $ | 1,690,000 | |||||||
Contract commitments | 216,000 | - | (186,000 | ) | �� | 30,000 | ||||||||||
Goodwill | 1,670,000 | - | 1,670,000 | |||||||||||||
Total | $ | 3,850,000 | $ | - | $ | (460,000 | ) | $ | 3,390,000 |
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Live Entertainment
Net Carrying | Net Carrying | |||||||||||||||
Amount At | Addition/ | Amortization | Amount At | |||||||||||||
12/31/2009 | Adjustment | Expense | 6/30/2010 | |||||||||||||
Contract commitments | $ | 2,084,000 | $ | - | $ | (346,000 | ) | $ | 1,738,000 | |||||||
Technology based | 4,000 | - | (2,000 | ) | 2,000 | |||||||||||
Goodwill | 4,225,000 | - | 4,225,000 | |||||||||||||
Total | $ | 6,313,000 | $ | - | $ | (348,000 | ) | $ | 5,965,000 |
Total amortization expense related to intangible assets for the three and six months ended June 30, 2010 and 2009 was $511,000, $965,000, $493,000 and $981,000, respectively. Additional amortization expense related to “Investment in and advances to nonconsolidated affiliates” as described in Note 3 was $30,000 for the six months ended June 30, 2010. No similar expense existed in the prior year.
Note 7- Related Party Transactions
During 2010 and 2009, Benjamin Frankel, a director of the Company, was a principal in Frankel, LoPresti & Co., an accountancy corporation that provides tax advisory and preparation services to the Company. For the three and six months ended June 30, 2010 and 2009, we paid Mr. Frankel or his firm $36,000, $12,000, $65,000 and $20,000, respectively, for tax preparation and advisory services.
Mr. Joseph Marsh, a greater than 10% shareholder of the Company, was a principal in Magic Arts and Entertainment - Florida, Inc., a company the Company acquired on January 2, 2008.
Note 8- Stock-Based Compensation Plans
Summary of Stock Options:
The Company has various stock-based compensation plans. The intrinsic value of outstanding stock options at June 30, 2010 was $0, as compared to $296,000 at June 30, 2009. A summary of the combined stock options for the six months ended June 30, 2010 is as follows:
Weighted | ||||||||
Number | average | |||||||
of | exercise | |||||||
options | price | |||||||
Balance outstanding, December 31, 2009 | 1,251,000 | $ | 5.24 | |||||
Options granted | - | - | ||||||
Options exercised | - | - | ||||||
Options expired or forfeited | (441,000 | ) | 7.00 | |||||
Balance outstanding, June 30, 2010 | 810,000 | $ | 4.78 | |||||
Balance exercisable, June 30, 2010 | 489,000 | $ | 5.34 |
Outstanding | Exercisable | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
Life | Average | Average | ||||||||||||||||||
Exercise Price Per Share | Shares | (Years) | Exercise Price | Shares | Exercise Price | |||||||||||||||
$6.00 - $7.20 | 465,000 | 5.66 | $ | 7.02 | 319,000 | $ | 7.03 | |||||||||||||
$4.00 - $5.99 | 20,000 | 1.71 | 4.30 | 20,000 | 4.30 | |||||||||||||||
$2.00 - $3.99 | 50,000 | 3.00 | 3.20 | 50,000 | 3.20 | |||||||||||||||
$0.22 - $1.99 | 275,000 | 7.00 | 1.30 | 100,000 | 1.25 | |||||||||||||||
810,000 | 5.85 | $ | 4.58 | 489,000 | $ | 5.34 |
15
The Company recorded compensation expense pursuant to authoritative guidance provided by the Financial Accounting Standards Board for the six months ended June 30, 2010 and 2009 of $237,000 and $685,000, respectively. During the six months ended June 30, 2010, the Company adjusted its estimate of forfeitures of unvested options and revised stock based compensation cost by $167,000, related to previously recorded stock based compensation expense. As of June 30, 2010, the Company has outstanding unvested options with future compensation costs of $205,000, which will be recorded as compensation expense as the options vest over their remaining average life of two years.
A summary of warrant activity for the six months ended June 30, 2010 is as follows:
Weighted | ||||||||
Number | average | |||||||
of | exercise | |||||||
warrants | price | |||||||
Balance outstanding, December 31, 2009 | 950,000 | $ | 3.70 | |||||
Warrants granted | - | - | ||||||
Warrants exercised | - | - | ||||||
Warrants expired | (500,000) | 5.35 | ||||||
Balance outstanding, June 30, 2010 | 450,000 | $ | 1.88 |
The intrinsic value of outstanding warrants was $92,000 and $491,000 at June 30, 2010 and 2009, respectively. Information relating to outstanding warrants at June 30, 2010, summarized by exercise price, is as follows:
Outstanding | Exercisable | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
Life | Average | Average | ||||||||||||||||||
Exercise Price Per Share | Shares | (Years) | Exercise Price | Shares | Exercise Price | |||||||||||||||
$2.00 - $5.50 | 150,000 | 1.17 | $ | 4.00 | 150,000 | $ | 4.00 | |||||||||||||
$0.36 - $1.99 | 300,000 | 1.62 | 0.82 | 300,000 | 0.82 | |||||||||||||||
450,000 | 1.47 | $ | 1.88 | 450,000 | $ | 1.88 |
Note 9- Income Taxes
At June 30, 2010, the Company had Federal net operating loss carryforwards (“NOL”) of approximately $19.9 million that begin expiring in 2009 in varying amounts through 2027. The Company also had California State net operating loss carryforwards of approximately $1.6 million. In September, 2008 California temporarily suspended use of net operating losses for 2008 and 2009, and the California state net operating losses expire beginning in 2012 in varying amounts through 2029.
Authoritative guidance issued by the Financial Accounting Standards Board requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Due to the restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL is limited to $6.7 million per year as a result of cumulative changes in stock ownership. As a result of the limitations related to Internal Revenue Code Section 382 and the Company’s lack of history of profits, as such, the Company recorded a 100% valuation allowance against its net deferred tax assets as of June 30, 2010 and December 31, 2009.
The provision for income taxes was $111,000 and 106,000 for the three and six months ended June 30, 2010 and 2009, respectively. The provision for income taxes for the three and six months ended June 30, 2010 and 2009 was determined using our effective rate estimated for the entire fiscal year.
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During 2010, we have utilized certain NOL’s. We have provided valuation allowances related to the benefits from income taxes resulting from the application of a statutory tax rate to our NOL’s generated in previous periods. The allowances were established and maintained as a result of our history of losses from operations.
Note 10- Earnings Per Share
Basic net income per common share is computed by dividing the net income applicable to common shares by weighted average number of common shares outstanding during the period. Diluted net income per common share adjusts basic net income per common share for the effects of stock options, restricted stock and other potentially dilutive financial instruments only in the periods in which such effect is dilutive.
The following table sets forth the computation of basic and diluted income per common share:
Six months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Net income (loss) | $ | (1,254,000 | ) | $ | 954,000 | |||
Weighted average common shares- basic | 31,123,357 | 32,332,963 | ||||||
Dilutive effect of employee incentive plans | - | 139,055 | ||||||
Dilutive effect of warrants issued | - | 120,107 | ||||||
Weighted average shares- diluted | 31,123,357 | 32,592,125 | ||||||
Net income per common share: | ||||||||
Basic | $ | (0.04 | ) | $ | 0.03 | |||
Diluted | $ | (0.04 | ) | $ | 0.03 |
As the Company had a loss in the six months ended June 30, 2010, basic and diluted loss per share are the same. Potentially dilutive securities were excluded from the earnings per diluted share calculation for the six months ended June 30, 2010 because their effect is anti-dilutive. These potentially dilutive securities at June 30, 2010 included outstanding warrants and options to purchase 1.3 million shares of our common stock, of which 450,000 were warrants to purchase shares of our common stock and 810,000 were options to purchase shares of our common stock.
As part of the acquisition of All Access discussed in Note 4, a secured convertible promissory note is convertible in August 2010, at the option of the owner or the Company, into the aggregate number of shares of the Company’s common stock equal to the quotient determined by dividing $1.0 million by the daily average closing sale price of the Company’s common stock as reported on the NASDAQ Capital Market for the thirty (30) day period prior to conversion but in no event less than $3.00 per share or 333,333 common shares.
Note 11- Segment Reporting
We operate in three reportable segments: Ticketing Services, Exhibit Merchandising, and Live Entertainment.
Ticketing Services:
Our ticketing business is operated by our wholly owned subsidiary Tix4Tonight. Ticketing Services offers two distinct services: discount ticketing and premium event ticketing.
Discount Ticketing – Tix4Tonight, Las Vegas
When selling discounted tickets, Tix4Tonight generally sells them from eleven locations in Las Vegas under short-term, exclusive and non-exclusive agreements with approximately 85 Las Vegas shows and attractions out of a total of approximately 110 shows and attractions running at any one time. Tix4Tonight typically does not know the exact shows it will be able to offer tickets for until the same day of the show. There are usually many more tickets available each day than are sold, although it is not uncommon for Tix4Tonight to sell out its supply of tickets for individual shows. The producers of the shows are paid on a weekly basis only for the tickets that Tix4Tonight actually sells to customers. Tix4Tonight has no financial risk with respect to unsold tickets and revenues are recorded at net of ticket cost, that is, commissions and fees on tickets sold.
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Our opportunities to grow the Las Vegas operations are focused on growing our inventory by reaching agreements with additional shows, increasing the number of our storefront sales locations and working to further monetize the relationships we have with customers by offering additional complementary products and services. Toward these ends, Tix4Tonight also offers discounted dining reservation tickets to approximately 30 Las Vegas area restaurants. Further, in March 2010, Tix4Tonight acquired certain assets and assumed the responsibility of certain leases of All Access Entertainment, LLC (All Access) see Note 4. All Access was a competitor of Tix4Tonight in the Las Vegas last minute discount ticket market and operated five locations with the main location located in Circus-Circus. The acquisition of these assets and the assumption of the leases provide us with greater coverage of the Las Vegas area in which to sell our discount tickets.
Premium Ticketing – Tix4AnyEvent
Tix4Tonight operates a national event ticket broker called Tix4AnyEvent (AnyEvent), which focuses on premium tickets for sporting events, concert tours and theatres. Tix4AnyEvent operations are located in our leased offices in Las Vegas, Nevada.
Exhibit Merchandising:
The segment provides exhibit and event merchandising through its wholly-owned subsidiary, Exhibit Merchandising, LLC (EM). EM provides retail specialty stores for touring museum exhibitions and touring theatrical productions. EM provides a complete turn-key retail store including professional management and both custom-branded products and commercially-available products for sale. EM operates the stores in space provided in conjunction with the exhibit. To date, revenues from the management of retail outlets associated with the sale of merchandise related to touring exhibits have been primarily derived from “Tutankhamun and The Golden Age of the Pharaohs.”
Management expects that EM’s growth will be from merchandising opportunities derived from shows produced or presented by our Live Entertainment segment, such as Jesus Christ Superstar and Mannheim Steamroller Christmas, or by adding additional exhibits and events that we currently do not represent.
Live Entertainment:
In January 2008, the Company acquired two live theatrical and concert production companies: Magic Arts & Entertainment, LLC (Magic) and NewSpace Entertainment, Inc. (NewSpace). Both Magic and NewSpace are independent presenters and producers of live theater and concerts with a history of working together. The Company merged the two entertainment companies into its wholly-owned subsidiary Tix Productions, Inc. We believe that by combining the operations of the two companies into a single entity, we are able to leverage our resources, gain operating efficiencies and more fully utilize the combined network of producers and promoters. NewSpace and Magic continue to do business under their former names as a reflection of the marketplace’s recognition of these entities.
As a live entertainment presenter, we book touring theatrical and concert presentations with a history of successful commercial appeal and participate in the development and roll out of new theatrical and concert presentations often originating on Broadway in New York or the West End in London. We use a wide variety of marketing channels to sell tickets to these programs including our substantial subscriber-based businesses in eleven US cities, our Salt Lake City based group sales team, and standard marketing tools including print, radio, television, outdoor and internet marketing tools. In addition, we invest in shows or productions in advance of their initial tour to obtain favorable touring and distribution rights.
Our Live Entertainment segment focuses on two major areas: production and presentation. As producers, we invest in the creation of original entertainment properties, which are then sold to third party presenters generating upfront guaranteed income, revenue sharing opportunities, and additional opportunities for sponsorship and other ancillary revenue streams. Examples of this are tours of Mannheim Steamroller Christmas and Jesus Christ Superstar.
As presenters, we generally contract for entertainment properties from producers to present in markets in the US and Canada. We have worked in most major North American cities and can negotiate terms that are unavailable to presenters in individual markets. In eleven markets, we have substantial subscriber-based operations operating as “Broadway in (city name)” series which greatly reduces the risk associated with individual presentations and provides additional opportunities to generate sponsorship and other ancillary revenue streams. These markets are Salt Lake City, Eugene, Kalamazoo, Akron, Albuquerque, Colorado Springs, Detroit, Fresno, Boise, Birmingham, and Milwaukee. In Canada, we have a presenting relationship that operates under the name Canada Theatricals Live which is now the second largest presenter of theater-based events in Canada.
Revenue and expenses earned and charged between segments are eliminated in consolidation. Corporate expenses, interest income, interest expense and income taxes are managed on a total company basis. Information related to these operating segments is as follows:
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Consolidating Statement of Operations (Unaudited)
Six months ended June 30,
Ticketing | Exhibit | Live | ||||||||||||||||||
Services | Merchandising | Entertainment | Corporate | Consolidated | ||||||||||||||||
2010 | ||||||||||||||||||||
Revenue | $ | 9,841,000 | $ | 4,368,000 | $ | 17,347,000 | $ | $ | 31,556,000 | |||||||||||
Direct cost of revenues | 4,182,000 | 2,580,000 | 15,328,000 | 22,090,000 | ||||||||||||||||
Selling, general and administrative expenses | 3,692,000 | 1,368,000 | 2,025,000 | 2,337,000 | 9,422,000 | |||||||||||||||
Depreciation and amortization | 296,000 | 577,000 | 397,000 | 16,000 | 1,286,000 | |||||||||||||||
Operating income (loss) | $ | 1,671,000 | $ | (157,000 | ) | $ | (403,000 | ) | $ | (2,353,000 | ) | $ | (1,242,000 | ) | ||||||
Current assets | $ | 3,552,000 | $ | 2,635,000 | $ | 2,425,000 | $ | 3,671,000 | $ | 12,283,000 | ||||||||||
Fixed assets | 935,000 | 424,000 | 64,000 | 135,000 | 1,558,000 | |||||||||||||||
Intangible assets and goodwill | 2,425,000 | 3,391,000 | 5,963,000 | - | 11,779,000 | |||||||||||||||
Other non-current assets | 174,000 | 28,000 | 997,000 | 19,000 | 1,218,000 | |||||||||||||||
Total assets | $ | 7,086,000 | $ | 6,478,000 | $ | 9,449,000 | $ | 3,825,000 | $ | 26,838,000 | ||||||||||
2009 | ||||||||||||||||||||
Revenue | $ | 8,825,000 | 5,110,000 | 32,819,000 | 46,754,000 | |||||||||||||||
Direct cost of revenues | 3,263,000 | 3,103,000 | 29,971,000 | 36,336,000 | ||||||||||||||||
Selling, general and administrative expenses | 1,775,000 | 1,267,000 | 2,334,000 | 2,904,000 | 8,280,000 | |||||||||||||||
Depreciation and amortization | 119,000 | 593,000 | 395,000 | 140,000 | 1,247,000 | |||||||||||||||
Operating income (loss) | $ | 3,668,000 | 147,000 | 120,000 | (3,044,000 | ) | 891,000 | |||||||||||||
Current assets | $ | 3,086,000 | 5,439,000 | 3,407,000 | 4,922,000 | 16,854,000 | ||||||||||||||
Fixed assets | 512,000 | 582,000 | 97,000 | 76,000 | 1,267,000 | |||||||||||||||
Intangible assets and goodwill | 119,000 | 4,310,000 | 6,976,000 | 258,000 | 11,663,000 | |||||||||||||||
Other non-current assets | 191,000 | 13,000 | 789,000 | 6,000 | 999,000 | |||||||||||||||
Total assets | $ | 3,908,000 | 10,344,000 | 11,269,000 | 5,262,000 | 30,783,000 |
Consolidating Statement of Operations (unaudited)
Three months ended June 30,
Ticketing | Exhibit | Live | ||||||||||||||||||
Services | Merchandising | Entertainment | Corporate | Consolidated | ||||||||||||||||
2010 | ||||||||||||||||||||
Revenue | $ | 5,098,000 | $ | 1,823,000 | $ | 7,885,000 | $ | $ | 14,806,000 | |||||||||||
Direct cost of revenues | 2,202,000 | 1,133,000 | 6,926,000 | 10,261,000 | ||||||||||||||||
Selling, general and administrative expenses | 2,332,000 | 731,000 | 973,000 | 1,151,000 | 5,187,000 | |||||||||||||||
Depreciation and amortization | 173,000 | 285,000 | 198,000 | 9,000 | 665,000 | |||||||||||||||
Operating income (loss) | $ | 391,000 | $ | (326,000 | ) | $ | (212,000 | ) | $ | (1,160,000 | ) | $ | (1,307,000 | ) | ||||||
2009 | ||||||||||||||||||||
Revenue | $ | 4,670,000 | $ | 2,321,000 | $ | 19,593,000 | $ | $ | 26,584,000 | |||||||||||
Direct cost of revenues | 1,729,000 | 1,398,000 | 18,283,000 | 21,410,000 | ||||||||||||||||
Selling, general and administrative expenses | 904,000 | 642,000 | 1,140,000 | 1,232,000 | 3,918,000 | |||||||||||||||
Depreciation and amortization | 61,000 | 297,000 | 198,000 | 70,000 | 626,000 | |||||||||||||||
Operating income (loss) | $ | 1,976,000 | $ | (16,000 | ) | $ | (28,000 | ) | $ | (1,302,000 | ) | $ | 630,000 |
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Note 12- Commitment and Contingencies
As of June 30, 2010, the end of the period covered by this report, the Company was subject to various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Other than as discussed below, in the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. The Company intends to contest each lawsuit vigorously but should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. Management continues to evaluate the lawsuits discussed below and based on the stage of these proceedings, management is unable to reasonably estimate the likelihood of any loss or the amount or range of any potential loss that could result from the litigation. Therefore, no accrual has been established for any potential loss in connection with these lawsuits.
Vegas.Com Trademark Litigation
On October 23, 2009, the Company and Tix4Tonight filed a complaint against Vegas.com ("Vegas.com") and Vegas Tix4Less (“VT4L”) in the United States District Court for the Central District of California for federal trademark infringement, federal trade dress infringement and unfair competition, and common law unfair competition. Specifically, the complaint alleges that Vegas.com and VT4L are intentionally confusing consumers by using the Company's and Tix4Tonight's trademarks and trade dress. The complaint seeks damages, an injunction, declaratory relief, and attorneys' fees and costs. On December 4, 2009, Vegas.com and VT4L filed a Motion to Dismiss and/or Transfer the Litigation to Nevada, arguing that the court lacked personal jurisdiction over the defendants and that venue was either improper or inconvenient. The Company and Tix4Tonight filed its Opposition on January 29, 2010, and on March 1, 2010 Vegas.com and VT4L filed their Reply. To stop Vegas.com and VT4L's infringement during the pendency of the litigation, the Company and Tix4Tonight filed a Motion for Preliminary Injunction on February 22, 2010. Vegas.com and VT4L responded on March 8, 2010, and the Company and Tix4Tonight filed a Reply one week later. On March 24, 2010, the Court granted both parties’ requests for jurisdictional discovery, which was completed on May 25, 2010. Pursuant to an order issued by the Court, the parties submitted supplemental briefing on June 21, 2010, addressing the results of jurisdictional discovery. The Company and Tix4Tonight requested that, if the Court denies Vegas.com's and VT4L's Motion to Dismiss on personal jurisdiction grounds, it proceed immediately to the merits of the Motion for Preliminary Injunction. Both motions are now fully briefed and awaiting decision by the Court.
Vegas.Com Antitrust Litigation
On December 14, 2009, Vegas.com and VT4L filed a complaint in the United States District Court for the District of Nevada alleging violations by the Company and its wholly owned subsidiary Tix4Tonight of 15 U.S.C. §1, 15 U.S.C. §2, 15 U.S.C. §14, and Nevada state law. The Complaint specifically alleges that the Company and Tix4Tonight entered into exclusive deals with venues and producers with the effect of unreasonably restricting trade and commerce, prevented actual and prospective competitors such as Vegas.com and VT4L from entering the market or obtaining a non-trivial share of the market, interfered with existing or prospective contractual arrangements between Vegas.com and VT4L and venues and producers, and asserted an invalid patent to prevent competition. In their demand, Vegas.com and VT4L seek compensatory, consequential, incidental, treble and punitive damages in an amount to be determined at trial, in addition to attorneys' fees and costs and injunctive relief. On December 23, 2009, Vegas.com and VT4L filed an Amended Complaint to add requests for declaratory judgment of non-infringement and invalidity related to the Company's ticket systems patent and also a claim for unfair trade practices under the Lanham Act related to the assertion of that patent. On February 3, 2010, Vegas.com and VT4L filed their Second Amended Complaint, to add allegations that the Company and Tix4tonight helped organize a group boycott among venues and producers against VT4L. On March 4, 2010, the Company and Tix4Tonight filed a Motion to Dismiss the Second Amended Complaint. On April 21, 2010, Vegas.com and VT4L filed an Opposition to the Motion to Dismiss. The Company and Tix4Tonight then filed a Reply in Support of the Motion to Dismiss on May 10, 2010. The Motion to Dismiss is now fully briefed and awaiting decision by the Court.
We are currently defending these proceedings and claims, and, although the outcome of legal proceedings is inherently uncertain, we anticipate that we will be able to resolve these matters in a manner that will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Lease Commitments:
The Company leases office space for its corporate headquarters in Studio City, California. Additionally, the Company’s wholly-owned subsidiaries, Tix4Tonight, LLC, Tix Productions, LLC and Exhibit Merchandising, lease space. Tix4Tonight leases its ticket facilities and its administrative offices in Las Vegas, Nevada, for various periods ranging from one year to five years. Tix Production, LLC leases office space in Salt Lake City, Utah and Aurora, Ohio. Exhibit Merchandising leases warehouse and office space in Streetsboro, Ohio.
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Many of the Company’s operating leases contain predetermined fixed increases in the minimum rental rate during the initial lease term and/or rent holiday periods. For these leases, the Company recognizes the related rent expense on a straight-line basis beginning on the effective date of the lease. The Company records the difference between the amounts charged to expense and the rent paid as deferred rent on the Company’s balance sheet.
The aggregate minimum future obligations for debt payments, rental payments under non-cancelable operating and capital leases for facilities in operation at June 30, 2010, excluding operating expenses, annual rent escalation provisions, and contingent rental payments based on achieving certain pre-determined sales levels, are as follows:
On March 19, 2010, the Company entered into a sixty month lease under which we lease our principal executive offices. Pursuant to the lease, we relocated our offices to 12711 Ventura Boulevard, Suite 340, Studio City CA 91604, a 3,970 square foot space. The lease commenced May 1, 2010 and our monthly rent under the lease is $12,250. The rent is subject to increase to approximately $12,600, $13,000, $13,400 and $13,800 respectively, on the first, second, third and fourth anniversaries of the extended lease term. We will be responsible for paying our allocable portion of operating expenses in addition to the monthly rent.
When we acquired All Access Entertainment, LLC (Note 4), we assumed certain operating leases for various locations. The obligations related to these locations are included in the table below.
Payments due by Fiscal Years Ending December 31, | ||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | 2014 and beyond | |||||||||||||||||||
Debt obligations | $ | 1,000,000 | $ | 1,000,000 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Capital lease obligations | 44,000 | 24,000 | 9,000 | 8,000 | 3,000 | - | ||||||||||||||||||
Operating lease obligations | 10,388,000 | 1,694,000 | 3,030,000 | 2,582,000 | 1,512,000 | 1,570,000 | ||||||||||||||||||
Total contractual cash obligations | $ | 11,432,000 | $ | 2,718,000 | $ | 3,039,000 | $ | 2,590,000 | $ | 1,515,000 | $ | 1,570,000 |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
“Tix” (which may be referred to as the “Company”, “we”, “us” or “our”) means Tix Corporation and its subsidiaries, or one of our segments or subsidiaries, as the context requires. You should read the following discussion of our financial condition and results of operations together with the unaudited consolidated financial statements and notes to the financial statements included elsewhere in this quarterly report.
Certain statements contained in this quarterly report (or otherwise made by us or on our behalf from time to time in other reports, filings with the Securities and Exchange Commission, news releases, conferences, internet postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, notwithstanding that such statements are not specifically identified. Forward-looking statements include, but are not limited to, statements about our financial position, business strategy, competitive position, potential growth opportunities, potential operating performance improvements, and the effects of competition, the effects of future legislation or regulations and plans and objectives of our management for future operations. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. Use of the words “may,” “should,” “continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “outlook,” “could,” “project,” “seek,” “predict” or variations of such words and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those set forth under Item 1A. — Risk Factors in both our 2009 Form 10-K and this quarterly report, as well as other factors described herein or in our annual, quarterly and other reports we file with the SEC (collectively, “cautionary statements”). Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We do not intend to update these forward-looking statements, except as required by applicable law.
Executive Overview
During the second quarter of 2010, we continued to execute our strategy to improve and build our operations comprised of Tix4Tonight, Exhibit Merchandising (EM) and Tix Productions, Inc. (TPI). The highlights for each of our segments for the six months ended June 30, 2010 were as follows:
Tix4Tonight
· | For the six months ended June 30, 2010, Tix4Tonight sold 716,000 tickets. These ticket sales represented an increase of 58,000 tickets over the prior year’s comparable six month period and reflected a 9% increase over the prior year’s ticket sales. |
· | For the six months ended June 30, 2010, Tix4Tonight sold tickets with a value of $44.2 million. The value of the tickets sold represented an increase of $6.2 million over the prior year’s comparable six month period, and reflected a 16% increase over the prior year’s ticket sales. |
· | For the six months ended June 30, 2010, Tix4Tonight’s Tix4Dinner business sold dinner reservations with a value of $636,000. These reservation sales represented an increase of $33,000 over the prior year’s comparable six month period, and reflected a 6% increase over prior year’s dinner reservations revenue. |
· | Tix4Tonight acquired certain assets and assumed the responsibility of certain leases of All Access Entertainment, LLC (All Access). All Access was a competitor of Tix4Tonight in the Las Vegas last minute discount ticket market and operated five locations with the main location located in Circus-Circus. The acquisition of these assets and the assumption of the leases provide us with greater coverage of the Las Vegas area in which to sell our discount tickets. |
Exhibit Merchandising
· | EM is now providing and operating the retail specialty store for the museum exhibition tour by Arts and Exhibitions International, LLC (AEI), a subsidiary of AEG, “Cleopatra: The Search for the Last Queen of Egypt”, which made its worldwide debut in Philadelphia at The Franklin Institute on June 5, 2010. The tour runs to January 2, 2011, before moving on to four other cities that are currently scheduled. |
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Live Entertainment
· | Total shows produced or presented declined to 459 during the six months ended June 30, 2010 as compared to 664 performances during the same period of the prior year. This segment of our business often fluctuates quarter to quarter due to the number of shows available on the market and the timing of the actual shows. The Company expects the number of performances to increase throughout the year. While revenues from this segment have historically experienced a signficant seasonal decline in the third quarter of a fiscal year, we don’t expect to see this seasonality this fiscal year due to the portfolio of shows and revenues scheduled during the third quarter of this year. This segment does typically experience a substantial increase during the fourth quarter of the fiscal year due to holiday related performances, and we expect that trend to continue for the coming fourth quarter. |
Critical Accounting Policies and Estimates:
The preparation of our consolidated financial statements is in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates its earlier estimates and judgments. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The following narrative describes the critical accounting policies that affect the more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.
Revenue Recognition and Presentation:
The Company has several streams of income, each of which is required under GAAP to be recognized in varying ways. The following is a summary of our revenue recognition policies:
The Company’s Las Vegas discount show ticketing business recognizes as revenue the commissions and related transaction fees earned from the sale of Las Vegas show tickets at the time the tickets are paid for and delivered to the customers. The Company’s commissions are calculated based on the face value of the show tickets sold. The Company’s transaction fees are charged on a per-ticket basis. With certain exceptions, ticket sales are generally non-refundable, although same-day exchanges of previously sold tickets are permitted. Claims for ticket refunds, which are generally received and paid the day after the show date, are charged back to the respective shows and are recorded as a reduction to the Company’s commissions and fees at the time that such refunds are processed. The Company does not have accounts receivable associated with its sales transactions, as payment is collected at the time of sale.
Tix4Dinner offers reservations for discounted dinners at various restaurants on and surrounding the Las Vegas strip and downtown with dining at specific times on the same day as the sale or in some cases as much as seven days after the day of the sale. Tix4Dinner recognizes as revenue the transaction fees earned from the purchaser of the dinner reservations at the time that the reservations are made and a subsequent nominal fee from the restaurant at the time the reservation is used. At this time, the Company has immaterial amounts of accounts receivable and does not have any accounts payable associated with the Tix4Dinner operations because the Company collects the transaction fee at the time that the reservation is made and the dinner payment is collected directly by the restaurant.
Tix4AnyEvent (AnyEvent) recognizes as revenue the gross amount from the sale of tickets that it owns. AnyEvent bears the risk of economic loss if the tickets are not sold by the date that the event is scheduled to occur. Revenue is considered earned when the related event has occurred. Refunds are only issued if the event is canceled or postponed. Payments for such ticket sales received prior to the event are recorded as deferred revenue. AnyEvent does not have any accounts receivable associated with sales transactions to individual customers, as payment is collected at the time of sale. However, sales transactions with other ticket brokers may be conducted on a credit basis, which would generate accounts receivable.
Exhibit Merchandising recognizes retail store sales at the time the customer takes possession of the merchandise. All sales are net of discounts and returns and exclude sales tax. For online sales, revenue is recognized free on board ("FOB") origin where title and risk of loss pass to the buyer when the merchandise leaves the Company's distribution facility at the time of shipment, which we refer to as the date of purchase by the customer. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. Shipping and handling revenues from sales are included as a component of net sales. Conversely, shipping and handling costs are a component of direct costs of revenues, pursuant to the authoritative guidance provided by the Financial Accounting Standards Board. The Company does not have any accounts receivable associated with this business because all transactions are done by cash or credit card.
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Tix Productions, Inc. recognizes revenue from the presentation and production of an event after the performance occurs upon settlement of the event; however any profits related to these tours is recognized after minimum revenue thresholds, if any have been achieved. Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue collected from sponsorship and other revenue, which is not related to any single event, is classified as deferred revenue and generally amortized over the tour’s season or the term of the contract. We account for taxes that are externally imposed on revenue producing transactions on a net basis, as a reduction to revenue.
Stock-Based Compensation:
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the FASB. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the guidelines provided by the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.
Impairment of Long-Lived Asset:
Our long-lived assets, such as property and equipment, are reviewed for impairment when events and circumstances indicate that depreciable or amortizable long lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current value.
We use various assumptions in determining the current fair value of these assets, including future expected cash flows and discount rates, as well as other fair value measures. Our impairment loss calculations require us to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results.
Intangible Assets and Goodwill:
The Company evaluates intangible assets and goodwill for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. There were no indications of impairment based on management’s assessment at June 30, 2010. As of June 30, 2010, we have $11.8 million of remaining goodwill and intangible assets related to our acquisitions of Exhibit Merchandising LLC, Magic and Arts Entertainment, NewSpace Entertainment, and All Access. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased revenues and increased costs, we may have further goodwill impairments.
Recently Issued Accounting Guidance:
In April 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This standard is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require the Company to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As the Company plans to implement this standard prospectively, the effect of this guidance will be limited to future transactions. The Company does not expect adoption of this standard to have a material impact on its financial position or results of operations as it has no material research and development arrangements which will be accounted for under the milestone method.
In January 2010, the FASB issued new accounting guidance which requires new disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring presentation on a gross basis of information about purchases, sales, issuances and settlements in Level 3 fair value measurements. The guidance also clarifies existing disclosures regarding level of disaggregation, inputs and valuation techniques. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010. As this guidance requires only additional disclosure, there should be no impact on the consolidated financial statements of the Company upon adoption.
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In October 2009, a new accounting consensus was issued for multiple-deliverable revenue arrangements. This consensus amends existing revenue recognition accounting standards. This consensus provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously the existing accounting consensus required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under the existing accounting consensus, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is in the process of evaluating whether the adoption of this standard will have a material effect on its financial position, results of operations or cash flows.
In June 2009, the FASB issued authoritative guidance on consolidation of variable interest entities. The new guidance is intended to improve financial reporting by requiring additional disclosures about a company’s involvement in variable interest entities. This new guidance is effective for fiscal years and interim periods beginning after November 15, 2009. The Company adopted this guidance effective January 3, 2010, and it had no impact on the consolidated financial statements of the Company.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Consolidated Results of Operations –
Three and Six Months Ended June 30, 2010 compared to the Three and Six Months Ended June 30, 2009:
Consolidated Results of Operations - Three and Six Months ended June 30,
% change | % change | |||||||||||||||||||||||
Three Months Ended June 30, | 2010 v | Six Months Ended June 30, | 2010 v | |||||||||||||||||||||
2010 | 2009 | 2009 | 2010 | 2009 | 2009 | |||||||||||||||||||
Revenue | $ | 14,806,000 | $ | 26,584,000 | -44 | % | $ | 31,556,000 | $ | 46,754,000 | -33 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Direct operating expenses | 10,261,000 | 21,410,000 | -52 | % | 22,090,000 | 36,336,000 | -39 | % | ||||||||||||||||
Selling, general and administrative expenses | 4,036,000 | 2,686,000 | 50 | % | 7,085,000 | 5,376,000 | 32 | % | ||||||||||||||||
Depreciation and Amortization | 665,000 | 626,000 | 6 | % | 1,286,000 | 1,247,000 | 3 | % | ||||||||||||||||
Corporate expenses | 1,151,000 | 1,232,000 | -7 | % | 2,337,000 | 2,904,000 | -20 | % | ||||||||||||||||
Operating Income (Loss) | (1,307,000 | ) | 630,000 | -307 | % | (1,242,000 | ) | 891,000 | -239 | |||||||||||||||
Operating Margin | -9 | % | 2 | % | -4 | % | 2 | % | ||||||||||||||||
Interest expense | (2,000 | ) | (3,000 | ) | (4,000 | ) | (7,000 | ) | ||||||||||||||||
Interest income | 18,000 | 9,000 | 25,000 | 22,000 | ||||||||||||||||||||
Other income – net | 71,000 | 129,000 | 78,000 | 154,000 | ||||||||||||||||||||
Income (loss) before income taxes | (1,220,000 | ) | 765,000 | (1,143,000 | ) | 1,060,000 | ||||||||||||||||||
Income tax expense | 111,000 | 106,000 | 111,000 | 106,000 | ||||||||||||||||||||
Net income (loss) | $ | (1,331,000 | ) | $ | 659,000 | $ | (1,254,000 | ) | $ | 954,000 |
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Three Months Ended June 30, 2010 and 2009:
Revenues
The Company earns fee revenues from the sales of discounted tickets from purchasers of the tickets and commissions from the entertainment supplier, as well as revenues from the sale of premium tickets to sporting and other entertainment events. Through our discounted ticket venues we also offer discount dinner reservations. From Exhibit Merchandising, LLC “EM”, we earn revenues from the management of retail outlets associated with the sale of merchandise related to touring exhibits, such as “Tutankhamun and The Golden Age of the Pharaohs.” Through our Live Entertainment segment, we earn revenues from the presentation and production of events, as well as sponsorship and ancillary revenues. Our revenues for the three months ended June 30, 2010 and 2009 were $14.8 million and $26.6 million, respectively. Our revenues decreased $11.8 million, or 44%, during the three months ended June 30, 2010 as compared to the same period of the prior year. The decrease in revenues was primarily the result of an $11.7 million decrease in Live Entertainment segment, a decrease in revenues of $498,000 from our Exhibit Merchandising segment partially offset by a $428,000 increase in revenues from our Ticketing Services segment.
More detailed explanations of the three months ended June 30, 2010 and 2009 changes are included in the applicable segment discussions following.
Direct Operating Expenses
Direct operating expenses include payroll and related costs, rents, cost of tickets and goods sold, artist fees, show related marketing costs and advertising expenses along with other related costs of promoting and producing live entertainment. Direct costs of revenues for the three months ended June 30, 2010 and 2009 were $10.3 million and $21.4 million, respectively. Our operating expenses decreased $11.1 million or 52% during the three months ended June 30, 2010 as compared to the same period of the prior year. The decrease in direct operating expenses is reflective primarily of the lower overall revenues from our Live Entertainment and Exhibit Merchandising segments.
More detailed explanations of the three months ended June 30, 2010 and 2009 changes are included in the applicable segment discussions following.
Selling, General and Administrative Expenses
Selling, marketing and administrative expenses include advertising and promotional costs related to the Company’s business activities. Our operating segment selling, marketing and administrative expenses for the three months ended June 30, 2010 and 2009 were $4.0 million and $2.7 million, respectively. Our selling, general and administrative expenses increased $1.4 million or 50% during the three months ended June 30, 2010 as compared to the same period of the prior year due to an increase of $1,428,000 and $89,000 increase in selling and general and administrative expenses in our Ticketing Services and Exhibit Merchandising segments, respectively. This increase was partially offset by a $167,000 decrease in selling, general and administrative expenses at our Live Entertainment segment.
During the three and six months ended June 30, 2010, the Company recorded a charge for bad debt of $1.0 million. This balance owed to us is related to our premium ticket business done through our Tix4AnyEvent unit, which is part of our Ticketing Services segment. Throughout fiscal year 2009, we both advanced funds and purchased tickets on behalf of an unrelated ticket broker. The tickets were for various sporting and live entertainment events, including the recent FIFA World Cup event concluded in July 2010. Our broker’s responsibility was to sell the tickets and both refund our advances and provide us with a commission based on our agreement. Due to non-payment, we have hired legal counsel to pursue collection on our behalf. Based on management’s current belief that collection is uncertain, we recorded a full reserve against the balance owed to us of $1.0 million.
More detailed explanations of the three months ended June 30, 2010 and 2009 changes are included in the applicable segment discussions following.
Corporate Expenses
Corporate expenses are expenses that relate to activities at or directed by our executive offices. Significant components of corporate expenses consist of corporate personnel and personnel-related costs, insurance, legal and accounting fees, consulting and advisory fees, merchant fees and corporate occupancy costs. Corporate expenses for the three months ended June 30, 2010 and 2009 were approximately the same at $1.2 million. Corporate expenses decreased $80,000 for the three months ended June 30, 2010, as compared to same period of the prior year. This decrease in corporate expenses is the result of a decrease in employee costs associated with stock option expense and regulatory costs, which was offset in part by $125,000 in severance costs associated with the departure of a former officer of the Company.
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Depreciation and Amortization
Our depreciation and amortization was $665,000 and $626,000 for the three months ended June 30, 2010 and 2009 respectively. The increase of $39,000 in depreciation and amortization expense in 2009 primarily is the result of intangible assets acquired in February 2010 as part of the All Access acquisition and the purchase of fixed assets during the first half of this fiscal year.
Other Income
Other income was $71,000 and 129,000 for the three months ended June 30, 2010, and was the result of miscellaneous box office revenues, such as patron club income and season handling fees, earned by our Live Entertainment segment Tix Productions.
Interest Income
Interest income was immaterial for all periods presented. Fluctuations in interest income were due primarily to fluctuations in our cash balances.
Income Tax Expense
The provision for income taxes was $111,000 for the three months ended June 30, 2010 compared to $106,000 for the three months ended June 30, 2009. The provision for income taxes for the three months ended June 30, 2010 and 2009 was determined using our effective rate estimated for the entire fiscal year. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses generated in previous periods, as a result of our history of losses from operations.
Six Months Ended June 30, 2010 and 2009:
Revenues
Our revenues for the six months ended June 30, 2010 and 2009 were $31.6 million and $46.8 million, respectively. Our revenues decreased $15.2 million, or 32%, during the six months ended June 30, 2010 as compared to the same period of the prior year. The decrease in revenues was primarily the result of a $15.5 million decrease in Live Entertainment segment revenues and a $742,000 decrease in Exhibit Merchandising segment revenues, which was partially offset by a $1.0 million increase in revenues from our Ticketing Services segment.
More detailed explanations of the six months ended June 30, 2010 and 2009 changes are included in the applicable segment discussions following.
Direct Operating Expenses
Direct operating expenses include payroll and related costs, rents, cost of tickets and goods sold, artist fees, show related marketing costs and advertising expenses along with other related costs of promoting and producing live entertainment. Direct costs of revenues were $22.1 million for the six months ended June 30, 2010 as compared to $36.3 million for the six months ended June 30, 2009. Our operating expenses decreased $14.2 million or 39% during the six months ended June 30, 2010 as compared to the same period of the prior year. The decrease in direct operating expenses is reflective of the 32% decline in overall revenues earned.
More detailed explanations of the six months ended June 30, 2010 and 2009 changes are included in the applicable segment discussions following.
Selling, General and Administrative Expenses
Selling, marketing and administrative expenses include advertising and promotional costs related to the Company’s business activities. Our operating segment selling, marketing and administrative expenses were $7.1 million and $5.4 million for the six months ended June 30, 2010 and 2009, respectively. Our selling, general and administrative expenses increased $1.7 million or 32% during the six months ended June 30, 2010 as compared to the same period of the prior year due to a $309,000 decline in selling and general and administrative expenses in our Live Entertainment segment. This decline was offset by $1.9 million and $101,000 increases in selling, general and administrative expenses at our Ticketing Services and Exhibit Merchandising segments, respectively.
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During the three and six months ended June 30, 2010, the Company recorded a charge for bad debt of $1.0 million. This balance owed to us is related to our premium ticket business done through our Tix4AnyEvent unit, which is part of our Ticketing Services segment. Throughout fiscal year 2009, we both advanced funds and purchased tickets on behalf of an unrelated ticket broker. The tickets were for various sporting and live entertainment events, including the recent FIFA World Cup event concluded in July 2010. Our broker’s responsibility was to sell the tickets and both refund our advances and provide us with a commission based on our agreement. Due to non-payment, we have hired legal counsel to pursue collection on our behalf. Based on management’s current belief that collection is uncertain, we recorded a full reserve against the balance owed to us of $1.0 million.
More detailed explanations of the six months ended June 30, 2010 and 2009 changes are included in the applicable segment discussions following.
Corporate Expenses
Corporate expenses are expenses that relate to activities at or directed by our executive offices. Significant components of corporate expenses consist of corporate personnel and personnel-related costs, insurance, legal and accounting fees, consulting and advisory fees, merchant fees and corporate occupancy costs. Corporate expenses for the six months ended June 30, 2010 and 2009 were $2.4 and $2.9 million, respectively. The reduction in expense of $567,000 was due to a decline of $614,000 in stock based compensation expense which was partially offset by the recording of severance expense of $125,000 related to the departure of one of our former officers. The remaining decline was due to normal fluctuations in our operating accounts with no one account that was individually significant.
Depreciation and Amortization
Our depreciation and amortization was $1.3 million and $1.2 million for the six months ended June 30, 2010 and 2009 respectively. The increase of $39,000 in depreciation and amortization expense in 2010 primarily reflects an increase in amortization expense related to intangible assets acquired during our acquisition of All Access in February 2010.
Other Income
Other Income and Expense was $78,000 and 154,000 for the six months ended June 30, 2010, and was the result of miscellaneous box office revenues, such as patron club income and season handling fees, earned by our Live Entertainment segment Tix Productions.
Interest Income
Interest income was immaterial for all periods presented. Fluctuations in interest income were due primarily to fluctuations in our cash balances.
Income Tax Expense
The provision for income taxes was $111,000 and $106,000 for the six months ended June 30, 2010 and 2009, respectively. The provision for income taxes for the six months ended June 30, 2010 and 2009 were determined using our effective rate estimated for the entire fiscal year. We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses generated in previous periods, as a result of our history of losses from operations.
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Ticketing Services:
Our Ticketing Services segment operating results were as follows:
Segment Reporting- Ticketing Services
% Change | % Change | |||||||||||||||||||||||
Three Months Ended June 30, | 2010 vs. | Six Months Ended June 30, | 2010 vs. | |||||||||||||||||||||
2010 | 2009 | 2009 | 2010 | 2009 | 2009 | |||||||||||||||||||
Revenue | $ | 5,098,000 | $ | 4,670,000 | 9 | % | $ | 9,841,000 | $ | 8,825,000 | 12 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Direct operating expenses | 2,202,000 | 1,729,000 | 27 | % | 4,182,000 | 3,263,000 | 28 | % | ||||||||||||||||
Selling, general and administrative expenses | 2,332,000 | 904,000 | 158 | % | 3,692,000 | 1,775,000 | 108 | % | ||||||||||||||||
Depreciation and amortization | 173,000 | 61,000 | 184 | % | 296,000 | 119,000 | 149 | % | ||||||||||||||||
Operating income (loss) | $ | 391,000 | $ | 1,976,000 | -80 | % | $ | 1,671,000 | $ | 3,668,000 | -54 | % | ||||||||||||
Operating margin | 8 | % | 42 | % | -82 | % | 17 | % | 42 | % | -59 | % |
Three months ended June 30, 2010 and 2009:
Revenues
Ticketing Services has two operating units:
· | Tix4Tonight, our discount ticket seller |
· | Tix4AnyEvent (AnyEvent or AE), our premium ticket operation |
The Ticketing Services segment earns fee revenues from the sales of discounted tickets from purchasers of the tickets and commissions from the entertainment supplier, as well as revenues from the sale of premium tickets to sporting and other entertainment events. Through our discounted ticket venues, we also offer discount dinner reservations. Ticketing Services revenues were $5.1 million for the three months ended June 30, 2010 as compared to $4.7 million for the three months ended June 30, 2009. Our revenues increased $428,000, or 9%, during the three months ended June 30, 2010 as compared to the same period of the prior year. The increase in Ticketing Service revenues is the result of a $615,000 million increase in Tix4Tonight revenues including a $93,000 increase in ancillary revenues i.e. the sale of dinner reservations, partially offset by an $187,000 decline in premium ticket revenues.
Tix4Tonight:
Tix4Tonight revenues for the three months ended June 30, 2010 and 2009 were $5.1 million and $4.5 million, which is an increase of $615,000 or 14% in 2010 as compared to the same period in 2009. The increase reflects a greater demand for discount tickets as well as an increase in the average selling price per ticket in 2010 as compared to 2009. Tix4Tonight discount tickets sold increased by 25,000 tickets or 7% to 366,000 discounted show tickets for the three months ended June 30, 2010. The gross sales value of show tickets sold to customers plus commissions and fees earned were $23.0 million for the three months ended June 30, 2010, as compared to $20.0 million for the three months ended June 30, 2009, or a 15% increase. Lastly, during the three months ended June 30, 2010, revenues from miscellaneous sources of income including dinner and golf reservations decreased by $10,000 and $86,000, respectively, as compared to the prior year. Tix4Tonight discontinued selling its golf reservations in 2009.
Tix4AnyEvent:
AnyEvent sells premium tickets to concerts, theatre shows and sporting events. AnyEvent’s revenues are dependent in part on sporting events and special concerts occurring, such as boxing matches and reunion tours, as well as our ability to obtain tickets to these events. AnyEvent revenues for the three months ended June 30, 2010 and 2009 were $7,000 and $196,000 respectively. Management reviews the events available on the market and determines, based on risk and other factors, which events to participate in. Due to the mix of current events and their associated risk, the Company has selectively declined to participate in a number of events in 2010 which has led to a decline of $187,000 in revenue during the three months ended June 30, 2010.
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Direct Operating Expenses
Direct operating expenses include payroll and related costs, rents, and cost of tickets sold. Direct costs of revenues for the three months ended June 30, 2010 and 2009 were $2.2 million and $1.7 million, respectively, which represented an increase in direct operating expenses of $473,000 or 27%. The direct operating expenses for the three months ended June 30, 2010 and 2009, as a percentage of revenues were comparable at 43% and 37%, respectively. The increase in direct operating expenses is not only due to the increase in sales, but we have also experienced increases in both our payroll and rent costs as a percentage of revenue compared to the prior year. The planned increase in payroll costs was required in order to manage our continued growth while the increase in rent costs is associated primarily with the recent acquisition of All Access Entertainment as discussed in Note 5.
Selling, General and Administrative Expenses
Marketing and administrative expenses include advertising and promotional costs related to our business activities, as well as the segment cost of management. Selling, general and administrative expenses for the three months ended June 30, 2010 and 2009 were $2.3 million and $904,000, respectively. Our selling, marketing and general and administrative expenses increased $1.4 million or 158%, during the three months ended June 30, 2010 as compared to 2009. During the three months ended June 30, 2010, the Company incurred a charge for bad debt of approximately $1.0 million, as discussed below, and $385,000 in litigation expense for which no similar expense existed in 2009. Excluding the bad debt charge and litigation expense, selling, general and administrative expenses were comparable at 17% percent of revenues during the three months ended June 30, 2010 as compared to 19% during the three months ended June 30, 2009.
During the three and six months ended June 30, 2010, the Company recorded a charge for bad debt of $1.0 million. This balance owed to us is related to our premium ticket business done through our Tix4AnyEvent name, which is part of our Ticketing Services segment. Throughout fiscal year 2009, we both advanced funds and purchased tickets on behalf of our ticket broker. The tickets were for various sporting and live entertainment events, including the recent FIFA World Cup event concluded in July 2010. Our broker’s responsibility was to sell the tickets and both refund our advances and provide us with a commission based on our agreement. Due to non-payment, we have hired legal counsel to pursue collection on our behalf. Based on management’s current belief that collection is uncertain, we recorded a full reserve against the balance owed to us of $1.0 million.
Depreciation and Amortization
Depreciation and amortization expense incurred during the three months ended June 30, 2010 and 2009 were $173,000 and $61,000, respectively. The increase of $112,000 or 184% was due primarily to additional amortization expense associated with the intangible assets purchased as part of the All Access acquisition in March 2010. We expect to incur a similar level of depreciation and amortization for the foreseeable future.
Six months ended June 30, 2010 and 2009:
Revenues
Ticketing Services revenues were $9.8 million and $8.8 million for the six months ended June 30, 2010 and 2009, respectively. Our revenues increased $1.0 million, or 12%, during the six months ended June 30, 2010 as compared to the same period of the prior year. The increase in Ticketing Service revenues is the result of a $1.2 million increase in Tix4Tonight revenues, offset by a $491,000 decline in premium ticket revenues.
Tix4Tonight:
Tix4Tonight revenues for the six months ended June 30, 2010 and 2009 were $9.8 million and $8.6 million, which is an increase of $1.2 million or 14% in 2010 as compared to the same period in 2009. The increase reflects a greater demand for discount tickets as well as an increase in the average selling price per ticket in 2010 as compared to 2009. Tix4Tonight discount tickets sold increased by 57,000 tickets or 9% to 716,000 discounted show tickets for the six months ended June 30, 2010. The gross sales value of show tickets sold to customers plus commissions and fees earned were $44.2 million for the six months ended June 30, 2010, as compared to $38.0 million for the six months ended June 30, 2009, or a 17% increase. Lastly, during the six months ended June 30, 2010, revenues from miscellaneous sources of income such as dinner reservations increased by $33,000 while golf reservations decreased by $156,000 compared to the prior year. Tix4Tonight discontinued selling its golf reservations in 2009.
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AnyEvent:
AnyEvent sells premium tickets to concerts, theatre shows and sporting events. AnyEvent’s revenues are dependent in part on sporting events and special concerts occurring, such as boxing matches and reunion tours, as well as our ability to obtain tickets to these events. AnyEvent revenues for the six months ended June 30, 2010 and 2009 were $31,000 and $254,000 respectively. Management reviews the events available on the market and determines, based on risk and other factors, which events to participate in. Due to the mix of current events and their associated risk, the Company has selectively declined to participate in a number of events in 2010 which has led to a decline of $224,000 in revenue during the three months ended June 30, 2009.
Direct Operating Expenses
Direct operating expenses include payroll and related costs, rents, and cost of tickets sold. Direct Costs of revenues for the six months ended June 30, 2010 and 2009 were $4.2 and $3.3 million, respectively, which represented an increase in direct operating expenses of $919,000 or 28%, which was the result of 24% increase in revenues. The direct operating expenses for the six months ended June 30, 2010 and 2009, as a percentage of revenues were 43% and 37%, respectively. The increase in direct operating expenses is not only due to the increase in sales, but from increases in both our payroll and rent costs, as a percentage of revenue, compared to the prior year. The planned increase in payroll costs was required in order to manage our continued growth while the increase in rent costs is associated primarily with the recent acquisition of All Access Entertainment as discussed in Note 5.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include advertising and promotional costs related to our business activities, as well as the segment cost of management. Selling, general and administrative expenses for the six months ended June 30, 2010 and 2009 were $3.7 million and $1.8 million, respectively. Our selling, general and administrative expenses increased $1.9 million or 108%, during the six months ended June 30, 2010 as compared to 2009. During the six months ended June 30, 2010, the Company incurred a charge for bad debt of approximately $1.0 million, and approximately $900,000 in litigation expense for which no similar expense existed in 2009. Excluding the bad debt charge and litigation expense, selling, general and administrative expenses were comparable at 18% percent of revenues during the three months ended June 30, 2010 as compared to 20% during the three months ended June 30, 2009.
During the three and six months ended June 30, 2010, the Company recorded a charge for bad debt of $1.0 million. This balance owed to us is related to our premium ticket business done through our Tix4AnyEvent name, which is part of our Ticketing Services segment. Throughout fiscal year 2009, we both advanced funds and purchased tickets on behalf of our ticket broker. The tickets were for various sporting and live entertainment events, including the recent FIFA World Cup event concluded in July 2010. Our broker’s responsibility was to sell the tickets and both refund our advances and provide us with a commission based on our agreement. Due to non-payment, we have hired legal counsel to pursue collection on our behalf. Based on management’s current belief that collection is uncertain, we recorded a full reserve against the balance owed to us of $1.0 million.
Depreciation and Amortization
Depreciation and amortization expense incurred during the six months ended June 30, 2010 and 2009 were $296,000 and $119,000, respectively. The increase of $177,000 or 149% was due primarily to additional amortization expense related to intangible assets acquired during the All Access acquisition in March 2010. We expect to incur a similar level of depreciation and amortization for the foreseeable future.
Exhibit Merchandising:
Our Exhibit Merchandising segment operating results were as follows:
Segment Reporting - Exhibit Merchandising
% Change | % Change | |||||||||||||||||||||||
Three Months Ended June 30, | 2010 vs. | Six Months Ended June 30, | 2010vs. | |||||||||||||||||||||
2010 | 2009 | 2009 | 2010 | 2009 | 2009 | |||||||||||||||||||
Revenue | $ | 1,823,000 | $ | 2,321,000 | -21 | % | $ | 4,368,000 | $ | 5,110,000 | -15 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Direct operating expenses | 1,133,000 | 1,398,000 | -19 | % | 2,580,000 | 3,103,000 | -17 | % | ||||||||||||||||
Selling, general and administrative expenses | 731,000 | 642,000 | 14 | % | 1,368,000 | 1,267,000 | 8 | % | ||||||||||||||||
Depreciation and amortization | 285,000 | 297,000 | -4 | % | 577,000 | 593,000 | 3 | % | ||||||||||||||||
Operating income (loss) | $ | (326,000 | ) | $ | (16,000 | ) | -1938 | % | $ | (157,000 | ) | $ | 147,000 | -207 | % | |||||||||
Operating margin | -18 | % | -1 | % | -2494 | % | -4 | % | 3 | % | -225 | % |
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Three Months Ended June 30, 2010 and 2009:
Revenues
Exhibit Merchandising (EM) provides retail specialty stores for touring museum exhibitions and touring theatrical productions. EM provides a complete turn-key retail store with commercially available and extensive custom-branded product for sale. It operates the stores in space rented in conjunction with the exhibit. During the three months ended June 30, 2010 and 2009, EM generated $1.8 million and $2.3 million in revenues, respectively. Revenue is derived from the Company’s retail outlets associated with the sale of merchandise related to touring exhibits, primarily derived from “Tutankhamun and The Golden Age of the Pharaohs.” EM is subject to revenue fluctuations as a result of the exhibits that it represents moving from one location to another. The move of an exhibit from one location to another generally results in the exhibit being closed from four to six weeks. The length of time an exhibit is closed is dependent upon the type of exhibit, the distance the exhibit is to be shipped, as well as any special needs that may be required in re-setting the exhibit. “Tutankhamun and The Golden Age of the Pharaohs” and “Tutankhamun the Golden King and the Great Pharaohs” are currently booked in museums through July 2011 and December 2012, respectively. The $498,000 decline in revenues during the second quarter of 2010 is due to the move of the exhibits, “Tutankhamun and The Golden Age of the Pharaohs” from San Francisco to New York, “Tutankhamun the Golden King and the Great Pharaohs” from Toronto, Canada to Denver, and “Real Pirates: The Untold Story of the Whydah from Slave Ship to Pirate Ship” from Norfolk to St. Louis, which caused the exhibits to be closed for approximately 98 combined days as compared to 40 days during the same period of the prior year. Exhibit Merchandising introduced one new exhibit during the three months ended June 30, 2010 titled “Cleopatra: The Search for the Last Queen of Egypt” which opened in Philadelphia on June 5, 2010.
Direct Operating Expenses
Exhibit Merchandising’s operating expenses include payroll and related costs, rents, and cost of goods sold. Direct operating expenses for the three months ended June 30, 2010 and 2009 were $1.1 million and $1.4 million, respectively and as a percent of revenues were 62% and 60%, respectively. Direct operating expenses declined due to the decline in revenues.
Selling, General and Administrative Expenses
Selling, marketing and administrative expenses include advertising and promotional costs related to our business activities, as well as the segment’s cost of management. For the three months ended June 30, 2010 and 2009, selling, marketing and administrative expenses were $731,000 or 40% of revenues and $642,000 or 28% of revenues, respectively. The increase in selling, marketing and administrative expenses reflects the increased cost of operating our stores abroad as compared to domestic stores.
Depreciation and Amortization
Depreciation and amortization expense incurred during the three months ended June 30, 2010 and 2009 was $285,000 and $297,000, respectively, and relates primarily to the amortization of the intangible assets that were created as a result of EM being acquired in August 2007. We expect the current level of depreciation and amortization to continue through 2010.
Six Months Ended June 30, 2010 and 2009:
Revenues
During the six months ended June 30, 2010 and 2009, EM generated $4.4 million and $5.1 million in revenues, respectively. Revenue is derived from the Company’s retail outlets associated with the sale of merchandise related to touring exhibits, primarily derived from “Tutankhamun and The Golden Age of the Pharaohs.” EM is subject to revenue fluctuations as a result of the exhibits that it represents moving from one location to another. The move of an exhibit from one location to another generally results in the exhibit being closed from four to six weeks. The length of time an exhibit is closed is dependent upon the type of exhibit, the distance the exhibit is to be shipped, as well as any special needs that may be required in re-setting the exhibit. “Tutankhamun and The Golden Age of the Pharaohs” and “Tutankhamun the Golden King and the Great Pharaohs” are currently booked in museums through July 2011 and December 2012, respectively. The $742,000 decline in revenues during the six months ended June 30, 2010 is due to the movement of a number of our exhibits from one location to another. During the six months of 2010, although there was a 6% decline in overall attendance to the exhibits, there was a 9% decrease in revenue per attendee at our retail specialty stores. The decline in revenues per attendee was the result of generally poor economic conditions.
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Direct Operating Expenses
EM’s operating expenses include payroll and related costs, rents, and cost of goods sold. Direct operating expenses for the six months ended June 30, 2010 and 2009 were $2.6 million and $3.1 million, respectively and were 59% and 60% of revenues. The decline in direct operating expenses was due to the decline in revenues.
Selling, General and Administrative Expenses
EM’s selling, marketing and administrative expenses include advertising and promotional costs related to our business activities, as well as the segment’s cost of management. For the six months ended June 30, 2010 and 2009, EM’s selling, marketing and administrative expenses were $1.4 million or 31% of revenues and $1.3 million or 25% of revenues, respectively. The increase in selling, marketing and administrative expenses reflects the increased cost of operating our stores abroad as compared to domestic stores.
Depreciation and Amortization
Depreciation and amortization expense incurred during the six months ended June 30, 2010 and 2009 was $577,000 and $593,000, respectively, and relates primarily to the amortization of the intangible assets that were created as a result of EM being acquired in August 2007. We expect the current level of depreciation and amortization to continue through 2010.
Live Entertainment:
Our Live Entertainment segment operating results were as follows:
Segment Reporting- Tix Productions
% Change | % Change | |||||||||||||||||||||||
Three Months Ended June 30, | 2010vs. | Six Months Ended June 30, | 2010 vs. | |||||||||||||||||||||
2010 | 2009 | 2009 | 2010 | 2009 | 2009 | |||||||||||||||||||
Revenue | $ | 7,885,000 | $ | 19,593,000 | -60 | % | $ | 17,347,000 | $ | 32,819,000 | -47 | % | ||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Direct operating expenses | 6,926,000 | 18,283,000 | -62 | % | 15,328,000 | 29,970,000 | -49 | % | ||||||||||||||||
Selling, general and administrative expenses | 973,000 | 1,140,000 | -15 | % | 2,025,000 | 2,334,000 | -13 | % | ||||||||||||||||
Depreciation and amortization | 198,000 | 198,000 | 0 | % | 397,000 | 395,000 | 1 | % | ||||||||||||||||
Operating income (loss) | $ | (212,000 | ) | $ | (28,000 | ) | 657 | % | $ | (403,000 | ) | $ | 120,000 | -436 | % | |||||||||
Operating margin | -3 | % | 0 | % | -1781 | % | -2 | % | 0 | % | -735 | % |
Tix Productions, Inc., the Company’s Live Entertainment segment, does business under the names Magic Arts & Entertainment (Magic) and NewSpace Entertainment (NewSpace). We acquired Magic and NewSpace operations effective January 2, 2008. Both Magic and NewSpace are independent presenters and producers of live theater and concerts with a history of working together. Combining the operations of these two companies under a single entity, we have better leveraged our resources, and gained operating efficiencies.
As a live entertainment presenter, we book touring theatrical and concert presentations with a history of successful commercial appeal as well as participate in the development and roll out of new theatrical and concert presentations often originating on Broadway in New York or the West End in London. We use a wide variety of marketing channels to sell tickets to these programs including our substantial subscriber-based businesses in eleven US cities, our Salt Lake City based group and corporate sales team, standard marketing tools including print, radio, television, outdoor and, most recently new e-marketing tools. In addition, we invest in shows or productions in advance of their initial tour to obtain favorable touring and distribution rights.
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Three Months Ended June 30, 2010:
Revenues
During the three months ended June 30, 2010 and 2009, revenues from our Live Entertainment operations were $7.9 million and $19.6 million, respectively. The $11.7 million decrease in revenues is due to several factors including:
· | In the second quarter of 2010 we presented or produced 219 show dates as compared to 305 show dates in the second quarter of 2009. This segment of our business often fluctuates quarter to quarter due to the number of shows available on the market and the timing of the actual shows. The Company expects the number of performances to increase throughout the year. While revenues from this segment have historically experienced significant seasonal decline in the third quarter of a fiscal year, we don’t expect to see this seasonality this fiscal year due to the portfolio of shows and revenues scheduled during the third quarter of this year. This segment does typically experience a substantial increase during the fourth quarter of the fiscal year due to holiday related performances and we expect that trend to continue for the coming fourth quarter. |
· | In 2009, many productions that Tix was associated with toured Canada during the election cycle which, due to a strong Canadian dollar and economy, resulted in unusually strong profits. These combined factors resulted in an unusually large number of productions in the first and fourth quarters that under normal circumstances would have naturally fallen in the second or third quarters. |
Revenues from live entertainment are a function of a number of elements: tickets sold, ticket prices and ancillary revenue streams including sponsorships and revenues generated through premium ticketing opportunities. In instances where the Company acts as the primary obligor with suppliers, assumes credit risk, directs the pricing of the tickets and purchases the advertising, the Company records these revenues at gross. In other instances where we only receive a fee and are not the principal obligors to vendors, we record these revenues at net. It is management’s belief that this is consistent with authoritative guidance issued by the Financial Accounting Standards Board. Revenues from our Live Entertainment operations are seasonal with the first and fourth quarters being traditionally the strongest.
Opportunities for growth in the Live Entertainment unit revolve around our expanding ownership of intellectual content. In addition, we see growth opportunities to present in major marketplaces such as Detroit and Milwaukee where competition has diminished due to industry consolidation, and even more opportunities in smaller markets where individual promoters and competitors have left the market.
Direct Operating Expenses
During the three months ended June 30, 2010 and 2009, direct operating expenses were $6.9 million and $18.3 million and represented 88% and 93% of revenues, respectively. The lower direct operating cost as a percentage of revenues reflects the mix of shows currently being presented. Expenses that are direct operating expenses include the show guarantees, profit sharing and royalties paid directly to the touring productions; direct expenses of the theater which include staffing, rent and box office charges; marketing costs and production costs which include equipment rentals, stagehands and the cost of our production and settlement manager to attend the production. Live Entertainment productions typically have large back-end sharing relationships with the productions involved and, as a result, significant increases in presentation revenue do not typically result in comparable increases in operating income as much of that goes to the production at hand. On the other hand, significant decreases in presentation revenue do have a comparable impact on operating income as the largest burden of risk in these presentations lies with the promoter. In instances where the Company acts as the primary obligor with suppliers, assumes credit risk, directs the pricing of the tickets and purchases the advertising, the Company records these expenses at gross.
Selling, General and Administrative Expenses
Live Entertainment’s selling, marketing and administrative expenses include advertising and promotional costs related to its business activities, as well as the segment cost of management. For the three months ended June 30, 2010 and 2009, Live Entertainment’s administrative expenses were $973,000 and $1.1 million, respectively. The decrease is due to decreased marketing expenses due to the decline in revenues.
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Depreciation and Amortization
Depreciation and amortization expense incurred during the three months ended June 30, 2010 and 2009 was $198,000 and $198,000, and primarily relates to amortization of the intangible assets that resulted from the acquisitions of Magic and NewSpace. We expect to incur a similar level of depreciation and amortization for the remainder of 2010.
Six Months Ended June 30, 2010:
Revenues
During the six months ended June 30, 2010 and 2009, revenues from our Live Entertainment operations were $17.3 million and $32.8 million, respectively. The $15.5 million decrease in revenues is due to several factors including:
· | During the six months ended June 30, 2010, we presented or produced 459 show dates as compared to 664 show dates in the six months ended June 30, 2009. This segment of our business often fluctuates quarter to quarter due to the number of shows available on the market and the timing of the actual shows. The Company expects the number of performances to increase throughout the year. While revenues from this segment have historically experienced a significant seasonal decline in the third quarter of a fiscal year, we don’t expect to see this seasonality this fiscal year due to the portfolio of shows and revenues scheduled during the third quarter of this year. This segment does typically experience a substantial increase during the fourth quarter of the fiscal year due to holiday related performances and we expect that trend to continue in the coming fourth quarter. |
· | In 2009, many productions that Tix was associated with toured Canada during the election cycle which, due to a strong Canadian dollar and economy, resulted in unusually strong profits. These combined factors resulted in an unusually large number of productions in the first and fourth quarters that under normal circumstances would have naturally fallen in the second or third quarters. |
Direct Operating Expenses
During the six months ended June 30, 2010 and 2009, direct operating expenses were $15.3 million and $30.0 million and represented 88% and 88% of revenues, respectively. Expenses that are direct operating expenses include the guarantees, profit sharing and royalties paid directly to the touring productions; direct expenses of the theater which include staffing, rent and box office charges; marketing costs and production costs which include equipment rentals, stagehands and the cost of our production and settlement manager to attend the production. Live Entertainment productions typically have large back-end sharing relationships with the productions involved and, as a result, significant increases in presentation revenue do not typically result in comparable increases in operating income as much of that goes to the production at hand. On the other hand, significant decreases in presentation revenue do have a comparable impact on operating income as the largest burden of risk in these presentations lies with the promoter. In instances where the Company acts as the primary obligor with suppliers, assumes credit risk, directs the pricing of the tickets and purchases the advertising, the Company records these expenses at gross.
Selling, General and Administrative Expenses
Live Entertainment’s selling, marketing and administrative expenses include advertising and promotional costs related to its business activities, as well as the segment cost of management. For the six months ended June 30, 2010 and 2009, Live Entertainment’s administrative expenses were $2.2 million and $2.4 million, respectively. The decrease is due to decreased marketing expenses due to the decline in revenues.
Depreciation and Amortization
Depreciation and amortization expense incurred during the six months ended June 30, 2010 and 2009 was $397,000 and $395,000, and primarily relates to amortization of the intangible assets that resulted from the acquisitions of Magic and NewSpace. We expect to incur a similar level of depreciation and amortization for the remainder of 2010.
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Liquidity and Capital Resources:
Summary of consolidated cash flows:
For The Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Net cash provided by operating activities | $ | 484,000 | $ | 4,353,000 | ||||
Net cash used in investing activities | $ | (1,895,000 | ) | $ | (98,000 | ) | ||
Net cash provided by (used in) financing activities | $ | (38,000 | ) | $ | (517,000 | ) | ||
Effect of exchange rate on cash | $ | 16,000 | $ | 14,000 | ||||
Change in cash: | ||||||||
Net increase (decrease) | (1,432,000 | ) | 3,752,000 | |||||
Balance at beginning of period | 9,885,000 | 9,192,000 | ||||||
Balance at end of period | $ | 8,453,000 | $ | 12,944,000 |
At June 30, 2010, we had cash of $8.5 million and total assets of $26.8 million compared to $9.9 million and $29.6 million, respectively, at December 31, 2009. Our working capital totaled $5.6 million at June 30, 2010, compared to $7.8 million at December 31, 2009. We had no debt for the six months ended June 30, 2010 and the year ended December 31, 2009.
Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, are funded from operations or from the selling of equity securities and to a much lesser extent upon proceeds received upon the exercise of options and warrants. We may need to incur debt or issue equity to make other strategic acquisitions. We currently do not have any lines of credit available to us. We have no commitments from third parties to provide us with any additional future financing, and may not be able to obtain future financing on favorable terms.
We generally receive cash related to the sale of discount tickets and merchandise at the time of purchase and for Live Entertainment at the time of the settlement of revenues and expenses of the show, which is generally on the last date of the show. In certain instances, but not all, the sale of premium tickets occurs before the event. In these instances, the sale is recorded as deferred revenue until the event occurs. We pay the majority of event related expenses at the time of or after the event occurs.
Our revenues and cash fluctuate based upon the seasonality of our various businesses. Examples of seasonality of our businesses include Ticketing Services, which generally reports slightly greater revenues in the third and fourth quarters than those reported in the first half of the year. Our Live Entertainment segment expects to record the majority of its revenues in the fourth quarter. Exhibit Merchandising and AnyEvent are not subject to seasonal fluctuation. Exhibit Merchandising is subject to revenue fluctuations as a result of exhibits that it represents moving from one location to another. Moving an exhibit from one location to another generally results in the exhibit being closed from four to six weeks. The length of time an exhibit is closed is dependent upon the type of exhibit, the distance the exhibit is to be shipped, as well as any special needs that may be required in re-setting the exhibit. AnyEvent revenues are not subject to seasonal fluctuation, but depend on our ability to obtain tickets for events. We expect cash flows from operations and other financing alternatives, to satisfy working capital and capital expenditures for at least the succeeding year.
Operating Activities:
Cash flows from operations were $484,000 for the six months ended June 30, 2010, compared to $4.4 million for the six months ended June 30, 2009. The $3.9 million decrease in cash flows provided from operations was the result of a $2.2 million decrease in net income in 2010, and adjustments for non-cash items and changes in accounts reflecting operating activities. Significant items adjusting net income in 2010 were $1.3 million in depreciation and amortization expense, a $1.0 million change in allowance for doubtful accounts and $237,000 of fair value of common stock options issued to directors and employees. Cash provided by operating activities was impacted by decreases in accounts receivable of $1.5 million, a decrease in inventory of 249,000, an increase in deferred revenue of $385,000 offset by a decline accounts payable and accrued expenses of $2.8 million. The remaining amounts relate to operating accounts that are reflective of the level and timing of activity that occurred during the period, e.g., accrued liabilities.
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Cash Flows from Investing Activities:
During the six months ended June 30, 2010 and 2009, we used $1.9 million and $98,000 related to investing activities.
Acquisitions
On February 10, 2010, the Company entered into an Asset Purchase Agreement with All Access Entertainment, LLC (All Access) with an effective date of March 1, 2010. Pursuant to the Asset Purchase Agreement, The Company paid the owner of All Access $1.5 million in cash and issued a six month secured convertible promissory note in the principal amount of $1.0 million at no interest due on August 10, 2010.
During the six months ended June 30, 2010 and 2009, we purchased fixed assets with a value of $394,000 and $98,000 respectively.
Cash Flows from Financing Activities:
During the six months ended June 30, 2010, we used $38,000 related to financing activities for payments on our existing capital lease obligations. During 2009, cash used by financing activities included the repurchase of 273,000 shares of our common stock with a fair value of $443,000, $46,000 related to the exercise of options and warrants, and $28,000 related to capital leases.
Summary
Our primary short-term liquidity needs are to fund general working capital requirements while our long-term liquidity needs are primarily acquisition related. Our primary source of funds for our short-term needs will be cash flows from operations, while our long-term sources of funds will be from operations and debt or equity financing. We have sufficient cash on hand and are generating sufficient cash from operations to meet our current operating needs.
Earnings before interest, income taxes, depreciation and amortization or EBITDA:
The following includes the financial measure of performance earnings before interest, income taxes, depreciation and amortization, or EBITDA, that is a commonly used measure of performance in the entertainment industry. EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in United States of America or GAAP. Management has historically evaluated the operating performance of management of Tix Productions, Tix4AnyEvent and Exhibit Merchandising based upon this non-GAAP measure.
EBITDA is presented solely as a supplemental disclosure because (1) management believes it enhances an overall understanding of its past and current performance; (2) management believes it is a useful tool for investors to assess the operating performance of the business in comparison to other entertainment businesses since EBITDA excludes certain items that may not be indicative of management’s operating results; (3) measures that are comparable to EBITDA are often used as an important basis for the valuation of entertainment companies; and (4) management uses EBITDA internally to evaluate its operating performance in comparison to its competitors.
The use of EBITDA has certain limitations. EBITDA should be considered in addition to, not as a substitute for or superior to any GAAP financial measure including net income as an indicator of management’s performance, or cash flows provided by operating activities as an indicator of the Company’s liquidity, nor should it be considered as an indicator of management’s overall performance. Management’s calculation of EBITDA may be different from the calculation of EBITDA or other similarly titled measurements used by other entertainment companies, and therefore comparability may be limited. EBITDA eliminates certain substantial recurring items from net income, such as depreciation, amortization, interest expense and income taxes. Each of these items has been incurred in the past, will continue to be incurred in the future and should be considered in the overall evaluation of the Company’s results. We compensate for these limitations by providing the relevant disclosure of depreciation and amortization, interest expense and income taxes that are excluded in the calculation of EBITDA both in the reconciliation to the GAAP financial measure of net income (loss) and in the consolidated financial statements and related footnotes, all of which should be considered when evaluating the Company’s results. Management strongly encourages readers to review our financial information in its entirety and not to rely on a single measure. A reconciliation of EBITDA to net income (loss) follows:
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Three months ended | Three months ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Net income (loss) | $ | (1,331,000 | ) | $ | 659,000 | |||||||||||
Interest income | $ | 18,000 | $ | 9,000 | ||||||||||||
Interest expense | (2,000 | ) | (3,000 | ) | ||||||||||||
Net interest income (expense) | $ | 16,000 | (16,000 | ) | $ | 6,000 | (6,000 | ) | ||||||||
Depreciation | 154,000 | 133,000 | ||||||||||||||
Amortization | 535,000 | 493,000 | ||||||||||||||
Income taxes | 111,000 | 106,000 | ||||||||||||||
EBITDA | $ | (571,000 | ) | $ | 1,385,000 |
Six months ended | Six months ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Net income (loss) | $ | (1,254,000 | ) | $ | 954,000 | |||||||||||
Interest income | $ | 25,000 | $ | 22,000 | ||||||||||||
Interest expense | (4,000 | ) | (7,000 | ) | ||||||||||||
Net interest income (expense) | $ | 21,000 | (21,000 | ) | $ | 15,000 | (15,000 | ) | ||||||||
Depreciation | 291,000 | 264,000 | ||||||||||||||
Amortization | 995,000 | 983,000 | ||||||||||||||
Income Taxes | 111,000 | 106,000 | ||||||||||||||
EBITDA | $ | 122,000 | $ | 2,292,000 |
Principal Commitments:
Lease Commitments:
The Company leases office space for its corporate headquarters in Studio City, California. Additionally, the Company’s wholly-owned subsidiaries, Tix4Tonight, LLC, Tix Productions, LLC and Exhibit Merchandising, lease space. Tix4Tonight leases its ticket facilities and its administrative offices in Las Vegas, Nevada, for various periods ranging from one year to five years. Tix Production, LLC leases office space in Salt Lake City, Utah and Aurora, Ohio. Exhibit Merchandising leases warehouse and office space in Streetsboro, Ohio.
Many of the Company’s operating leases contain predetermined fixed increases in the minimum rental rate during the initial lease term and/or rent holiday periods. For these leases, the Company recognizes the related rent expense on a straight-line basis beginning on the effective date of the lease. The Company records the difference between the amounts charged to expense and the rent paid as deferred rent on the Company’s balance sheet.
The aggregate minimum future rental payments under non-cancelable operating leases for facilities in operation at June 30, 2010, excluding operating expenses, annual rent escalation provisions, and contingent rental payments based on achieving certain pre-determined sales levels, are as follows:
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On March 19, 2010, the Company entered into a sixty month lease under which we lease our principal executive offices. Pursuant to the lease, we relocated our offices to 12711 Ventura Boulevard, Suite 340, Studio City CA 91604, a 3,970 square foot space. The lease commenced May 1, 2010 and our monthly rent under the lease is $12,250. The rent is subject to increase to approximately $12,600, $13,000, $13,400 and $13,800 respectively, on the first, second, third and fourth anniversaries of the extended lease term. We will be responsible for paying our allocable portion of operating expenses in addition to the monthly rent.
When we acquired All Access Entertainment, LLC (Note 4), we assumed certain operating leases for various locations. The obligations related to these locations are included in the table below.
Payments due by Fiscal Years Ending December 31, | ||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | 2014 and beyond | |||||||||||||||||||
Debt obligations | $ | 1,000,000 | $ | 1,000,000 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Capital lease obligations | 44,000 | 24,000 | 9,000 | 8,000 | 3,000 | - | ||||||||||||||||||
Operating lease obligations | 10,388,000 | 1,694,000 | 3,030,000 | 2,582,000 | 1,512,000 | 1,570,000 | ||||||||||||||||||
Total contractual cash obligations | $ | 11,432,000 | $ | 2,718,000 | $ | 3,039,000 | $ | 2,590,000 | $ | 1,515,000 | $ | 1,570,000 |
Employment Agreements:
The Company has employment agreements with its President and Chief Executive Officer, as well as several of its key officers and employees that are for varying periods of one to three years.
Retirement Plan:
The Company has a 401(k) retirement plan which covers substantially all employees. Under the plan, participants may defer the receipt of up to 75% percent of their annual compensation, but not to exceed the maximum amount as determined by the Internal Revenue Code. The amount of the employer matching contribution is equal to 100% of the first 3% withheld and 50% for the next 2% withheld. The Company may make additional matching contributions as determined and approved by the Board of Directors. Total 401(k) retirement plan expense amounted to $83,000 and $76,000 for the six months ended June 30, 2010 and 2009, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As substantially all of our investments are in short-term bank deposits, our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve principal. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any derivative financial instruments or foreign currency instruments. If interest rates had varied by 10% in the three or six month periods ended June 30, 2010, it would not have had a material effect on our results of operations or cash flows for that period.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act (defined below)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
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Changes in Internal Control Over Financial Reporting
In addition, our management with the participation of our Principal Executive Officer and Principal Financial Officer have determined that no change in our internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) occurred during or subsequent to the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 2010, the end of the period covered by this report, the Company was subject to various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Other than as discussed below, in the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. The Company intends to contest each lawsuit vigorously but should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. Management continues to evaluate the lawsuits discussed below and based on the stage of these proceedings, management is unable to reasonably estimate the likelihood of any loss or the amount or range of any potential loss that could result from the litigation. Therefore, no accrual has been established for any potential loss in connection with these lawsuits.
We are party to the legal proceedings described in Part I, Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 12 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s 2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TIX CORPORATION (Registrant) | ||
Date: August 9, 2010 | By: | /s/Mitch Francis |
Mitch Francis | ||
Chief Executive Officer | ||
Date: August 9, 2010 | By: | /s/ Steve Handy |
Steve Handy | ||
Chief Financial Officer (On behalf of the registrant and Principal Financial and Accounting Officer) |
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INDEX TO EXHIBITS
31.1 | Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Officer’s Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Officer’s Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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