United States Securities and Exchange Commission
FORM 10-Q
[ x ] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
OR | |
For the quarterly period ended | |
[ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _________to ________. | |
Commission File Number 001-09014 | |
ChyronHego Corporation | |
(Exact name of registrant as specified in its charter) | |
New York | 11-2117385 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5 Hub Drive, Melville, New York | 11747 | |
(Address of principal executive offices) | (Zip Code) | |
(631) 845-2000 | ||
(Registrant's telephone number, including area code) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [x] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [x] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
The number of shares outstanding of the issuer's common stock, par value $.01 per share, on May 7,August 6, 2014 was 35,531,124.36,706,773.
CHYRONHEGO CORPORATION
INDEX
PART I | FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | ||
Consolidated Balance Sheets as of | |||
December 31, 2013 | 3 | ||
Consolidated Statements of Operations for the Three and Six Months ended June 30, 2014 and 2013 (unaudited) | 4 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended | |||
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2014 and 2013 (unaudited) | 6 | ||
Notes to Consolidated Financial Statements (unaudited) | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | 19 |
Item 3. | Quantitative and | 24 | |
Item 4. | Controls and Procedures | ||
24 | |||
| |||
| PART II | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 25 | |
Item 1A. | Risk Factors | 25 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 25 | |
Item 3. | Defaults Upon Senior Securities | 25 | |
Item 4. | Mine Safety Disclosures | 25 | |
Item 5. | Other Information | 25 | |
Item 6. | Exhibits | 26 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHYRONHEGO CORPORATION
| Unaudited | ||||||||
| March 31, | December 31, | |||||||
| Assets | 2014 | 2013 | ||||||
| Current assets: | ||||||||
Cash and cash equivalents | $ | 3,988 | $ | 5,266 | ||||
Accounts receivable, net | 9,009 | 7,781 | ||||||
Inventories, net | 2,747 | 2,816 | ||||||
| Prepaid expenses and other current assets | 2,226 | 2,525 | ||||||
Total current assets | 17,970 | 18,388 | ||||||
Property and equipment, net | 4,209 | 4,145 | ||||||
Intangible assets, net | 8,637 | 8,968 | ||||||
Goodwill | 18,948 | 18,948 | ||||||
Deferred tax asset | 77 | 56 | ||||||
| Other assets | 141 | 147 | ||||||
TOTAL ASSETS | $ | 49,982 | $ | 50,652 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 8,418 | $ | 9,240 | ||||
Deferred revenue | 4,359 | 4,660 | ||||||
Short-term debt | 1,578 | 1,532 | ||||||
Due to related parties | 727 | 716 | ||||||
Current portion of pension liability | 472 | 518 | ||||||
Deferred tax liability | 260 | 271 | ||||||
Capital lease obligations | 190 | 215 | ||||||
Total current liabilities | 16,004 | 17,152 | ||||||
Contingent consideration | 8,328 | 12,260 | ||||||
Pension liability | 2,330 | 2,197 | ||||||
Deferred revenue | 841 | 923 | ||||||
Long-term debt | 763 | 772 | ||||||
Deferred tax liability | 962 | 1,195 | ||||||
Other liabilities | 628 | 686 | ||||||
Total liabilities | 29,856 | 35,185 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders' equity: | ||||||||
| Preferred stock, par value $1.00, without designation | ||||||||
| Authorized - 1,000,000 shares, Issued - none | ||||||||
| Common stock, par value $.01 | ||||||||
| Authorized - 150,000,000 shares | ||||||||
| Issued and outstanding - 34,059,219 at March 31, 2014 | ||||||||
and 30,788,251 at December 31, 2013 | 341 | 308 | ||||||
Additional paid-in capital | 111,469 | 103,642 | ||||||
Accumulated deficit | (91,485 | ) | (88,243 | ) | ||||
Accumulated other comprehensive loss | (405 | ) | (421 | ) | ||||
Total ChyronHego Corporation shareholders' equity | 19,920 | 15,286 | ||||||
Non controlling interests | 206 | 181 | ||||||
Total shareholders' equity | 20,126 | 15,467 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 49,982 | $ | 50,652 | ||||
Unaudited | ||||||||
June 30, | December 31, | |||||||
| 2014 | 2013 | ||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,972 | $ | 5,266 | ||||
Accounts receivable, net | 10,077 | 7,781 | ||||||
Inventories, net | 1,587 | 2,816 | ||||||
Prepaid expenses and other current assets | 2,810 | 2,525 | ||||||
Total current assets | 19,446 | 18,388 | ||||||
Property and equipment, net | 4,255 | 4,145 | ||||||
Intangible assets, net | 10,905 | 8,968 | ||||||
Goodwill | 21,973 | 18,948 | ||||||
Deferred tax asset | 76 | 56 | ||||||
Other assets | 136 | 147 | ||||||
TOTAL ASSETS | $ | 56,791 | $ | 50,652 | ||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 6,981 | $ | 9,240 | ||||
Deferred revenue | 5,618 | 4,660 | ||||||
Short-term debt | 1,189 | 1,532 | ||||||
Due to related parties | 738 | 716 | ||||||
Current portion of pension liability | 377 | 518 | ||||||
Deferred tax liability | 296 | 271 | ||||||
Capital lease obligations | 164 | 215 | ||||||
Total current liabilities | 15,363 | 17,152 | ||||||
Contingent consideration | 7,714 | 12,260 | ||||||
Pension liability | 2,418 | 2,197 | ||||||
Deferred revenue | 797 | 923 | ||||||
Long-term debt | 792 | 772 | ||||||
Deferred tax liability | 1,626 | 1,195 | ||||||
Other liabilities | 591 | 686 | ||||||
Total liabilities | 29,301 | 35,185 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, par value $1.00, without designationAuthorized - 1,000,000 shares, Issued - none | ||||||||
Common stock, par value $.01Authorized - 150,000,000 sharesIssued and outstanding - 35,567,299 at June 30, 2014and 30,788,251 at December 31, 2013 | 356 | 308 | ||||||
Additional paid-in capital | 115,941 | 103,642 | ||||||
Accumulated deficit | (88,538 | ) | (88,243 | ) | ||||
Accumulated other comprehensive loss | (449 | ) | (421 | ) | ||||
Total ChyronHego Corporation shareholders' equity | 27,310 | 15,286 | ||||||
Non controlling interests | 180 | 181 | ||||||
Total shareholders' equity | 27,490 | 15,467 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 56,791 | $ | 50,652 | ||||
See Notes to Consolidated Financial Statements (unaudited)
CHYRONHEGO CORPORATION
THREE AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2014 AND 2013
(Unaudited)
| 2014 | 2013 | |||||||
| Product revenues | $ | 5,781 | $ | 5,974 | ||||
| Service revenues | 6,840 | 2,043 | ||||||
| Total revenues | 12,621 | 8,017 | ||||||
| Cost of sales | 4,885 | 2,295 | ||||||
| Gross profit | 7,736 | 5,722 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 6,111 | 4,751 | ||||||
| Research and development | 2,178 | 1,780 | ||||||
| Change in fair value of contingent consideration | 2,556 | - | ||||||
| Total operating expenses | 10,845 | 6,531 | ||||||
| Operating loss | (3,109 | ) | (809 | ) | ||||
| Interest expense, net | (126 | ) | (14 | ) | ||||
| Other loss, net | (70 | ) | (83 | ) | ||||
| Loss before taxes | (3,305 | ) | (906 | ) | ||||
| Income tax benefit (expense), net | 88 | (11 | ) | |||||
| Net loss | (3,217 | ) | (917 | ) | ||||
| Less: Net income attributable to non-controlling interests | 25 | - | ||||||
| Net loss attributable to ChyronHego shareholders | (3,242 | ) | $ | (917 | ) | |||
| Net loss per share attributable to ChyronHego | ||||||||
| shareholders - basic | $ | (0.10 | ) | $ | (0.05 | ) | ||
| Net loss per share attributable to ChyronHego | ||||||||
| shareholders - diluted | $ | (0.10 | ) | $ | (0.05 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic | 31,118 | 17,362 | ||||||
| Diluted | 31,118 | 17,362 | ||||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Product revenues | $ | 7,654 | $ | 6,744 | $ | 13,435 | $ | 12,718 | ||||||||
Service revenues | 7,050 | 3,972 | 13,890 | 6,015 | ||||||||||||
Total revenues | 14,704 | 10,716 | 27,325 | 18,733 | ||||||||||||
Cost of sales | 5,628 | 3,385 | 10,513 | 5,680 | ||||||||||||
Gross profit | 9,076 | 7,331 | 16,812 | 13,053 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 6,139 | 6,836 | 12,250 | 11,587 | ||||||||||||
Research and development | 2,128 | 2,345 | 4,306 | 4,125 | ||||||||||||
Change in fair value of contingent consideration | (2,156 | ) | 400 | |||||||||||||
Total operating expenses | 6,111 | 9,181 | 16,956 | 15,712 | ||||||||||||
Operating income (loss) | 2,965 | (1,850 | ) | (144 | ) | (2,659 | ) | |||||||||
Interest expense, net | (117 | ) | (95 | ) | (244 | ) | (109 | ) | ||||||||
Other income (loss), net | 68 | (39 | ) | (1 | ) | (122 | ) | |||||||||
Income (loss) before taxes | 2,916 | (1,984 | ) | (389 | ) | (2,890 | ) | |||||||||
Income tax benefit (expense), net | 37 | (93 | ) | 125 | (104 | ) | ||||||||||
Net income (loss) | 2,953 | (2,077 | ) | (264 | ) | (2,994 | ) | |||||||||
Less: Net income attributable toNon-controlling interests | 6 | 8 | 31 | 8 | ||||||||||||
Net income (loss) attributable to ChyronHegoshareholders | $ | 2,947 | $ | (2,085 | ) | $ | (295 | ) | $ | (3,002 | ) | |||||
Net income (loss) per share attributable toChyronHego shareholders - basic | $ | 0.08 | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.15 | ) | |||||
Net income (loss) per share attributable toChyronHego shareholders - diluted | $ | 0.08 | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.15 | ) | |||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 35,089 | 22,989 | 33,114 | 20,191 | ||||||||||||
Diluted | 36,090 | 22,989 | 33,114 | 20,191 | ||||||||||||
See Notes to Consolidated Financial Statements (unaudited)
CHYRONHEGO CORPORATION
THREE AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2014 AND 2013
(Unaudited)
| 2014 | 2013 | |||||||
Net loss | $ | (3,217 | ) | $ | (917 | ) | ||
| Other comprehensive income (loss): | ||||||||
Cumulative translation adjustment | 16 | (20 | ) | |||||
Comprehensive loss | (3,201 | ) | (937 | ) | ||||
| Less: Comprehensive income attributable to | ||||||||
non-controlling interest | 25 | - | ||||||
| Comprehensive loss attributable to ChyronHego | ||||||||
Corporation | $ | (3,226 | ) | $ | (937 | ) | ||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income (loss) | $ | 2,953 | $ | (2,077 | ) | $ | (264 | ) | $ | (2,994 | ) | |||||
Other comprehensive income (loss): | ||||||||||||||||
Cumulative translation adjustment | (44 | ) | 90 | (28 | ) | 70 | ||||||||||
Comprehensive income (loss) | 2,909 | (1,987 | ) | (292 | ) | (2,924 | ) | |||||||||
Less: Comprehensive income attributable tonon-controlling interest | 6 | 8 | 31 | 8 | ||||||||||||
Comprehensive income (loss) attributable toChyronHego Corporation | $ | 2,903 | $ | (1,995 | ) | $ | (323 | ) | $ | (2,932 | ) | |||||
See Notes to Consolidated Financial Statements (unaudited)
CHYRONHEGO CORPORATION
SIX MONTHS ENDED MARCH 31,JUNE 30, 2014 AND 2013
(Unaudited)
| 2014 | 2013 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,217 | ) | $ | (917 | ) | ||
| Adjustments to reconcile net loss to net cash used in | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 733 | 187 | ||||||
| Deferred tax asset allowance | (67 | ) | 353 | |||||
| Deferred income tax benefit | (197 | ) | (353 | ) | ||||
| Share-based payment arrangements | 290 | 340 | ||||||
| Shares issued for 401(k) match | 52 | 70 | ||||||
| Change in fair value of contingent consideration | 2,556 | - | ||||||
| Other | 100 | (130 | ) | |||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | (1,235 | ) | 19 | |||||
| Inventories | 69 | 188 | ||||||
| Prepaid expenses and other assets | 300 | (128 | ) | |||||
Accounts payable and accrued expenses | 34 | 348 | ||||||
Deferred revenue | (382 | ) | (209 | ) | ||||
Other liabilities | 77 | 210 | ||||||
Net cash used in operating activities | (887 | ) | (22 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Acquisitions of property and equipment | (539 | ) | (72 | ) | ||||
Net cash used in investing activities | (539 | ) | (72 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from revolving credit facilities, net | 302 | - | ||||||
| Repayments on debt | (282 | ) | (70 | ) | ||||
| Proceeds from borrowings | 10 | - | ||||||
| Payments on capital lease obligations | (63 | ) | (10 | ) | ||||
| Proceeds from exercise of stock options | 178 | - | ||||||
| Net cash provided by (used in) financing activities | 145 | (80 | ) | |||||
| Effect of exchange rates on cash and cash equivalents | 3 | - | ||||||
| Change in cash and cash equivalents | (1,278 | ) | (174 | ) | ||||
| Cash and cash equivalents at beginning of period | 5,266 | 2,483 | ||||||
| Cash and cash equivalents at end of period | $ | 3,988 | $ | 2,309 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Common stock issued in settlement of contingent consideration | $ | 6,488 | - | |||||
| Common stock issued in settlement of awards under the | ||||||||
| Management Incentive Compensation Plan and | ||||||||
| Severance Agreements | 846 | - | ||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (264 | ) | $ | (2,994 | ) | ||
Adjustments to reconcile net loss to net cash provided byoperating activities: | ||||||||
Depreciation and amortization | 1,384 | 768 | ||||||
Deferred income taxes | (276 | ) | 56 | |||||
Share-based payment arrangements | 602 | 2,384 | ||||||
Shares issued for 401(k) match | 105 | 128 | ||||||
Change in fair value of contingent consideration | 400 | |||||||
Other | 139 | 55 | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (2,385 | ) | (1,631 | ) | ||||
Inventories | 1,241 | (401 | ) | |||||
Prepaid expenses and other assets | (74 | ) | (69 | ) | ||||
Accounts payable and accrued expenses | (1,396 | ) | 1,837 | |||||
Deferred revenue | 760 | 52 | ||||||
Other liabilities | 83 | 339 | ||||||
Net cash provided by operating activities | 319 | 524 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Acquisitions of property and equipment, net | (904 | ) | (714 | ) | ||||
Acquisition of business, net of cash acquired | 537 | (28 | ) | |||||
Net cash used in investing activities | (367 | ) | (742 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayments on revolving credit facilities, net | (67 | ) | ||||||
Repayments on debt | (359 | ) | (213 | ) | ||||
Proceeds from borrowings | 54 | 222 | ||||||
Payments on capital lease obligations | (128 | ) | (102 | ) | ||||
Proceeds from exercise of stock options | 289 | 2 | ||||||
Net cash used in financing activities | (211 | ) | (91 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (35 | ) | 15 | |||||
Change in cash and cash equivalents | (294 | ) | (294 | ) | ||||
Cash and cash equivalents at beginning of period | 5,266 | 2,483 | ||||||
Cash and cash equivalents at end of period | $ | 4,972 | $ | 2,189 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Common stock issued for acquisition | $ | 3,299 | $ | 16,591 | ||||
Contingent consideration for acquisition | $ | 1,543 | $ | 7,500 | ||||
Common stock issued in settlement of contingent consideration | $ | 6,488 | ||||||
Common stock issued in settlement of awards under theManagement Incentive Compensation Plan andSeverance Agreements | $ | 846 | ||||||
See Notes to Consolidated Financial Statements (unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Nature of Business
On May 22, 2013 Chyron Corporation ("Chyron") acquired the outstanding stock of Hego Aktiebolag ("Hego" or "Hego AB"), and changed its name to ChyronHego Corporation (the "Company" or "ChyronHego"). Hego is a global graphics services company based in Stockholm, Sweden that develops real-time graphics products for the broadcast and sports industries. The companies combined in a cash and stock-for-stock transaction and the Company has continued to trade on the NASDAQ under the symbol "CHYR." The combination of these two companies, which is referred to in these consolidated financial statements as the "Business Combination," forms a leading global provider of broadcast graphics creation, playout and real-time data visualization.
General
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts have been eliminated. The results of operations include the operating results of Hego since the completion of the Business Combination on May 22, 2013. See Note 8 of these consolidated financial statements.
In the opinion of management of the Company, the unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31,June 30, 2014 and the consolidated results of its operations, its comprehensive income (loss) and its cash flows for the periods ended March 31,June 30, 2014 and 2013. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2014. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates made by management include inventory valuations, stock and bonus compensation, allowances for doubtful accounts, income taxes, pension assumptions, allocations of purchase price, contingent consideration, valuation of intangible assets and reserves for warranty and incurred but not reported health insurance claims. Estimates, by their nature, are based on judgment and available information. Also, during interim periods, certain costs and expenses are allocated among periods based on an estimate of time expired, benefit received, or other activity associated with the periods. Accordingly, actual results could differ from those estimates. The Company has not segregated its cost of sales between costs of products and costs of services as it is not practicable to segregate such costs. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The December 31, 2013 figures included herein were derived from such audited consolidated financial statements.
Recent Accounting Pronouncements
In AprilJune 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU No. 2014-12"). ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performancecondition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. ASU No. 2014-12 is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of the provisions of ASU No. 2014-12 is not expected to have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures ("ASU No. 2014-11"). ASU No. 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings, rather than as sales with forward repurchase agreements. In addition, the ASU eliminates accounting guidance on linked repurchase financing transactions. ASU No. 2014-11 also expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. ASU No. 2014-11 is effective for interim and annual periods beginning after December 15, 2014, with early application prohibited. The adoption of the provisions of ASU No. 2014-11 is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, ASU No. 2014-09 supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts . Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 is effective for interim and annual periods beginning after December 15, 2016, with early application prohibited. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. The Company is evaluating the transition method that will be elected and the potential effects of adopting the provisions of ASU No. 2014-09.
In April 2014, the FASB issued Accounting Standards Update ("ASU") 2014-08, which includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. This update is effective for periods beginning after December 15, 2014. The implementation of the amended guidance is not expected to have a material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position,or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, in which case the unrecognized tax benefit should be presented as a liability. This standard is effective for fiscal years beginning after December 15, 2013. The Company's adoption of this standard did not have a significant impact on its consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, which addresses the accounting for a cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longernolonger holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The standard is effective for fiscal years beginning after December 15, 2013. The Company's adoption of this standard did not have a significant impact on its consolidated financial statements.
Earnings (Loss) Per Share
Basic earnings (loss) per share isare computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and restricted stock units are reflected in diluted net income (loss) per share by applying the treasury stock method.
The Company recorded net losses for the three months ended March 31,June 30, 2013 and the six months ended June 30, 2014 and 2013. Potential common shares are anti-dilutive in periods in which the Company records a net loss because they would reduce the respective period's net loss per share. Anti-dilutive potential common shares are excluded from the calculation of diluted earnings per share. As a result,
Shares used to calculate net diluted lossincome (loss) per share was equal to basic net loss per share in all periods presented.
| Three Months | ||
| Ended March 31, | ||
| 2014 | 2013 | |
| Weighted average shares which are not included | ||
| in the calculation of diluted earnings (loss) | ||
| per share because their impact is anti-dilutive: | ||
| Stock options | 1,189 | 3,003 |
| Restricted stock units | - | 120 |
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic weighted average shares outstanding | 35,089 | 22,989 | 33,114 | 20,191 | ||||||||||||
Effect of dilutive stock options | 946 | - | - | - | ||||||||||||
Effect of dilutive restricted stock units | 55 | - | - | - | ||||||||||||
Diluted weighted average shares outstanding | 36,090 | 22,989 | 33,114 | 20,191 | ||||||||||||
Weighted average shares which are not includedin the calculation of diluted earnings (loss) pershare because their impact is anti-dilutive: | ||||||||||||||||
Stock options | 459 | 3,340 | 2,365 | 3,172 | ||||||||||||
Restricted stock units | - | - | - | 60 | ||||||||||||
| 459 | 3,340 | 2,365 | 3,232 | |||||||||||||
2. 2. LONG-TERM INCENTIVE PLANS
Pursuant to the 2008 Long-term Incentive Plan, as amended (the "Plan"), the Company may grant stock options (non-qualified or incentive), stock appreciation rights, restricted stock, restricted stock units and other share-based awards to employees, directors and other persons who serve the Company. The Plan is overseen by the Compensation Committee of the Board of Directors, which approves the timing and circumstances under which share-based awards may be granted. At March 31,June 30, 2014 there were 0.53.2 million shares available to be granted under the Plan. The Company issues new shares to satisfy the exercise or release of share-based awards. Under the provisionsprovision of FASB Accounting Standards Codification ("ASC") Topic 718,Stock Compensation, all share-based payments are required to be recognized in the statement of operations based on their fair values at the date of grant.
The fair value of each option award is estimated using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company's stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. Options generally have a life of 10 years and have either time-based or performance-based vesting features. Time-based awards generally vest over a three year period, while the performance-based awards vest upon the achievement of specific performance targets. There were no options granted during the three months ended June 30, 2013. The fair values of the options granted during the three months ended March 31,June 30, 2014 and the six months ended June 30, 2014 and 2013, were estimated based on the following weighted average assumptions:
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Expected volatility | 78.39 | % | 76.23 | % | ||||
| Risk-free interest rate | 2.00 | % | 1.06 | % | ||||
| Expected dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected life (in years) | 6.0 | 6.0 | ||||||
| Estimated fair value per option granted | $ | 1.86 | $ | 0.87 | ||||
Three Months | Six Months | ||||||||
Ended June 30, | Ended June 30, | ||||||||
2014 | 2014 | 2013 | |||||||
Expected volatility | 79.30% | 78.78% | 76.23% | ||||||
Risk-free interest rate | 1.79% | 1.91% | 1.06% | ||||||
Expected dividend yield | 0.00% | 0.00% | 0.00% | ||||||
Expected life (in years) | 6.0 | 6.0 | 6.0 | ||||||
Estimated fair value per option granted | $1.49 | $1.70 | $0.87 | ||||||
The following table presents a summary of the Company's stock option activity for the threesix months ended March 31,June 30, 2014:
Number of Options | ||||
Outstanding at January 1, 2014 | 5,994,788 | |||
Granted | 866,250 | |||
Exercised | (473,789 | ) | ||
Forfeited and cancelled | | (47,870 | ) | |
Outstanding at | 6,339,379 | |||
The Company also grants restricted stock units, or RSUs, each of which entitles the holder to a share of Company common stock. The fair value of an RSU is equal to the market value of a share of common stock on the date of grant. The following table presents a summary of the Company's RSU activity for the threesix months ended March 31,June 30, 2014:
Shares | ||||
Nonvested at January 1, 2014 | - | |||
Granted | 125,803 | |||
Forfeited and Cancelled | (27,956 | ) | ||
Nonvested at | 97,847 | |||
The Company amortizes share-based compensation expense over the vesting period on a straight line basis. The impact on the Company's results of operations of recording share-based compensation expense is as follows (in thousands):
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cost of sales | $ | 25 | $ | 11 | $ | 49 | $ | 28 | ||||||||
Research and development | 105 | 67 | 203 | 154 | ||||||||||||
Selling, general and administrative | 181 | 1,966 | 350 | 2,202 | ||||||||||||
| $ | 311 | $ | 2,044 | $ | 602 | $ | 2,384 | |||||||||
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Cost of sales | $ | 24 | $ | 17 | ||||
| Research and development | 98 | 87 | ||||||
| Selling, general and administrative | 168 | 236 | ||||||
| $ | 290 | $ | 340 | |||||
3. INVENTORIES
Inventories, net are comprised of the following (in thousands):
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Finished goods | $ | 473 | $ | 539 | ||||
| Work-in-progress | 159 | 310 | ||||||
| Raw material | 2,115 | 1,967 | ||||||
| $ | 2,747 | $ | 2,816 | |||||
| June30, | December 31, | |||||||
| 2014 | 2013 | |||||||
Finished goods | $ | 292 | $ | 539 | ||||
Work-in-progress | 254 | 310 | ||||||
Raw material | 1,041 | 1,967 | ||||||
| $ | 1,587 | $ | 2,816 |
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Revolving credit facilities - Europe | $ | 1,232 | $ | 933 | ||||
| Note payable - Europe | 934 | 921 | ||||||
| Term loans - Europe | 82 | 355 | ||||||
| Other | 93 | 95 | ||||||
| 2,341 | 2,304 | |||||||
| Less: portion due within one year | 1,578 | 1,532 | ||||||
| $ | 763 | $ | 772 | |||||
June30, | December 31, | |||||||
2014 | 2013 | |||||||
Revolving credit facilities - Europe | $ | 864 | $ | 933 | ||||
Note payable - Europe | 919 | 921 | ||||||
Term loans - Europe | 58 | 355 | ||||||
Other | 140 | 95 | ||||||
| 1,981 | 2,304 | |||||||
Less: portion due within one year | 1,189 | 1,532 | ||||||
| $ | 792 | $ | 772 | |||||
Revolving credit facilities - Europe
We have revolving credit facilities associated with our European operations that total $1.3 million of which $1.2$0.9 million is outstanding at March 31,June 30, 2014. The revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods, unless notified by the lender ninety days prior to expiration. The interest rate on these revolving credit facilities is 5.95%. The revolving credit agreements are collateralized by the assets of certain European subsidiaries of the Company.
Note payable - Europe
In connection with the acquisition of Granvideo AB in 2013, the Company issued a note to the previous shareholder of Granvideo in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. The Company made principal payments of $0.06 million on September 1, 2013 and $0.1 million on November 15, 2013, and is required to make four equal annual payments of $0.26 million on December 31 of each year from 2014 to 2017. The principal balance at March 31,June 30, 2014 was $0.9 million.
Term loans - Europe
In addition, we have two term loans with European lenders that total $0.1 million. These term loans require principal payments totaling $8 thousand per month and bear interest at rates that range between 7.45% and 7.75% and will mature in 2014 and 2015.
Revolving line of credit - US
In November 2013, the Company entered into a two-year $4 million revolving line of credit (the "Revolver") with SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. At March 31,June 30, 2014, available borrowings under the Revolver were $3.4$3.9 million but no borrowings were outstanding. The Company is also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if the Company's AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x
The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If the Company's AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%. In connection with the Revolver, the Company was required to pay the outstanding balance on its previously outstanding term loan which was $0.4 million on the closing date. The original term loan was being repaid over 30 months and was subject to interest at Prime + 2.25% .
As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts the Company's ability to pay dividends without the bank's consent.
The Revolver is collateralized by the assets of the U.S. subsidiaries of the Company, except for (i) its intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.
5. BENEFIT PLANS
The net periodic benefit cost relating to the Company's U.S. Pension Plan is as follows (in thousands):
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Service cost | $ | 82 | $ | 146 | ||||
| Interest cost | 101 | 90 | ||||||
| Expected return on plan assets | (107 | ) | (100 | ) | ||||
| Amortization of net loss | 14 | 66 | ||||||
| Amortization of prior service cost | (2 | ) | (2 | ) | ||||
| $ | 88 | $ | 200 | |||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost | $ | 82 | $ | 135 | $ | 164 | $ | 281 | ||||||||
Interest cost | 101 | 98 | 202 | 188 | ||||||||||||
Expected return on plan assets | (107 | ) | (98 | ) | (214 | ) | (198 | ) | ||||||||
Amortization of net loss | 14 | 57 | 28 | 123 | ||||||||||||
Amortization of prior service cost | (2 | ) | (2 | ) | (4 | ) | (4 | ) | ||||||||
| $ | 88 | $ | 190 | $ | 176 | $ | 390 | |||||||||
The Company's policy is to fund the minimum contributions required under the Employee Retirement Income Security Act (ERISA) and, subject to cash flow levels, the Company may choose to make a discretionary contribution to its pension plan to reduce the unfunded liability. In the firstsecond quarter of 2014, the Company was notmade a required to make any contributions to its pension plan. However, basedcontribution of $0.1 million. Based on current assumptions, the Company expects to make required contributions of $0.5$0.4 million in the next twelve months.
The Company has adopted a 401(k) Plan exclusively for the benefit of participants and their beneficiaries. All U.S. employees of the Company are eligible to participate in the 401(k) Plan. The Company may make discretionary matching contributions of the compensation contributed by the participant.theparticipant. The Company has the option of making the matching contributions in cash or through shares of Company common stock. During the threesix months
Substantially all employees of the Company's foreign subsidiaries receive retirement benefits, at least to the extent required by law, through funds that are governed by local statutory requirements. Contributions are typically based on specified percentages of the employees' salaries.
6. PRODUCT WARRANTY
The Company provides product warranties for its various products, typically for one year. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the sale is recognized. The Company established its reserve based on historical data, taking into consideration specific product information. The following table sets forth the changes in the warranty reserve (in thousands):
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Balance at beginning of period | $ | 118 | $ | 50 | ||||
| Provisions | 113 | 29 | ||||||
| Warranty services provided, net | (63 | ) | (24 | ) | ||||
| $ | 168 | $ | 55 | |||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Balance at beginning of period | $ | 168 | $ | 55 | $ | 118 | $ | 50 | ||||||||
Provisions | 81 | 41 | 194 | 70 | ||||||||||||
Warranty services provided, net | (123 | ) | (31 | ) | (186 | ) | (55 | ) | ||||||||
| $ | 126 | $ | 65 | $ | 126 | $ | 65 | |||||||||
7. INCOME TAXES
The components of deferred income taxes are as follows (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 11,551 | $ | 12,074 | ||||
Inventory | 1,866 | 1,856 | ||||||
Other liabilities | 3,195 | 3,051 | ||||||
Fixed assets | 2,274 | 2,069 | ||||||
Other temporary differences | 845 | 751 | ||||||
| 19,731 | 19,801 | |||||||
Less: valuation allowance | (19,655 | ) | (19,745 | ) | ||||
Total deferred tax assets | 76 | 56 | ||||||
Deferred tax liability: | ||||||||
Intangibles | (2,019 | ) | (1,453 | ) | ||||
Other temporary differences | 97 | (13 | ) | |||||
Net deferred tax liability | $ | (1,846 | ) | $ | (1,410 | ) | ||
As reported: | ||||||||
Non-current deferred tax assets | $ | 76 | $ | 56 | ||||
Current deferred tax liability | $ | (296 | ) | $ | (271 | ) | ||
Non-current deferred tax liability | $ | (1,626 | ) | $ | (1,195 | ) | ||
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 12,210 | $ | 12,074 | ||||
| Inventory | 1,855 | 1,856 | ||||||
| Other liabilities | 2,967 | 3,051 | ||||||
| Fixed assets | 2,007 | 2,069 | ||||||
| Other temporary differences | 716 | 751 | ||||||
| 19,755 | 19,801 | |||||||
| Less: valuation allowance | (19,678 | ) | (19,745 | ) | ||||
| Total deferred tax assets | 77 | 56 | ||||||
| Deferred tax liability: | ||||||||
| Intangibles | (1,385 | ) | (1,453 | ) | ||||
| Other temporary differences | 163 | (13 | ) | |||||
| Net deferred tax liability | $ | (1,145 | ) | $ | (1,410 | ) | ||
| As reported: | ||||||||
| Non-current deferred tax assets | $ | 77 | $ | 56 | ||||
| Current deferred tax liability | $ | (260 | ) | $ | (271 | ) | ||
| Non-current deferred tax liability | $ | (962 | ) | $ | (1,195 | ) | ||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At March 31,June 30, 2014, the gross deferred tax balance was $19.8$19.7 million and includes the $12$11 million tax effect of $34$32 million in U.S. Federal net operating loss carryforwards ("NOLs") expiring between 2018 and 2032. The Company has not recorded a deferred tax asset of approximately $1.3 million related to the NOLs resulting from the exercise of disqualifying stock options and restricted stock units which will be accounted for as a credit to additional paid in capital when realized as a reduction to income taxes payable.
Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the net operating loss and tax credit carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the net operating loss carryforwards that the Company may utilize in any one year may be limited. As of March 31, 2014, the Company's net operating loss and tax credit carryforwards are not limited by any such limitations under Sections 382 and 383.
There are no undistributed net earnings for the Company's foreign subsidiaries, and accordingly no related deferred taxes.
Accounting standards require that the Company continually assess the likelihood that its deferred taxes will be realizable. All available evidence, both positive and negative, must be considered in determining whether it is more likely than not that the deferred tax assets will be realized. In making such assessments, significant weight is given to evidence that can be objectively verified. A company's current or previous losses are given more weight than its future outlook. As of March 31,June 30, 2014 and December 31, 2013, using that standard, the Company concluded that a full valuation allowance was required for its U.S. and state deferred tax assets. As of March 31,June 30, 2014 the unreserved balance of $77$76 thousand relates to certain foreign deferred tax assets. The Company will continue to assess the likelihood that its deferred tax assets will be realizable, and its valuation allowance will be adjusted accordingly, which could materially impact its financial position and results of operations in future periods.
The components of the provision for income tax benefit (expense), net are as follows for the periods ended (in thousands):
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Current: | ||||||||
| State and foreign | $ | (176 | ) | $ | (11 | ) | ||
| Deferred: | ||||||||
| State | (4 | ) | 10 | |||||
| Federal | (75 | ) | 343 | |||||
| Foreign | 276 | - | ||||||
| 197 | 353 | |||||||
| Change in valuation allowance | 67 | (353 | ) | |||||
| Income tax benefit (expense) | $ | 88 | $ | (11 | ) | |||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Current: | ||||||||||||||||
State and foreign | $ | 25 | $ | (37 | ) | $ | (151 | ) | $ | (48 | ) | |||||
Deferred: | ||||||||||||||||
Federal | (11 | ) | (23 | ) | (23 | ) | (23 | ) | ||||||||
Foreign | 23 | (33 | ) | 299 | (33 | ) | ||||||||||
| 12 | (56 | ) | 276 | (56 | ) | |||||||||||
Income tax benefit (expense), net | $ | 37 | $ | (93 | ) | $ | 125 | $ | (104 | ) | ||||||
The difference between the Company's effective income tax rate and the federal statutory rate is primarily due to the mark to market adjustment for our contingent liability that will not be deductible for tax purposes, the amount of expense associated with the Company's share-based payment arrangements which is also not deductible and international tax rate differences.
8. BUSINESS COMBINATION
On May 22, 2013, Chyron and Hego completed the Business Combination whereby a wholly-owned subsidiary of Chyron acquired all of the issued and outstanding shares of Hego for a total purchase price of $24.6 million. The Company and Hego entered into the Business Combination to create a market leading company in the fields of TV graphics, data visualization and production services for 'Live' and on line news and sports production.
The total purchase price of $24.6 million is comprised of 12.2 million shares of Chyronthe Company's common stock valued at $16.6 million, contingent consideration of shares of Chyronthe Company's common stock (the Earn-Out Shares) valued at an estimated $7.5 million and $0.5 million in cash and other consideration. The $7.5 million represents the value of the Earn-Out Shares based on a probability-based model measuring the likelihood of achieving certain revenue milestones as detailed below, and has been recorded as a liability in the balance sheet. In connection with FASB ASC 805,Business Combinations, the fair value of the contingent consideration was established at the date of the Business Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. This adjustment has had a material impact on the Company's financial position orand results of operations and will continue to impact the Company until all contingencies have been settled. In the quarterthree and six months ended March 31,June 30, 2014 a benefit of $2.2 million and a charge of $2.6$0.4 million, hasrespectively, have been recorded in order to adjust the contingent consideration to $8.3$6.2 million, its current fair value at March 31,June 30, 2014, in the level 3 category. Based on the revenue milestones, additional shares could be issued as follows:
Revenue milestones | Additional shares | |||
$15.5 million in 2013 | 2,772,598 | |||
$16.0 million in 2014 | 1,584,342 | |||
$16.5 million in 2015 | 1,742,776 | |||
Total | 6,099,716 | |||
Or, alternatively, if $33.0 | ||||
| 6,099,716 | ||||
At December 31, 2013, the 2013 revenue milestone was achieved and 2,772,598 additional shares were issued in March 2014 at a stock price of $2.34 per share.
The following table summarizes the allocation of the purchase price (in thousands):
| Net fair value of assets acquired | $ | 107 | ||
| Intangible assets, net of tax | 9,930 | |||
| Goodwill | 16,321 | |||
| 26,358 | ||||
| Deferred tax liability | (1,766 | ) | ||
| $ | 24,592 |
Net fair value of assets acquired | $ | 107 | ||
Intangible assets | 9,930 | |||
Goodwill | 16,321 | |||
| 26,358 | ||||
Deferred tax liability | (1,766 | ) | ||
| $ | 24,592 |
The components of the intangible assets acquired are stated below (in thousands):
Definite-lived intangibles: | ||||
Customer relationships | $ | 6,400 | ||
Proprietary technology | 800 | |||
Other intangibles | 830 | |||
Indefinite-lived intangibles: | ||||
Tradename | 1,900 | |||
| $ | 9,930 |
On April 30, 2014 the Company completed its acquisition of Norway-based Zxy Sport Tracking AS (“Zxy”). Pursuant to the terms of the Share Purchase Agreement (“SPA”), the Company acquired 67% of the issued and outstanding shares of Zxy for a total purchase price of $5.5 million. Pursuant to the terms of the SPA, the Company issued 1,374,545 shares of ChyronHego Common Stock (“Common Stock”) at a value of $3.3 million and issued 549,818 warrants at a value of $0.7 million, based on a Black Scholes valuation model. The warrants give the holders the right to purchase one share of Common Stock at a price of $2.75 for a three year period from closing.
In addition, stockholders of Zxy will be entitled to a 15% earn-out, payable in cash, based on net revenues from all sales of Zxy products and services from the closing date through December 31, 2018 up to $3.0 million. If and when $3.0 million in earn-out has been achieved, the rate shall be reduced to 7.5% for the remainder of the earn-out period. The stockholders are entitled to a guaranteed minimum of earn-out of $110,000 in each of 2014, 2015 and 2016. The earn-out was valued at $1.5 million based on a discounted model measuring the likelihood of achieving certain revenue levels.
The following table summarizes the estimated allocation of the purchase price which is preliminary and subject to adjustment following the completion of the valuation process ( in thousands):
Net fair value of assets acquired | $ | 628 | ||
Intangible assets | 2,600 | |||
Goodwill | 3,025 | |||
| 6,253 | ||||
Deferred tax liability | (702 | ) | ||
| $ | 5,551 |
The Company believes that the goodwill resulting from the Zxy acquisition reflects a transponder-based sports tracking technology that will strengthen our position in the sports analysis market across both the sports broadcast and professional sports markets. The Company believes that this preliminary estimate of goodwill will not be deductible for tax purposes.
The components and estimated useful lives of intangible assets acquired as of June 30, 2014 are stated below. Amortization is provided on a straight line method over the following estimated useful lives ( in thousands):
| Estimated Useful Life | |||||||
| Definite-lived intangibles: | ||||||||
Proprietary technology | $ | 2,300 | 15 | |||||
Tradename | 300 | 15 | ||||||
| $ | 2,600 | |||||||
Below are the unaudited proforma results of operations for the six months ended June 30, 2014 and 2013 as if the Company had acquired Zxy on January 1, 2013. Such proforma results are not necessarily indicative of the annual results of operations that would have been achieved if the acquisition occurred on the date assumed, nor are they necessarily indicative of future consolidated results of operations (in thousands except per share data):
2014 | 2013 | |||||||
Net revenues | $ | 27,645 | $ | 18,837 | ||||
Net loss | (331 | ) | (3,227 | ) | ||||
Net loss per share - basic and diluted | $ | (0.01 | ) | $ | (0.15 | ) | ||
| Definite-lived intangibles: | ||||
| Customer relationships | $ | 6,400 | ||
| Proprietary technology | 800 | |||
| Other intangibles | 830 | |||
| Indefinite-lived intangibles: | ||||
| Tradename | 1,900 | |||
| $ | 9,930 | |||
9. INTANGIBLE ASSETS
The following is a schedule of intangible assets, net (in thousands):
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Definite-lived intangibles: | ||||||||
| Customer relationships | $ | 4,775 | $ | 5,058 | ||||
| Tradenames | 933 | 951 | ||||||
| Proprietary technology | 988 | 1,017 | ||||||
| Domain name and related website | 41 | 42 | ||||||
| 6,737 | 7,068 | |||||||
| Indefinite-lived intangibles: | ||||||||
| Tradename | 1,900 | 1,900 | ||||||
| $ | 8,637 | $ | 8,968 | |||||
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Definite-lived intangibles: | ||||||||
Customer relationships | $ | 4,493 | $ | 5,058 | ||||
Tradenames | 1,214 | 951 | ||||||
Proprietary technology | 3,259 | 1,017 | ||||||
Domain name and related website | 39 | 42 | ||||||
| 9,005 | 7,068 | |||||||
Indefinite-lived intangibles: | ||||||||
Tradename | 1,900 | 1,900 | ||||||
| $ | 10,905 | $ | 8,968 | |||||
Amortization expense was $0.3 million and $0.02$0.7 million for the three and six months ended March 31,June 30, 2014, respectively. Amortization expense was $0.2 million and $0.3 million for the three and six months ended June 30, 2013, respectively.
10. OTHER COMPREHENSIVE INCOME
Components and activity related to accumulated other comprehensive income (loss) is as follows (in thousands):
| Foreign | Accumulated | |||||||||||
| Currency | Pension | Other | ||||||||||
| Translation | Benefit | Comprehensive | ||||||||||
| Adjustment | Costs | Income (Loss) | ||||||||||
| January 1, 2014 | $ | 131 | $ | (552 | ) | $ | (421 | ) | ||||
| Change for period | 16 | - | 16 | |||||||||
| Amounts reclassed from accumulated | ||||||||||||
| other comprehensive income (loss) | - | - | - | |||||||||
| March 31, 2014 | $ | 147 | $ | (552 | ) | $ | (405 | ) | ||||
Foreign | Accumulated | |||||||||||
Currency | Pension | Other | ||||||||||
Translation | Benefit | Comprehensive | ||||||||||
Adjustment | Costs | Income (Loss) | ||||||||||
January 1, 2014 | $ | 131 | $ | (552 | ) | $ | (421 | ) | ||||
Change for period | (28 | ) | - | (28 | ) | |||||||
Amounts reclassed from accumulatedother comprehensive income (loss) | - | - | - | |||||||||
June 30, 2014 | $ | 103 | $ | (552 | ) | $ | (449 | ) | ||||
11.DUE TO RELATED PARTIES
The balance due to related parties represents amounts that are due to certain former shareholders or employees of Hego AB that are now shareholders or employees of the Company. The balance resulted from loans to Hego AB, and dividends declared but not paid by Hego AB, prior to its merger with Chyron. Interest is accrued on the outstanding balance at the annual rate of 5.95%.
12. SEGMENT AND GEOGRAPHIC INFORMATION
Prior to the Business Combination, with Hego, the Company operated as one reporting segment. As a result of the Business Combination, the Company manages its business primarily on a geographic basis. The Company's two reportable operating segments consist of the Americas and EMEA (Europe, Middle East and Africa). The Americas segment includes both North and Latin America, as well as Asia. The Company's chief operating decision maker evaluates performance of the segments based on revenues and operating income (loss). Unallocated corporate amounts are deemed by the Company as administrative, oversight costs, not managed by the segment managers. The Company does not allocate assets by segment because the chief operating decision maker does not review the assets by segment to assess the segments' performance, as the assets are managed on an entity-wide basis.
Operating segment data is as follows (in thousands):
| Three Months Ended | ||||
| March 31, 2014 | ||||
| Revenues: | ||||
| Americas | $ | 8,052 | ||
| EMEA | 4,569 | |||
| $ | 12,621 | |||
| Operating income (loss): | ||||
| Americas | $ | 1,080 | ||
| EMEA | (714 | ) | ||
| Unallocated corporate expense | (3,475 | ) | ||
| $ | (3,109 | ) | ||
Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | |||||||
Revenues: | ||||||||
Americas | $ | 8,763 | $ | 16,815 | ||||
EMEA | 5,941 | 10,510 | ||||||
| $ | 14,704 | $ | 27,325 | |||||
Operating income (loss): | ||||||||
Americas | $ | 1,433 | $ | 2,513 | ||||
EMEA | 343 | (371 | ) | |||||
Unallocated corporate expense | 1,189 | (2,286 | ) | |||||
| $ | 2,965 | $ | (144 | ) | ||||
13. SUBSEQUENT EVENTS
On April 5, 2014, the Company entered into a share purchase agreement ("Share Purchase Agreement A"Agreement") with Metaphor AS ("Metaphor") and the stockholders of Metaphor, pursuant to which the Company will acquire all of the issued and outstanding shares of Metaphor and its wholly owned subsidiaries WeatherOne AS and WeatherOne Limited (collectively referred to as "WeatherOne"). WeatherOne is a leading provider of weather forecast solutions for broadcast and digital media based in Oslo, Norway. The acquisition of Metaphor and WeatherOne is referred to as the WeatherOne Transaction.
The closing of the WeatherOne Transaction took place on July 1, 2014. In accordance with the Share Purchase Agreement, A provides for a purchase pricewe issued 1,126,288 shares of $3.8 million plus warrants to purchase ChyronHego common stock ("common stock") equal to 30% of the purchase price. The $3.8 million in purchase price shall be paid at closing in cash and shares of common stock equal to 17.5% and 82.5%, respectively, of the purchase price.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
This Quarterly Report on Form 10-Q, including, without limitation, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as "believe," "could," "plan," "may," "expect," "intend," "continue," "estimate," "likely," "will," "target," "strategy," "goal" and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including, but not limited to: current and future economic conditions that may adversely affect our business and customers; our revenues and profitability may fluctuate from period to period and therefore may fail to meet expectations, which could have a material adverse effect on our business, financial condition and results of operations; our ability to maintain adequate levels of working capital; our ability to successfully maintain the level of operating costs; our ability to obtain financing for our future needs should there be a need; our ability to incentivize and retain our current senior management team and continue to attract and retain qualified scientific, technical and business personnel; our ability to expand our Axis online graphics creation solution or to develop other new products and services; our ability to generate sales and profits from our Axis online graphics services, workflow and asset management solutions; our ability to integrate the business of Chyron and Hego; our ability to grow sales and profits from our Hego products and services; our ability to develop new Hego products and services; rapid technological changes and new technologies that could render certain of our products and services to be obsolete; competitors with significantly greater financial resources; new product and service introductions by competitors; challenges associated with expansion into new markets; our ability to integrate Zxy's business and WeatherOne's business into our business; our ability to complete the WeatherOne Transaction and other factors set forth in Part I, Item 1A, entitled "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"), as well as any updates or modifications to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. Those factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statementswherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law.
Overview
On May 22, 2013 we acquired the outstanding stock of Hego AB, or Hego, and changed our name to ChyronHego Corporation. The acquisition of the Hego business provides us with very strong sports products and service offerings that address the needs of both sports broadcasters and sports leagues and rights holders. The Chyron and Hego product lines are complementary with very little overlap. Hego's solutions and services predominantly address the needs of live sports production, while Chyron has recently been more focused on graphics solutions for live and near-live news production workflows. There are significant budgets available in the sports TV space for those companies who offer an improved viewer experience, and we believe that we will be positioned to benefit from these kinds of expenditures. Ultimately, we believe that the business combination of Chyron and Hego has placed us in the position of a global leader in broadcast graphics creation, playout and real-time data visualization.
The results of operations include the operating results of Hego since completion of the business combination on May 22, 2013. The combination of these two companies is referred to as the "Business Combination."
Results of Operations for the Threeand SixMonths Ended March 31,June 30, 2014 and 2013
Net sales. Revenues for the quarter ended March 31,June 30, 2014 were $12.6$14.7 million, an increase of $4.6$4.0 million, or 57%37%, from the $8.0$10.7 million reported in the quarter ended March 31,June 30, 2013. Revenues for the six months ended June 30, 2014 were $27.3 million, an increase of $8.6 million, or 46%, from the $18.7 million reported in the six months ended June 30, 2013.
Revenues by type, for the three and six month periods are as follows (dollars in thousands):
| Three Months | ||||||||||||||||
| Ended March 31, | ||||||||||||||||
| % of | % of | |||||||||||||||
| 2014 | Total | 2013 | Total | |||||||||||||
| Product | $ | 5,781 | 46 | % | $ | 5,974 | 75 | % | ||||||||
| Services | 6,840 | 54 | % | 2,043 | 25 | % | ||||||||||
| $ | 12,621 | $ | 8,017 | |||||||||||||
Three Months | Six Months | |||||||||||||||||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
2014 | Total | 2013 | Total | 2014 | Total | 2013 | Total | |||||||||||||||||||||||||
Product | $ | 7,654 | 52% | $ | 6,744 | 63% | $ | 13,435 | 49% | $ | 12,718 | 68% | ||||||||||||||||||||
Services | 7,050 | 48% | 3,972 | 37% | 13,890 | 51% | 6,015 | 32% | ||||||||||||||||||||||||
| $ | 14,704 | $ | 10,716 | $ | 27,325 | $ | 18,733 | |||||||||||||||||||||||||
In the quarter and six months ended March 31,June 30, 2014 our product sales were down slightlygrew 13% and 6%, respectively, compared to the quarter and six months ended March 31, 2013.June 30, 2013 primarily due to the sale of tracking systems to a European soccer league. In the same periodperiods our services revenues grew $4.8$3.1 million and $7.9 million, respectively, primarily due to the contribution of services from the Business Combination with Hego.
Gross profit. Gross margins for the quarters ended March 31,June 30, 2014 and 2013 were 61%62% and 71%68%, respectively. Gross margins for the six months ended June 30, 2014 and 2013 were 62% and 70%, respectively. The decrease in the gross margin percentage is primarily attributable to product mix. As services become a greater component of revenues, we expect our margins to decline because our products carry a higher gross margin than our services. In addition, we incurred higher than anticipated costs in connection with our investment in contracts with European soccer leagues. Absent the effect of this product mix, we have been able to obtain reasonable and consistent pricing for our materials.
Selling, general and administrative expenses. Selling, general and administrative expenses are as follows (in thousands):
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Sales and marketing | $ | 4,783 | $ | 2,879 | ||||
| General and administrative | 1,328 | 1,872 | ||||||
| $ | 6,111 | $ | 4,751 | |||||
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales and marketing | $ | 4,778 | $ | 3,272 | $ | 9,561 | $ | 6,152 | ||||||||
General and administrative | 1,361 | 3,564 | 2,689 | 5,435 | ||||||||||||
| $ | 6,139 | $ | 6,836 | $ | 12,250 | $ | 11,587 | |||||||||
The increase of $1.9 millionincreases in sales and marketing expenses ("S&M") in the three and six month periodperiods ended March 31,June 30, 2014, as compared to the same periodperiods in 2013, isare primarily attributable to the incremental sales and marketing costs from our Business Combination with Hego which includes amortization of acquired intangible assets of $0.3 million.
The decrease in general and administrative ("G&A") expenses in the three months ended March 31,June 30, 2014 is due to the merger transaction costs incurred in the second quarter of 2013 of $0.7$0.3 million and cost savings fromin transaction costs relating to the 2013 workforce reduction of $0.1 million, offset by the incremental G&A costs from our Business Combination and $1.7 million associated with Hegothe accelerated vesting of approximately $0.3 million.
Research and development expenses. Research and development ("R&D") expenses were $2.2$2.1 million in the quarter ended March 31,June 30, 2014 compared to $1.8$2.3 million in the quarter ended March 31,June 30, 2013. The net increasedecrease was a result of the additional R&D costs resulting from the Business Combination with Hego of approximately $0.8$0.7 million, offset by the cost savings from the 2013 workforce reduction. R&D expenses increased $0.2 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to the incremental R&D costs from the Business Combination.
Change in fair value of contingent consideration. In connection with the Business Combination with Hego, a portion of the purchase price consisted of contingent consideration of shares of ChyronHego common stock. The fair value of any contingent consideration was established at the date of the Business Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. In the three months ended March 31,June 30, 2014 a net chargeincrease to earnings of $2.6$2.2 million has been recorded in order to adjust the contingent consideration to $8.3$6.2 million, its current fair value at March 31,June 30, 2014.
Interest expense, net. Interest expense, net increased in the three and six months ended March 31,June 30, 2014 as compared to the same periodperiods in 2013. This is2013 due to the addition of interest expense associated with the additional long-term debt that wewas assumed from Hego in the Business Combination.
Other income(loss), net. The components of other loss,income (loss), net are as follows (in thousands):
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Foreign exchange transaction gain (loss) | $ | 80 | $ | 3 | $ | 83 | $ | (78 | ) | |||||||
Loss on disposal of fixed assets | - | - | (74 | ) | - | |||||||||||
Other | (12 | ) | (42 | ) | (10 | ) | (44 | ) | ||||||||
| $ | 68 | $ | (39 | ) | $ | (1 | ) | $ | (122 | ) | ||||||
| Three Months | ||||||||
| Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Foreign exchange transaction gain (loss) | $ | 3 | $ | (82 | ) | |||
| Loss on disposal of fixed assets | (74 | ) | - | |||||
| Other | 1 | (1 | ) | |||||
| $ | (70 | ) | $ | (83 | ) | |||
We continue to be exposed to foreign currency and exchange risk in the normal course of business due to international transactions. However, we believe that this risk is not material to our near-term financial position or results of operations. This exposure has increased due to our Business Combination with Hego, as a result of which a larger percentage of the Company's business is transacted in foreign currencies.
Income tax benefit (expense), net.In the three and six months ended March 31,June 30, 2014 we recorded an income tax benefitbenefits of $0.09 million.$0.03 and $0.1 million, respectively. In the three and six months ended March 31,June 30, 2013 we recorded an income tax expense of $0.01 million.$0.09 and $0.1 million, respectively. The difference between our effective income tax rate and the federal statutory rate is primarily due to the mark to market adjustment for the contingent liability associated with the Business Combination that will not be deductible for tax purposes, the amount of expense associated with our share-based payment arrangements which is also not deductible and international tax rate differences.
Liquidity and Capital Resources
At March 31,June 30, 2014, we had cash and cash equivalents on hand of $4.0$5.0 million and working capital of $2.0$4.1 million. In the first threesix months of 2014 our cash was used primarily to fund acquisitions of property and equipment of $0.5$0.9 million primarily in connection with our services to provide several European soccer leagues with real-time digital sports data systems and to purchase a new trade show booth for our participation at NAB 2014. Also, we experienced an increase in accounts receivable based on increased revenues and for amounts not yet due based on customer payment terms.
During the firstsecond quarter of 2014 there were nowe made a required contributions forcontribution to our pension plan basedof $0.1 million. Based on current assumptions. However,assumptions, we expect to make contributions of $0.5$0.4 million over the next twelve months as required under ERISA. Our pension plan assets were valued at $6.0 million at June 30, 2014 and $5.7 million at March 31, 2014 and December 31, 2013. Our investment strategy has been consistent in recent years and we believe that the pension plan's assets are more than adequate to meet pension plan obligations for the next twelve months.
In November 2013, we entered into a new two-year $4 million revolving line of credit (the "Revolver") with Silicon Valley Bank, or SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. We are also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if our AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, we will maintain a static loan balance and all collections will be deposited into our operating account. The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If our AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%.
As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts our ability to pay dividends without the bank's consent.
The Revolver is collateralized by the assets of our U.S. subsidiaries, except for (i) our intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.
We also have revolving credit facilities associated with our European operations that total $1.3 million of which $1.2$0.9 million is outstanding at March 31,June 30, 2014. The revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods unless notified by the lender ninety days prior to expiration. In addition, we have two outstanding term loans in Europe that total $0.1 million at March 31,June 30, 2014. These term loans require principal payments that total $8 thousand per month and will mature in 2014 and 2015.
In connection with the acquisition of Granvideo AB in 2013, we issued a note payable to the previous shareholder in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. We made principal payments of $0.06 million on September 1, 2013 and $0.1 million on November 15, 2013 and are required to make four equal annual payments of $0.26 million on December 31 of each year from 2014 to 2017. The principal balance at March 31,June 30, 2014 was $0.9 million.
Our long-term success will depend on our ability to achieve and sustain profitable operating results and our ability to raise additional capital on acceptable terms should such additional capital be required. In the event that we are unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.
Based on our plan for continuing to combine the operating activities of both Chyron and Hego, and provided that we are able to achieve our planned results of operations and retain the availability under our credit facilities, we believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facilities, will be sufficient to meet our cash requirements for at least the next twelve months.
If these sources of funds are not sufficient, we may need to reduce, delay or terminate our existing or planned products and services. We may also need to raise additional funds through one or more capital financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products, or grant licenses on terms that are not favorable to us.
There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate development activities for one or more of our products or services; or delay, limit, reduce or terminate our sales and marketing capabilities or other activities that may be necessary to commercialize one or more of our products or services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
The information called for by this Item is omitted in reliance upon Item 305(e) of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared.
On May 22, 2013, the Company completed the Business Combination with Hego business combination for a purchase price of $24.6 million represented substantially by goodwill and identifiable intangible assets. Hego's operations contributed approximately $5.0$6.0 million in revenues to our consolidated financial results for the three months ended March 31,June 30, 2014. We continue to evaluate the internal control over financial reporting of the acquired business. As permitted by SEC Staff interpretive guidanceInterpretive Guidance for newly acquired businesses, the internal control over financial reporting of Hego was excluded from a formal evaluation of the effectiveness of our disclosure controls and procedures as of MarchJune 30, 2014. A report will be included in our annual report on Form 10-K for the year ended December 31, 2014, but we will include an assessment within one year from the date of the business combination.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control, that occurred during our most recent completed quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to our legal proceedings as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or results of operations. The risks described in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q are not the only risks that we face. In addition, risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations. There have been no material changes in or additions to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS
In April and July of 2014, we issued 1,374,545 and 1,126,288 shares, respectively, of our common stock in private transactions in connection with our acquisitions of Zxy sport Tracking AS (“Zxy”) and Metaphor AS (“Metaphor”). These issuances of shares of common stock were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
In connection with the acquisition of Zxy, the Company also issued 549,818 warrants that give the holders the right to purchase one share of our common stock at a price of $2.75 for a three year period from closing.
Also, in connection with the acquisition of Metaphor, the Company issued 337,870 warrants to purchase our common stock at $2.78 per share for a three year period from closing.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
None.
ITEM 5.OTHER INFORMATION
None.
ITEM 6. EXHIBITSEXHIBITS
(a) | Exhibits: |
Exhibit No. | Description of Exhibit |
31.1** | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2** | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1** | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2** | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101** | Interactive Data Files formatted in XBRL (Extensible Business Reporting Language) from (a) our Consolidated Balance Sheets as of |
**Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHYRONHEGO CORPORATION | ||
(Registrant) | ||
August 14, 2014 | /s/ Johan Apel | |
(Date) | Johan Apel | |
Chief Executive Officer | ||
(Principal Executive Officer) | ||
August 14, 2014 | /s/ Dawn Johnston | |
(Date) | Dawn Johnston | |
Interim Chief Financial Officer | ||
(Principal Financial Officer) |
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