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EXCEL - IDEA: XBRL DOCUMENT - MODERN HOLDINGS Inc | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - MODERN HOLDINGS Inc | s000895x1_ex32-1.htm |
EX-31.2 - EXHIBIT 31.2 - MODERN HOLDINGS Inc | s000895x1_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - MODERN HOLDINGS Inc | s000895x1_ex31-1.htm |
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2015 | ||
o | 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 333-193822 | ||
MODERN HOLDINGS INCORPORATED | ||
(Exact name of Registrant as Specified in Its Charter) |
Delaware | 33-3799783 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
89 Summit Avenue, Summit, New Jersey | 07901 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (973) 491-3600 |
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 o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller reporting company x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of May 15, 2015, there were 14,410,333 shares of the registrant’s common stock outstanding.
INDEX
Page |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2015 |
December 31, 2014 | |||||||
CURRENT ASSETS: | (Unaudited) | |||||||
Cash and cash equivalents | $ | 6,418,096 | $ | 7,514,173 | ||||
Accounts receivable | 1,011,081 | 958,127 | ||||||
Fiduciary assets | 577,754 | 708,649 | ||||||
Receivable from the sale of subsidiary | 707,063 | 779,473 | ||||||
Prepaid expenses and other current assets | 642,440 | 458,324 | ||||||
Total Current Assets | 9,356,434 | 10,418,746 | ||||||
PROPERTY AND EQUIPMENT, NET | 175,604 | 173,360 | ||||||
OTHER ASSETS: | ||||||||
Intangibles, net | 552,331 | 588,498 | ||||||
Goodwill | 1,001,957 | 1,001,957 | ||||||
Other assets | 424,842 | 415,117 | ||||||
Total Other Assets | 1,979,130 | 2,005,572 | ||||||
$ | 11,511,168 | $ | 12,597,678 |
The accompanying notes are an integral part of these consolidated financial statements.
1 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
March 31, 2015 |
December 31, 2014 | |||||||
CURRENT LIABILITIES: | (Unaudited) | |||||||
Fiduciary liabilities | $ | 577,754 | $ | 708,649 | ||||
Short-term debt and current maturities of long-term debt | 2,763,265 | 2,213,265 | ||||||
Accounts payable | 244,730 | 416,888 | ||||||
Due to affiliates | 350,869 | 352,166 | ||||||
Accrued expenses and other current liabilities | 2,064,998 | 2,190,553 | ||||||
Deferred revenue | 787,049 | 776,201 | ||||||
Total Current Liabilities | 6,788,665 | 6,657,722 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Long-term debt, less current maturities | 13,799 | 15,372 | ||||||
Total Long-Term Liabilities | 13,799 | 15,372 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
PUTTABLE NONCONTROLLING INTEREST | 251,742 | 279,888 | ||||||
EQUITY: | ||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Common stock, $.01 par value, 20,000,000 shares authorized, 15,204,320 shares issued in 2015 and 2014 and 14,410,333 shares outstanding in 2015 and 2014 | 152,043 | 152,043 | ||||||
Additional paid-in capital | 82,707,684 | 82,707,684 | ||||||
Treasury stock, 793,987 shares, at cost, in 2015 and 2014 | (530,400 | ) | (530,400 | ) | ||||
Accumulated deficit | (76,504,371 | ) | (75,915,245 | ) | ||||
Accumulated other comprehensive (loss) | (1,367,994 | ) | (769,386) | |||||
Total Equity | 4,456,962 | 5,644,696 | ||||||
$ | 11,511,168 | $ | 12,597,678 |
The accompanying notes are an integral part of these consolidated financial statements.
2 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
THREE MONTHS ENDED MARCH 31, | ||||||||
2015 | 2014 | |||||||
REVENUES: | ||||||||
Product sales | $ | 614,623 | $ | 570,184 | ||||
Service revenue | 1,521,543 | 1,575,701 | ||||||
Total Revenues | 2,136,166 | 2,145,885 | ||||||
COSTS AND EXPENSES: | ||||||||
Cost of product sales | 320,872 | 264,812 | ||||||
Cost of service revenue | 991,303 | 980,366 | ||||||
Selling, general and administrative | 1,400,583 | 1,738,113 | ||||||
Depreciation and amortization | 50,794 | 53,406 | ||||||
Total Costs and Expenses | 2,763,552 | 3,036,697 | ||||||
LOSS FROM CONTINUING OPERATIONS | (627,386 | ) | (890,812 | ) | ||||
OTHER INCOME (EXPENSE): | ||||||||
Interest income | 1,594 | 1,599 | ||||||
Interest expense | (14,828 | ) | (19,578 | ) | ||||
Management fee income | 52,863 | 43,024 | ||||||
Other income (expense) | (6,763 | ) | 11,517 | |||||
Total Other Income | 32,866 | 36,562 | ||||||
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (594,520 | ) | (854,250 | ) | ||||
PROVISION FOR INCOME TAXES | 22,752 | 8,147 | ||||||
NET LOSS FROM CONTINUING OPERATIONS | (617,272 | ) | (862,397 | ) | ||||
ADD: NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST | 28,146 | 15,592 | ||||||
NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED | (589,126 | ) | (846,805 | ) | ||||
Net income from discontinued operations | — | 27,914 | ||||||
NET LOSS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED | (589,126 | ) | (818,891 | ) | ||||
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX of $0: | ||||||||
Foreign currency translation adjustment | (598,608 | ) | 64,825 | |||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED | (1,187,734 | ) | (754,066 | ) | ||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | (28,146 | ) | (15,592 | ) | ||||
COMPREHENSIVE LOSS | $ | (1,215,880 | ) | $ | (769,658 | ) | ||
AMOUNTS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED STOCKHOLDERS: | ||||||||
Basic and Diluted net income (loss) per common share | ||||||||
Net income (loss) per share from continuing operations | $ | (0.04 | ) | $ | (0.06 | ) | ||
Net income (loss) per share from discontinued operations | — | 0.00 | ||||||
Net income (loss) per share | $ | (0.04 | ) | $ | (0.06 | ) | ||
Weighted average common shares outstanding | 14,410,333 | 14,410,333 |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2015
(Unaudited)
Common Stock |
Additional |
Treasury Stock |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss), Net of Tax |
Total Equity | |||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Balance, December 31, 2014 | 14,410,333 | $ | 152,043 | $ | 82,707,684 | $ | (530,400 | ) | $ | (75,915,245 | ) | $ | (769,386) | $ | 5,644,696 | |||||||||||||
Other comprehensive loss | — | — | — | — | — | (598,608 | ) | (598,608 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (589,126 | ) | — | (589,126 | ) | |||||||||||||||||||
Balance, March 31, 2015 | 14,410,333 | $ | 152,043 | $ | 82,707,684 | $ | (530,400 | ) | $ | (76,504,371 | ) | $ | (1,367,994 | ) | $ | 4,456,962 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, | ||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss attributable to Modern Holdings | $ | (617,272 | ) | $ | (834,483 | ) | ||
Less: Net income from discontinued operations | — | 27,914 | ||||||
Net loss from continuing operations | (617,272 | ) | (862,397 | ) | ||||
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
Depreciation and amortization | 50,794 | 53,406 | ||||||
Gain on sale of equipment | — | (13,063 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (85,523 | ) | 308,037 | |||||
Prepaid expenses and other current assets | (213,849 | ) | (13,487 | ) | ||||
Other assets | (9,725 | ) | (6,635 | ) | ||||
Fiduciary assets | 130,895 | 641,018 | ||||||
Fiduciary liabilities | (130,895 | ) | (641,018 | ) | ||||
Accounts payable | (159,573 | ) | (277,658 | ) | ||||
Due to affiliates | (1,035 | ) | (1,517 | ) | ||||
Accrued expenses and other current liabilities | (50,360 | ) | 31,466 | |||||
Deferred revenue | 35,233 | 7,819 | ||||||
Net cash used in operating activities from continuing operations | (1,051,310 | ) | (774,029 | ) | ||||
Net cash used in operating activities from discontinued operations | — | (422,160 | ) | |||||
Net cash used in operating activities | (1,051,310 | ) | (1,196,189 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (22,716 | ) | (35,927 | ) | ||||
Proceeds from sale of cost method investment | — | 4,567 | ||||||
Proceeds from sale of equipment | — | 17,598 | ||||||
Net cash used in investing activities from continuing operations | (22,716 | ) | (13,762 | ) | ||||
Net cash provided by investing activities from discontinued operations | — | — | ||||||
Net cash used in investing activities | (22,716 | ) | (13,762 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Distributions | — | (179,283 | ) | |||||
Borrowings of debt | 550,000 | 400,000 | ||||||
Repayments of debt | (1,574 | ) | (2,229 | ) | ||||
Net cash provided by financing activities from continuing operations | 548,426 | 218,488 | ||||||
Net cash (used in) provided by financing activities from discontinued operations | — | (48,424 | ) | |||||
Net cash provided by financing activities | 548,426 | 170,064 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (570,477 | ) | 9,149 | |||||
Net decrease in cash and cash equivalents | (1,096,077 | ) | (1,030,738 | ) | ||||
Cash and cash equivalents at beginning of period | 7,514,173 | 3,744,572 | ||||||
Cash and cash equivalents at end of period | 6,418,096 | 2,713,834 | ||||||
Less: Cash and cash equivalents of discontinued operations | — | 472 | ||||||
Cash and cash equivalents at end of period from continuing operations | $ | 6,418,096 | $ | 2,713,362 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 14,877 | $ | 15,635 | ||||
Cash paid for income taxes | $ | 20,611 | $ | 46,147 |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Note 1—Nature of Operations, Basis of Presentation and Principles of Consolidation
Modern Holdings Incorporated (“Modern Holdings” or the “Company”), a Delaware corporation, is a diversified holding company owning companies in several industries including IT support, insurance claims administration, and school photography. Modern Holdings’ portfolio companies provide their products and services to a diverse range of clients worldwide. The Company’s primary operations are in New Jersey with additional operations in Sweden, and the Company’s headquarters are located in Summit, NJ.
The operating companies of Modern Holdings are:
• | Xpeedio Support Solutions AB (“Xpeedio”) based in Sweden, is an IT support company with clients located primarily in Sweden, in the business to business market. |
• | Lors Photography Inc. (“Lors”) based in Union, New Jersey, is a regional provider of school photography throughout the tri-state area. |
• | Innova Claims Management LLC (“Innova”) doing business as Specialty Claims Management (“SCM”) is a company that provides third party claims administration to the insurance industry. In 2014, SCM moved their corporate headquarters to Maywood, New Jersey from Secaucus, New Jersey. |
• | Modern Billing Solutions, Inc. (“Modern Billings”) provides sales personnel for Basset and Tailormade regarding sales in the United States. Modern Billings had limited activity in 2015 and 2014. |
• | Blackbook Photography Inc. (“Blackbook”) publishes photography and illustration source books for finding photographers, illustrators and graphic designers and had limited activity in 2015 and 2014. |
• | Loft Life, Inc. (“Loft Life”) is a lifestyle magazine and had limited activity in 2015 and 2014. |
• | Great Universal, Inc. (“GUI”) and its subsidiaries is a holding company for various investments. During 2015 and 2014, GUI had limited activity. |
• | Basset AB (“Basset”) based in Sweden, is a provider of interconnect, roaming and fraud detection billing software for the telecommunication industry, worldwide. Basset was sold on July 4, 2014 with an effective date of July 1, 2014. Basset’s results of operations have been reclassified to Net Income from Discontinued Operations on the accompanying statements of operations and comprehensive loss for the three months ended March 31, 2014. |
Basis of Presentation
The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by US GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2014.
The unaudited interim consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of operations and comprehensive loss for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared on a consolidated basis and reflect the financial statements of Modern Holdings Incorporated and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The puttable noncontrolling interest represents the minority partners’ interests in the operations of SCM and the profits or losses associated with the minority partners’ interests in those operations, in the consolidated balance sheets and consolidated statements of operations and comprehensive loss, respectively. (See puttable noncontrolling interest section of Note 2.)
6 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Note 2—Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates and assumptions on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates. The amounts of assets and liabilities reported in the Company’s consolidated balance sheets and revenues and expenses reported in the consolidated statements of operations and comprehensive loss for the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, allowance for doubtful accounts, deferred tax valuation allowances, depreciation and amortization periods, recoverability of long-term assets including goodwill and intangibles, income taxes and related reserves and the average duration of insurance claims.
Discontinued Operations
The Company recognizes operations as discontinued when a component of the Company’s operations has either ceased or is expected to be disposed of in a sale transaction in the near term, the operations and cash flows of all discontinued operations have been eliminated, or will be eliminated upon consummation of the expected sale transaction, and the Company will not have any significant continuing involvement in the discontinued operations of the component subsequent to the expected sale transaction.
Fair Value Measurements
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC Topic 820, Fair Value Measurements and Disclosures defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.
FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:
• | Level 1 – Quoted prices for identical instruments in active markets; |
• | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and |
• | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
See Note 6 for fair value measurements.
Cash and Cash Equivalents
The Company maintains cash balances in several financial institutions. Interest-bearing balances in U.S. banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000 per institution. From time to time, the Company’s balances may exceed these limits. At March 31, 2015 and December 31, 2014, the Company had approximately $4,980,000 and $6,345,000, respectively, of cash in international bank accounts which are not insured. In 2013, Xpeedio entered into a new lease that requires the Company to maintain a balance of approximately $160,000 with a Swedish banking institution. This amount is included in the above foreign cash balances.
7 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Allowance for Doubtful Accounts
Accounts receivable are recorded at net realizable value consisting of the carrying amount less the allowance for uncollectible accounts. The Company evaluates the collectability of its accounts receivable based on a combination of factors. When the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, the current business environment and its historical experience. The Company’s policy to determine past due accounts is based upon the contractual payment terms of the receivables. The Company generally does not record interest on past due accounts. Accounts are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. At March 31, 2015 and December 31, 2014, the Company determined that no allowance for doubtful accounts was necessary.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization.
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable through an assessment of the estimated future undiscounted cash flows related to such assets. In the event that assets are found to be carried at amounts that are in excess of estimated undiscounted future cash flows, the carrying value of the related asset or group of assets is reduced to a level commensurate with fair value based on a discounted cash flow analysis. No impairment indicators were identified during the three months ended March 31, 2015 and 2014.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization on leasehold improvements is computed using the straight-line method over the shorter of the assets’ estimated useful lives or the lease term.
The estimated useful lives used in determining depreciation are as follows:
Useful Life | |
Computers and equipment | 3 to 7 years |
Furniture and fixtures | 5 to 7 years |
Software | 3 years |
Goodwill and Other Intangible Assets
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company is required to perform a goodwill impairment test on at least an annual basis. Application of the goodwill impairment test requires an initial qualitative assessment of the likelihood that the carrying value of the reporting unit exceeds the fair value. If management concludes that it is more likely than not that the carrying value exceeds the fair value, then management conducts a two-step quantitative impairment test which includes significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company conducts its annual goodwill impairment test as of the last day of December each year, or more frequently if indicators of impairment exist. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others.
8 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Intangible assets acquired in business combinations are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Indefinite lived intangibles are reviewed annually for impairment or more frequently, if indicators of impairment arise. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment, if indicators of impairment arise. The evaluation of impairment is based upon a comparison of the carrying amount of the intangible asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted cash flows are less than the carrying amount of the asset, the asset is considered impaired. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its carrying value, with any shortfall from fair value recognized as an expense in the current period.
The Company’s definite lived intangible assets consist of customer relationships and are amortized over their estimated useful lives of 6 years using a straight-line method.
No impairment indicators were identified during the three months ended March 31, 2015 and 2014.
Cost-Method Equity Investments
The Company’s cost-method equity investments are carried at cost as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. The Company regularly evaluates the carrying value of its cost-method equity investments for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is judged to be other-than-temporary, the Company will record an other-than-temporary impairment charge in other income (expense), net in the consolidated statement of operations and comprehensive loss. During the year ended December 31, 2014, the Company made no additional cost-method investments but redeemed a partial investment for $9,200. During the three months ended March 31, 2015, the Company made no additional cost-method investments or redemptions. At March 31, 2015 and December 31, 2014, the Company has approximately $320,000 of cost-method equity investments, which are included in other assets on the accompanying consolidated balance sheets.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities at March 31, 2015 and December 31, 2014 consist of the following:
March 31, 2015 | December 31, 2014 | |||||||
Accrued compensation costs | $ | 659,896 | $ | 675,260 | ||||
Accrued compensated absences | 129,743 | 127,222 | ||||||
Accrued professional fees | 372,781 | 427,270 | ||||||
Accrued sales and value added taxes | 156,118 | 144,429 | ||||||
Accrued rebates | 325,494 | 344,036 | ||||||
Accrued other current liabilities | 420,966 | 472,336 | ||||||
Total accrued expenses and other current liabilities | $ | 2,064,998 | $ | 2,190,553 |
Deferred Revenue
Deferred revenue consists of payments received in advance of revenue being earned under school photography and claims administration. Advances are recognized as revenue when earned, pursuant to the applicable revenue recognition principles for the specific type of revenue as disclosed in this Note 2.
9 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Fiduciary Assets and Liabilities
In its capacity as a third party insurance claim administrator, the Company retains certain funds from insurance companies to pay claims on behalf of the insurance companies. These funds are held by the Company in a fiduciary capacity.
Accumulated Other Comprehensive Income
FASB ASC Topic 220, Reporting Comprehensive Income, establishes rules for the reporting of comprehensive income and its components. Comprehensive income is defined as all changes in equity from non-owner sources. For the Company, comprehensive income (loss) consists of net income (loss) and changes in the cumulative foreign currency translation adjustments. Accumulated other comprehensive income (loss) consists of cumulative foreign currency translation adjustments as of March 31, 2015 and December 31, 2014.
Puttable Noncontrolling Interest
A noncontrolling interest reflects an ownership interest in entities that are consolidated as less than 100% owned. The Company follows FASB ASC Topic 810, Consolidation, to account for the noncontrolling interest, which establishes accounting and reporting standards pertaining to: (i) ownership interests in subsidiaries held by parties other than the parent (“noncontrolling interest”), (ii) the amount of net income attributable to the parent and to noncontrolling interest, (iii) changes in the parent’s ownership interest, and (iv) the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. If a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary is measured at fair value and a gain or loss is recognized in net income based on such fair value. For presentation and disclosure purposes, the guidance requires a noncontrolling interest to be classified as a separate component of equity. The Company and the former owners of SCM have entered into a call right and put option agreement. The Company has the right to purchase the remaining noncontrolling interests at a unit value based upon a formula using earnings before interest, taxes, depreciation and amortization for the trailing twelve months from the date the noncontrolling interests were put to the Company or called by the Company. The former owners of SCM, after a period of two years from the acquisition date, have the option to put their noncontrolling interests back to the Company for a unit value based upon a formula derived from the trailing twelve months from the date of the put date earnings before interest, taxes, depreciation and amortization. Since the redemption feature of the put option is out of the control of the Company, for presentation and disclosure purposes, the noncontrolling interest is classified as temporary equity on the accompanying consolidated balance sheets. During the quarter ended March 31, 2015, the Company made zero distributions to the puttable noncontrolling interest holders.
In July 2014, two former owners of SCM, representing 22.5% of the 30% of the noncontrolling interests, put their member units to the Company. In September 2014, one additional former owner of SCM, representing 6% of the 30% of the noncontrolling interests, put their member units to the Company. Since the parties are in disagreement as to the other parties’ Unit Put FMV calculation, the closing of the transaction has not occurred. As such, the holders of the units have not transferred their interests and the Company has not redeemed the puttable noncontrolling interests and thus has not accounted for the exercise of the put right. Collectively, the three former owners have asserted that the FMV calculation of their interest is approximately $1,650,000. The Company believes the amount recorded as puttable noncontrolling interest on the accompanying consolidated balance sheet is sufficient for any subsequent payments. Since the closing of the transaction has not occurred yet, the company is still allocating the profits and losses associated with the minority members’ interests in those operations.
To date, the parties had not reached an agreement. As per the terms of the operating agreement, the parties are in the arbitration process.
Foreign Currency Translation
The functional currency of each entity in the Company is its respective local country currency which is also the currency of the primary economic environment in which it operates. Monetary assets and liabilities in foreign currencies are re-measured into the functional currency at the rate of exchange prevailing at the balance sheet date. Transactions in foreign currencies are re-measured into functional currency at the rate of exchange prevailing on the date of the transaction. All transaction foreign exchange gains and losses are recorded as other income (expense) in the accompanying consolidated statement of operations. The Company recorded net transaction foreign exchange losses of approximately $(3,900) and $(415) for the three months ended March 31, 2015 and 2014, respectively. These amounts are included in other income (expense) on the accompanying consolidated statements of operations.
10 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
The assets and liabilities of the subsidiaries for which the functional currency is other than the U.S. dollar, are translated into U.S. dollars, the reporting currency, at the rate of exchange prevailing on the consolidated balance sheet date. Revenues and expenses are translated into U.S. dollars at the exchange rates prevailing on the last business day of each month, which approximates the average monthly exchange rate. Resulting translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of equity.
Revenue Recognition
The Company’s revenues are primarily derived from consulting services, photograph sales and the administration of insurance claims. Revenues are recognized under contracts generally when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, services have been performed or products have been delivered and collection of the amounts billed is reasonably assured.
Revenues from consulting services related to training and general consulting are recognized under a time-and-material basis as the services are performed.
11 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Photography revenue is recognized upon delivery of the photographs. The Company charges a shipping and handling fee to its customers to ship the photographs. These amounts are recorded as revenue. Revenues associated with the shipping and handling fees were approximately $32,000 for each of the three months ended March 31, 2015 and 2014. The costs of shipping and handling are expensed as incurred and are included in cost of sales and services on the accompanying consolidated statements of operations and comprehensive loss. The Company receives payment before the photographs are shipped. These amounts are recorded as deferred revenue until the product is delivered.
Revenue from the administration of insurance claims is recognized ratably over the estimated period that it takes to administer the type of claim from start to close. The claim length could range for periods up to 13 months. The Company’s billings do not necessarily correlate with the revenues recognized ratably over the life of the claim. At March 31, 2015 and December 31, 2014, the Company has recorded unbilled receivables of $191,679 and $300,957, respectively, which are included in accounts receivable on the consolidated balance sheets. These balances are generally billable within 12 months. Billings rendered in advance of services performed are recorded and classified as deferred revenue on the consolidated balance sheets.
Total revenue does not include sales or value added tax, as the Company considers itself a pass-through entity for collecting and remitting sales and value added taxes.
Software Development Costs
Costs incurred in connection with the development of software products are accounted for in accordance FASB ASC Subtopic 985-20, Software - Costs of Software to be Sold, Leased or Marketed. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the Company has not capitalized any development costs related to software products since the time period between technological feasibility and general release of a product has not been significant and the related costs incurred during that time period have not been material.
Advertising Expenses
Advertising costs are charged to operations as incurred. The Company recorded approximately $3,800 and $6,138 of advertising expenses for the three months ended March 31, 2015 and 2014, respectively. These costs are included in selling, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive loss.
Research and Development Expenses
Research and development expenditures are charged to research and development expense as incurred. There were no research and development costs during the three months ended March 31, 2015 and 2014.
12 |
MODERN HOLDINGS
INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, Income Taxes under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and their respective tax basis and all operating losses carried forward, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the applicable temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or tax status is recognized in the statement of operations in the period in which the change is identified. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
FASB ASC Topic 740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The guidance contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FASB ASC Topic 740. The first step is to evaluate the tax position for recognition by determining, based on the technical merits, that the position will be more likely than not sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties, if any, related to unrecognized tax benefits would be included in provision for income tax expense in the accompanying consolidated statements of operations and comprehensive loss.
Net Loss Per Share
Basic and diluted net income (loss) per common share is determined by dividing net income (loss) applicable to common stockholders by the weighted average common shares outstanding during the period. For the periods where there is a net loss attributable to common shareholders, any other outstanding equity instruments would be excluded from the calculation of diluted income (loss) per common shareholder because their effect would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted loss per share would be the same for those periods. At March 31, 2015 and December 31, 2014, the Company had no other equity instruments outstanding.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. By their nature, all such financial instruments involve risks including the credit risks of non-performance by counterparties. Trade accounts receivable are incurred pursuant to contractual terms with customers. Credit losses on accounts receivable have not been material because of a large concentration of revenues with a small number of large, established companies. The Company evaluates the creditworthiness of its clients in conjunction with its revenue recognition processes as well as through its ongoing collectability assessment processes for accounts receivable.
One client in the insurance segment accounted for 10% of consolidated revenues for the three months ended March 31, 2015. There were no other significant customers for the three months ended March 31, 2015 and 2014.
One client accounted for 19% of consolidated accounts receivable as of March 31, 2015 and December 31, 2014. No other clients accounted for more than 10% of consolidated accounts receivable as of March 31, 2015 or December 31, 2014.
13 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
New Accounting Pronouncements
In May, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of 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. To achieve that core principle, an entity should apply the following steps:
-Step 1: Identify the contract(s) with a customer.
-Step 2: Identify the performance obligations in the contract.
-Step 3: Determine the transaction price.
-Step 4: Allocate the transaction price to the performance obligations in the contract.
-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also significantly expands disclosure requirements concerning revenues for most entities. ASU 2014-09 will be effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. Management is currently evaluating the impact that ASU 2014-09 will have on the Company.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued and, if so, disclose that fact. Such evaluation is to be done for both annual and interim reporting periods, if applicable. Management is also required to evaluate and disclose whether its plans alleviate that doubt. ASU 2014-15 will become effective from January 1, 2017 and the Company is currently evaluating the impact of adopting this guidance.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08). ASU 2014-08 is aimed at reducing the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or are expected to have a major effect on an entity’s operations and financial results. Such a shift could include the disposal of a major line of business, a major geographical area, a major equity method investment or other major parts of the entity. ASU 2014-08 also permits companies to have continuing cash flows and significant continuing involvement with the disposed component. ASU 2014-08 requires expanded disclosures for discontinued operations and new disclosures for individually material disposals that do not meet the definition of a discontinued operation. The Company has early adopted ASU 2014-08 during 2014, which was applied to the sale of Basset.
Note 3—Segment Information
The Company has determined that it has three reportable segments organized around the types of businesses:
IT Support - includes the operating segment Xpeedio, which provides IT support for business to business markets.
Photography - includes the operating segment of Lors, which provides school photography throughout the New Jersey, New York and Pennsylvania areas.
Insurance - includes the operating segment SCM, which provides third party claims administration to the insurance industry.
Net revenues include no significant intersegment revenues. Operating loss by segment and geographic area excludes general corporate and interest expenses. The following table represents financial information by segment as of and for the three months ended March 31, 2015 and 2014.
14 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Three Months Ended March 31, 2015 | ||||||||||||||||||||
IT Support | Photography | Insurance | Corporate | Consolidated | ||||||||||||||||
REVENUES: | ||||||||||||||||||||
Product sales | $ | 30,296 | $ | 584,327 | $ | — | $ | — | $ | 614,623 | ||||||||||
Service revenue | 838,923 | — | 682,620 | — | 1,521,543 | |||||||||||||||
Total Revenues | $ | 869,219 | $ | 584,327 | $ | 682,620 | $ | — | $ | 2,136,166 | ||||||||||
Depreciation and Amortization | $ | 6,606 | $ | 5,194 | $ | 38,524 | $ | 470 | $ | 50,794 | ||||||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS | $ | 130,067 | $ | (109,928 | ) | $ | (45,738 | ) | $ | (601,787 | ) | $ | (627,386 | ) | ||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||
Interest Income | 1,594 | |||||||||||||||||||
Interest expense | (14,828 | ) | ||||||||||||||||||
Management fee income | 52,863 | |||||||||||||||||||
Other income (expense) | (6,763 | ) | ||||||||||||||||||
Total Other Income | 32,866 | |||||||||||||||||||
PROVISION FOR INCOME TAXES | 22,752 | |||||||||||||||||||
NET LOSS FROM CONTINUING OPERATIONS | $ | (617,272 | ) |
Three Months Ended March 31, 2014 | ||||||||||||||||||||
IT Support | Photography | Insurance | Corporate | Consolidated | ||||||||||||||||
REVENUES: | ||||||||||||||||||||
Product sales | $ | — | $ | 570,184 | $ | — | $ | — | $ | 570,184 | ||||||||||
Service revenue | 882,172 | — | 693,529 | — | 1,575,701 | |||||||||||||||
Total Revenues | $ | 882,172 | $ | 570,184 | $ | 693,529 | $ | — | $ | 2,145,885 | ||||||||||
Depreciation and Amortization | $ | 8,384 | $ | 6,790 | $ | 37,416 | $ | 816 | $ | 53,406 | ||||||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS | $ | 72,013 | $ | (76,703 | ) | $ | (223 | ) | $ | (885,899 | ) | $ | (890,812 | ) | ||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||
Interest Income | 1,599 | |||||||||||||||||||
Interest expense | (19,578 | ) | ||||||||||||||||||
Management fee income | 43,024 | |||||||||||||||||||
Other income | 11,517 | |||||||||||||||||||
Total Other Income | 36,562 | |||||||||||||||||||
PROVISION FOR INCOME TAXES | 8,147 | |||||||||||||||||||
NET LOSS FROM CONTINUING OPERATIONS | $ | (862,397 | ) |
15 |
MODERN HOLDINGS
INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Geographic Operations
For the three months ended March 31, | ||||||||
2015 | 2014 | |||||||
Net Revenues: | ||||||||
United States | $ | 1,266,947 | $ | 1,263,713 | ||||
Scandinavia | 869,219 | 882,172 | ||||||
Total Net Revenues | $ | 2,136,166 | $ | 2,145,885 |
Note 4—Property and Equipment
Property and equipment, net, consists of the following:
March 31, 2015 | December 31, 2014 | |||||||
Computers and equipment | $ | 1,017,637 | $ | 1,013,710 | ||||
Furniture and fixtures | 257,747 | 251,603 | ||||||
Software | 212,565 | 212,565 | ||||||
Leasehold improvements | 353,806 | 353,806 | ||||||
1,841,755 | 1,831,684 | |||||||
Less: Accumulated depreciation and amortization | (1,666,151 | ) | (1,658,324 | ) | ||||
$ | 175,604 | $ | 173,360 |
Depreciation and amortization expense of property and equipment was $14,627 and $17,239 for the three months ended March 31, 2015 and 2014, respectively.
Note 5—Goodwill and Intangible Assets
Goodwill
There was no change in our goodwill balance from December 31, 2014 to March 31, 2015.
Intangible Assets
Information regarding the Company’s amortizable intangible assets is set forth below:
March 31, 2015 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount | ||||||||||
Customer relationships | $ | 1,472,500 | $ | (1,291,669 | ) | $ | 180,831 |
December 31, 2014 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount | ||||||||||
Customer relationships | $ | 1,472,500 | $ | (1,255,502 | ) | $ | 216,998 |
Amortization expense of intangible assets for the three months ended March 31, 2015 and 2014 was $36,167 and 36,167, respectively.
16 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Estimated amortization expense of intangible assets is as follows:
Years Ending March 31: | |||
2016 | $ | 144,667 | |
2017 | 36,164 | ||
Total | $ | 180,831 |
The Company has $371,500 of indefinite life tradenames and trademarks at both March 31, 2015 and December 31, 2014.
There were no impairments of tradenames and trademarks during the three months ended March 31, 2015 and 2014.
Note 6—Fair Value Measurements
The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, fiduciary assets and liabilities, short-term debt and current maturities of long-term debt, accounts payable, due to affiliates, accrued expenses and other current liabilities. The carrying amounts of the Company’s financial assets and liabilities approximate fair value because of the short maturity of these instruments. The Company’s long term debt is deemed immaterial.
The Company’s nonfinancial assets measured at fair value on a nonrecurring basis include goodwill, intangible assets and property, plant and equipment. These assets are recorded at carrying value. However, whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (or at least annually for goodwill and indefinite-lived intangible assets), such assets are assessed for impairment and, if applicable, written down to and recorded at fair value. To measure fair value for such assets, the Company uses techniques including discounted expected future cash flows (“DCF”) (Level 3 input). A discounted cash flow analysis calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit or asset and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including judgment about appropriate discount rates, growth rates and the amount and timing of expected future cash flows.
17 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Note 7—Debt
Debt consists of the following:
March 31, 2015 | December 31, 2014 | |||||||
Debt: | ||||||||
Lines of credit | $ | 1,730,400 | $ | 1,180,400 | ||||
Affiliated Party Debt: | ||||||||
Note payable – Brookstone/GUI | 369,000 | 369,000 | ||||||
Note payable – Brookstone | 468,865 | 468,865 | ||||||
Note payable – Brookstone/Primetime 24 JV | 190,000 | 190,000 | ||||||
Equipment loan | 18,799 | 20,372 | ||||||
Total affiliated party debt | 1,046,664 | 1,048,237 | ||||||
Total Debt | 2,777,064 | 2,228,637 | ||||||
Less: Short-term portion | 2,763,265 | 2,213,265 | ||||||
Long-term debt | $ | 13,799 | $ | 15,372 |
The Company has three separate lines of credit with one financial institution in Sweden. The three lines are considered the Xpeedio line, the Lors line and Modern Holdings line.
Xpeedio line: Xpeedio has a line-of-credit agreement through a financial institution of up to 3,000,000 SEK (approximately $348,600 and $384,300 at March 31, 2015 and December 31, 2014, respectively). The line is unsecured, due on demand and is at an interest rate of STIBOR plus 1.9 basis points (totaling 2% and 2% at March 31, 2015 and December 31, 2014, respectively). Unused amounts under the line bear interest at 0.6% annually. At March 31, 2015 and December 31, 2014, there is no balance outstanding. The line is renewed annually on January 1 and is renewed through December 31, 2015.
Lors line: Lors has a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at March 31, 2015 and December 31, 2014 (totaling approximately 3.25% at both March 31, 2015 and December 31, 2014), and amounts can be advanced under the line until April 30, 2016. We pay an annual facility fee of $1,500. At March 31, 2015 and December 31, 2014, borrowings outstanding under the Lors line totaled $800,000 and $500,000, respectively.
Modern Holdings line: We have a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at March 31, 2015 and December 31, 2014 (totaling approximately 3.25% at both March 31, 2015 and December 31, 2014), and amounts can be advanced under the line until April 30, 2016. At March 31, 2015 and December 31, 2014, borrowings outstanding under the Modern Holdings line totaled $930,400 and $680,400, respectively.
Interest expense for debt was $11,021 and $15,678 for the three months ended March 31, 2015 and 2014, respectively.
18 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Affiliated Party Debt (see Note 11 for description of affiliates)
Brookstone/GUI: The Company has a note payable to GUI that had an original loan amount of $559,000. The note is due on demand with interest payable on a monthly basis. The interest rate is fixed at 4%. The note is unsecured. At March 31, 2015 and December 31, 2014, borrowings outstanding under the Brookstone/GUI note payable totaled $369,000 in each period.
Brookstone: During 2009, the Company entered into various note payable agreements with an affiliate. The notes are due on demand, and accrue interest equal to the applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.36% and 3% at March 31, 2015 and December 31, 2014, respectively. These notes are unsecured. At March 31, 2015 and December 31, 2014, the outstanding balance under these notes totaled $468,865 in each period.
Brookstone/Primetime 24 JV: In 2012, the Company borrowed $210,000 from Primetime 24 JV in an interest only note with interest payable annually. The interest rate is equal to the short-term applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.36% and 3% at March 31, 2015 and December 31, 2014, respectively. The note is due on demand. The note is unsecured. At March 31, 2015 and December 31, 2014, the outstanding amount under this note was $190,000 in each period.
Interest expense for the affiliated party debt was $3,807 and $3,900 for the three months ended March 31, 2015 and 2014, respectively.
All Debt
The Company does not have any financial ratio covenants and does not provide collateral for any of its debt agreements noted above.
Maturities of the Company’s long-term debt did not change significantly from December 31, 2014.
Note 8—Capital Structure
The following summarizes the terms of the Company’s capital stock:
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock at $.01 par value. There were zero shares issued and outstanding at March 31, 2015 and December 31, 2014. To date, the preferred stock powers, designation, rights and preferences have not been designated by the Board of Directors.
Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock at $.01 par value. As of March 31, 2015 and December 31, 2014, there were 15,204,320 shares issued and outstanding including 793,987 shares held in treasury which were repurchased in August 2011 for $530,400.
Note 9—Leases
The Company conducts its operations using facilities, office equipment and automobiles leased under noncancellable operating lease agreements that expire at various dates. Future minimum lease payments have not changed significantly from December 31, 2014.
Rent expense under operating leases was approximately $131,000 and $142,000 for the three months ended March 31, 2015 and 2014, respectively.
Note 10—Income Taxes
The Company determines the tax provision for interim periods using an estimate of annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.
The Company recorded income tax expense of $22,752 and $8,147 for the three months ended March 31, 2015 and 2014, respectively. The tax expense represents minimal state and local taxes. In both periods, these amounts differ from the expected benefit of our net losses due to the uncertainty of realizing those benefits.
The Company did not have unrecognized tax benefits as of March 31, 2015 and December 31, 2014 and does not expect this to change significantly over the next twelve months. As of March 31, 2015 and December 31, 2014, the Company has not accrued interest or penalties related to uncertain tax positions.
19 |
MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(UNAUDITED)
Note 11—Related Party Transactions
The Company has certain transactions with related parties. Related parties are various companies that the Company has transactions with, that have a common significant stockholder as the Company. The following entities are determined to be related parties: Tele2 AB (“Tele2”), Millicom International Cellular S.A. (“Millicom”), Anima Regni Partners LLC and Brookstone USA Inc.
All affiliate balances excluding affiliated debt and interest as noted in Note 7, are generated through payment and reimbursement of costs and borrowings to and from entities related through common control or ownership. Related party balances are paid/received in the normal course of business.
The Company had payables to related parties, for the periods presented as follows:
Due to Affiliates | ||||||||
March 31, 2015 | December 31, 2014 | |||||||
Brookstone | $ | 317,535 | $ | 317,535 | ||||
Other affiliates | 33,334 | 34,631 | ||||||
$ | 350,869 | $ | 352,166 |
The Company also provides certain management services to a related party. Income from these services is recorded as management fee income on the accompanying consolidated statements of operations.
Note 12—Benefit Plans
The Company and its subsidiaries maintain various defined contribution plans for its employees. The entities located in the United States established plans under Section 401(k) of the Internal Revenue Code. The Company contributes an amount ranging from 4% to 6% of the employee’s salary. The entities in Sweden have established defined contribution plans in accordance with their country’s regulations. The Company contributes an amount based upon the plan’s contribution formula which is based upon the employee’s salary. The Company’s contribution to the various plans amounted to approximately $52,933 and $81,164 during the three months ended March 31, 2015 and 2014, respectively.
Note 13—Legal Proceedings
In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions; however, at March 31, 2015, the Company is not a party to any litigation that is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Note 14—Commitments
During the quarter ended March 31, 2015, there have been no significant changes to the Company’s aggregate future commitments to be paid over the next twelve months.
Note 15—Subsequent Events
In April 2015, the Company made distributions to the noncontrolling interest members of approximately $43,000.
20 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2014, included in our prospectus dated May 14, 2015, filed with the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Prospectus”).
Executive Overview
We are a diversified holding company with a portfolio of privately held operating companies and other investments. We were incorporated under the laws of the State of Delaware in September 1994 under the name Innova International Corporation and in April 1999 changed our name to XSource Corporation. We changed the name of the firm to Modern Holdings Incorporated in January 2003. Our most recent investments include purchasing a 70% equity stake in Specialty Claims Management and investing in NeighborMD through both equity and convertible note investments. Our minority investment in NeighborMD was subsequently sold in April 2013. Additionally, effective July 1, 2014, we sold Basset to Enghouse Interactive AB. Basset’s results of operations have been reclassified to Net Income from Discontinued Operations within the statement of operations for the quarter ended March 31, 2014.
Our corporate structure allows for great flexibility in the types of investments we make. We can invest in any industry, in any geographical area, in any part of the capital structure. The geographic focus of the Company is to pursue deals in the United States and Scandinavia. Deals can vary from buying a majority or all of a small privately held company to investing in a minority position in an early stage, scalable business. In all cases we look for management teams who are passionate about their business and we must be able to identify why Modern Holdings can add value to a particular business.
Our investments are in several different industries including IT support, school photography, and insurance. Each of these companies provides a service to the major operators in their industries. For example, SCM is a third party administrator within the property and casualty insurance space. Our strategy is to dampen regulatory and cyclical risk by selling to operators within each industry versus being an operator within an industry. We maintain oversight over these portfolio companies by appointing a majority of the members of the board of directors and by providing management expertise when beneficial.
In addition to our majority owned and wholly owned investments, we have several small minority stakes in companies which we feel have game changing technologies or business approaches.
In certain of these minority investments, we require a board seat as a term of our investment. In other cases, we invest alongside trusted partners who have extensive industry expertise and are located in the same geographical area as the investment.
Our subsidiary companies and minority investments are primarily located in three geographical areas: 1) the New York/New Jersey metropolitan area, 2) the greater Stockholm, Sweden area and 3) the southeastern United States, primarily Nashville, Tennessee. In each of these three geographies, we have extensive business contacts which are contributing sources to our deal flow. Additionally, we have trusted partners in these markets who we invest alongside and who alert us to deals in their respective areas.
Our Segments
The Company has determined that it has three reportable segments organized around the types of businesses:
• | IT Support – includes the operating segment Xpeedio which provides IT support for business to business markets. |
• | Photography – includes the operating segment Lors which provides school photography services in New Jersey and New York. |
• | Insurance – includes the operating segment SCM which provides third party claims administration to the insurance industry. |
Key Performance Indicators
Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include revenues and results from operations. Results from operations provides us with a measure of our financial performance that we use to evaluate operations. In addition, we have historically used and continue to use revenue targets and operating income targets in determining our incentive compensation.
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Additionally, we use certain GAAP and non-GAAP indicators to assist in managing our businesses. We have determined that in all of our segments, there are certain non-GAAP measurements that are vital to measuring the success of our businesses. These measures are as follows:
• | IT Support. We review new clients each reporting period as an indicator of how well we are growing our business. |
• | Photography. We focus heavily on metrics surrounding the number of students photographed as well as metrics surrounding the number and amount of orders received. It is critical for the business to maintain a certain level of students photographed in order to generate orders. Monitoring how many orders are received and at what order value is critical as well. As most of the cost of an order has already been incurred at the time a photograph is taken, all additional revenue that can be received through one order helps to improve our margins. |
• | Insurance. We closely monitor adjuster activity as well as loss reporting activity. As revenues are based upon the number of cases opened, it is important to know the metrics on how many of these are being done by each adjuster. Additionally, in order to maintain the relationships that we have with our carriers, it is important to monitor the losses that they have taken and advise them well in advance of any problems arising. As such, internal guidelines for reporting and settlements are very closely monitored by senior management. |
Net revenues include no significant intersegment revenues. Operating loss by segment and geographic area excludes general corporate and interest expenses.
Financial Results
Product Sales and Services Revenue
Revenue consists of revenue from the sale of products and services, less returns, discounts and allowances and other offsets to net revenues. In our IT Support segment, revenue is recognized as the services are performed or as resale equipment is delivered and title has passed. In our Photography segment, revenue is recognized upon the delivery of the photographs and in our Insurance segment, revenue is recognized ratably over the estimated period length that it takes to administer the type of claim from start to close. Provisions for discounts, rebates to consumers and returns are recorded as a reduction of net revenues in the same period as the related revenue is recognized. Amounts billed to customers for delivery costs are classified as a component of net sales revenues, and any other related delivery costs are classified as a component of cost of revenues. Sales and value added tax collected from consumers and remitted to governmental authorities are accounted for on a net basis and are excluded from net revenues on our consolidated results of operations.
Operating expenses
Operating expenses consist of cost of sales and services, selling, general and administrative expenses, research and development expenses, and depreciation and amortization.
• | Cost of sales and services. Cost of sales includes the related labor and travel expenses that are incurred to deliver the services that have been provided. Cost of sales also includes the costs of producing the photographs and the costs of resale equipment. |
• | Selling, general and administrative. Selling, general and administrative expenses consist of salaries, benefits, commissions, incentive programs, travel and entertainment, meetings and seminars and other selling costs and expenses, in each case related to our business. General and administrative expenses consist of costs associated with running our company such as occupancy and employment expenses; employee-related costs associated with our executive, finance, information technology and human resource functions; costs associated with our corporate headquarters and legal, tax and accounting fees. |
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• | Depreciation and amortization. Depreciation and amortization expenses consist of the depreciation of physical assets purchased in the ordinary course of business to best service and maintain all customers. Amortization expense consists of the amortization of certain definite-lived intangible assets. |
Operating income (loss)
Operating income (loss) consists of total revenues less operating expenses, and excludes other income and expenses (i.e., non-operating income and expenses).
Other income (expenses)
• | Interest income. Interest income consists of interest payments made on our cash deposit accounts. |
• | Interest expense. Interest expense consists of interest payments made pursuant to our credit facilities and our related party debt agreements with, among others, one of the largest banks in Sweden. |
• | Management fee income. Management fee income consists of fees paid by related parties for general and administrative services performed by our corporate offices. |
• | Other non-operating income (expenses). Other non-operating income (expenses) includes all other non-operating income and expenses. |
Provision for income taxes
We record income tax expenses related to federal, state, local and foreign income.
Results of Operations
The following table sets forth consolidated operating results and other operating data for the periods indicated.
REVENUES: | Three months ended March 31, 2015 |
Three months ended March 31, 2014 | ||||||
Product sales | $ | 614,623 | $ | 570,184 | ||||
Service revenue | 1,521,543 | 1,575,701 | ||||||
Total Revenues | 2,136,166 | 2,145,885 | ||||||
COSTS AND EXPENSES: | ||||||||
Cost of product sales | 320,872 | 264,812 | ||||||
Cost of service revenue | 991,303 | 980,366 | ||||||
Selling, general and administrative | 1,400,583 | 1,738,113 | ||||||
Depreciation and amortization | 50,794 | 53,406 | ||||||
Total Costs and Expenses | 2,763,552 | 3,036,697 | ||||||
LOSS FROM CONTINUING OPERATIONS | (627,386 | ) | (890,812 | ) | ||||
OTHER INCOME (EXPENSE): | ||||||||
Interest income | 1,594 | 1,599 | ||||||
Interest expense | (14,828 | ) | (19,578 | ) | ||||
Management fee income | 52,863 | 43,024 | ||||||
Other income (expense) | (6,763 | ) | 11,517 | |||||
Total Other Income | 32,866 | 36,562 | ||||||
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (594,520 | ) | (854,250 | ) | ||||
PROVISION FOR INCOME TAXES | 22,752 | 8,147 | ||||||
NET LOSS FROM CONTINUING OPERATIONS | (617,272 | ) | (862,397 | ) | ||||
ADD: NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST | 28,146 | 15,592 | ||||||
NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED | (589,126 | ) | (846,805 | ) | ||||
Net income from discontinued operations | — | 27,914 | ||||||
NET LOSS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED | $ | (589,126 | ) | $ | (818,891 | ) |
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Three months ended March 31, 2015 compared with the three months ended March 31, 2014
Net revenues
The following table presents net revenues by segment for the three months ended March 31, 2015 compared with the three months ended March 31, 2014.
2015 | 2014 | % Change | ||||||||||
IT Support | 869,219 | 882,172 | (1 | )% | ||||||||
Photography | 584,327 | 570,184 | 2 | % | ||||||||
Insurance | 682,620 | 693,529 | (2 | )% | ||||||||
Total | $ | 2,136,166 | $ | 2,145,885 | 0 | % |
Net revenues remained relatively constant in 2015 from 2014. This is due to a slight increase in our Photography segment offset by slight decreases in our IT Support and Insurance segments.
Net revenues in our IT Support segment decreased $13,000, or (1)%, from $0.88 million in 2014 to $0.87 million in 2015. The decrease is solely due to the effects of currency fluctuations in 2015 as compared to 2014. There was a decrease of approximately 22% in the average exchange rate from 2014 to 2015. In local currency, revenue increased by approximately 25% due to an increase in the amount of revenue from one time consulting arrangements that have a significantly higher profit margin than the recurring revenue.
Net revenues in our Photography segment increased $14,000, or 2%, from $0.57 million in 2014 to $0.58 million in 2015. The increase is primarily due to the timing of when certain schools received their portraits in 2015 in relation to 2014.
Net revenues in our Insurance segment decreased $11,000, or (2)%, from $0.69 million in 2014 to $0.68 million in 2015. This is primarily due to the timing of when claims occurred in 2015 as compared to 2014.
Operating loss
The following table presents operating income (loss) by segment for the three months ended March 31, 2015 compared with the three months ended March 31, 2014.
2015 | 2014 | % Change | ||||||||||
IT Support | $ | 130,067 | $ | 72,013 | 81 | % | ||||||
Photography | (109,928 | ) | (76,703 | ) | (43 | )% | ||||||
Insurance | (45,738 | ) | (223 | ) | (20,410 | )% | ||||||
Non-allocated corporate expenses | (601,787 | ) | (885,899 | ) | 32 | % | ||||||
Total | $ | (627,386 | ) | $ | (890,812 | ) | 30 | % |
Operating losses decreased $263,000, or 30%, from $0.89 million in 2014 to $0.63 million in 2015. This decrease is primarily attributable to the decrease in the costs associated with the registration statement that was filed in May 2014, as well as improvement in the operating income of the IT Support segment, offset by the Photography and Insurance segments.
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Operating income in our IT Support segment increased approximately $58,000, or 81%, from approximately $72,000 in 2014 to $130,000 in 2015. The increase is primarily due to the effects of currency fluctuations in 2015 as compared to 2014. There was a decrease of approximately 22% in the average exchange rate from 2014 to 2015. In local currency, revenue increased by approximately 25% due to an increase in the amount of revenue from one time consulting arrangements that have a significantly higher profit margin than the recurring revenue.
Operating losses in our Photography segment increased $33,000 or 43%, from $77,000 in 2014 to $110,000 in 2015. The increase is due to the timing of when pictures were taken at certain schools in 2015 as compared to 2014 as well as the increased amount of new schools that require higher photography costs in their first year of the contract during 2015.
Operating loss in our Insurance segment increased by $46,000, from breakeven in 2014 to $(46,000) in 2015. This is primarily due to the decrease in revenue and a slight increase in operating costs, including pay rates, from 2014 to 2015.
Operating expense in our corporate segment decreased by $284,000 from $886,000 for the three months ended March 31, 2014 to $602,000 for the three months ended March 31, 2015. This is primarily due to decreased cost associated with the filing of the Company’s registration statement in May 2014.
Interest income
Interest income remained relatively constant in 2015 as compared to 2014 even though there are higher cash balances in interest bearing accounts. Due to the low interest rates being offered in risk free investments, there is minimal impact on interest income.
Interest expense
Interest expense decreased by approximately $4,800 in 2015 as compared to 2014, due to the timing of the borrowings in 2015 as compared to 2014.
Management fee income
Management fee income increased by $9,800 in 2015 as compared to 2014 due to an increase in amounts charged for providing back-office services to related parties.
Other income (expense)
In 2015, we had other income (expense) totaling approximately $(6,800), which is a decrease of $18,000 from the approximate $11,500 of other income in 2014. The difference is primarily due to the gain in 2014 on the sale of automobiles as well as increased foreign currency transaction losses in 2015.
Income tax expense
Income tax expense for the three months ended March 31, 2015 and 2014 was $22,752 and $8,147, respectively. The tax expense in 2015 and 2014 represents minimal state and local taxes. In both periods, these amounts differ from the expected benefit of our net losses due to the uncertainty of realizing those benefits.
Net loss
Net loss remained relatively constant for the reasons noted above.
Seasonality
In a typical year, our operating results are impacted by seasonality. Our IT Support segment in the third quarter typically will have lower operating results due to the extended vacations allowable under Swedish law. Historically, revenues in our Photography segment are highest in the fall to coincide with the beginning of the school year. Our Insurance segment can also have positive seasonal variations in operating results. They may be significantly impacted by inclement weather conditions, such as cold or wet weather, which can cause an increase in the number of insurance claims made.
Liquidity and Capital Resources
Historically, we have financed our operations primarily through cash flow from operations and borrowings on our lines of credit. We believe we have sufficient working capital and liquidity to support our operations for at least the next twelve months.
Cash and cash equivalents
At March 31, 2015 and December 31, 2014, we had cash and cash equivalents of approximately $6.4 million and $7.5 million, respectively. A summary of our cash flows provided by and used in operating, investing and financing activities is presented below.
Operating activities
Cash flows from operating activities consist primarily of net loss adjusted for certain non-cash items, including depreciation and amortization, and other non-cash charges, net. Our cash flows from operations are largely dependent on revenues from our clients, which are in turn dependent on general economic conditions and consumer confidence.
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We used cash in operations from continuing operations of $1.1 million and $0.77 million during the three months ended March 31, 2015 and 2014, respectively. The significant drivers contributing to the increased use of cash were increased prepayments of certain operating expenses, payments of accrued expenses and changes in our accounts receivable associated with the settlement of the AmTrust contract in our insurance segment. These factors were partially offset by decreased payments of our accounts payable.
We used cash in operations from discontinued operations of approximately $422,000 during the three months ended March 31, 2014. The significant drivers contributing to the decreased use of cash were increases in the collection times of the accounts receivable and higher amounts of prepaid operating expenses.
Investing activities
Cash used in investing activities from continuing operations has been mainly for the purchase of property and equipment. During the three months ended March 31, 2015, investing activities used cash due to additional fixed asset purchases of approximately $23,000. For the three months ended March 31, 2014, cash used in investing activities was related to further divestitures in cost method investments of approximately $4,600 as well as purchases of property and equipment of $36,000, which was partially offset by proceeds from the sale of fixed assets of $17,600.
We had no investing activities from discontinued operations during the three months ended March 31, 2014 and 2015.
Financing activities
For the three months ended March 31, 2015, cash provided by financing activities from continuing operations has been mainly due to the net borrowings under our lines of credit of approximately $550,000. For the three months ended March 31, 2014, provided by financing activities was due to the net borrowings under our lines of credit of approximately $400,000 offset by the distribution of approximately $179,000 to puttable non-controlling interests in our Insurance segment.
For the three months ended March 31, 2014, cash used in financing activities from discontinued operations was due to the net repayments under our lines of credit of approximately $48,000.
Debt
The Company has three separate lines of credit with one financial institution in Sweden. The three lines are considered the Xpeedio line, the Lors line and Modern Holdings line.
Xpeedio line: Xpeedio has a line-of-credit agreement through a financial institution of up to 3,000,000 SEK (approximately $348,600 and $384,300 at March 31, 2015 and December 31, 2014, respectively). The line is unsecured, due on demand and is at an interest rate of STIBOR plus 1.9 basis points (totaling 2% and 2% at March 31, 2015 and December 31, 2014, respectively). Unused amounts under the line bear interest at 0.6% annually. At March 31, 2015 and December 31, 2014, there is no balance outstanding. The line is renewed annually on January 1 and is renewed through December 31, 2015.
Lors line: Lors has a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at March 31, 2015 and December 31, 2014 (totaling approximately 3.25% at both March 31, 2015 and December 31, 2014), and amounts can be advanced under the line until April 30, 2016. We pay an annual facility fee of $1,500. At March 31, 2015 and December 31, 2014, borrowings outstanding under the Lors line totaled $800,000 and $500,000, respectively.
Modern Holdings line: We have a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at march 31, 2015 and December 31, 2014 (totaling approximately 3.25% at both March 31, 2015 and December 31, 2014), and amounts can be advanced under the line until April 30, 2016. At March 31, 2015 and December 31, 2014, borrowings outstanding under the Modern Holdings line totaled $930,400 and $680,400, respectively.
Interest expense for debt was $11,021 and $15,678 for the three months ended March 31, 2015 and 2014, respectively.
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Affiliated Party Debt
Brookstone/GUI: The Company has a note payable to GUI that had an original loan amount of $559,000. The note is due on demand with interest payable on a monthly basis. The interest rate is fixed at 4%. The note is unsecured. At March 31, 2015 and December 31, 2014, borrowings outstanding under the Brookstone/GUI note payable totaled $369,000 in each period.
Brookstone: During 2009, the Company entered into various note payable agreements with an affiliate. The notes are due on demand, and accrue interest equal to the applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.36% and 3% at March 31, 2015 and December 31, 2014, respectively. These notes are unsecured. At March 31, 2015 and December 31, 2014, the outstanding balance under these notes totaled $468,865 in each period.
Brookstone/Primetime 24 JV: In 2012, the Company borrowed $210,000 from Primetime 24 JV in an interest only note with interest payable annually. The interest rate is equal to the short-term applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.36% and 3% at March 31, 2015 and December 31, 2014, respectively. The note is due on demand. The note is unsecured. At March 31, 2015 and December 31, 2014, the outstanding amount under this note was $190,000 in each period.
Interest expense for the affiliated party debt was $3,807 and $3,900 for the three months ended March 31, 2015 and 2014, respectively.
The Company does not have any financial ratio covenants and does not provide collateral for any of its debt agreements noted above.
Maturities of the Company’s long-term debt did not change significantly from December 31, 2014.
The Company has a recent trend of operations generating negative
cash flows and increasing working capital deficit due to the decline in our current assets. Despite these negative factors, the
Company believes its renewed lines of credit, the additional availability under those lines of credit of approximately $0.62 million
and the cash on hand of approximately $6.4 million as of March 31, 2015 will be sufficient to support the Company’s operations
for the next twelve months.
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Contractual Obligations
The following table sets forth our contractual obligations as of March 31, 2015:
Payments Due by Period | |||||||||||||||||||
Less than 1 year |
1-3 years | 4-5 years | After 5 years |
Total | |||||||||||||||
Long-Term debt | $ | 2,763,265 | $ | 13,799 | — | — | $ | 2,777,064 | |||||||||||
Interest payments on debt(1) | 95,598 | 700 | — | — | 96,298 | ||||||||||||||
Operating leases | 367,343 | 44,885 | — | — | 412,228 | ||||||||||||||
Employment agreements(2) | 875,935 | — | — | — | 875,935 | ||||||||||||||
Severance agreements | 58,318 | — | — | — | 58,318 | ||||||||||||||
$ | 4,160,459 | $ | 59,384 | $ | — | $ | — | $ | 4,219,843 |
(1) | Assumes debt balances, interest rates and foreign currency exchange rates remain the same as period end balances |
(2) | Employment agreements are renewed on an annual basis for our key employees. |
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: accounting for revenue recognition; collectability of accounts receivable; depreciation and amortization periods; tax rates, deferred income taxes and tax reserves; and the recoverability of long-term assets including goodwill and other intangibles. The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:
Revenue recognition
The Company’s revenues are primarily derived from consulting services, photograph sales and the administration of insurance claims. Revenues are recognized under contracts generally when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, services have been performed or products have been delivered and collection of the amounts billed is reasonably assured.
Revenues from consulting services related to training and general consulting are recognized under a time-and-material basis as the services are performed.
Photography revenue is recognized upon delivery of the photographs. The Company charges a shipping and handling fee to its customers to ship photographs. These amounts are recorded as revenue. Revenues associated with the shipping and handling fees were approximately $32,000 for each of the three months ended March 31, 2015 and 2014. The costs of shipping and handling are expensed as incurred and are included in cost of sales and services on the accompanying statement of operations. The Company receives money in advance before the photographs are shipped. These amounts are recorded as deferred revenue until the product is delivered.
Revenue from the administration of insurance claims is recognized ratably over the estimated period length that it takes to administer the type of claim from start to close. The claim length could range for periods up to 13 months. The Company’s billings do not necessarily correlate with the revenues recognized ratably over the life of the claim. The Company has recorded unbilled receivables of $191,679 and $300,957 which are included in accounts receivable on the consolidated balance sheet as of March 31, 2015 and December 31, 2014, respectively. When billings occur in advance of services performed, the Company records deferred revenue for those amounts.
Total revenue does not include sales or value added tax; the Company considers itself a pass-through entity for collecting and remitting sales and value added taxes.
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Accounts receivable
Accounts receivable are recorded at net realizable value consisting of the carrying amount less the allowance for uncollectible accounts. The Company evaluates the collectability of its accounts receivable based on a combination of factors. Where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, the current business environment and its historical experience. The Company’s policy to determine past due accounts is based upon the contractual payment terms of the receivables. The Company generally does not record interest on past due accounts. Accounts are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. At March 31, 2015 and December 31, 2014, the Company believes an allowance for doubtful accounts in is not necessary.
Goodwill and intangible assets
Accounting Standards Codification (ASC) Topic 805, “Business Combinations” (ASC No. 805), requires that the purchase method of accounting be used for all business combinations. The guidance specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other” (ASC No. 350), all assets and liabilities of the acquired businesses including goodwill are assigned to reporting units. We evaluate goodwill for impairment at least annually, or as circumstances warrant. When determining the fair value of our reporting units, we utilize various assumptions, including projections of future cash flows. Any adverse changes in key assumptions about our businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge.
We review long-lived assets and certain identifiable intangibles other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset. The estimate of undiscounted cash flows and the fair value of assets require several assumptions and estimates like the weighted average cost of capital, discount rates, risk-free rates, market rate of return and risk premiums and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
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There were no impairments noted during the three months ended March 31, 2015 and 2014.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to enter into the determination of taxable income.
The Company believes the expiration date of the tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely the Company has established a full valuation allowance for all of its deferred tax assets.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of ongoing tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.
The Company continues to assess the likelihood of realizing the tax credit for withheld amounts from foreign customers. These credits have been historically recorded in “prepaid income and other taxes” on the accompanying balance sheet. Due to the operating loss levels in the Telecommunications segment in 2015, the Company believes that it will not be able to utilize these credits prior to their expiration beginning in 2016 and accordingly has reserved for them.
The Company recognizes a liability for uncertain tax positions that the Company has taken or expects to file in an income tax return. An uncertain tax position is recognized only if it is “more likely than not” that the position is sustainable based on its technical merit. A recognized tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information.
The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. If foreign investments are not expected to be indefinitely invested, the Company provides income taxes on the portion that is not indefinitely invested.
Accounting standards applicable to emerging growth companies
We are an emerging growth company as defined under the Jumpstart Our Business Startups Act (JOBS Act). Emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We have elected to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.
Recently Issued Accounting Pronouncements
In May, 2015, the FASB issued ASU 2015 - 09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2015-09”).The amendments in ASU 2015-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of 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. To achieve that core principle, an entity should apply the following steps:
-Step 1: Identify the contract(s) with a customer.
-Step 2: Identify the performance obligations in the contract.
-Step 3: Determine the transaction price.
-Step 4: Allocate the transaction price to the performance obligations in the contract.
-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2015-09 also significantly expands disclosure requirements concerning revenues for most entities. ASU 2015-09 will be effective for the Company for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. Management is currently evaluating the impact that ASU 2015-09 will have on the Company.
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In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued and, if so, disclose that fact. Such evaluation is to be done for both annual and interim reporting periods, if applicable. Management is also required to evaluate and disclose whether its plans alleviate that doubt. ASU 2014-15 will become effective from January 1, 2017 and we are currently evaluating the impact of adopting this guidance.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08). ASU 2014-08 is aimed at reducing the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or are expected to have a major effect on an entity’s operations and financial results. Such a shift could include the disposal of a major line of business, a major geographical area, a major equity method investment or other major parts of the entity. ASU 2014-08 also permits companies to have continuing cash flows and significant continuing involvement with the disposed component. ASU 2014-08 requires expanded disclosures for discontinued operations and new disclosures for individually material disposals that do not meet the definition of a discontinued operation. The Company has early adopted ASU 2014-08 during 2014, which was applied to the sale of Basset.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, we are not required to provide such information.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
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As discussed in Note 2 to our Consolidated Financial Statements attached hereto, in July 2013, two former owners of SCM, representing 22.5% of the 30% of the noncontrolling interests, put their member units to the Company. In September 2013, one additional former owner of SCM, representing 6% of the 30% of the noncontrolling interests, put their member units to the Company. Since the parties are in disagreement as to the other parties’ Unit Put FMV calculation, the closing of the transaction has not occurred. As such, the holders of the units have not transferred their interests and the Company has not redeemed the puttable noncontrolling interests and thus has not accounted for the exercise of the put right. Collectively, the three former owners have asserted that the FMV calculation of their interest is approximately $1,650,000. The Company believes the amount recorded as puttable noncontrolling interest on the accompanying consolidated balance sheet is sufficient for any subsequent payments.
To date, the parties had not reached an agreement. As per the terms of the operating agreement, the parties are in the arbitration process.
We are not a party to any other material pending legal proceeding.
We have omitted a discussion of risk factors because, as a smaller reporting company, we are not required to provide such information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibit No. | Description |
31.1 | Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer. |
31.2 | Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer and Principal Accounting Officer. |
32.1 | Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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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.
MODERN HOLDINGS INCORPORATED | ||
By: | /s/ Henry L. Guy | |
Dated: May 15, 2015 | Henry L. Guy | |
President & Chief Executive Officer (Principal Executive Officer)
| ||
By: | /s/ Jay Murray | |
Dated: May 15, 2015 | Jay Murray | |
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
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