United States Securities and Exchange Commission

Washington, DC 20549

  

FORM 10-Q

  

[x]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

OR

 

For the quarterly period ended September 30, 2014

 

[  ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from_________to_________.

 

Commission File Number 001-09014

 

ChyronHego Corporation

(Exact name of registrant as specified in its charter)

 

New York		11-2117385
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5 Hub Drive, Melville, New York		11747
(Address of principal executive offices)		(Zip Code)
(631) 845-2000
(Registrant's telephone number, including area code)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]    No [  ]

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [x]    No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]		Accelerated filer [  ]
Non-accelerated filer [  ]		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 [  ]    No [x]

 

The number of shares outstanding of the issuer's common stock, par value $.01 per share, on November 7, 2014 was 40,252,967.

 

 

CHYRONHEGO CORPORATION

 

INDEX

  

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3
	Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2014 and 2013 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2014 and 2013 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2014 and 2013 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	23

 

 

PART I     FINANCIAL INFORMATION

Item 1.      Financial Statements

 

CHYRONHEGO CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

		Unaudited
		September 30,				December 31,
		2014				2013
Assets:
Current assets:
Cash and cash equivalents		$	5,874			$	5,266
Accounts receivable, net			12,227				7,781
Inventories, net			2,216				2,816
Prepaid expenses and other current assets			2,683				2,525
Total current assets			23,000				18,388
Property and equipment, net			3,906				4,145
Intangible assets, net			11,390				8,968
Goodwill			23,799				18,948
Deferred tax asset			42				56
Other assets			132				147
TOTAL ASSETS		$	62,269			$	50,652
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses		$	8,091			$	9,240
Deferred revenue			5,398				4,660
Short-term debt			1,113				1,532
Due to related parties			587				716
Current portion of pension liability			327				518
Deferred tax liability			301				271
Capital lease obligations			137				215
Total current liabilities			15,954				17,152
Contingent consideration			11,506				12,260
Pension liability			2,431				2,197
Deferred revenue			764				923
Long-term debt			733				772
Deferred tax liability			1,806				1,195
Other liabilities			552				686
Total liabilities			33,746				35,185
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $1.00, without designation
Authorized - 1,000,000 shares, Issued -none
Common stock, par value $.01
Authorized - 150,000,000 shares
Issued and outstanding - 36,901,406 at September 30, 2014 and 30,788,251 at December 31, 2013			369				308
Additional paid-in capital			119,156				103,642
Accumulated deficit			(91,098	)			(88,243	)
Accumulated other comprehensive loss			(924	)			(421	)
Total ChyronHego Corporation shareholders' equity			27,503				15,286
Non-controlling interests			1,020				181
Total shareholders' equity			28,523				15,467
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	62,269			$	50,652

 

 

See Notes to Consolidated Financial Statements (unaudited)

 

 

CHYRONHEGO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

 

(In thousands, except per share amounts)

 

(Unaudited)

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Product revenues		$	7,105			$	7,697			$	20,540			$	20,415
Service revenues			8,906				6,262				22,796				12,277
Total revenues			16,011				13,959				43,336				32,692
Cost of sales			5,912				5,210				16,425				10,890
Gross profit			10,099				8,749				26,911				21,802
Operating expenses:
Selling, general and administrative			6,441				6,487				18,691				18,074
Research and development			2,247				2,399				6,553				6,524
Change in fair value of contingent consideration			3,776				878				4,176				933
Total operating expenses			12,464				9,764				29,420				25,531
Operating loss			(2,365	)			(1,015	)			(2,509	)			(3,729	)
Interest expense, net			(31	)			(94	)			(275	)			(203	)
Other income (loss), net			(22	)			30				(23	)			(37	)
Loss before taxes			(2,418	)			(1,079	)			(2,807	)			(3,969	)
Income tax benefit (expense), net			(137	)			32				(12	)			(72	)
Net loss			(2,555	)			(1,047	)			(2,819	)			(4,041	)
Less: Net income attributable to Non-controlling interests			5				30				36				38
Net loss attributable to ChyronHego Shareholders		$	(2,560	)		$	(1,077	)		$	(2,855	)		$	(4,079	)
Net loss per share attributable to ChyronHego shareholders - basic		$	(0.07	)		$	(0.04	)		$	(0.08	)		$	(0.17	)
Net loss per share attributable to ChyronHego shareholders - diluted		$	(0.07	)		$	(0.04	)		$	(0.08	)		$	(0.17	)
Weighted average shares outstanding:
Basic			36,754				30,236				34,341				23,576
Diluted			36,754				30,236				34,341				23,576

 

See Notes to Consolidated Financial Statements (unaudited)

 

 

CHYRONHEGO CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

 

(Unaudited)

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Net loss		$	(2,555	)		$	(1,047	)		$	(2,819	)		$	(4,041	)
Other comprehensive income (loss):
Cumulative translation adjustment			(475	)			92				(503	)			162
Comprehensive loss			(3,030	)			(955	)			(3,322	)			(3,879	)
Less: Comprehensive income attributable to Non-controlling interests			5				30				36				38
Comprehensive loss attributable to ChyronHego Corporation		$	(3,035	)		$	(985	)		$	(3,358	)		$	(3,917	)

  

See Notes to Consolidated Financial Statements (unaudited)

 

 

CHYRONHEGO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

 

(In thousands)

 

(Unaudited)

 

  

		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(2,819	)		$	(4,041	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			2,178				1,755
Deferred income taxes			(317	)			27
Inventory provisions			125				50
Share-based payment arrangements			982				2,641
Shares issued for 401(k) match			162				179
Change in fair value of contingent consideration			4,176				933
Other			131				427
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(4,349	)			(1,649	)
Inventories			626				(784	)
Prepaid expenses and other assets			162				(472	)
Accounts payable and accrued expenses			(174	)			1,828
Deferred revenue			348				432
Other liabilities			(105	)			410
Net cash provided by operating activities			1,126				1,736
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment, net			(1,349	)			(1,648	)
Acquisition of business, net of cash acquired			866				14
Net cash used in investing activities			(483	)			(1,634	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on revolving credit facilities, net			1				315
Repayments on debt			(357	)			(399	)
Proceeds from borrowings			55				280
Payments on capital lease obligations			(195	)			(134	)
Proceeds from exercise of stock options			499				6
Net cash provided by financing activities			3				68
Effect of exchange rates on cash and cash equivalents			(38	)			48
Change in cash and cash equivalents			608				218
Cash and cash equivalents at beginning of period			5,266				2,483
Cash and cash equivalents at end of period		$	5,874			$	2,701
SUPPLEMENTAL CASH FLOW INFORMATION:
Common stock and warrants issued for acquisitions		$	6,586			$	16,591
Contingent consideration for acquisition		$	1,557			$	7,500
Common stock issued in settlement of contingent consideration		$	6,488
Common stock issued in settlement of awards under the
Management Incentive Compensation Plan and Severance Agreements		$	846
Debt incurred for acquisition						$	1,044

  

See Notes to Consolidated Financial Statements (unaudited)

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

1.            BASIS OF PRESENTATION

 

Nature of Business

 

On May 22, 2013 Chyron Corporation ("Chyron") acquired the outstanding stock of Hego Aktiebolag ("Hego" or "Hego AB"), and changed its name to ChyronHego Corporation (the "Company" or "ChyronHego"). Hego is a global graphics services company based in Stockholm, Sweden that develops real-time graphics products for the broadcast and sports industries. The companies combined in a cash and stock-for-stock transaction and the Company has continued to trade on the NASDAQ under the symbol "CHYR." The combination of these two companies, which is referred to in these consolidated financial statements as the "Business Combination," forms a leading global provider of broadcast graphics creation, playout and real-time data visualization.

 

General

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts have been eliminated. The results of operations include the operating results of Hego since the completion of the Business Combination on May 22, 2013. See Note 8 of these consolidated financial statements.

 

In the opinion of management of the Company, the unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 2014 and the consolidated results of its operations, its comprehensive income (loss) and its cash flows for the periods ended September 30, 2014 and 2013. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2014. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates made by management include inventory valuations, stock and bonus compensation, allowances for doubtful accounts, income taxes, pension assumptions, allocations of purchase price, contingent consideration, valuation of intangible assets and reserves for warranty and incurred but not reported health insurance claims. Estimates, by their nature, are based on judgment and available information. Also, during interim periods, certain costs and expenses are allocated among periods based on an estimate of time expired, benefit received, or other activity associated with the periods. Accordingly, actual results could differ from those estimates. The Company has not segregated its cost of sales between costs of products and costs of services as it is not practicable to segregate such costs. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The December 31, 2013 figures included herein were derived from such audited consolidated financial statements.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and restricted stock units are reflected in diluted net income (loss) per share by applying the treasury stock method.

 

 

The Company recorded net losses for the three and nine months ended September 30, 2014 and 2013. Potential common shares are anti-dilutive in periods in which the Company records a net loss because they would reduce the respective period's net loss per share. Anti-dilutive potential common shares are excluded from the calculation of diluted earnings per share.      

 

Shares used to calculate net income (loss) per share are as follows (in thousands): 

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Basic weighted average shares outstanding			36,754				30,236				34,341				23,576
Effect of dilutive stock options			-				-				-				-
Effect of dilutive restricted stock units			-				-				-				-
Diluted weighted average shares outstanding			36,754				30,236				34,341				23,576
Weighted average shares which are not included in the calculation of diluted earnings (loss) per share because their impact is anti-dilutive:
Stock options			1,679				2,409				2,136				2,918
Restricted stock units			-				-				-				40
			1,679				2,409				2,136				2,958

 

2.            LONG-TERM INCENTIVE PLANS

 

Pursuant to the 2008 Long-term Incentive Plan, as amended (the "Plan"), the Company may grant stock options (non-qualified or incentive), stock appreciation rights, restricted stock, restricted stock units and other share-based awards to employees, directors and other persons who serve the Company. The Plan is overseen by the Compensation Committee of the Board of Directors, which approves the timing and circumstances under which share-based awards may be granted. At September 30, 2014 there were 3.1 million shares available to be granted under the Plan. The Company issues new shares to satisfy the exercise or release of share-based awards. Under the provision of FASB Accounting Standards Codification ("ASC") Topic 718, Stock Compensation , all share-based payments are required to be recognized in the statement of operations based on their fair values at the date of grant.

 

The fair value of each option award is estimated using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company's stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. Options generally have a life of 10 years and have either time-based or performance-based vesting features. Time-based awards generally vest over a three year period, while the performance-based awards vest upon the achievement of specific performance targets. There were no options granted during the three months ended September 30, 2014 and 2013. The fair values of the options granted during the nine months ended September 30, 2014 and 2013 were estimated based on the following weighted average assumptions:

   

		Nine Months
		Ended September 30,
		2014				2013
Expected volatility			78.78	%			76.23	%
Risk-free interest rate			1.91	%			1.06	%
Expected dividend yield			0.00	%			0.00	%
Expected life (in years)			6.0				6.0
Estimated fair value per option granted		$	1.70			$	0.87

 

 

The following table presents a summary of the Company's stock option activity for the nine months ended September 30, 2014:

  

		Number of Options
Outstanding at January 1, 2014			5,994,788
Granted			866,250
Exercised			(665,597	)
Forfeited and cancelled			(73,438	)
Outstanding at September 30, 2014			6,122,003

 

The Company also grants restricted stock units, or RSUs, each of which entitles the holder to a share of Company common stock. The fair value of an RSU is equal to the market value of a share of common stock on the date of grant. The following table presents a summary of the Company's RSU activity for the nine months ended September 30, 2014:

 

		Shares
Non-vested at January 1, 2014
Granted			139,839
Forfeited and cancelled			(27,956	)
Vested			(14,036	)
Non-vested at September 30, 2014			97,847

 

The Company amortizes share-based compensation expense over the vesting period on a straight line basis. The impact on the Company's results of operations of recording share-based compensation expense is as follows (in thousands):     

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Cost of sales		$	31			$	2			$	80			$	30
Research and development			128				35				331				189
Selling, general and administrative			221				220				571				2,422
		$	380			$	257			$	982			$	2,641

 

3.             INVENTORIES

 

Inventories, net are comprised of the following (in thousands):

  

		September 30,				December 31,
		2014				2013
Finished goods		$	249			$	539
Work-in-progress			266				310
Raw material			1,701				1,967
		$	2,216			$	2,816

  

 

4.            LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

  

		September 30,				December 31,
		2014				2013
Revolving credit facilities - Europe		$	829			$	933
Note payable - Europe			867				921
Terms loans - Europe			32				355
Other			118				95
			1,846				2,304
Less: portion due within one year			1,113				1,532
Other		$	733			$	772

 

Revolving credit facilities - Europe

 

We have revolving credit facilities associated with our European operations that total $1.2 million of which $0.8 million is outstanding at September 30, 2014. The revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods, unless notified by the lender ninety days prior to expiration. The interest rate on these revolving credit facilities is 5.95%. The revolving credit agreements are collateralized by the assets of certain European subsidiaries of the Company.

 

Note payable - Europe

 

In connection with the acquisition of Granvideo AB in 2013, the Company issued a note to the previous shareholder of Granvideo in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. The Company made principal payments of $0.06 million on September 1, 2013 and $0.1 million on November 15, 2013, and is required to make four equal annual payments of $0.26 million on December 31 of each year from 2014 to 2017. The principal balance at September 30, 2014 was $0.9 million.

 

Term loans - Europe

 

In addition, we have two term loans with European lenders that total $0.03 million. These term loans require principal payments totaling $8 thousand per month and bear interest at rates that range between 7.45% and 7.75% and will mature in 2014 and 2015.

 

Revolving line of credit - US

 

In November 2013, the Company entered into a two-year $4.0 million revolving line of credit (the "Revolver") with Silicon Valley Bank ("SVB"). Borrowings on the Revolver will be based on 80% of eligible accounts receivable. At September 30, 2014, available borrowings under the Revolver were $4.0 million but no borrowings were outstanding. The Company is also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if the Company's AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, the Company will maintain a static loan balance and all collections will be deposited into the Company's operating account.

 

The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If the Company's AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%. In connection with the Revolver, the Company was required to pay the outstanding balance on its previously outstanding term loan which was $0.4 million on the closing date. The original term loan was being repaid over 30 months and was subject to interest at Prime + 2.25%.

 

 

As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts the Company's ability to pay dividends without the bank's consent.

 

The Revolver is collateralized by the assets of the U.S. subsidiaries of the Company, except for (i) its intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.

  

5.            BENEFIT PLANS

 

The net periodic benefit cost relating to the Company's U.S. Pension Plan is as follows (in thousands):

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Service cost		$	82			$	140			$	246			$	421
Interest cost			101				94				303				282
Expected return on plan assets			(107	)			(99	)			(321	)			(297	)
Amortization of net loss			14				62				42				185
Amortization of prior service cost			(2	)			(2	)			(6	)			(6	)
		$	88			$	195			$	264			$	585

 

The Company's policy is to fund the minimum contributions required under the Employee Retirement Income Security Act ("ERISA") and, subject to cash flow levels, the Company may choose to make a discretionary contribution to its pension plan to reduce the unfunded liability. In the third quarter of 2014, the Company made a required contribution of $0.1 million. Based on current assumptions, the Company expects to make required contributions of $0.3 million in the next twelve months.

 

The Company has adopted a 401(k) Plan exclusively for the benefit of participants and their beneficiaries. All U.S. employees of the Company are eligible to participate in the 401(k) Plan. The Company may make discretionary matching contributions of the compensation contributed by the participant. The Company has the option of making the matching contributions in cash or through shares of Company common stock. During the nine months ended September 30, 2014 and 2013, the Company issued 70 thousand and 174 thousand shares of common stock in connection with the Company match for the 401(k) Plan in lieu of an aggregate cash match of $162 thousand and $179 thousand, respectively.

 

Substantially all employees of the Company's foreign subsidiaries receive retirement benefits, at least to the extent required by law, through funds that are governed by local statutory requirements. Contributions are typically based on specified percentages of the employees' salaries.

 

 

6.             PRODUCT WARRANTY

 

The Company provides product warranties for its various products, typically for one year. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the sale is recognized. The Company established its reserve based on historical data, taking into consideration specific product information. The following table sets forth the changes in the warranty reserve (in thousands):

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Balance at beginning of period		$	126			$	65			$	118			$	50
Provisions			-				55				194				125
Warranty services provided, net			(87	)			(25	)			(273	)			(80	)
		$	39			$	95			$	39			$	95

 

7.             INCOME TAXES

 

The components of deferred income taxes are as follows (in thousands):

   

		September 30,				December 31,
		2014				2013
Deferred tax assets:
Net operating loss carryforwards		$	10,895			$	12,074
Inventory			1,903				1,856
Other liabilities			3,209				3,051
Fixed assets			2,385				2,069
Other temporary differences			942				751
			19,334				19,801
Less: valuation allowance			(19,292	)			(19,745	)
Total deferred tax assets			42				56
Deferred tax liability:
Intangibles			(2,172	)			(1,453	)
Other temporary differences			65				(13	)
Net deferred tax liability		$	(2,065	)		$	(1,410	)
As reported:
Non-current deferred tax assets		$	42			$	56
Current deferred tax liability		$	(301	)		$	(271	)
Non-current deferred tax liability		$	(1,806	)		$	(1,195	)

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At September 30, 2014, the gross deferred tax balance was $19.3 million and includes the $11 million tax effect of $30 million in U.S. Federal net operating loss carryforwards ("NOLs") expiring between 2019 and 2032. The Company has not recorded a deferred tax asset of approximately $1.3 million related to the NOLs resulting from the exercise of disqualifying stock options and restricted stock units which will be accounted for as a credit to additional paid in capital when realized as a reduction to income taxes payable.

 

Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the net operating loss and tax credit carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the net operating loss carryforwards that the Company may utilize in any one year may be limited.

 

 

There are no undistributed net earnings for the Company's foreign subsidiaries, and accordingly no related deferred taxes.

 

Accounting standards require that the Company continually assess the likelihood that its deferred taxes will be realizable. All available evidence, both positive and negative, must be considered in determining whether it is more likely than not that the deferred tax assets will be realized. In making such assessments, significant weight is given to evidence that can be objectively verified. A company's current or previous losses are given more weight than its future outlook. As of September 30, 2014 and December 31, 2013, using that standard, the Company concluded that a full valuation allowance was required for its U.S. and state deferred tax assets. As of September 30, 2014 the unreserved balance of $42 thousand relates to certain foreign deferred tax assets. The Company will continue to assess the likelihood that its deferred tax assets will be realizable, and its valuation allowance will be adjusted accordingly, which could materially impact its financial position and results of operations in future periods.

 

The components of the provision for income tax benefit (expense), net are as follows for the periods ended (in thousands):

  

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Current:		$	(178	)		$	3			$	(329	)		$	(45	)
State and Foreign
Deferred:
Federal			(12	)			(16	)			(35	)			(39	)
Foreign			53				45				352				12
			41				29				317				(27	)
Income tax (expense) benefit, net		$	(137	)		$	32			$	(12	)		$	(72	)

 

The difference between the Company's effective income tax rate and the federal statutory rate is primarily due to the mark to market adjustment for our contingent liability relating to the Business Combination that will not be deductible for tax purposes, the amount of expense associated with the Company's share-based payment arrangements which is also not deductible and international tax rate differences.

  

8.            BUSINESS COMBINATION AND OTHER ACQUISITIONS

 

On May 22, 2013, Chyron and Hego completed the Business Combination whereby a wholly-owned subsidiary of Chyron acquired all of the issued and outstanding shares of Hego for a total purchase price of $24.6 million. The Company and Hego entered into the Business Combination to create a market leading company in the fields of TV graphics, data visualization and production services for 'Live' and on line news and sports production.

 

The total purchase price of $24.6 million is comprised of 12.2 million shares of the Company's common stock valued at $16.6 million, contingent consideration of shares of the Company's common stock (the "Earn-Out Shares") valued at an estimated $7.5 million and $0.5 million in cash and other consideration. The $7.5 million represents the value of the Earn-Out Shares based on a probability-based model measuring the likelihood of achieving certain revenue milestones as detailed below, and has been recorded as a liability in the balance sheet. In connection with FASB ASC 805, Business Combinations, the fair value of the contingent consideration was established at the date of the Business Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. This adjustment has had a material impact on the Company's financial position and results of operations and will continue to impact the Company until all contingencies have been settled. In the three and nine months ended September 30, 2014 charges of $3.8 million and $4.2 million, respectively, have been recorded in order to adjust the contingent consideration to $9.9 million, its current fair value at September 30, 2014, in the level 3 category. Based on the revenue milestones, additional shares are likely to be issued as follows:

 

Revenue milestones		Additional shares
$15.5 million in 2013			2,772,599
$16.0 million in 2014			1,584,339
$16.5 million in 2015			1,742,775
Total			6,099,713
Or, alternatively, if $33.0 million for 2013 and 2014 combined			6,099,713

 

 

At December 31, 2013, the 2013 revenue milestone was achieved and 2,772,599 additional shares were issued in March 2014 at a stock price of $2.34 per share. At September 30, 2014, the 2013 and 2014 combined revenue milestone of $33.0 million was achieved and 3,327,114 additional shares were issued in November 2014 at a stock price of $2.88.

 

On April 30, 2014 the Company completed its acquisition of Norway-based Zxy Sport Tracking AS (“Zxy”). Pursuant to the terms of the Share Purchase Agreement with Zxy (the “SPA”), the Company acquired 67% of the issued and outstanding shares of Zxy for a total purchase price of $5.5 million. Pursuant to the terms of the SPA, the Company issued 1,374,545 shares of ChyronHego Common Stock (“Common Stock”) at a value of $3.3 million and issued 549,818 warrants at a value of $0.7 million, based on a Black-Scholes valuation model. The warrants give the holders the right to purchase one share of Common Stock at a price of $2.75 for a three year period from closing.

 

In addition, stockholders of Zxy will be entitled to an earn-out, payable in cash, in an amount equal to 15% of the net revenues from all sales of Zxy products and services from the closing date through December 31, 2018, up to $3.0 million. If and when $3.0 million in such revenues has been achieved, the earn-out rate shall be reduced to 7.5% for the remainder of the earn-out period. The stockholders are entitled to a guaranteed minimum earn-out amount of $110,000 in each of 2014, 2015 and 2016. The earn-out was valued at $1.5 million based on a discounted model measuring the likelihood of achieving certain revenue levels.

 

The following table summarizes the estimated allocation of the purchase price which is preliminary and subject to adjustment following the completion of the valuation process (in thousands):

 

 

 

Net fair value of assets acquired		$	628
Intangible assets			2,600
Goodwill			3,783
			7,011
Deferred tax liability			(702	)
Amounts attributable to minority shareholders			(836	)
		$	5,473

  

The goodwill resulting from the Zxy acquisition reflects a transponder-based sports tracking technology that the Company believes will strengthen its position in the sports analysis market across both the sports broadcast and professional sports markets. The Company believes that this preliminary estimate of goodwill will not be deductible for tax purposes.

 

 

The components and estimated useful lives of intangible assets acquired are stated below. Amortization is provided on a straight line method over the following estimated useful lives (dollar amounts in thousands):

 

Definite-lived intangibles:					Estimated Useful Life (in years)
Proprietary technology		$	2,300		15
Tradename			300		15
		$	2,600

  

On July 1, 2014, the Company completed its acquisition of Norway based Metaphor AS ("Metaphor") and its wholly owned subsidiaries WeatherOne AS and WeatherOne Limited (collectively referred to as "WeatherOne"). The acquisition of Metaphor and WeatherOne is referred to as the WeatherOne Transaction.

 

In accordance with the share purchase agreement for the acquisition of Metaphor and WeatherOne, the Company issued 1,126,228 shares of Common Stock at a value of $2.4 million, 337,870 warrants at a value of $0.3 million, based on a Black-Scholes valuation model, and $0.6 million in cash. The warrants give the holders the right to purchase one share of Common Stock at a price of $2.78 per share for a three-year period.

 

The following table summarizes the estimated allocation of the purchase price which is preliminary and subject to adjustment following the completion of the valuation process (in thousands):

 

 

Net fair value of assets acquired		$	1,245
Intangible assets			900
Goodwill			1,440
			3,585
Deferred tax liability			(244	)
		$	3,341

 

The goodwill resulting from the WeatherOne Transaction reflects a weather forecast solution for broadcast and digital media that the Company believes will strengthen its product offering. The Company believes that this preliminary estimate of goodwill will not be deductible for tax purposes.

 

The components and estimated useful lives of intangible assets acquired are stated below. Amortization is provided on a straight line method over the following estimated useful lives (dollar amounts in thousands):

 

Definite-lived intangibles:					Estimated Useful Life (in years)
Proprietary technology		$	400		15
Supplier relationships			400		15
Tradename			100		15
		$	900

  

Below are the unaudited proforma results of operations for the nine months ended September 30, 2014 and 2013 as if the Company had acquired Zxy and WeatherOne on January 1, 2013. Such proforma results are not necessarily indicative of the annual results of operations that would have been achieved if the acquisitions occurred on the date assumed, nor are they necessarily indicative of future consolidated results of operations (in thousands except per share data):

 

		2014				2013
Net revenues		$	44,495			$	34,106
Net loss			(2,892	)			(4,430	)
Net loss per share - basic and diluted		$	(0.08	)		$	(0.17	)

  

 

9.            OTHER COMPREHENSIVE INCOME

 

Components and activity related to accumulated other comprehensive income (loss) is as follows (in thousands):

 

		Foreign								Accumulated
		Currency				Pension				Other
		Translation				Benefit				Comprehensive
		Adjustment				Costs				Income (Loss)
January 1, 2014		$	131			$	(552	)		$	(421	)
Change for period			(503	)			-				(503	)
Amounts re-classed from accumulated other comprehensive income (loss)			-				-				-
September 30, 2014		$	(372	)		$	(552	)		$	(924	)

  

10.          DUE TO RELATED PARTIES

 

The balance due to related parties represents amounts that are due to certain former shareholders or employees of Hego AB that are now shareholders or employees of the Company. The balance resulted from loans to Hego AB, and dividends declared but not paid by Hego AB, prior to its merger with Chyron. Interest is accrued on the outstanding balance at the annual rate of 5.95%.

  

11.          SEGMENT AND GEOGRAPHIC INFORMATION

 

Prior to the Business Combination, the Company operated as one reporting segment. As a result of the Business Combination, the Company manages its business primarily on a geographic basis. The Company's two reportable operating segments consist of the Americas and EMEA (Europe, Middle East and Africa). The Americas segment includes both North and Latin America, as well as Asia. The Company's chief operating decision maker evaluates performance of the segments based on revenues and operating income (loss). Unallocated corporate amounts are deemed by the Company as administrative, oversight costs, not managed by the segment managers. The Company does not allocate assets by segment because the chief operating decision maker does not review the assets by segment to assess the segments' performance, as the assets are managed on an entity-wide basis.

 

Operating segment data is as follows (in thousands):

 

		Three Months Ended September 30, 2014				Nine Months Ended September 30, 2014
Revenues:
Americas		$	10,094			$	26,909
EMEA			5,917				16,427
		$	16,011			$	43,336
Operating income (loss):
Americas		$	2,229			$	4,741
EMEA			650				279
Unallocated corporate expense			(5,244	)			(7,529	)
		$	(2,365	)		$	(2,509	)

 

 

Item 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

This Quarterly Report on Form 10-Q, including, without limitation, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as "believe," "could," "plan," "may," "expect," "intend," "continue," "estimate," "likely," "will," "target," "strategy," "goal" and similar expressions.

  

Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including, but not limited to: current and future economic conditions that may adversely affect our business and customers; our revenues and profitability may fluctuate from period to period and therefore may fail to meet expectations, which could have a material adverse effect on our business, financial condition and results of operations; our ability to maintain adequate levels of working capital; our ability to successfully maintain the level of operating costs; our ability to obtain financing for our future needs should there be a need; our ability to incentivize and retain our current senior management team and continue to attract and retain qualified scientific, technical and business personnel; our ability to expand our Axis online graphics creation solution or to develop other new products and services; our ability to generate sales and profits from our Axis online graphics services, workflow and asset management solutions; our ability to grow sales and profits from our Hego products and services; our ability to develop new Hego products and services; rapid technological changes and new technologies that could render certain of our products and services to be obsolete; competitors with significantly greater financial resources; new product and service introductions by competitors; challenges associated with expansion into new markets; our ability to integrate Zxy's business and WeatherOne's business into our business; and other factors set forth in Part I, Item 1A, entitled "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"), as well as any updates or modifications to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. Those factors as well as other cautionary statements made in this Quarterly Report on Form 10-Q, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, "ChyronHego," the "Company," "we," "us," and "our" refer to ChyronHego Corporation and "Hego" or "Hego AB" refers to Hego Aktiebolag.

  

  

Overview

 

On May 22, 2013 we acquired the outstanding stock of Hego AB, or Hego, and changed our name to ChyronHego Corporation. The acquisition of the Hego business provides us with strong sports products and service offerings that address the needs of sports broadcasters and sports leagues and rights holders.There are significant budgets available in the sports TV space for those companies who offer an improved viewer experience, and we believe that we will be positioned to benefit from these kinds of expenditures. Ultimately, we believe that the business combination of Chyron and Hego has placed us in the position of a global leader in broadcast graphics creation, playout and real-time data visualization.

 

The results of operations include the operating results of Hego since completion of the business combination on May 22, 2013. The combination of these two companies is referred to as the "Business Combination."

  

Results of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

 

Net sales. Revenues for the quarter ended September 30, 2014 were $16.0 million, an increase of $2.0 million, or 15%, from the $14.0 million reported in the quarter ended September 30, 2013. Revenues for the nine months ended September 30, 2014 were $43.3 million, an increase of $10.6 million, or 33%, from the $32.7 million reported in the nine months ended September 30, 2013.

 

Revenues by type, for the three and nine month periods are as follows (dollars in thousands):

 

		Three Months																Nine Months
		Ended September 30,																Ended September 30,
						% of								% of								% of								% of
		2014				Total				2013				Total				2014				Total				2013				Total
Product		$	7,105				41%			$	7,697				55%			$	20,540				46%			$	20,415				62%
Services			8,906				59%				6,262				45%				22,796				54%				12,277				38%
		$	16,011							$	13,959							$	43,336							$	32,692

 

In the quarter ended September 30, 2014 our product sales were lower by 8%, compared to the quarter ended September 30, 2013 primarily due to sales in the third quarter of 2013 of systems for the Sochi Winter Olympics and for a new customer facility that were not present in the third quarter of 2014. Product sales in the nine month periods ended September 30, 2014 and 2013 were relatively flat. In the three and nine month periods ended September 30, 2014 our services revenues grew $2.6 million and $10.5 million, respectively, primarily due to the contribution of services from the Business Combination.

 

Gross profit. Gross margins for each of the quarters ended September 30, 2014 and 2013 were 63%. Gross margins for the nine months ended September 30, 2014 and 2013 were 62% and 67%, respectively. The decrease in the gross margin percentage in the nine month period ended September 30, 2014 is primarily attributable to product mix as our products carry a higher gross margin than our services. Absent the effect of this product mix, we have been able to obtain reasonable and consistent pricing for our materials.

 

 

Selling, general and administrative expenses. Selling, general and administrative expenses are as follows (in thousands):

 

 

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Sales and marketing		$	4,653			$	3,518			$	14,214			$	9,670
General and administrative			1,788				2,969				4,477				8,404
		$	6,441			$	6,487			$	18,691			$	18,074

 

The increase in sales and marketing ("S&M") expenses in the quarter ended September 30, 2014 as compared to the quarter ended September 30, 2013 is primarily due to increased presence at trade shows and other marketing costs and additional sales and support personnel in Europe. The increase in S&M expenses in the nine month period ended September 30, 2014, as compared to the same period in 2013, is primarily attributable to the increased presence at trade shows and other marketing expenses and additional sales and support personnel in Europe that occurred in the quarter ended September 30, 2014 and the incremental sales and marketing costs from our Business Combination.

 

The decrease in general and administrative ("G&A") expenses in the three months ended September 30, 2014 is primarily due to costs incurred in the third quarter of 2013 of $1.0 million in compensation related severance costs payable to a former executive officer. The decrease in G&A expenses in the nine months ended September 30, 2014 as compared to September 30, 2013 is due to $1.0 million in transaction costs relating to the Business Combination, $1.7 million in costs associated with the accelerated vesting of equity awards as a result of the Business Combination and the $1.0 million in compensation related severance costs, all incurred in 2013. These costs are not included in any periods in 2014 and are not recurring.

 

Research and development expenses. Research and development ("R&D") expenses were $2.2 million in the quarter ended September 30, 2014 compared to $2.4 million in the quarter ended September 30, 2013. R&D expenses were $6.5 million in each of the quarters ended September 30, 2014 and 2013. Our consolidated R&D costs remain fairly consistent in 2014 as compared to all corresponding periods in 2013, although such R&D costs are re-directed as projects are completed and new initiatives begin.

 

Change in fair value of contingent consideration. In connection with the Business Combination, a portion of the purchase price consisted of contingent consideration of shares of ChyronHego common stock. The fair value of any contingent consideration was established at the date of the Business Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. In the three and nine months ended September 30, 2014 a net decrease to earnings of $3.8 million and $4.2 million, respectively have been recorded in order to adjust the contingent consideration to $9.9 million, its current fair value at September 30, 2014.

 

Interest expense, net. Interest expense, net decreased in the three months ended September 30, 2014 as compared to the quarter ended September 30, 2013 due to the full paydown of our U.S. term loan in 2013. Interest expense increased in the nine months ended September 30, 2014 as compared to September 30, 2013 due to higher outstanding borrowings in the nine month period in 2014.

 

Other income (loss), net. The components of other income (loss), net are as follows (in thousands):

 

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2014				2013				2014				2013
Foreign exchange transaction (loss) gain		$	(11	)		$	30			$	72			$	(48	)
Loss on disposal of fixed assets			-				-				(74	)			-
Other			(11	)			-				(21	)			11
		$	(22	)		$	30			$	(23	)		$	(37	)

 

 

We continue to be exposed to foreign currency and exchange risk in the normal course of business due to international transactions. However, we believe that this risk is not material to our near-term financial position or results of operations. This exposure has increased due to our Business Combination, as a result of which a larger percentage of our business is transacted in foreign currencies.

 

Income tax benefit (expense), net. In the three and nine months ended September 30, 2014 we recorded income tax expense of $0.1 and $0.01 million, respectively. In the three and nine months ended September 30, 2013 we recorded a benefit of $0.03 million and an income tax expense of $0.07 million, respectively. The difference between our effective income tax rate and the federal statutory rate is primarily due to the mark to market adjustment for the contingent liability associated with the Business Combination that will not be deductible for tax purposes, the amount of expense associated with our share-based payment arrangements which is also not deductible and international tax rate differences.

 

Liquidity and Capital Resources 

 

At September 30, 2014, we had cash and cash equivalents on hand of $5.9 million and working capital of $7.0 million. In the first nine months of 2014, approximately $1.1 million in cash was generated from operations and we used cash to fund acquisitions of property and equipment of $1.3 million primarily in connection with our services to provide several European soccer leagues with real-time digital sports data systems and to purchase a new trade show booth for our participation at NAB 2014. We experienced an increase in accounts receivable based on increased revenues and for amounts not yet due based on customer payment terms. Cash also increased by approximately $0.9 million as a result of the acquisition of Zxy Sport Tracking AS ("Zxy") and Metaphor AS ("Metaphor") and its wholly owned subsidiaries WeatherOne AS and Weather One Limited (collectively referred to as "Weather One").

 

During the third quarter of 2014 we made a required contribution to our pension plan of $0.1 million. Based on current assumptions, we expect to make contributions of $0.3 million over the next twelve months as required under ERISA. Our pension plan assets were valued at $6.0 million at September 30, 2014 and $5.7 million at December 31, 2013. Our investment strategy has been consistent in recent years and we believe that the pension plan's assets are more than adequate to meet pension plan obligations for the next twelve months. 

 

In November 2013, we entered into a new two-year $4.0 million revolving line of credit (the "Revolver") with Silicon Valley Bank, or SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. At September 30, 2014, available borrowings were $4.0 million, but no borrowings were outstanding. We are also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if our AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, we will maintain a static loan balance and all collections will be deposited into our operating account. The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If our AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%.

 

As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts our ability to pay dividends without the bank's consent.

 

The Revolver is collateralized by the assets of our U.S. subsidiaries, except for (i) our intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.

 

We also have revolving credit facilities associated with our European operations that total $1.2 million of which $0.8 million is outstanding at September 30, 2014. The revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods unless notified by the lender ninety days prior to expiration. In addition, we have two outstanding term loans in Europe that total $0.03 million at September 30, 2014. These term loans require principal payments that total $8 thousand per month and will mature in 2014 and 2015.

 

 

 

In connection with the acquisition of Granvideo AB in 2013, we issued a note payable to the previous shareholder in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. We made principal payments of $0.06 million on September 1, 2013 and $0.1 million on November 15, 2013 and are required to make four equal annual payments of $0.26 million on December 31 of each year from 2014 to 2017. The principal balance at September 30, 2014 was $0.9 million.

 

Our long-term success will depend on our ability to achieve and sustain profitable operating results and our ability to raise additional capital on acceptable terms should such additional capital be required. In the event that we are unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.

 

We believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facilities, will be sufficient to meet our cash requirements for at least the next twelve months if we are able to achieve our planned results of operations and retain the availability of credit under our Revolver.

 

If these sources of funds are not sufficient, we may need to reduce, delay or terminate our existing or planned products and services. We may also need to raise additional funds through one or more capital financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products, or grant licenses on terms that are not favorable to us.

 

There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate development activities for one or more of our products or services; or delay, limit, reduce or terminate our sales and marketing capabilities or other activities that may be necessary to commercialize one or more of our products or services.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information called for by this Item is omitted in reliance upon Item 305(e) of Regulation S-K.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures 

 

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared.

 

 

On May 22, 2013 we completed the Business Combination for a purchase price of $24.6 million represented substantially by goodwill and identifiable intangible assets. Hego's operations contributed approximately $7.0 million in revenues to our consolidated financial results for the three months ended September 30, 2014. We continue to evaluate the internal control over financial reporting of the acquired business. As permitted by SEC Staff Interpretive Guidance for newly acquired businesses, the internal control over financial reporting of Hego was excluded from a formal evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2014. A report will be included in our annual report on Form 10-K for the year ending December 31, 2014.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our most recent completed quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.   OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

There have been no material changes to our legal proceedings as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or results of operations. The risks described in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q are not the only risks that we face. In addition, risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations. There have been no material changes in or additions to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In July of 2014, we issued 1,126,228 shares of our common stock in a private transaction in connection with our acquisition of Metaphor AS (“Metaphor”). This issuance of shares of common stock was not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.

 

In connection with the acquisition of Metaphor, the Company also issued 337,870 warrants to purchase our common stock at $2.78 per share for a three year period from closing.

  

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.     OTHER INFORMATION

 

None.

 

 

ITEM 6.   EXHIBITS

 

(a)

Exhibits:

 

Exhibit No.	Description of Exhibit
31.1**	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**	Interactive Data Files formatted in XBRL (Extensible Business Reporting Language) from (a) our Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013, (b) our Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2014 and 2013 (unaudited), (c) our Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2014 and 2013 (unaudited), (d) our Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2014 and 2013 (unaudited) and (e) the Notes to such Consolidated Financial Statements (unaudited).
	**Filed herewith.

 

   

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

		CHYRONHEGO CORPORATION
		(Registrant)
November 14, 2014		/s/ Johan Apel
(Date)		Johan Apel
		Chief Executive Officer
		(Principal Executive Officer)
November 14, 2014		/s/ Dawn Johnston
(Date)		Dawn Johnston
		Interim Chief Financial Officer
		(Principal Financial Officer)

 

 

 

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