TIX CORP 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2009
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-24592
(Exact name of small business issuer as specified in its charter)
12001 Ventura Place, Suite 340, Studio City, California 91604
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the Registrant was required to submit and post such reports). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ¨ No x
Number of shares of Tix Corporation common stock, $.08 par value, issued and outstanding as of October 30, 2009: 32,449,460, exclusive of treasury shares.
Special Note Regarding Forward-Looking Statements:
This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that include the words “believes”, “expects”, “anticipates”, “intends”, “plans”, “may”, “will” or similar expressions that are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements may include, among others, statements concerning the Company's expectations regarding its business, growth prospects, revenue trends, operating costs, working capital requirements, facility expansion plans, competition, results of operations and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein.
Each forward-looking statement should be read in context with, and with an understanding of, the various disclosures concerning the Company and its business made throughout this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, as well as other public reports filed with the United States Securities and Exchange Commission. Investors should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. Except as required by applicable law or regulation, the Company undertakes no obligation to update or revise any forward-looking statement contained in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, whether as a result of new information, future events or otherwise.
Tix Corporation and Subsidiaries
TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to condensed consolidated financial statements.
TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
See accompanying notes to the condensed consolidated financial statements.
TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
See accompanying notes to the condensed consolidated financial statements.
TIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Nature of Business
Tix Corporation (the “Company”) was incorporated in Delaware in April 1993. The Company is a diversified integrated entertainment company providing ticketing services, event merchandising and the production and promotion of live entertainment. We operate three complementary business units: Ticketing Services (Tix4Tonight) provides discount, premium and membership group sales; Exhibit Merchandising (EM) provides our exhibit and event merchandise sales and services; and Tix Productions Inc. (TPI) provides the production and promotion of live entertainment.
Preparation of Interim Financial Statements
The consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to present fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that its disclosures are sufficiently presented to prevent this information from being misleading. Due to seasonality and other factors, the results for the interim periods are not necessarily indicative of results for a full year. The financial statements contained herein should be read in conjunction with the consolidated and combined financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K and interim financial statements and information reported on Forms 8-K and 10-Q.
The Company has evaluated subsequent events for disclosure in its consolidated financial statements through November 6, 2009, the Friday before the issuance date of the consolidated financial statements. There are no significant subsequent events.
Note 2 - Summary of Significant Accounting Policies
Revenue Recognition, Presentation and Concentrations:
The Company has several streams of income, each of which is required under Generally Accepted Accounting Principles (GAAP) to be recognized in varying ways. The following is a summary of our revenue recognition policies.
The Company’s Las Vegas discount show ticketing business recognizes as revenue the commissions and related transaction fees earned from the sale of Las Vegas show tickets at the time the tickets are paid for and delivered to the customers. The Company’s commissions are calculated based on the face value of the show tickets sold. The Company’s transaction fees are charged on a per-ticket basis. With certain exceptions, ticket sales are generally non-refundable, although same-day exchanges of previously sold tickets are permitted. Claims for ticket refunds, which are generally received and paid the day after the show date, are charged back to the respective shows and are recorded as a reduction to the Company’s commissions and fees at the time that such refunds are processed. The Company does not have accounts receivable associated with its sales transactions, as payment is collected at the time of sale.
The Company’s Tix4Members.com recognizes as revenue the commissions and related transaction fees from the sale of tickets when the related event has occurred. Refunds are only issued if the event is canceled or postponed. Payments for such ticket sales received prior to the event are recorded as deferred revenue. Claims for ticket refunds, which are generally received and paid the week after the show date, are charged back to the respective shows and are recorded as a reduction to the Company’s commissions and fees at the time that such refunds are processed. Presently, Tix4Members.com does not have any accounts receivable associated with sales transactions to individual customers because payment is collected at the time of sale.
Tix4Dinner offers reservations for discounted dinners at various restaurants surrounding the Las Vegas strip and downtown with dining at specific times on the same day as the sale. Tix4Dinner recognizes as revenue the transaction fees earned from the booking of dinner reservations at the time the reservations are made. At this time, the Company has minor accounts receivable and no accounts payable associated with the Tix4Dinner operations, as the Company collects the transaction fee at the time the reservation is made, and the dinner payment is collected directly by the restaurant. The restaurants pay the Company a fee for each reservation.
Tix4Golf recognizes as revenue the difference between how much it charges its customers for tee-times and how much it pays golf courses for tee-times. The revenue per tee-time, as well as the cost per tee-time, varies, depending on the desirability of the golf course, tee-time, weather, time of year and several other factors. Revenue per tee-time is significantly higher when tee-times are guaranteed or pre-bought in large quantities. Tee-times are generally sold the day before or the day of the tee-time, however, tee-times may be booked in advance. Revenue is not recognized until the day of the tee-time. The Company does not have any accounts receivable associated with this business because all transactions are paid for at the time of purchase.
Tix4AnyEvent (AnyEvent) recognizes as revenue the gross amount from the sale of tickets that it owns. AnyEvent bears the risk of economic loss if the tickets are not sold by the date the event is scheduled to occur. Revenue is considered earned when the related event has occurred. Refunds are only issued if the event is canceled or postponed. Payments for such ticket sales received prior to the event are recorded as deferred revenue. AnyEvent does not have any accounts receivable associated with sales transactions to retail customers because payment is collected at the time of sale. However, sales transactions to other ticket brokers may be conducted on a credit basis, which would generate accounts receivable.
Exhibit Merchandising recognizes retail store sales at the time the customer takes possession of the merchandise. Sales are recorded net of discounts and returns and exclude sales tax. Discounts are estimated based upon historical experience. For online sales, revenue is recognized free on board (“FOB”) origin where title and risk of loss pass to the buyer when the merchandise leaves the Company's distribution facility at the time of shipment, which we refer to as the date of purchase by the customer. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. Shipping and handling revenues from sales are included as a component of net sales. Conversely, shipping and handling costs are a component of direct cost of revenues. The Company does not have any accounts receivable associated with this business as transactions are done by cash or credit card.
On January 1, 2008, the Company began its live entertainment business. Revenue from the presentation and production of an event is recognized after the performance occurs. Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue collected from sponsorship and other revenue, which is not related to any single event, is classified as deferred revenue and generally amortized over the tour’s season or the term of the contract. We account for taxes that are externally imposed on revenue producing transactions on a net basis, as a reduction to revenue.
Tix Productions Inc.’s (TPI) operating units Magic Arts & Entertainment and NewSpace Entertainment act as both presenters and promoters of productions, as well as agent. TPI’s revenues from live entertainment where it is acting as the producer or promoter are a function of a number of elements; revenue is a direct reflection of tickets sold times ticket prices plus ancillary revenue streams including sponsorships and revenues generated through premium ticketing opportunities. In instances where the Company acts as the presenter or promoter it:
The above are indicators of ownership and would be evidence that revenues and related expenses should be recorded at gross. As the Company is acting as the principal in the transaction, i.e., it has the risks and rewards of ownership and has recorded the related revenues and expenses at gross. In other instances where we only receive a fee and are not the principal obligors to vendors we record these revenues at net.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.
Intangible Assets and Goodwill:
The Company accounts for intangible assets and goodwill in accordance with the authoritative guidance issued by the Financial Accounting Standards Board. Intangibles are valued at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
Impairment of Long-Lived Assets:
Authoritative guidance issued by the Financial Accounting Standards Board established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized, and how impairment losses should be measured. Authoritative guidance from the Financial Accounting Standards Board also provided a single accounting model for long-lived assets to be disposed of and significantly changed the criteria that would have to be met to classify an asset as held-for-sale.
Management regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, then management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Management believes that the accounting estimate related to impairment of its property and equipment is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on the Company’s balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so. There were no indications of impairment based on management’s assessment at September 30, 2009. At December 31, 2008, we recorded an impairment charge of $33.1 million related to the goodwill and intangible assets from our acquisition of EM. As of September 30, 2009, we have $11.2 million of remaining goodwill and intangible assets related to our acquisitions of John’s Tickets, LLC, EM, Magic and NewSpace. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased revenues and increased costs, we may have further goodwill impairments.
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax basis of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies, in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determines that the deferred tax assets, which were written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.
The Company prescribes a recognition threshold and a measurement attributable for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likelihood of being realized.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash, accounts and other receivables, accounts payable and accrued liabilities, and short-term loans approximate fair value because of their short maturity. The carrying amounts of capital lease obligations approximate fair value because the related effective interest rates on these instruments approximate the rates currently available to the Company.
The Company's cash balances on deposit with banks in savings accounts in the United States (US) are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation (the “FDIC”). The Company may periodically be exposed to risk for the amount of funds held in one bank in excess of the insurance limit. In order to control the risk, the Company's policy is to maintain cash balances with high quality financial institutions. At September 30, 2009, the Company’s aggregate cash in excess of the FDIC insured amount was $8.7 million. In addition, the Company had aggregate cash balances in Austria of $102,000, which is within this country’s equivalent of the US FDIC guarantee.
Results of foreign operations are translated into U.S. dollars using the average exchange rates during the year. The assets and liabilities of those operations are translated into U.S. dollars using the exchange rates at the balance sheet date. The realized and unrealized exchange losses and gains were minor in the three and nine months ending September 30, 2009. The related translation adjustments are recorded in a separate component of stockholders’ equity in accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in the results of operations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Advertising costs are charged to operations as selling and marketing expenses at the time the costs are incurred. For the three and nine months ended September 30, 2009 and 2008, advertising costs were $207,000 and $377,000, and $1.4 million and $4.2 million, respectively.
Recently Issued Accounting Guidance:
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. We believe adoption of this new guidance will not have a material impact on our financial statements.
On July 1, 2009, the Company adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. We have applied this guidance to business combinations completed since July 1, 2009. Adoption of the new guidance did not have a material impact on our financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standard No. 168 (“SFAS 168”), “Accounting Standards Codification * and the Hierarchy of Generally Accepted Accounting Principles.” The FASB Accounting Standards Codification* (“Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our quarter ending September 30, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it does not have an impact on our financial position, results of operations and cash flows.
In June 2009, the Financial Accounting Standards Board ("FASB") amended its guidance on accounting for variable interest entities ("VIE"). Among other things, the new guidance requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE; requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE; enhances disclosures about an enterprise's involvement with a VIE; and amends certain guidance for determining whether an entity is a VIE. Under the new guidance, a VIE must be consolidated if the enterprise has both (a) the power to direct the activities of the VIE that most significantly impact the entity's economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company is evaluating the impact that this change in accounting policy will have on our consolidated financial statements. Based on our initial assessment, we anticipate that certain entities that are consolidated under our current accounting policy may not be consolidated subsequent to the effective date of the new guidance. The Company does not expect this change in accounting policy to have a material impact on our consolidated financial statements.
In May 2009, the FASB issued new accounting and disclosure guidance for recognized and non-recognized subsequent events that occur after the balance sheet date but before financial statements are issued. The new guidance also requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The new accounting guidance was effective for our Company beginning with our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2009, and is being applied prospectively. This change in accounting policy had no impact on our consolidated financial statements.
In December 2007, the FASB issued new accounting and disclosure guidance related to noncontrolling interests in subsidiaries (previously referred to as minority interests), which resulted in a change in our accounting policy effective January 1, 2009. Among other things, the new guidance requires that a noncontrolling interest in a subsidiary be accounted for as a component of equity separate from the parent's equity, rather than as a liability. The new guidance is being applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption of this new accounting policy did not have a significant impact on our consolidated financial statements.
In December 2007, the FASB issued new accounting guidance that defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. It also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to those arrangements. This new accounting guidance was effective for our Company on January 1, 2009, and its adoption did not have a significant impact on our consolidated financial statements. In September 2006, the FASB issued new accounting guidance that defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. However, in February 2008, the FASB delayed the effective date of the new accounting guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until January 1, 2009. The adoption of this new accounting guidance for our nonfinancial assets and nonfinancial liabilities did not have a significant impact on our consolidated financial statements.
Note 3 - Acquisitions
On January 2, 2008, the Company entered into separate letters of intent to acquire Magic Arts and Entertainment, LLC (Magic) and NewSpace Entertainment, LLC (NewSpace). As part of the letters of intent, the managements of Magic and NewSpace agreed to manage the operations of their respective companies for the benefit of the Company from January 2, 2008 until the transactions could be finalized. The managements of Magic and NewSpace were required to consult and obtain the approval of the management of the Company prior to entering into any long term arrangements or transactions that were outside the normal course of business. Further, the Company assumed all responsibility for any losses or profits that might be incurred or earned during this period by both Magic and NewSpace. As such, the Company has included the results of operations of Magic and NewSpace in its consolidated operations as of January 2, 2008, the date the Company acquired effective control. The acquisition of Magic was completed on February 29, 2008 and the acquisition of NewSpace was completed on March 12, 2008.
Magic Arts and Entertainment:
Pursuant to the Merger Agreement and Plan of Merger, we paid to the two stockholders of Magic, Joseph Marsh and Lee Marshall, a total of $2.1 million in cash and issued to them a total of 476,190 restricted shares of our common stock with a market value of $2.3 million. Mr. Marsh and Mr. Marshall were the former owners of Exhibit Merchandising. Mr. Marsh, as a result of the two transactions and open market purchases owns approximately 14% of the Company and Mr. Marshall owns approximately 6% of the Company. Further, at February 28, 2009, we issued an additional 190,476 shares of our common stock with a fair market value of $256,000 to the former owners of Magic Arts and Entertainment as they achieved the pre-determined EBITDA threshold. We will be required to issue to the former Magic stockholders an additional 190,476 shares of our common stock if certain EBITDA milestones are achieved during the next twenty-four months. These milestones are based upon the results achieved by Tix Productions, Inc. (“TPI”), a wholly owned subsidiary of the Company that focuses on providing live entertainment.
The assets of Magic consist primarily of agreements, copyrights and licenses to theatres, productions, and touring acts. We carry on Magic’s business through TPI.
The acquisition of Magic has been accounted for as a purchase and the operations of the company have been consolidated commencing with the closing of the transaction. The $4.4 million purchase price was allocated based upon the fair value of the acquired assets, as determined by management with the assistance of an independent valuation firm. As a result of the additional shares issued with a fair market value of $256,000, the adjusted purchase price of Magic is $4.7 million.
Allocation of the Purchase Price of Magic Arts & Entertainment:
In conjunction with the completion of the Merger, we entered into written employment agreements with Messrs. Marsh and Marshall, under which they serve as the Co-Chief Executive Officers of TPI. The term of each of the employment agreements commenced on February 29, 2008 and will expire on February 28, 2011, unless sooner terminated in accordance with the applicable provisions of the employment agreement. Under the employment agreements, Mr. Marsh is entitled to an annual salary of $100,000 and Mr. Marshall is entitled to an annual salary of $300,000 that will increase by $25,000 each year during the term of the agreement. Mr. Marshall also is eligible to receive annual bonuses based upon TPI exceeding performance milestones specified in his employment agreement.
In the event of the termination of employment of Mr. Marsh or Mr. Marshall for any reason other than termination by us for “cause” (as defined in the employment agreement) or termination by reason of his death or permanent disability, we have agreed to continue to pay Mr. Marsh or Mr. Marshall or their personal representatives, as the case may be, the annual salary under his employment agreement for six months following their departure.
Under their employment agreements, each of Messrs. Marsh and Marshall agrees not to compete with us during the period from the date on which their employment with the Company is terminated for any reason through the fifth anniversary of such date.
Pursuant to the Merger, we paid to the three stockholders of NewSpace $1.4 million in cash and issued to them a total of 571,428 restricted shares of our common stock with a market value of $2.6 million.
The assets of NewSpace consist primarily of agreements, copyrights and licenses to theatres, productions, and touring acts. We carry on the business of NewSpace through TPI.
The acquisition of NewSpace has been accounted for as a purchase and the operations of the company have been consolidated commencing with the closing of the transaction. The $4.0 million purchase price was allocated based upon the fair value of the acquired assets, as determined by management with the assistance of an independent valuation firm. This valuation is still subject to change and revision may occur in the assigned value. The Company does not believe any changes or revisions will be significant.
Allocation of the Purchase Price of NewSpace Entertainment:
In conjunction with the completion of the Merger, we entered into written employment agreements with John Ballard, Steve Boulay and Bruce Granath, the three stockholders of NewSpace, pursuant to which they serve as President, Chief Operating Officer and Vice President - Marketing, respectively, at TPI. The term of each of the employment agreements commenced on March 11, 2008, and will expire on the third anniversary of such date, unless sooner terminated in accordance with applicable provisions of the employment agreements.
Mr. Ballard and Mr. Boulay are entitled under their respective employment agreements to an annual salary of $185,000. Mr. Granath, pursuant to his employment agreement, is entitled to an annual salary of $115,000. Messrs. Ballard, Boulay and Granath are each entitled to increases in their annual salaries of at least 3% per annum.
If Messrs. Ballard, Boulay and Granath are terminated “for cause” as defined in their employment agreements or the employment agreements expire upon their respective terms, each agrees not to compete with us during the period from the date of termination or expiration through the fifth anniversary of such date.
If the employment of Messrs. Ballard, Boulay or Granath is terminated “without cause” (as defined in their respective employment agreements), we have agreed to continue to pay Messrs. Ballard, Boulay, Granath, or their personal representatives, as the case may be, their annual salary under his employment agreement for six months.
Note 4- Intangible Assets
The following tables summarize the original cost, the related accumulated amortization, impairment adjustment, and the net carrying amounts for the Company’s intangible assets at September 30, 2009 in total and by segment.
During 2009, the Company recorded an adjustment to goodwill as a result of the issuance of 190,000 shares of common stock with a fair market value on the date of issuance of $256,000 to the former shareholders of Magic pursuant to an earn-out provision of the Magic Arts and Entertainment merger agreement.
Total amortization expense related to intangible assets for the three months ended September 30, 2009 and 2008 was $492,000 and $1,026,000, respectively. Total amortization expense related to intangible assets for the nine months ended September 30, 2009 and 2008 was $1,475,000 and $3,013,000, respectively. The decline in amortization costs is primarily due to the $7.7 million impairment charge associated with EM which was recorded at December 31, 2008, and will result in an annual decrease of $2.0 million of amortization expense over the next four years. Total estimated amortization expense with respect to intangible assets for the remainder of 2009 through 2013 is as follows:
Note 5- Obligations under Capital Leases
The Company has entered into various capital leases for equipment with monthly payments ranging from $216 to $1,767 per month, including interest, at interest rates ranging from 9.8% to 19.7% per annum. At September 30, 2009, monthly payments under these leases aggregated $5,200. The leases expire at various dates through 2013.
At September 30, 2009 and 2008, property and equipment for each period included assets under capital leases of $408,000, net of accumulated amortization of $306,000 and $268,000, respectively.
Minimum future payments under capital lease obligations for the remainder of 2009, and thereafter are as follows:
Note 6- Related Party Transactions
During 2009 and 2008, Benjamin Frankel, a director of the Company, was a principal in Frankel, LoPresti & Co., an accountancy corporation that provides tax advisory and preparation services to the Company. For the three and nine months ended September 30, 2009 and 2008, we paid Mr. Frankel or his firm $17,000 and $2,000, and $38,000 and $24,000, respectively for tax preparation and advisory services.
Mr. Joseph Marsh, a greater than 10% shareholder of Tix, was a principal in Magic Arts and Entertainment - Florida, Inc., a company Tix acquired on January 2, 2008. For more details regarding the purchase of Magic, see Note 3 - Acquisitions.
Note 7- Stockholders’ equity
During the nine months ended September 30, 2009, the Company issued: 50,000 shares of common stock to a consultant with a fair market value of $119,000 on the date of issuance, and 38,000 shares of common stock to officers and employees with a fair market value of $8,000 on the date of issuance. Additionally, the Company issued 107,000 shares of common stock, net of 43,000 shares withheld related to income taxes as a result of an employee option exercise. The Company also issued 190,000 shares of common stock during the nine months ended September 30, 2009 with a fair market value on the date of issuance of $256,000 pursuant to an earn-out provision of the Magic Arts and Entertainment merger agreement.
In the third quarter of 2008, the Company’s board of directors authorized a share repurchase program. As of September 30, 2009, the Company has repurchased 1,000,000 shares for $2,532,000. The shares were repurchased at prices that range from $1.20 per share to $4.13 per share.
In the second quarter of 2009, the Company’s board of directors authorized an additional share repurchase program (“the 2009 Repurchase Program”) as the 1,000,000 shares authorized to be repurchased under the program authorized in the third quarter of 2008 had been purchased. Under the 2009 Repurchase Program, the Company had repurchased 14,000 shares for $29,000, as of September 30, 2009. The shares were repurchased at prices that range from $1.91 per share to $2.18 per share.
Note 8- Stock-Based Compensation Plans
Summary of Stock Options:
The Company has various stock-based compensation plans. The intrinsic value of outstanding stock options at September 30, 2009 was $759,000, as compared to $927,000 at September 30, 2008. The intrinsic value of exercisable stock options at September 30, 2009 was $375,000, as compared to $683,000 at September 30, 2008. A summary of the combined stock options for the nine months ended September 30, 2009 is as follows:
Information relating to outstanding stock options at September 30, 2009, summarized by exercise price, is as follows:
Tix Corporation recorded compensation expense pursuant to authoritative guidance provided by the Financial Accounting Standards Board for the nine months ended September 30, 2009 and 2008 of $1.0 million and $1.2 million, respectively. As of September 30, 2009, the Company has outstanding unvested options with future compensation costs of $1.4 million, which will be recorded as compensation expense as the options vest over their remaining average life of 6.64 years.
The assumptions used in calculating the fair value of the options granted during 2009, using the Black Scholes option-pricing model were as follows:
In conjunction with an investor relations consulting agreement in 2009, the Company issued 150,000 warrants, of which 75,000 vested immediately. The remaining 75,000 vested over six months, which was the term of the consulting agreement. As the consulting agreement can be terminated at any time and the consulting arrangement does not contain any performance measurements or sufficiently large disincentives for non-performance, the related consulting expense on these 75,000 warrants is recognized over the life of the contract. In the nine months ended September 30, 2009, we recorded an expense of $207,000 related to warrants issued in conjunction with this consulting agreement. In conjunction with a consulting agreement in 2008, the Company issued 150,000 warrants, of which 50,000 vested immediately. The remaining 100,000 warrants vested over six months, which is the term of the consulting agreement. As the consulting agreement could have been terminated at any time and the consulting arrangement does not contain any performance measurements or sufficiently large disincentives for non-performance, the related consulting expense on these 100,000 warrants was recognized over the life of the contract. In the nine months ended September 30, 2009, the remaining 33,000 warrants vested, and we recorded an expense of $18,000 related to the 2008 contract.
A summary of warrant activity for the nine months ended September 30, 2009 is as follows:
The intrinsic value of outstanding warrants at September 30, 2009 was $908,000, as compared to $407,000 at September 30, 2008. Information relating to outstanding warrants at September 30, 2009, summarized by exercise price, is as follows:
Note 9- Income Taxes
At September 30, 2009, the Company had Federal net operating loss carryforwards of approximately $20.8 million that begin expiring in 2009 in varying amounts through 2028. The Company also had California state net operating loss carryforwards of approximately $700,000. In October, 2008 California temporarily suspended use of net operating losses for 2008 and 2009, and the California state net operating losses expire beginning in 2015 in varying amounts through 2018.
Authoritative guidance issued by the Financial Accounting Standards Board requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Due to the restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s net operating loss carryforwards are limited to $6.7 million per year as a result of cumulative changes in stock ownership. As a result of the limitations related to Internal Revenue Code Section 382 and the Company’s lack of history of profits, as such, the Company recorded a 100% valuation allowance against its net deferred tax assets as of September 30, 2009 and 2008.
There was no provision for income taxes for the three months ended September 30, 2009 and the provision for income taxes was $106,000 for the nine months ended September 30, 2009 compared with no provision for the three and nine months ended September 30, 2008. The provision for income taxes for the three and nine months ended September 30, 2009 and 2008 was determined using our effective rate estimated for the entire fiscal year.
In addition, during 2009, we utilized certain federal net operating loss (“NOL”) carryforwards. We have provided valuation allowances related to the benefits from income taxes resulting from the application of a statutory tax rate to our NOL’s generated in previous periods. The allowances were established and maintained as a result of our history of losses from operations.
Note 10- Earnings Per Share
Basic net income per common share is computed by dividing the net income applicable to common shares by weighted average number of common shares outstanding during the period. Diluted net income per common share adjusts basic net income per common share for the effects of stock options, restricted stock and other potentially dilutive financial instruments only in the periods in which such effect is dilutive.
The following table sets forth the computation of basic and diluted income per common share:
Potentially dilutive securities were excluded from the earnings per diluted share calculation for the three months ended September 30, 2009 and 2008 because their effect is anti-dilutive. These potentially dilutive securities at September 30, 2009 included outstanding warrants and options to purchase 2.2 million shares of our common stock, of which 1.0 million were warrants to purchase shares of our common stock and 1.2 million were options to purchase shares of our common stock.
Note 11- Fair Value Measurements
The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated with investing in those securities. The following table provides the fair value measurements of applicable Company financial assets that are measured at fair value on a recurring basis according to the fair value levels defined by authoritative guidance from the Financial Accounting Standards Board as of September 30, 2009 and December 31, 2008.