UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission file number 333-193822
MODERN HOLDINGS INCORPORATED
(Exact name of Registrant as Specified in Its Charter)

Delaware	33-3799783
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
89 Summit Avenue, Summit, New Jersey	07901
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code: (973) 491-3600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     x    No     o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x     No      o

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

Large Accelerated Filer   o	Accelerated Filer o	Non-Accelerated Filer o	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     o    No     x

As of November 14, 2014, there were 14,410,333 shares of the registrant’s common stock outstanding.

MODERN HOLDINGS INCORPORATED

INDEX

Page

PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
	Item 4.	Controls and Procedures	35
			35
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	36
	Item 1A.	Risk Factors	36
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 3.	Defaults Upon Senior Securities	43
	Item 4.	Mine Safety Disclosures	43
	Item 5.	Other Information	43
	Item 6.	Exhibits	43
SIGNATURES			44

PART I.  FINANCIAL INFORMATION 

Item 1.  Financial Statements                                

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES  

CONSOLIDATED BALANCE SHEETS 

ASSETS

	September 30, 2014		December 31, 2013
CURRENT ASSETS:	(Unaudited)
Cash and cash equivalents	$	8,750,204	$	3,744,376
Accounts receivable, net		1,078,930		1,429,808
Fiduciary assets		1,014,596		1,587,821
Prepaid expenses and other current assets		1,090,135		482,407
Current assets held for sale		—		4,184,118
Total Current Assets		11,933,865		11,428,530
PROPERTY AND EQUIPMENT, NET		173,361		192,211
OTHER ASSETS:
Intangibles, net		624,665		733,166
Goodwill		1,001,957		1,001,957
Other assets		402,396		378,148
Long term assets held for sale		—		46,653
Total Other Assets		2,029,018		2,159,924
	$	14,136,244	$	13,780,665

The accompanying notes are an integral part of these consolidated financial statements.

1

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES  

CONSOLIDATED BALANCE SHEETS 

LIABILITIES AND EQUITY

	September 30, 2014			December 31, 2013
CURRENT LIABILITIES:	(Unaudited)
Fiduciary liabilities	$	1,014,596		$	1,587,821
Short-term debt and current maturities of long-term debt		2,734,085			2,309,086
Accounts payable		545,024			707,621
Due to affiliates		321,775			343,742
Accrued expenses and other current liabilities		2,208,290			2,102,030
Deferred revenue		2,125,924			775,440
Current liabilities held for sale		—			6,316,209
Total Current Liabilities		8,949,694			14,141,949
LONG-TERM LIABILITIES:
Long-term debt, less current maturities		15,756			26,985
Total Long-Term Liabilities		15,756			26,985
COMMITMENTS AND CONTINGENCIES
PUTTABLE NONCONTROLLING INTEREST		284,939			475,517
EQUITY (DEFICIT):
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.01 par value, 20,000,000 shares authorized, 15,204,320 shares issued in 2014 and 2013 and 14,410,333 shares outstanding in 2014 and 2013		152,043			152,043
Additional paid-in capital		82,707,684			82,707,684
Treasury stock, 793,987 shares, at cost, in 2014 and 2013		(530,400	)		(530,400	)
Accumulated deficit		(77,082,310	)		(86,841,756	)
Accumulated other comprehensive income (loss), net of tax		(361,162	)		3,648,643
Total Equity (Deficit)		4,885,855			(863,786	)
	$	14,136,244		$	13,780,665

The accompanying notes are an integral part of these consolidated financial statements.

2

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2014			2013			2014			2013
REVENUES:
Product sales	$	1,183,881		$	917,533		$	2,650,427		$	2,490,597
Service revenue		1,529,559			2,751,064			4,761,520			7,288,503
Total Revenues		2,713,440			3,668,597			7,411,947			9,779,100
COSTS AND EXPENSES:
Cost of product sales		699,890			552,211			1,452,816			1,374,176
Cost of service revenue		816,244			1,206,174			2,785,375			3,910,420
Selling, general and administrative		1,975,304			1,834,602			5,317,583			5,347,205
Impairment of intangible assets		—			—			—			1,422,434
Depreciation and amortization		53,691			57,475			160,863			272,470
Total Costs and Expenses		3,545,129			3,650,462			9,716,637			12,326,705
INCOME (LOSS) FROM CONTINUING OPERATIONS		(831,689	)		18,135			(2,304,690	)		(2,547,605	)
OTHER INCOME (EXPENSE):
Interest income		2,053			9,499			5,401			20,668
Interest expense		(15,573	)		(17,260	)		(49,356	)		(56,752	)
Management fee income		56,947			39,178			140,375			124,539
Other income (expense)		2,717			659,421			7,416			855,620
Total Other Income (expense)		46,144			690,838			103,836			944,075
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES		(785,545	)		708,973			(2,200,854	)		(1,603,530	)
PROVISION FOR INCOME TAXES		14,763			14,672			33,091			28,932
NET INCOME (LOSS) FROM CONTINUING OPERATIONS		(800,308	)		694,301			(2,233,945	)		(1,632,462	)
ADD: NET (INCOME) LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST		4,797			(451,558	)		6,345			(41,543	)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED		(795,511	)		242,743			(2,227,600	)		(1,674,005	)
Net income (loss) from discontinued operations, net of tax		11,637,710			(36,562	)		11,987,046			(599,334	)
NET INCOME (LOSS) ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED		10,842,199			206,181			9,759,446			(2,273,339	)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment		(630,853	)		(64,862	)		(685,600	)		(129,679	)
		(630,853	)		(64,862	)		(685,600	)		(129,679	)
Reclassification Adjustments:
Amounts Recognized as a result of the sale of the Company’s Subsidiary in Sweden		(3,342,205	)		—			(3,324,205	)		—
		(3,973,058	)		(64,862	)		(4,009,805	)		(129,679	)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED		6,869,141			141,319			5,749,641			(2,403,018	)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST		(4,797	)		451,558			(6,345	)		41,543
COMPREHENSIVE INCOME (LOSS)	$	6,864,344		$	592,877		$	5,743,296		$	(2,361,475	)
AMOUNTS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED STOCKHOLDERS:
Basic and Diluted net income (loss) per common share
Net income (loss) per share from continuing operations	$	(0.06	)	$	0.02		$	(0.15	)	$	(0.12	)
Net income (loss) per share from discontinued operations		0.81			(0.00	)		0.83			(0.04	)
Net income (loss) per share	$	0.75		$	0.02		$	0.68		$	(0.16	)
Weighted average common shares outstanding		14,410,333			14,410,333			14,410,333			14,410,333

The accompanying notes are an integral part of these consolidated financial statements.

3

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN (DEFICIT) EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 

 (Unaudited)

	Common Stock				Additional Paid-In Capital		Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss), Net of Tax			Total Equity (Deficit)
	Shares		Amount
Balance, December 31, 2013		14,410,333	$	152,043	$	82,707,684	$	(530,400	)	$	(86,841,756	)	$	3,648,643		$	(863,786	)
Other comprehensive loss		—		—		—		—			—			(685,600	)		(685,600	)
Amount recognized as a result of the sale of the Company’s subsidiary in Sweden														(3,324,205	)		(3,324,205	)
Net income		—		—		—		—			9,759,446			—			9,759,446
Balance, September 30, 2014		14,410,333	$	152,043	$	82,707,684	$	(530,400	)	$	(77,082,310	)	$	(361,162	)	$	4,885,855

The accompanying notes are an integral part of these consolidated financial statements.

4

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 

(UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations	$	(2,233,945	)	$	(1,632,462	)
Net income (loss) from discontinued operations		11,987,046			(599,334	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		160,863			272,470
Gain on sale of discontinued operations		(11,637,710	)		—
Disposal of equipment		—			39,417
Gain on sale of cost method investment		—			(194,205	)
Impairment of intangible assets		—			1,422,434
Changes in operating assets and liabilities:
Accounts receivable		275,706			519,512
Due from affiliates		—			(345	)
Prepaid income and other taxes		(17,231	)		(89,937	)
Deferred expenses		—			(137,016	)
Prepaid expenses and other current assets		(737,078	)		(24,330	)
Other assets		16,098			299,796
Fiduciary assets		573,225			(139,322	)
Fiduciary liabilities		(573,225	)		139,322
Accounts payable		(271,250	)		(352,583	)
Due to affiliates		(21,401	)		(12,893	)
Accrued expenses and other current liabilities		358,743			(104,614	)
Deferred revenue		1,386,927			(504,409	)
Net cash used in operating activities from continuing operations		(1,082,568	)		(499,165	)
Net cash provided by (used in) operating activities from discontinued operations		(392,650	)		136,010
Net cash used in operating activities		(1,475,218	)		(363,155	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(43,551	)		(81,536	)
Proceeds from sale of cost method investment		4,567			578,481
Investment in cost method investments		—			(42,000	)
Net cash (used in) provided by investing activities from continuing operations		(38,984	)		454,945
Net cash provided by (used in) investing activities from discontinued operations		6,870,240			(349	)
Net cash provided by investing activities		6,831,256			454,596
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions		(184,233	)		(150,000	)
Borrowings of debt		425,000			706,500
Repayments of debt		(11,231	)		(611,312	)
Net cash provided by (used in) financing activities from continuing operations		229,536			(54,812	)
Net cash used in financing activities from discontinued operations		(75,182	)		(395,304	)
Net cash provided by (used in) financing activities		154,354			(450,116	)
Effect of exchange rate changes on cash and cash equivalents		(504,564	)		70,142
Net increase (decrease) in cash and cash equivalents		5,005,828			(288,533	)
Cash and cash equivalents at beginning of period		3,744,376			3,617,051
Cash and cash equivalents at end of period		8,750,204			3,328,518
Less: Cash and cash equivalents of discontinued operations		—			3,718
Cash and cash equivalents at end of period from continuing operations	$	8,750,204		$	3,324,800
Supplemental disclosure of cash flow information:
Note receivable received for partial sale of cost method investment	$	—		$	99,000
Note receivable received for settlement agreement	$	—		$	700,000
Cash paid for interest	$	56,531		$	46,602
Cash paid for income taxes	$	86,108		$	55,607

The accompanying notes are an integral part of these consolidated financial statements.

5

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 SEPTEMBER 30, 2014  

(UNAUDITED)

Note 1—Nature of Operations, Basis of Presentation and Principles of Consolidation

Modern Holdings Incorporated (“Modern Holdings” or the “Company”), a Delaware corporation, is a diversified holding company owning companies in several industries including IT support, insurance claims administration, and school photography. Modern Holdings’ portfolio companies provide their products and services to a diverse range of clients worldwide. The Company’s primary operations are in Sweden, and the Company’s headquarters are located in Summit, New Jersey.

The operating companies of Modern Holdings are:

• Basset AB (“Basset”) based in Sweden, is a provider of interconnect, roaming and fraud detection billing software for the telecommunication industry, worldwide. Basset’s operations made up the total activity in the historical telecommunications segment.  Basset was sold on July 4, 2014 with an effective date of July 1, 2014. Basset’s assets and liabilities have been reclassified to assets or liabilities held for sale on the accompanying consolidated balance sheet as of December 31, 2013. Basset’s results of operations and gain on sale of discontinued operations have been reclassified to Net Income (Loss) from Discontinued Operations on the accompanying statements of operations.

• Xpeedio Support Solutions AB (“Xpeedio”) based in Sweden, is an IT support company with clients located primarily in Sweden, in the business to business market.

• Lors Photography Inc. (“Lors”) based in Union, New Jersey, is a regional provider of school photography throughout the tri-state area.

• Innova Claims Management LLC (“Innova”) doing business as Specialty Claims Management (“SCM”) is a company that provides third party claims administration to the insurance industry. In 2014, SCM moved their corporate headquarters to Maywood, New Jersey from Secaucus, New Jersey.

• Modern Billing Solutions, Inc. (“Modern Billings”) provides sales personnel for Basset regarding sales in the United States. Modern Billings had limited activity in 2014 and 2013.

• Blackbook Photography Inc. (“Blackbook”) publishes photography and illustration source books for finding photographers, illustrators and graphic designers and had limited activity in 2014 and 2013.

• Loft Life, Inc. (“Loft Life”) is a lifestyle magazine and had limited activity in 2014 and 2013.

• Great Universal, Inc. (“GUI”) and its subsidiaries is a holding company for various investments. During 2014 and 2013, GUI had limited activity.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by US GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2013.

The unaudited interim consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of operations and comprehensive loss for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared on a consolidated basis and reflect the financial statements of Modern Holdings Incorporated and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The noncontrolling interest represents the minority partners’ interests in the operations of SCM and the profits or losses associated with the minority partners’ interests in those operations, in the consolidated balance sheets and consolidated statements of operations and comprehensive loss, respectively.

6

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Note 2—Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates and assumptions on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates. The amounts of assets and liabilities reported in the Company’s consolidated balance sheets and revenues and expenses reported in the consolidated statements of operations and comprehensive income (loss) for the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, allowance for doubtful accounts, deferred tax valuation allowances, depreciation and amortization periods, recoverability of long-term assets including goodwill and intangibles, income taxes and related reserves, the average duration of insurance claims and the gain on sale of discontinued operations.

Discontinued Operations

The Company recognizes operations as discontinued when a component of the Company’s operations has either ceased or is expected to be disposed of in a sale transaction in the near term, the operations and cash flows of all discontinued operations have been eliminated, or will be eliminated upon consummation of the expected sale transaction, and the Company will not have any significant continuing involvement in the discontinued operations of the component subsequent to the expected sale transaction.

Fair Value Measurements

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC Topic 820, Fair Value Measurements and Disclosures defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair value hierarchy requires the use of observable market data when available and consists of the following levels:

• Level 1 – Quoted prices for identical instruments in active markets;

• Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and

• Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

See Note 6 for fair value measurements.

Cash and Cash Equivalents

The Company maintains cash balances in several financial institutions. Interest-bearing balances in U.S. banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000 per institution. From time to time, the Company’s balances may exceed these limits. At September 30, 2014 and December 31, 2013, the Company had approximately $6,867,000 and $2,291,000, respectively, of cash in international bank accounts which are not insured. In 2013, Xpeedio entered into a new lease that requires the Company to maintain a balance of approximately $160,000 with a Swedish banking institution. This amount is included in the above foreign cash balances.

7

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Allowance for Doubtful Accounts

Accounts receivable are recorded at net realizable value consisting of the carrying amount less the allowance for uncollectible accounts. The Company evaluates the collectability of its accounts receivable based on a combination of factors. When the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, the current business environment and its historical experience. The Company’s policy to determine past due accounts is based upon the contractual payment terms of the receivables. The Company generally does not record interest on past due accounts. Accounts are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. At September 30, 2014 and December 31, 2013 the Company determined that no allowance for doubtful accounts was necessary.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization.

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable through an assessment of the estimated future undiscounted cash flows related to such assets. In the event that assets are found to be carried at amounts that are in excess of estimated undiscounted future cash flows, the carrying value of the related asset or group of assets is reduced to a level commensurate with fair value based on a discounted cash flow analysis. No impairment indicators were identified during the three and nine months ended September 31, 2014 and 2013.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization on leasehold improvements is computed using the straight-line method over the shorter of the assets’ estimated useful lives or the lease term.

The estimated useful lives used in determining depreciation are as follows:

	Useful Life
Computers and equipment	3 to 7 years
Furniture and fixtures	5 to 7 years
Software	3 years

Goodwill and Other Intangible Assets

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company is required to perform a goodwill impairment test on at least an annual basis. Application of the goodwill impairment test requires an initial qualitative assessment of the likelihood that the carrying value of the reporting unit exceeds the fair value. If management concludes that it is more likely than not that the carrying value exceeds the fair value, then management conducts a two-step quantitative impairment test which includes significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company conducts its annual goodwill impairment test as of the last day of December each year, or more frequently if indicators of impairment exist. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others.

8

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Indefinite lived intangibles are reviewed annually for impairment or more frequently, if indicators of impairment arise. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment, if indicators of impairment arise. The evaluation of impairment is based upon a comparison of the carrying amount of the intangible asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted cash flows are less than the carrying amount of the asset, the asset is considered impaired. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its carrying value, with any shortfall from fair value recognized as an expense in the current period.

The Company’s definite lived intangible assets consist of customer relationships and are amortized over their estimated useful lives of 6 years using a straight-line method.

Cost-Method Equity Investments

The Company’s cost-method equity investments are carried at cost as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. The Company regularly evaluates the carrying value of its cost-method equity investments for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is judged to be other-than-temporary, the Company will record an other-than-temporary impairment charge in other income (expense), net in the consolidated statement of operations and comprehensive loss. During the year ended December 31, 2013, there was no impairment recorded. During the year ended December 31, 2013, the Company made cost-method investments totaling approximately $42,000 and redeemed a partial investment for $33,000. In addition, the Company sold a cost-method investment totaling approximately $484,000 for approximately $677,000 during the year ended December 31, 2013. During the nine months ended September 30, 2014, the Company made no additional cost-method investments but redeemed a partial investment for $4,567. At September 30, 2014 and December 31, 2013, the Company has approximately $324,700 and $329,250, respectively, of cost-method equity investments, which are included in other assets on the accompanying consolidated balance sheets.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities at September 30, 2014 and December 31, 2013 consist of the following:

	September 30, 2014		December 31, 2013
Accrued compensation costs	$	1,216,240	$	633,741
Accrued compensated absences		121,417		148,877
Accrued professional fees		435,749		474,394
Accrued sales and value added taxes		137,868		206,040
Accrued rebates		92,819		309,817
Accrued other current liabilities		204,197		329,161
Total accrued expenses and other current liabilities	$	2,208,290	$	2,102,030

Deferred Revenue

Deferred revenue consists of payments received in advance of revenue being earned under school photography and claims administration. Advances are recognized as revenue when earned, pursuant to the applicable revenue recognition principles for the specific type of revenue as disclosed in this Note 2.

9

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Fiduciary Assets and Liabilities

In its capacity as a third party insurance claim administrator, the Company retains certain funds from insurance companies to pay claims on behalf of the insurance companies. These funds are held by the Company in a fiduciary capacity.

Accumulated Other Comprehensive Income (Loss)

FASB ASC Topic 220, Reporting Comprehensive Income, establishes rules for the reporting of comprehensive income and its components. Comprehensive income is defined as all changes in equity from non-owner sources. For the Company, comprehensive income (loss) consists of net income (loss) and changes in the cumulative foreign currency translation adjustments. Accumulated other comprehensive income consists of cumulative foreign currency translation adjustments as of September 30, 2014 and December 31, 2013. During the three months ended September 30, 2014, the Company realized approximately $3.3 million of accumulated comprehensive income related to Basset within the gain on sale of discontinued operations (see Note 15).

Puttable Noncontrolling Interest

A noncontrolling interest reflects an ownership interest in entities that are consolidated as less than 100% owned. The Company follows FASB ASC Topic 810, Consolidation, to account for the noncontrolling interest, which establishes accounting and reporting standards pertaining to: (i) ownership interests in subsidiaries held by parties other than the parent (“noncontrolling interest”), (ii) the amount of net income attributable to the parent and to noncontrolling interest, (iii) changes in the parent’s ownership interest, and (iv) the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. If a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary is measured at fair value and a gain or loss is recognized in net income based on such fair value. For presentation and disclosure purposes, the guidance requires a noncontrolling interest to be classified as a separate component of equity. The Company and the former owners of SCM have entered into a call right and put option agreement. The Company has the right to purchase the remaining noncontrolling interests at a unit value based upon a formula using earnings before interest, taxes, depreciation and amortization for the trailing twelve months from the date the noncontrolling interests were put to the Company or called by the Company. The former owners of SCM, after a period of two years from the acquisition date, have the option to put their noncontrolling interests back to the Company for a unit value based upon a formula derived from the trailing twelve months from the date of the put date earnings before interest, taxes, depreciation and amortization. Since the redemption feature of the put option is out of the control of the Company, for presentation and disclosure purposes, the noncontrolling interest is classified as temporary equity on the accompanying consolidated balance sheets. During the nine months ended September 30, 2014, the Company made $184,233 of distributions to the puttable noncontrolling interest holders.

In July 2013, two former owners of SCM, representing 22.5% of the 30% of the noncontrolling interests, put their member units to the Company. In September 2013, one additional former owner of SCM, representing 6% of the 30% of the noncontrolling interests, put their member units to the Company. Since the parties are in disagreement as to the other parties’ Unit Put FMV calculation, the closing of the transaction has not occurred. As such, the holders of the units have not transferred their interests and the Company has not redeemed the puttable noncontrolling interests and thus has not accounted for the exercise of the put right. The Company believes the amount recorded as puttable noncontrolling interest on the accompanying consolidated balance sheet is sufficient for any subsequent payments.

To date, the parties had not reached an agreement. As per the terms of the operating agreement, the parties are beginning the arbitration process.

Foreign Currency Translation

The functional currency of each entity in the Company is its respective local country currency which is also the currency of the primary economic environment in which it operates. Transactions in foreign currencies are re-measured into functional currency at the rate of exchange prevailing on the date of the transaction. All transaction foreign exchange gains and losses are recorded as other income (expense) in the accompanying consolidated statement of operations. The Company recorded net transaction foreign exchange gain (loss) with respect to continuing operations of approximately $(1,700) and $6,000 for the three months ended September 30, 2014 and 2013, respectively. The Company recorded net transaction foreign exchange gain (loss) with respect to continuing operations of approximately $(700) and $(1,000) for the nine months ended September 30, 2014 and 2013, respectively. These amounts are included in other income (expense) on the accompanying consolidated statements of operations.

10

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

The assets and liabilities of the subsidiaries for which the functional currency is other than the U.S. dollar, are translated into U.S. dollars, the reporting currency, at the rate of exchange prevailing on the consolidated balance sheet date. Revenues and expenses are translated into U.S. dollars at the exchange rates prevailing on the last business day of each month, which approximates the average monthly exchange rate. Resulting translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of equity.

Revenue Recognition

The Company’s revenues are primarily derived from consulting services, photograph sales and the administration of insurance claims. Revenues are recognized under contracts generally when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, services have been performed or products have been delivered and collection of the amounts billed is reasonably assured.

Revenues from consulting services related to training and general consulting are recognized under a time-and-material basis as the services are performed.

11

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014 

(UNAUDITED)  

Photography revenue is recognized upon delivery of the photographs. The Company charges a shipping and handling fee to its customers to ship the photographs. These amounts are recorded as revenue. Revenues associated with the shipping and handling fees were approximately $49,500 and $48,000 for the three months ended September 30, 2014 and 2013, respectively. Revenues associated with the shipping and handling fees were approximately $128,000 and $134,000 for the nine months ended September 30, 2014 and 2013, respectively. The costs of shipping and handling are expensed as incurred and are included in cost of sales and services on the accompanying consolidated statements of operations and comprehensive loss. The Company receives payment before the photographs are shipped. These amounts are recorded as deferred revenue until the product is delivered.

Revenue from the administration of insurance claims is recognized ratably over the estimated period that it takes to administer the type of claim from start to close. The claim length could range for periods up to 13 months. The Company’s billings do not necessarily correlate with the revenues recognized ratably over the life of the claim. At September 30, 2014 and December 31, 2013, the Company has recorded unbilled receivables of $270,933 and $335,390, respectively, which are included in accounts receivable on the consolidated balance sheets. These balances are generally billable within 12 months. Billings rendered in advance of services performed are recorded and classified as deferred revenue on the consolidated balance sheets.

Total revenue does not include sales or value added tax, as the Company considers itself a pass-through entity for collecting and remitting sales and value added taxes.

Software Development Costs

Costs incurred in connection with the development of software products are accounted for in accordance FASB ASC Subtopic 985-20, Software - Costs of Software to be Sold, Leased or Marketed. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the Company has not capitalized any development costs related to software products since the time period between technological feasibility and general release of a product has not been significant and the related costs incurred during that time period have not been material.

Advertising Expenses

Advertising costs are charged to operations as incurred. The Company recorded approximately $50,400 and $59,000 of advertising expenses for the three months ended September 30, 2014 and 2013, respectively. The Company recorded approximately $69,000 and $78,000 of advertising expenses for the nine months ended September 30, 2014 and 2013, respectively. These costs are included in selling, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive loss.

Research and Development Expenses

Research and development expenditures are charged to research and development expense as incurred.

12

 MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740, Income Taxes. Under FASB ASC Topic 740, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and their respective tax basis and all operating losses carried forward, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the applicable temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or tax status is recognized in the statement of operations in the period in which the change is identified. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

FASB ASC Topic 740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The guidance contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FASB ASC Topic 740. The first step is to evaluate the tax position for recognition by determining, based on the technical merits, whether the position will be more likely than not sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are being included in provision for income tax expense in the accompanying consolidated statements of operations and comprehensive loss.

Net Income (Loss) Per Share

Basic and diluted net income (loss) per common share is determined by dividing net income (loss) applicable to common stockholders by the weighted average common shares outstanding during the period. For the periods where there is a net loss attributable to common shareholders, any other outstanding equity instruments would be excluded from the calculation of diluted income (loss) per common shareholder because their effect would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted loss per share would be the same for those periods. At September 30, 2014 and December 31, 2013, the Company had no other equity instruments outstanding.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. By their nature, all such financial instruments involve risks including the credit risks of non-performance by counterparties. Trade accounts receivable are incurred pursuant to contractual terms with customers. Credit losses on accounts receivable have not been material because of a large concentration of revenues with a small number of large, established companies. The Company evaluates the creditworthiness of its clients in conjunction with its revenue recognition processes as well as through its ongoing collectability assessment processes for accounts receivable.

One client in the insurance segment accounted for 16% of consolidated revenues for the three months ended September 30, 2013. There were no other significant customers for the three months ended September 30, 2014 and 2013.

One client in the insurance segment accounted for 21% of consolidated revenues for the nine months ended September 30, 2013. There were no other significant customers for the nine months ended September 30, 2014 and 2013.

One client accounted for 64% of consolidated accounts receivable as of December 31, 2013. As of September 30, 2014, all of this client’s receivables have been collected. No other clients accounted for more than 10% of consolidated accounts receivable as of September 30, 2014 or December 31, 2013.

13

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

New Accounting Pronouncements

In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This update became effective from January 1, 2014. This pronouncement was incorporated into the Company’s gain calculation related to the sale of Basset in the third quarter of 2014.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This ASU provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The adoption of ASU 2013-11 did not have any impact on the Company’s unaudited consolidated financial statements.

In May, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

-Step 1: Identify the contract(s) with a customer. 

-Step 2: Identify the performance obligations in the contract. 

-Step 3: Determine the transaction price. 

-Step 4: Allocate the transaction price to the performance obligations in the contract. 

-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

ASU 2014-09 also significantly expands disclosure requirements concerning revenues for most entities. ASU 2014-09 will be effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Management is currently evaluating the impact that ASU 2014-09 will have on the Company. 

 In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15” ) . ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued and, if so, disclose that fact. Such evaluation is to be done for both annual and interim reporting periods, if applicable. Management is also required to evaluate and disclose whether its plans alleviate that doubt. ASU 2014-15 will become effective from January 1, 2017 and the Company is currently evaluating the impact of adopting this guidance.

Note 3—Segment Information

The Company has determined that it has three reportable segments organized around the types of businesses:

IT Support – includes the operating segment Xpeedio, which provides IT support for business to business markets.

Photography – includes the operating segment of Lors, which provides school photography throughout the New Jersey, New York and Pennsylvania areas.

Insurance – includes the operating segment SCM, which provides third party claims administration to the insurance industry.

Net revenues include no significant intersegment revenues. Operating loss by segment and geographic area excludes general corporate and interest expenses. The following table represents financial information by segment as of and for the three and nine months ended September 30, 2014 and 2013.

14

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Three Months Ended September 30, 2014
	IT Support		Photography		Insurance		Corporate			Consolidated
REVENUES:
Product sales	$	81,154	$	1,102,727	$	—	$	—		$	1,183,881
Service revenue		824,462		—		705,097		—			1,529,559
Total Revenues	$	905,616	$	1,102,727	$	705,097	$	—		$	2,713,440
Depreciation and Amortization	$	7,912	$	7,900	$	37,062	$	817		$	53,691
(LOSS) INCOME FROM CONTINUING OPERATIONS	$	113,295	$	25,525	$	34,834	$	(1,005,343	)	$	(831,689	)
OTHER INCOME (EXPENSE)
Interest Income											2,053
Interest expense											(15,573	)
Management fee income											56,947
Other income											2,717
Total Other Income											46,144
PROVISION FOR INCOME TAXES											14,763
NET LOSS FROM CONTINUING OPERATIONS										$	(800,308	)

Three Months Ended September 30, 2013
	IT Support		Photography			Insurance		Corporate			Consolidated
REVENUES:
Product sales	$	—	$	917,533		$	—	$	—		$	917,533
Service revenue		760,896		—			1,990,168		—			2,751,064
Total Revenues	$	760,896	$	917,533		$	1,990,168	$	—		$	3,668,597
Depreciation and Amortization	$	7,675	$	6,080		$	40,898	$	2,822		$	57,475
(LOSS) INCOME FROM CONTINUING OPERATIONS	$	49,558	$	(50,118	)	$	929,919	$	(911,224	)	$	18,135
OTHER INCOME (EXPENSE)
Interest Income												9,499
Interest expense												(17,260	)
Management fee income												39,178
Other income												659,421
Total Other Income												690,838
PROVISION FOR INCOME TAXES												14,672
NET INCOME FROM CONTINUING OPERATIONS											$	694,301

15

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Nine Months Ended September 30, 2014
	IT Support		Photography			Insurance		Corporate			Consolidated
REVENUES:
Product sales	$	81,154	$	2,569,273		$	—	$	—		$	2,650,427
Service revenue		2,613,412		—			2,148,108		—			4,761,520
Total Revenues	$	2,694,566	$	2,569,273		$	2,148,108	$	—		$	7,411,947
Depreciation and Amortization	$	24,631	$	21,889		$	111,895	$	2,447		$	160,863
(LOSS) INCOME FROM CONTINUING OPERATIONS	$	261,889	$	(16,611	)	$	132,409	$	(2,682,377	)	$	(2,304,690	)
OTHER INCOME (EXPENSE)
Interest Income												5,401
Interest expense												(49,356	)
Management fee income												140,375
Other income												7,416
Total Other Income												103,836
PROVISION FOR INCOME TAXES												33,091
NET LOSS FROM CONTINUING OPERATIONS											$	(2,233,945	)

Nine Months Ended September 30, 2013
	IT Support		Photography			Insurance			Corporate			Consolidated
REVENUES:
Product sales	$	—	$	2,490,597		$	—		$	—		$	2,490,597
Service revenue		2,573,894		—			4,714,609			—			7,288,503
Total Revenues	$	2,573,894	$	2,490,597		$	4,714,609		$			$	9,779,100
Depreciation and Amortization	$	21,010	$	16,763		$	226,925		$	7,772		$	272,470
(LOSS) INCOME FROM CONTINUING OPERATIONS	$	140,251	$	(158,197	)	$	(260,090	)	$	(2,269,569	)	$	(2,547,605	)
OTHER INCOME (EXPENSE)
Interest Income													20,668
Interest expense													(56,752	)
Management fee income													124,539
Other income													855,620
Total Other Income													944,075
PROVISION FOR INCOME TAXES													28,932
NET LOSS FROM CONTINUING OPERATIONS												$	(1,632,462	)

16

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014
 (UNAUDITED)

Geographic Operations

	For the three months ended  September 30,
	2014		2013
Net Revenues:
United States	$	1,807,824	$	2,907,701
Scandinavia		905,616		760,896
Total Net Revenues	$	2,713,440	$	3,668,597

Geographic Operations

	For the nine months ended  September 30,
	2014		2013
Net Revenues:
United States	$	4,717,381	$	7,205,206
Scandinavia		2,694,566		2,573,894
Total Net Revenues	$	7,411,947	$	9,779,100

Note 4—Property and Equipment

Property and equipment, net, consists of the following:

	September 30, 2014			December 31, 2013
Computers and equipment	$	1,090,098		$	1,090,883
Furniture and fixtures		242,165			226,011
Software		212,565			212,565
Leasehold improvements		353,806			353,806
		1,898,634			1,883,265
Less: Accumulated depreciation and amortization		(1,725,273	)		(1,691,054	)
	$	173,361		$	192,211

Depreciation and amortization expense of property and equipment was $17,524 and $21,307 for the three months ended September 30, 2014 and 2013, respectively. Depreciation and amortization expense of property and equipment was $52,362 and $63,219 for the nine months ended September 30, 2014 and 2013, respectively.

Note 5—Goodwill and Intangible Assets

Goodwill

There was no change in our goodwill balance from December 31, 2013 to September 30, 2014.

Intangible Assets

Information regarding the Company’s amortizable intangible assets is set forth below:

	September 30, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	1,472,500	$	(1,219,335	)	$	253,165

	December 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	1,472,500	$	(1,110,834	)	$	361,666

Amortization expense of intangible assets for the three months ended September 30, 2014 and 2013 was $36,167 and $36,168, respectively. Amortization expense of intangible assets for the nine months ended September 30, 2014 and 2013 was $108,501 and $209,251, respectively.

17

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

SEPTEMBER 30, 2014  

(UNAUDITED)

Estimated amortization expense of intangible assets is as follows:

For the Twelve Months Ending September 30:
2015	$	144,667
2016		108,498
Total	$	253,165

The Company has $371,500 of indefinite life tradenames and trademarks at both September 30, 2014 and December 31, 2013.

Note 6—Fair Value Measurements

The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, fiduciary assets and liabilities, short-term debt and current maturities of long-term debt, accounts payable, due to affiliates, accrued expenses and other current liabilities. The carrying amounts of the Company’s financial assets and liabilities approximate fair value because of the short maturity of these instruments.

The Company’s nonfinancial assets include goodwill, intangible assets and property, plant and equipment. These assets are recorded at carrying value. However, whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (or at least annually for goodwill and indefinite-lived intangible assets), such assets are assessed for impairment and, if applicable, written down to and recorded at fair value. To measure fair value for such assets, the Company uses techniques including discounted expected future cash flows (“DCF”) (Level 3 input). A discounted cash flow analysis calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit or asset and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including judgment about appropriate discount rates, growth rates and the amount and timing of expected future cash flows.

18

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Note 7—Debt

Debt consists of the following:

	September 30, 2014		December 31, 2013
Debt:
Lines of credit	$	1,680,400	$	1,255,400
Affiliated Party Debt:
Note payable – Brookstone/GUI		379,000		379,000
Note payable – Brookstone		468,865		468,865
Note payable – Brookstone/Primetime 24 JV		200,000		200,000
Equipment loan		21,576		32,805
Total affiliated party debt		1,069,441		1,080,670
Total Debt		2,749,841		2,336,071
Less: Short-term portion		2,734,085		2,309,086
Long-term debt	$	15,756	$	26,985

The Company has three separate lines of credit with one financial institution in Sweden. The three lines are considered the Xpeedio line, the Lors line and Modern Holdings line.

Xpeedio line: Xpeedio has a line-of-credit agreement through a financial institution of up to 3,000,000 SEK (approximately $413,400 and $462,900 at September 30, 2014 and December 31, 2013, respectively). The line is unsecured, due on demand and is at an interest rate of STIBOR plus 1.9 basis points (totaling 3% at both September 30, 2014 and December 31, 2013). Unused amounts under the line bear interest at .6% annually. At September 30, 2014 and December 31, 2013, there is no balance outstanding. The line is renewed annually on January 1 and is renewed through December 31, 2014.

Lors line: Lors has a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at September 30, 2014 and December 31, 2013 (totaling approximately 3.25% at both September 30, 2014 and December 31, 2013), and amounts can be advanced under the line until April 30, 2015. The Company pays an annual facility fee of $1,500. At September 30, 2014 and December 31, 2013, borrowings outstanding under the Lors line totaled $700,000 and $475,000, respectively.

Modern Holdings line: The Company has a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at September 30, 2014 and December 31, 2013 (totaling approximately 3.25% at both September 30, 2014 and December 31, 2013), and amounts can be advanced under the line until April 30, 2015. At September 30, 2014 and December 31, 2013, borrowings outstanding under the Modern Holdings line totaled $980,400 and $780,400, respectively.

Interest expense for debt was $11,589 and $13,354 for the three months ended September 30, 2014 and 2013, respectively. Interest expense for debt was $37,529 and $44,887 for the nine months ended September 30, 2014 and 2013, respectively.

19

MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Affiliated Party Debt (see Note 11 for description of affiliates)

Brookstone/GUI: The Company has a note payable to GUI that had an original loan amount of $559,000. The note is due on demand with interest payable on a monthly basis. The interest rate is fixed at 4%. The note is unsecured. At September 30, 2014 and December 31, 2013, borrowings outstanding under the Brookstone/GUI note payable totaled $379,000 each period.

Brookstone: During 2009, the Company entered into various note payable agreements with an affiliate. The notes are due on demand, and accrue interest equal to the applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.84% and 3% at September 30, 2014 and December 31, 2013, respectively. These notes are unsecured. At September 30, 2014 and December 31, 2013, the outstanding balance under these notes totaled $468,865 each period.

Brookstone/Primetime 24 JV: In 2012, the Company borrowed $210,000 from Primetime 24 JV in an interest only note with interest payable annually. The interest rate is equal to the short-term applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.84% and 3% at September 30, 2014 and December 31, 2013, respectively. The note is due on demand. The note is unsecured. At September 30, 2014 and December 31, 2013, the outstanding amount under this note was $200,000 each period.

Interest expense for the affiliated party debt was $3,984 and $3,906 for the three months ended September 30, 2014 and 2013, respectively. Interest expense for the affiliated party debt was $11,827 and $11,865 for the nine months ended September 30, 2014 and 2013, respectively.

All Debt

The Company does not have any financial ratio covenants and does not provide collateral for any of its debt agreements noted above.

Maturities of the Company’s long-term debt did not change significantly from December 31, 2013.

Note 8—Capital Structure

The following summarizes the terms of the Company’s capital stock:

Preferred Stock

The Company is authorized to issue 1,000,000 shares of Preferred Stock at $.01 par value. There were zero shares issued and outstanding at September 30, 2014 and December 31, 2013. To date, the preferred stock powers, designation, rights and preferences have not been designated by the Board of Directors.

Common Stock

The Company is authorized to issue 20,000,000 shares of Common Stock at $.01 par value. As of September 30, 2014 and December 31, 2013, there were 15,204,320 shares issued and outstanding including 793,987 shares held in treasury which were repurchased in August 2011 for $530,400.

Note 9—Leases

The Company conducts its operations using facilities, office equipment and automobiles leased under noncancellable operating lease agreements that expire at various dates. Future minimum lease payments have not changed significantly from December 31, 2013.

Rent expense under operating leases was approximately $142,000 and $148,000 for the three months ended September 30, 2014 and 2013, respectively. Rent expense under operating leases was approximately $436,000 and $485,000 for the nine months ended September 30, 2014 and 2013, respectively.

Note 10—Income Taxes

The Company determines the tax provision for interim periods using an estimate of its annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.

The Company recorded income tax expense from continuing operations of $14,763 and $14,672 for the three months ended September 30, 2014 and 2013, respectively. The Company recorded income tax expense from continuing operations of $33,091 and $28,932 for the nine months ended September 30, 2014 and 2013, respectively. The tax expense represents minimal state and local taxes. In all periods, these amounts differ from the expected benefit of our net losses due to the uncertainty of realizing those benefits.

The Company did not have unrecognized tax benefits as of September 30, 2014 and December 31, 2013 and does not expect this to change significantly over the next twelve months. As of September 30, 2014 and December 31, 2013, the Company has not accrued interest or penalties related to uncertain tax positions.

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MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014  

(UNAUDITED)

Note 11—Related Party Transactions

The Company has certain transactions with related parties. Related parties are various companies that the Company has transactions with, that have a common significant stockholder as the Company. The following entities are determined to be related parties: Tele2 AB (“Tele2”), Millicom International Cellular S.A. (“Millicom”), Modern Asset Management Incorporated, Anima Regni Partners LLC and Brookstone USA Inc.

All affiliate balances excluding affiliated debt and interest as noted in Note 7, are generated from sales and services provided and through payment and reimbursement of costs and borrowings to and from entities related through common control or ownership. Related party balances are paid/received in the normal course of business. During the nine months ended September 30, 2013, there was approximately $119,000 in service revenue to affiliates included in the service revenue on the accompanying statement of operations. There was no affiliate revenue for the three months ended September 30, 2013 or for the three and nine months ended September 30, 2014.

The Company had payables to related parties, for the periods presented as follows:

	Due to Affiliates
	September 30, 2014		December 31, 2013
Brookstone		316,949		317,535
Other affiliates		4,826		26,207
	$	321,775	$	343,742

The Company also provides certain management services to a related party. Income from these services is recorded as management fee income on the accompanying consolidated statements of operations.

Note 12—Benefit Plans

The Company and its subsidiaries maintain various defined contribution plans for its employees. The entities located in the United States established plans under Section 401(k) of the Internal Revenue Code. The Company contributes an amount ranging from 4% to 6% of the employee’s salary. The entities in Sweden have established defined contribution plans in accordance with their country’s regulations. The Company contributes an amount based upon the plan’s contribution formula which is based upon the employee’s salary. The Company’s contribution to the various plans amounted to approximately $74,000 and $79,000 during the three months ended September 30, 2014 and 2013, respectively. The Company’s contribution to the various plans amounted to approximately $236,000 and $257,000 during the nine months ended September 30, 2014 and 2013, respectively.

Note 13—Legal Proceedings

In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions; however, at September 30, 2014, the Company is not a party to any litigation that is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 14—Commitments

During the nine months September 30, 2014, there have been no significant changes to the Company’s aggregate future commitments to be paid over the next twelve months.

Note 15—Discontinued Operations

Effective July 1, 2014, the Company completed the sale of its wholly-owned subsidiary, Basset, a Swedish based software business for 61,500,000 SEK (equivalent to $9.1 million as of the date of the sale). We realized a $11.6 million gain on the sale, net of transaction costs, with no tax expense associated with the gain because it was not taxable under Swedish tax law. The sale of Basset reflects our strategy to maximize our cash flow.

We do not have significant continuing involvement with Basset after the sale. The operating results of the sold business and associated gain on sale are presented as discontinued operations on our Consolidated Statements of Operations.

The following summarizes the operating results including the gain on sale of our discontinued operations for the respective periods, which are represented in the Income from discontinued operations, net of tax on our Consolidated Statements of Operations.

	THREE MONTHS ENDED SEPTEMBER 30,					NINE MONTHS ENDED SEPTEMBER 30,
	2014		2013			2014		2013
REVENUES	$	—	$	2,743,822		$	6,806,709	$	8,799,980
GAIN ON SALE		11,637,710		—			11,637,710		—
COSTS AND EXPENSES		—		2,780,384			6,457,373		9,399,314
INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		11,637,710		(36,562	)		11,987,046		(599,334	)
Income tax expense		—		—			—		—
NET Income (Loss) from discontinued operations, net of tax	$	11,637,710	$	(36,562	)	$	11,987,046	$	(599,334	)

The 61,500,000 SEK purchase price contained an initial payment of 46,800,000 SEK (equivalent to $6.9 million) as of the closing date. The remaining purchase price of 14,700,000 SEK (equivalent to $2.18 million as of the date of sale) was placed in escrow by the buyer and contains three contingent payments to be made by the buyer over the next twelve months.

The first contingent payment relates to a working capital adjustment which is targeted from a previous pre-sale calculation. The second contingent payment of 7,200,000 SEK (equivalent to $1.07 million as of the date of the sale) is based upon our former affiliated client, Tele2, maintaining a certain piece of business with the buyer for a period of 12 months after the sale date. The third contingent payment of 7,500,000 SEK (equivalent to $1.1 million as of the date of the sale) is based upon the buyer collecting all of the outstanding Basset receivables including any unbilled amounts as of the date of the sale within 180 days after the sale date.

In determining the total proceeds in connection with the gain on sale of Basset, the Company made the following estimates:

- Estimated the working capital adjustment to be a payment back to the buyer of $41,000. This is based upon the Company’s working capital calculation. Our negotiations with the buyer are on- going and a final payment is expected before the end of the year. We believe that the range of working capital payment back to the buyer would be between $40,000 to $100,000 based upon the Company’s and the buyer’s initial working capital calculations.

- On November 11, 2014, we received notice from the buyer and Tele2 of Tele2’s intention to cancel the specific business, linked to the contingent payment, with Basset. As such, we have not included the contingent payment of $1.07 million within the total proceeds of the gain on sale of discontinued operations.

- As of the date of sale, the Company had approximately 41,000,000 SEK (equivalent of $5.95 million as of the date of the sale) of receivables including amounts that were unbilled. In assessing cash collections of the receivables after 90 days from the sale date, the remaining outstanding receivables balance is $640,000. Based upon the current status of the remaining outstanding receivables and our historical payment terms, we estimate that we would collect an additional $50,000 of the remaining receivables outstanding within the next 90 days. As such, we expect to collect approximately $510,000 of the $1.1 million of the third contingent payment.

The Company’s gain on sale of discontinued operations is calculated as follows:

Total proceeds	$	7,371,000
Net equity deficit of Basset	$	4,569,000
Transaction costs	$	(302,000	)
Gain on sale of discontinued operations	$	11,638,000

The equity deficit of Basset includes a foreign currency gain of approximately of $3.3 million due to the elimination of the accumulated other comprehensive income associated with Basset. As of September 30, 2014, the Company has recorded a receivable of $0.4 million associated with the additional contingent payments it is expected to receive from the escrow account established on the date of sale. This receivable is included within the prepaid expenses and other current assets on the accompanying consolidated balance sheet.

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MODERN HOLDINGS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014 

(UNAUDITED)

The following table sets forth the assets and liabilities of the discontinued operations included in the consolidated balance sheets of the Company as of September 30, 2014 and December 31, 2013:

	September 30, 2014		December 31, 2013
CURRENT ASSETS:
Cash	$	—	$	196
Accounts receivable		—		1,044,608
Due from affiliate		—		2,043,567
Prepaid taxes		—		238,411
Other current assets		—		857,336
Total Current Assets Held for Sale		—		4,184,118
LONG-TERM ASSETS:
Property and equipment, net		—		46,653
Total Long-Term Assets Held for Sale		—		46,653
CURRENT LIABILITIES:
Accounts payable		—		272,183
Accrued expenses		—		2,138,507
Short term notes payable		—		1,866,014
Deferred revenue		—		2,030,523
Other current liabilities		—		8,982
Total Current Liabilities Held for Sale		—		6,316,209

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2013, included in our prospectus dated May 14, 2014, filed with the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Prospectus”).

Executive Overview

We are a diversified holding company with a portfolio of privately held operating companies and other investments. We were incorporated under the laws of the State of Delaware in September 1994 under the name Innova International Corporation and in April 1999 changed our name to XSource Corporation. We changed the name of the firm to Modern Holdings Incorporated in January 2003. Our most recent investments include purchasing a 70% equity stake in Specialty Claims Management and investing in NeighborMD through both equity and convertible note investments. Additionally, effective July 1, 2014, we sold Basset AB to Enghouse Interactive AB.

Our corporate structure allows for great flexibility in the types of investments we make. We can invest in any industry, in any geographical area, in any part of the capital structure. The geographic focus of the company is to pursue deals in the United States and Scandinavia. Deals can vary from buying a majority or all of a small privately held company to investing in a minority position in an early stage, scalable business. In all cases we look for management teams who are passionate about their business and we must be able to identify why Modern Holdings can add value to a particular business.

Our investments are in several different industries including IT support, school photography, and insurance. Each of these companies provides a service to the major operators in their industries. For example, Specialty Claims Management is a third party administrator within the property and casualty insurance space. Our strategy is to dampen regulatory and cyclical risk by selling to operators within each industry versus being an operator within an industry. We maintain oversight over these portfolio companies by appointing a majority of the members of the board of directors and by providing management expertise when beneficial.

In addition to our majority owned and wholly owned investments, we have several small minority stakes in companies which we feel have game changing technologies or business approaches.

In certain of these minority investments, we require a board seat as a term of our investment. In other cases, we invest alongside trusted partners who have extensive industry expertise and are located in the same geographical area as the investment.

Our subsidiary companies are primarily located in three geographical areas: 1) the New York/New Jersey metropolitan area, 2) the Southeastern United States, primarily Nashville, Tennessee and 3) the greater Stockholm, Sweden area. In each of these three geographies, we have extensive business contacts which are contributing sources to our deal flow. Additionally, we have trusted partners in these markets who we invest alongside and who alert us to deals in their respective areas.

Our Segments

The Company has determined that it has three reportable segments organized around the types of businesses:

• IT Support – includes the operating segment Xpeedio which provides IT support for business to business markets.

• Photography – includes the operating segment Lors which provides school photography services in New Jersey and New York.

• Insurance – includes the operating segment SCM which provides third party claims administration to the insurance industry.

Key Performance Indicators

Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include revenues and results from operations. Results from operations provides us with a measure of our financial performance that we use to evaluate operations. In addition, we have historically used and continue to use revenue targets and operating income targets in determining our incentive compensation.

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Additionally, we use certain GAAP and non-GAAP indicators to assist in managing our businesses. We have determined that in all of our segments, there are certain non-GAAP measurements that are vital to measuring the success of our businesses. These measures are as follows:

• IT Support. We review new clients each reporting period as an indicator of how well we are growing our business.

• Photography. We focus heavily on metrics surrounding the number of students photographed as well as metrics surrounding the number and amount of orders received. It is critical for the business to maintain a certain level of students photographed in order to generate orders. Monitoring how many orders are received and at what order value is critical as well. As most of the cost of an order has already been incurred at the time a photograph is taken, all additional revenue that can be received through one order helps to improve the margins of the company.

• Insurance. We closely monitor adjuster activity as well as loss reporting activity. As revenues are based upon the number of cases opened, it is important to know the metrics on how many of these are being done by each adjuster. Additionally, in order to maintain the relationships that we have with our carriers, it is important to monitor the losses that they have taken and advise them well in advance of any problems arising. As such, internal guidelines for reporting and settlements are very closely monitored by senior management.

Financial Results

Product Sales and Services Revenue

Revenue consists of revenue from the sale of products and services, less returns, discounts and allowances and other offsets to net revenues. In our IT Support segment, revenue is recognized as the services are performed or as resale equipment is delivered and title has passed. In our Photography segment, revenue is recognized upon the delivery of the photographs and in our Insurance segment, revenue is recognized ratably over the estimated period length that it takes to administer the type of claim from start to close. Provisions for discounts, rebates to consumers and returns are recorded as a reduction of net revenues in the same period as the related revenue is recognized. Amounts billed to customers for delivery costs are classified as a component of net sales revenues, and any other related delivery costs are classified as a component of cost of revenues. Sales and value added tax collected from consumers and remitted to governmental authorities are accounted for on a net basis and are excluded from net revenues on our consolidated results of operations.

Services Revenue to Related Parties

In our IT Support segment, revenue is recognized as the services are performed. During the nine months ended September 30, 2013, there was approximately $119,000 in service revenue to affiliates included in the service revenue on the accompanying statement of operations. There was no affiliate revenue for the three months ended September 30, 2013 or for the three and nine months ended September 30, 2014. Provisions for discounts are recorded as a reduction of net revenues in the same period as the related revenue is recognized. Value added tax collected from consumers and remitted to governmental authorities is accounted for on a net basis and is excluded from net revenues on our consolidated results of operations.

Operating expenses

Operating expenses consist of cost of sales and services, selling, general and administrative expenses, impairment charges, and depreciation and amortization.

• Cost of sales and services. Cost of sales includes the related labor and travel expenses that are incurred to deliver the services that have been provided. Cost of sales also includes the costs of producing the photographs and the costs of resale equipment.

• Selling, general and administrative. Selling, general and administrative expenses consist of salaries, benefits, commissions, incentive programs, travel and entertainment, meetings and seminars and other selling costs and expenses, in each case related to our business. General and administrative expenses consist of costs associated with running our company such as occupancy and employment expenses; employee-related costs associated with our executive, finance, information technology and human resource functions; costs associated with our corporate headquarters and legal, tax and accounting fees.

• Depreciation and amortization. Depreciation and amortization expenses consist of the depreciation of physical assets purchased in the ordinary course of business to best service and maintain all customers. Amortization expense consists of the amortization of certain definite-lived intangible assets.

• Intangible assets impairment. Intangible assets impairment consists of impairment charges to customer relationships, tradename and Goodwill at SCM.

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Operating income (loss) from continuing operations

Operating income (loss) consists of total revenues less operating expenses, and excludes other income and expenses (i.e., non-operating income and expenses).

Other income (expenses)

• Interest income. Interest income consists of interest payments received on our cash deposit accounts.

• Interest expense. Interest expense consists of interest payments made pursuant to our amended credit facilities and our related party debt agreements with, among others, one of the largest banks in Sweden.

• Management fee income. Management fee income consists of fees paid by related parties for general and administrative services performed by our corporate offices.

• Other non-operating income (expenses). Other non-operating income (expenses) includes all other non-operating income and expenses.

Provision for income taxes from continuing operations

We record income tax expenses related to federal, state, local and foreign income.

Discontinued operations

We have reclassified the results of operations from Basset for all periods presented and recorded the gain on sale of discontinued operations during the three and nine months ended September 30, 2014 as discontinued operations.

Results of Operations

The following table sets forth consolidated operating results and other operating data for the periods indicated.

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2014			2013			2014			2013
REVENUES:
Product sales	$	1,183,881		$	917,533		$	2,650,427		$	2,490,597
Service revenue		1,529,559			2,751,064			4,761,520			7,288,503
Total Revenues		2,713,440			3,668,597			7,411,947			9,779,100
COSTS AND EXPENSES:
Cost of product sales		699,890			552,211			1,452,816			1,374,176
Cost of service revenue		816,244			1,206,174			2,785,375			3,910,420
Selling, general and administrative		1,975,304			1,834,602			5,317,583			5,347,205
Impairment of intangible assets		—			—			—			1,422,434
Depreciation and amortization		53,691			57,475			160,863			272,470
Total Costs and Expenses		3,545,129			3,650,462			9,716,637			12,326,705
INCOME (LOSS) FROM CONTINUING OPERATIONS		(831,689	)		18,135			(2,304,690	)		(2,547,605	)
OTHER INCOME (EXPENSE):
Interest income		2,053			9,499			5,401			20,668
Interest expense		(15,573	)		(17,260	)		(49,356	)		(56,752	)
Management fee income		56,947			39,178			140,375			124,539
Other income		2,717			659,421			7,416			855,620
Total Other Income		46,144			690,838			103,836			944,075
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES		(785,545	)		708,973			(2,200,854	)		(1,603,530	)
PROVISION FOR INCOME TAXES		14,763			14,672			33,091			28,932
NET INCOME (LOSS) FROM CONTINUING OPERATIONS		(800,308	)		694,301			(2,233,945	)		(1,632,462	)
ADD: NET (INCOME) LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST		4,797			(451,558	)		6,345			(41,543	)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED		(795,511	)		242,743			(2,227,600	)		(1,674,005	)
Net income (loss) from discontinued operations, net of tax		11,637,710			(36,562	)		11,987,046			(599,334	)
NET INCOME (LOSS) ATTRIBUTABLE TO MODERN HOLDINGS INCORPORATED	$	10,842,199		$	206,181		$	9,759,446		$	(2,273,339	)

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Three months ended September 30, 2014 compared with the three months ended September 30, 2013

Net revenues

The following table presents net revenues by segment for the three months ended September 30, 2014 compared with the three months ended September 30, 2013.

	2014		2013		% Change
IT Support		905,616		760,896		19	%
Photography		1,102,727		917,533		20	%
Insurance		705,097		1,990,168		(65	)%
Total	$	2,713,440	$	3,668,597		(26	)%

Net revenues decreased $0.96 million, or 26%, to $2.71 million in 2014 from $3.67 million in 2013. This is due to decreases in the insurance segment that was partially offset by increases in our other segments.

Net revenues in our IT Support segment increased $145,000, or 19%, from $760,000 in 2013 to $905,000 in 2014. The increase is primarily due to several new smaller customers brought in during the second half of 2013 and the first half of 2014. The new customers more than offset the loss of one large customer that had decided to bring its operation in-house instead of using an outsourced vendor in 2013.

Net revenues in our Photography segment increased $180,000, or 20%, from $920,000 in 2013 to $1.1 million in 2014. The increase is primarily due to the timing of when certain schools received their portraits in 2014 in relation to 2013. Additionally, in 2014, the continued marketing efforts yielded slight changes to the seasonality of the revenue which increased the orders that were taken in 2014.

Net revenues in our Insurance segment decreased $1.3 million, or 65%, from $2.0 million in 2013 to $700,000 in 2014. This is primarily due to the loss of our largest customer who decided to perform the claim administration in house beginning in September 2013. This decrease was partially offset by an increase in a few new smaller customers.

Operating income (loss) from continuing operations

The following table presents operating income (loss) by segment for the three months ended September 30, 2014 compared with the three months ended September 30, 2013.

	2014			2013			% Change
IT Support		113,295			49,558			129	%
Photography		25,525			(50,118	)		151	%
Insurance		34,834			929,919			(96	)%
Non-allocated corporate expenses		(1,005,343	)		(911,224	)		(10	)%
Total	$	(831,689	)	$	18,135			(4,686	)%

Operating income (loss) decreased $850,000, or (4,686)%, from $18,000 to $(832,000) in 2014. In 2013, we were relieved of any future obligations from our contract with our largest customer in the Insurance segment. In connection with this release, we recognized approximately $700,000 of revenue associated with this customer that was previously deferred. There was no such recognition in 2014. This was partially offset by improvements in our IT Support and Photography segments.

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Operating income in our IT Support segment increased approximately $64,000, or 129%, from approximately $49,000 in 2013 to $113,000 in 2014. We were able to reduce personnel costs while slightly increasing revenue. We were able to serve the increased number of customers with our existing personnel, thus increasing operating income.

Operating income in our Photography segment increased $76,000 or 151%, from $(50,000) in 2013 to $26,000 in 2014. The increase is due to the increase in revenue previously discussed as well as the ongoing cost cutting measures throughout the business including the continuing reduction in number of photography days used at schools.

Operating income in our Insurance segment decreased by $895,000, or 96%, from $930,000 in 2013 to $35,000 in 2014. In 2013, we were relieved of any future obligations from our contract with our largest customer in the Insurance segment. In connection with this release, we recognized approximately $700,000 of revenue associated with this customer that was previously deferred. There was no such recognition in 2014. This was partially offset by an overall reduction in operating expenses due to a majority of our employees moving to AmTrust in connection with the settlement agreement.

Operating expense in our corporate segment increased $94,000 or 10% primarily due to the severance costs associated with the termination of certain employees in 2014.

Interest income

Interest income decreased by approximately $7,400 in 2014 as compared to 2013, due to lower average cash balances in interest bearing accounts. The cash received from the sale of Basset AB was held in a non-interest bearing account through September 30, 2014.

Interest expense

Interest expense decreased by approximately $1,700 in 2014 as compared to 2013, due to the timing of the borrowings in 2014 as compared to 2013.

Management fee income

Management fee income remained relatively constant in 2014 as compared to 2013.

Other income (expense)

In 2013, there was a $660,000 gain on settlement with our largest former client within the insurance segment. No such gain was recorded in 2014. The remaining amounts are attributable to foreign exchange gains and losses.

Income tax expense

Income tax expense for the three months ended September 30, 2014 and 2013 was $14,763 and $14,672 respectively. The tax expense in 2014 and 2013 represents minimal state and local taxes. In both periods, these amounts differ from the expected benefit of our net losses due to the uncertainty of realizing those benefits.

Net loss from continuing operations

Net loss increased by $1.5 million for the reasons noted above.

Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013

Net revenues

The following table presents net revenues by segment for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013.

	2014		2013		% Change
IT Support		2,694,566		2,573,894		5	%
Photography		2,569,273		2,490,597		3	%
Insurance		2,148,108		4,714,609		(54	)%
Total	$	7,411,947	$	9,779,100		(24	)%

Net revenues decreased $2.37 million, or 24%, to $7.41 million in 2014 from $9.78 million in 2013. This is primarily due to the decrease in our insurance segment partially offset by increases in our IT Support and Photography segments.

Net revenues in our IT Support segment increased $0.12 million, or 5%, from $2.58 million in 2013 to $2.7 million in 2014. The increase is primarily due to several new smaller customers brought in during the second half of 2013 and the first half of 2014. The new customers more than offset the loss of one large customer that had decided to bring its operation in-house instead of using an outsourced vendor in 2013.

Net revenues in our Photography segment increased $.08 million, or 3%, from $2.49 million in 2013 to $2.57 million in 2014. The increase is primarily due to the timing of when certain schools received their portraits in 2014 in relation to 2013. Additionally, in 2014, the continued marketing efforts yielded slight changes to the seasonality of the revenue which increased the orders that were taken in 2014.

Net revenues in our Insurance segment decreased $2.6 million, or 54%, from $4.71 million in 2013 to $2.15 million in 2014. This is primarily due to the loss of our largest customer who decided to perform the claim administration in house beginning in September 2013. This decrease was partially offset by an increase in a few new smaller customers.

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Operating income (loss) from continuing operations

The following table presents operating income (loss) by segment for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013.

	2014			2013			% Change
IT Support		261,889			140,251			87	%
Photography		(16,611	)		(158,197	)		90	%
Insurance		132,409			(260,090	)		151	%
Non-allocated corporate expenses		(2,682,377	)		(2,269,569	)		(18	)%
Total	$	(2,304,690	)	$	(2,547,605	)		(10	)%

Operating losses decreased $243,000, or 10%, to $2.30 million in 2014 from $2.55 million in 2013. This is due to the additional revenues in the IT Support and Photography segments and the increased cost efficiencies in all segments.

Operating income in our IT Support segment increased approximately $122,000, or 87%, from approximately $140,000 in 2013 to $262,000 in 2014. We were able to reduce personnel costs while increasing revenue. We were able to serve the increased number of customers with our existing personnel, thus increasing operating income.

Operating loss in our Photography segment decreased $141,000 or 90%, from $158,000 in 2013 to $17,000 in 2014. The decrease is due to the slight increase in revenue previously discussed as well as the ongoing cost cutting measures throughout the business including the continuing reduction in number of photography days used at schools.

Operating income (loss) in our Insurance segment increased by $392,000, or 151%, from $(260,000) in 2013 to $132,000 in 2014. This is primarily due to the impairment charge due to the loss of our largest customer who decided to perform the claim administration in house. This charge was partially offset by the recognition of previously deferred revenue totaling approximately $700,000 when our future obligations to this customer were released. In 2014, we have been able to add new smaller customers as well as an overall reduction in operating expenses due to a majority of our employees moving to AmTrust in connection with the settlement agreement which has increased profitability.

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Operating expense in our corporate segment increased by $413,000 from $2.27 million for the nine months ended September 30, 2013 to $2.68 million for the nine months ended September 30, 2014. This is primarily due to the severance costs associated with the termination of several employees as well as the ongoing costs of being a public registrant.

Interest income

Interest income decreased by approximately $15,000 in 2014 as compared to 2013, due to lower average cash balances in interest bearing accounts. The cash received from the sale of Basset AB was held in a non-interest bearing account through September 30, 2014.

Interest expense

Interest expense decreased by approximately $7,400 in 2014 as compared to 2013, due to the timing of the borrowings in 2014 as compared to 2013.

Management fee income

Management fee income remained relatively constant in 2014 as compared to 2013.

Other income (expense)

In 2013, there was a gain of approximately $194,000 on the sale of a minority investment and a $660,000 settlement gain with our largest former customer in the insurance segment. No such gains were recorded in 2014. The remaining amounts are attributable to foreign exchange gains and losses.

Income tax expense

Income tax expense for the nine months ended September 30, 2014 and 2013 was $33,091 and $28,932, respectively. The tax expense in 2014 and 2013 represents minimal state and local taxes. In both periods, these amounts differ from the expected benefit of our net losses due to the uncertainty of realizing those benefits.

Net loss from continuing operations

Net loss increased by $.6 million for the reasons noted above.

Seasonality

In a typical year, our operating results are impacted by seasonality. Our IT Support segment in the third quarter typically will have lower operating results due to the extended vacations allowable under Swedish law. Historically, revenues in our Photography segment are highest in the fall to coincide with the beginning of the school year. Our Insurance segment can also have positive seasonal variations in operating results. They may be significantly impacted by inclement weather conditions, such as cold or wet weather, which can cause an increase in the number of insurance claims made.

Liquidity and Capital Resources

Historically, we have financed our operations primarily through cash flow from operations and borrowings on our lines of credit. Additionally, the sale of Basset has provided cash of approximately $6.9 million to date. We believe we have sufficient working capital and liquidity to support our operations for at least the next twelve months.

Cash and cash equivalents

At September 30, 2014 and December 31, 2013, we had cash and cash equivalents of approximately $8.7 million and $3.7 million, respectively. A summary of our cash flows provided by and used in operating, investing and financing activities is presented below.

Operating activities

Cash flows from operating activities consist primarily of net loss adjusted for certain non-cash items, including depreciation and amortization, impairment of intangibles and other non-cash charges, net. Our cash flows from operations are largely dependent on revenues from our clients, which are in turn dependent on general economic conditions and consumer confidence.

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We used cash in operations from continuing operations of approximately $1,083,000 and $499,000 during the nine months ended September 30, 2014 and 2013, respectively. The significant drivers contributing to the increased use of cash were the increased losses in our combined operations as well as changes in our prepaid expense and other current assets related to the receivables from AmTrust and from the sale of our subsidiary. These factors were significantly offset by changes in our deferred revenue related to the settlement with AmTrust.

We used cash in operations from discontinued operations of approximately $393,000 during the nine months ended September 30, 2014. During the nine months ended September 30, 2013, we provided cash of approximately $136,000. The significant drivers contributing to the increased use of cash in 2014 were increases in the collection times of the accounts receivable and higher amounts of prepaid operating expenses. The significant drivers contributing to the providing of cash in 2013 were the increased collection efforts on amounts due from affiliates significantly offset by increases in severance and administrative costs accrued.

Investing activities

Cash used in investing activities from continuing operations has been mainly for the purchase of property and equipment and activity with our cost method investments. During the nine months ended September 30, 2014, investing activities used cash due to additional fixed asset purchases of approximately $44,000 which was partially offset by proceeds from the partial sale of a cost method investment of approximately $4,600. For the nine months ended September 30, 2013, cash provided by investing activities from continuing operations was related to the net proceeds from the sales of cost method investments of approximately $536,000 partially offset by purchases of property and equipment of $82,000.

We purchased approximately $349 of property and equipment in our discontinued operations during the nine months ended September 30, 2013. There was no investing activity in the nine months ended September 30, 2014.

Financing activities

For the nine months ended September 30, 2014, cash provided by financing activities from continuing operations has been mainly due to the net borrowings under our lines of credit of approximately $414,000 offset by the distribution of approximately $184,000 to puttable non-controlling interests in our Insurance segment. For the nine months ended September 30, 2013, cash used in financing activities from continuing operations was due to the net borrowings under our lines of credit of approximately $95,000 offset by a distribution of $150,000 to puttable non-controlling interests.

For the nine months ended September 30, 2014, cash used in financing activities from discontinued operations was due to the net repayments under our lines of credit of approximately $75,000. For the nine months ended September 30, 2013, cash provided by financing activities from discontinued operations was due to the net repayments under our lines of credit of approximately $395,000.

Debt

The Company has three separate lines of credit with one financial institution in Sweden. The three lines are considered the Xpeedio line, the Lors line and Modern Holdings line.

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Xpeedio line: Xpeedio has a line-of-credit agreement through a financial institution of up to 3,000,000 SEK (approximately $413,400 and $462,900 at September 30, 2014 and December 31, 2013, respectively). The line is unsecured, due on demand and is at an interest rate of STIBOR plus 1.9 basis points (totaling 3% at both September 30, 2014 and December 31, 2013). Unused amounts under the line bear interest at .6% annually. At September 30, 2014 and December 31, 2013, there is no balance outstanding. The line is renewed annually on January 1 and is renewed through December 31, 2014.

Lors line: Lors has a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at September 30, 2014 and December 31, 2013 (totaling approximately 3.25% at both September 30, 2014 and December 31, 2013), and amounts can be advanced under the line until April 30, 2015. The Company pays an annual facility fee of $1,500. At September 30, 2014 and December 31, 2013, borrowings outstanding under the Lors line totaled $700,000 and $475,000, respectively.

Modern Holdings line: The Company has a line-of-credit of up to $1,000,000. Any amounts advanced under the line will be issued in the form of a demand promissory note, with the minimum drawdown amount being $50,000. The line is unsecured, has an interest rate of the institution’s Base Rate at September 30, 2014 and December 31, 2013 (totaling approximately 3.25% at both September 30, 2014 and December 31, 2013), and amounts can be advanced under the line until April 30, 2015. At September 30, 2014 and December 31, 2013, borrowings outstanding under the Modern Holdings line totaled $980,400 and $780,400, respectively.

Interest expense for debt was $11,589 and $13,354 for the three months ended September 30, 2014 and 2013, respectively. Interest expense for debt was $37,529 and $44,887 for the nine months ended September 30, 2014 and 2013, respectively.

Affiliated Party Debt

Brookstone/GUI: The Company has a note payable to GUI that had an original loan amount of $559,000. The note is due on demand with interest payable on a monthly basis. The interest rate is fixed at 4%. The note is unsecured. At September 30, 2014 and December 31, 2013, borrowings outstanding under the Brookstone/GUI note payable totaled $379,000 each period.

Brookstone: During 2009, the Company entered into various note payable agreements with an affiliate. The notes are due on demand, and accrue interest equal to the applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.84% and 3% at September 30, 2014 and December 31, 2013, respectively. These notes are unsecured. At September 30, 2014 and December 31, 2013, the outstanding balance under these notes totaled $468,865 each period.

Brookstone/Primetime 24 JV: In 2012, the Company borrowed $210,000 from Primetime 24 JV in an interest only note with interest payable annually. The interest rate is equal to the short-term applicable federal short-term, semiannual interest rate in effect at the end of each month, 3.84% and 3% at September 30, 2014 and December 31, 2013, respectively. The note is due on demand. The note is unsecured. At September 30, 2014 and December 31, 2013, the outstanding amount under this note was $200,000 each period.

Interest expense for the affiliated party debt was $3,984 and $3,906 for the three months ended September 30, 2014 and 2013, respectively. Interest expense for the affiliated party debt was $11,827 and $11,865 for the nine months ended September 30, 2014 and 2013, respectively.

The Company does not have any financial ratio covenants and does not provide collateral for any of its debt agreements noted above.

Maturities of the Company’s long-term debt did not change significantly from December 31, 2013.

The Company has a recent trend of operations generating negative cash flows and increasing working capital deficit due to the decline in our current assets. Despite these negative factors, the Company believes its renewed lines of credit, the additional availability under those lines of credit of approximately $733,000 and the cash on hand of approximately $8.75 million as of September 30, 2014 will be sufficient to support the Company’s operations for the next twelve months.

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Contractual Obligations

The following table sets forth our contractual obligations as of September 30, 2014:

	Payments Due by Period
	Less than 1 year		1-3 years		4-5 years		After 5 years		Total
Long-Term debt	$	2,734,085	$	15,756		0		0	$	2,749,841
Interest payments on debt(1)		95,457		800		0		0		96,257
Operating leases		487,007		376,115		0		0		863,122
Employment agreements(2)		1,737,072		0		0		0		1,737,072
	$	5,053,621	$	392,671	$	—	$	—	$	5,446,292

(1)	Assumes debt balances, interest rates and foreign currency exchange rates remain the same as the period end balances
(2)	Employment agreements are renewed on an annual basis for our key employees.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: accounting for revenue recognition; collectability of accounts receivable; depreciation and amortization periods; tax rates, deferred income taxes and tax reserves; and the recoverability of long-term assets including goodwill and other intangibles and the gain on sale of discontinued operations. The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:

Gain on sale of discontinued operations

Effective July 1, 2014, the Company completed the sale of its wholly-owned subsidiary, Basset, a Swedish based software business for 61,500,000 SEK (equivalent to $9.1 million as of the date of the sale). We realized a $11.6 million gain on the sale, net of transaction costs, with no tax expense associated with the gain because it was not taxable under Swedish tax law.

The 61,500,000 SEK purchase price contained an initial payment of 46,800,000 SEK (equivalent to $6.9 million) as of the closing date. The remaining purchase price of 14,700,000 SEK (equivalent to $2.18 million as of the date of sale) was placed in escrow by the buyer and contains three contingent payments to be made by the buyer over the next twelve months.

The first contingent payment relates to a working capital adjustment which is targeted from a previous pre-sale calculation. The second contingent payment of 7,200,000 SEK (equivalent to $1.07 million as of the date of the sale) is based upon our former affiliated client, Tele2, maintaining a certain piece of business with the buyer for a period of 12 months after the sale date. The third contingent payment of 7,500,000 SEK (equivalent to $1.1 million as of the date of the sale) is based upon the buyer collecting all of the outstanding Basset receivables including any unbilled amounts as of the date of the sale within 180 days after the sale date.

In determining the total proceeds in connection with the gain on sale of Basset, the Company made the following estimates:

- Estimated the working capital adjustment to be a payment back to the buyer of $41,000. This is based upon the Company’s working capital calculation. Our negotiations with the buyer are on- going and a final payment is expected before the end of the year. We believe that the range of working capital payment back to the buyer would be between $40,000 to $100,000 based upon the Company’s and the buyer’s initial working capital calculations.

- On November 11, 2014, we received notice from the buyer and Tele2 of Tele2’s intention to cancel the specific business, linked to the contingent payment, with Basset. As such, we have not included the contingent payment of $1.07 million within the total proceeds of the gain on sale of discontinued operations.

- As of the date of sale, the Company had approximately 41,000,000 SEK (equivalent of $5.95 million as of the date of the sale) of receivables including amounts that were unbilled. In assessing cash collections of the receivables after 90 days from the sale date, the remaining outstanding receivables balance is $640,000. Based upon the current status of the receivable and our historical payment terms, we estimate that we would collect an additional $50,000 of the remaining receivables outstanding. As such, we expect to collect approximately $510,000 of the $1.1 million of the third contingent payment.

The Company’s gain on sale of discontinued operations is calculated as follows:

Total proceeds	$	7,371,000
Net equity deficit of Basset	$	4,569,000
Transaction costs	$	(302,000	)
Gain on sale of discontinued operations	$	11,638,000

The equity deficit of Basset includes a foreign currency gain of approximately of $3.3 million due to the elimination of the accumulated other comprehensive income associated with Basset. As of September 30, 2014, the Company has recorded a receivable of $0.4 million associated with the additional contingent payments it is expected to receive from the escrow account established on the date of sale. This receivable is included within the Prepaid expenses and other current assets on the accompanying consolidated balance sheet.

Revenue recognition

The Company’s revenues are primarily derived from consulting services, photograph sales and the administration of insurance claims. Revenues are recognized under contracts generally when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, services have been performed or products have been delivered and collection of the amounts billed is reasonably assured.

Revenues from consulting services related to training and general consulting are recognized under a time-and-material basis as the services are performed.

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Photography revenue is recognized upon delivery of the photographs. The Company charges a shipping and handling fee to its customers to ship the photographs. These amounts are recorded as revenue. Revenues associated with the shipping and handling fees were approximately $49,500 and $48,000 for the three months ended September 30, 2014 and 2013, respectively. Revenues associated with the shipping and handling fees were approximately $128,000 and $134,000 for the nine months ended September 30, 2014 and 2013, respectively. The costs of shipping and handling are expensed as incurred and are included in cost of sales and services on the accompanying consolidated statements of operations and comprehensive loss. The Company receives payment before the photographs are shipped. These amounts are recorded as deferred revenue until the product is delivered.

Revenue from the administration of insurance claims is recognized ratably over the estimated period that it takes to administer the type of claim from start to close. The claim length could range for periods up to 13 months. The Company’s billings do not necessarily correlate with the revenues recognized ratably over the life of the claim. At September 30, 2014 and December 31, 2013, the Company has recorded unbilled receivables of $270,933 and $335,390, respectively, which are included in accounts receivable on the consolidated balance sheets. These balances are generally billable within 12 months. Billings rendered in advance of services performed are recorded and classified as deferred revenue on the consolidated balance sheets.

Total revenue does not include sales or value added tax; the Company considers itself a pass-through entity for collecting and remitting sales and value added taxes.

Accounts receivable

Accounts receivable are recorded at net realizable value consisting of the carrying amount less the allowance for uncollectible accounts. The Company evaluates the collectability of its accounts receivable based on a combination of factors. Where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, the current business environment and its historical experience. The Company’s policy to determine past due accounts is based upon the contractual payment terms of the receivables. The Company generally does not record interest on past due accounts. Accounts are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. At December 31, 2013 and September 30, 2014, the Company believes an allowance for doubtful accounts is not necessary.

Goodwill and intangible assets

Accounting Standards Codification (ASC) Topic 805, “Business Combinations” (ASC No. 805), requires that the purchase method of accounting be used for all business combinations. The guidance specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill. In accordance with ASC Topic 350, “Intangibles-Goodwill and Other” (ASC No. 350), all assets and liabilities of the acquired businesses including goodwill are assigned to reporting units. We evaluate goodwill for impairment at least annually, or as circumstances warrant. When determining the fair value of our reporting units, we utilize various assumptions, including projections of future cash flows. Any adverse changes in key assumptions about our businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge.

We review long-lived assets and certain identifiable intangibles other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset. The estimate of undiscounted cash flows and the fair value of assets require several assumptions and estimates like the weighted average cost of capital, discount rates, risk-free rates, market rate of return and risk premiums and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

There were no impairments noted during the three and nine months ended September 30, 2014. In September 2013, the Company recorded an impairment charge of $1.4 million related to intangible assets of SCM: customer relationships, tradename as well as goodwill.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to enter into the determination of taxable income.

The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely the Company establishes a valuation allowance.

In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of ongoing tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.

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The Company continues to assess the likelihood of realizing the tax credit for withheld amounts from foreign customers. These credits have been historically recorded in “prepaid income and other taxes” on the accompanying balance sheet. Due to the operating loss levels in the Telecommunications segment in 2014, the Company believes that it will not be able to utilize these credits prior to their expiration beginning in 2016 and accordingly has reserved for them.

The Company recognizes a liability for uncertain tax positions that the Company has taken or expects to file in an income tax return. An uncertain tax position is recognized only if it is “more likely than not” that the position is sustainable based on its technical merit. A recognized tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information.

The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. If foreign investments are not expected to be indefinitely invested, the Company provides income taxes on the portion that is not indefinitely invested.

Accounting standards applicable to emerging growth companies

We are an emerging growth company as defined under the Jumpstart Our Business Startups Act (JOBS Act). Emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We have elected to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.

Recently Issued Accounting Pronouncements

In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The Company does not expect the adoption of this update will have a material impact on its consolidated financial statements, absent any material transactions involving the derecognition of subsidiaries or groups of assets within a foreign entity. This update became effective from January 1, 2014. This pronouncement was incorporated into the Company’s gain calculation related to the sale of Basset in the third quarter of 2014.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This ASU provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of ASU 2013-11 did not have any impact on the Company’s unaudited consolidated financial statements.

In May, 2014, the FASB issued ASU 2014 - 09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

-Step 1: Identify the contract(s) with a customer. 

-Step 2: Identify the performance obligations in the contract. 

-Step 3: Determine the transaction price. 

-Step 4: Allocate the transaction price to the performance obligations in the contract. 

-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

ASU 2014-09 also significantly expands disclosure requirements concerning revenues for most entities. ASU 2014-09 will be effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Management is currently evaluating the impact that ASU 2014-09 will have on the Company. 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued and, if so, disclose that fact. Such evaluation is to be done for both annual and interim reporting periods, if applicable. Management is also required to evaluate and disclose whether its plans alleviate that doubt. ASU 2014-15 will become effective from January 1, 2017 and the Company is currently evaluating the impact of adopting this guidance.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not currently hold or issue financial instruments for trading purposes, although we have in the past entered into interest rate hedges for the purposes of limiting our exposure to fluctuations in interest rates.

Foreign currency exchange risk

Our primary operations are located in Sweden. Revenues from Sweden account for approximately 30% of our consolidated revenues. Our Swedish subsidiaries record transactions in their local currency, the Swedish Krona. As we invoice those transactions predominantly in Swedish Krona, and do not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of our foreign subsidiaries. If the U.S. dollar strengthens against foreign currencies, our future net revenues could be adversely affected. Therefore, foreign exchange fluctuations could create a risk of significant balance sheet gains or losses on our consolidated financial statements. If overall foreign currency exchange rates in comparison to the U.S. dollar uniformly change by 10%, the amount of cash and cash equivalents we would report in U.S. dollars as of September 30, 2014 and December 31, 2013 would change by approximately $687,000 and $229,000 respectively.

Interest rate risk

Historically, our exposure to market risk for changes in interest rates relates to our debt obligations under our various lines of credit outstanding. Our lines of credit primarily bear interest rates that are variable and are linked to the lending institutions base rate or the Stockholm Interbank Offered Rate. As of September 30, 2014 and December 31, 2013, we had approximately $2,750,000 and $2,336,000 of debt respectively. A 1% increase in these floating rates would increase annual interest expense by approximately $23,500.

Inflation

Inflationary factors such as increases in the cost of sales and services, including labor costs, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain our gross margin levels and our current levels of selling expenses and general and administrative expenses as a percentage of net revenues if the sale prices of our products do not increase with any increase in cost of sales and services.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

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PART II. OTHER INFORMATION

Item 1 . Legal Proceedings

None.

Item 1A. Risk Factors

We are a small company with limited resources.

We are a small company with limited resources. For the nine months ended September 30, 2014, we had total revenues of $7,411,947 and loss from operations from continuing operations of $2,304,690. For the nine months ended September 30, 2013, we had total revenues of $9,779,100 and loss from operations from continuing operations of $2,547,605. Most of our competitors have greater resources than we do. Our competitors may be able to anticipate, influence or adapt more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the promotion and sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisitions or other opportunities more readily and develop and expand their services more quickly than we can.

General economic and business conditions could negatively affect our business in multiple ways.

We conduct business through our portfolio companies across a range of business areas. Therefore, we are exposed to risks attributable to the general economic environment, and risks inherent in individual industrial sectors and business lines in which we operate.

Adverse global economic conditions and uncertain conditions in the credit market have had, and in the future could have, a significant adverse effect on our company and our operating businesses. Some of the risks and uncertainties we face as a result of these global economic and credit market conditions include the following:

• Volatile Demand. Negative or uncertain global economic conditions could cause many of our direct and indirect customers to delay or reduce their purchases of our products and systems containing our products. In addition, many of our customers rely on credit financing to purchase our products. If negative conditions in the global credit markets prevent our customers’ access to credit, product orders may decrease, which could result in lower revenue. Likewise, if our suppliers, sub-suppliers and sub-contractors (collectively referred to as “suppliers”) face challenges in obtaining credit, in selling their products or otherwise in operating their businesses, they may be unable to offer the materials we use to manufacture our products. These actions could result in reductions in our revenue and increased operating costs, which could adversely affect our business, results of operations and financial condition.

• Restructuring Activities. If demand slows significantly as a result of a deterioration in economic conditions or otherwise, we may need to execute restructuring activities to realign our cost structure with softening demand. The occurrence of restructuring activities could result in impairment charges and other expenses, which could adversely impact our results of operations or financial condition.

• Credit Volatility and Loss of Receivables. We extend credit and payment terms to some of our customers. We perform ongoing credit evaluations of our customers’ financial condition. We could suffer significant losses if a customer fails and is unable to pay us. A significant loss of an accounts receivable would have a negative impact on our financial results.

• Impairment Charges. Negative or uncertain global economic conditions could result in circumstances, such as a sustained decline in our stock price and market capitalization or a decrease in our forecasted cash flows such that they are insufficient, indicating that the carrying value of our long-lived assets or goodwill may be impaired. If we are required to record a significant charge to earnings in our consolidated financial statements because an impairment of our long-lived assets or goodwill is determined, our results of operations will be adversely affected. We recorded an impairment charge of approximately $1.4 million during the year ended December 31, 2013.

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Consistency in our revenues from period to period depends in part on our ability to reflect the changing demands and needs of our existing and potential clients. If we are unable to adjust our pricing terms or the mix of products and services we provide to meet the changing demands of our clients and potential clients, our business, results of operations and financial condition may be adversely affected.

Most of our contracts use a pricing model that provides for hourly or annual billing rates. Industry pricing models are evolving, however, and we anticipate that clients may increasingly request transaction-based or other pricing models. If we are unable to obtain operating efficiencies or if we make inaccurate assumptions for contracts with transaction-based pricing, our results of operations may be negatively affected. If we are unable to adapt our operations to evolving pricing protocols, our results of operations may be adversely affected or we may not be able to offer pricing that is attractive relative to our competitors.

In addition, the services we provide to our clients and the revenues and income from those services may decline or vary as the type and quantity of services we provide under those contracts changes over time, including as a result of a shift in the mix of products and services we provide. Furthermore, our clients, some of which have experienced significant and adverse changes in their prospects, substantial price competition and pressures on their profitability, have in the past and may in the future demand price reductions, automate some or all of their processes or change their outsourcing strategy by moving more work in-house or to other providers, any of which could reduce our results of operations. Any significant reduction in or the elimination of the use of the services we provide to any of our clients, or any requirement to lower our prices, would harm our business.

We have experienced declining revenues and continued losses.

In 2013, our Insurance segment lost its largest customer. For the past several years leading up to 2014, our IT support segment has also experienced declines in revenue and continued losses.

For the nine months ended September 30, 2014, net revenues in our Insurance segment decreased $2.6 million, or 54.4%, from $4.7 million in 2013 to $2.1 million in 2014. This is primarily due to the loss of our largest customer who decided to perform the claim administration in house.

Operating losses in 2013 and 2014 reflect the decline in revenue.

These trends of declining revenue and continued losses could have a material adverse effect on our business and the value of our common stock.

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Our results of operations will suffer if we are not able to appropriately price our services or manage our asset utilization levels.

Our results of operations are largely a function of the efficiency with which we utilize our assets, and in particular our people and our operations centers, and the pricing that we are able to obtain for our services. Our asset utilization levels are affected by a number of factors, including our ability to transition employees from completed projects to new assignments, attract, train and retain employees, forecast demand for our services and maintain an appropriate headcount in each of our locations, as well as our need to dedicate resources to employee training and development and other typically non-chargeable activities. The prices we are able to charge for our services are affected by a number of factors, including our clients’ perceptions of our ability to add value through our services, substantial price competition, introduction of new services or products by us or our competitors, our ability to accurately estimate, attain and sustain revenues from client engagements, our ability to estimate resources for long-term pricing, margins and cash flows for long-term contracts and general economic and political conditions. Therefore, if we are unable to appropriately price our services or manage our asset utilization levels, there could be a material adverse effect on our business, results of operations and financial condition.

Certain of our services are cyclical and based on specific projects involving short-term contracts.

Certain of our services, such as our photography and IT support services, are cyclical and can be significantly affected by variations in business cycles. Changes in the deadlines or the scope of work required for compliance with the requirements of legislation applicable to our clients could have a significant impact on certain service offerings of our telecommunications business services.

In addition, a majority of our IT support services consist of specific projects with contract terms generally not exceeding one year and may not produce ongoing or recurring business for us once the project is completed. These contracts also usually contain provisions permitting termination of the contract after a short notice period. The short-term nature and specificity of these projects could lead to material fluctuations and uncertainties in the revenues generated from these businesses.

Our operating results may experience significant variability and as a result it may be difficult for us to make accurate financial forecasts.

Our revenues and operating results have varied in the past and are likely to vary in the future, which could make it difficult to make accurate financial forecasts. Factors that are likely to cause these variations include:

• the number, timing, scope and contractual terms of projects in which we are engaged;

• delays in project commencement or staffing delays due to difficulty in assigning appropriately skilled or experienced IT professionals;

• the accuracy of estimates of resources, time and fees required to complete fixed-price projects and costs incurred in the performance of each project;

• changes in pricing in response to client demand and competitive pressures;

• changes in the allocation of onsite and offshore staffing;

• the business decisions of our clients regarding the use of our services;

• the ability to further grow revenues from existing clients;

• the available leadership and senior technical resources compared to junior engineering resources staffed on each project;

• seasonal trends, primarily our hiring cycle and the budget and work cycles of our clients;

• delays or difficulties in expanding our operational facilities or infrastructure;

• the ratio of fixed-price contracts to time-and-materials contracts in process;

• employee wage levels and increases in compensation costs, including timing of promotions and annual pay increases;

• unexpected changes in the utilization rate of our professionals;

• unanticipated contract or project terminations;

• the timing of collection of accounts receivable;

• the continuing financial stability of our clients; and

• general economic conditions.

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If we are unable to make accurate financial forecasts, it could materially adversely affect our business, financial condition and results of operations.

Our management has no experience in managing and operating a public company, and any failure to comply or adequately comply with any federal or state securities laws, rules, or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and financial condition.

Our management has no experience in managing and operating a public company and may rely in many instances on the professional experience and advice of third parties including its attorneys and accountants. Failure to comply or adequately comply with any federal or state securities laws, rules, or regulations may result in fines or regulatory actions, which may materially adversely affect our business, results of operation, or financial condition.

Our senior management team is critical to our continued success and the loss of one or more members of our senior management team could harm our business.

Our future success substantially depends on the continued services and performance of the members of our management team and other key employees possessing technical and business capabilities, including industry expertise, that are difficult to replace. Specifically, the loss of the services of Henry L. Guy, our Chief Executive Officer, could seriously impair our ability to continue to manage and expand our business. There is intense competition for experienced senior management and personnel with technical and industry expertise in the industries in which we operate, and we may not be able to retain these officers or key employees. We have not entered into employment and non-competition agreements with all of our executive officers, and for the agreements we have entered into certain terms of those agreements may not be enforceable and in any event these agreements do not ensure the continued service of these executive officers. In addition, we currently do not maintain “key person” insurance covering any member of our management team.

The loss of any of our key employees, particularly to competitors, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We may fail to attract and retain enough sufficiently trained employees to support our operations, as competition for highly skilled personnel is intense and we experience significant employee turnover rates.

There is significant competition for professionals with skills necessary to perform the services we offer to our clients. Increased competition for these professionals could have an adverse effect on us. A significant increase in the turnover rate among our employees, particularly among the highly skilled workforce needed to provide our services, would increase our recruiting and training costs and decrease our operating efficiency, productivity and margins, and could lead to a decline in demand for our services. High turnover rates generally do not impact our revenues as we factor the attrition rate into our pricing models by maintaining additional employees for each process. However, high turnover rates do increase our cost of revenues and therefore impact our margins due to higher recruitment, training and retention costs as a result of maintaining larger hiring, training and human resources departments, and higher operating costs due to having to reallocate certain business processes among our operations centers where we have access to the skilled workforce needed for the business.

In addition, our ability to maintain and renew existing engagements and obtain new business will depend, in large part, on our ability to attract, train and retain personnel with skills that keep pace with the demand for the services we provide, evolving industry standards and changing client preferences. A lack of sufficiently qualified personnel could also inhibit our ability to establish operations in new markets and our efforts to expand geographically. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future clients or to assimilate new employees successfully could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Employee wage increases may prevent us from sustaining our competitive advantage and may reduce our results of operations.

As the scale of our operations and services increases, wages as a percentage of revenues will likely increase. Wage increases in the long term may reduce our margins and increase operation losses.

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We may not be fully insured for all losses we may incur.

Although we attempt to limit and mitigate our liability for damages arising from negligent acts, errors or omissions through contractual provisions, limitations of liability set forth in our contracts may not be enforceable in all instances or may not otherwise protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients, are generally not limited under those agreements. Although we have general liability insurance coverage, including coverage for errors or omissions, property damage or loss and breaches of privacy and network security, that coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, and our insurers may disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or changes in our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have a material adverse effect on our business, reputation, results of operations, financial condition and cash flows.

We do not intend to pay dividends in the foreseeable future, and, because we are a holding company, we may be unable to pay dividends.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, including restrictions under our credit agreement, business prospects and other factors that our board of directors considers relevant. Furthermore, because we are a holding company, any dividend payments would depend on the cash flow of our subsidiaries. Accordingly, we may not be able to pay dividends even if our board of directors would otherwise deem it appropriate.

The tax effects of onshoring funds earned in overseas subsidiaries are prohibitive.

Net income earned in our Swedish subsidiaries is taxed in Sweden at a rate of 22%. In order to transfer those funds back to the U.S. to be used as working capital or investment capital an additional tax must be paid of approximately 12% which is the difference between the Swedish and U.S. tax rates. This additional tax makes it inefficient and costly to use funds earned in Sweden for various purposes in the United States, and this will restrict our ability to conduct our business and seek additional acquisitions in the United States.

We may choose to expand operations to additional countries and may not be successful in maintaining our current margins in our new locations due to factors beyond our control.

We may choose to expand our product line to sell into additional markets beyond the United States and Scandinavia, and if we do, the overall complexity of our business could increase at an accelerated rate as we would become subject to different market dynamics. The new markets into which we may expand may have different characteristics from the markets in which we currently exist. These different characteristics may include, among other things, demand volume requirements, demand seasonality, product generation development rates, customer concentrations, warranty and product return policies and performance and compatibility requirements. Our failure to make the necessary adaptations to our business model to address these different characteristics, complexities and new market dynamics could adversely affect our operating results.

We have significant foreign operations and there are inherent risks in operating overseas.

There are risks in operating facilities in foreign countries because, among other reasons, we may be unable to attract sufficient qualified personnel, intellectual property rights may not be enforced as we expect, and legal rights may not be available as contemplated. Should any of these risks occur, our ability to expand our foreign operations may be materially limited and we may be unable to maximize the output from these facilities and our financial results may decrease from our anticipated levels. The inherent risks of international operations could materially adversely affect our business, financial condition and results of operations. The types of risks faced in connection with international operations and sales include, among others:

• cultural differences in the conduct of business;

• greater difficulty in accounts receivable collection and longer collection periods;

• challenges in obtaining and maintaining financing;

• impact of recessions in economies outside of the United States;

• reduced or obtainable protection for intellectual property rights in some countries;

• unexpected changes in regulatory requirements;

• tariffs and other trade barriers;

• political conditions in each country;

• management and operation of an enterprise spread over various countries;

• the burden and administrative costs of complying with a wide variety of foreign laws; and

• currency restrictions.

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We may increase the range of services that we provide to our clients and our business and future prospects are difficult to evaluate.

We are exploring opportunities to provide services that we have not provided to date. Should we decide to expand our service offerings, our results of operations may be negatively affected during any transition or growth period before such offerings achieve profitability. For example, we may need to expand our training of our existing employees or recruit new, specially-trained employees to provide these services, which could increase our costs of revenues disproportionately to the revenues generated by such services. Other challenges we may face include the diversion of our management’s attention, attracting and retaining clients for such services, integrating any new services into our current suite of services and managing any resulting growth in our operations.

Our inability to identify and make acquisitions could disrupt our operations and adversely impact our business and operating results.

A key part of our growth strategy is to acquire other companies that complement our service offerings or broaden our technical capabilities and geographic presence. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. For example:

• we may not be able to identify suitable acquisition candidates or acquire additional companies on acceptable terms;

• we may pursue international acquisitions, which inherently pose more risk than domestic acquisitions;

• we compete with others to acquire companies, which may result in decreased availability of, or increased price for, suitable acquisition candidates;

• we may not be able to obtain the necessary financing on favorable terms, or at all, to finance any of our potential acquisitions;

• we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a company; and

• acquired companies may not perform as we expect, and we may fail to realize anticipated revenue and profits.

In addition, our acquisition strategy may divert management’s attention away from our existing businesses, resulting in the loss of key clients or key employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor-in-interest for undisclosed or contingent liabilities of acquired businesses or assets.

If we are not able to integrate acquired businesses successfully, our business could be harmed.

Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:

• unanticipated issues in integration of information, communications, and other systems;

• unanticipated incompatibility of logistics, marketing, and administration methods;

• maintaining employee morale and retaining key employees;

• integrating the business cultures of both companies;

• preserving important strategic client relationships;

• consolidating corporate and administrative infrastructures and eliminating duplicative operations; and

• coordinating geographically separate organizations.

In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings, or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. If we are unable to effectively execute acquisitions, our business, financial condition and operating results could be adversely affected.

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Our financial results are based in part on our estimates or judgments relating to our critical accounting policies. These estimates or judgments may prove to be incorrect, which could harm our operating results and result in a decline in our stock price.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for doubtful accounts, depreciation and amortization periods, recoverability for long-term assets including goodwill and intangibles, accounting for income taxes including reserves and valuation allowances as well as average duration of insurance claims and the gain on sale of discontinued operations.

The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC.

The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenue is less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:

• the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

• the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;

• the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

• the date on which it is deemed to be a “large accelerated filer,” which will occur at the time the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (c) has filed at least one annual report pursuant to the Exchange Act.

Under this definition, we are an “emerging growth company” and we could remain an emerging growth company until as late as December 31, 2019.

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

• be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

• be exempt from the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers), the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, and certain disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;

• be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and instead provide a reduced level of disclosure concerning executive compensation;

• be permitted to delay compliance with new or revised financial accounting standards available under Section 107(b) of the JOBS Act; and

• be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

In addition, Section 107(b)(1) of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 107(b)(1) of the JOBS Act. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

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Our qualification as an “emerging growth company” means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide investors with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our stock price may be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6.  Exhibits

Exhibit No.	Description
31.1	Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer and Principal Accounting Officer.
32.1	Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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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.

	MODERN HOLDINGS INCORPORATED
	By:	/s/ Henry L. Guy
Dated: November 14, 2014		Henry L. Guy
		President & Chief Executive Officer    (Principal Executive Officer)
	By:	/s/ Jay Murray
Dated: November 14, 2014		Jay Murray
		Chief Financial Officer    (Principal Financial Officer and Principal Accounting Officer)

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