EX-99.2 4 v388966_ex99-2.htm EXHIBIT 99.2

 

Exhibit 99.2

 

GemGroup Inc. and Subsidiaries

 

Consolidated Financial Report

June 30, 2014

 

 
 

 

Contents

 

Financial Statements  
   
Consolidated Balance Sheets 1
Consolidated Statements of Income 3
Consolidated Statements of Stockholders’ Equity 4
Consolidated Statements of Cash Flows 5
   
Notes to Consolidated Financial Statements 6

 

 
 

 

GemGroup Inc. and Subsidiaries

 

Consolidated Balance Sheets

June 30, 2014 and December 31, 2013

 

   (unaudited)     
   Jun-14   Dec-13 
Assets          
Current Assets:          
Cash  $108,365   $91,542 
Accounts receivable, less allowance for uncollectible accounts of $52,101 and $60,614   2,608,255    2,282,622 
Inventories (Note 2)   2,123,949    2,606,822 
Prepaid expenses   500,902    398,303 
    5,341,471    5,379,289 
           
Property and Equipment:          
Land and building   3,330,069    3,342,840 
Machinery and equipment   7,862,703    8,853,865 
Office furniture and fixtures   494,874    501,518 
    11,687,646    12,698,223 
Less accumulated depreciation   5,977,344    6,750,839 
    5,710,302    5,947,384 
           
Other Assets:          
Goodwill   1,940,514    1,940,514 
Deposits   56,281    339,113 
    1,996,795    2,279,627 
   $13,048,568   $13,606,300 

 

(Continued)

 

1
 

 

GemGroup Inc. and Subsidiaries

 

Consolidated Balance Sheets (Continued)

June 30, 2014 and December 31, 2013

 

   (unaudited)     
Liabilities and Stockholders' Equity  Jun-14   Dec-13 
Current Liabilities:          
Current maturities of long-term debt (Note 3)  $832,310   $808,978 
Line of credit (Note 3)   353,260    529,270 
Current portion of deferred compensation (Note 6)   25,525    24,286 
Accounts payable (Note 5)   1,723,568    2,270,301 
Accrued expenses   780,261    827,111 
    3,714,924    4,459,946 
           
Long-Term Debt, less current maturities (Note 3)   2,533,534    2,697,017 
           
Deferred Compensation, less current portion (Note 6)   50,650    55,010 
           
Deferred Taxes   362,000    362,000 
           
Stockholders' Equity:          
Common stock, $.01 par value; 100,000 shares authorized;  11,177 shares issued and outstanding   112    112 
Additional paid-in capital   3,571,747    3,571,747 
Retained earnings   2,815,601    2,460,468 
    6,387,460    6,032,327 
   $13,048,568   $13,606,300 

 

See Notes to Consolidated Financial Statements.

 

2
 

 

GemGroup Inc. and Subsidiaries

 

Consolidated Statements of Income

Six Months Ended June 30, 2014 and 2013

(unaudited)

 

   2014   2013 
Net sales  $12,973,637   $12,141,388 
Cost of goods sold   8,878,966    8,766,470 
Gross profit   4,094,671    3,374,918 
           
Operating expenses:          
Selling expenses   905,237    909,659 
General and administrative expenses   1,533,400    1,205,597 
    2,438,637    2,115,256 
Operating income   1,656,034    1,259,662 
           
Financial income (expense):          
Interest income   -    11 
Interest expense   (79,068)   (103,139)
    (79,068)   (103,128)
Net Income  $1,576,966   $1,156,534 

 

See Notes to Consolidated Financial Statements.

 

3
 

 

GemGroup Inc. and Subsidiaries

 

Consolidated Statements of Stockholders' Equity

Six Months Ended June 30, 2014 and 2013

(unaudited)

 

       Additional       Total 
   Common   Paid-in   Retained   Stockholders' 
   Stock   Capital   Earnings   Equity 
Balance at December 31, 2012  $112   $3,550,693   $1,577,462   $5,128,267 
                     
Accrued issuance of stock under restricted stock agreement (Note 4)        21,054         21,054 
                     
Distributions - stockholders             (1,296,489)   (1,296,489)
                     
Net income             1,156,534    1,156,534 
Balance at June 30, 2013  $112   $3,571,747   $1,437,507   $5,009,366 
                     
Balance at December 31, 2013  $112   $3,571,747   $2,460,468   $6,032,327 
                     
Distributions - stockholders             (1,221,833)   (1,221,833)
                     
Net income             1,576,966    1,576,966 
Balance at June 30, 2014  $112   $3,571,747   $2,815,601   $6,387,460 

 

See Notes to Consolidated Financial Statements.

 

4
 

 

GemGroup Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2014 and 2013

(unaudited)

 

   2014   2013 
Cash Flows from Operating Activities:          
Net income  $1,576,966   $1,156,534 
Adjustments to reconcile net income to net cash  provided by operating activities:          
Depreciation   543,027    496,326 
Amortization   -    33,275 
(Gain) on disposal of building and equipment   -    (9,750)
Compensation related to restricted stock agreement   -    21,054 
(Increase) decrease in:          
Accounts receivable   (325,633)   242,723 
Inventories   482,873    149,674 
Prepaid expenses   (102,599)   (138,532)
Other assets   282,832    (19,499)
Increase (decrease) in:          
Accounts payable   (546,733)   (352,491)
Accrued expenses   (46,850)   (76,887)
Deferred compensation   (3,121)   1,565 
Net cash provided by operating activities   1,860,762    1,503,992 
           
Cash Flows from Investing Activities:          
Purchase of property and equipment   (305,945)   (643,258)
Note receivable issued to stockholder   -    180,000 
Net cash (used in) investing activities   (305,945)   (463,258)
           
Cash Flows from Financing Activities:          
Net (principal payments) on line of credit   (176,010)   741,991 
Proceeds from long-term debt borrowings   213,758    - 
Principal payments on long-term debt   (329,028)   (395,353)
Payments on deferred purchase obligatoins   (24,881)   (20,693)
Distributions to stockholders   (1,221,833)   (1,296,489)
Net cash (used in) financing activities   (1,537,994)   (970,544)
           
Net increase in cash   16,823    70,190 
           
Cash:          
Beginning  $91,542   $138,900 
Ending  $108,365   $209,090 
           
Supplemental Disclosure of Cash Flow Information:          
Cash payments for interest  $83,492   $108,210 

 

See Notes to Consolidated Financial Statements.

 

5
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 1.          Nature of Business and Significant Accounting Policies

 

Nature of business: GemGroup Inc. is a holding company. Its wholly owned subsidiary, Gemaco Inc. (Gemaco), is a manufacturer of GEMACO playing cards, calendar, information and game cards, gaming table layouts and gaming chips. Gemaco Inc. sells primarily to three industries — retailers, advertising specialty distributors, and casinos — all on an international basis. GemTech LLC is a manufacturer of custom injection molded products. In prior years, GemTech was a division of Gemaco and not a separate entity. On January 3, 2012, GemGroup Inc. formed a new Kansas one-member limited liability company under the name GemTech LLC and transferred all of the assets and liabilities of the custom injection molding business to GemTech LLC. GemAsia, LLC is a single member Missouri limited liability company which is wholly owned by GemGroup. GemAsia conducts business in Macau, China where it produces and installs gaming table layouts for the casino market and also sells table layouts, playing cards and gaming accessories to the gaming industry throughout Asia. GemGroup DISC, LLC is a single member Missouri limited liability company which is wholly owned by GemGroup. The DISC is qualified as a domestic international sales corporation which arranges for the sale of Gemaco Inc.’s products for use outside of the United States. It was formed in 2013.

 

A summary of the Company’s significant accounting policies follows:

 

Principles of consolidation: The accompanying consolidated financial statements include the accounts of GemGroup Inc. and its wholly owned subsidiaries, Gemaco Inc., GemTech LLC, GemAsia LLC and GemGroup DISC, LLC (collectively referred to as “the Company”). All significant intercompany balances and transactions have been eliminated.

 

Revenue recognition: Sales are recognized upon shipment of goods at the time title transfers.

 

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts receivable: Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are past due after 30 days and are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Interest is not charged on trade receivables.

 

Inventories: Inventories of Gemaco and GemTech, consisting of raw materials, work-in-progress and finished goods, are valued at the lower of cost, determined using the last-in, first-out (LIFO) method, or market. Inventories of GemAsia, consisting of raw materials, work-in-progress and finished goods, are valued at the lower of cost, determined using the first-in, first-out (FIFO) method, or market.

 

Subsequent event: Management has evaluated and disclosed subsequent events up to and including September 15, 2014, which is the date the financial statements were available to be issued.

 

6
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 1.          Nature of Business and Significant Accounting Policies (Continued)

 

Property and equipment: Property and equipment are carried at cost. Depreciation is provided on the straight-line method over the following estimated useful lives:

 

Building 15-39 years
Machinery and equipment 5-10 years
Office furniture and fixtures 5-10 years

 

Goodwill and other intangible assets: The Company follows FASB ASC Topic 350 with regards to accounting for goodwill and other intangible assets. Goodwill is subject to an impairment test if events or changes in circumstances indicate that impairment may have occurred. Impairment losses are recognized to the extent that the carrying amount exceeds the assets' estimated fair value.

 

For the year ended December 31, 2013, the Company assessed qualitative factors in determining whether it is more likely than not that the fair value of the Company is less than its carrying amount. The Company is privately held and thus has no separate public market price for its units. The fair value of the reporting unit was estimated based on a discounted cash flow method which was derived using forecasts prepared by the Company. Based on the qualitative assessment and the results of the Company's valuation performed for each year end period, no goodwill impairment charge was required for the year ended December 31, 2013.

 

Intangible assets consist of a customer list and a trade name. These amounts were amortized over their estimated life of 120 months by the straight-line method and were fully amortized in 2013.

 

Impairment of long-lived assets: Management of the Company periodically reviews the carrying value of the long-lived assets owned by the Company by comparing the carrying value of those assets with their related expected future net cash flows. Should the sum of the related expected future cash flows be less than the carrying value, management will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the assets exceeds the fair value of assets. To date, management has determined that no impairment of these assets exists.

 

Income taxes: Effective January 1, 2004, the Company’s stockholders elected to be taxed under sections of federal and state income tax law which provide that, in lieu of corporate income taxes, the stockholders separately account for their pro rata shares of the Company’s items of income, deductions, credits and losses. As a result of this election, no income taxes have been recognized in the accompanying financial statements except for writing off deferred taxes and estimated prior-year income tax refunds and credits not realized.

 

The remaining deferred tax liability relates to the difference in the financial reporting and income tax basis of buildings and equipment for possible built-in gains tax liability.

 

7
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 1.          Nature of Business and Significant Accounting Policies (Continued)

 

The Company follows the Financial Accounting Standards Board (FASB) guidance for uncertainty in income taxes. Management has evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state, or local tax authorities for years before 2010.

 

Advertising: The Company expenses the costs of advertising as incurred. Advertising expense for the 6 months ended June 30, 2014 and 2013 was $23,836 and $66,413, respectively.

 

Stock compensation: The Company has a stock compensation plan with a key employee. Stock-based compensation expense includes all stock-based compensation awards granted after January 1, 2006, and is based on the grant date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.

 

Note 2.          Inventories

 

The components of inventories at June 30, 2014 and December 31, 2013 are as follows:

 

   Jun-14   Dec-13 
Raw materials  $1,598,873   $1,977,576 
Work-in-progress   290,737    397,608 
Finished goods   952,098    925,117 
    2,841,708    3,300,301 
LIFO reserve   (520,267)   (561,835)
Reserve for obsolescence   (197,492)   (131,644)
   $2,123,949   $2,606,822 

 

At June 30, 2014 and December 31, 2013, inventory subject to the LIFO method reserve was $2,698,678 and $3,134,664, respectively.

 

8
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 3.          Pledged Assets, Line of Credit, and Long-Term Debt

 

The line of credit at June 30, 2014 and December 31, 2013 consists of the following:

 

The following line of credit is payable to a bank and secured by substantially all the assets of the Company and personal guarantees of the principal stockholders of the Company. At June 30, 2014 and December 31, 2013, the prime rate was 3.25%.

  

June 30, 2014
   Original                  
Maturity  Principal  Interest          Monthly  Outstanding 
Date  Amount  Rate  Floor   Ceiling   Payments  Balance 
May 24, 2014  $3,600,000 (max)  Prime + 0.5%   4.0%   8.50%  Interest  $353,260 
   (line of credit)                     

 

December 31, 2013
   Original                  
Maturity  Principal  Interest          Monthly  Outstanding 
Date  Amount  Rate  Floor   Ceiling   Payments  Balance 
May 24, 2014  $3,600,000 (max)  Prime + 0.5%   4.0%   8.50%  Interest  $529,270 
   (line of credit)                     

 

Long-term debt at June 30, 2014 and December 31, 2013 consists of the following:

 

(a)The following notes are payable to a bank and secured by substantially all the assets of the Company or specific assets referred to in the loan documents and personal guarantees of the principal stockholders of the Company. At June 30, 2014 and December 31, 2013, the prime rate was 3.25%.

 

Maturity  Interest           Monthly   Outstanding Balance 
Date  Rate   Floor   Ceiling   Payments   Jun-14   Dec-13 
January 2014   Prime + 0.5%   4.00%   8.00%   9,844    -    9,791 
                               
April 2015   Prime + 0.5%   4.00%   8.00%   2,723    25,542    40,253 
                               
February 2016   Prime + 0.5%   4.00%   8.00%   25,900    488,363    627,627 
                               
October 2016   Prime + 0.5%   4.00%   8.00%   14,707    364,152    437,473 
                               
May 2017   4.00%   4.00%   8.00%   6,979    203,987    240,232 
                               
February 2019   4.00%   N/A    N/A    6,117    610,873    426,028 
                        1,692,917    1,781,404 

 

9
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 3.          Pledged Assets, Line of Credit, and Long-Term Debt (Continued)

 

(b)The following notes are payable to banks and secured by real property and personal guarantees of the principal stockholder of the Company:

 

Maturity  Interest           Monthly   Outstanding Balance 
Date  Rate   Floor   Ceiling   Payments   Jun-14   Dec-13 
October 2017   4.00%   N/A    N/A    7,217   $890,144   $915,147 
                               
October 2017   4.00%   N/A    N/A    5,896    727,284    747,712 
                        1,617,428    1,662,859 

 

(c)The following items are also included in long-term debt:

 

Maturity      Interest      Monthly   Outstanding Balance 
Date  Payable to   Rate   Secured by  Payments   Jun-14   Dec-13 
October 2017   Lender    0.90%  Vehicle   616    24,223    27,768 
                             
January 2018   Lender    1.90%  Vehicle   594    31,276    33,964 
                      55,499    61,732 
Total of all long-term debt                     3,365,845    3,505,995 
Less current maturities                     832,310    808,978 
                     $2,533,535   $2,697,017 

 

10
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 4.          Stock Incentive Plan

 

The Company has a stock incentive agreement under which it has awarded restricted stock to a key employee of the Company. The plan provides restricted stock grants for shares of common stock at a value which is generally equal to the fair value of the underlying stock at the date of grant as determined by the Board of Directors. The vesting period is determined at the date of grant and generally does not exceed five years. The shares are subject to forfeiture if certain vesting requirements are not met.

 

Pursuant to the Plan, the Company had a restricted stock agreement with a key employee whereby the key employee received 556 shares of common stock. The stock vested in 20% increments on an annual basis as long as the employee was employed by the Company. The Company recorded $21,054 of expenses related to this agreement for the 6 months ended June 30, 2013. As of December 31, 2013, all shares were vested and there was no remaining unrecognized compensation expense.

 

Pursuant to the Plan, the Company has a restricted stock agreement with a key employee whereby the key employee received 621 shares of common stock.  The stock vests in 20% increments on an annual basis as long as the employee is employed by the Company.  The Company recorded $0 of expense related to this agreement for the 6 month periods ended June 30, 2014 and 2013.  As of June 30, 2014, there is no unrecognized compensation expense related to the nonvested shares to be recognized over 0.5 years. At June 30, 2014, the employee has become vested in 559 shares.

 

Note 5.          Major Supplier

 

Purchases from one supplier were 17% and 22% of net revenues for the 6 months ended June 30, 2014 and 2013, respectively. Accounts payable to this supplier at June 30, 2014 and December 31, 2013, were $555,444 and $812,126, respectively.

 

11
 

 

GemGroup Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 6.          Deferred Compensation

 

The Company has a deferred compensation agreement with a key employee that provides for a base amount of deferred compensation each year, and an additional amount based on the previous year’s revenues, excluding any sales on which the employee receives a commission. The deferred compensation vests 20% a year over a period of five years from the start of the year in which the compensation is granted. Vested amounts will be paid out within 30 days after the date of vesting. Upon termination of employment, all non-vested amounts will be cancelled. The Company has recorded a liability of $76,175 and $79,296 related to deferred compensation as of June 30, 2014 and December 31, 2013, respectively. The Company recognized compensation expense of $12,763 and $14,460 related to this agreement for the 6 month ended June 30, 2014 and 2013, respectively.

 

Note 7.          Subsequent Events

 

On July 1, 2014, we sold substantially all of our net gaming assets of GemGroup, for $19.75 million subject to certain post-closing working capital adjustments.

 

12