SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2013

Subsequent Events [Abstract]

Subsequent Events

On July 31, 2013, Mr. Richarde resigned from his positions as President and Chairman of the Company and from all positions held in the Company’s subsidiaries.  On August 6, 2013, the Company, and certain of its subsidiaries, entered into a Mutual Release Agreement (the "Release Agreement") with Mr. Richarde.  As a condition of the Release Agreement, Mr. Richarde sold 5,000,000 of his shares to a shareholder of the Company, 15,000,000 shares to X Shares, LLC (“X Shares”), an entity controlled by Mr. Najafi who is a member of the Company’s Board of Directors and the Company’s majority shareholder through beneficial ownership, and canceled 4,440,064 of his shares. Mr. Richarde’s sale of the 15,000,000 shares to X Shares was done partially for the benefit of the Company and Mr. Richarde such that the Company would have a clear control shareholder who would be incentivized to, and could, assist in the future financing of the Company.  Accordingly, the Company recorded a contribution to capital by Mr. Richarde and non-cash stock compensation of $27,037,500 in September 2013, when the sale occurred, for the difference between the actual price paid and fair value of the shares.  While the closing market value of the Company’s common stock was $2.15 per share on the date the sale occurred, the Company determined the market value should be reduced by a 15% discount for trading restrictions associated with such a large number of shares to a fair value amount of $1.8275 per share.  Upon completion of the sales and cancellation of the shares at closing, Mr. Richarde retained 20,000,000 shares of the Company’s common stock and was the Company’s second largest shareholder.

On September 18, 2013, the Company borrowed $5,000,000 from SMXE Lending, LLC (“SMXE”), an entity controlled by Mr.  Najafi, (the “Term Debt”).  The Term Debt matures on September 18, 2014 and interest is payable monthly at a rate of LIBOR plus 4.5%.  The Term Debt is junior to the existing Bank Line, which continued in its current form, but is fully guaranteed by, and secured by all of the assets of, the Company and its subsidiaries, including the SkyMall Companies pursuant to Continuing Guarantees and Continuing Security Agreements of each of the Company and its subsidiaries; a Leasehold Deed Of Trust, Assignment Of Rents And Leases, Security Agreement And Fixture Filing executed by SkyMall, LLC; a Trademark Collateral Agreement executed by SkyMall, LLC; and a Trademark And Copyright Collateral Agreement executed by the Company.

In accordance with the Company’s accounting policy, an impairment review was undertaken of goodwill and intangible assets during the 2013 year-end financial statement closing process.  The Company determined that a review of the qualitative factors of its recorded goodwill as described in ASC 350-20-35-3 was not going to benefit its analysis since the acquisition had occurred so recently.  However, the Company determined that the following conditions surrounding the fair value of the SkyMall reporting unit raised concerns that the fair value of the SkyMall reporting unit could be less than the carrying value, including goodwill:

· From the SkyMall Merger closing to December 31, 2013, the Xhibit market share price had decreased by 63% (from $4.00 to $1.50 per share), despite significant increases in all major market indexes during this same period.

· Revenue growth in both SkyMall’s Commerce and Loyalty business units did not occur as anticipated during the latter part of 2013.

· SkyMall executed a reduction in force in the third quarter of 2013 in which 13 corporate positions, including SkyMall’s President, who had served in that role since 2003, were eliminated.  These position eliminations represented 14% of SkyMall’s corporate staff.

Based on the factors noted above, the Company believed an impairment test was required.  The Company engaged an independent valuation firm to assist the Company in conducting the impairment test.  A quantitative Step 1 test was first performed by comparing the fair value of the SkyMall reporting unit at December 31, 2013 to the related carrying value, including goodwill.  This Step 1 test showed that the carrying value of the SkyMall reporting unit did exceed fair value and accordingly, an impairment analysis of the implied fair value of the SkyMall reporting unit’s goodwill and other intangible assets using customary valuation methodologies, including income (i.e., discounted cash flow) and market analyses was performed.  Based on the results of the impairment analysis, the Company determined that an impairment had occurred in the SkyMall reporting unit with respect to the restated goodwill and certain other intangible assets.  An impairment charge of $137,764,842 for goodwill and certain other intangible assets was recorded at December 31, 2013.