NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation and Consolidation
On May 31, 2012, the Company changed its name from Function(x) Inc. to Viggle Inc. It now conducts business under the name Viggle Inc.
The consolidated financial statements include the accounts of Viggle Inc., and its wholly-owned subsidiaries. The Company has
8
wholly-owned subsidiaries, Function(x) Inc., Project Oda, Inc., Sports Hero Inc., Loyalize Inc., Viggle Media Inc., VX Acquisition Corp., Viggle Merger Sub II Inc. and Wetpaint.com, Inc., each a Delaware corporation. All intercompany transactions and balances have been eliminated.
Going Concern
These financial statements have been prepared on a going concern basis which assumes the Company's ability to continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to generate significant revenue or earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary equity or debt financing to continue development of its business and to generate revenue. Management intends to raise additional funds through equity and/or debt offerings until sustainable revenues are developed. There is no assurance such equity and/or debt offerings will be successful or that development of the business will be successful. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.
2. Line of Business and Recent Acquisition
The Company's Line of Business
Viggle is an incentive-based, interactive loyalty program and application that seeks to enhance the TV viewing experience and make TV more rewarding for viewers, advertisers and producers. Viggle helps viewers decide what to watch and when, broadens the viewing experience with real time games and additional content, and rewards viewers for being loyal to their favorite shows throughout a season. For advertisers, Viggle provides clients targeted interactive ads to amplify their TV messaging. For TV networks and content producers, Viggle delivers promotional benefits by driving tune ins to specific shows, engaging viewers in a richer content experience, and increasing awareness of promoted shows. The Company's content website, wetpaint.com, extends its promotional capabilities by reaching entertainment fans before a TV show is broadcast and by continuing the conversation with additional show coverage after the broadcast date. In addition, the Company recently launched its music service, which allows consumers to check in to songs on Viggle and earn points. As a media company, Viggle seeks to attract a significant and growing audience in order to sell advertising. The Company believes that making TV more rewarding and engaging around the shows consumers love will drive them to use Viggle.
Through its recently acquired subsidiary, Wetpaint, the Company reports original news stories and publishes information content covering top television shows, music, celebrities, entertainment news and fashion. Wetpaint publishes more than 150 new articles, videos and galleries per day.
U.S. consumers can become Viggle users through a free app that works on multiple types of mobile phones and tablets and is distributed through the Apple App Store and the Google Play Store. After a consumer downloads the App, he or she must create an account. Viggle then allows consumers to play along with TV shows, share comments through social media, answer trivia questions or polls, chat with friends, play games, or discover more about the show, all while watching TV. Users can also use the App to discover new music. The App can listen to a song and identify it and allow users to build playlists and purchase the music. All of this activity earns the user points they can redeem for real rewards.
The Viggle user experience is simple. While watching TV or listening to music, a user taps the “check-in” button, which activates the device’s microphone. Viggle collects an audio sample of the content the user can hear and uses technology to convert that sample into a digital fingerprint. Within seconds, that digital fingerprint is matched against a database of reference fingerprints that are collected from at least 170 English and Spanish television channels within the United States and over 20 million songs.
Viggle is able to verify TV check-ins across broadcast, cable, online, satellite, time-shifted and on-demand content as well as most songs cataloged on Apple’s iTunes music library. The ability to verify check-ins is critical because users are rewarded with points for each check-in and engagement (defined as a poll, video quiz, game or slide show). Users can redeem the points within the rewards catalog for items that have a monetary value such as unique deals and offers, products, sweepstakes, charitable donations, select retail gift cards and Viggle-branded merchandise. Once a user has “checked-in” to content, the app provides a set of optional games, tools, and information to enhance the consumer experience.
The Company has purchased and will continue to source rewards from vendors that it will issue to users upon the redemption of their points. The Company has only generated minimal revenue to date, and there is no guarantee that it will be able to generate sufficient revenue in the future to continue to purchase rewards from vendors or continue its business.
Acquisition of Wetpaint
On December 16, 2013, the Company and Viggle Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Viggle (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Wetpaint.com, Inc., a Delaware corporation (“Wetpaint”), certain stockholders of Wetpaint and Shareholder Representative Services LLC, a Colorado limited liability company (solely in its capacity as the Stockholders’ Agent).
Wetpaint is a Seattle, Washington-based Internet company, founded in 2005, that publishes the website Wetpaint.com, focused on entertainment news, and develops a proprietary technology platform, the Social Distribution System, that is used to provide analytics for its own website as well as other online publishers.
The Merger Agreement and the transactions contemplated thereby (collectively, the "Acquisition") have been approved by the board of directors of each of the Company, Merger Sub and Wetpaint. Within twenty four hours following the execution and delivery of the Merger Agreement, Wetpaint delivered to Viggle and Merger Sub the irrevocable written consent (the “Written Consent”) of certain of the holders of Wetpaint common stock (the “Wetpaint Common Stock”) and Wetpaint preferred stock (the “Wetpaint Preferred Stock” and, collectively with the Wetpaint Common Stock, the “Wetpaint Capital Stock”) adopting and approving the Merger Agreement and the transactions contemplated thereby. Following receipt of the Written Consent, upon the terms set forth in the Merger Agreement, Merger Sub merged with and into Wetpaint (the “Merger”), with Wetpaint continuing as the surviving corporation and a wholly-owned subsidiary of Viggle. The Merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
In connection with the Acquisition, all outstanding shares of Wetpaint Capital Stock were converted into the right to receive an aggregate amount of cash and shares of Viggle common stock (the “Stock Consideration”) payable as described below. At the completion of the Acquisition, (i)
$1,634
in cash (subject to certain adjustments for payment of certain transaction expenses by Viggle and bonus and premium payments to certain Wetpaint employees and stockholders),
$22,923
in shares of Viggle common stock (subject to certain adjustments as described below) and
$3,860
in restricted stock units were delivered to the holders of Wetpaint Capital Stock in accordance with the allocation set forth in the Merger Agreement, and (ii)
$4,771
in shares of Viggle common stock (the “Escrow Shares”) were delivered to an escrow agent to satisfy potential indemnification claims. There are no known indemnification claims, and the escrow was established to cover claims in the event that any indemnification claims arise or are discovered. The shares will be held in escrow for a period of twelve months after closing to satisfy any indemnification claims that might arise during that twelve month period, and if no claims arise, these shares will be distributed to the former shareholders of Wetpaint. On the earlier of a date within three business days following the date that Viggle completes a public offering of its capital stock in which it raises at least
$20,000
in net cash proceeds (a “Subsequent Offering”) or February 15, 2014, an aggregate amount of
$3,367
in cash (subject to certain adjustments for changes in Wetpaint’s net working capital, payment of certain transaction expenses by Viggle and bonus and premium payments to certain Wetpaint employees and stockholders) shall be delivered to the holders of Wetpaint Capital Stock in accordance with the allocation set forth in the Merger Agreement. The values of shares of Viggle common stock and restricted stock units noted above were based on the average closing market price of the Company's common stock during the
10
days prior to completion of the Acquisition, in accordance with the Acquisition Agreement.
Pursuant to the terms of the Acquisition Agreement, if the Company completes a recapitalization on or before December 31, 2015, the stock consideration paid in the Acquisition shall be adjusted such that (i) if upon giving effect to the Recapitalization, the shares constituting such stock consideration collectively represent less than
13.17%
of the total outstanding shares of our common stock on a fully-diluted basis (subject to certain adjustments set forth in the merger agreement), we will issue to our stockholders that are former stockholders of Wetpaint (the “Wetpaint/Viggle Holders”) the additional number of shares of our common stock as is necessary such that the shares constituting the stock consideration, as so adjusted, represent
13.17%
of the total outstanding shares of our common stock on a fully-diluted basis (subject to certain adjustments set forth in the merger agreement) as of such time, and (ii) if upon giving effect to the Recapitalization, the shares constituting the stock consideration collectively represent
greater than
17.55%
of the total outstanding shares of our common stock on a fully-diluted basis (subject to certain adjustments set forth in the merger agreement), then we will cancel such number of shares of our common stock constituting the stock consideration as is necessary such that the stock consideration, as so adjusted, collectively represent
17.55%
of the total outstanding shares of our common stock on a fully-diluted basis (subject to certain adjustments set forth in the merger agreement) as of such time. The Company determined a fair value of
$6,100
for this contingent consideration and have added such amount to the total acquisition price. At December 31, 2013, the fair value was
$5,400
. The change in fair value of
$700
has been included in other income, net for the three and six months ended December 31, 2013 in the accompanying consolidated statements of operations.
The Acquisition Agreement contains customary representations, warranties and covenants of Viggle, Merger Sub and Wetpaint.
The Acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805,
Business Combinations
. Under the acquisition method, the consideration transferred is measured at the acquisition closing date. The assets of Wetpaint have been measured based on various preliminary estimates using assumptions that the Company’s management believes are reasonable utilizing information currently available. Use of different estimates and judgments could yield different results. The Company has performed a preliminary allocation of the purchase price to the underlying net assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with any excess of the purchase price allocated to goodwill. The Company has not completed the analysis of certain acquired assets and assumed liabilities, including, but not limited to, other identifiable intangible assets such as customer contracts and technology. However, the Company is continuing its review of these items during the measurement period, and further changes to the preliminary allocation will be recognized as the valuations are finalized.
A summary of the fair value of consideration transferred for the Acquisition and the estimated fair value of the assets and liabilities at the date of acquisition is as follows (amounts in thousands):
|
|
|
|
|
Consideration transferred:
|
|
Shares of Viggle common stock and restricted stock units based on closing market price prior to the Acquisition
|
$
|
31,554
|
|
Payable to sellers (a)
|
1,619
|
|
Contingent consideration (b)
|
6,100
|
|
Total consideration transferred
|
39,273
|
|
|
|
Preliminary allocation:
|
|
Goodwill
|
24,836
|
|
Intangible assets
|
17,984
|
|
Other assets
|
1,723
|
|
Total liabilities, including acquired accrued expenses
|
(5,270
|
)
|
|
$
|
39,273
|
|
(a) The payable to sellers may be adjusted for changes in Wetpaint's final net working capital. An estimate of such adjustment is between
$100
and
$400
.
(b) As noted above, the contingent consideration is the estimated fair value of additional stock consideration if the Company completes a recapitalization prior to December 15, 2015. The Company cannot estimate a range of potential adjustment to the fair value of contingent consideration as such amount will be based on the market price of the Company's stock at the time of the Recapitalization. However, if the Company's stock price were to change by
10%
, the value of the contingent consideration would change by approximately
$600
.
The results of operations of Wetpaint were combined with the Company's consolidated results from the date of acquisition of December 16, 2013. The amortization period period of intangible assets acquired is approximately
7
years. The goodwill recorded in connection with this acquisition reflects the strategic fit and revenue and earnings growth potential of this business. Goodwill related to the acquisition is expected to be non-deductible for income tax purposes.
The following unaudited pro forma condensed consolidated financial results of operations for the three and six months ended December 31, 2013 and 2012 are presented as if the acquisition had been completed at the beginning of fiscal year 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
2013
|
2012
|
|
2013
|
2012
|
Revenues
|
$
|
6,488
|
|
$
|
5,611
|
|
|
$
|
12,498
|
|
$
|
9,414
|
|
Operating loss
|
(12,978
|
)
|
(13,981
|
)
|
|
(37,379
|
)
|
(36,944
|
)
|
Net loss
|
(13,775
|
)
|
(13,534
|
)
|
|
(38,863
|
)
|
(34,088
|
)
|
Net loss per common share - basic and diluted
|
$
|
(0.12
|
)
|
$
|
(0.11
|
)
|
|
$
|
(0.31
|
)
|
$
|
(0.28
|
)
|
These pro forma condensed consolidated financial results have been prepared for comparative purposes only. No adjustment has been made to reflect the impact of of synergies and integration costs that would result from integration of this acquisition.
3. Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2014.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid securities purchased with original maturities of 90 days or less to be cash equivalents. Cash equivalents are stated at cost which approximates market value and primarily consists of money market funds that are readily convertible into cash. Restricted cash comprises amounts held in deposit that were required as collateral under the lease of office space.
Accounts Receivable
Accounts receivable are recorded net of an allowance for doubtful accounts. The Company's allowance for doubtful accounts is based upon historical loss patterns, the number of days that the billings are past due and an evaluation of the potential risk associated with delinquent accounts. The Company also considers any changes to the financial condition of its customers and any other external market factors that could impact the collectability of its receivables in the determination of its allowance for doubtful accounts. The Company's allowance for doubtful accounts as of December 31, 2013 was
$103
.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains cash and cash equivalents with domestic financial institutions of high credit quality. The Company performs periodic evaluations of the relative credit standing of all of such institutions.
The Company performs ongoing credit evaluations of customers to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, and review of the invoicing terms of the contract. The Company generally does not require collateral. The Company maintains reserves for potential credit losses on customer accounts when deemed necessary. Actual credit losses during the three and six months ended December 31, 2013 and December 31, 2012 were not significant.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts and other receivables and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount of loans payable approximates fair value as current borrowing rates for the same, or similar loans, are the same as those that were recently issued to the Company.
Property and Equipment
Property and equipment (consisting primarily of computers, software, furniture and fixtures, and leasehold improvements) is recorded at historical cost and is depreciated using the straight-line method over their estimated useful lives. The useful life and depreciation method are reviewed periodically to ensure they are consistent with the anticipated pattern of future economic benefits. Expenditures for maintenance and repairs are charged to operations as incurred, while betterments are capitalized. Gains and losses on disposals are included in the results of operations. The estimated useful lives of the Company's property and equipment is as follows: computer equipment and software:
3
years; furniture and fixtures:
4
years; and leasehold improvements: the lesser of the lease term or life of the asset.
Goodwill and Certain Other Long-Lived Assets
As required by ASC 350,
Goodwill and Other Intangible Assets
, the Company tests goodwill for impairment during the fourth quarter of its fiscal year. Goodwill is not amortized, but instead tested for impairment at the reporting unit level at least annually and more frequently upon occurrence of certain events. The Company has one reporting unit. The annual goodwill impairment test is a two step process. First, the Company determines if the carrying value of its reporting unit exceeds fair value, which would
indicate that goodwill may be impaired. If the Company then determines that goodwill may be impaired, it compares the implied fair value of the goodwill to its carrying amount to determine if there is an impairment loss.
There were no impairments of goodwill during the year ended June 30, 2013 as the fair value of the reporting unit exceeded its carrying amount.
The Company accounts for the impairment of long-lived assets other than goodwill in accordance with ASC 360, “
Property, Plant, and Equipment”
, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.
There were no impairments of long-lived assets during the three and six months ended December 31, 2013.
Capitalized Software
The Company records amortization of acquired software on a straight-line basis over the estimated useful life of the software.
In addition, the Company records and capitalizes internally generated computer software and, appropriately, certain internal costs have been capitalized in the amounts of $
3,554
and $
3,119
as of December 31, 2013 and June 30, 2013, respectively, in accordance with ASC 350-40
"Internal-use Software"
. At the time software is placed into service, the Company records amortization on a straight-line basis over the estimated useful life of the software.
Deferred Rent
The Company is party to a lease for office space for its corporate office, and as part the agreement the landlord provided a rent abatement for the first
10 months
of the lease. Such abatement has been accounted for as a reduction of rental expense over the life of the lease. The Company accounts for rental expense on a straight line basis over the entire term of the lease. Deferred rent is equal to the cumulative timing difference between actual rent payments and recognized rental expense.
Revenue Recognition
The Company recognizes revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. For all revenue transactions, the Company considers a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement.
Advertising Revenue: the Company generates advertising revenue primarily from display and video advertising, which is typically sold on a cost-per-thousand impressions, or CPM basis, and completed engagements on a cost per engagement, or CPE basis. Advertising campaigns typically range from
1
to
12
months, and advertisers generally pay the Company based on a minimum of delivered impressions or the satisfaction of other criteria, such as click-throughs.
Deferred Revenue: deferred revenue consists principally of both prepaid but unrecognized revenue and advertising fees received or billed in advance of the delivery or completion of the delivery of services. Deferred revenue is recognized as revenue when the services are provided and all other revenue recognition criteria have been met.
Barter Revenue: barter transactions represent the exchange of advertising or programming for advertising, merchandise or services. Barter transactions which exchange advertising for advertising are accounted for in accordance with EITF Issue No. 99-17 "Accounting for Advertising Barter Transactions" (ASC Topic 605-20-25). Such transactions are recorded at the fair value of the advertising provided based on the Company's own historical practice of receiving cash for similar advertising from buyers unrelated to the counter party in the barter transactions. Barter transactions which exchange advertising or programming for merchandise or services are recorded at the monetary value of the revenue expected to be realized from the ultimate disposition of merchandise or services.
The Company recognized barter revenue and barter expense for the three and six months ended December 31, 2013 of
$649
and
$2,033
, respectively. The Company recognized barter revenue and barter expense for the three and six months ended December 31, 2012 of
$597
and
$597
, respectively.
Watchpoints and Engagement Points
The Company issues points to its users as an incentive to utilize the App and its features. Users can redeem these points for rewards. The Company records the cost of these points based on the weighted average cost of redemptions during the period. Points earned but not redeemed are classified as a liability.
Users earn points for various activities within the Company's App. The Company reports points earned for checking into shows and points earned for engaging in advertiser sponsored content as a separate line in its Statements of Operations ("Cost of watchpoints and engagement points"). All other points earned by users are reflected as a marketing expense in selling, general and administrative expense.
During the three months ended December 31, 2013, the Company recorded an adjustment reducing its point liability by approximately
$2,400
related to a change in estimate of the average cost per point earned for users of the Viggle App.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718,
Compensation - Stock Compensation
. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and warrants issued. Stock-based awards issued to date are comprised of both restricted stock awards (RSUs) and employee stock options.
Marketing
Marketing costs are expensed as incurred. Marketing expense for the three and six months ended December 31, 2013 was
$1,911
and $
3,710
, respectively. Marketing expense for the three and six months ended December 31, 2012 was
$1,429
and
$3,004
, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in ASC 740,
Income Taxes
. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 expenses during the reporting period. These estimates include, among others, fair value of financial assets and liabilities, net realizable values on long-lived assets, certain accrued expense accounts, and estimates related to stock-based compensation. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
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" (ASU No 2013-11")
.
ASU No. 2013-11 requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. The guidance is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. The
Company does not expect that adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
4. Property and Equipment
Property and Equipment consists of the following:
|
|
|
|
|
December 31, 2013
|
June 30, 2013
|
|
|
|
Leasehold Improvements
|
$2,262
|
$2,254
|
Furniture and Fixtures
|
589
|
550
|
Computer Equipment
|
874
|
738
|
Software
|
177
|
100
|
Total
|
3,902
|
3,642
|
Accumulated Depreciation and Amortization
|
(1,135)
|
(827)
|
Property and Equipment, net
|
$2,767
|
$2,815
|
Depreciation and amortization charged to selling, general and administrative expenses for the six months ended December 31, 2013 and 2012 amounted to $
308
and $
296
, respectively.
5. Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 30, 2013
|
|
Description
|
Amortization
Period
|
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wetpaint Intangible Assets
|
84 months
|
|
$
|
17,985
|
|
|
|
$
|
(107
|
)
|
|
|
$
|
17,878
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property
|
36 months
|
|
4,209
|
|
|
|
(3,157
|
)
|
|
|
1,052
|
|
|
|
$
|
4,209
|
|
|
|
$
|
(2,456
|
)
|
|
|
$
|
1,753
|
|
|
Acquired Capitalized Software
|
36 months
|
|
2,350
|
|
|
|
(1,501
|
)
|
|
|
849
|
|
|
|
2,350
|
|
|
|
(1,110
|
)
|
|
|
1,240
|
|
|
Internally Generated Capitalized Software
|
36 months
|
|
3,554
|
|
|
|
(1,727
|
)
|
|
|
1,827
|
|
|
|
3,119
|
|
|
|
(1,190
|
)
|
|
|
1,929
|
|
|
Intellectual Property
|
24 months
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
80
|
|
|
|
(60
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
28,178
|
|
|
|
$
|
(6,572
|
)
|
|
|
$
|
21,606
|
|
|
|
$
|
9,758
|
|
|
|
$
|
(4,816
|
)
|
|
|
$
|
4,942
|
|
|
See Note 2, Line of Business and Recent Acquisition, for discussion of intangible assets related to the Wetpaint acquisition.
Amortization of intangible assets included in selling, general and administrative expenses for the six months ended December 31, 2013 and 2012 amounted to $
1,756
and $
722
, respectively. Future annual amortization expense expected is as follows:
|
|
|
|
|
Years Ending June 30,
|
|
|
|
2014
|
$
|
2,959
|
|
2015
|
4,421
|
|
2016
|
2,747
|
|
2017
|
2,593
|
|
2018
|
2,569
|
|
6. Loans Payable
|
|
|
|
|
|
|
|
|
Outstanding Balances
|
Facility Name
|
Maturity Date
|
Total Facility Amount
|
December 31, 2013
|
June 30, 2013
|
|
|
|
|
|
Term Loan Agreement ("DB Line")
|
04/30/14
|
30,000
|
$30,000
|
$10,000
|
Loan payable, current portion
|
|
|
30,000
|
10,000
|
|
|
|
|
|
New $25,000 Line of Credit
|
Retired
|
25,000
|
$—
|
$4,000
|
Secured Convertible 8% Notes
|
Retired
|
50,082
|
—
|
20,782
|
Long term debt
|
|
|
$—
|
$24,782
|
|
|
|
|
|
Debt Restructuring
On December 13, 2013 and September 16, 2013, the Company, Deutsche Bank Trust Company Americas, SIC and SIC II entered into a series of transactions to restructure certain of the Company's outstanding debt and equity securities. The impact on each loan is described below, where appropriate.
Term Loan Agreement
On March 11, 2013, the Company entered into a Term Loan Agreement (the “DB Line”) with Deutsche Bank Trust Company Americas (“Deutsche Bank”), under which Deutsche Bank agreed to loan the Company up to $
10,000
. The Company may, from time to time, request advances (the “Advances”) from the DB Line in amounts of no less than $
1,000
. The Company paid a $
150
facility fee from the initial draw of $
5,000
made at closing, which has been capitalized to prepaid expenses and is being expensed over the term of the agreement.
On December 13, 2013, the Company entered into an amendment (the “Amendment”) to the DB Line. Pursuant to the Amendment, the line of credit was increased to
$30,000
, and the maturity date was extended from December 16, 2013 to April 30, 2014. Interest will be due sooner as a result of the receipt of net proceeds by the Company or any of its wholly-owned subsidiaries from one or more debt or equity offerings by the Company or any of its wholly-owned subsidiaries in an amount equal to at least the amount of principal and accrued and unpaid interest outstanding on the DB Line.
The interest rate on the outstanding balance was lowered as a result of the Amendment. Previously, the interest rate on the outstanding balance was, at the Company’s election, a per annum rate equal to the LIBOR Rate plus
4.00%
or (ii) the Prime Rate plus
1.75%
. Pursuant to the Amendment, the interest rate on the outstanding balance was lowered to a per annum rate, at the Company’s option, of the LIBOR Rate plus
2.50%
, or the Prime Rate plus
0.25%
. Interest is payable monthly in arrears.
The Company may make prepayments, in whole or in part, under the DB Line at any time, as long as all accrued and unpaid interest thereon is paid through the prepayment date.
On December 13, 2013, the Company made a draw under the DB Line of $
16,951
, bringing the total draws to $
26,951
. The proceeds of this draw were used to repay amounts outstanding under the Amended and Restated $
25,000
Line of Credit, discussed below. On December 19, 2013, the Company drew the remaining amount available under the DB Line of $
3,049
. The Company used the proceeds from the final draw on the DB Line to fund working capital requirements and for general corporate purposes.
Repayment of the DB Line is guaranteed by Mr. Sillerman. In consideration for the guarantee Mr. Sillerman's designee, SIC II, which is the lender under the Amended and Restated
$25,000
Line of Credit described below, received a warrant for
10,000,000
shares of common stock of Viggle, which may be exercised at any time within
60 months
of the issuance date at
$1.00
a share, (subject to adjustment in the event of stock splits and combination, reclassification, merger or consolidation)(the “Guarantee Warrant”). The Guarantee Warrant contains a piggyback registration right with respect to the underlying common shares which may be issued if it is exercised. The Guarantee Warrant was issued in a transaction exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereunder and Rule 506 of Regulation D promulgated thereunder. The Company recorded compensation expense in the third fiscal quarter of 2013 of $
5,559
related to the Guarantee Warrant issued to SIC II, as Mr. Sillerman's designee.
As of December 31, 2013 and June 30, 2013 the Company had drawn $
30,000
and
$10,000
, respectively, on the DB Line. Interest expense on the DB Line for the three and six months ended December 31, 2013 was $
115
and
$223
, respectively.
Amended and Restated $25,000 Line of Credit
On February 11, 2013, SIC II, an affiliate of Mr. Sillerman provided a line of credit (the “Original
$25,000
Line of Credit”) to the Company in the amount of up to
$25,000
, which, as described above, has since been repaid. In consideration of the Lender's agreement to provide the Original
$25,000
Line of Credit, the Company issued to SIC II
5,000,000
shares of the Company's common stock. On September 16, 2013, pursuant to a Rescission Agreement (the "Rescission Agreement"), the Company and SIC II agreed to rescind the issuance of the
5,000,000
shares of the Company's common stock. Additionally, on September 16, 2013, the Company issued SIC II warrants to purchase
5,000,000
shares of the Company's common stock at an exercise price of
$0.69
per share. The warrants are exercisable for a period of
five
years from the date of issuance. The shares of common stock were held in treasury at December 31, 2013. See Note 8, Stockholders' Equity, for further discussion of the accounting impact of this transaction.
On March 11, 2013, the Company and SIC II entered into an amended and restated line of credit (the “New $
25,000
Line of Credit”) to the Company, which modified the Original $
25,000
Line of Credit to reduce the interest rate from
14%
per annum to
9%
per annum and provide, as security for the Company's obligations, a pledge of the Company's (and its subsidiaries') assets pursuant to a security agreement (the “Security Agreement”, more particularly described below). In addition, the Company entered into a subordination agreement (the “Subordination Agreement”, as more particularly described below) by which the repayment and the security for the New $
25,000
Line of Credit was subordinated to the repayment of the DB Line.
As described above, the balance of the New $
25,000
Line of Credit was fully repaid on December 13, 2013 and the line was retired at that date. In connection with the draw downs during the three and six months ended December 31, 2013, the Company issued a total of
4,000
and
7,000
warrants and recorded compensation expense of $
940
and
$3,810
, respectively. Interest expense on the New $
25,000
Line of Credit was
$245
and
$410
during the three and six months ended December 31, 2013, respectively. In connection with the repayment and retirement of the New
$25,000
Line of Credit on December 13, 2013, the Company recorded interest expense related to the November 25, 2013 PIPE Exchange of $
1,231
. See Note 8, Stockholders' Equity, for further discussion.
$
20,000
Line of Credit Exchange
The Company and SIC entered into a Line of Credit Grid Promissory Note on June 29, 2012, which was subsequently amended (as amended, the “
$20,000
Line of Credit Note”). The
$20,000
Line of Credit Note was fully drawn, so that as of March 11, 2013 Company owed SIC
$20,782
including outstanding principal and accrued interest. On March 11, 2013, SIC exchanged the
$20,000
Line of Credit Note for an
8%
Convertible Secured Note (the “8% Note”), in the principal amount of
$20,782
. The exchange was made pursuant to an exchange agreement (the “Exchange Agreement”), which provided for the issuance of
40,000
shares of common stock of the Company, par value $
0.001
per share (“Common Stock”) for each $
100
in principal amount of the Original Note exchanged, so that the Company issued to SIC
8,312,699
shares of Common Stock.
On September 16, 2013, in connection with the Rescission Agreement, the Company and SIC agreed to rescind the transactions in the Exchange Agreement. The effect of the transaction was to (a) rescind the issuance of the
8,312,699
shares originally issued to SIC and (b) rescind the exchange of the
8%
Note for the Original
$20,000
Line of Credit Note. This had the effect of extinguishing the
8%
Note and reinstating the Original
$20,000
Line of Credit Note. The Original
$20,000
Line of Credit Note had accrued and unpaid interest on September 16, 2013 of
$1,748
. The shares of common stock were held in treasury at September 30, 2013.
On September 16, 2013, SIC agreed to waive, pursuant to a Waiver (the “Waiver”),
$1,748
of accrued and unpaid interest on the Original
$20,000
Line of Credit Note, which interest accrued from June 29, 2012 through and including September 16, 2013.
Additionally, on September 16, 2013, the Company and SIC entered into an Exchange Agreement (the “Note Exchange Agreement”) pursuant to which the Company issued, in full satisfaction of the Original
$20,000
Line of Credit Note,
20,000
shares of Series A Convertible Redeemable Preferred Stock and
15,237
shares of Series B Convertible Preferred Stock. See Note 8, Stockholders Equity, for further description of the Series A and B Convertible Preferred Stock.
Prior to the execution of the Note Exchange Agreement, the
8%
Notes could have, at any time at the option of the holder thereof, been converted into shares of the Company's common stock at a conversion price equal to
$1.25
per share, subject to customary adjustments for stock splits, combinations, dividends, or recapitalization. Further, the conversion price was subject to "down round" protection, whereby any dilution above
33%
requires the consent of a majority of holders of the
8%
Notes, after which the
8%
Notes would receive weighted-average share dilution protection. The Company determined that, due to the nature of the "down round" protection, the conversion feature was an embedded derivative in accordance with ASC 815-15-25,
Derivatives and Hedging.
The embedded derivative was bifurcated from the host contract and recorded at its fair value. The fair value of the embedded derivative was determined utilizing the Binomial Lattice Model in accordance with ASC 820-10,
Fair Value Measurements.
The fair value of the embedded derivative when issued was
$6,662
, which was recorded as stock compensation cost and included in selling, general and administrative expense in the Consolidated Statements of Operations due to the fact that the
8%
Notes were owned 100% by an executive officer of the Company. The embedded derivative was marked to market at June 30, 2013 and September 16, 2013 to a fair value of
$3,870
and
$3,854
, respectively. The Company recorded a gain of
$16
to other income, net in the Consolidated Statements of Operations for the quarter ended September 30, 2013. In connection with the Note Exchange Agreement, the embedded derivative no longer existed after September 16, 2013.
Related Approvals
Because each of the transactions (other than the DB Line) referred to in the foregoing sections entitled "Amended and Restated $
25,000
Line of Credit" and "$
20,000
Line of Credit Exchange" involved Mr. Sillerman, or an affiliate of his, the transactions were subject to certain rules regarding "affiliate" transactions. As such, each was approved by a Special Committee of the Board of Directors and a majority of the independent members of the Board of Directors of the Company.
7. Commitments and Contingencies
On August 17, 2012, the Company was served with a patent infringement lawsuit filed on August 13, 2012 by Blue Spike, LLC ("Blue Spike") in the United States District Court for the Eastern District of Texas, Tyler Division (Civil Action No. 6:12-CV-526). The lawsuit claims patent infringement under U.S. Patent numbers 7,346,472, 7,660,700, 7,949,494, and 8,214,715 in connection with the Company's audio recognition technology. Blue Spike has commenced suits against numerous other companies involving the same patent family.
The Company denies that it is infringing any valid, enforceable claims of the asserted patents and intends to vigorously defend itself against the lawsuit. The Company filed its answer on October 3, 2012.
The Company is subject to litigation and other claims that arise in the ordinary course of business. While the ultimate result of our outstanding legal matters cannot presently be determined, the Company does not expect that the ultimate disposition will have a material adverse effect on its results of operations or financial condition. However, legal matters are inherently unpredictable
and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome will not have a material adverse effect on the Company's financial condition and results of operations.
8. Stockholders’ Equity
Common Stock
As of December 31, 2013 and June 30, 2013, there were
300,000,000
shares of authorized common stock and
117,943,325
,
91,124,452
shares of common stock outstanding, respectively. Except as otherwise provided by Delaware law, the holders of the Company's common stock are entitled to one vote per share on all matters to be voted upon by the stockholders.
Series A Convertible Redeemable Preferred Stock
Prior to September 16, 2013, the Company had authorized a class of series A preferred shares, but none of those shares were issued or outstanding. On September 16, 2013, the Company eliminated the prior class of series A preferred shares and created a new class of Series A Convertible Redeemable Preferred Stock (the “Series A Convertible Redeemable Preferred Stock”). The Company authorized the issuance of up to
100,000
shares of the Series A Convertible Redeemable Preferred Stock. The designation, powers, preferences and rights of the shares of Series A Convertible Redeemable Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
|
|
•
|
The shares of Series A Convertible Redeemable Preferred Stock have an initial stated value of
$1,000
per share (the "Stated Value").
|
|
|
•
|
The shares of Series A Convertible Redeemable Preferred Stock are entitled to receive quarterly cumulative dividends at a rate equal to
7%
per annum of the Stated Value whenever funds are legally available and when and as declared by the Company's board of directors. If the Company declares a dividend or the distribution of its assets, the holders of Series A Convertible Redeemable Preferred Stock shall be entitled to participate in the distribution to the same extent as if they had converted each share of Series A Convertible Redeemable Preferred Stock held into Company common stock.
|
|
|
•
|
Each share of Series A Convertible Redeemable Preferred Stock is convertible, at the option of the holders, into shares of Company common stock at a conversion price of
$1.15
.
|
|
|
•
|
The Company may redeem any or all of the outstanding Series A Convertible Redeemable Preferred Stock at any time at the then current Stated Value, subject to a redemption premium of (i)
8%
if redeemed prior to the one year anniversary of the initial issuance date; (ii)
6%
if redeemed on or after the one year anniversary of the initial issuance date and prior to the two year anniversary of the initial issuance date; (iii)
4%
if redeemed on or after the two year anniversary of the initial issuance date and prior to the three year anniversary of the initial issuance date; (iv)
2%
if redeemed on or after the three year anniversary of the initial issuance date and prior to the
42 months
anniversary of the initial issuance date; and (v)
0%
if redeemed on or after the
42 months
anniversary of the initial issuance date. However, no premium shall be due on the use of up to
33%
of proceeds of a public offering of common shares at a price of
$1.00
or more per share.
|
|
|
•
|
The Company is required to redeem the Series A Convertible Redeemable Preferred Stock on the fifth anniversary of its issuance.
|
|
|
•
|
Upon a change of control of the Company, the holders of Series A Convertible Redeemable Preferred Stock shall be entitled to a change of control premium of (i)
8%
if redeemed prior to the one year anniversary of the initial issuance date; (ii)
6%
if redeemed on or after the one year anniversary of the initial issuance date and prior to the two year anniversary of the initial issuance date; (iii)
4%
if redeemed on or after the two year anniversary of the initial issuance date and prior to the three year anniversary of the initial issuance date; (iv)
2%
if redeemed on or after the three year anniversary of the initial issuance date and prior to the
42 months
anniversary of the initial issuance date; and (v)
0%
if redeemed on or after the
42 months
anniversary of the initial issuance date.
|
|
|
•
|
The shares of Series A Convertible Redeemable Preferred Stock are senior in liquidation preference to the shares of Company common stock.
|
|
|
•
|
The shares of Series A Convertible Redeemable Preferred Stock shall have no voting rights except as required by law.
|
|
|
•
|
The consent of the holders of
51%
of the outstanding shares of Series A Convertible Redeemable Preferred Stock shall be necessary for the Company to: (i) create or issue any Company capital stock (or any securities convertible into any
|
Company capital stock) having rights, preferences or privileges senior to or on parity with the Series A Convertible Redeemable Preferred Stock; or (ii) amend the Series A Convertible Redeemable Preferred Stock.
Series B Convertible Preferred Stock
On September 16, 2013, the Company created
50,000
shares of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”). The designation, powers, preferences and rights of the shares of Series B Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
|
|
•
|
The shares of Series B Convertible Preferred Stock have an initial stated value of
$1,000
per share.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock are convertible, at the option of the holders, into shares of Company common stock at a conversion price of
$1.15
. The shares of Series B Convertible Preferred Stock may only be converted from and after the earlier of either of: (x) the first trading day immediately following (i) the closing sale price of the Company's common stock being equal to or greater than
$1.67
per share (as adjusted for stock dividends, stock splits, stock combinations and other similar transactions occurring with respect to the Company's common stock from and after the initial issuance date) for a period of five consecutive trading days following the initial issuance date and (ii) the average daily trading volume of the Company's common stock (as reported on Bloomberg) on the principal securities exchange or trading market where the Company's common stock is listed or traded during the measuring period equaling or exceeding
25,000
shares of Company's common stock per trading day (the conditions set forth in the immediately preceding clauses (i) and (ii) are referred to herein as the “Trading Price Conditions”) or (y) immediately prior to the consummation of a “fundamental transaction”, regardless of whether the Trading Price Conditions have been satisfied prior to such time. A “fundamental transaction” is defined as (i) a sale of all or substantially all of the assets of the Company, (ii) a sale of at least
90%
of the shares of capital stock of the Company or (iii) a merger, consolidation or other business combination as a result of which the holders of capital stock of the Company prior to such merger, consolidation or other business combination (as the case may be) hold in the aggregate less than
50%
of the Voting Stock of the surviving entity immediately following the consummation of such merger, consolidation or other business combination (as the case may be), in each case of clauses (i), (ii) and (iii), the Board has determined that the aggregate implied value of the Company's capital stock in such transaction is equal to or greater than
$125,000
.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock are not redeemable by either the Company or the holders thereof.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock are on parity in dividends and liquidation preference with the shares of Company common stock, which shall be payable only if then convertible into common stock.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock shall have no voting rights except as required by law.
|
|
|
•
|
The consent of the holders of
51%
of the outstanding shares of Series B Convertible Preferred Stock shall be necessary for the Company to alter, amend or change any of the terms of the Series B Convertible Preferred Stock.
|
Exchange Agreement
As described in Note 6, Loans Payable, on September 16, 2013, the Company and SIC entered into an Exchange Agreement pursuant to which the Company issued, in full satisfaction of the Original
$20,000
Line of Credit Note,
20,000
shares of Series A Convertible Redeemable Preferred Stock and
15,237
shares of Series B Convertible Preferred Stock.
PIPE Exchanges
In August of 2011 and May of 2012, the Company completed certain private placement offerings (the “PIPE Transactions”) in which the Company issued to certain investors (the “PIPE Investors”) shares of the Company's common stock and warrants to purchase shares of common stock. The Company's Board of Directors approved an exchange (the “PIPE Exchange”) by certain PIPE Investors of the common stock and warrants that they received in the PIPE Transactions for Series A Convertible Preferred Stock and Series B Convertible Preferred Stock.
On September 16, 2013, as part of the PIPE Exchange, the Company and SIC entered into an exchange agreement (the “PIPE Exchange Agreement”) pursuant to which SIC agreed to exchange: (a)
2,609,455
shares of the Company's common stock (the “PIPE Common Shares”), (b) warrants to purchase
2,064,000
shares of the Company's common stock at an exercise price of
$8
(the “August PIPE Warrants”) and (c) warrants to purchase
545,455
shares of the Company's common stock at
$1.25
(the “May PIPE Warrants,” and collectively with the August PIPE Warrants, the “PIPE Warrants”) that it had received in the PIPE Transactions
for: (i)
13,320
shares of Series A Convertible Redeemable Preferred Stock (the “Exchange Series A Shares”) and (ii)
6,127.2
shares of Series B Convertible Preferred Stock (the “Exchange Series B Shares”). The shares of common stock were held in treasury at December 31, 2013.
As described in Note 6, Loans payable, on November 25, 2013, the Company drew
$1,045
under the New
$25,000
Line of Credit, and drew an additional
$955
from other investors who had committed to fund under the New
$25,000
Line of Credit (the "LOC Investors").
On November 25, 2013, as part of an additional PIPE Exchange, the Company and the LOC Investors entered into exchange agreements pursuant to which the LOC Investors agreed to exchange: (a) a total of
191,000
shares of the Company's Common Stock and (b) warrants to purchase
191,000
shares of the Company's common stock that they had received in the PIPE Transactions for: (i) a total of
955
shares of Series A Convertible Preferred Stock and (ii) a total of
439.3
shares of Series B Convertible Preferred Stock. As a condition of such exchange, the LOC Investors committed to fund a total of
$955
under the New
$25,000
Line of Credit, and the Company drew on those commitments on November 25, 2013. The debt to the LOC Investors is subordinate to the Company's Term Loan Agreement with Deutsche Bank Trust Company Americas. As part of such draw, the Company also issued to the LOC Investors warrants to purchase
955,000
shares of the Company’s Common Stock at
$1
per share. These warrants are exercisable for
5
years. The Company recorded debt discount of
$1,231
, based on the fair values of the common stock, warrants and Convertible Preferred Stock. In connection with the repayment and retirement of the New $
25,000
Line of Credit on December 16, 2013, described in Note 6, Loans Payable, the Company wrote off the debt discount as interest expense.
Carrying Value and Compensation Expense
In accordance with ASC 470-50, "Debt - Modifications and Extinguishments", the shares of Series A Convertible Redeemable Preferred Stock and Series B Convertible Preferred Stock have been recorded in the accompanying consolidated balance sheet at their fair values as of the date of the exchange of September 16, 2013. In addition, in connection with the Exchange Agreement, the Company recorded compensation expense of
$6,259
during the six months ended December 31, 2013. The Series A Convertible Redeemable Preferred Stock is classified as mezzanine equity in the accompanying consolidated balance sheets. The difference between the carrying value of the Series A Convertible Redeemable Preferred Stock and its liquidation value is being accreted over the redemption period of
5
years. During the three and six months ended December 31, 2013, the Company recorded accretion of
$176
related to the Series A Convertible Redeemable Preferred Stock.
Related Approvals
Because the transaction referred to in the foregoing section entitled "PIPE Exchanges" involved Mr. Sillerman, or an affiliate of his, the transaction was subject to certain rules regarding "affiliate" transactions. As such, it was approved by a Special Committee of the Board of Directors and a majority of the independent members of the Board of Directors of the Company.
9.
Share-Based Payments
Equity Incentive Plan
The 2011 Executive Incentive Plan (the "Plan") of the Company was approved on February 21, 2011 by the written consent of the holder of a majority of the Company's outstanding common stock. The Plan provides the Company the ability to grant to any officer, director, employee, consultant or other person who provides services to the Company or any related entity, options, stock appreciation rights, restricted stock awards, dividend equivalents and other stock-based awards and performance awards, provided that only employees are entitled to receive incentive stock options in accordance with IRS guidelines. The Company reserved
30,000,000
shares of common stock for delivery under the Plan. Pursuant to the Executive Incentive Plan and the employment agreements, between February 15, 2011 and December 31, 2013, the Compensation Committee of the Company's Board of Directors authorized the grants of restricted stock and stock options described below.
Restricted Stock
The per share fair value of RSUs granted with service conditions was determined on the date of grant using the fair market value of the shares on that date and is recognized as an expense over the requisite service period. This information does not include RSUs granted as part of the acquisition of Wetpaint described in Note 2.
|
|
|
|
|
|
|
|
Shares
|
Weighted Average Grant Date Fair Value
|
Nonvested at July 1, 2013
|
1,869,168
|
|
$
|
31.11
|
|
Granted
|
—
|
|
—
|
|
Vested
|
(39,167
|
)
|
13.96
|
|
Forfeited and canceled
|
(25,001
|
)
|
17.67
|
|
Nonvested at December 31, 2013
|
1,805,000
|
|
$
|
31.16
|
|
|
|
|
Compensation expense related to restricted stock was $
4,851
and $
9,614
for the three and six months ended December 31, 2013, respectively. As of December 31, 2013 and June 30, 2013 there was
$39,024
and
$48,576
, respectively, in total unrecognized share-based compensation costs related to restricted stock.
Stock Options
The following table summarizes the Company's stock option activity for six months ended December 31, 2013:
|
|
|
|
|
|
|
|
Number of Options
|
Weighted average exercise price
|
Outstanding at June 30, 2013
|
17,429,728
|
|
$
|
1.69
|
|
Granted
|
1,118,003
|
|
0.65
|
|
Exercised
|
—
|
|
—
|
|
Forfeited and canceled
|
(2,126,812
|
)
|
1.19
|
|
Outstanding at December 31, 2013
|
16,420,919
|
|
1.69
|
|
Exercisable at December 31, 2013
|
7,344,170
|
|
$
|
1.90
|
|
The Company is accounting for these options at fair market value of the options on the date of grant, with the value being recognized over the requisite service period. The fair value of each option award is estimated using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of comparable companies' stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. Options generally have an expiration of
10 years
and vest over a period of
3
or
4 years
. The fair value of the options granted during the six months ended December 31, 2013 and 2012 were estimated based on the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
2013
|
2012
|
Expected volatility
|
80
|
%
|
80
|
%
|
Risk-free interest rate
|
1.7
|
%
|
1.03
|
%
|
Expected dividend yield
|
—
|
|
—
|
|
Expected life (in years)
|
6.03
|
|
6.47
|
|
Estimated fair value per option granted
|
$
|
0.48
|
|
$
|
0.99
|
|
Compensation expense related to stock options of $
1,847
and $
3,751
is included in the accompanying Consolidated Statements of Operations in selling, general and administrative expenses for the three and six months ended December 31, 2013, respectively. As of December 31, 2013, there was approximately $
9,246
of total unrecognized stock-based compensation cost which will generally be recognized over a four year period.
10. Income Taxes
For the three and six months ended December 31, 2013, the Company recorded an income tax provision of $
22
and
$46
, respectively to reflect tax amortization of the Company's goodwill. For the three and six months ended December 31, 2012, the Company recorded an income tax provision of
$44
and
$44
, respectively. At December 31, 2013, the Company had a Net Operating Loss
carryforward of $
60,901
, which will begin to expire in 2030. The Company has established a full valuation allowance against its deferred tax assets as of December 31, 2013 and June 30, 2013.
The Company has evaluated its income tax positions and has determined that it does not have any uncertain tax positions. The Company will recognize interest and penalties related to any uncertain tax positions through its income tax expense.
The Company may in the future become subject to federal, state and local income taxation though it has not been since its inception. The Company is not presently subject to any income tax audit in any taxing jurisdiction.
11. Related Party Transactions
Recapitalization Note
In Fiscal 2011, Mr. Sillerman (and his spouse and entities controlled by him), executed promissory notes in accordance with his subscription agreement for the payment of the purchase price of certain shares of common stock, in the amounts of
$3,242
. The note is an unsecured five-year note with interest accruing at the annual rate equal to the long-term Applicable Federal Rate in effect as of the date of the Recapitalization Agreement (which was
4.15%
per annum). Interest income recorded on this note for the three and six months ended December 31, 2013 was $
34
and $
68
, respectively. Interest income recorded on this note for the three and six months ended December 31, 2012 was
$35
and
$70
, respectively.
Shared Services Agreements
In an effort to economize on costs and be efficient in its use of resources, the Company entered into a shared services agreement with Circle Entertainment Inc. (“Circle”) as of February 15, 2011, pursuant to which it shares costs for legal and administrative services in support of Mitchell J. Nelson, its then General Counsel and General Counsel to Circle. The shared services agreement provides, in general, for sharing of the applicable support provided by either company to Mr. Nelson in connection with his capacity of providing legal services, and an allocation generally based on the services provided by Mr. Nelson, which are initially estimated to be divided evenly between the companies. The Company is responsible for advancing the salary to Mr. Nelson for both companies and will be reimbursed by Circle for such salary and benefits (but not for any bonus, option or restricted share grant made by either company, which will be the responsibility of the company making such bonus, option or restricted share grant). The agreement provides for the Chief Executive Officer or President of each Company to meet periodically to assess whether the services have been satisfactorily performed and to discuss whether the allocation has been fair. The Audit Committee of each company's Board of Directors will then review and, if appropriate, approve the allocations made and whether payments need to be adjusted or reimbursed, depending on the circumstances. Because this transaction is subject to certain rules regarding “affiliate” transactions, the Audit Committee and a majority of the independent members of the Company's Board of Directors have approved the shared services agreement. This is deemed to be an affiliate transaction because Mr. Sillerman is the former Chairman, a Board member, and a greater than 10% stockholder of Circle and Mr. Nelson is Executive Vice President and General Counsel of Circle. For the three and six months ended December 31, 2013, the Company billed Circle $
13
and $
60
, respectively. For the three and six months ended December 31, 2012, the Company billed Circle
$79
and
$158
, respectively. Such billings primarily relate to support consisting of legal and administrative services. These services are to be reviewed and, if appropriate, approved by Circle's Audit Committee and the Company's Audit Committee. The balance due from Circle as of December 31, 2013 and June 30, 2013 was $
70
and $
23
, respectively.
The Company also entered into a shared services agreement with SFX, a company affiliated with Mr. Sillerman, pursuant to which it shares costs for legal and administrative services in support of Mr. Nelson and several other of the Company's employees. The shared services agreement provides, in general, for sharing generally based on the services provided by Mr. Nelson and such other employees. Mr. Nelson and such other employees will continue to be paid by the Company, and SFX will either reimburse Circle (which will reimburse the Company, if applicable) or reimburse the Company directly for its portion of such salary and benefits (but not for any bonus, option or restricted share grant made by either company, which will be the responsibility of the company making such bonus, option or restricted share grant). The agreement provides for the Chief Executive Officer or President of each company to meet periodically to assess whether the services have been satisfactorily performed and to discuss whether the allocation has been fair. The Audit Committee of each company's Board of Directors will then review and, if appropriate, approve the allocations made and whether payments need to be adjusted or reimbursed, depending on the circumstances. Because this transaction is subject to certain rules regarding “affiliate” transactions, the Company's Audit Committee and a majority of the independent members of the Company's Board of Directors have approved this shared services agreement. For the three and six months ended December 31, 2013, the Company billed SFX $
154
and
$285
, respectively. No amounts were billed to SFX during the three and six months ended December 31, 2012. The balance due from SFX as of December 31, 2013 and June 30, 2013 was $
39
and
$47
, respectively.
Certain Company accounting personnel may provide personal accounting services to Mr.. Sillerman. To the extent that such services are rendered, Mr. Sillerman shall reimburse the Company therefor. The reimbursement for any such services shall be reviewed by the Company's Audit Committee. For the three and six months ended December 31, 2013, the Company billed Mr. Sillerman $
8
and $
8
, respectively. For the three and six months ended December 31, 2012, the Company billed Mr. Sillerman
$78
and
$148
, respectively. The balance due from Mr. Sillerman as of December 31, 2013 and June 30, 2013 was $
7
and $
0
, respectively.
Lines of Credit
See Note 6, Loans Payable, for a description of certain loans which have been provided by related parties.
12. Fair Value Measurement
The Company values its assets and liabilities using the methods of fair value as described in ASC 820,
Fair Value Measurements and Disclosures
. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of fair value hierarchy are described below:
Level 1
– Quoted prices in active markets for identical assets or liabilities.
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-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
– Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counter-party credit risk in its assessment of fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available. The Company has certain liabilities that are required to be recorded at fair value on a recurring basis in accordance with accounting principles generally accepted in the United States, as described below.
The Company issued
1,709,091
warrants in connection with the May 10, 2012 PIPE. Each warrant has a sale price of $
5.50
and is exercisable into
1
share of common stock at a price of $
8.00
over a term of
3 years
. Further, the exercise price of the warrants is subject to "down round" protection, whereby any issuance of shares at a price below the current price resets the exercise price equal to a price equal to the price of the newly issued shares (the "Warrants"). In connection with the PIPE Exchanges described in Note 8, Stockholders' Equity, the exercise price of the Warrants was reset to
$1.15
on September 16, 2013. The fair value of the warrants has been determined utilizing the Binomial Lattice Model in accordance with ASC 820-10,
Fair Value Measurements.
The fair value of the warrants when issued was $
5,281
and was $
443
as of June 30, 2013. As described in Note 6, Loans Payable,
545,455
warrants were exchanged on September 16, 2013. The remaining
1,163,636
warrants were marked to market as of December 31, 2013 to a fair value of $
175
. The Company recorded a gain of $
267
and $
3,683
to other income, net in the accompanying Consolidated Statements of Operations for the six months ended December 31, 2013 and 2012, respectively. The Company's warrants were classified as Level 3 within the fair value hierarchy because they were valued using unobservable inputs and management's judgment due to the absence of quoted market prices and inherent lack of liquidity.
The Company issued $
20,782
of
8%
secured convertible notes (“
8%
Notes”), which were due to mature on March 11, 2016. The
8%
Notes allowed for, at any time at the option of the holder thereof, conversion into shares of the Company's common stock at a conversion price equal to $
1.25
per share, subject to customary adjustments for stock splits, combinations, dividends, or recapitalization. Further, the conversion price was subject to "down round" protection, whereby any dilution above
33%
required the consent of a majority of holders of the
8%
Notes, after which the
8%
Notes would receive weighted-average share dilution protection. The Company previously determined that, due to the nature of the "down round" protection, the conversion feature was an embedded derivative in accordance with ASC 815-15-25,
Derivatives and Hedging.
The embedded derivative was bifurcated from the host contract and recorded at its fair value utilizing the Binomial Lattice Model in accordance with ASC 820-10,
Fair Value Measurements.
The embedded derivative was classified as Level 3 within the fair value hierarchy because it was valued using unobservable inputs and management's judgment due to the absence of quoted market prices and inherent lack of liquidity.
The fair value of the embedded derivative when issued was $
6,662
, which was recorded as stock compensation cost due to the fact that the
8%
Notes were owned 100% by an executive officer of the Company. The fair value of the embedded derivative at June 30, 2013 and September 16, 2013 was
$3,870
and
$3,854
, respectively. The Company recorded a gain of
$16
to other income,
net in the Consolidated Statements of Operations for the quarter ended September 30, 2013. In connection with the Note Exchange Agreement described in Note 6, Loans Payable, the embedded derivative no longer existed after September 16, 2013.
As discussed in Note 2, Line of Business and Recent Acquisition, the Company estimated the fair value of contingent consideration for the acquisition of Wetpaint at $
6,100
. As of December 31, 2013, the fair value of the contingent consideration was estimated to be $
5,400
. The Company recorded a gain of $
700
to other income, net in the accompanying Consolidated Statements of Operations for the three and six months ended December 31, 2013. The fair value of the contingent consideration were classified as Level 3 within the fair value hierarchy because it was valued using unobservable inputs and management's judgment.
The following table presents a reconciliation of items measured at fair value on a recurring basis using unobservable inputs (level 3):
|
|
|
|
|
|
(in thousands)
|
Balance at June 30, 2013
|
$
|
4,313
|
|
Additions to Level 3
|
6,100
|
|
Unrealized gains for the period included in other income, net
|
(892
|
)
|
Extinguishments
|
(3,946
|
)
|
Balance at December 31, 2013
|
$
|
5,575
|
|
|
|
13. Subsequent Events
On January 29, 2014, the Company acquired Dijit Media, a San Francisco based maker of award-winning technology that helps consumers search for, find, and set reminders for their favorite TV shows and movies wherever they are offered. Pro forma financial statements for this acquisition are not required.
On January 31, 2014, the Company entered into a Revolving Loan Agreement (the “Revolving Line”) with Deutsche Bank Trust Company Americas (“Deutsche Bank”), under which Deutsche Bank agreed to loan the Company up to $
2,500
. In addition, amounts outstanding under the Revolving Line may not exceed
85%
of the Company's eligible accounts receivable at any time. The Company may, from time to time, request advances from the Revolving Line in amounts of no less than $
500
. Interest on the outstanding balance may, at the Company’s election, be charged at a rate per annum equal to the LIBOR Rate plus
4.00%
or (ii) the Prime Rate plus
1.75%
. Interest is payable monthly in arrears. The Company paid a $
50
facility fee from the initial draw of $
1,000
made at closing. The Revolving Line matures on April 30, 2014. The Company may make prepayments, in whole or in part, under the Revolving Line at any time, as long as all accrued and unpaid interest thereon is paid through the prepayment date. The Revolving Line is secured by a lien on all of the Company's assets. Repayment of the Revolving Line was guaranteed by Mr. Sillerman.