Item 2.01. Completion of
Acquisition or Disposition of Assets.
Sale of Plaor, Inc.
On March 18, 2016, CrowdGather, Inc., a Nevada corporation (the
“Registrant,” “Crowdgather,” the “Company,” “our,” or “we”) completed
a Stock Purchase Agreement (“SPA”) to sell our subsidiary Plaor, Inc. (“Plaor”) to Native Games America,
LLC (“NGA”). Total consideration offered was $3,500,000 in aggregate including cash, debt and liability assumption
as well as deferred payments. The terms of the sale included an upfront cash payment of $200,000, the assumption of approximately
$1,800,000 of CrowdGather debt, assumption of approximately $500,000 of Plaor liabilities, and a deferred payment of nearly $1,000,000
twelve months following the closing of the sale. Immediately prior to closing, CrowdGather held approximately
$2,600,000 net intangible asset value and $1,800,000 of goodwill related to the purchase of Plaor. As a result we expect
to record a loss of approximately $900,000 related to this transaction.
On November 24, 2015 we accepted a non-binding bid to sell our subsidiary
Plaor, Inc. (“Plaor”) to Native Games America, LLC (“NGA”). A definitive Stock Purchase Agreement was closed
on March 18, 2016 During our consideration of the terms and further discussion we received $164,000 in advance of the sale of Plaor
to NGA prior to January 31, 2016, reflected in our financial statements as current liabilities. Those funds were taken as reductions
of total consideration allocated between the $200,000 cash payment and the approximately $500,000 of Plaor liabilities with $12,000
and $152,000 to each respectively.
Cash Payment
A part of the total consideration paid to us for the sale of Plaor
we received $200,000 in cash. During the course of our consideration of the terms of the sale we received $20,000 in advance of
the sale. Upon closing we received the remaining $180,000.
Plaor Liabilities
At the time of the closing Plaor held approximately $500,000 of
liabilities. These liabilities included approximately $60,000 on a line of credit with Facebook, $140,000 of accounts payable,
$264,000 of deposits by NGA in advance of the sale of Plaor, and other liabilities. All of Plaor’s outstanding liabilities
remained Plaor liabilities in the sale of Plaor, effectively being assumed by the purchaser.
CrowdGather Debt
Approximately $1,800,000 of our debt was assumed by NGA as a component
of the consideration paid by NGA for the sale of Plaor. This debt was largely comprised of our secured notes entered into during
November and December 2014. It also included a secured note entered into in July 2016. As part of the assumption of debt NGA assumed
these notes and all accrued interest.
Deferred Payment
As part of the consideration paid by NGA
for Plaor, we are entitled to a payment of approximately $1,000,000 (the “Deferred Payment”) with six (6) equal payments
beginning in May 2017. The Deferred Payment will be reflected in our financial statements as a note receivable maturing in October
2017. We have pledged these funds to Vinay Holdings, one of our note holders, to secure our debt with them.
Divestiture Considerations
The terms of the sale did provide us with
not only working capital but also reduced our overall debt by approximately $2,300,000, or approximately 43% of our total liabilities.
In addition, a future deferred payment of nearly $1,000,000 (which has been pledged) will further reduce our liabilities by another
18% of our total liabilities if and when paid. In total, the sale of Plaor facilitates the reduction of our total liabilities as
of the time of this report by approximately 61%.
Plaor specialized in developing highly scalable multi-platform social
games that are available on Facebook, Google Play, and the Apple App Store. Plaor’s initial social gaming platform
was a simulated casino environment referred to as Mega Fame Casino wherein individual gamers are able to play online casino style
games socially with other players from around the world. Unlike traditional casinos or their online counterparts, the betting
on Mega Fame was virtual and no real money bets were accepted and there was no ability for a player to redeem their winnings for
cash.
Although we operated MegaFame casino at near breakeven operating
levels we found it difficult to raise the capital necessary to service historical debt payments and fund the required player acquisition
strategy we deemed necessary to allow Plaor to reach its full potential. Those challenges combined with an increasingly competitive
market fueled by consolidation posed what we believed were significant future challenges to our strategic initiative to grow the
social games business at the rate we determined was needed.
In evaluating the offer and sale of Plaor we considered many important
factors including the current and on going negative cash flow of the operations, the difficulties encountered raising additional
working capital in such a condition, including the extremely high cost of such capital, and the additional time and working capital
needed to achieve positive cash flow and more favorable operating conditions. In addition to the operating factors, we also considered
the approximately $1,800,000 of direct debt relief, $500,000 of other current liability relief, and potential of more than $900,000
for additional debt relief included as part of the consideration in the sale of Plaor, Inc. as relevant to our decision.
We believe that the sale of Plaor, Inc may help shareholder value
by allowing the company to refocus on its core business of forums and social network. With the assignment of more than 40% of our
existing debt and the potential to offset and reclassify 15% more of our debt we believe that we have achieved a more efficient
capital structure with considerably less financial leverage and, as a result, have achieved a meaningful reduction of financial
risk levels as opposed to our former leverage levels.
With the sale of the Plaor gaming asset, CrowdGather continues to
hold over $4,000,000 of forum publishing assets generating approximately $450,000 in annualized revenues. We intend to focus
on procuring additional financing and achieving break even from operations by the end of calendar 2016. The Company is also in
discussions with the owners of cannabis related media and digital assets with an eye towards building a larger portfolio of properties
in this sector as a major growth initiative at the Company and to complement CrowdGather's remaining business.
Assumed Debt from which CrowdGather, Inc. has been released
The specific notes assumed by NGA in connection with the sale of
Plaor, Inc. are summarized below.
Notes and Warrant Purchase Agreements
|
Notes Assumed By Purchaser
|
|
Instrument Date
|
|
Principal Value
|
|
|
|
|
|
|
|
Nov. 20, 2014
|
|
$
|
100,00
|
|
|
Nov. 21, 2014
|
|
$
|
150,000
|
|
|
Dec. 01, 2015
|
|
$
|
1,100,000
|
|
|
Dec. 02, 2015
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,550,000
|
|
In the cases of each instrument summarized in the table above and
detailed in the paragraphs below we determined the embedded warrants attached to the notes meet the definition of a derivative
under ASC 815 and require bifurcation and are accounted for as separate embedded derivatives. We have estimated the
fair market value of the embedded derivatives of the notes as the difference between the fair market value of the notes with the
conversion feature and the fair market value of the notes without the conversion feature associated with the embedded derivative,
in both cases using relevant market data. In the case of the fair market value of the notes with the conversion feature, a binomial
lattice model was used utilizing a discount rate based on variable conversion probability. In the case of the fair market value
of the notes without the conversion feature associated with the embedded derivative, a discounted cash flow approach was used.
The key valuation assumptions used consist of the price of our common stock, a risk free interest rate based on the average yield
of a similarly termed Treasury Note and the historical volatility of our common stock over a period of similar length to the term
of the instrument, all as of the measurement dates. The embedded derivatives were recorded on the balance sheet at their estimated
fair values. Debt discounts are amortized over the life of the debt using the effective interest rate method. The fair value of
the embedded derivative will be measured and recorded at fair value each subsequent reporting period and changes in fair value
will be recognized in the statement of operations as a gain or loss on derivative
We have recorded each of the instruments’ derivative
liability balances on our balance sheet in the Derivative liabilities account; the carrying amount of each host contract has been
recorded in Notes payable, net of discount; on our statement of operations we have recorded gains (losses) resulting from fair
value adjustments in Change in fair value of derivative liabilities; we have recognized the amortization costs in Interest expense,
net
Modifications of Secured Notes and Warrant Purchase
Agreements
On November 20, 2014 and November 21, 2014, we entered into
two Note and Warrant Purchase Agreements with two investors (“Investors”) providing for the purchase
of Secured Promissory Notes (“Notes”) in the aggregate principal amount of $250,000 and warrants to purchase an
aggregate amount of 1,250,000 shares of our common stock (the “Warrants”). The Notes were issued on November 20,
2014 and November 21, 2014, respectively. The Notes bear interest at the rate of 12% per annum and were due and payable one year
from the date of issuance. The investors have granted waivers of default valid until April 17, 2016 and the notes are currently
in good standing. The Warrants grant the Investors the right to purchase five shares of our common stock for every one dollar
of principal of the Notes purchased by the Investors at an exercise price equal to 110% of the closing price of our common stock
on the date of investment. The Warrants have an exercise term equal to five years and are exercisable commencing on
November 20, 2014 and November 21, 2014, respectively. In connection with the issuance of the Notes, we entered into a security
agreement with the Investors to secure the timely payment and performance in full of our obligations pursuant to the Notes. Each
of these notes has been assumed by NGA as part of the sale of Plaor, Inc. The full carrying value and accrued interest have been
extinguished as a result of the sale while the warrants and related derived liabilities will remain with CrowdGather, Inc.
On December 2, 2014, we entered a Note and Warrant Purchase
Agreement with one investor providing for the purchase of a Secured Promissory Note (“Note”) in the principal
amount of $200,000 and warrants to purchase 1,000,000 shares of our common stock (the “Warrants”). The
Note was issued and funded on December 2, 2014. The Note bears interest at the rate of 12% per annum and was due and payable one
year from the date of issuance. The investors have granted waivers of default and the notes are currently in good standing. The
Warrants grant the investor the right to purchase five shares of our common stock for every one dollar of principal of the
Note purchased by the investor at an exercise price of $0.11 per share which is equal to 110% of the closing price of our common
stock on the date of investment. The Warrants have an exercise term equal to five years and are exercisable commencing
on the date of issuance. In connection with the issuance of the Note, we entered into a security agreement with the investor to
secure the timely payment and performance in full of our obligations pursuant to the Note, which has now been assumed by the purchaser
.
The full carrying value and accrued interest have been extinguished as a result of the sale while the warrants and related
derived liabilities will remain with CrowdGather, Inc.
Modification of Exchange Notes and Warrant Purchase Agreements
On December 1, 2014, we entered into a
separate exchange agreement with each holder (collectively, the “Holders”) of (i) shares of our Series B Preferred
Stock (“Preferred Stock”), and (ii) warrants to purchase 10,000,000 shares of our common stock issued in connection
with the Preferred Stock (the “Old Warrants”) pursuant to which we issued Secured Promissory Notes (“Exchange
Notes”) in the aggregate principal amount of $1,100,000 and warrants to purchase 5,500,000 shares of our common
stock (the “Exchange Warrants”) to the Holders in the amounts as specified in the separate Exchange Agreements
in exchange for all of the issued and outstanding Preferred Stock and all of the Old Warrants held by the Holders. Following the
consummation of the transactions contemplated by each Exchange Agreement, the Preferred Stock and Old Warrants were no longer outstanding,
and we removed from reservation 30,000,000 shares of common stock underlying the Preferred Stock and Old Warrants. The Notes bear
interest at the rate of 12% per annum and were due and payable one year from the date of issuance. The investors have
granted waivers of default and the notes are currently in good standing. The Exchange Warrants grant the Holders the right to purchase five
shares of our common stock for every one dollar of principal of the Exchange Notes issued to the Holders at an exercise price equal
to $0.11 per share. The Exchange Warrants have an exercise term equal to five years and are exercisable commencing on
December 3, 2014. In connection with the issuance of the Exchange Notes, we entered into a security agreement with the Holders
to secure the timely payment and performance in full of our obligations pursuant to the Exchange Notes, which Notes have been assumed
by the purchaser. The full carrying value and accrued interest have been extinguished as a result of the sale while the warrants
and related derived liabilities will remain with CrowdGather, Inc.