NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation and Consolidation
Overview
On January 27, 2016, Function(x) Inc. ("Company", "Function(x)" and "we") changed its name from Viggle Inc. to DraftDay Fantasy Sports, Inc. ("DraftDay"), and changed its ticker symbol from VGGL to DDAY. On June 10, 2016, the Company changed its name from DraftDay Fantasy Sports, Inc. to Function(x) Inc., and changed its ticker symbol from DDAY to FNCX. It now conducts business under the name Function(x) Inc.
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, and DraftDay Gaming Group, Inc. ("DDGG"). The Company has
nine
wholly-owned subsidiaries, Function(x) Inc., Project Oda, Inc., Sports Hero Inc., Loyalize Inc., Viggle Media Inc., VX Acquisition Corp., Nextguide Inc., Wetpaint.com, Inc. ("Wetpaint"), and Choose Digital, Inc. ("Choose Digital"), each a Delaware corporation. DraftDay owns approximately
60%
of the issued and outstanding common stock of DDGG, and also appoints a majority of the members of its Board of Directors.
On September 8, 2015, the Company and its newly created subsidiary DraftDay Gaming Group, Inc. (“DDGG”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with MGT Capital Investments, Inc. (“MGT Capital”) and MGT Sports, Inc. (“MGT Sports”), pursuant to which the Company acquired all of the assets of the DraftDay.com business (the “DraftDay Business” or "DraftDay.com") from MGT Capital and MGT Sports.
In December 2015, as a result of the sale of certain assets to Perk and acquisition of the DraftDay Business, we reorganized the organizational management and oversight of the Company into three segments (see Note 4, Segments). Accordingly, prior period financial information has been recast to confirm to the current period presentation. These changes impacted Note 4: Segments and Note 3: Summary of Significant Accounting Policies, with no impact on consolidated net loss or cash flows in any period.
On February 8, 2016, the Company completed the sale of assets related to the Company’s rewards business, including the Viggle App, in accordance with the Asset Purchase Agreement (the "Perk Agreement") with Perk.com, Inc. ("Perk") entered into on December 13, 2015. Management entered into this binding sales agreement following a strategic decision to divest the operations related to the Viggle App and place greater focus on its remaining businesses. The assets, liabilities and operations related to Loyalize Inc., and Nextguide Inc. (as well as the portion of the assets relating to our discontinued rewards business within the Company) have been classified as discontinued operations on the accompanying consolidated financial statements for all periods presented. In accordance with Accounting Standards Codification ("ASC") No. 205,
Presentation of Financial Statements
, the inter-segment revenues and expenses related to services provided by Choose Digital to the Viggle rewards business (discontinued operations) are presented at cost in the Consolidated Statements of Operations.
On July 12, 2016, the Company and RACX Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“RACX”), completed an acquisition pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rant, Inc., a Delaware corporation, pursuant to which RACX has acquired the assets of Rant (the “Asset Purchase”) used in the operation of Rant’s Rant.com independent media network and related businesses (the “Rant Assets”). The Company acquired assets of Rant for approximately
$1,990
in assumed liabilities, a
$3,000
note, and
4,435
shares of Series E Convertible Preferred stock which, upon satisfaction of certain conditions including shareholder approval, will be convertible into shares of our common stock equal to
22%
of the fully diluted shares outstanding, in a move to become a market leader in social publishing.
On September 16, 2016,the Company amended its Certificate of Incorporation to effect a reverse stock split of all issued and outstanding shares of common stock at a ratio of 1 for 20 (the "Reverse Stock Split"). Owners of fractional shares outstanding after the Reverse Stock Split will be paid cash for such fractional interests. The effective date of the Reverse Stock Split is September 16, 2016. All common stock share amounts disclosed in these financial statements have been adjusted to reflect the Reverse Stock Split.
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 and the Company's ability to cure the events of default (Note 16, Subsequent Events.) 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 and therefore there is substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties, including the events of default.
2. Lines of Business
The Company conducts business through
three
operating segments:Wetpaint, Choose Digital, and DDGG. These operating segments are described below.
Through 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 55 new articles, videos and galleries each day. The Company generates revenues through wetpaint.com by displaying advertisements to wetpaint.com users as they view its content.
To enhance our digital publishing business, the Company recently acquired assets of Rant Inc. ("Rant'), a leading digital publisher that publishes original content in
13
different verticals, most notably in sports, entertainment, pets, cars, and food. The combined Wetpaint and Rant properties currently have approximately
13.5 million
fans on their Facebook pages and generate an average of
14.4 million
visits per month.
Choose Digital is a white-label digital marketplace featuring a recent and wide range of digital content, including music, movies, TV shows, eBooks and audiobooks. The content is sourced from the world’s leading record companies and book publishers and an aggregator of movie and TV content. Choose Digital generates revenues when participants in Choose Digital's clients' loyalty programs redeem loyalty credits for digital content provided by Choose Digital. For example, if a participant in a loyalty program redeems credits for a song download provided by Choose Digital, the client loyalty program pays Choose Digital for the download.
The Company's wholly owned subsidiary, DDGG, made a recent investment in the DraftDay.com platform. Through DraftDay.com, users can draft a fantasy sports team within a salary cap, follow game action and reap rewards. DraftDay.com will continue to offer high-quality entertainment to consumers as well as to businesses desiring turnkey solutions to new revenue streams. See Note 6, Acquisitions, for further details on 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
months ended
September 30, 2016
are not necessarily indicative of the results that may be expected for the year ending June 30, 2017.
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 leases of office space.
Marketable Securities
In February 2016, the Company received
1,370,000
shares of Perk's stock, which is publicly traded on the Toronto Stock Exchange, as part of the consideration in the sale of assets described in the Perk Agreement. These securities are short-term marketable securities, and have been classified as “available-for-sale” securities. Pursuant to Accounting Standards Codification ("ASC") 320-10, “
Investments - Debt and Equity Securities
” the Company's marketable securities are marked to market on a quarterly basis, with unrealized gains and losses recorded in equity as Other Comprehensive Income/Loss. On September 30, 2016, the Company sold to Perk the remaining shares (
1,013,068
) of Perk common stock, the warrants for additional shares, and the right
to the Earn-Out Shares received from Perk on the sale of the Viggle rewards business on February 8, 2016. The Company received
$1,300
from Perk as consideration therefor. The execution of the Securities Purchase Agreement and closing were simultaneous. In connection with the sale of the Perk shares, the warrants for additional shares and the right to the Earn-Out Shares, the Company recorded a loss of
$2,193
in the Other Expense line item of the Consolidated Statements of Operations for the three months ended September 30, 2016.
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
September 30, 2016
and June 30, 2016 was
$20
.
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 months ended
September 30, 2016
and
September 30, 2015
were $
0
.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount of Perk marketable securities held is marked-to-market on a quarterly basis using the closing day share price of the last business day of the quarter. The changes to fair value are recorded in Other Comprehensive Income/Loss. The carrying amount of Perk warrants held is marked-to-market on a quarterly basis using the Monte Carlo valuation model. The changes to fair value are recorded in the Consolidated Statement of Operations. The carrying amount of loans payable approximates fair value as current borrowing rates for the same, or similar issues, are the same as those that were given to the Company at the issuance of these loans.
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 that 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.
Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method of accounting. The Company allocates the purchase price of acquired companies to the identifiable assets acquired, liabilities assumed and any non-controlling interest based on their acquisition date estimated fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Any contingent consideration to be transferred to the acquiree is recognized at fair value at the acquisition date.
Determining the fair value of assets acquired and liabilities assumed requires the Company to make significant estimates and assumptions, including assumptions related to future cash flows, discount rates, asset lives and the probability of future cash pay-outs related to contingent consideration. The estimates of fair value are based upon assumptions believed to be reasonable by management, but are inherently uncertain and unpredictable and, therefore, actual results may differ from estimates. As a result,
during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Consolidated Statements of Operations.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company's reporting units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.Where goodwill has been allocated to a reporting unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative fair values of the disposed operation and the portion of the reporting units retained.
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. As noted above, the Company has three reporting units. 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 carry amount to determine if there is an impairment loss.
Historically, the Company had
one
reporting unit. However, in connection with the sale of a significant portion of the Company's assets (see Note 1, Basis of Presentation and Consolidation), the remaining operations were divided into
three
reporting units (see Note 4, Segments). The Company engaged a third-party valuation firm to test the Choose Digital and Wetpaint reporting units for goodwill impairment. The DDGG reporting unit was not tested for impairment at December 31, 2015 as the acquisition of this entity occurred in September 2015. The Company determined that the fair value of both of the Wetpaint and Choose Digital reporting units were significantly below their respective carrying values, indicating that goodwill related to these reporting units may be impaired. The Company determined the fair value of all long-lived assets other than goodwill related to each reporting unit and calculated the residual goodwill value for each. Upon comparing the residual goodwill values to the respective carrying values, the Company determined that there was an impairment loss on both the Choose Digital and Wetpaint reporting units.
The Company recorded an impairment loss of $
4,335
related to the Choose Digital reporting unit and $
10,708
related to the Wetpaint reporting unit during the three months ended December 31, 2015. Upon the finalization of the December 31, 2015 Choose Digital and Wetpaint goodwill impairment analysis, the consolidated goodwill ending balances as of March 31, 2016 were adjusted by
$3,350
at June 30, 2016. The Company also recorded an additional goodwill impairment loss of
$1,672
in the Selling, general and administrative expense line and reduced the gain on the sale of the Viggle Business by
$1,672
in the Consolidated Statement of Operations during the nine months ended March 31, 2016 as a result of the finalization of the December 2015 Choose Digital and Wetpaint impairment analysis. There were
no
impairments recorded during the three months ended
September 30, 2016
.
At June 30, 2016, the Company determined that the fair value of the DDGG reporting unit was significantly below its carrying value, indicating that goodwill may be impaired. The Company determined the fair value of all long-lived assets other than goodwill and calculated the residual goodwill for the reporting unit. The residual goodwill was higher than the carrying value of goodwill related to the DDGG reporting unit, therefore the Company did not record an impairment loss for DDGG goodwill during the year ended June 30, 2016.
Other Long-Lived Assets
The Company accounts for the impairment of long-lived assets other than goodwill in accordance with ASC 360, “
Property, Plant, and Equipment”
("ASC 360"), 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 (fair value) 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.
At June 30, 2015, the Company determined that certain intangible assets related to the acquisition of Choose Digital (see Note 6, Acquisitions for further detail regarding the Choose Digital acquisition) were impaired. Due to a shift in the Company's business operations and utilization of its resources, during the fourth quarter of fiscal 2015 the Company determined that intangible assets related to customer relationships and trade name no longer had value. Therefore, such assets were written off as of June 30, 2015. The total amount of the write-off was
$2,086
.
At December 31, 2015, as described above, the Company determined that the fair value of the Choose Digital and Wetpaint reporting units tested was significantly below the respective carrying values and assessed the fair values of the long-lived assets other than goodwill for each reporting unit. Upon comparing the fair values of the long-lived assets to their respective carrying values, the Company recorded a loss of $
1,331
on intangible assets related to Choose Digital's software and licenses, and a loss of $
11,418
on intangible assets related to Wetpaint's technology, trademark, customer relationships and non-competition agreements, during the three months ended December 31, 2015.
No
impairments were recorded during the three months ended
September 30, 2016
.
At June 30, 2016, the Company determined that certain intangible assets related to the acquisition of Draftday.com were impaired. At June 30, 2016, DDGG's Management Services Agreement By and Between DraftDay Gaming Group, Inc. and Sportech Racing, LLC ("Sportech MSA") terminated, which led to a significantly lower revenues forecast for the reporting unit. As a result, the Company determined that the intangible assets related to internally developed software, trade name and non-compete agreements were impaired. The Company recorded a loss of
$749
on intangible assets related to DDGG during the year ended June 30, 2016.
No
impairments were recorded during the three months ended
September 30, 2016
.
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 amount of
$1,498
as of
September 30, 2016
and $
1,498
as of June 30, 2016, 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. The change in capitalized software is due to impairment of long-term assets related to the Choose Digital and Wetpaint businesses described earlier, as well as the abandonment of certain technology as of January 1, 2016, and internal development costs.
DDGG Player Deposits
The Company maintains a separate bank account to hold player deposits in accordance with current industry regulations. The player deposits bank account represents money reserved for player withdrawals and winnings. Accordingly, the Company records an offsetting liability at the time of receipt of player deposits.
Deferred Rent
The Company leases its corporate office, and as part of the lease agreement the landlord provided a rent abatement for the first
10 months
of the lease. In 2014, the Company entered into
two
lease agreements for its satellite offices which provided for tenant improvement work sponsored by the landlords. The abatement and landlord sponsored improvements have 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. The satellite office leases were terminated in Fiscal 2016. The Company wrote-off residual leasehold improvement and deferred rent balances related to landlord sponsored tenant improvement work, and recorded a write-off of
$83
in the Consolidated Statements of Operations for the year ended June 30, 2016.
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 third-party advertising via real-time bidding, which is typically sold on a per impression basis.
Deferred Revenue
: deferred revenue consists principally of prepaid but unrecognized revenue. 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 Emerging Issues Task Force 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 in the amount of $
0
and
$2,609
for the three months ended
September 30, 2016
and
September 30, 2015
, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, "
Compensation - Stock Compensation"
("ASC 718"). 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 Company for the
three
months ended
September 30, 2016
and
September 30, 2015
was
$32
and
$3,321
, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in ASC 740, "
Income Taxes"
("ASC 740"). 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. The Company assesses its income tax positions and record tax benefits for all years subject to examination based upon the Company's 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, the Company's 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.
Comprehensive Loss
In accordance with ASC 220,
"Comprehensive Income"
, the Company reports by major components and as a single total, the change in its net assets during the period from non-owner sources. Comprehensive income consists of net income (loss), accumulated other comprehensive income (loss), which includes certain changes in equity that are excluded from net income (loss). The Company’s comprehensive loss for all periods presented is related to the effect of unrealized gain on available for sale marketable securities.
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.
During the three months ended September 30, 2016, there have been no significant changes related to the Company's critical accounting policies and estimates as disclosed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2016.
Recently Issued Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory” (ASU 2016-16”). This update eliminates the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. ASU 2016-16 is effective for financial statements issued for annual periods beginning after December 15, 2017. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In May 2016, FASB issued Accounting Standards Update 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"). The amendments in this update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which is not yet effective. This update focuses on improving several aspects of ASU 2014-09, such as assessing the collectability criterion in paragraph 606-10-25-1(e) and accounting for contracts that do not meet the criteria for step 1; presentation of sales taxes and other similar taxes collected from customers; noncash consideration; contract modifications at transition; and completed contracts at transition. ASU 2016-12 is effective for financial statements issued for annual periods beginning after December 15, 2017. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In April 2016, the FASB issued Accounting Standards Update 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10"). The amendments in this update affect the guidance in ASU 2014-09, which is not yet effective. This update focuses on clarifying the following two aspects of ASU 2014-09: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. ASU 2016-10 is effective for financial statements issued for annual periods beginning after December 15, 2017. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-09,
Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU
2016-09"). This update is intended to improve the accounting for employee share-based payments and affects all organizations
that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award
transactions are simplified, including:(a)income tax consequences;(b)classification of awards as either equity or liabilities; and(c) classification on the statement of cash flows. ASU 2016-09 is effective for financial statements issued for annual periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-09 on its financial statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02
requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a
lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its financial statements.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments- Overall: Recognition
and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). Additionally, it requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Lastly, the standard eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for financial statements issued for annual periods beginning after December 15,
2017, and interim periods within those annual periods. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, “Income taxes: Balance Sheet Classification
of Deferred Taxes Business” (“ASU 2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred income tax
liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities
and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, ASU 2015-17 requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standard Update No. 2015-16,
Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments
("ASU 2015-16"). This standard requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the ASU 2015-16 require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017 (July 1, 2017 for the Company). The Company does not believe that the adoption of ASU 2015-16 will have a material impact on its consolidated financial statements.
4. Segments
Historically, the Company had
one
operating segment. However, in connection with the sale of the Viggle rewards business (discontinued operations) to Perk in February 2016, which represents a significant portion of the Company's assets and revenues, the Company's remaining operations were divided into
three
operating segments. These segments offer different products and services and are currently presented separately in internal management reports, and managed separately.
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Wetpaint:
a media channel reporting original news stories and publishing information content covering top television shows, music, celebrities, entertainment news and fashion.
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•
|
Choose Digital
: a business-to-business platform for delivering digital content.
|
|
|
•
|
DDGG
: a business-to-business operator of daily fantasy sports.
|
The accounting policies followed by the segments are described in Note 3, Summary of Significant Accounting Policies. The operating segments of the Company include the assets, liabilities, revenues and expenses that management has determined are specifically or primarily identifiable to each segment, as well as direct and indirect costs that are attributable to the operations of each segment. Direct costs are the operational costs that are administered by the Company following the shared services concept. Indirect costs are the costs of support functions that are provided on a centralized or geographic basis by the Company, which include, but are not limited to, finance, human resources, benefits administration, procurement support, information technology, legal, corporate strategy, corporate governance and other professional services and general commercial support functions.
Central support costs have been allocated to each operating segment based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method (primarily based on net sales or direct payroll costs), depending on the nature of the services received. Management considers that such allocations have been made on a reasonable basis, but may not necessarily be indicative of the costs that would have been incurred if the operating segments had been operated on a stand-alone basis for the periods presented.
Information regarding the results of each reportable segment is included below. Performance is measured based on unit profit after tax, as included in the internal management reports that are reviewed by the chief operating decision maker, who is the Company's Chief Executive Officer. Business unit profit is used to measure performance as management believes that such information is the most relevant in evaluating the success of each business and determining the going forward strategy for the Company as a whole.
Information about reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Wetpaint
|
|
Choose Digital
|
|
DDGG
|
|
Total
|
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
External revenues
|
371
|
|
516
|
|
|
58
|
|
198
|
|
|
105
|
|
83
|
|
|
534
|
|
797
|
|
Inter-segment revenues (1)
|
—
|
|
—
|
|
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, net of income taxes (2)
|
(2,077
|
)
|
(1,857
|
)
|
|
(401
|
)
|
(484
|
)
|
|
(752
|
)
|
26
|
|
|
(3,230
|
)
|
(2,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
|
|
|
(1) The Choose Digital business provides digital content to the Viggle business. These inter-segment revenues are presented at Choose Digital's cost in this schedule and in the consolidated statements of operations.
|
(2) The net loss figures presented exclude certain corporate expenses detailed in the reconciliation to the consolidated net loss below.
|
(3) Assets and liabilities are not presented as they are reviewed at the consolidated level by management and not accounted for by segment.
|
Reconciliation of revenues attributable to reportable segments to consolidated revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
Revenues attributable to reportable segments
|
$
|
534
|
|
|
$
|
797
|
|
Licensing revenues related to SFX licensing agreement
|
125
|
|
|
125
|
|
Other revenues
|
—
|
|
|
—
|
|
Revenues per Consolidated Statements of Operations
|
$
|
659
|
|
|
$
|
922
|
|
Reconciliation of net loss for reportable segments, net of income taxes to consolidated net loss from continuing operations, net of income taxes:
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
Net loss for reportable segments, net of income taxes
|
(3,230
|
)
|
|
(2,315
|
)
|
Other net gain (loss)
|
(2,478
|
)
|
|
—
|
|
|
(5,708
|
)
|
|
(2,315
|
)
|
|
|
|
|
Stock compensation related to corporate financing activities (1)
|
—
|
|
|
(4,250
|
)
|
Corporate expenses allocated to discontinued operations (2)
|
(158
|
)
|
|
(211
|
)
|
Interest expense (3)
|
(1,651
|
)
|
|
(856
|
)
|
Consolidated net loss from continuing operations, net of income taxes
|
(7,517
|
)
|
|
(7,632
|
)
|
|
|
|
|
Notes:
|
|
|
|
(1) Stock compensation expense related to RSUs, options and warrants issues in connection with financing activities. Expenses related to financing activities are considered to be corporate expenses and are not allocated to reportable segments.
|
(2) Certain corporate expenses were allocated to the Viggle segment, however such expenses are not classified as discontinued operations because they are fixed and are not affected by the sales transaction.
|
(3) Interest expense related to corporate debt instruments is not allocated to reportable segments.
|
Total assets for reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Wetpaint
|
|
Choose Digital
|
|
DDGG
|
|
Total
|
Total assets for reportable segments
|
$
|
21,740
|
|
|
$
|
5,273
|
|
|
$
|
4,021
|
|
|
$
|
31,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Wetpaint
|
|
Choose Digital
|
|
DDGG
|
|
Total
|
Total assets for reportable segments
|
$
|
8,495
|
|
|
$
|
5,416
|
|
|
$
|
3,740
|
|
|
$
|
17,651
|
|
Reconciliation of assets attributable to reportable segments to consolidated assets of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
Total assets for reportable segments
|
$
|
31,034
|
|
|
$
|
17,651
|
|
Other assets (1)
|
2,016
|
|
|
5,349
|
|
Total consolidated assets, net of current and non-current assets of discontinued operations
|
$
|
33,050
|
|
|
$
|
23,000
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
(1) Corporate assets that are not specifically related to any of the reporting units.
|
The Company continues to support the cash needs and operations of DDGG. As of
September 30, 2016
the Company has transferred $
736
to the DDGG subsidiary. A portion of these transfers, or
$500
, was funded as part of the purchase price commitment. The remaining transfers are part of the subscription agreement entered into with DDGG on May 12, 2016 (see Note 16, Subsequent Events).
On July 12, 2015, to enhance our digital publishing business, we recently acquired assets of Rant. Rant is a leading digital publisher that publishes original content in 13 different verticals, most notably in sports, entertainment, pets, cars, and food. Rant results of operations are included in the Company's digital publishing segment, Wetpaint.
5. Discontinued Operations
On February 8, 2016, the Company completed the sale of assets related to the Company’s rewards business, including the Viggle App, in accordance with the Perk Agreement entered into on December 13, 2015. Management entered into this binding sales agreement following a strategic decision to divest the operations related to the Viggle App and place greater focus on its remaining businesses. The Company has classified the Viggle assets, liabilities and operations as discontinued operations in the accompanying Consolidated Financial Statements for all periods presented. In accordance with ASC No. 205,
Presentation of Financial Statements
, the inter-segment revenues and expenses related to services provided by Choose Digital to the Viggle rewards business (discontinued operations) are presented at cost in the Consolidated Statements of Operations.
On December 13, 2015, the Parent entered into the Perk Agreement. Perk’s shares are currently traded on the Toronto Stock Exchange. On February 8, 2016, pursuant to the Perk Agreement, the Company completed the sale of the assets related to the Company’s rewards business, including Viggle’s application, to Perk. The total consideration received net of transaction fees was approximately
$5,110
,
and consisted of the following:
|
|
•
|
1,370,000
shares of Perk common stock, a portion of which was placed in escrow to satisfy any potential indemnification claims;
|
|
|
•
|
2,000,000
shares of Perk common stock if Perk’s total revenues exceed USD
$130,000
for the year ended December 31, 2016 or December 31, 2017;
|
|
|
•
|
a warrant entitling the Company to purchase
1,000,000
shares of Perk common stock at a strike price of CDN
$6.25
per share in the event the volume weighted average price (“VWAP”) of shares of Perk common stock is greater than or equal to CDN
$12.50
for
20
consecutive trading days in the
two
year period following the closing of the transaction;
|
|
|
•
|
a warrant entitling the Company to purchase
1,000,000
shares of Perk common stock at a strike price of CDN
$6.25
per share in the event that the VWAP of Perk common stock is greater than or equal to CDN
$18.75
for
20
consecutive trading days in the
two
year period following the closing of the transaction, and
|
|
|
•
|
Perk assumed certain liabilities of the Company, consisting of the Viggle points liability.
|
At the time the Company entered into the Perk Agreement, Perk provided the Company with a
$1,000
secured line of credit, which the Company fully drew down. The Company had the option of repaying amounts outstanding under that line of credit by reducing the number of Initial Perk Shares by
130,000
. The Company exercised this option and received
1,370,000
shares of Perk common stock at closing, and the amounts outstanding under the Line of Credit were deemed paid in full.
At the closing,
37.5%
(
562,600
) of the Initial Perk Shares were issued and delivered to an escrow agent to be used exclusively for the purpose of securing the Company's indemnification obligations under the Perk Agreement.
Additionally, after the closing, the Company delivered
357,032
of the Initial Perk Shares to Gracenote, Inc. and Tribune Media Services, Inc., former providers of technology services of the Company, as per the Settlement and Transfer Agreement dated February 5, 2016, to satisfy an obligation. The Company recognized a gain of
$593
in the Consolidated Statements of Operations for the year ended June 30, 2016.
On September 30, 2016, the Company sold to Perk the remaining shares (
1,013,068
) of Perk common stock, the warrants for additional shares, and the right to the Earn-Out Shares received from Perk on the sale of the Viggle rewards business on February 8, 2016. The Company received
$1,300
from Perk as consideration therefor. The execution of the Securities Purchase Agreement and closing were simultaneous. The escrowed shares were released as part of this transaction.
The Company recognized a gain of
$1,060
on this transaction, net of transaction fees associated with the sale of the Viggle rewards business.
Results of operations classified as discontinued operations:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
Revenues
|
$
|
—
|
|
|
$
|
4,130
|
|
Cost of watchpoints and engagement points
|
—
|
|
|
(2,022
|
)
|
Selling, general and administrative expenses
|
(36
|
)
|
|
(7,866
|
)
|
Loss before income taxes
|
(36
|
)
|
|
(5,758
|
)
|
|
|
|
|
Income taxes (see Note 13, Income Taxes)
|
—
|
|
|
(22
|
)
|
Net loss
|
$
|
(36
|
)
|
|
$
|
(5,780
|
)
|
Current assets and non-current assets used in discontinued operations:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
Current assets:
|
|
|
|
Accounts receivable, net
|
$
|
20
|
|
|
$
|
39
|
|
Prepaid expenses
|
—
|
|
|
—
|
|
Current assets of discontinued operations
|
$
|
20
|
|
|
$
|
39
|
|
|
|
|
|
Non-current assets:
|
|
|
|
Property and equipment, net
|
$
|
—
|
|
|
$
|
—
|
|
Intangible assets, net
|
—
|
|
|
—
|
|
Goodwill
|
—
|
|
|
—
|
|
Other assets
|
—
|
|
|
—
|
|
Non-current assets of discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities and non-current liabilities used in discontinued operations:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
2,609
|
|
|
$
|
2,634
|
|
Reward points payable
|
|
|
—
|
|
Current portion of loan payable
|
221
|
|
|
217
|
|
Current liabilities of discontinued operations
|
$
|
2,830
|
|
|
$
|
2,851
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
Other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
Non-current liabilities of discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
6. Acquisitions
Acquisition of Choose Digital
On June 24, 2014, the Company acquired Choose Digital, a Miami, Florida based, digital marketplace platform that allows companies to incorporate digital content into existing rewards and loyalty programs in support of marketing and sales initiatives.
In connection with the acquisition, the Company was required to make a contingent payment, which was due within
five
business days after June 24, 2015, of
$4,792
. Such amount was accrued in the accompanying Consolidated Balance Sheets as of June 30, 2015. On June 24, 2015, the Company determined that the maximum amount of contingent consideration of
$4,792
should be recorded. As such, the Company adjusted the original estimate of contingent consideration of
$2,570
to
$4,792
. The increase of
$2,222
was recorded as an expense and included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations for the year ended June 30, 2015. On July 31, 2015, the Company entered into a Forbearance Agreement with AmossyKlein Family Holdings, LLP ("AmossyKlein"), as representative of the former shareholders of Choose Digital Inc. (the “Stockholders”). The Forbearance Agreement provides that the Company will make monthly installment payments to the Stockholders, beginning on July 31, 2015 and ending on January 29, 2016. Specifically, the Company agreed to pay
$668
on July 31, 2015;
$532
on August 31, 2015;
$528
on September 30, 2015;
$524
on October 31, 2015;
$521
on November 30, 2015;
$517
on December 31, 2015; and
$1,754
on January 29, 2016. The scheduled payments include
$170
of interest and
$82
of legal fee charges. The Company agreed to deliver an affidavit of confession of judgment to be held in escrow by AmossyKlein’s counsel in the event the Company does not make such installment payments. The Company made the installment payments through December 2015, but failed to make the payment due on January 29, 2016.
On May 12, 2016. the Company and AmossyKlein entered into an amendment to the Forbearance Agreement to provide for the payment of the remaining
$1,754
. The Forbearance Agreement now provides that the Company will make a payment of approximately
$300
by May 18, 2016, and thereafter, the Company will make monthly payments of
$100
, plus interest at a rate of
9%
per annum, until the remaining amount is paid in full. In addition, the Company agreed to pledge
100,000
shares of common stock it holds in Perk.com, Inc. as collateral for these obligations. Finally, the Company agreed if it consummates a sale of a substantial part of its assets or a public equity offering, the Company will first apply the proceeds to remaining amounts due to AmossyKlein, except for payments to advisors or expenses necessary to close such transactions. The Company also delivered an amended confession of judgment that it had previously delivered to AmossyKlein, which will be held in escrow by AmossyKlein's counsel in the event the Company does not make installment payments as set forth in the amended Forbearance Agreement. During the three months ended September 30, 2016, the Company paid approximately
$400
under the Forbearance Agreement.
In addition, at June 30, 2015, due to a shift in business operations and utilization of resources during the fourth quarter of 2015, the Company determined that certain intangible assets related to the acquisition of Choose Digital no longer had value (see Note 3, Summary of Significant Accounting Policies). At December 31, 2015, the Company further determined that certain intangible assets and goodwill related to the acquisition of Choose digital were impaired (see Note 3, Summary of Significant Accounting Policies).
Acquisition of DraftDay.com
On September 8, 2015, the Company and its newly created subsidiary DDGG entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with MGT Capital Investments, Inc. (“MGT Capital”) and MGT Sports, Inc. (“MGT Sports”), pursuant to which the Company acquired all of the assets of the DraftDay.com business (the “DraftDay Business”) from MGT
Capital and MGT Sports. In exchange for the acquisition of the DraftDay Business, the Company paid MGT Sports the following: (a)
63,647
shares of the Company’s Common Stock, par value
$0.001
per share (“Common Stock”), (b) a promissory note in the amount of
$234
due September 29, 2015, (c) a promissory note in the amount of
$1,875
due March 8, 2016 (the "MGT Note"), and (d)
2,550
shares of common stock of DDGG. In addition, in exchange for providing certain transitional services, DDGG will issue to MGT Sports a warrant to purchase
1,500
shares of DDGG common stock at an exercise price of
$400
per share.
In addition, in exchange for the release of various liens and encumbrances, the Company also agreed to issue to third parties: (a)
4,232
shares of its Common Stock, (b) a promissory note in the amount of
$16
due September 29, 2015 and (c) a promissory note in the amount of
$125
due March 8, 2016, and DDGG issued: (i)
150
shares of its common stock and (ii) a warrant to purchase
150
shares of DDGG common stock at
$400
per share.
Accordingly, the Company issued a total of
67,879
shares of Common Stock in connection with the acquisition of the DraftDay Business.
The Company contributed the assets of the DraftDay Business to DDGG and received
11,250
shares of DDGG common stock.
The Asset Purchase Agreement contains customary representations, warranties and covenants of MGT Capital and MGT Sports. In addition, on September 8, 2015, DDGG entered into an agreement with Sportech Racing, LLC (“Sportech”) pursuant to which Sportech agreed to provide certain management services to DDGG in exchange for
9,000
shares of DDGG common stock.
As a result of the transactions described above, the Company owns a total of
11,250
shares of DDGG common stock, Sportech Inc., an affiliate of Sportech, owns
9,000
shares of DDGG common stock, MGT Sports owns
2,550
shares of DDGG common stock and an additional third party owns
150
shares of DDGG common stock. In addition, MGT Sports holds a warrant to purchase
1500
shares of DDGG common stock at an exercise price of
$400
and an additional third party holds a warrant to purchase
350
shares of DDGG common stock at
$400
per share. On September 8, 2015, the various stockholders of DDGG entered into a Stockholders Agreement (the “Stockholders Agreement”). The Stockholders Agreement provides that all stockholders will vote their shares of DDGG common stock for a Board comprised of
three
members,
two
of which will be designated by the Company and
one
of which will be designated by Sportech. Mr. Sillerman will serve as the Chairman of DDGG. The Stockholders Agreement also provides customary rights of first refusal for the various stockholders, as well as customary co-sale, drag along and preemptive rights.
As a result of the transactions described herein, the Company issued promissory notes in the aggregate principal amount of
$250
due and paid on September 29, 2015 and in the aggregate principal amount of
$2,000
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$2,000
in payments at the due date and on March 24, 2016 converted
$825
of the promissory notes to common stock and
$110
of the promissory notes to a Series D Preferred Stock (see Note 11, Stockholders' (Deficit) Equity). On April 13, 2016, MGT converted all
110
shares of the Company's Series D Preferred Stock into shares of common stock of the Company. Accordingly, the Company issued
18,332
shares of common stock to MGT. Thereafter, there are no shares of the Company's Series D Preferred Stock outstanding. On June 14, 2016, the Company entered into a second exchange agreement with MGT (the “Second MGT Exchange Agreement”) relating to the
$940
remaining due under the MGT Note. Under the Second MGT Exchange Agreement, the MGT Note shall be exchanged in full for (a)
$11
in cash representing accrued interest and (b)
132,092
shares of our common stock, subject to certain adjustments. Issuance of the shares is conditioned upon approval of the Company’s shareholders and approval of its listing of additional shares application with NASDAQ. On October 10, 2016, the Company satisfied the MGT Note through the issuance of
136,304
shares of its common stock and payment of interest of
$16
.
On December 28, 2015, DDGG's Board of Directors effectuated a 1-for-1,000 reverse stock split (the “1-for-1,000 Reverse Split”). Under the terms of the 1-for-1,000 Reverse Split, each share of DDGG's common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one-thousandth of one share of common stock, without any action by the stockholders. Fractional shares were cashed out.
On May 12, 2016, the Company entered into a subscription agreement with DDGG pursuant to which the Company agreed to purchase up to
550
shares of Series A Preferred Stock of DDGG for
$1
per share. DDGG also entered into a subscription agreement with Sportech pursuant to which Sportech agreed to purchase up to
450
shares of Series A Preferred Stock of DDGG for
$1
per share. In accordance with this agreement, the Company transferred a total of
$550
to the DDGG subsidiary since the date of acquisition and through November 20, 2016.
Kuusamo Warrants
In exchange for releasing certain liens and encumbrances with respect to DDGG, the Company issued promissory notes to Kuusamo Capital Ltd. ("Kuusamo Promissory Notes") in the principal amount of
$16
due and paid on September 29, 2015 and
in the aggregate principal amount of
$125
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$125
payment at the due date. On April 25, 2016, the Company also entered into an exchange agreement with Kuusamo Capital Ltd. (“Kuusamo"), pursuant to which the Company issued
10,394
shares of its common stock to Kuusamo in exchange for a reduction of
$71
in principal amount of a promissory note the Company owed to Kuusamo.
The outstanding balance of the Kuusamo Promissory Notes was
$55
and
$54
at September 30, 2016 and June 30, 2016, respectively. The Company recorded
$5
in interest expense for the year ended June 30, 2016.
Sportech MSA Termination
On April 12, 2016, DDGG entered into an amendment to the transitional management services agreement pursuant to which the DDGG's Management Services Agreement By and Between DraftDay Gaming Group, Inc. and Sportech Racing, LLC ("Sportech MSA") terminated effective June 30, 2016. Sportech paid a
$75
termination fee, to provide transitional services for 45 days, and has agreed to revert
4,200
shares of DDGG stock back to the Company on August 15, 2016. The Company had previously recorded the value of the services provided by Sportech under the Sportech MSA to prepaid assets, to be recognized as a professional services expense in the Consolidated Statements of Operations over the term of the agreement. Due to the termination of the agreement, the Company reduced prepaid assets and non-controlling interest accounts for the value of the returned
4,200
shares of DDGG stock, and expensed the remaining value of the Sportech services, except for 45 days of transitional services. The value of returned DDGG shares was determined by a third-party valuation firm as of June 30, 2016 using Level 3 inputs. The termination of the Sportech MSA will require DDGG to begin performing certain functions on its own.
DDGG Intangibles and Goodwill Impairment
As noted above, at June 30, 2016, the Sportech MSA terminated, which led to a significantly lower revenues forecast for the reporting unit. As a result, the Company determined that intangible assets related to internally developed software, trade name and non-compete agreements were impaired as of June 30, 2016. The Company recorded a loss of
$749
on intangible assets related to DDGG during the year ended June 30, 2016. There was no impairment of goodwill (see Note 3, Summary of Significant Accounting Policies).
This 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 the DraftDay Business 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 lists 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. Such valuations are being conducted using Level 3 inputs as described in ASC 820, "
Fair Value Measurements and Disclosures"
, that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
A summary of the fair value of consideration transferred for this acquisition and the fair value of the assets and liabilities at the date of acquisition is as follows (amounts in thousands):
|
|
|
|
|
Consideration transferred:
|
|
Shares of the Company's common stock on closing market price at issuance
|
$
|
1,760
|
|
Notes issued to sellers
|
2,250
|
|
Total consideration transferred
|
$
|
4,010
|
|
|
|
Purchase allocation:
|
|
Goodwill
|
$
|
1,591
|
|
Intangible assets
|
3,012
|
|
Other Assets
|
799
|
|
Total liabilities
|
(1,392
|
)
|
|
$
|
4,010
|
|
The operations of this acquisition are not material, and thus, pro forma disclosures are not presented.
Rant
On July 12, 2016, the Company, and RACX Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“RACX”), completed an acquisition pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rant, Inc., a Delaware corporation, pursuant to which RACX has acquired the assets of Rant (the “Asset Purchase”) used in the operation of Rant’s Rant.com independent media network and related businesses, including but not limited to the www.rantsports.com, www.rantlifestyle.com, www.rantchic.com, www.rantgirls.com, www.rant-inc.com, www.rantstore.com, www.rantcities.com, www.rantcars.com, www.rantfinance.com, www.ranthollywood.com, www.rantfood.com, www.rantgamer.com, www.rantgizmo.com, www.rantpets.com, www.rantplaces.com, www.rantpolitical.com, www.rantmn.com, www.rantbeats.com, www.rantgirls.com, www.rantstore.com, www.rantcities.com, www.rantranet.com, and www.rantmovies.com websites (the “Rant Assets”).
In consideration for the purchase of the Rant Assets, the Company delivered a Secured Convertible Promissory Note (the “Secured Convertible Note”) to Rant with a fair value determined to be
$3,500
and delivered the stock consideration of
$7,600
described below.
The
$3,000
Secured Convertible Note matures on July 8, 2017 barring any events of default or a change of control of the Company. The Secured Convertible Note bears interest at
12%
per annum, payable at maturity. At the election of Rant, the Secured Convertible Note is convertible into shares of the Company's common stock at a price equal to the lower of (i)
$5.20
per share, or (ii) such lower price as may have been set for conversion of any debt or securities into Common Stock held on or after the date hereof by Sillerman until the first to occur of March 31, 2017 or the date the Note has been satisfied or converted (for the purposes hereof Robert F.X. Sillerman is the Company’s Executive Chairman and Chief Executive Officer and/or any affiliate of Robert F.X. Sillerman is herein collectively, “Sillerman”). In connection with the Secured Convertible Note, the Company has entered into a Note Purchase Agreement (the “NPA”) and a Security Agreement (the “Rant Security Agreement”) with Rant, under which the Company has granted Rant a continuing security interest in substantially all assets of the Company. In connection with the issuance of the Secured Convertible Note, Sillerman and Rant entered into a subordination agreement subordinating repayment of the notes to the Debentures (as described in (b) hereof) and entered into an Intercreditor Agreement providing for the parties’ respective rights and remedies with respect to payments against the collateral held as security for both of them.
In connection with the Asset Purchase Agreement, and in addition to the consideration represented by the Secured Convertible Note and the Assumed Liabilities, the Company issued to Rant
4,435
shares of Company Series E Convertible Preferred Stock which, upon satisfaction of certain conditions including shareholder approval, will be convertible into shares of Company common stock equal to
22%
of the outstanding common stock of the Company. The number of shares will be adjusted for dilution between the date of closing and the date of any public offering by the Company of its common stock and to reflect additional capital structure changes through the first of (i) the date Sillerman converts debt and preferred shares to common shares pursuant to the Exchange Agreement just before an offering of the Company’s common stock closes or (ii) March 31, 2017.
This 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 Rant 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 lists 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. Such valuations are being conducted using Level 3 inputs as described in ASC 820, "
Fair Value Measurements and Disclosure
s", that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The 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 is as follows:
|
|
|
|
|
Goodwill
|
$
|
7,589
|
|
Intangible assets
|
5,500
|
|
Total liabilities
|
(1,990
|
)
|
|
$
|
11,099
|
|
The goodwill related to the Rant acquisition is tax deductible.
7. Property and Equipment
Property and Equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
|
|
|
|
Leasehold Improvements
|
$
|
2,261
|
|
|
$
|
2,261
|
|
Furniture and Fixtures
|
588
|
|
|
588
|
|
Computer Equipment
|
456
|
|
|
456
|
|
Software
|
164
|
|
|
164
|
|
Total
|
3,469
|
|
|
3,469
|
|
Accumulated Depreciation and Amortization
|
(2,132
|
)
|
|
(2,055
|
)
|
Property and Equipment, net
|
$
|
1,337
|
|
|
$
|
1,414
|
|
Depreciation and amortization charged to selling, general and administrative expenses for the
three
months ended
September 30, 2016
and 2015 amounted to $
77
and $
53
, respectively.
8. Intangible Assets and Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
|
Description
|
Amortization
Period
|
|
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Wetpaint technology
|
60 months
|
|
$
|
4,952
|
|
|
|
$
|
(3,368
|
)
|
|
|
$
|
1,584
|
|
|
|
$
|
4,952
|
|
|
|
$
|
(3,276
|
)
|
|
|
$
|
1,676
|
|
|
Wetpaint trademarks
|
276 months
|
|
1,453
|
|
|
|
(427
|
)
|
|
|
1,026
|
|
|
|
1,453
|
|
|
|
(415
|
)
|
|
|
1,038
|
|
|
Wetpaint customer relationships
|
60 months
|
|
917
|
|
|
|
(832
|
)
|
|
|
85
|
|
|
|
917
|
|
|
|
(827
|
)
|
|
|
90
|
|
|
Choose Digital licenses
|
60 months
|
|
829
|
|
|
|
(574
|
)
|
|
|
255
|
|
|
|
829
|
|
|
|
(559
|
)
|
|
|
270
|
|
|
Choose Digital software
|
60 months
|
|
627
|
|
|
|
(234
|
)
|
|
|
393
|
|
|
|
627
|
|
|
|
(212
|
)
|
|
|
415
|
|
|
DraftDay tradename
|
84 months
|
|
180
|
|
|
|
(50
|
)
|
|
|
130
|
|
|
|
180
|
|
|
|
(38
|
)
|
|
|
142
|
|
|
Draftday non-compete agreements
|
6 months
|
|
30
|
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
30
|
|
|
|
(30
|
)
|
|
|
—
|
|
|
DraftDay internally generated capitalized software
|
60 months
|
|
1,498
|
|
|
|
(394
|
)
|
|
|
1,104
|
|
|
|
1,498
|
|
|
|
(303
|
)
|
|
|
1,195
|
|
|
DraftDay customer relationships
|
24 months
|
|
556
|
|
|
|
(456
|
)
|
|
|
100
|
|
|
|
556
|
|
|
|
(351
|
)
|
|
|
205
|
|
|
Rant trademarks
|
120 months
|
|
2,700
|
|
|
|
(56
|
)
|
|
|
2,644
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Rant content
|
24 months
|
|
650
|
|
|
|
(68
|
)
|
|
|
582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Rant technology
|
60 months
|
|
1,500
|
|
|
|
(64
|
)
|
|
|
1,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Rant advertising relationships
|
24 months
|
|
650
|
|
|
|
(68
|
)
|
|
|
582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
various
|
|
326
|
|
|
|
(18
|
)
|
|
|
308
|
|
|
|
326
|
|
|
|
(18
|
)
|
|
|
308
|
|
|
Total
|
|
|
$
|
16,868
|
|
|
|
$
|
(6,639
|
)
|
|
|
$
|
10,229
|
|
|
|
$
|
11,368
|
|
|
|
$
|
(6,029
|
)
|
|
|
$
|
5,339
|
|
|
See Note 3, Summary of Significant Accounting Policies, for a discussion of the write-downs recorded with respect to intangible assets related to the Wetpaint and Choose Digital businesses in the quarter ended December 31, 2015 and to the DraftDay business in the quarter ended June 30, 2016. The changes in the gross amounts and useful lives of intangibles related to the Wetpaint, Choose Digital and DraftDay businesses, and to internally generated capitalized software, are a result of these write-downs during the three months ended December 31, 2015 and June, 30, 2016, as well as the abandonment of certain technology as of January 1, 2016, and internal development costs. See Note 6, Acquisitions, for a detailed description of DraftDay and Rant assets and liabilities purchased and their fair values on the date of the acquisition.
Amortization of intangible assets included in selling, general and administrative expenses for the
three
months ended
September 30, 2016
and 2015 amounted to
$610
and $
797
, respectively.
Future annual amortization expense expected is as follows:
|
|
|
|
|
Years ending June 30,
|
|
2017
|
$
|
2,370
|
|
2018
|
$
|
3,026
|
|
2019
|
$
|
1,730
|
|
2020
|
$
|
1,367
|
|
2021
|
$
|
1,036
|
|
Goodwill consists of the following:
|
|
|
|
|
Description
|
Amount
|
Balance at July 1, 2016
|
$
|
11,270
|
|
Rant preliminary purchase price allocation
|
7,589
|
|
Balance at September 30, 2016
|
$
|
18,859
|
|
9. Loans Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Maturity Date
|
Facility Amount
|
September 30, 2016
|
June 30, 2016
|
Convertible Debentures (the "Debentures"), net of discount
|
7/11/2017
|
$
|
4,444
|
|
$
|
3,155
|
|
$
|
—
|
|
Secured Convertible Promissory Note (the "Secured Convertible Note")
|
7/8/2017
|
3,000
|
|
3,500
|
|
—
|
|
Line of Credit Promissory Note (the "Note")
|
10/24/2017
|
20,000
|
|
—
|
|
19,716
|
|
Line of Credit Grid Note (the "Grid Note")
|
12/31/2016
|
10,000
|
|
900
|
|
4,563
|
|
Secured Line of Credit (the "Secured Revolving Loan I")
|
12/31/2016
|
1,500
|
|
—
|
|
1,500
|
|
Secured Line of Credit (the "Secured Revolving Line of Credit")
|
12/31/2016
|
500
|
|
—
|
|
500
|
|
Secured Revolving Loan (the "Secured Revolving Loan")
|
12/31/2016
|
500
|
|
—
|
|
500
|
|
Secured Revolving Loan II (the "Secured Revolving Loan II")
|
12/31/2016
|
500
|
|
—
|
|
500
|
|
Secured Revolving Loan III (the "Secured Revolving Revolving Loan III")
|
12/31/2016
|
1,200
|
|
—
|
|
135
|
|
Convertible Promissory Note (the "RI Convertible Note")
|
12/31/2016
|
300
|
|
300
|
|
300
|
|
MGT Promissory Notes (the "MGT Promissory Notes")
|
7/31/2016
|
2,109
|
|
943
|
|
943
|
|
Kuusamo Promissory Notes (the "Kuusamo Promissory Notes")
|
3/8/2016
|
141
|
|
55
|
|
55
|
|
Total Loans Payable, net
|
|
|
$
|
8,853
|
|
$
|
28,712
|
|
Convertible Debentures
On July 12, 2016, the Company closed a private placement (the "Private Placement") of
$4,444
principal amount of convertible debentures (the "Debentures") and common stock warrants (the "Warrants".) The Debentures and Warrants were issued pursuant to a Securities Purchase Agreement, dated July 12, 2016 (the “Purchase Agreement”), by and among the Company and certain accredited investors within the meaning of the Securities Act of 1933, as amended (the “Purchasers”). Upon the closing of the Private Placement, the Company received gross proceeds of
$4,000
before placement agent fees, original issue discount, and other expenses associated with the transaction.
$1,162
of the proceeds was used to repay the Grid Note. The placement agent fees of
$420
and original issue discount of
$444
were recorded as a reduction to the debenture balance and will be accreted to interest expense over the term of the Debentures.
The Debentures mature on the
one
-year anniversary of the issuance date thereof. The Debentures are convertible at any time at the option of the holder into shares of the the Company's common stock at an initial conversion price of
$6.2660
per share (the “Conversion Price”). Based on such initial Conversion Price, the Debentures will be convertible into up to
780,230
shares of common stock. If we issue or sell shares of our common stock, rights to purchase shares of our common stock, or securities convertible into shares of our common stock for a price per share that is less than the Conversion Price then in effect, the Conversion Price then in effect will be decreased to equal such lower price. The adjustments to the Conversion Price will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans or for certain acquisitions. In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. However, in no event will the Conversion Price be less than
$0.10
per share. The Debentures are secured by a first priority lien on substantially all of the Company's assets in accordance with a security agreement.
The Debentures bear interest at
10%
per annum with interest payable upon maturity or on any earlier redemption date. At any time after the issuance date, we will have the right to redeem all or any portion of the outstanding principal balance of the Debentures, plus all accrued but unpaid interest at a price equal to
120%
of such amount. The holders of Debentures shall have the right to convert any or all of the amount to be redeemed into common stock prior to redemption. Subject to certain exceptions, the Debentures contain customary covenants against incurring additional indebtedness and granting additional liens and contain customary events of default. Upon the occurrence of an event of default under the Debentures, a holder of Debentures may require the Company to pay the greater of (i) the outstanding principal amount, plus all accrued and unpaid interest, divided by the Conversion Price multiplied by the daily volume weighted average price or (ii)
115%
of the outstanding principal amount plus
100%
of accrued and unpaid interest. Pursuant to the Debentures, the Company is required to make amortizing payments of the aggregate principal amount, interest, and other amounts outstanding under the Debentures. Such payments must be made beginning three months from the issuance of the Debentures and on the monthly anniversary through and including the maturity date. The Amortization Amount is payable in cash or in shares of our common stock pursuant to the conversion mechanism contained in the Debentures.
On July 20, 2016, the Company and the Purchasers entered into an Amendment to Securities Purchase Agreement and Consent to Modify Debentures (the “Amendment and Consent”). The Amendment and Consent provides that, while the Debentures are outstanding, Mr. Sillerman will guarantee that the Company shall have
$1,000
available in its commercial bank account or otherwise available in liquid funds. At any time when the Company's available funds fall below
$1,000
, Mr. Sillerman will provide (the “Sillerman Guaranty”) the amounts necessary to make-up the shortfall in an aggregate amount not to exceed
$6,000
; however, the first
$5,000
of the guaranty shall be provided by drawing down on our Line of Credit with SIC IV. Any remaining amounts, up to a maximum aggregate of
$1,000
million shall be provided by Sillerman. In connection with the Sillerman Guaranty, the Company's independent directors approved a fee of $100 as compensation for providing such guaranty.
As a part of the Private Placement, the Company issued Warrants to the Purchasers providing them with the right to purchase up to an aggregate of
354,650
shares of the Company’s common stock at an initial exercise price of
$6.5280
per share. Subject to certain limitations, the Warrants are exercisable on any date after the date of issuance and the exercise price for the Warrant is subject to adjustment for certain events, such as stock splits and stock dividends. If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price of the Debentures, the exercise price of the Warrants will be decreased to a lower price based on the amount by which the conversion price of the Debentures was reduced due to such transaction. The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans or for certain acquisitions. In addition, the exercise price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The Warrants will expire
5
years from the initial issuance date. The fair value of the warrants as of July 12, 2016 was determined to be
$1,500
and the offset was recorded as a debt discount. The warrants are recorded as a liability due to the adjustment of the exercise price due to subsequent common stock issuances.
The Purchasers shall not have the right to convert the Debentures or exercise the Warrants to the extent that such conversion or exercise would result in such Purchaser being the beneficial owner in excess of
4.99%
of our common stock. In addition, the Purchasers have no right to convert the Debentures or exercise the Warrants if the issuance of the shares of common stock upon such conversion or exercise would exceed the aggregate number of shares of our common stock which we may issue upon conversion of the Note and exercise of the Warrants without breaching our obligations under NASDAQ listing rules. Such limitation does not apply if our shareholders approve such issuances. We intend to promptly seek shareholder approval for issuances of shares of common stock issuable upon conversion of the Debentures and exercise of the Warrants.
In connection with the Private Placement, the Company and the Purchasers entered into a Registration Rights Agreement under which the Company was required, on or before 30 days after the closing of the Private Placement, to file a registration statement with the Securities and Exchange Commission (the “SEC”) covering the resale of the shares of its common stock issuable pursuant to the Debentures and Warrants and to use commercially reasonable efforts to have the registration declared effective as soon as practicable, but in no event later than 90 days after the filing date. The Company will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement.
Also in connection with the Private Placement, certain stockholders of the Company have executed Lock-Up Agreements, pursuant to which they have agreed not to sell any shares of the Company's common stock until the later of (i)
six
months following the issuance of the Debentures or (ii)
90
days following the effectiveness of a resale registration statement filed pursuant to the requirements of the Registration Rights Agreement.
The Company valued the Debentures as of July 12, 2016, the issuance date, using the methods of fair value as described ASC 820, "
Fair Value Measurements and Disclosures"
("ASC 820"). The fair value of the conversion feature in the Debentures was determined to be
$1,856
as of July 12, 2016 and the offset was recorded as a debt discount.
On October 12, 2016, the first amortization payment in the amount of
$444
, plus accrued interest of approximately
$114
pursuant to the terms of the Debentures became due and payable to the Purchasers. The Company did not make such payment at the time it was due.
The Company has also not maintained the Minimum Cash Reserve as required by the Purchase Agreement. Pursuant to the terms of the Debentures, the failure to cure the failure to maintain the Minimum Cash Reserve within
three
trading days constitutes an Event of Default. Among other things: (1) at the Purchaser’s election, the outstanding principal amount of the Debentures, plus accrued but unpaid interest, plus all interest that would have been earned through the one year anniversary of the original issue date if such interest has not yet accrued, liquidated damages and other amounts owed through the date of acceleration, shall become, immediately due and payable in either cash or stock pursuant to the terms of the Debentures; and (2) the interest rate on the Debentures will increase to the lesser of
18%
or the maximum allowed by law. In addition to other remedies available to the
Purchasers, our obligation to repay amounts due under the Debentures is secured by a first priority security interest in and lien on all of our assets and property, including our intellectual property, and such remedies can be exercised by the Purchasers without additional notice to the Company.
The Company entered into waiver agreements with respect to the initial amortization payments due under the Debentures with Purchasers holding approximately
87%
of the Debentures. The Waivers entered into with some of the Purchasers related to the failure to pay the amortization amounts do not address the failure to maintain the Minimum Cash Reserve.
Pursuant to the terms of the Debentures, the failure to cure the non-payment of the amortization amount within
three
trading days after the date such payment was due constitutes an Event of Default. Following the occurrence of an event of default, among other things: (1) at the Purchaser’s election, the outstanding principal amount of the Debentures, plus accrued but unpaid interest, plus all interest that would have been earned through the one year anniversary of the original issue date if such interest has not yet accrued, liquidated damages and other amounts owed through the date of acceleration, shall become, immediately due and payable in either cash or stock pursuant to the terms of the Debentures; and (2) the interest rate on the Debentures will increase to the lesser of
18%
or the maximum allowed by law. In addition to other remedies available to the Purchasers, our obligation to repay amounts due under the Debentures is secured by a first priority security interest in and lien on all of our assets and property, including our intellectual property, and such remedies can be exercised by the Purchasers without additional notice to the Company.
The Company did not receive a waiver from one of its debenture holders, holding approximately
13%
of the principal amount of the Debentures with respect to the event of default arising out of the Company’s failure to make the first amortization payment when due. Pursuant to the terms of the Debentures, such holder has sent a notice of acceleration, stating that the Company owes
$696
, reflecting the principal amount of the Debenture plus interest through November 1, 2016. Interest will accrue at
18%
until this amount is satisfied. The Company is seeking to settle the matter with the holder; however, there can be no assurance that an agreement will be reached.
Secured Convertible Promissory Note
On July 8, 2016 the Company issued a Secured Convertible Promissory Note (the “Secured Convertible Note”) to Rant in the amount of
$3,000
as part of the consideration for the purchase of the Rant Assets.
The
$3,000
Secured Convertible Note matures on July 8, 2017 barring any events of default or a change of control of the Company. The Secured Convertible Note bears interest at
12%
per annum, payable at maturity. At the election of Rant, the Secured Convertible Note is convertible into shares of the Company’s common stock at a price equal to the lower of (i)
$5.20
per share, or (ii) such lower price as may have been set for conversion of any debt or securities into common stock held on or after the date hereof by Sillerman until the first to occur of March 31, 2017 or the date the Note has been satisfied or converted (for the purposes hereof Robert F.X. Sillerman is the Company’s Executive Chairman and Chief Executive Officer and/or any affiliate of Robert F.X. Sillerman is herein collectively, “Sillerman”). The Company valued the conversion feature at issuance using methods of fair value as described in ASC 820 and it was determined to be
$500
. In connection with the Secured Convertible Note, the Company has entered into a Note Purchase Agreement (the “NPA”) and a Security Agreement (the “Rant Security Agreement”) with Rant, under which the Company has granted Rant a continuing security interest in substantially all assets of the Company. In connection with the issuance of the Secured Convertible Note, Sillerman and Rant entered into a subordination agreement subordinating repayment of the notes to the Debentures (as described in (b) hereof) and entered into an Intercreditor Agreement providing for the parties’ respective rights and remedies with respect to payments against the collateral held as security for both of them.
The events of default under the Debentures noted above also constituted a default under the Secured Convertible Note issued in connection with the acquisition of Rant. The holder of the Secured Convertible Note has executed a waiver that provides that, until May 15, 2017, the events of default arising out of the failure to pay the amounts due under the Debentures as of the date of the waiver and the failure by the Company to maintain the Minimum Cash Reserve shall not constitute events of default for purposes of the Secured Convertible Note.
Line of Credit Promissory Note
On October 24, 2014, the Company and SIC III, a company affiliated with Mr. Sillerman, entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") pursuant to which SIC III agreed to purchase certain securities issued by the Company for a total of
$30,000
. Pursuant to the Securities Purchase Agreement, the Company issued a Line of Credit Promissory Note (the “Note”), which provides for a
$20,000
line of credit to the Company (see Note 11, Stockholders' Equity, for a discussion of the remaining
$10,000
of the Securities Purchase Agreement). The Company also agreed to issue to SIC III warrants to purchase
1,000,000
shares of the Company’s common stock. The Company issued warrants to purchase
50,000
shares of the Company’s common stock for every
$1,000
advanced under the Note. The warrants will be issued in proportion to the amounts the Company
draws under the Note. The exercise price of the warrants will be
10%
above the closing price of the Company’s shares on the date prior to the issuance of the warrants. Exercise of the warrants was subject to approval of the Company’s stockholders, which occurred on January 13, 2015.
The Note provides a right for the Company to request advances under the Note from time to time. The Note bears interest at a rate of
12%
per annum, payable in cash on a quarterly basis. The Note matures on October 24, 2017. On October 24, 2014, SIC III made an initial advance under the Note in the principal amount of
$4,500
. On December 15, 2014, SIC III made an additional advance in the principal amount of
$15,500
pursuant to the terms of the Note (the proceeds of which were used to repay amounts outstanding under the DB Line, as discussed above). As of September 30, 2016, the total outstanding principal amount of the Note was
$20,000
. The Note provides for a
3%
discount, such that the amount advanced by SIC III was
3%
less than the associated principal amount of the advances. Therefore, the net amount actually outstanding under the Note at September 30, 2016, was
$19,666
, which includes accretion of the discount of
$266
(the
3%
discount of
$600
is being accreted to the principal balance over the life of the Note). From and after the occurrence and during the continuance of any event of default under the Note, the interest rate is automatically increased to
17%
per annum.
In connection with the first drawdown of
$4,500
under the Note, the Company issued SIC III warrants to purchase
11,250
shares of the Company’s common stock. These warrants have an exercise price of
$70.20
, representing a price equal to
10%
above the closing price of the Company’s common stock on the day prior to issuance. In connection with the additional drawdown of
$15,500
under the Note, the Company issued SIC III warrants to purchase
38,750
shares of the Company's common stock. These warrants have an exercise price of
$72.60
, representing a price equal to
10%
above the closing price of the Companys common stock on the day prior to issuance. The warrants are exercisable for a period of
five
years from issuance. Stock compensation expense related to the issuances of warrants to SIC III was
$2,049
during the year ended June 30, 2015.
The Note is not convertible into equity securities of the Company.
The Note also contains certain covenants and restrictions, including, among others, that, for so long as the Note is outstanding, the Company will not, without the consent of the holder of the Note, (i) make any loan or advance in excess of
$500
to any officer, director, employee of affiliate of the Company (except advances and similar expenditures : (a) under the terms of employee stock or option plans approved by the Board of Directors, (b) in the ordinary course of business, consistent with past practice or (c) to its subsidiaries), (ii) incur any indebtedness that exceeds
$1,000
in the aggregate other than indebtedness outstanding under the Note, (iii) guaranty any indebtedness of any unaffiliated third party, (iv) change the principal business of the Company or exit the Company's current business, provided that the foregoing is subject to the Board's compliance with its fiduciary duties, (v) sell, assign, or license material technology or intellectual property of the Company except (a) in the ordinary course of business, consistent with past practice, (b) sales and assignments thereof in any
12
month period that do not have a fair market value in excess of
$500
or (c) in connection with a change of control transaction, (vi) enter into any corporate strategic relationship involving the payment, contribution or assignment by the Company of its assets that have a fair market value in excess of
$1,000
or (vii) liquidate or dissolve the Company or wind up the business of the Company, except in connection with changes of control or merger, acquisition or similar transactions or as approved by the Company’s Board in compliance with their fiduciary duties.
On August 22, 2016, the Company and SIC III, entered into a Note Exchange Agreement pursuant to which
$23,264
, which represents all of the outstanding principal and accrued interest outstanding under the Notes, was exchanged for
23,264
shares of the Company’s Series C Preferred Stock at an exchange price of
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement. After the exchange, the Notes were retired.
Interest expense on the Note was
$382
and
$613
for the three months ended September 30, 2016 and 2015, respectively.
Line of Credit Grid Note
On June 11, 2015, the Company and Sillerman Investment Company IV, LLC ("SIC IV") entered into a Line of Credit Grid Note (the "Grid Note"). The Grid Note provides a right for the Company to request advances under the Grid Note from time to time in an aggregate amount of up to
$10,000
. The Grid Note bears interest at a rate of
12%
per annum, payable in cash on the maturity of the Grid Note. From and after the occurrence and during the continuance of any event of default under the Grid Note, the interest rate is automatically increased to
14%
per annum.
The Grid Note is not convertible into equity securities of the Company.
In order for the Company to make requests for advances under the Grid Note, the Company must have an interest coverage ratio equal to or greater than 1, unless SIC IV waives this requirement. The interest coverage ratio is calculated by dividing: (a) the
Company’s net income for the measurement period, plus the Company’s interest expense for the measurement period, plus the Company’s tax expense for the measurement period, by (b) the Company’s interest expense for the measurement period, plus the amount of interest expense that would be payable on the amount of the requested draw for the
twelve
months following the request for the advance. The measurement period is the twelve months ended as of the last day of the last completed fiscal quarter prior to the request for the advance. The Company currently does not have an interest coverage ratio equal to or greater than
1
, so advances would require the SIC IV to waive this requirement. In addition, in order to make requests for advances under the Grid Note, there can be no event of default under the Note at the time of the request for an advance, including that there has been no material adverse change in the business plan or prospects of the Company in the reasonable opinion of SIC IV.
The Grid Note matures on the first to occur of: (a) 12/31/2016 or (b) upon a “Change of Control Transaction.” A “Change of Control Transaction” includes (i) a sale of all or substantially all of the assets of the Company or (ii) the issuance by the Company of common stock that results in any “person” or “group” becoming the “beneficial owner” of a majority of the aggregate ordinary voting power represented by the Company’s issued and outstanding common stock (other than as a result of, or in connection with, any merger, acquisition, consolidation or other business combination in which the Company is the surviving entity following the consummation thereof), excluding transactions with affiliates of the Company.
If an event of default occurs under the Grid Note, SIC IV has the right to require the Company to repay all or any portion of the Grid Note. An event of default is deemed to have occurred on: (i) the non-payment of any of the amounts due under the Grid Note within
five
(5) Business Days after the date such payment is due and payable; (ii) dissolution or liquidation, as applicable, of the Company; (iii) various bankruptcy or insolvency events shall have occurred, (iv) the inaccuracy in any material respect of any warranty, representation, statement, report or certificate the Company makes to Lender under the Note hereto; (v) the Company contests, disputes or challenges in any manner, whether in a judicial proceeding or otherwise, the validity or enforceability of any material provision in the Grid Note; or (vi) a material adverse change in the business plan or prospects of the Company in the reasonable opinion of SIC IV.
As of September 30, 2016 and June 30, 2016 the principal amount outstanding under the Grid Note was
$900
and
$4,563
, respectively.
On July 8, 2016, the Company and SIC III, SIC IV and SIC VI entered into an Exchange Agreement pursuant to which, subject to adjustment, (i)
3,000
shares of the Company's Series C Preferred Stock owned by SIC III are to be exchanged for
890,898
shares of the Company's common stock and (ii) all of the debt held by Mr. Sillerman and such affiliates is to be exchanged for
5,066,654
shares of the Company's common stock. Issuance of the shares is conditioned upon approval of the Company’s shareholders, the closing of an offering of the Company’s common stock in the amount of at least
$10,000
, approval of its Listing of Additional Shares application with NASDAQ, the Company shall not be subject to any bankruptcy proceeding, and various other conditions. The exchange price shall be equal to the lesser of
$5.20
and the price at which the Debentures can be exchanged for shares of the Company’s common stock. The Company received an independent valuation with respect to the original exchange that the exchange price of
$5.20
reflects fair value. Any additional change is subject to the receipt by the Company of an updated fair value determination. The agreement provides for termination in the event the conditions are not satisfied by March 31, 2017. At the date of this filing, this transaction has not yet closed.
Amended Exchange Agreement/Amended Grid Note
On July 18, 2016, SIC III, SIC IV and SIC VI, LLC entered into an amendment to the Exchange Agreement relating to the exchange of debt and shares of the Series C Preferred Stock of the Company for shares of the Company's common stock. The Exchange Agreement modified the Grid Note to provide that SIC IV shall be entitled to repayment of up to
$2,000
of the outstanding principal balance of the Grid Note and the Company shall be entitled to draw up to an additional
$5,000
.
On August 22, 2016, the Company and SIC IV, entered into a Note Exchange Agreement pursuant to which
$3,150
, which represents all of the outstanding principal and accrued interest outstanding under the Grid Note other than
$900
, was exchanged for
3,150
shares of the Company’s Series C Preferred Stock at an exchange price of
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement. Therefore, the outstanding balance of the Grid Note at
September 30, 2016
was
$900
.
Interest expense on the Grid Note for the
three
months ended
September 30, 2016
and 2015 was
$77
and
$96
, respectively.
In connection with the Company's entering into the Perk Credit Agreement (as defined below), SIC IV agreed to subordinate payment of the Grid Note to amounts owed to Perk under the Perk Credit Agreement. SIC IV also consented to the consummation
of the Asset Purchase Agreement with Perk. In exchange for such consent and such agreement to subordinate, the Company agreed to provide SIC IV a security interest in the assets of the Company in connection with amounts outstanding under the Grid Note.
The Company entered into a Security Agreement with SIC IV , pursuant to which the Company pledged its assets in connection with such security interest. The foregoing descriptions of the Security Agreement is qualified in its entirety by reference to the full text of the form of Security Agreement.
Secured Revolving Loans and Lines of Credit
On January 27, 2016, Sillerman Investment Company VI LLC (“SIC VI”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, entered into a Secured Revolving Loan agreement (the “Secured Revolving Loan I”) with the Company and its subsidiaries, wetpaint.com, Inc. and Choose Digital Inc. (collectively, the “Subsidiaries”), pursuant to which the Company can borrow up to
$1,500
. The Secured Revolving Loan bears interest at the rate of
12%
per annum. In connection with the Secured Revolving Loan, the Company and the Subsidiaries have entered into a Security Agreement (the “Security Agreement”) with SIC VI, under which the Company and the Subsidiaries have granted SIC VI a continuing security interest in all assets of the Company and the Subsidiaries, with the exception of the Company’s interest in DraftDay Gaming Group, Inc. The Company intends to use the proceeds from the Secured Revolving Loan to fund working capital requirements and for general corporate purposes in accordance with a budget to be agreed upon by SIC VI and the Company. As of June 30, 2016,
$1,500
had been advanced thereunder. Interest expense on the Secured Revolving Loan I was
$27
for the three months ended September 30, 2016.
The Company and its subsidiaries wetpaint.com, inc., and Choose Digital, Inc. (the "Subsidiaries") entered into a secured, revolving Line of Credit on March 29, 2016 with SIC VI (the “Secured Revolving Line of Credit”), pursuant to which the Company can borrow up to
$500
. The Secured Revolving Line of Credit bears interest at the rate of
12%
per annum.
In connection with the Secured Revolving Line of Credit, the Company and the Subsidiaries have entered into a Security Agreement (the “Security Agreement”) with SIC VI, under which the Company and the Subsidiaries have granted SIC VI a continuing security interest in all assets of the Company and the Subsidiaries, with the exception of the Company’s interest in DraftDay Gaming Group, Inc. The Company intends to use the proceeds from the Secured Revolving Line of Credit to fund working capital requirements and for general corporate purposes in accordance with a budget to be agreed upon by SIC VI and the Company. At June 30, 2016,
$500
had been advanced thereunder. Interest expense on the Secured Revolving Line of Credit was
$9
for the three months ended September 30, 2016.
On April 29, 2016, SIC VI entered into an additional secured revolving loan agreement with the Company and the Subsidiaries ("Secured Revolving Loan"), pursuant to which the Company can borrow up to
$500
. Loans under this loan agreement bear interest at the rate of
12%
per annum and mature on December 31, 2016, barring any events of default or a change of control of the Company. As of June 30, 2016,
$500
had been advanced thereunder. Interest expense on the Secured Revolving Loan was
$9
for the three months ended September 30, 2016.
On May 16, 2016, SIC VI entered into an additional secured revolving loan agreement with the Company and the Subsidiaries ("Secured Revolving Loan II"), pursuant to which the Company can borrow up to
$500
. Loans under this loan agreement bear interest at the rate of
12%
per annum and mature on December 31, 2016, barring any events of default or a change of control of the Company. As of June 30, 2016,
$500
had been advanced thereunder. Interest expense on the Secured Revolving Loan II was
$9
for the three months ended September 30, 2016.
On June 27, 2016, SIC VI entered into a secured revolving loan agreement (the “Secured Revolving Loan III”) with the Company and its subsidiaries, pursuant to which the Company can borrow up to
$1,200
. The Secured Revolving Loan III bears interest at the rate of
12%
per annum and matures on December 31, 2016, barring any events of default or a change of control of the Company. At June 30, 2016,
$135
had been advanced thereunder. Interest expense on the Secured Revolving Loan III was
$8
for the three months ended September 30, 2016.
On August 22, 2016, the Company and SIC VI entered into a Note Exchange Agreement pursuant to which
$3,608
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC VI was exchanged for
3,608
shares of the Company’s Series C Preferred Stock at an exchange price of
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement. The Secured Revolving Loans and Lines of Credit were retired with the exchange transaction.
Related Approvals
Because each of the transactions referred to in the foregoing sections 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.
Convertible Promissory Note
On June 27, 2016, the Company entered into a Convertible Promissory Note with Reaz Islam (“RI”), the Company's Chief of Staff, pursuant to which RI loaned the Company
$300
(the “RI Convertible Note”). The RI Convertible Note bears interest at a rate of
12%
and matures on December 31, 2016. RI shall have the right to convert the RI Convertible Note into shares of the common stock of the Company at such time, on such terms, and in accordance with such procedures as Mr. Sillerman shall have the right to convert debt held by Mr. Sillerman or his affiliates into shares of the Company’s common stock. The RI Convertible Note is subordinate to any note held by Mr. Sillerman or his affiliates and RI has agreed to execute any agreement reasonably required in connection therewith. As of September 30, 2016 and June 30, 2016,
$300
of principal was outstanding under the RI Convertible Note.
Promissory Notes
In accordance with the Assets Purchase Agreement to purchase the DraftDay Business (see Note 6, Acquisitions), the Company issued promissory notes to MGT Capital ("MGT Promissory Notes") in the principal amount of
$234
due and paid on September 29, 2015 and in the aggregate principal amount of
$1,875
due March 8, 2016. The Company was not able to make the payment at the due date and on March 24, 2016 converted
$824
of the promissory notes to common stock and
$110
of the promissory notes to a Series D Preferred Stock (see Note 11, Stockholders' Equity (Deficit)). All such notes bear interest at a rate of
5%
per annum. On April 13, 2016, MGT converted all
110
shares of the Company's Series D Preferred Stock into shares of common stock of the Company. Accordingly, the Company issued
18,332
shares of common stock to MGT. Thereafter, there are
no
shares of the Company's Series D Preferred Stock outstanding.
On June 14, 2016, the Company entered into a second exchange agreement with MGT (the “Second MGT Exchange Agreement”) relating to the
$940
remaining due under the MGT Note (see Note 6, Acquisitions). Under the Second MGT Exchange Agreement, the MGT Note shall be exchanged in full for (a)
$11
in cash representing accrued interest and (b)
132,092
shares of Company common stock, subject to certain adjustments. Issuance of the shares is conditioned upon approval of the Company’s shareholders and approval of its Listing of Additional Shares application with NASDAQ. Therefore, the outstanding balance of the MGT Promissory Notes was $
943
at
September 30, 2016
. The Company recorded interest expense of
$12
for the three months ended
September 30, 2016
. On October 10, 2016, the Company satisfied the MGT Note through the issuance of
136,304
shares of its common stock and payment of interest of
$16
.
In exchange for releasing certain liens and encumbrances with respect to the DraftDay Business(see Note 6, Acquisitions), the Company issued promissory notes to Kuusamo Capital Ltd. ("Kuusamo Promissory Notes") in the principal amount of
$16
due and paid on September 29, 2015 and in the aggregate principal amount of
$125
due March 8, 2016. The Company was not able to make the payment at the due date. All such notes bear interest at a rate of
5%
per annum.
The outstanding balance of the Kuusamo Promissory Notes was $
55
at
September 30, 2016
. The Company recorded interest expense of
$1
for the three months ended
September 30, 2016
.
Accounts Payable Settlements
North America Photon Infotech Ltd. (“Photon”), a company based in Mauritius that had provided development services to the Company, filed suit in California on March 28, 2016 to collect approximately
$218
owed by the Company to Photon. The Company settled this matter on May 12, 2016 in part by issuing a Note in the amount of
$110
, payable in six months. Such note was settled on November 15, 2016 with the issuance of
31,510
shares of the Company's common stock.
On April 7, 2016, the Company issued a note in the amount of
$56
to Simulmedia, Inc., a former vendor of the Company, as partial settlement of the outstanding balance due to Simulmedia, Inc. for services provided.
Pandera Systems, LLC (“Pandera”), which formerly provided analytics development services to the Company, filed suit on March 11, 2016 against the Company to demand collection of amounts due for such services. The Company settled this matter on April 12, 2016, in part by issuing a note in the amount of
$50
.
Interest expense on these notes issued in connection with settlements with vendors was
$14
for the three months ended September 30, 2016.
10. Commitments and Contingencies
Litigation
CFGI, LLC, a former provider of consulting services of the Company, served the Company with a lawsuit to collect approximately
$200
owed by the Company to CFGI, LLC on September 9, 2016. The Company settled this matter for
$150
and the case was dismissed.
Creditors Adjustment Bureau, Inc., a collection agency in California, has filed suit in Santa Clara County Superior Court (California) to collect an
$84
debt assigned to it by Gigya Inc. The Company settled this matter for
$55
.
A Complaint (Index #654984/2016) was filed by Andy Mule, on behalf of himself and others similarly situated, in the Supreme Court of the State of New York. The Complaint, which names the Company, each of its current directors, and President, as a former director, as defendants, claims a breach of fiduciary duty relating to the terms of a proposed conversion of debt and preferred shares into common equity by Mr. Sillerman and/or his affiliates. The Complaint seeks unspecified damages and such relief as the Court may deem appropriate. The Company accepted service on October 4, 2016, and filed a motion to dismiss on November 14, 2016. The Company believes that this claim is without merit.
A Complaint (Case #8:16-cv-02101-DOC-JCG) was filed in the United States District Court, Central District of California, Southern Division by Stephan Wurth Photography, Inc. The Complaint, which names Wetpaint.com, Inc. and two former employees of Rant, Inc., claims copyright infringement relating to photographs of Anna Kournikova that first appeared on a Rant website some time ago and continued to appear after our purchase of Rant on July 8, 2016. We have not yet been served in this matter. If and when we are served, we intend to vigorously defend the matter.
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.
11. Stockholders’ Equity
Reverse Stock Split
On September 16, 2016, the Company amended its Certificate of Incorporation to effect a reverse stock split of all issued and outstanding shares of common stock at a ratio of 1 for 20 (the "Reverse Stock Split"). Owners of fractional shares outstanding after the Reverse Stock Split were paid cash for such fractional interests. The effective date of the Reverse Stock Split is September 16, 2016. All common stock share amounts disclosed in these financial statements have been adjusted to reflect the Reverse Stock Split.
Common Stock
As of
September 30, 2016
there were
300,000,000
shares of authorized common stock and
3,056,353
shares of common stock issued and outstanding, respectively. As of
June 30, 2016
there were
300,000,000
shares of authorized common stock and
3,023,753
shares of common stock issued and 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.
Preferred Stock
The Company has authorized
four
series of preferred stock, including classes of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock. At this time, there is no Series A, Series B or Series D Preferred Stock outstanding. Only Series C and Series E Preferred Stock are outstanding, as described below.
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:
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The shares of Series A Convertible Redeemable Preferred Stock have an initial stated value of
1,000
per share (the "Stated Value").
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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.
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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
$23.00
.
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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.
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The Company is required to redeem the Series A Convertible Redeemable Preferred Stock on the fifth anniversary of its issuance.
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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.
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•
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The shares of Series A Convertible Redeemable Preferred Stock are senior in liquidation preference to the shares of Company common stock.
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•
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The shares of Series A Convertible Redeemable Preferred Stock shall have no voting rights except as required by law.
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•
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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.
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At September 30, 2016 and June 30, 2016 there were no shares of Series A Convertible Redeemable Preferred Stock outstanding.
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:
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•
|
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
$23.00
. 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
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Company's common stock being equal to or greater than
$33.40
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
1,250
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
.
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•
|
The shares of Series B Convertible Preferred Stock are not redeemable by either the Company or the holders thereof.
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•
|
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.
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•
|
The shares of Series B Convertible Preferred Stock shall have no voting rights except as required by law.
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|
•
|
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.
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At
September 30, 2016
and June 30, 2016, there were no shares of Series B Convertible Preferred Stock outstanding.
Series C Convertible Preferred Stock
On October 24, 2014, the Company created a new class of Series C Convertible Redeemable Preferred Stock (the “Series C Convertible Redeemable Preferred Stock”). The Company authorized the issuance of up to
100,000
shares of the Series C Convertible Redeemable Preferred Stock. The rights, preferences, privileges and restrictions of the shares of Series C Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
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|
•
|
The shares of Series C Convertible Redeemable Preferred Stock have a stated value of
$1,000
per share.
|
|
|
•
|
Each holder of a share of Series C Convertible Redeemable Preferred Stock shall be entitled to receive dividends (“Dividends”) on such share equal to twelve percent (
12%
) per annum (the “Dividend Rate”) of the Stated Value before any Dividends shall be declared, set apart for or paid upon any junior stock or parity stock. Dividends on a share of Series C Convertible Redeemable Preferred Stock shall accrue daily at the Dividend Rate, commence accruing on the issuance date thereof, compound annually, be computed on the basis of a
360
-day year consisting of
twelve
30
-day months and be convertible into common stock in connection with the conversion of such share of Series C Convertible Redeemable Preferred Stock.
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•
|
Each share of Series C Convertible Redeemable Preferred Stock is convertible, at the option of the holders, on the basis of its stated value and accrued, but unpaid dividends, into shares of Company common stock at a conversion price of
$80.00
per common share.
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•
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The Company may redeem any or all of the outstanding Series C Convertible Redeemable Preferred Stock at any time at the then current Stated Value plus accrued Dividends thereon plus a redemption premium equal to the Stated Value multiplied by
6%
. 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
$100.00
or more per share.
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|
•
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The Company is required to redeem each Series C Convertible Redeemable Preferred Stock on the tenth business day immediately following the fifth anniversary of its issuance. However, the Company shall have no obligation to mandatorily redeem any shares of Series C Convertible Redeemable Preferred Stock at any time that (x) the Company does not have surplus under Section 154 of the Delaware General Corporation Law (the “DGCL”) or funds legally available to redeem all shares of Series C Convertible Redeemable Preferred Stock, (y) the Company's capital is impaired under Section 160 of the DGCL or (z) the redemption of any shares of Series C Convertible Redeemable Preferred Stock would result in an impairment
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of the Company's capital under Section 160 of the DGCL; provided, that if the Company is prohibited from redeeming the shares due to those limitations, the Company will redeem the Shares as soon as possible after such restrictions are no longer applicable.
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•
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Upon a change of control of the Company, each holder of Series C Convertible Redeemable Preferred Stock shall be entitled to require the Company to redeem from such holder all of such holder's shares of Series C Convertible Redeemable Preferred Stock so long as such holder requests such redemption in writing at least one business day prior to the consummation of such change of control. The redemption amount per share equals the Stated Value thereof plus accrued Dividends plus a change of control premium equal to the stated value multiplied
6%
.
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•
|
The shares of Series C Convertible Redeemable Preferred Stock are senior in liquidation preference to all shares of capital stock of the Company unless otherwise consented to by a majority of the holders of shares of Series C Convertible Redeemable Preferred Stock.
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•
|
The shares of Series C Convertible Redeemable Preferred Stock shall have no voting rights except as required by law.
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|
•
|
The consent of the holders of a majority of the shares of Series C Convertible Redeemable Preferred Stock is necessary for the Company to amend the Series C certificate of designation.
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The Series C Convertible Redeemable Preferred Stock was not classified as a component of stockholders' equity in the accompanying Consolidated Balance Sheets. Likewise, the undeclared dividends related to Series C Convertible Redeemable Preferred Stock have been recorded as an addition within the Series C Convertible Preferred Stock account in the amount of
$484
and $
307
for the
three
months ended
September 30, 2016
and
September 30, 2015
.
On August 22, 2016, the Company amended the terms of the Series C Convertible Redeemable Preferred Stock. The amendment provided that the Series C Preferred Stock is no longer convertible into common stock by its terms (though the Series C Preferred Stock held by Mr. Sillerman remains subject to the Exchange Agreement in Note 9, Loans Payable) and is no longer redeemable by holder five years after issuance. As amended, the rights, preferences, privileges and restrictions of the shares of Series C Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
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|
•
|
The shares of Series C Convertible Redeemable Preferred Stock have a stated value of
$1,000
per share.
|
|
|
•
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Each holder of a share of Series C Convertible Redeemable Preferred Stock shall be entitled to receive dividends (“Dividends”) on such share equal to twelve percent (
12%
) per annum (the “Dividend Rate”) of the Stated Value before any Dividends shall be declared, set apart for or paid upon any junior stock or parity stock. Dividends on a share of Series C Preferred Stock shall accrue daily at the Dividend Rate, commence accruing on the issuance date thereof, compound annually, be computed on the basis of a
360
-day year consisting of
twelve
30
-day months and be convertible into common stock in connection with the conversion of such share of Series C Preferred Stock.
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•
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The Company may redeem any or all of the outstanding Series C Preferred Stock at any time at the then current Stated Value plus accrued Dividends thereon plus a redemption premium equal to the Stated Value multiplied by
6%
. However, no premium shall be due on the use of up to
33%
of proceeds of a public offering of common stock at a price of
$5.00
or more per share.
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•
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The shares of Series C Preferred Stock are senior in liquidation preference to all shares of capital stock of the Company unless otherwise consented to by a majority of the holders of shares of Series C Preferred Stock.
|
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|
•
|
The shares of Series C Preferred Stock shall have no voting rights except as required by law.
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|
•
|
The consent of the holders of a majority of the shares of Series C Preferred Stock is necessary for the Company to amend the Series C certificate of designation.
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The Series C Preferred Stock is no longer convertible into common stock, except in accordance with the Exchange Agreement.
Preferred Stock Conversion
Sillerman Investment Company III, LLC (“SIC III”), an affiliate of Robert F.X. Sillerman, the Company's Executive Chairman and Chief Executive Officer of the Company, owned
10,000
shares of Series C Convertible Redeemable Preferred Stock. On May 9, 2016 (the “Exchange Date”), the Company and SIC III entered into a Subscription Agreement pursuant to which SIC III
subscribed for
1,129,032
shares of the Company’s common stock at a price of
$6.20
per share. Accordingly, the aggregate purchase price for such shares was
$7,000
. The Company and SIC III agreed that SIC III would pay the purchase price for such shares by exchanging
$7,000
shares of the Company’s Series C Convertible Redeemable Preferred Stock owned by SIC III for the common stock (the “Exchange”). All conditions of the Subscription Agreement have been satisfied, and therefore
1,129,032
shares of the Company’s common stock were issued to SIC III. Mr. Sillerman and his affiliates now own more than
50%
of the outstanding shares of the Company’s common stock. The Company determined that this was a fair transaction and did not recognize any stock compensation expense in relation with the conversion.
On August 22, 2016, the Company and SIC III, SIC IV, SIC VI entered into an Note Exchange Agreement pursuant to which
$30,175
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC III, SIC IV, and SIC VI other than
$900
of debt held by SIC IV pursuant to that certain Line of Credit Grid Note dated as of June 11, 2015, was exchanged for
30,175
shares of the Company’s Series C Convertible Preferred Stock at an exchange price of
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement.
At September 30, 2016 and June 30, 2016, there were
33,175
and
3,000
shares of Series C Convertible Preferred Stock outstanding, respectively.
Series D Convertible Preferred Stock
On March 24, 2016, the Company created a new class of Series D Convertible Redeemable Preferred Stock (the “Series D Convertible Preferred Stock”). The Company authorized the issuance of up to
110
shares of the Series D Convertible Preferred Stock. The rights, preferences, privileges and restrictions of the shares of Series D Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
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|
•
|
The shares of Series D Convertible Preferred Stock have a stated value of
$1,000
per share.
|
|
|
•
|
Each share of Series D Convertible Preferred Stock is convertible, at the option of the holders, at a rate of
167
shares of common stock for one share of converted Series D Convertible Preferred Stock.
|
|
|
•
|
Shares of Series D Convertible Preferred Stock are not entitled to a liquidation preference.
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|
•
|
Conversions of the Series D Convertible Preferred Stock shall be limited such that any given conversion shall not cause the holder's aggregate beneficial ownership of the shares of common stock to exceed
9.99%
of the Company’s outstanding common stock.
|
|
|
•
|
The shares of Series D Convertible Preferred Stock shall have no voting rights except as required by law.
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|
|
•
|
The consent of the holders of a majority of the shares of Series D Convertible Preferred Stock is necessary for the Company to amend the Series D certificate of designation.
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The Series D Convertible Preferred Stock is classified as a component of stockholders' equity in the accompanying consolidated balance sheets. There were no shares of Series D Convertible Preferred Stock outstanding at September 30, 2016 and June 30, 2016.
Series E Convertible Preferred Stock
On July 7, 2016, the Company created a new class of Series E Convertible Preferred Stock (the "Series E Convertible Preferred Stock") by filing a Certificate of Designation of the Series E Convertible Preferred Stock of the Company (the "Series E Certificate of Designation") with the Secretary of State of the State of Delaware. The Company authorized the issuance of up to
10,000
shares of the Series E Convertible Preferred Stock. The rights, preferences, privileges and restrictions of the shares of Series E Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are contained in the Series E Certificate of Designation and are summarized as follows:
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•
|
The shares of Series E Convertible Preferred Stock have a stated value of
$1,000
per share (the "Stated Value").
|
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|
•
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Subject to the satisfaction of certain conditions as set forth therein, each share of Series E Convertible Preferred Stock is convertible, at the option of the holders, on the basis of its Stated Value and accrued, but unpaid Dividends, into shares of the Company's common stock at a conversion price equal to the lesser of
$5.20
or the Exchange Price.
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|
|
•
|
The shares of Series E Convertible Preferred Stock shall have no voting rights except as required by law.
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|
|
•
|
The consent of the holders of a majority of the shares of Series E Convertible Preferred Stock is necessary for the Company to amend its Series C Certificate of Designation.
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As of September 30, 2016, there were
4,435
shares of Series E Convertible Preferred Stock outstanding. There were no shares of Series E Convertible Preferred Stock outstanding as of June 30, 2016.
Subscription Agreement
On December 3, 2015, the Company and SIC IV entered into a Subscription Agreement pursuant to which SIC IV subscribed for
437,500
shares of the Company’s common stock at a price of
$9.40
per share. Accordingly, the aggregate purchase price for such shares was
$4,112
.
Non-controlling Interest
As discussed in Note 6, Acquisitions, on September 8, 2015, the Company acquired the assets of the DraftDay Business and its operations have been consolidated with the Company's operations as of that date. The Company has recorded non-controlling interest in its Consolidated Balance Sheets and Consolidated Statements of Operations for the portion of the DraftDay Business that the Company does not own. In the three months ended September 30, 2016, Sportech invested an additional
$121
into the DraftDay Business in exchange for shares of Series A Preferred Stock of DDGG for
$1
per share. In connection with termination of the Sportech MSA at June 30, 2016 (see Note 6, Acquisitions), Sportech returned
4,200
shares of DDGG stock. The Company reduced non-controlling interest by
$378
, which represents the fair value of these shares.
12.
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 Plan provides for the issuance of a maximum of
6,250,000
shares of common stock. Pursuant to the Executive Incentive Plan and the employment agreements, between February 15, 2011 and
September 30, 2016
, the Compensation Committee of the Company's Board of Directors authorized the grants of restricted stock and stock options described below.
Restricted Stock
Compensation expense related to restricted stock was $
15
and $
4,991
for the
three
months ended
September 30, 2016
and 2015, respectively. As of
September 30, 2016
, there was $
29
in total unrecognized share-based compensation costs related to restricted stock. There was
no
restricted stock granted during the three months ended September 30, 2016.
Stock Options
The Company accounts 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
. There were
no
options granted during the
three
months ended
September 30, 2016
and 2015.
Compensation expense related to stock options of $
12
and $
173
is included in the accompanying Consolidated Statements of Operations in selling, general and administrative expenses for the
three
months ended
September 30, 2016
and 2015, respectively. As of
September 30, 2016
, there was approximately $
133
of total unrecognized stock-based compensation cost which will generally be recognized over a
four
year period.
13. Income Taxes
For the
three
months ended
September 30, 2016
and 2015, the Company did not record an income tax benefit because it has incurred taxable losses and has no history of generating taxable income and therefore the Company cannot presently anticipate the realization of a tax benefit on its Net Operating Loss carryforward. At
September 30, 2016
the Company has a Net Operating Loss carryforward of approximately
$162,900
, which will begin to expire in 2030.
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.
14. Related Party Transactions
Shared Services Agreements
The Company also entered into a shared services agreement ("SFX Shared Services Agreement") with SFX, pursuant to which it shares costs for services provided by several of the Company's and/or SFX's employees. Such employees will continue to be paid by their current employers, and SFX will reimburse the Company directly for its portion of such salary and benefits and Company will reimburse SFX 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 Audit Committee of each company's Board of Directors reviews and, if appropriate, approves the allocations made and whether payments need to be adjusted or reimbursed, depending on the circumstances. The Company entered into an amendment (the “Amendment”) to the shared services agreement on January 22, 2015, pursuant to which the Company may provide additional services to SFX, and SFX may provide certain services to the Company. In particular, the shared services agreement provides that, in addition to services already provided, certain employees of the Company may provide human resources, content and programming, and facilities services to SFX, subject to reimbursement based on salary and benefits for the employees providing the services, plus
20%
for miscellaneous overhead, based on a reasonable estimate of time spent. In addition, the Amendment provides that SFX may provide certain tax services to the Company, subject to reimbursement based on salary and benefits for the employees providing the services, plus
20%
for miscellaneous overhead, based on a reasonable estimate of time spent.
The parties terminated the SFX Shared Services Agreement effective as of January 1, 2016. We continue to try to settle amounts remaining outstanding.
For the three months ended September 30, 2015, the Company was billed by SFX
, net of amounts billed by the Company to SFX, respectively. The net balance due (to)/from SFX, including amounts related to the Sales Agency Agreement, discussed below, as of
September 30, 2016
and June 30, 2016 was
$139
and
$142
, respectively.
License Agreement
On March 10, 2014, the Company entered into an audio recognition and related loyalty program software license and services agreement with SFX. Pursuant to the terms of the license agreement, SFX paid the Company
$5,000
to license its audio recognition software and related loyalty platform for a term of
10 years
. The amount was deferred and is being amortized over the
ten years
period. For the three months ended
September 30, 2016
and 2015, the Company recognized
$125
and
$125
, respectively of revenue related to this agreement.
Secured Line of Credit
On January 27, 2016, Sillerman Investment Company VI LLC (“SIC VI”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, entered into a secured revolving loan agreement (the “Secured Revolving Loan”) with the Company and its subsidiaries, Wetpaint and Choose Digital (collectively, the “Subsidiaries”), pursuant to which the Company can borrow up to
$1,500
. The Secured Revolving Loan bears interest at the rate of
12%
per annum. In connection with the Secured Revolving Loan, the Company and the Subsidiaries have entered into a Security Agreement (the “Security Agreement”) with SIC VI, under which the Company and the Subsidiaries have granted SIC VI a continuing security interest in all assets of the Company and the Subsidiaries, with the exception of the Company’s interest in DraftDay Gaming Group, Inc. The Company intends to use the proceeds from the Secured Revolving Loan to fund working capital requirements and for general corporate purposes in accordance with a budget to be agreed upon by SIC VI and the Company. As of June 30, 2016,
$1,500
had
been advanced thereunder. Because Mr. Sillerman is a director, executive officer and greater than
10%
stockholder of the Company, a majority of the Company’s independent directors approved the transaction. On August 22, 2016, the Company and SIC IV entered into an Note Exchange Agreement pursuant to which
$1,500
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC IV was exchanged for
1,500
shares of the Company’s Series C Convertible Preferred Stock at an exchange price of
$1,000
per share. See Note Exchange Agreement paragraph below for additional information on the August 22, 2016 exchange.
$500 Line of Credit
The Company and its subsidiaries entered into a secured, revolving Line of Credit on March 29, 2016 with SIC VI (the “Secured Revolving Line of Credit”), pursuant to which the Company can borrow up to
$500
. The Secured Revolving Line of Credit bears interest at the rate of
12%
per annum. In connection with the Secured Revolving Line of Credit, the Company and the Subsidiaries have entered into a Security Agreement (the “Security Agreement”) with SIC VI, under which the Company and the Subsidiaries have granted SIC VI a continuing security interest in all assets of the Company and the Subsidiaries, with the exception of the Company’s interest in DraftDay Gaming Group, Inc. The Company intends to use the proceeds from the Secured Revolving Line of Credit to fund working capital requirements and for general corporate purposes in accordance with a budget to be agreed upon by SIC VI and the Company. At June 30, 2016,
$500
had been advanced thereunder. On August 22, 2016, the Company and SIC VI entered into an Note Exchange Agreement pursuant to which
$500
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC VI was exchanged for
500
shares of the Company’s Series C Convertible Preferred Stock at an exchange price of
$1,000
per share. See Note Exchange Agreement paragraph below for additional information on the August 22, 2016 exchange.
Preferred Stock Conversion
Sillerman Investment Company III, LLC (“SIC III”), an affiliate of Robert F.X. Sillerman, the Company's Executive Chairman and Chief Executive Officer of the Company, owned
10,000
shares of Series C Convertible Redeemable Preferred Stock. On May 9, 2016 (the “Exchange Date”), the Company and SIC III entered into a Subscription Agreement pursuant to which SIC III subscribed for
1,129,032
shares of the Company’s common stock at a price of
$6.20
per share. Accordingly, the aggregate purchase price for such shares was
$7,000
. The Company and SIC III agreed that SIC III would pay the purchase price for such shares by exchanging
7,000
shares of the Company’s Series C Convertible Redeemable Preferred Stock owned by SIC III for the common stock (the “Exchange”). All conditions of the Subscription Agreement have been satisfied, and therefore
1,129,032
shares of the Company’s common stock were issued to SIC III. Mr. Sillerman and his affiliates now own more than
50%
of the outstanding shares of the Company’s common stock. The Company determined that this was a fair transaction and did not recognize any stock compensation expense in relation with the conversion.
Exchange Agreement
On July 8, 2016, the Company and SIC III, SIC IV and SIC VI, each an affiliate of Mr. Sillerman, entered into an Exchange Agreement pursuant to which, subject to adjustment, (i)
3,000
shares of the Company's Series C Preferred Stock owned by SIC III are to be exchanged for
890,898
shares of the Company's common stock and (ii) all of the debt held by Mr. Sillerman and such affiliates is to be exchanged for
5,066,654
shares of the Company's common stock. Issuance of the shares is conditioned upon approval of the Company’s shareholders (see "Shareholder Approval" in this section), the closing of an offering of the Company’s common stock in the amount of at least
$10,000
, approval of its Listing of Additional Shares application with NASDAQ, the Company shall not be subject to any bankruptcy proceeding, and various other conditions. The exchange price shall be equal to the lesser of
$5.20
and the price at which the Debentures can be exchanged for shares of the Company’s common stock. The Company received an independent valuation with respect to the original exchange that the exchange price of
$5.20
reflects fair value. Any additional change is subject to the receipt by the Company of an updated fair value determination. The agreement provides for termination in the event the conditions are not satisfied by March 31, 2017. At the date of this filing, this transaction has not yet closed.
Amended Exchange Agreement/Amended Grid Note
On July 18, 2016, SIC III, SIC IV and SIC VI, LLC entered into an amendment to the Exchange Agreement relating to the exchange of debt and shares of the Series C Preferred Stock of the Company for shares of the Company's common stock. The Exchange Agreement modified the Grid Note to provide that SIC IV shall be entitled to repayment of up to
$2,000
of the outstanding principal balance of the Grid Note and the Company shall be entitled to draw up to an additional
$5,000
.
$3,605
remains available to draw under the Grid Note and at the date of this filing, the current balance is
$1,405
.
Note Exchange Agreement
On August 22, 2016, the Company and SIC III, SIC IV, and SIC VI, each an affiliate of Mr. Sillerman, entered into a Note Exchange Agreement pursuant to which
$30,175
, which represents all of the outstanding principal and accrued interest of the Note, the Loans, the Secured Revolving Loan, the Secured Revolving Promissory Note, the Secured Revolving Promissory Note II, and the Secured Revolving Promissory Note III (all described and defined in Note 9, Loans Payable) other than
$900
of debt held by SIC IV pursuant to that certain Line of Credit Grid Promissory Note dated as of June 11, 2015 (see "Grid Note"), was exchanged for
30,175
shares of the Company’s Series C Preferred Stock (see "Amendment to Certificate of Designation of Series C Preferred Stock" in this section.) The exchange price is
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement, and subject to the additional obligations set forth in the Subordination Agreement and the Lockup Agreements. The Grid Note remains subject to the Exchange Agreement.
Related Approvals
Because the above transactions were 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 approved each of these transactions.
15. Fair Value Measurement
The Company values its assets and liabilities using the methods of fair value as described in ASC 820. 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
1,068
warrants in connection with the May 10, 2012 PIPE. Each warrant has a sale price of
$8,800
and is exercisable into
1
share of common stock at a price of
$12,800
over a term of
three 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 the price of newly issued shares (the "Warrants"). In connection with the PIPE Exchanges on September 16, 2013, the exercise price of the Warrants was reset to
$2
. The fair value of such 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
. On September 16, 2013,
341
warrants were exchanged in connection with the PIPE Exchanges. The remaining
14,545
warrants were marked to market as of
September 30, 2016
and 2015 to a fair value of $
10
and $
10
, respectively. The Company recorded gains/(losses) of
$0
and $
(5)
to other income, net in the Consolidated Statements of Operations for the nine months ended
September 30, 2016
and 2015, respectively. The fair value of the warrant is classified as a long-term liability on the Consolidated Balance Sheets as of
September 30, 2016
, due to the Company's intention to retire a significant portion of these warrants in its next round of financing. The Company's warrants were classified as a Level 3 input 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.
On February 8, 2016, the Company received Perk warrants as part of the consideration in the sale of the Viggle business. The carrying amount of Perk warrants held is marked-to-market on a quarterly basis using the Monte Carlo valuation model, in accordance with ASC 820-10,
Fair Value Measurements.
The changes to fair value are recorded in the Consolidated Statement of Operations. The fair value of the warrants when issued was $
1,023
. The warrants were marked to market as of
September 30, 2016
to a fair value of $
1,091
. The Company recorded a loss of $
503
to other expense, net in the Consolidated Statements of
Operations for the three months ended
September 30, 2016
. The fair value of the warrant was classified as an other asset on the Consolidated Balance Sheet as of
June 30, 2016
. The Perk warrants were classified as a Level 3 input 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.
In February 2016, the Company received
1,370,000
shares of Perk stock, which is publicly traded on the Toronto Stock Exchange, as part of the consideration in the sale of assets described in the Perk Agreement. These securities are short-term marketable securities, and have been classified as "available-for-sale" securities. Pursuant to ASC 320-10, "Investments - Debt and Equity Securities" the Company's marketable securities are marked to market on a quarterly basis, with unrealized gains and losses recorded in equity as Other Comprehensive Income/Loss.
On September 30, 2016, the Company sold to Perk the remaining shares (
1,013,068
) of Perk common stock, the warrants for additional shares, and the right to the Earn-Out Shares received from Perk on the sale of the Viggle rewards business on February 8, 2016. The Company received
$1,300
from Perk as consideration therefor. The execution of the Securities Purchase Agreement and closing were simultaneous. In connection with the sale of the Perk shares, the warrants for additional shares and the right to the Earn-Out Shares, the Company recorded a loss of
$2,193
in the Other Expense line item of the Consolidated Statements of Operations for the three months ended September 30, 2016.
As discussed in Note 6, Acquisitions, the Company purchased Rant on July 12, 2016. In conjunction with the Rant acquisition, the Company delivered a Secured Convertible Note to Rant in the amount of
$3,000
and issued
4,435
of Series E Convertible Preferred Stock. In accordance with ASC 820, the Company had the Secured Convertible Note and Series E Preferred Stock fair valued at the acquisition date. The fair value of the Rant Note was
$3,500
and the fair value of the Series E Preferred Stock was
$7,600
. The Rant Note and Series E Preferred Stock were recorded at their acquisition date fair values with a corresponding charges to goodwill in the Consolidated Balance Sheets at September 30, 2016.
On July 12, 2016, the Company closed the Private Placement of
$4,444
principal amount of the Debentures and Warrants. The Debentures and Warrants were fair valued at the Private Placement closing date. The fair value of the Conversion feature was
$1,856
and the fair value of the Warrants was
$1,500
. The Conversion feature and Warrants were recorded at the Private Placement closing date fair values with corresponding charges to debt discount of
$1,856
for the Debentures and
$1,500
for the Warrants in the Consolidated Balance Sheets at September 30, 2016.
On August 22, 2016, the Company and SIC III, SIC IV, SIC VI entered into an Note Exchange Agreement pursuant to which
$30,175
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC III, SIC IV, and SIC VI other than
$900
of debt held by SIC IV pursuant to that certain Line of Credit Grid Note dated as of June 11, 2015, was exchanged for
30,175
shares of the Company’s Series C Convertible Preferred Stock at an exchange price of
$1,000
per share. The Series C Convertible Preferred Stock was fair valued at the exchange date, August 22, 2016, and determined to be
$28,500
. The Series C Convertible Preferred Stock was recorded at the exchange date fair value with a corresponding charge to additional paid-in capital of
$1,675
in the Consolidated Balance Sheets at September 30, 2016.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs. During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment at the reporting unit level. For each acquisition, the Company performed a detailed review to identify intangible assets and a valuation is performed for all such identified assets. The Company used several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies, and/or revenue or EBITDA multiples, among other methods. The amounts allocated to assets acquired and liabilities assumed in the acquisitions were determined using Level 3 inputs. Fair value for property and equipment was based on other observable transactions for similar property and equipment. Accounts receivable represents the best estimate of balances that will ultimately be collected, which is based in part on allowance for doubtful accounts reserve criteria and an evaluation of the specific receivable balances.
Where goodwill has been allocated to a reporting unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the
portion of the reporting units retained. The relative fair value of each reporting unit is established using discounted expected cash flow methodologies, and/or revenue or EBITDA multiples, or other applicable valuation methods, which are considered to be Level 3 inputs.
The following table presents a reconciliation of assets measured at fair value on a recurring basis using unobservable inputs (level 3):
|
|
|
|
|
|
(in thousands)
|
|
|
Balance at July 1, 2016
|
$
|
648
|
|
Unrealized losses for the period included in other income (expense), net
|
(503
|
)
|
Sale of Perk warrants
|
(145
|
)
|
Balance at September 30, 2016
|
$
|
—
|
|
As noted above, on September 30, 2016, the Company sold to Perk the remaining shares of Perk common stock, the warrants for additional shares, and the right to the Earn-Out Shares received from Perk on the sale of the Viggle rewards business on February 8, 2016. The Company received
$1,300
from Perk as consideration therefor. In connection with the sale of the Perk shares, the warrants for additional shares and the right to the Earn-Out Shares, the Company recorded a loss of
$2,193
in the Other Expense line item of the Consolidated Statements of Operations for the three months ended September 30, 2016.
The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using unobservable inputs (level 3):
|
|
|
|
|
|
(in thousands)
|
|
|
Balance at July 1, 2016
|
$
|
10
|
|
Additions to Level 3
|
—
|
|
Balance at September 30, 2016
|
$
|
10
|
|
16. Subsequent Events
MGT Shares
On October 10, 2016, the Company satisfied the MGT Notes through the issuance of
136,304
shares of its common stock and payment of interest of
$16
.
Events of Default
The Company is currently in default under the Debentures issued in the Private Placement for failure to make the first amortization payment and for failure to maintain the Minimum Cash Reserve.
On October 12, 2016, the first amortization payment in the amount of
$444
, plus accrued interest of approximately
$114
pursuant to the terms of the Debentures became due and payable to the Purchasers. The Company did not make such payment at the time it was due.The Company entered into waiver agreements with Purchasers holding approximately
87%
of the principal amount of the Debentures. Such waivers are not binding on the remaining Purchasers of the Debentures. Pursuant to the terms of the Waiver, the Purchasers have agreed to waive the payment of the amortization payments and accrued interest due for October 2016 and November 2016. In consideration for waiving the payment terms of the Debentures, the Company has agreed to pay, upon execution of the Waiver,
10%
of the Amortization Amount that became due on October 12, 2016 and has agreed to pay on November 12, 2016
10%
of the Amortization Amount due in November 2016. All other amounts will be due and payable in accordance with the terms of the Debentures, with the deferred payments due at maturity. The Company did not receive a waiver from one of its debenture holders, holding approximately
13%
of the principal amount of the Debentures with respect to the event of default arising out of the Company’s failure to make the first amortization payment when due. Pursuant to the terms of the Debentures, such holder has sent a notice of acceleration, stating that the Company owes
$696
, reflecting the principal amount of the Debenture plus interest through November 1, 2016. Interest will accrue at
18%
until this amount is satisfied. The Company is seeking to settle the matter with the holder; however, there can be no assurance that an agreement will be reached.
The waivers entered into with some of the Purchasers related to the failure to pay the amortization amount do not address the failure to maintain the Minimum Cash Reserve. Pursuant to the terms of the Debentures, the failure to cure the non-payment of amortization or failure to maintain the Minimum Cash Reserve within three trading days after the due date constitutes an Event of Default. Following the occurrence of an event of default, among other things: (1) at the Purchaser’s election, the outstanding principal amount of the Debentures, plus accrued but unpaid interest, plus all interest that would have been earned through the one year anniversary of the original issue date if such interest has not yet accrued, liquidated damages and other amounts owed through the date of acceleration, shall become, immediately due and payable in either cash or stock pursuant to the terms of the Debentures; and (2) the interest rate on the Debentures will increase to the lesser of
18%
or the maximum allowed by law. In addition to other remedies available to the Purchasers. the Company's obligation to repay amounts due under the Debentures is secured by a first priority security interest in and lien on all of the Company's assets and property, including the Company's intellectual property, and such remedies can be exercised by the Purchasers without additional notice to the Company.
Under terms of the
$3,000
Secured Convertible Note issued in connection with the acquisition of Rant, a default under other indebtedness owed by the Company constitutes a default under the Rant Note. As a result of such Event of Default, the holder of the Rant Note has executed a waiver that provides that, until May 15, 2017, the events of default arising out of the failure to pay the amounts due under the Debentures as of the date of the waiver and the failure by the Company to maintain the Minimum Cash Reserve shall not constitute events of default for purposes of the Rant Note.
Pursuant to the terms of the Registration Rights Agreement, the Company is required to pay liquidated damages to the Purchasers if the resale Registration Statement, of which this prospectus is a part, was not declared effective within 90 days of the filing deadline, which was August 11, 2016. As a result, the Purchasers are entitled to liquidated damages on the date the deadline was missed and on each monthly anniversary thereafter until the Registration Statement is declared effective calculated as follows:
|
|
•
|
1.5% of the purchase price paid for securities purchased pursuant to the Purchase Agreement payable in cash; and
|
|
|
•
|
Shares of Common Stock of the Company equivalent to 1.5% of the purchase price divided by the average closing bid price for the Company’s common stock for the five-day period prior to the date liquidated damaged became due (or the monthly anniversary thereof).
|
After the first monthly anniversary, any liquidated damages will be pro-rated on a daily basis for any portion of a month before the Registration Statement is declared effective. In no event will the Company be liable for liquidated damages in excess of 12% of the aggregate purchase price of securities purchased under the Purchase Agreement.
Departure of an Officer
On October 18, 2016, Olga Bashkatova resigned her position as the Controller and Principal Accounting Officer of the Company effective October 26, 2016. Her employment agreement with the Company, previously reported on the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016, was terminated as of October 26, 2016.
NASDAQ Status
The Company's common stock is listed on The NASDAQ Capital Market under the symbol FNCX. The NASDAQ Staff informed the Company that it failed to comply with NASDAQ's continued listing criteria for stockholders’ equity and minimum bid price. In response, the Company appealed the decision to a NASDAQ Listing Qualifications Panel (the “Panel”). Following the hearing and an extension of time to regain compliance granted by the Panel, the Company was notified by NASDAQ on November 1, 2016 that it had regained compliance with the stockholders’ equity and bid price requirements. The Panel further indicated, however, that the Company will remain subject to a “Panel Monitor” as that term is defined under NASDAQ Listing Rule 5815(d)(4)(A), through November 1, 2017.
Under the terms of the Panel Monitor, in the event the Company’s stockholders’ equity falls below the $2.5 million threshold (or any other requirement that would ordinarily require the Company to submit a compliance plan to the NASDAQ Staff) during the monitor period and the Company does not qualify for continued listing under an alternative to the stockholders’ equity requirement, the Panel will promptly conduct a hearing with respect to the stockholders’ equity deficiency.
In addition, the Company received a letter from NASDAQ that due to the resignation of Birame Sock as a director, the Company is no longer in compliance with NASDAQ rules relating to independent directors and audit committee compliance. The Company has until February 1, 2017 to regain compliance with these requirements.
Secured Lines of Credit
Since the three months ended September 30, 2016, the Company borrowed an additional
$505
under the SIC IV Line of Credit as of the date of this filing. The principal amount now outstanding under the Line of Credit is
$2,115
and the Company is entitled to draw up to an additional
$3,785
under the Line of Credit.
Function(x) Inc. (formerly known as Viggle Inc.)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Function(x) Inc. (formerly known as Viggle Inc.)
New York, New York
We have audited the accompanying consolidated balance sheets of Function(x) Inc. (the “Company”) (formerly known as Viggle Inc.) as of June 30, 2016 and 2015, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Function(x) Inc. (formerly known as Viggle Inc.) at June 30, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and at June 30, 2016 has a deficiency in working capital that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
New York, NY
October 11, 2016
FINANCIAL STATEMENTS
Function(x) Inc.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
Assets
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
537
|
|
|
$
|
4,217
|
|
Marketable securities
|
2,495
|
|
|
—
|
|
Accounts receivable (net of allowance for doubtful accounts of $20 at June 30, 2016 and 2015)
|
307
|
|
|
838
|
|
Prepaid expenses
|
226
|
|
|
483
|
|
Other receivables
|
114
|
|
|
661
|
|
Other current assets
|
110
|
|
|
—
|
|
Current assets of discontinued operations
|
39
|
|
|
3,431
|
|
Total current assets
|
3,828
|
|
|
9,630
|
|
Restricted cash
|
440
|
|
|
695
|
|
Property & equipment, net
|
1,414
|
|
|
2,334
|
|
Intangible assets, net
|
5,339
|
|
|
18,683
|
|
Goodwill
|
11,270
|
|
|
24,722
|
|
Other assets
|
748
|
|
|
270
|
|
Non-current assets of discontinued operations
|
—
|
|
|
13,895
|
|
Total assets
|
$
|
23,039
|
|
|
$
|
70,229
|
|
|
|
|
|
Liabilities, convertible redeemable preferred stock and stockholders' (deficit) equity
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
11,625
|
|
|
$
|
10,040
|
|
Deferred revenue
|
637
|
|
|
593
|
|
Current portion of loans payable
|
8,996
|
|
|
1,575
|
|
Current liabilities of discontinued operations
|
2,851
|
|
|
13,278
|
|
Total current liabilities
|
24,109
|
|
|
25,486
|
|
Loans payable, less current portion
|
19,716
|
|
|
22,516
|
|
Deferred revenue
|
3,429
|
|
|
3,854
|
|
Common stock warrant liability
|
10
|
|
|
10
|
|
Other long-term liabilities
|
951
|
|
|
1,678
|
|
Non-current liabilities of discontinued operations
|
—
|
|
|
538
|
|
Total liabilities
|
48,215
|
|
|
54,082
|
|
|
|
|
|
Series A Convertible Redeemable Preferred Stock, $1,000 stated value, authorized 100,000 shares, issued and outstanding -0- shares as of June 30, 2016 and 2015
|
—
|
|
|
—
|
|
|
|
|
|
Series C Convertible Redeemable Preferred Stock, $1,000 stated value, authorized 100,000 shares, issued and outstanding of 3,000 and 10,000 shares as of June 30, 2016 and 2015, respectively
|
4,940
|
|
|
11,815
|
|
|
|
|
|
Commitments and contingencies
|
—
|
|
|
—
|
|
|
|
|
|
Stockholders' (deficit) equity:
|
|
|
|
Series B Convertible Preferred Stock, $1,000 stated value, authorized 50,000 shares, issued and outstanding -0- shares as of June 30, 2016 and 2015
|
—
|
|
|
—
|
|
Series D Convertible Preferred Stock, $1,000 stated value, authorized 150 shares, issued and outstanding -0- shares as of June 30, 2016 and 2015
|
—
|
|
|
—
|
|
Common stock, $0.001 par value: authorized 15,000,000 shares, issued and outstanding 3,023,753 and 1,169,156 shares as of June 30, 2016 and 2015, respectively
|
3
|
|
|
1
|
|
Additional paid-in-capital
|
409,765
|
|
|
383,607
|
|
Treasury stock, 10,758 shares at June 30, 2016 and 2015
|
(11,916
|
)
|
|
(11,916
|
)
|
Accumulated deficit
|
(428,380
|
)
|
|
(367,360
|
)
|
Accumulated other comprehensive loss
|
(361
|
)
|
|
—
|
|
Non-controlling interest
|
773
|
|
|
—
|
|
Total stockholders' (deficit) equity
|
(30,116
|
)
|
|
4,332
|
|
Total liabilities, convertible redeemable preferred stock and stockholders' (deficit) equity
|
$
|
23,039
|
|
|
$
|
70,229
|
|
See accompanying Notes to Consolidated Financial Statements
Function(x) Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
Revenues
|
$
|
4,509
|
|
|
$
|
5,674
|
|
Selling, general and administrative expenses
|
(29,324
|
)
|
|
(47,072
|
)
|
Impairment loss (see Note 8)
|
(28,541
|
)
|
|
(2,085
|
)
|
Operating loss
|
(53,356
|
)
|
|
(43,483
|
)
|
|
|
|
|
Other income (expense):
|
|
|
|
Other income, net
|
(23
|
)
|
|
6
|
|
Interest expense, net
|
(3,788
|
)
|
|
(2,050
|
)
|
Total other expense, net
|
(3,811
|
)
|
|
(2,044
|
)
|
|
|
|
|
Net loss before provision for income taxes
|
(57,167
|
)
|
|
(45,527
|
)
|
|
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
|
|
|
Net loss from continuing operations
|
(57,167
|
)
|
|
(45,527
|
)
|
|
|
|
|
Net loss from discontinued operations, net of tax
|
(6,522
|
)
|
|
(33,012
|
)
|
|
|
|
|
Net loss
|
(63,689
|
)
|
|
(78,539
|
)
|
|
|
|
|
Accretion of Convertible Redeemable Preferred Stock
|
280
|
|
|
135
|
|
|
|
|
|
Undeclared Series C Convertible Redeemable Preferred Stock Dividend
|
(1,156
|
)
|
|
(468
|
)
|
|
|
|
|
Add: Net loss attributable to non-controlling interest
|
$
|
1,826
|
|
|
$
|
—
|
|
|
|
|
|
Net loss attributable to common stockholders
|
$
|
(62,739
|
)
|
|
$
|
(78,872
|
)
|
|
|
|
|
Net loss per common stock - basic and diluted:
|
|
|
|
Continuing operations
|
$
|
(33.03
|
)
|
|
$
|
(54.78
|
)
|
Discontinued operations
|
$
|
(3.83
|
)
|
|
$
|
(39.44
|
)
|
Net loss per common stock attributable to common stockholders - basic and diluted
|
$
|
(36.86
|
)
|
|
$
|
(94.22
|
)
|
|
|
|
|
Weighted average common stock outstanding - basic and diluted
|
1,702,080
|
|
|
837,093
|
|
See accompanying Notes to Consolidated Financial Statements
Function(x) Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
Net loss
|
$
|
(63,689
|
)
|
|
$
|
(78,539
|
)
|
Other comprehensive income, net of tax
|
|
|
|
Unrealized loss on available for sale securities
|
(361
|
)
|
|
—
|
|
Other comprehensive loss
|
(361
|
)
|
|
—
|
|
Comprehensive loss
|
$
|
(64,050
|
)
|
|
$
|
(78,539
|
)
|
Function(x) Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
Class D Preferred Stock
|
Additional Paid-In
Capital
|
Treasury Stock
|
Accumulated Other Comprehensive Loss
|
Accumulated Deficit
|
Non-Controlling Interest
|
Total
|
Balance June 30, 2014
|
$
|
1
|
|
$
|
—
|
|
$
|
340,178
|
|
$
|
(11,556
|
)
|
$
|
—
|
|
$
|
(288,821
|
)
|
$
|
—
|
|
$
|
39,802
|
|
Net loss
|
|
|
|
|
|
(78,539
|
)
|
|
(78,539
|
)
|
Purchase of common stock from former officer
|
|
|
|
(360
|
)
|
|
|
|
(360
|
)
|
Accretion of Series C Convertible Redeemable Preferred Stock
|
|
|
135
|
|
|
|
|
|
135
|
|
Undeclared Series C Preferred Stock Dividend
|
|
|
(468
|
)
|
|
|
|
|
(468
|
)
|
Common stock offerings
|
|
|
12,459
|
|
|
|
|
|
12,459
|
|
Common stock issued for services
|
|
|
208
|
|
|
|
|
|
208
|
|
Common stock issued in settlement of Blue Spike litigation
|
|
|
139
|
|
|
|
|
|
139
|
|
Share based compensation in connection with Securities Purchase Agreement
|
|
|
2,657
|
|
|
|
|
|
2,657
|
|
Restricted stock - share based compensation
|
|
|
24,649
|
|
|
|
|
|
24,649
|
|
Employee stock options share based compensation
|
|
|
3,650
|
|
|
|
|
|
3,650
|
|
Balance June 30, 2015
|
$
|
1
|
|
$
|
—
|
|
$
|
383,607
|
|
$
|
(11,916
|
)
|
$
|
—
|
|
$
|
(367,360
|
)
|
$
|
—
|
|
$
|
4,332
|
|
Net loss
|
|
|
|
|
|
(61,863
|
)
|
$
|
(1,826
|
)
|
(63,689
|
)
|
Unrealized loss on marketable securities
|
|
|
|
|
(361
|
)
|
|
|
(361
|
)
|
Common stock issued for DraftDay acquisition
|
|
|
1,755
|
|
|
|
|
610
|
|
2,365
|
|
Common stock and warrants of Draftday issued for management service contracts
|
|
|
|
|
|
|
1,733
|
|
1,733
|
|
Series A investment into DDGG
|
|
|
|
|
|
|
256
|
|
256
|
|
Series D issuance
|
|
110
|
|
|
|
|
|
|
110
|
|
Series D conversion to common stock
|
|
(110
|
)
|
110
|
|
|
|
|
|
—
|
|
Common stock issued for MGT debt conversion
|
|
|
797
|
|
|
|
|
|
797
|
|
Conversion of Sillerman debt to common stock
|
1
|
|
|
4,111
|
|
|
|
|
|
4,112
|
|
Common stock issued for Kuusamo debt conversion
|
|
|
71
|
|
|
|
|
|
71
|
|
Common stock issued to Coda search - debt conversion
|
|
|
5
|
|
|
|
|
|
5
|
|
Common stock purchased - PP - Reaz Islam
|
|
|
200
|
|
|
|
|
|
200
|
|
Accretion of Series C Convertible Redeemable Preferred Stock
|
|
|
280
|
|
|
|
|
|
280
|
|
Undeclared Series C Preferred Stock Dividend
|
|
|
(1,156
|
)
|
|
|
|
|
(1,156
|
)
|
Series C conversion to common
|
1
|
|
|
7,750
|
|
|
|
|
|
7,751
|
|
Interest income on note receivable from shareholders
|
|
|
2
|
|
|
|
|
|
2
|
|
Other matter related to Choose Digital RSUs (Note 12)
|
|
|
|
|
|
843
|
|
|
843
|
|
Restricted stock - share based compensation
|
|
|
11,998
|
|
|
|
|
|
11,998
|
|
Employee stock options - share based compensation
|
|
|
235
|
|
|
|
|
|
235
|
|
Balance June 30, 2016
|
$
|
3
|
|
$
|
—
|
|
$
|
409,765
|
|
$
|
(11,916
|
)
|
$
|
(361
|
)
|
$
|
(428,380
|
)
|
$
|
773
|
|
$
|
(30,116
|
)
|
See accompanying Notes to Consolidated Financial Statements
Function(x) Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
Net loss
|
$
|
(63,689
|
)
|
|
$
|
(78,539
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Restricted stock based compensation
|
11,998
|
|
|
24,649
|
|
Employee stock options - share based compensation
|
235
|
|
|
3,650
|
|
Share based compensation in connection with securities purchase agreement
|
—
|
|
|
4,140
|
|
Write-off of certain intangible assets related to Choose Digital
|
—
|
|
|
2,086
|
|
Stock issued for services
|
—
|
|
|
208
|
|
Stock issued in settlement of litigation
|
—
|
|
|
139
|
|
Gain on sale of a business
|
(1,262
|
)
|
|
—
|
|
Gain on settlement of accounts payable
|
(2,132
|
)
|
|
—
|
|
Fair value loss in financial assets
|
376
|
|
|
—
|
|
Loss on abandonment of assets
|
173
|
|
|
—
|
|
Loss on settlement of receivables
|
549
|
|
|
—
|
|
Impairment loss
|
28,541
|
|
|
—
|
|
Decrease in fair value of common stock warrants
|
—
|
|
|
(5
|
)
|
Increase in fair value of contingent consideration related to acquisitions
|
—
|
|
|
2,222
|
|
Accretion of note discount
|
200
|
|
|
115
|
|
Depreciation and amortization
|
3,748
|
|
|
6,040
|
|
Interest income on notes receivable from shareholders and officer
|
(2
|
)
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Marketable securities
|
(148
|
)
|
|
—
|
|
Accounts receivable
|
3,299
|
|
|
(157
|
)
|
Other receivables
|
547
|
|
|
(581
|
)
|
Prepaid expenses
|
2,065
|
|
|
316
|
|
Other assets
|
319
|
|
|
41
|
|
Deferred revenue
|
(381
|
)
|
|
(818
|
)
|
Points liability
|
(64
|
)
|
|
4,102
|
|
Accounts payable and accrued expenses
|
6,213
|
|
|
1,737
|
|
Other liabilities
|
(180
|
)
|
|
(40
|
)
|
Net cash used in operating activities
|
(9,595
|
)
|
|
(30,695
|
)
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Purchase of property and equipment
|
—
|
|
|
(113
|
)
|
Capitalized software costs
|
—
|
|
|
(1,051
|
)
|
Net cash used in investing activities
|
—
|
|
|
(1,164
|
)
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Issuance of common stock and warrants for cash
|
200
|
|
|
12,459
|
|
Proceeds from loans
|
11,535
|
|
|
35,975
|
|
Repayments on loans
|
(3,000
|
)
|
|
(27,000
|
)
|
Sale of Class C Convertible Redeemable Preferred Stock
|
—
|
|
|
10,000
|
|
Purchase of common stock from former officer
|
—
|
|
|
(360
|
)
|
Restricted cash
|
—
|
|
|
4,995
|
|
Payments related to contingent consideration
|
(2,570
|
)
|
|
—
|
|
Repayment on notes payable
|
(250
|
)
|
|
—
|
|
Net cash provided by financing activities
|
5,915
|
|
|
36,069
|
|
|
|
|
|
Net change in cash
|
(3,680
|
)
|
|
4,210
|
|
|
|
|
|
Cash at beginning of period
|
4,217
|
|
|
7
|
|
|
|
|
|
Cash at end of period
|
$
|
537
|
|
|
$
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
110
|
|
|
$
|
999
|
|
Landlord lease incentive build-out allowance
|
$
|
—
|
|
|
$
|
449
|
|
Common stock and warrants issued for DraftDay acquisition
|
$
|
1,755
|
|
|
$
|
—
|
|
DDGG common stock and warrants issued for DraftDay acquisition
|
$
|
610
|
|
|
$
|
—
|
|
Notes issued for DraftDay acquisition
|
$
|
2,250
|
|
|
$
|
—
|
|
Common stock and warrants issued for management service contracts
|
$
|
2,111
|
|
|
$
|
—
|
|
Common stock issued for partially settled notes related to DraftDay acquisition
|
$
|
868
|
|
|
$
|
—
|
|
Preferred Series D shares issued to partially settle notes related to DraftDay acquisition
|
$
|
110
|
|
|
$
|
—
|
|
Settlement of Perk Loan in common stock
|
$
|
1,000
|
|
|
$
|
—
|
|
Loans converted to common stock
|
$
|
4,117
|
|
|
$
|
—
|
|
Preferred Series C shares converted to common stock
|
$
|
7,751
|
|
|
$
|
—
|
|
Reversal of Choose Digital RSU liability (Note 12)
|
$
|
843
|
|
|
$
|
—
|
|
See accompanying Notes to Consolidated Financial Statements
Function(x) Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
1. Basis of Presentation and Consolidation
On January 27, 2016, Function(x) Inc. (“Function(x)” and/or the “Company”) changed its name from Viggle Inc. to DraftDay Fantasy Sports, Inc. ("DraftDay"), and changed its ticker symbol from VGGL to DDAY. On June 10, 2016, the Company changed its name from DraftDay Fantasy Sports, Inc. to Function(x) Inc., and changed its ticker symbol from DDAY to FNCX. It now conducts business under the name Function(x) Inc. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. The Company has
nine
wholly-owned subsidiaries, Function(x) Inc., Project Oda, Inc., Sports Hero Inc., Loyalize Inc., Viggle Media Inc., VX Acquisition Corp., Nextguide Inc., Wetpaint.com, Inc. ("Wetpaint"), and Choose Digital Inc. ("Choose Digital"), each a Delaware corporation. The Company also owns approximately
49%
of the issued and outstanding common stock of DDGG, and also appoints a majority of the members of its Board of Directors. All significant intercompany accounts and transactions have been eliminated in consolidation.
On September 8, 2015, the Company and its newly created subsidiary DraftDay Gaming Group, Inc. (“DDGG”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with MGT Capital Investments, Inc. (“MGT Capital”) and MGT Sports, Inc. (“MGT Sports”), pursuant to which the Company acquired all of the assets of the DraftDay.com business (the “DraftDay Business” or "DraftDay.com") from MGT Capital and MGT Sports.
On February 8, 2016, the Company completed the sale of assets related to the Company’s rewards business, including the Viggle App, in accordance with the Asset Purchase Agreement (the "Perk Agreement") with Perk.com, Inc. ("Perk") entered into on December 13, 2015. Management entered into this binding sales agreement following a strategic decision to divest the operations related to the Viggle App and place greater focus on its remaining businesses. The assets, liabilities and operations related to Loyalize Inc., and Nextguide Inc. (as well as the portion of the assets relating to the Company's discontinued rewards business within the Company) have been classified as discontinued operations in the accompanying consolidated financial statements for all periods presented. In accordance with Accounting Standards Codification ("ASC") No. 205,
Presentation of Financial Statements
, the inter-segment revenues and expenses related to services provided by Choose Digital to the Viggle rewards business (discontinued operations) are presented at cost in the Consolidated Statements of Operations.
In December 2015, as a result of the sale of certain assets to Perk and acquisition of the DraftDay Business, we reorganized the organizational management and oversight of the Company into three segments (see Note 4, Segments). Accordingly, prior period financial information has been recast to confirm to the current period presentation. These changes impacted Note 4: Segments and Note 3: Summary of Significant Accounting Policies, with no impact on consolidated net loss or cash flows in any period.
On July 12, 2016, the Company and RACX Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“RACX”), completed an acquisition pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rant, Inc., a Delaware corporation, pursuant to which RACX has acquired the assets of Rant (the “Asset Purchase”) used in the operation of Rant’s Rant.com independent media network and related businesses (the “Rant Assets”). We acquired assets of Rant for
$2,000
in assumed liabilities, a
$3,000
note, and
4,435
shares of Function(x) Inc. Series E Convertible Preferred Stock which, upon satisfaction of certain conditions including shareholder approval, will be convertible into shares of our common stock equal to
22%
of the fully diluted shares outstanding, in a move to become a market leader in social publishing.
On September 16, 2016,the Company amended its Certificate of Incorporation to effect a reverse stock split of all issued and outstanding shares of common stock at a ratio of 1 for 20 (the "Reverse Stock Split"). Owners of fractional shares outstanding after the Reverse Stock Split will be paid cash for such fractional interests. The effective date of the Reverse Stock Split is September 16, 2016. All common stock share amounts disclosed in these financial statements have been adjusted to reflect the Reverse Stock Split.
Going Concern
These consolidated 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 and therefore there is substantial doubt about the Company’s ability to continue as a going concern
within one year after the financial statements are issued. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
2. Line of Business
The Company conducts business through
three
operating segments: Wetpaint, Choose Digital and DDGG. These operating segments are described below.
Through 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 55 new articles, videos and galleries each day. The Company generates revenues through wetpaint.com by displaying advertisements to wetpaint.com users as they view its content.
Choose Digital is a white-label digital marketplace featuring a recent and wide range of digital content, including music, movies, TV shows, eBooks and audiobooks. The content is sourced from the world’s leading record companies and book publishers and an aggregator of movie and TV content. Choose Digital generates revenues when participants in Choose Digital's clients' loyalty programs redeem loyalty credits for digital content provided by Choose Digital. For example, if a participant in a loyalty program redeems credits for a song download provided by Choose Digital, the client loyalty program pays Choose Digital for the download.
The Company's wholly owned subsidiary, DDGG, made a recent investment in the DraftDay.com platform. Through DraftDay.com, users can draft a fantasy sports team within a salary cap, follow game action and reap rewards. DraftDay.com will continue to offer high-quality entertainment to consumers as well as to businesses desiring turnkey solutions to new revenue streams. See Note 6, Acquisitions, for further details on this acquisition.
3. Summary of Significant Accounting Policies
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 and security interest held by Deutsche Bank Trust Company Americas in connection with the Company's debt agreement more fully described in Note 9, Loans Payable.
Marketable Securities
In February 2016, the Company received
1,370,000
shares of Perk's stock, which is publicly traded on the Toronto Stock Exchange, as part of the consideration in the sale of assets described in the Perk Agreement. These securities are short-term marketable securities, and have been classified as “available-for-sale” securities. Pursuant to ASC 320-10, “
Investments - Debt and Equity Securities
” the Company's marketable securities are marked to market on a quarterly basis, with unrealized gains and losses recorded in equity as Other Comprehensive Income/Loss.
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.
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 years ended
June 30, 2016
and
June 30, 2015
were $
549
and
$0
, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount of Perk marketable securities held is marked-to-market on a quarterly basis using the closing day share price of the last business day of the quarter. The changes to fair value are recorded in Other Comprehensive Income/Loss. The carrying amount of Perk warrants held is marked-to-market on a quarterly basis using the Monte Carlo valuation model. The changes to fair value are recorded in the Consolidated Statement of Operations. The carrying amount of loans payable approximates fair value as current borrowing rates for the same, or similar issues, are the same as those that were given to the Company at the issuance of these loans.
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.
Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method of accounting. The Company allocates the purchase price of acquired companies to the identifiable assets acquired, liabilities assumed and any non-controlling interest based on their acquisition date estimated fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Any contingent consideration to be transferred to the acquiree is recognized at fair value at the acquisition date.
Determining the fair value of assets acquired and liabilities assumed requires the Company to make significant estimates and assumptions, including assumptions related to future cash flows, discount rates, asset lives and the probability of future cash pay-outs related to contingent consideration. The estimates of fair value are based upon assumptions believed to be reasonable by management, but are inherently uncertain and unpredictable and, therefore, actual results may differ from estimates. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Consolidated Statements of Operations.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company's reporting units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocated to a reporting unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the reporting units retained.
As required by Accounting Standards Codification (“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. As noted above, the Company has
three
reporting units. 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.
Historically, the Company had
one
reporting unit. However, in connection with the sale of a significant portion of the Company's assets (see Note 1, Basis of Presentation and Consolidation), the remaining operations were divided into
3
reporting units (see
Note 4, Segments). The Company engaged a third-party valuation firm to test the Choose Digital and Wetpaint reporting units for goodwill impairment. The DDGG reporting unit was not tested for impairment at December 31, 2015 as the acquisition of this entity occurred in September 2015. The Company determined that the fair value of both of the Wetpaint and Choose Digital reporting units were significantly below their respective carrying values, indicating that goodwill related to these reporting units may be impaired. The Company determined the fair value of all long-lived assets other than goodwill related to each reporting unit and calculated the residual goodwill value for each. Upon comparing the residual goodwill values to the respective carrying values, the Company determined that there was an impairment loss on both the Choose Digital and Wetpaint reporting units. As a result, the Company recorded an impairment loss of $
4,335
related to the Choose Digital reporting unit and $
10,708
related to the Wetpaint reporting unit in the Selling, general and administrative expense line of the Consolidated Statements of Operations during the six months ended December 31, 2015. Upon the finalization of the December 31, 2015 Choose Digital and Wetpaint goodwill impairment analysis, the consolidated goodwill ending balances as of March 31, 2016 were adjusted by
$3,350
at June 30, 2016. The Company also recorded an additional goodwill impairment loss of
$1,672
in the Selling, general and administrative expense line and reduced the gain on the sale of the Viggle Business by
$1,672
in the Consolidated Statement of Operations during the nine months ended March 31, 2016 as a result of the finalization of the December 2015 Choose Digital and Wetpaint impairment analysis. There were no other impairments of goodwill related to the Choose Digital or Wetpaint reporting units recorded during the year ended June 30, 2016.
At June 30, 2016, the Company determined that the fair value of the DDGG reporting unit was significantly below its carrying value, indicating that goodwill may be impaired. The Company determined the fair value of all long-lived assets other than goodwill and calculated the residual goodwill for the reporting unit. The residual goodwill was higher than the carrying value of goodwill related to the DDGG reporting unit, therefore the Company did not record an impairment loss for DDGG goodwill during the year ended
June 30, 2016
.
There were
no
impairments to goodwill recorded during the year ended
June 30, 2015
.
Other Long-Lived Assets
The Company accounts for the impairment of long-lived assets other than goodwill in accordance with ASC 360, “
Property, Plant, and Equipment”
("ASC 360"), 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.
At June 30, 2015, the Company determined that certain intangible assets related to the acquisition of Choose Digital were impaired. Due to a shift in the Company's business operations and utilization of its resources, during the fourth quarter of fiscal 2015, the Company determined that intangible assets related to customer relationships and trade name no longer had value. Therefore, such assets were written off as of
June 30, 2015
. The total amount of the write off was
$2,085
and is included in selling, general and administrative costs in the accompanying Consolidated Statements of Operations. There were
no
other impairments of long-lived assets during the year ended
June 30, 2015
.
At December 31, 2015, as described above, the Company determined that the fair value of the Choose Digital and Wetpaint reporting units tested was significantly below the respective carrying values and assessed the fair values of the long-lived assets other than goodwill for each reporting unit. Upon comparing the fair values of the long-lived assets to their respective carrying values, the Company recorded a loss of $
1,331
on intangible assets related to Choose Digital's software and licenses, and a loss of $
11,418
on intangible assets related to Wetpaint's technology, trademark, customer relationships and non-competition agreements, during the three months ended December 31, 2015. There were no other impairments of long-lived assets related to the Choose Digital or Wetpaint reporting units during the year ended June 30, 2016.
At June 30, 2016, the Company determined that certain intangible assets related to the acquisition of Draftday.com were impaired. At June 30, 2016, DDGG's Management Services Agreement By and Between DraftDay Gaming Group, Inc. and Sportech Racing, LLC ("Sportech MSA") terminated, which led to a significantly lower revenues forecast for the reporting unit. As a result, the Company determined that the intangible assets related to internally developed software, trade name and non-compete agreements were impaired. The Company recorded a loss of $
749
on intangible assets related to DDGG during the year ended
June 30, 2016
.
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
$1,498
and
$1,610
as of
June 30, 2016
and
June 30, 2015
, respectively, in accordance with ASC 350-40,
"Internal-use Software"
. Once software is placed into service, the Company records amortization on a straight-line basis over the estimated useful life of the software. The change in capitalized software is due to impairment of long-term assets related to Choose Digital and Wetpaint businesses described earlier, as well as the abandonment of certain technology as of January 1, 2016, and internal development costs.
DDGG Player Deposits
The Company maintains a separate bank account to hold player deposits in accordance with current industry regulations. The player deposits bank account represents money reserved for player withdrawals and winnings. Accordingly, the Company records an offsetting liability at the time of receipt of player deposits.
Deferred Rent
The Company currently leases office space for its corporate office, and as part of the lease agreement the landlord provided a rent abatement for the first
10 months
of the lease. In 2014, the Company entered into
two
lease agreements for its satellite offices which provided for tenant improvement work sponsored by the landlords. The abatement and landlord sponsored improvements have 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. The satellite office leases were terminated in Fiscal 2016. The Company wrote-off residual leasehold improvement and deferred rent balances related to landlord sponsored tenant improvement work, and recorded a write-off of
$83
in the Consolidated Statements of Operations for the year ended
June 30, 2016
.
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 third-party advertising via real-time bidding, which is typically sold on a per impression basis.
Deferred Revenue
: deferred revenue consists principally of prepaid but unrecognized revenue. 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 Emerging Issues Task Force 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 year ended
June 30, 2016
of
$428
and
$428
, respectively.
The Company recognized barter revenue and barter expense for the year ended
June 30, 2015
of
$437
and
$437
, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, "
Compensation - Stock Compensation"
("ASC 718"). 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 years ended
June 30, 2016
and
June 30, 2015
was
$603
and
$528
, respectively, including barter expense.
Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in ASC 740, "
Income Taxes"
("ASC 740"). 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. The Company assesses its income tax positions and record tax benefits for all years subject to examination based upon the Company's 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, the Company's 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.
Comprehensive Loss
In accordance with ASC 220,
"Comprehensive Income"
, the Company reports by major components and as a single total, the change in its net assets during the period from non-owner sources. Comprehensive income consists of net income (loss), accumulated other comprehensive income (loss), which includes certain changes in equity that are excluded from net income (loss). The Company’s comprehensive loss for all periods presented is related to the effect of an unrealized loss on available for sale marketable securities.
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 May 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"). The amendments in this update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which is not yet effective. This update focuses on improving several aspects of ASU 2014-09, such as assessing the collectability criterion in paragraph 606-10-25-1(e) and accounting for contracts that do not meet the criteria for step 1; presentation of sales taxes and other similar taxes collected from customers; noncash consideration; contract modifications at transition; and completed contracts at transition. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In April 2016, the FASB issued Accounting Standards Update 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10"). The amendments in this update affect the guidance in ASU 2014-09, which is not yet effective. This update focuses on clarifying the following two aspects of ASU 2014-09: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In March 2016, FASB issued Accounting Standards Update No. 2016-09, "Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). This update is intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including:(a)income tax consequences;(b)classification of awards as either equity or liabilities; and(c) classification on the statement of cash flows. ASU 2016-09 is effective for financial statements issued for annual periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-09 on its financial statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, "Leases" ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability,
which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its financial statements.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). Additionally, it requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Lastly, the standard eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, “Income taxes: Balance Sheet Classification of Deferred Taxes Business” (“ASU 2015-17”). Topic 740, Income Taxes, requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, ASU 2015-17 requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standard Update No. 2015-16, "Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"). This standard requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the ASU 2015-16 require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017 (July 1, 2017 for the Company). The Company does not believe that the adoption of ASU 2015-16 will have a material impact on its consolidated financial statements.
4. Segments
Historically, the Company had
one
operating segment. However, in connection with the sale of the Viggle rewards business (discontinued operations) to Perk in February 2016, which represents a significant portion of the Company's assets and revenues, the Company's remaining operations were divided into
three
operating segments. These segments offer different products and services are separately reviewed in internal management reports, and managed separately.
|
|
•
|
Wetpaint
: a media channel reporting original news stories and publishing information content covering top television shows, music, celebrities, entertainment news and fashion.
|
|
|
•
|
Choose Digital
: a business-to-business platform for delivering digital content.
|
|
|
•
|
DDGG
: a business-to-business operator of daily fantasy sports.
|
The accounting policies followed by the segments are described in Note 3, Summary of Significant Accounting Policies. The operating segments of the Company include the assets, liabilities, revenues and expenses that management has determined are specifically or primarily identifiable to each segment, as well as direct and indirect costs that are attributable to the operations of each segment. Direct costs are the operational costs that are administered by the Company following the shared services concept. Indirect costs are the costs of support functions that are provided on a centralized or geographic basis by the Company, which include, but are not limited to, finance, human resources, benefits administration, procurement support, information technology, legal, corporate strategy, corporate governance and other professional services and general commercial support functions.
Central support costs have been allocated to each operating segment based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method (primarily based on net sales or direct payroll costs), depending on the nature of the services received. Management considers that such allocations have been made on a reasonable basis, but may not necessarily be indicative of the costs that would have been incurred if the operating segments had been operated on a stand-alone basis for the periods presented.
Information regarding the results of each reportable segment is included below. Performance is measured based on unit profit after tax, as included in the internal management reports that are reviewed by the Chief Operating Decision Maker, who is the Company's Chief Executive Officer. Business unit profit is used to measure performance as management believes that such information is the most relevant in evaluating the success of each business and determining the going forward strategy for the Company as a whole.
Information about reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended June 30,
|
|
Wetpaint
|
Choose Digital
|
DDGG
|
Total
|
In thousands of U.S. dollars
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
External revenues
|
$
|
1,533
|
|
$
|
3,454
|
|
$
|
664
|
|
$
|
848
|
|
$
|
528
|
|
$
|
—
|
|
$
|
2,725
|
|
$
|
4,302
|
|
Inter-segment revenues (1)
|
—
|
|
—
|
|
1,285
|
|
855
|
|
—
|
|
—
|
|
1,285
|
|
855
|
|
|
|
|
|
|
|
|
|
|
Net loss, net of income taxes (2)
|
(27,560
|
)
|
(8,747
|
)
|
(7,621
|
)
|
(6,744
|
)
|
(5,194
|
)
|
—
|
|
(40,375
|
)
|
(15,491
|
)
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
(1) In September 2014, the Choose Digital business began providing digital content to the Viggle business. These inter-segment revenues are presented at Choose Digital's cost in this schedule and in the consolidated statements of operations.
|
(2) The net loss figures presented exclude certain corporate expenses detailed in the reconciliation to the consolidated net loss below.
|
Reconciliation of revenues attributable to reportable segments to consolidated revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
In thousands of U.S. dollars
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues attributable to reportable segments
|
$
|
4,010
|
|
|
$
|
5,157
|
|
Licensing revenues related to SFX licensing agreement
|
499
|
|
|
507
|
|
Other revenues
|
—
|
|
|
10
|
|
Revenues per Consolidated Statements of Operations
|
$
|
4,509
|
|
|
$
|
5,674
|
|
Reconciliation of net loss for reportable segments, net of income taxes to consolidated net loss from continuing operations, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars
|
|
Year Ended June 30, 2016
|
|
Year Ended June 30, 2015
|
|
|
|
|
|
|
Net loss for reportable segments, net of income taxes
|
$
|
(40,375
|
)
|
|
$
|
(15,491
|
)
|
Other net loss
|
|
(72
|
)
|
|
(659
|
)
|
|
|
|
(40,447
|
)
|
|
(16,150
|
)
|
|
|
|
|
|
|
Stock compensation related to corporate financing activities (1)
|
(11,017
|
)
|
|
(21,141
|
)
|
Corporate expenses, net allocated to discontinued operations (2)
|
(1,915
|
)
|
|
(3,262
|
)
|
Interest expense, net (3)
|
(3,788
|
)
|
|
(2,050
|
)
|
Loss on contingent consideration (4)
|
—
|
|
|
(2,222
|
)
|
Corporate financing expenses
|
—
|
|
|
(702
|
)
|
Consolidated net loss from continuing operations, net of tax
|
$
|
(57,167
|
)
|
|
$
|
(45,527
|
)
|
Notes:
|
|
|
|
|
|
(1) Stock compensation expense related to RSUs, options and warrants issued in connection with financing activities. Expenses related to financing activities are considered to be corporate expenses and are not allocated to reportable segments.
|
(2) Certain corporate expenses were allocated to the Viggle business, however such expenses are not classified as discontinued operations because they are fixed and are not affected by the sales transaction.
|
(3) Interest expense related to corporate debt instruments is not allocated to reportable segments.
|
(4) Contingent consideration loss related to Choose Digital (see Note 6,
Acquisitions).
|
Total assets for reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Wetpaint
|
Choose Digital
|
DDGG
|
Total
|
In thousands of U.S. dollars
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
Total assets for reportable segments
|
$
|
8,495
|
|
$
|
35,272
|
|
$
|
5,416
|
|
$
|
10,587
|
|
$
|
3,740
|
|
$
|
—
|
|
$
|
17,651
|
|
$
|
45,859
|
|
Reconciliation of assets attributable to reportable segments to consolidated assets of continuing operations:
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars
|
|
June 30, 2016
|
|
June 30, 2015
|
|
|
|
|
|
Total assets for reportable segments
|
$
|
17,651
|
|
|
$
|
45,859
|
|
Other assets (1)
|
5,349
|
|
|
8,723
|
|
Total consolidated assets, net of current and non-current assets of discontinued operations
|
$
|
23,000
|
|
|
$
|
54,582
|
|
Notes:
|
|
|
|
|
(1) Corporate assets that are not specifically related to any of the reporting units.
|
The Company continues to support the cash needs and operations of DDGG. As of June 30, 2016 the Company has transferred
$857
to the DDGG subsidiary. A portion of these transfers, or
$500
, was funded as part of the purchase price commitment. The remaining transfers are part of the subscription agreement entered into with DDGG on May 12, 2016 (see Note 6, Acquisitions).
5. Discontinued Operations
On February 8, 2016, the Company completed the sale of assets related to the Company’s rewards business, including the Viggle App, in accordance with the Perk Agreement entered into on December 13, 2015. Management entered into this binding sales agreement following a strategic decision to divest the operations related to the Viggle App and place greater focus on its remaining businesses. The Company has classified the Viggle assets, liabilities and operations as discontinued operations in the accompanying Consolidated Financial Statements for all periods presented. In accordance with ASC No. 205,
Presentation of Financial Statements
,
the inter-segment revenues and expenses related to services provided by Choose Digital to the Viggle rewards business (discontinued operations) are presented at cost in the Consolidated Statements of Operations.
On December 13, 2015, the Company entered into the Perk Agreement. Perk’s shares are currently traded on the Toronto Stock Exchange. On February 8, 2016, pursuant to the Perk Agreement, the Company completed the sale of the assets related to the Company’s rewards business, including the Viggle App, to Perk. The total consideration received, net of transaction fees, was approximately
$5,110
, and consisted of the following:
|
|
•
|
1,370,000
shares of Perk common stock, a portion of which was placed in escrow to satisfy any potential indemnification claims;
|
|
|
•
|
2,000,000
shares of Perk common stock if Perk’s total revenues exceed USD
$130,000
for the year ended December 31, 2016 or December 31, 2017;
|
|
|
•
|
a warrant entitling the Company to purchase
1,000,000
shares of Perk common stock at a strike price of CDN
$6.25
per share in the event the volume weighted average price (“VWAP”) of shares of Perk common stock is greater than or equal to CDN
$12.50
for
20
consecutive trading days in the
two
year period following the closing of the transaction;
|
|
|
•
|
a warrant entitling the Company to purchase
1,000,000
shares of Perk common stock at a strike price of CDN
$6.25
per share in the event the volume weighted average price (“VWAP”) of shares of Perk common stock is greater than or equal to CDN
$18.75
for
20
consecutive trading days in the
two
year period following the closing of the transaction;
|
|
|
•
|
Perk assumed certain liabilities of the Company, consisting of the Viggle points liability.
|
At the time the Company entered into the Perk Agreement, Perk provided the Company with a $
1,000
secured line of credit, which the Company fully drew down. The Company had the option of repaying amounts outstanding under that line of credit by reducing the number of Initial Perk Shares by
130,000
. The Company exercised this option and received
1,370,000
shares of Perk common stock at closing, and the amounts outstanding under the Line of Credit were deemed paid in full.
Escrow
At the closing,
37.5%
(
562,600
) of the Initial Perk Shares were issued and delivered to an escrow agent to be used exclusively for the purpose of securing the Company's indemnification obligations under the Perk Agreement.
On September 30, 2016, the Company sold to Perk the remaining shares (
1,013,068
) of Perk common stock, the warrants for additional shares, and the right to the Earn-Out Shares received from Perk on the sale of the Viggle rewards business on February 8, 2016. The Company received
$1,300
from Perk as consideration therefor. The execution of the Securities Purchase Agreement and closing were simultaneous. The escrowed shares were released as part of this transaction.
The Company recognized a gain of
$1,060
on this transaction, net of transaction fees.
Additionally, after the closing, the Company delivered
357,032
of the Initial Perk Shares to Gracenote, Inc. and Tribune Media Services, Inc., former providers of technology services of the Company, as per the Settlement and Transfer Agreement dated February 5, 2016, to satisfy an obligation. The Company recognized a gain of
$593
in the consolidated statements of operations for the year ended June 30, 2016.
Results of operations classified as discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
In thousands of U.S. dollars
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
$
|
5,321
|
|
|
$
|
19,852
|
|
Cost of watch points and engagement points
|
(3,416
|
)
|
|
(9,574
|
)
|
Selling, general and administrative expenses
|
(12,553
|
)
|
|
(43,203
|
)
|
Operating loss
|
|
|
(10,648
|
)
|
|
(32,925
|
)
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
Other income, net
|
|
|
4,169
|
|
|
—
|
|
Total other expense, net
|
|
|
4,169
|
|
|
—
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
(6,479
|
)
|
|
(32,925
|
)
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(43
|
)
|
|
(87
|
)
|
|
|
|
|
|
|
|
Net loss from discontinued operations, net of tax
|
$
|
(6,522
|
)
|
|
$
|
(33,012
|
)
|
Cash flows used in discontinued operations:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
In thousands of U.S. dollars
|
2016
|
|
2015
|
Net cash used in operating activities
|
$
|
(15,998
|
)
|
|
$
|
(17,984
|
)
|
Net cash used in investing activities
|
—
|
|
|
(843
|
)
|
Net cash used in discontinued operations
|
$
|
(15,998
|
)
|
|
$
|
(18,827
|
)
|
Current assets and Non-current assets used in discontinued operations:
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars
|
|
June 30, 2016
|
|
June 30, 2015
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
39
|
|
|
$
|
3,281
|
|
Prepaid expenses
|
|
—
|
|
|
150
|
|
Current assets of discontinued operations
|
$
|
39
|
|
|
$
|
3,431
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
Property and equipment, net
|
|
$
|
—
|
|
|
$
|
114
|
|
Intangible assets, net
|
—
|
|
|
2,630
|
|
Goodwill
|
|
—
|
|
|
11,111
|
|
Other assets
|
|
—
|
|
|
40
|
|
Non-current assets of discontinued operations
|
$
|
—
|
|
|
$
|
13,895
|
|
Current liabilities and Non-current liabilities used in discontinued operations:
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars
|
|
June 30, 2016
|
|
June 30, 2015
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
2,634
|
|
|
$
|
4,249
|
|
Reward points payable
|
|
—
|
|
|
9,029
|
|
Current portion of loan payable
|
|
217
|
|
|
—
|
|
Current liabilities of discontinued operations
|
$
|
2,851
|
|
|
$
|
13,278
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
538
|
|
Non-current liabilities of discontinued operations
|
$
|
—
|
|
|
$
|
538
|
|
6. Acquisitions
Acquisition of Choose Digital
On June 24, 2014, the Company acquired Choose Digital, a Miami, Florida based, digital marketplace platform that allows companies to incorporate digital content into existing rewards and loyalty programs in support of marketing and sales initiatives.
In connection with the acquisition, all outstanding shares of Choose Digital, the Company was required to make a contingent payment, which was due within five business day after June 24, 2015, of
$4,792
. Such amount was accrued in the accompanying Consolidated Balance Sheets as of June 30, 2015. On June 24, 2015, the Company determined that the maximum amount of contingent consideration of
$4,792
should be recorded. As such, the Company adjusted the original estimate of contingent consideration of
$2,570
to
$4,792
. The increase of
$2,222
is recorded as an expense and included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations for the year ended June 30, 2015. On July 31, 2015, the Company entered into a Forbearance Agreement with AmossyKlein Family Holdings, LLP ("AmossyKlein"), as representative of the former shareholders of Choose Digital Inc. (the “Stockholders”). The Forbearance Agreement provides that the Company will make monthly installment payments to the Stockholders, beginning on July 31, 2015 and ending on January 29, 2016. Specifically, the Company agreed to pay
$668
on July 31, 2015;
$532
on August 31, 2015;
$528
on September 30, 2015;
$524
on October 31, 2015;
$521
on November 30, 2015;
$517
on December 31, 2015; and
$1,754
on January 29, 2016. The scheduled payments include
$170
of interest and
$82
of legal fee charges. The Company agreed to deliver an affidavit of confession of judgment to be held in escrow by AmossyKlein’s counsel in the event the Company does not make such installment payments. The Company made the installment payments through December 2015, but failed to make the payment due on January 29, 2016.
On May 12, 2016, the Company and AmossyKlein entered into an amendment to the Forbearance Agreement to provide for the payment of the remaining
$1,754
. The Forbearance Agreement now provides that the Company will make a payment of approximately
$300
by May 18, 2016, and thereafter, the Company will make monthly payments of
$100
, plus interest at a rate of
9%
per annum, until the remaining amount is paid in full. In addition, the Company agreed to pledge
100,000
shares of common stock it holds in Perk.com, Inc. as collateral for these obligations. Finally, the Company agreed if it consummates a sale of a substantial part of its assets or a public equity offering, the Company will first apply the proceeds to remaining amounts due to AmossyKlein, except for payments to advisors or expenses necessary to close such transactions. The Company also delivered an amended confession of judgment that it had previously delivered to AmossyKlein, which will be held in escrow by AmossyKlein's counsel in the event the Company does not make installment payments as set forth in the amended Forbearance Agreement. At June 30, 2016, the Company was in compliance with the agreed upon payment plan.
In addition, at June 30, 2015, due to a shift in business operations and utilization of resources during the fourth quarter of 2015, the Company determined that certain intangible assets related to the acquisition of Choose Digital no longer had value (see Note 3, Summary of Significant Accounting Policies). At December 31, 2015, the Company further determined that certain intangible assets and goodwill related to the acquisition of Choose digital were impaired (see Note 3, Summary of Significant Accounting Policies).
DraftDay.com
On September 8, 2015, the Company and its newly created subsidiary DDGG entered into an Asset Purchase Agreement with MGT Capital and MGT Sports, pursuant to which the Company acquired all of the assets of the DraftDay Business from MGT Capital and MGT Sports. In exchange for the acquisition of the DraftDay Business, the Company paid MGT Sports the following: (a)
63,647
shares of the Company’s common stock, par value
$0.001
per share, (b) a promissory note in the amount of
$234
, which will be due September 29, 2015, (c) a promissory note in the amount of
$1,875
due March 8, 2016, and (d)
2,550
shares of common stock of DDGG. In addition, in exchange for providing certain transitional management services, DDGG will issue to MGT Sports a warrant to purchase
1,500
shares of DDGG common stock at an exercise price of
$400
per share.
In addition, in exchange for the release of various liens and encumbrances, the Company also agreed to issue to third parties: (a)
4,232
shares of its common stock, (b) a promissory note in the amount of
$16
due September 29, 2015 and (c) a promissory note in the amount of
$125
due March 8, 2016, and DDGG issued: (i)
7,500
shares of the Company's common stock and (ii) a warrant to purchase
150
shares of DDGG common stock at
$400
per share.
Accordingly, the Company issued a total of
67,879
shares of common stock in connection with the acquisition of the DraftDay Business.
The Company contributed the assets of the DraftDay Business to DDGG and received
11,250
shares of DDGG common stock.
The Asset Purchase Agreement contains customary representations, warranties and covenants of MGT Capital and MGT Sports. In addition, on September 8, 2015, DDGG entered into an agreement with Sportech Racing, LLC (“Sportech”) pursuant to which Sportech agreed to provide certain management services to DDGG in exchange for
9,000
shares of DDGG common stock ("Sportech MSA"). As a result of the transactions described above, the Company owns a total of
11,250
shares of DDGG common stock, Sportech Inc., an affiliate of Sportech, owns
9,000
shares of DDGG common stock, MGT Sports owns
2,550
shares of DDGG common stock and an additional third party owns
150
shares of DDGG common stock. In addition, MGT Sports holds a warrant to purchase
1,500
shares of DDGG common stock at an exercise price of
$400
and an additional third party holds a warrant to purchase
350
shares of DDGG common stock at
$400
per share. On September 8, 2015, the various stockholders of DDGG entered into a Stockholders Agreement (the “Stockholders Agreement”). The Stockholders Agreement provides that all stockholders will vote their shares of DDGG common stock for a Board comprised of three members, two of which will be designated by the Company and one of which will be designated by Sportech. Mr. Sillerman will serve as the Chairman of DDGG. The Stockholders Agreement also provides customary rights of first refusal for the various stockholders, as well as customary co-sale, drag along and preemptive rights.
As a result of the transactions described herein, the Company issued promissory notes in the aggregate principal amount of
$250
due and paid on September 29, 2015 and in the aggregate principal amount of
$2,000
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$2,000
in payments at the due date and on March 24, 2016 converted
$825
of the promissory notes to common stock and
$110
of the promissory notes to a Series D Preferred Stock (see Note 11, Stockholders' (Deficit) Equity).
On April 13, 2016, MGT converted all
110
shares of the Company's Series D Preferred Stock into shares of common stock of the Company. Accordingly, the Company issued
18,332
shares of common stock to MGT. Thereafter, there are
no
shares of the Company's Series D Preferred Stock outstanding.
On June 14, 2016, the Company entered into a second exchange agreement with MGT (the “Second MGT Exchange Agreement”) relating to the
$940
remaining due under the MGT Note. Under the Second MGT Exchange Agreement, the MGT Note shall be exchanged in full for (a)
$11
in cash representing accrued interest and (b)
132,092
shares of our common stock, subject to certain adjustments. Issuance of the shares is conditioned upon approval of the Company’s shareholders and approval of its listing of additional shares application with NASDAQ. On October 10, 2016, the Company satisfied the MGT Note through the issuance of
136,304
shares of its common stock and payment of interest of
$16
.
On December 28, 2015, DDGG's Board of Directors effectuated a 1-for-1,000 reverse stock split (the “1-for-1,000 Reverse Split”). Under the terms of the 1-for-1,000 Reverse Split, each share of DDGG's common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one-thousandth of one share of common stock, without any action by the stockholders. Fractional shares were cashed out.
On May 12, 2016, the Company entered into a subscription agreement with DDGG pursuant to which the Company agreed to purchase up to
550
shares of Series A Preferred Stock of DDGG for
$1
per share. DDGG also entered into a subscription agreement with Sportech pursuant to which Sportech agreed to purchase up to
450
shares of Series A Preferred Stock of DDGG for
$1
per share. In accordance with this agreement, the Company transferred a total of
$502
to
the DDGG subsidiary since the date of acquisition and through October 11, 2016.
Kuusamo Warrants
In exchange for releasing certain liens and encumbrances with respect to DDGG, the Company issued promissory notes to Kuusamo Capital Ltd. ("Kuusamo Promissory Notes") in the principal amount of
$16
due and paid on September 29, 2015 and in the aggregate principal amount of
$125
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$125
payment at the due date. On April 25, 2016, the Company also entered into an exchange agreement with Kuusamo Capital Ltd. (“Kuusamo"), pursuant to which the Company issued
10,394
shares of its common stock to Kuusamo in exchange for a reduction of
$71
in principal amount of a promissory note the Company owed to Kuusamo.
The outstanding balance of the Kuusamo Promissory Notes was
$54
at June 30, 2016. The Company recorded
$5
in interest expense for the year ended June 30, 2016.
Sportech MSA Termination
On April 12, 2016, DDGG entered into an amendment to the transitional management services agreement pursuant to which the DDGG's Management Services Agreement By and Between DraftDay Gaming Group, Inc. and Sportech Racing, LLC ("Sportech MSA") terminated effective June 30, 2016. Sportech paid a
$75
termination fee, to provide transitional services for
45
days, and has agreed to revert
4,200
shares of DDGG stock back to the Company on August 15, 2016. The Company had previously recorded the value of the services provided by Sportech under the Sportech MSA to prepaid assets, to be recognized as a professional
services expense in the Consolidated Statements of Operations over the term of the agreement. Due to the termination of the agreement, the Company reduced prepaid assets and non-controlling interest accounts for the value of the returned
4,200
shares of DDGG stock, and expensed the remaining value of the Sportech services, except for
45
days of transitional services. The value of returned DDGG shares was determined by a third-party valuation firm as of June 30, 2016 using Level 3 inputs. The termination of the Sportech MSA will require DDGG to begin performing certain functions on its own.
DDGG Intangibles and Goodwill Impairment
As noted above, at June 30, 2016, the Sportech MSA terminated, which led to a significantly lower revenues forecast for the reporting unit. As a result, the Company determined that intangible assets related to internally developed software, trade name and non-compete agreements were impaired as of June 30, 2016. The Company recorded a loss of
$749
on intangible assets related to DDGG during the year ended
June 30, 2016
. There was no impairment of goodwill (see Note 3, Summary of Significant Accounting Policies).
This 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 the DraftDay Business have been measured based on various 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. In the quarter ended June 30, 2015, the Company completed the analysis of certain acquired assets and assumed liabilities, including, but not limited to, other identifiable intangible assets such as customer lists, technology, trade name and non-competition agreements. Therefore, the Company finalized its 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. These valuations were conducted using Level 3 inputs as described in ASC 820,
Fair Value Measurements and Disclosures
, that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
A summary of the fair value of consideration transferred for this acquisition and the 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 on closing market price at issuance
|
$
|
1,760
|
|
Notes issued to sellers
|
2,250
|
|
Total consideration transferred
|
4,010
|
|
|
|
|
Purchase allocation:
|
|
|
Goodwill
|
1,591
|
|
Intangible assets
|
3,012
|
|
Other Assets
|
799
|
|
Total liabilities
|
(1,392
|
)
|
|
$
|
4,010
|
|
The operations of this acquisition are not material, and thus, pro forma disclosures are not presented.
7. Property and Equipment
Property and Equipment consists of the following:
|
|
|
|
|
|
|
|
|
Description
|
June 30, 2016
|
|
June 30, 2015
|
|
|
|
|
Leasehold Improvements
|
$
|
2,261
|
|
|
$
|
2,886
|
|
Furniture and Fixtures
|
588
|
|
|
588
|
|
Computer Equipment
|
456
|
|
|
458
|
|
Software
|
164
|
|
|
5
|
|
Total
|
3,469
|
|
|
3,937
|
|
Accumulated Depreciation and Amortization
|
(2,055
|
)
|
|
(1,603
|
)
|
Property and Equipment, net
|
$
|
1,414
|
|
|
$
|
2,334
|
|
Depreciation and amortization charges included in Selling, general and administrative expenses for the years ended June 30, 2016 and 2015 amounted to $
512
and $
656
, respectively.
8. Intangible Assets and Goodwill
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Amortization
|
|
Accumulated
|
Carrying
|
|
|
Accumulated
|
Carrying
|
Description
|
Period
|
Amount
|
Amortization
|
Value
|
|
Amount
|
Amortization
|
Value
|
Wetpaint technology
|
60 months
|
$
|
4,952
|
|
$
|
(3,276
|
)
|
$
|
1,676
|
|
|
$
|
10,600
|
|
$
|
(2,336
|
)
|
$
|
8,264
|
|
Wetpaint trademarks
|
276 months
|
1,453
|
|
(415
|
)
|
1,038
|
|
|
5,800
|
|
(296
|
)
|
5,504
|
|
Wetpaint customer relationships
|
60 months
|
917
|
|
(827
|
)
|
90
|
|
|
2,000
|
|
(617
|
)
|
1,383
|
|
Wetpaint non-compete agreements
|
36 months
|
—
|
|
—
|
|
—
|
|
|
609
|
|
(313
|
)
|
296
|
|
Choose Digital licenses
|
60 months
|
829
|
|
(559
|
)
|
270
|
|
|
1,740
|
|
(355
|
)
|
1,385
|
|
Choose Digital software
|
60 months
|
627
|
|
(212
|
)
|
415
|
|
|
550
|
|
(112
|
)
|
438
|
|
DraftDay tradename
|
84 months
|
180
|
|
(38
|
)
|
142
|
|
|
—
|
|
—
|
|
—
|
|
Draftday non-compete agreements
|
6 months
|
30
|
|
(30
|
)
|
—
|
|
|
—
|
|
—
|
|
—
|
|
DraftDay internally generated capitalized software
|
60 months
|
1,498
|
|
(303
|
)
|
1,195
|
|
|
—
|
|
—
|
|
—
|
|
DraftDay customer relationships
|
24 months
|
556
|
|
(351
|
)
|
205
|
|
|
—
|
|
—
|
|
—
|
|
Internally generated capitalized software
|
36 months
|
—
|
|
—
|
|
—
|
|
|
1,610
|
|
(515
|
)
|
1,095
|
|
Other
|
various
|
326
|
|
(18
|
)
|
308
|
|
|
326
|
|
(8
|
)
|
318
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,368
|
|
$
|
(6,029
|
)
|
$
|
5,339
|
|
|
$
|
23,235
|
|
$
|
(4,552
|
)
|
$
|
18,683
|
|
See Note 3, Summary of Significant Accounting Policies, for a discussion of the write-downs recorded with respect to intangible assets related to the Wetpaint and Choose Digital businesses in the quarter ended December 31, 2015 and to the DraftDay business in the quarter ended June 30, 2016. The changes in the gross amounts and useful lives of intangibles related to the Wetpaint, Choose Digital and DraftDay businesses, and to internally generated capitalized software, are a result of these write-downs during the three months ended December 31, 2015 and June, 30, 2016, as well as the abandonment of certain technology as of January 1, 2016, and internal development costs. See Note 6, Acquisitions, for a detailed description of DraftDay assets and liabilities purchased and their fair values on the date of the acquisition.
Amortization of intangible assets included in selling, general and administrative expenses for the years ended June 30, 2016 and 2015 amounted to
$1,227
and
$3,497
, respectively. Future annual amortization expense expected is as follows:
|
|
|
|
|
Years Ending June 30
|
Amount
|
|
2017
|
$
|
1,194
|
|
2018
|
966
|
|
2019
|
919
|
|
2020
|
919
|
|
2021
|
670
|
|
The activity in the goodwill balance consists of the following:
|
|
|
|
|
Description
|
Amount
|
|
Balance at June 30, 2015
|
$
|
24,722
|
|
Acquisition of DDGG
|
1,591
|
|
Wetpaint impairment loss
|
(10,708
|
)
|
Choose Digital impairment loss
|
(4,335
|
)
|
Balance at June 30, 2016
|
$
|
11,270
|
|
9. Loans Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Outstanding Balances
|
Facility Name
|
Maturity Date
|
Facility Amount
|
June 30, 2016
|
June 30, 2015
|
|
|
|
|
|
Term Loan Agreement ("DB Line")
|
Retired
|
$
|
15,000
|
|
$
|
—
|
|
$
|
—
|
|
Line of Credit Promissory Note (the "Note")
|
10/24/2017
|
20,000
|
|
19,716
|
|
19,516
|
|
Unsecured Demand Loans (the "Loans")
|
On Demand
|
—
|
|
—
|
|
1,575
|
|
Line of Credit Grid Note (the "Grid Note")
|
12/31/2016
|
10,000
|
|
4,563
|
|
3,000
|
|
Secured Line of Credit (the "Secured Revolving Loan I")
|
12/31/2016
|
1,500
|
|
1,500
|
|
—
|
|
Secured Line of Credit (the "Secured Revolving Line of Credit")
|
12/31/2016
|
500
|
|
500
|
|
—
|
|
Secured Revolving Loan (the "Secured Revolving Loan")
|
12/31/2016
|
500
|
|
500
|
|
—
|
|
Secured Revolving Loan II (the "Secured Revolving Loan II")
|
12/31/2016
|
500
|
|
500
|
|
—
|
|
Secured Revolving Loan III (the "Secured Revolving Revolving Loan III")
|
12/31/2016
|
1,200
|
|
135
|
|
—
|
|
Convertible Promissory Note (the "RI Convertible Note")
|
12/31/2016
|
300
|
|
300
|
|
—
|
|
MGT Promissory Notes (the "MGT Promissory Notes")
|
7/31/2016
|
2,109
|
|
943
|
|
—
|
|
Kuusamo Promissory Notes (the "Kuusamo Promissory Notes")
|
3/8/2016
|
141
|
|
55
|
|
—
|
|
Total Loans Payable
|
|
|
$
|
28,712
|
|
$
|
24,091
|
|
Term Loan Agreement
On March 11, 2013, Viggle 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
.
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.
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 Company's previous Amended and Restated
$25,000
Line of Credit. 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.
On February 13, 2014, the Company entered into a further amendment (the "February Amendment") to the DB Line. Pursuant to the February Amendment, the maturity date of the DB Line was extended to December 31, 2014, and the mandatory prepayment provision was amended to provide that only the first
$10,000
in net cash proceeds from an equity offering shall be required to be used to prepay amounts outstanding under the DB Line.
On March 11, 2014, the Company entered into a further amendment (the "March Amendment") to the DB Line. Pursuant to the March Amendment, the line of credit was increased from
$30,000
to
$35,000
, providing the Company with an additional
$5,000
for working capital purposes. Concurrent with the March Amendment, on March 11, 2014, the Company entered into a Pledge
and Security Agreement with Deutsche Bank pursuant to which it agreed to provide Deutsche Bank a security interest in
$5,000
in cash, as well as a pledge to secure the prompt and timely payment of all obligations under the DB Line. The Pledge and Security Agreement will remain in place as long as there are any obligations outstanding under the DB Line. The
$5,000
is classified as short term restricted cash in the accompanying Consolidated Balance Sheet as of June 30, 2014.
On April 30, 2014, the Company repaid
$10,000
of the DB Line in accordance with the February Amendment discussed above. On June 13, 2014, the Company repaid an additional
$10,000
of the DB Line. Each repayment reduced the amount available on the DB Line.
On December 15, 2014, the Company repaid the remaining
$15,000
outstanding under the DB Line from the proceeds of the Line of Credit Promissory Note (see description below). After this repayment, the DB Line was retired.
The DB Line did not contain any financial covenants.
Repayment of the DB Line was guaranteed by Mr. Sillerman. In consideration for the guarantee, Mr. Sillerman's designee, Sillerman Investment Company II LLC ("SIC II"), which was the lender under the Amended and Restated
$25,000
Line of Credit described below, received a warrant for
6,250
shares of common stock of Viggle, which may be exercised at any time within
60
months of the issuance date at
$1,600
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 stock 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 used the proceeds from the DB Line to fund working capital requirements and for general corporate purposes.
Interest expense on the DB Line for the year ended June 30, 2015 was
$185
.
Line of Credit Promissory Note
On October 24, 2014, the Company and Sillerman Investment Company III LLC ("SIC III"), a company affiliated with Mr. Sillerman entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") pursuant to which SIC III agreed to purchase certain securities issued by the Company for a total of
$30,000
. Pursuant to the Securities Purchase Agreement, the Company issued a Line of Credit Promissory Note (the “Note”), which provides for a
$20,000
line of credit to the Company (see Note 11, Stockholders' (Deficit) Equity, for a discussion of the remaining
$10,000
of the Securities Purchase Agreement). The Company also agreed to issue to SIC III warrants to purchase
50,000
shares of the Company’s common stock. The Company issued warrants to purchase
2,500
shares of the Company’s common stock for every
$1,000
advanced under the Note. The warrants will be issued in proportion to the amounts the Company draws under the Note. The exercise price of the warrants will be
10%
above the closing price of the Company’s shares on the date prior to the issuance of the warrants. Exercise of the warrants was subject to approval of the Company’s stockholders, which occurred on January 13, 2015.
The Note provides a right for the Company to request advances under the Note from time to time. The Note bears interest at a rate of
12%
per annum, payable in cash on a quarterly basis. The Note matures on October 24, 2017. On October 24, 2014, SIC III made an initial advance under the Note in the principal amount of
$4,500
. On December 15, 2014, SIC III made an additional advance in the principal amount of
$15,500
pursuant to the terms of the Note (the proceeds of which were used to repay amounts outstanding under the DB Line, as discussed above). As of June 30, 2015, the total outstanding principal amount of the Note was
$20,000
. The Note provides for a
3%
discount, such that the amount advanced by SIC III was
3%
less than the associated principal amount of the advances. Therefore, the net amount actually outstanding under the Note at June 30, 2016, was
$19,716
which includes accretion of the discount of
$316
(the
3%
discount of
$600
is being accreted to the principal balance over the life of the Note). From and after the occurrence and during the continuance of any event of default under the Note, the interest rate is automatically increased to
17%
per annum.
In connection with the first drawdown of
$4,500
under the Note, the Company issued SIC III warrants to purchase
11,250
shares of the Company’s common stock. These warrants have an exercise price of
$70.20
, representing a price equal to
10%
above the closing price of the Company’s common stock on the day prior to issuance. In connection with the additional drawdown of
$15,500
under the Note, the Company issued SIC III warrants to purchase
38,750
shares of the Company's common stock. These warrants have an exercise price of
$72.60
, representing a price equal to
10%
above the closing price of the Company's common stock on the day prior to issuance. The Warrants are exercisable for a period of
five
years from issuance. Stock compensation expense related to the issuances of warrants to SIC III was
$2,049
during the year ended June 30, 2015.
The Note is not convertible into equity securities of the Company as of June 30, 2016 (see Note 16, Subsequent Events).
The Note also contains certain covenants and restrictions, including, among others, that, for so long as the Note is outstanding, the Company will not, without the consent of the holder of the Note, (i) make any loan or advance in excess of
$500
to any officer, director, employee of affiliate of the Company (except advances and similar expenditures : (a) under the terms of employee stock or option plans approved by the Board of Directors, (b) in the ordinary course of business, consistent with past practice or (c) to its subsidiaries), (ii) incur any indebtedness that exceeds
$1,000
in the aggregate other than indebtedness outstanding under the Note, (iii) guaranty any indebtedness of any unaffiliated third party, (iv) change the principal business of the Company or exit the Company's current business, provided that the foregoing is subject to the Board's compliance with its fiduciary duties, (v) sell, assign, or license material technology or intellectual property of the Company except (a) in the ordinary course of business, consistent with past practice, (b) sales and assignments thereof in any
12
month period that do not have a fair market value in excess of
$500
or (c) in connection with a change of control transaction, (vi) enter into any corporate strategic relationship involving the payment, contribution or assignment by the Company of its assets that have a fair market value in excess of
$1,000
or (vii) liquidate or dissolve the Company or wind up the business of the Company, except in connection with changes of control or merger, acquisition or similar transactions or as approved by the Company’s Board in compliance with their fiduciary duties.
On August 22, 2016, the Company and SIC III, SIC IV, SIC VI entered into a Note Exchange Agreement pursuant to which
$30,175
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC III, SIC IV, and SIC VI other than
$900
of debt held by SIC IV pursuant to that certain Line of Credit Grid Note dated as of June 11, 2015, was exchanged for
30,175
shares of the Company’s Series C Preferred Stock at an exchange price of
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement (see Note 16, Subsequent Events).
Interest expense on the Note was
$2,440
and
$1,391
for the years ended June 30, 2016 and 2015.
Unsecured Demand Loans
During the year ended June 30, 2015, Mr. Sillerman made the following demand loans (the "Loans") to the Company:
|
|
|
|
|
|
Date
|
Amount
|
|
|
December 19, 2014
|
$
|
2,000
|
|
|
January 14, 2015
|
2,000
|
|
|
January 30, 2015
|
2,000
|
|
|
February 13, 2015
|
750
|
|
|
February 26, 2015
|
1,000
|
|
|
March 2, 2015
|
1,000
|
|
|
March 16, 2015
|
3,000
|
|
|
April 20, 2015
|
1,000
|
|
|
May 5, 2015
|
500
|
|
|
May 14, 2015
|
325
|
|
|
Total
|
$
|
13,575
|
|
|
Each of the Loans bear interest at the rate of
12%
per annum. Principal and interest due under the Loans shall be due and payable upon demand. The principal amount of the Loans may be prepaid at any time and from time to time, in whole or in part, without premium or penalty. The Company used the proceeds from the Loans to fund working capital requirements and for general corporate purposes.
As discussed in Note 11, Stockholders' (Deficit) Equity, on March 16, 2015, SIC III purchased
7,000
shares of Series C Convertible Preferred Stock pursuant to the Securities Purchase Agreement, for a purchase price of
$7,000
. The Company used the
$7,000
proceeds from the sale of
7,000
shares of Series C Convertible Stock to repay
$7,000
in principal amount of the Loans. In addition, the Company used
$798
of the proceeds of the Loan on March 16, 2015 to pay all accrued and unpaid interest on the Loans. On June 1, 2015, the Company repaid an additional
$5,000
in principal amount of the Loans. On July 1, 2015, the Company repaid
the remaining
$1,575
in principal amount of the Loans. Accordingly, after the transactions described herein, the total outstanding principal amount of the Loans at June 30, 2016 and 2015 is
$0
and
$1,575
, respectively.
Interest expense on the Loans was
$1
and
$306
for the years ended June 30, 2016 and 2015, respectively.
Line of Credit Grid Note
On June 11, 2015, the Company and SIC IV entered into a Line of Credit Grid Note (the "Grid Note"). The Grid Note provides a right for the Company to request advances under the Grid Note from time to time in an aggregate amount of up to
$10,000
. The Grid Note bears interest at a rate of
12%
per annum, payable in cash on the maturity of the Grid Note. From and after the occurrence and during the continuance of any event of default under the Grid Note, the interest rate is automatically increased to
14%
per annum.
The Grid Note is not convertible into equity securities of the Company.
In order for the Company to make requests for advances under the Grid Note, the Company must have an interest coverage ratio equal to or greater than
1
, unless SIC IV waives this requirement. The interest coverage ratio is calculated by dividing: (a) the Company’s net income for the measurement period, plus the Company’s interest expense for the measurement period, plus the Company’s tax expense for the measurement period, by (b) the Company’s interest expense for the measurement period, plus the amount of interest expense that would be payable on the amount of the requested draw for the
twelve months
following the request for the advance. The measurement period is the twelve months ended as of the last day of the last completed fiscal quarter prior to the request for the advance. The Company currently does not have an interest coverage ratio equal to or greater than
1
, so advances would require the SIC IV to waive this requirement. In addition, in order to make requests for advances under the Grid Note, there can be no event of default under the Note at the time of the request for an advance, including that there has been no material adverse change in the business plan or prospects of the Company in the reasonable opinion of SIC IV.
The Company made requests for advances under the Grid Note, and SIC IV made advances to the Company as follows:
|
|
|
|
|
|
Date
|
Amount
|
|
|
6/11/2015
|
$
|
1,000
|
|
|
6/24/2015
|
2,000
|
|
|
7/31/2015
|
1,000
|
|
|
8/31/2015
|
2,000
|
|
|
9/15/2015
|
1,000
|
|
|
9/29/2015
|
1,000
|
|
|
10/13/2015
|
500
|
|
|
10/30/2015
|
600
|
|
|
11/25/2015
|
1,000
|
|
|
Total
|
$
|
10,100
|
|
|
On July 1, 2015, the Company repaid
$1,425
of the Grid Note.
On December 3, 2015, the Company and SIC IV entered into a Subscription Agreement pursuant to which SIC IV subscribed for
437,500
shares of the Company’s common stock at a price of
$9.40
per share. Accordingly, the aggregate purchase price for such shares was
$4,112
.
The Company and SIC IV agreed that SIC IV would pay the purchase price for such shares by reducing the amounts outstanding under the Line of Credit. As of December 3, 2015, there was
$8,675
in outstanding principal amount under the Line of Credit.
Accordingly, the principal amount of the Line of Credit was therefore reduced to
$4,563
.
The Grid Note matures on the first to occur of: (a)
12/31/2016
or (b) upon a “Change of Control Transaction.” A “Change of Control Transaction” includes (i) a sale of all or substantially all of the assets of the Company or (ii) the issuance by the Company of common stock that results in any “person” or “group” becoming the “beneficial owner” of a majority of the aggregate ordinary voting power represented by the Company’s issued and outstanding common stock (other than as a result of, or in connection with, any merger, acquisition, consolidation or other business combination in which the Company is the surviving entity following the consummation thereof), excluding transactions with affiliates of the Company.
If an event of default occurs under the Grid Note, SIC IV has the right to require the Company to repay all or any portion of the Grid Note. An event of default is deemed to have occurred on: (i) the non-payment of any of the amounts due under the Grid Note within
five
(5) Business Days after the date such payment is due and payable; (ii) dissolution or liquidation, as applicable, of the Company; (iii) various bankruptcy or insolvency events shall have occurred, (iv) the inaccuracy in any material respect of any warranty, representation, statement, report or certificate the Company makes to Lender under the Note hereto; (v) the Company contests, disputes or challenges in any manner, whether in a judicial proceeding or otherwise, the validity or enforceability of any material provision in the Grid Note; or (vi) a material adverse change in the business plan or prospects of the Company in the reasonable opinion of SIC IV.
Interest expense on the Grid Note for the years ended June 30, 2016 and 2015 was
$574
and
$10
, respectively.
In connection with the Company's entering into the Perk Credit Agreement (as defined below), SIC IV agreed to subordinate payment of the Grid Note to amounts owed to Perk under the Perk Credit Agreement. SIC IV also consented to the consummation of the Asset Purchase Agreement with Perk. In exchange for such consent and such agreement to subordinate, the Company agreed to provide SIC IV a security interest in the assets of the Company in connection with amounts outstanding under the Grid Note.
The Company entered into a Security Agreement with SIC IV, pursuant to which the Company pledged its assets in connection with such security interest.
On July 8, 2016, SIC III, SIC IV and SIC VI, entered into an exchange agreement (the “Exchange Agreement”) relating to the exchange of debt and shares of the Series C Preferred stock of the Company for common stock of the Company under certain conditions. Issuance of the shares is conditioned upon approval of the Company’s shareholders, the closing of an offering of the Company’s common stock in the amount of at least
$10,000
, approval of its Listing of Additional Shares application with NASDAQ, the Company shall not be subject to any bankruptcy proceeding, and various other conditions. The exchange price shall be equal to the lesser of
$5.20
and the price at which the Debentures can be exchanged for shares of the Company’s common stock, so long as the Company received a valuation that the exchange price reflects fair value. The agreement provides for termination in the event the conditions are not satisfied by March 31, 2017.
On July 18, 2016, SIC III, SIC IV and SIC VI entered into an amended exchange agreement (the “Amended Exchange Agreement”) relating to the exchange of debt and shares of the Series C Preferred stock of the Company for common stock of the Company under certain conditions. The Amended Exchange Agreement modified the Grid Note to provide that SIC IV shall be entitled to repayment of up to
$2,000
of the outstanding principal balance of the Grid Note and the Company shall be entitled to draw up to an additional
$5,000
(see Note 16, Subsequent Events).
This debt has been converted to Preferred C Shares in accordance with the Note Exchange Agreement described above, except for the
$900
of debt that remains outstanding under the SIC IV Note that will remain subject to the Exchange Agreement (see Note 16, Subsequent Events).
Secured Revolving Loans and Lines of Credit
On January 27, 2016, Sillerman Investment Company VI LLC (“SIC VI”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, entered into a Secured Revolving Loan agreement (the “Secured Revolving Loan I”) with the Company and its subsidiaries, wetpaint.com, Inc. and Choose Digital Inc. (collectively, the “Subsidiaries”), pursuant to which the Company can borrow up to
$1,500
. The Secured Revolving Loan bears interest at the rate of
12%
per annum. In connection with the Secured Revolving Loan, the Company and the Subsidiaries have entered into a Security Agreement (the “Security Agreement”) with SIC VI, under which the Company and the Subsidiaries have granted SIC VI a continuing security interest in all assets of the Company and the Subsidiaries, with the exception of the Company’s interest in DraftDay Gaming Group, Inc. The Company intends to use the proceeds from the Secured Revolving Loan to fund working capital requirements and for general corporate purposes in accordance with a budget to be agreed upon by SIC VI and the Company. As of June 30, 2016,
$1,500
has been advanced thereunder. Interest expense on the Secured Revolving Loan I was
$71
for the year ended June 30, 2016.
The Company and its subsidiaries wetpaint.com, inc., and Choose Digital, Inc. (the "Subsidiaries") entered into a secured, revolving Line of Credit on March 29, 2016 with SIC VI (the “Secured Revolving Line of Credit”), pursuant to which the Company can borrow up to
$500
. The Secured Revolving Line of Credit bears interest at the rate of
12%
per annum.
$500
had been advanced thereunder. Interest expense on the Secured Revolving Line of Credit was
$12
for the year ended June 30, 2016.
On April 29, 2016, SIC VI entered into an additional secured revolving loan agreement with the Company and the Subsidiaries ("Secured Revolving Loan"), pursuant to which the Company can borrow up to
$500
. Loans under this loan agreement bear interest at the rate of
12%
per annum and mature on December 31, 2016, barring any events of default or a change of control of the Company. As of June 30, 2016,
$500
had been advanced thereunder. Interest expense on the Secured Revolving Loan was
$9
for the year ended June 30, 2016.
On May 16, 2016, SIC VI entered into an additional secured revolving loan agreement with the Company and the Subsidiaries ("Secured Revolving Loan II"), pursuant to which the Company can borrow up to
$500
. Loans under this loan agreement bear interest at the rate of
12%
per annum and mature on December 31, 2016, barring any events of default or a change of control of the Company. As of June 30, 2016,
$500
had been advanced thereunder. Interest expense on the Secured Revolving Loan II was
$6
for the year ended June 30, 2016.
On June 27, 2016, SIC VI entered into a secured revolving loan agreement (the “Secured Revolving Loan III”) with the Company and its subsidiaries, pursuant to which the Company can borrow up to
$1,200
. The Secured Revolving Loan III bears interest at the rate of
12%
per annum and matures on December 31, 2016, barring any events of default or a change of control of the Company. At June 30, 2016,
$135
had been advanced thereunder.
This debt has been converted to Preferred C Shares in accordance with the Note Exchange Agreement described above.
Related Approvals
Because each of the above loan payable transactions (other than the DB Line) referred to in the foregoing sections 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.
Loan from Perk
During the year ended June 30, 2016, Perk made two advances to the Company as follows:
|
|
|
|
|
Date
|
Amount
|
|
|
12/14/2015
|
$
|
667
|
|
12/23/2015
|
333
|
|
Total
|
$
|
1,000
|
|
On December 13, 2015, the Company entered into a Credit Agreement with Perk pursuant to which Perk provided a
$1,000
line of credit to the Company (the “Perk Credit Agreement”). The Perk Credit Agreement provided for drawdowns pursuant to which Perk made advances to the Company, which totaled
$1,000
. The first advance in the amount of
$667
was made on December 14, 2015. The final drawdown of
$333
was made when the Information Statement relating to the transaction was filed with the SEC, which occurred on December 23, 2015. Amounts outstanding under the Perk Credit Agreement bore interest at
12%
per annum, with an additional
12%
if the Company was in default of its obligations under the Perk Credit Agreement. Amounts outstanding under the Perk Credit Agreement were repaid on February 8, 2016 upon the closing of the sale of the Viggle assets to Perk. The Company was entitled to elect to repay all amounts outstanding pursuant to the Perk Credit Agreement by reducing the number of the shares of Perk common stock payable upon closing of the sale of the Viggle assets to Perk by
130,000
shares. The Company elected to so reduce the number of shares issuable to the Company at the closing of the asset sale transaction. Therefore, Perk agreed to deliver to the Company at closing
1,370,000
shares of Perk common stock, rather than
1,500,000
shares, and in return the amounts outstanding under the Perk Credit Agreement were deemed repaid in full.
Therefore, the outstanding balance of the loan from Perk was
$0
at June 30, 2016.
No
interest expense was recorded by the Company for the year ended June 30, 2016.
In connection with the Perk Credit Agreement, the Company also entered into a Security Agreement, pursuant to which the Company provided Perk with a security interest in its assets to secure repayment of amounts outstanding under the Perk Credit Agreement. As the amounts payable under the Perk Credit Agreement have now been settled in full, the Security Agreement has been terminated.
Promissory Notes
In accordance with the Assets Purchase Agreement to purchase the DraftDay Business (see Note 6, Acquisitions), the Company issued promissory notes to MGT Capital ("MGT Promissory Notes") in the principal amount of
$234
due and paid on September 29, 2015 and in the aggregate principal amount of
$1,875
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$1,875
payment at the due date and on March 24, 2016 converted
$824
of the promissory notes to common stock and
$110
of the promissory notes to a Series D Preferred Stock (see Note 11, Stockholders' (Deficit) Equity).
On April 13, 2016, MGT converted all
110
shares of the Company's Series D Preferred Stock into shares of common stock of the Company. Accordingly, the Company issued
18,332
shares of common stock to MGT. Thereafter, there are
no
shares of the Company's Series D Preferred Stock outstanding.
On June 14, 2016, the Company entered into a second exchange agreement with MGT (the “Second MGT Exchange Agreement”) relating to the
$940
remaining due under the MGT Note (see Note 6, Acquisitions). Under the Second MGT Exchange Agreement, the MGT Note shall be exchanged in full for (a)
$11
in cash representing accrued interest and (b)
132,092
shares of Company common stock, subject to certain adjustments. Issuance of the shares is conditioned upon approval of the Company’s shareholders and approval of its Listing of Additional Shares application with NASDAQ. Therefore, the outstanding balance of the MGT Promissory Notes was
$943
at June 30, 2016. The Company recorded interest expense of
$65
for the year ended June 30, 2016. On October 10, 2016, the Company satisfied the MGT Note through the issuance of
136,304
shares of its common stock and payment of interest of
$16
.
In exchange for releasing certain liens and encumbrances with respect to the DraftDay Business (see Note 6, Acquisitions), the Company issued promissory notes to Kuusamo Capital Ltd. in the principal amount of
$16
due and paid on September 29, 2015 and in the aggregate principal amount of
$125
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$125
payment at the due date. On April 25, 2016, the Company entered into an exchange agreement with Kuusamo Capital Ltd. (“Kuusamo"), pursuant to which the Company issued
10,394
shares of its common stock to Kuusamo in exchange for a reduction of
$71
in principal amount of a promissory note the Company owed to Kuusamo.
Thereafter, the outstanding balance of the Kuusamo Promissory Notes was
$55
at June 30, 2016. The Company recorded interest expense of
$5
for the year ended June 30, 2016.
Accounts Payable Settlements
North America Photon Infotech Ltd. (“Photon”), a company based in Mauritius that had provided development services to the Company, filed suit in California on March 28, 2016 to collect approximately
$218
owed by the Company to Photon. The Company settled this matter on May 12, 2016 in part by issuing a Note in the amount of
$110
, payable in six months.
On April 7, 2016, the Company issued a note in the amount of
$56
to Simulmedia, Inc., a former vendor of the Company, as partial settlement of the outstanding balance due to Simulmedia, Inc. for services provided.
Pandera Systems, LLC (“Pandera”), which formerly provided analytics development services to the Company, filed suit on March 11, 2016 against the Company to demand collection of amounts due for such services. The Company settled this matter on April 12, 2016, in part by issuing a note in the amount of
$50
.
On April 25, 2016, Carpathia Hosting, LLC (“Carpathia”), which formerly provided hosting services to the Company, filed suit
in the Eastern District of Virginia to demand collection of
$658
due. The Company settled this matter on June 29, 2016. The
Company recorded a gain of
$505
for the year ended June 30, 2016.
On June 24, 2016, the Company entered into a settlement agreement with Pandora. As a result, the Company recorded a gain of
$222
in the Consolidated Statements of Operations for the year ended June 30, 2016.
Interest expense on these notes issued in connection with settlements with vendors was
$2
for the year ended June 30, 2016.
Convertible Promissory Note
On June 27, 2016, the Company entered into a Convertible Promissory Note with Reaz Islam ("Islam"), an advisor to Sillerman, pursuant to which Islam loaned the Company
$300
(the “RI Convertible Note”). The RI Convertible Note bears interest at a rate of
12%
and matures on December 31, 2016. Islam has the right to convert the RI Convertible Note into shares of common stock of the Company at the same time and on the same terms as Sillerman can convert debt held by Sillerman into shares of the Company’s common stock. The RI Convertible Note is subordinate to any note held by Sillerman. As of June 30, 2016, there was
$300
outstanding under the RI Convertible Note. Interest expense on the RI Convertible Note was
$2
for the year ended June 30, 2016. The fair value of the conversion feature of the RI Convertible Note is nominal but will be marked to market at its fair value in future periods until the debt is repaid or converted to shares of the Company's common stock.
10. Commitments and Contingencies
Operating Leases
The Company maintains operating leases for its corporate office and several satellite offices. There are no capital leases. Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term. Total rent expense for continuing operations, net of sublease income, for the Company under operating leases recorded for the years ended June 30, 2016 and 2015 was
$361
and
$610
, respectively. The Company’s future minimum rental commitments under noncancelable operating leases are as follows (amounts are shown net of contractual sublease income):
|
|
|
|
|
Years Ending June 30,
|
Amount
|
|
2017
|
$
|
466
|
|
2018
|
490
|
|
2019
|
688
|
|
2020
|
729
|
|
2021
|
749
|
|
Thereafter
|
640
|
|
Total
|
$
|
3,762
|
|
Litigation
The Company delivered
357,032
of the Initial Perk Shares to Gracenote, Inc. and Tribune Media Services, Inc., former providers of technology services of the Company, as per the Settlement and Transfer Agreement dated February 5, 2016, to satisfy an obligation. The Company recognized a gain of
$593
in the consolidated statements of operations for the year ended June 30, 2016.
CFGI, LLC, a former provider of consulting services of the Company, served the Company with a lawsuit to collect approximately
$200
owed by the Company to CFGI, LLC on September 9, 2016. There is a dispute regarding the services rendered by CFGI, LLC and the Company is attempting to settle the matter. There was no impact on the consolidated financial statements for the year ended June 30, 2016.
A Complaint (Index #654984/2016) was filed by Andy Mule, on behalf of himself and others similarly situated, in the Supreme Court of the State of New York. The Complaint, which names the Company, each of its current directors, and President, as a former director, as defendants, claims a breach of fiduciary duty relating to the terms of a proposed conversion of debt and preferred shares into common equity by Mr. Sillerman and/or his affiliates. The Complaint seeks unspecified damages and such relief as the Court may deem appropriate. The Company accepted service on October 4, 2016, and has agreed to respond by November 14, 2016. The Company believes that this claim is without merit.
The Company is subject to litigation and other claims that arise in the ordinary course of business. While the ultimate result of the Company's 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 the Company's control. As such, there can be no assurance that the final outcome will not have a material adverse effect on the Company's consolidated financial condition and results of operations.
11. Stockholders’ (Deficit) Equity
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 had an initial stated value of
$1,000
per share (the "Stated Value").
|
|
|
•
|
The shares of Series A Convertible Redeemable Preferred Stock were 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 declared a dividend or the distribution of its assets, the holders of Series A Convertible Redeemable Preferred Stock were 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 was convertible, at the option of the holders, into shares of Company common stock at a conversion price of
$23.00
.
|
|
|
•
|
The Company could 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 was due on the use of up to
33%
of proceeds of a public offering of common stock at a price of
$80.00
or more per share.
|
|
|
•
|
The Company was 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 were 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 were senior in liquidation preference to the shares of Company common stock.
|
|
|
•
|
The shares of Series A Convertible Redeemable Preferred Stock had 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 was 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.
|
At
June 30, 2016
and
2015
, there were
no
shares of Series A Convertible Redeemable Preferred Stock outstanding.
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 had an initial stated value of
$1,000
per share.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock were convertible, at the option of the holders, into shares of Company common stock at a conversion price of
$23.00
. The shares of Series B Convertible Preferred Stock could 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
$33.40
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
1,250
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 determined that the aggregate implied value of the Company's capital stock in such transaction was equal to or greater than
$125,000
.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock were not redeemable by either the Company or the holders thereof.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock were on parity in dividends and liquidation preference with the shares of Company common stock, which were payable only if then convertible into common stock.
|
|
|
•
|
The shares of Series B Convertible Preferred Stock had 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 was necessary for the Company to alter, amend or change any of the terms of the Series B Convertible Preferred Stock.
|
At
June 30, 2016
and
2015
, there were
no
shares of Series B Convertible Preferred Stock outstanding.
Series C Convertible Redeemable Preferred Stock
On October 24, 2014, the Company created a new class of Series C Convertible Redeemable Preferred Stock (the “Series C Convertible Redeemable Preferred Stock”). The Company authorized the issuance of up to
100,000
shares of the Series C Convertible Redeemable Preferred Stock. The rights, preferences, privileges and restrictions of the shares of Series C Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
|
|
•
|
The shares of Series C Convertible Redeemable Preferred Stock have a stated value of
$1,000
per share.
|
|
|
•
|
Each holder of a share of Series C Convertible Redeemable Preferred Stock shall be entitled to receive dividends (“Dividends”) on such share equal to twelve percent (
12%
) per annum (the “Dividend Rate”) of the Stated Value before any Dividends shall be declared, set apart for or paid upon any junior stock or parity stock. Dividends on a share of Series C Convertible Redeemable Preferred Stock shall accrue daily at the Dividend Rate, commence accruing on the issuance date thereof, compound annually, be computed on the basis of a 360-day year consisting of twelve 30-day months and be convertible into common stock in connection with the conversion of such share of Series C Convertible Redeemable Preferred Stock.
|
|
|
•
|
Each share of Series C Convertible Redeemable Preferred Stock is convertible, at the option of the holders, on the basis of its stated value and accrued, but unpaid dividends, into shares of Company common stock at a conversion price of
$80.00
per common stock share.
|
|
|
•
|
The Company may redeem any or all of the outstanding Series C Convertible Redeemable Preferred Stock at any time at the then current Stated Value plus accrued Dividends thereon plus a redemption premium equal to the Stated Value multiplied by
6%
. However, no premium shall be due on the use of up to
33%
of proceeds of a public offering of common stock at a price of
$100.00
or more per share.
|
|
|
•
|
The Company is required to redeem each Series C Convertible Redeemable Preferred Stock on the tenth business day immediately following the fifth anniversary of its issuance. However, the Company shall have no obligation to mandatorily redeem any shares of Series C Convertible Redeemable Preferred Stock at any time that (x) the Company does not have surplus under Section 154 of the Delaware General Corporation Law (the “DGCL”) or funds legally available to redeem all shares of Series C Convertible Redeemable Preferred Stock, (y) the Company's capital is impaired under Section 160 of the DGCL or (z) the redemption of any shares of Series C Convertible Redeemable Preferred Stock would result in an impairment of the Company's capital under Section 160 of the DGCL; provided, that if the Company is prohibited from redeeming the shares due to those limitations, the Company will redeem the Shares as soon as possible after such restrictions are no longer applicable.
|
|
|
•
|
Upon a change of control of the Company, each holder of Series C Convertible Redeemable Preferred Stock shall be entitled to require the Company to redeem from such holder all of such holder's shares of Series C Convertible Redeemable Preferred Stock so long as such holder requests such redemption in writing at least one business day prior to the consummation of such change of control. The redemption amount per share equals the Stated Value thereof plus accrued Dividends plus a change of control premium equal to the stated value multiplied
6%
.
|
|
|
•
|
The shares of Series C Convertible Redeemable Preferred Stock are senior in liquidation preference to all shares of capital stock of the Company unless otherwise consented to by a majority of the holders of shares of Series C Convertible Redeemable Preferred Stock.
|
|
|
•
|
The shares of Series C Convertible Redeemable Preferred Stock shall have no voting rights except as required by law.
|
|
|
•
|
The consent of the holders of a majority of the shares of Series C Convertible Redeemable Preferred Stock is necessary for the Company to amend the Series C certificate of designation.
|
The Series C Convertible Redeemable Preferred Stock is not classified as a component of stockholders' (deficit) equity in the accompanying consolidated balance sheets. Likewise, the undeclared dividends related to Series C Convertible Redeemable Preferred Stock have been recorded as an addition within the Series C Convertible Preferred Stock account in the amount of
$1,156
for the year ended
June 30, 2016
, and
$468
for the year ended
June 30, 2015
.
On August 22, 2016, the Company amended the terms of the Series C Preferred Stock. The amendment provided that the Series C Preferred Stock is no longer convertible into common stock by its terms (though the Series C Preferred Stock held by Mr. Sillerman remains subject to the Exchange Agreement described in this section) and is no longer redeemable by holder five years after issuance. See Note 16, Subsequent Events.
Securities Purchase Agreement
Pursuant to the Securities Purchase Agreement discussed in Note 7, Loans Payable, SIC III acquired a total of
10,000
Shares of Series C Convertible Redeemable Preferred Stock for
$10,000
as described below. The Company also agreed to issue to SIC III warrants to purchase a total of
25,000
shares of the Company’s common stock. The Company issued warrants to purchase
2,500
shares of the Company’s common stock for every
$1,000
of purchase price paid for the shares. The exercise price of the warrants was
10%
above the closing price of the Company’s shares on the date prior to the issuance of the warrants. Exercise of the warrants was subject to approval of the Company’s stockholders, which occurred on January 13, 2015.
On November 25, 2014, SIC III purchased
3,000
shares of Series C Convertible Redeemable Preferred Stock for
$3,000
. The shares of Series C Convertible Redeemable Preferred Stock were recorded in the accompanying consolidated balance sheet at its fair value as of the date of the purchase of November 25, 2014. In addition, in accordance with the Securities Purchase Agreement, the Company also issued SIC III warrants to purchase
7,500
shares of the Company's common stock at an exercise price of
$59.60
, which was
10%
above the closing price of the Company's shares on the date prior to issuance.
On March 16, 2015, SIC III purchased
7,000
additional shares of Series C Convertible Redeemable Preferred Stock for
$7,000
. The shares of Series C Convertible Redeemable Preferred Stock were recorded in the accompanying consolidated balance sheet at its fair value as of the date of the purchase of March 16, 2015. In addition, in accordance with the Securities Purchase Agreement, the Company also issued SIC III warrants to purchase
17,500
shares of the Company’s common stock at an exercise price of
$35.60
, which was
10%
above the closing price of the Company's shares on the date prior to issuance.
In connection with the Securities Purchase Agreement, the Company recorded total stock compensation expense based on the fair value of the Series C Convertible Redeemable Preferred Stock and warrants of
$2,091
during the year ended June 30, 2015.
Preferred Stock Conversion
Sillerman Investment Company III, LLC (“SIC III”), an affiliate of Robert F.X. Sillerman, the Company's Executive Chairman and Chief Executive Officer of the Company, owned
10,000
shares of Series C Convertible Redeemable Preferred Stock. On May 9, 2016 (the “Exchange Date”), the Company and SIC III entered into a Subscription Agreement pursuant to which SIC III subscribed for
1,129,032
shares of the Company’s common stock at a price of
$6.20
per share. Accordingly, the aggregate purchase price for such shares was
$7,000
. The Company and SIC III agreed that SIC III would pay the purchase price for such shares by exchanging
$7,000
shares of the Company’s Series C Convertible Redeemable Preferred Stock owned by SIC III for the common stock (the “Exchange”). All conditions of the Subscription Agreement have been satisfied, and therefore
1,129,032
shares of the Company’s common stock were issued to SIC III. Mr. Sillerman and his affiliates now own more than
50%
of the outstanding shares of the Company’s common stock. The Company determined that this was a fair transaction and did not recognize any stock compensation expense in relation with the conversion.
On August 22, 2016, the Company and SIC III, SIC IV, SIC VI entered into an Note Exchange Agreement pursuant to which
$30,175
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC III, SIC IV, and SIC VI other than
$900
of debt held by SIC IV pursuant to that certain Line of Credit Grid Note dated as of June 11, 2015, was exchanged for
30,175
shares of the Company’s Series C Convertible Redeemable Preferred Stock at an exchange price of
$1,000
per share. The Note Exchange Agreement provides for the newly issued shares to be held subject to the obligations to convert the shares into common stock on the terms and on the conditions set forth in the Exchange Agreement (see Note 16, Subsequent events).
At June 30, 2016, there were
3,000
shares of Series C Convertible Redeemable Preferred Stock outstanding.
Series D Convertible Preferred Stock
On March 24, 2016, the Company created a new class of Series D Convertible Redeemable Preferred Stock (the “Series D Convertible Preferred Stock”). The Company authorized the issuance of up to
150
shares of the Series D Convertible Preferred Stock. The rights, preferences, privileges and restrictions of the shares of Series D Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
|
|
•
|
The shares of Series D Convertible Preferred Stock have a stated value of
$1,000
per share.
|
|
|
•
|
Each share of Series D Convertible Preferred Stock is convertible, at the option of the holders, at a rate of
167
shares of common stock for one share of converted Series D Convertible Preferred Stock.
|
|
|
•
|
Shares of Series D Convertible Preferred Stock are not entitled to a liquidation preference.
|
|
|
•
|
Conversions of the Series D Convertible Preferred Stock shall be limited such that any given conversion shall not cause the holder's aggregate beneficial ownership of the shares of common stock to exceed
9.99%
of the Company’s outstanding common stock.
|
|
|
•
|
The shares of Series D Convertible Preferred Stock shall have no voting rights except as required by law.
|
|
|
•
|
The consent of the holders of a majority of the shares of Series D Convertible Preferred Stock is necessary for the Company to amend the Series D certificate of designation.
|
On April 13, 2016, MGT Sports, Inc. ("MGT") converted all
110
shares of the Company's Series D Convertible Preferred Stock it held into shares of common stock of the Company. Accordingly, the Company issued
18,332
shares of common stock to MGT. Thereafter, there are
no
shares of the Company's Series D Convertible Preferred Stock outstanding.
Public Offerings of Common Stock
On May 28, 2015, the Company closed an underwritten public offering of
181,309
shares of its common stock at a price of
$50.00
per share, resulting in approximately
$8,442
of net proceeds. The offering was made pursuant to a registration statement previously filed with the Securities and Exchange Commission which became effective on May 12, 2015.
On June 30, 2015, the Company closed an underwritten public offering of
102,439
shares of its common stock at a price of
$41.00
per share, resulting in approximately
$3,878
of net proceeds. The offering was made pursuant to a registration statement previously filed with the Securities and Exchange Commission which became effective on May 12, 2015.
Private Placements of Common Stock
Subscription Agreement
On December 3, 2015, the Company and SIC IV entered into a Subscription Agreement pursuant to which SIC IV subscribed for
437,500
shares of the Company’s common stock at a price of
$9.40
per share. Accordingly, the aggregate purchase price for such shares was
$4,112
.
Non-controlling Interest
As discussed in Note 6, Acquisitions, on September 8, 2015, the Company acquired the assets of the DraftDay Business and its operations have been consolidated with the Company's operations as of that date. The Company has recorded non-controlling interest in its Consolidated Balance Sheets and Consolidated Statements of Operations for the portion of the DraftDay Business that the Company does not own. In the year ended
June 30, 2016
, Sportech invested an additional
$257
into the DraftDay Business in exchange for shares of Series A Preferred Stock of DDGG for
$1
per share. In connection with termination of the Sportech MSA at June 30, 2016 (see Note 6, Acquisitions), Sportech returned
4,200
shares of DDGG stock. The Company reduced non-controlling interest by
$378
, which represents the fair value of these shares.
12.
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
187,500
shares of common stock for delivery under the Plan. Pursuant to the Plan and the employment agreements, between February 15, 2011 and June 30, 2016, 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 acquisitions of Wetpaint and Choose Digital.
|
|
|
|
|
|
|
|
Description
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Nonvested at July 1, 2015
|
23,313
|
|
|
$
|
1,044.60
|
|
Granted
|
17,571
|
|
|
32.60
|
|
Vested
|
(19,138
|
)
|
|
944.60
|
|
Forfeited and canceled
|
(17,704
|
)
|
|
74.80
|
|
Nonvested at June 30, 2016
|
4,042
|
|
|
$
|
2,740.40
|
|
Compensation expense related to restricted stock was
$11,720
and
$23,562
for the years ended
June 30, 2016
and
2015
, respectively. As of
June 30, 2016
, there was
$59
in unrecognized share-based compensation costs related to restricted stock.
During the fourth of fiscal 2016, the Company recorded an out-of-period adjustment related to the correction of an error for fiscal 2015 that was deemed immaterial for adjustment to the fiscal 2015 financial statements. The impact of the correction to the fiscal 2015 full year results was to decrease Selling, general and administrative expenses and accrued expense by
$843
. The adjustment was for erroneously recorded stock compensation expense on restricted stock units issued in connection with the Choose Digital acquisition. The Company corrected the error by decreasing accumulated deficit and accrued expenses by
$843
as of June 30, 2016.
Stock Options
The following table summarizes the Company's stock option activity for year ended June 30, 2016: