NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
$1,990,000
in assumed liabilities, a
$3,000,000
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. 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.
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
13.1 million
fans on their Facebook pages and generate an average of
16.2 million
visits per month.
Over the six months ended December 31, 2016, the Company focused its efforts on growing Wetpaint user engagement and monetization. The Company anticipates applying the same focus and methodology in the near future to the Rant sites to continue to grow and strengthen its publishing business.
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
six
months ended
December 31, 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
$1,300,000
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
$2,195,000
in the Other Expense line item of the Consolidated Statements of Operations for the six months ended
December 31, 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
December 31, 2016
and June 30, 2016 was approximately
$20,000
.
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
December 31, 2016
and
December 31, 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.
The carrying amounts of the Debenture Conversion feature, Rant Note Conversion feature and warrants is marked-to-market on a quarterly basis using a Monte Carlo simulation. The changes to fair value are recorded as other (expense)/income in the Consolidated Statement of Operations
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 $
4,335,000
related to the Choose Digital reporting unit and $
10,708,000
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
$3,350,000
at June 30, 2016. The Company also recorded an additional goodwill impairment loss of
$1,672,000
in the Selling, general and administrative expense line and reduced the gain on the sale of the Viggle Business by
$1,672,000
in the Consolidated Statements 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 and six months ended
December 31, 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 the year ended
June 30, 2016
. There were
no
impairments recorded during the three and six months ended
December 31, 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 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 $
1,331,000
on intangible assets related to Choose Digital's software and licenses, and a loss of $
11,418,000
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 and six months ended
December 31, 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
$749,000
on intangible assets related to DDGG during the year ended June 30, 2016.
No
impairments were recorded during the three and six months ended
December 31, 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
$1,498,000
as of
December 31, 2016
and
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 approximately
$83,000
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
$217,000
for the three months ended
December 31, 2016
and
December 31, 2015
, respectively. The Company recognized barter revenue and barter expense in the amount of
$0
and
$424,000
for the six months ended December 31, 2016 and December 31, 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
December 31, 2016
and
December 31, 2015
was approximately
$82,000
and
$239,000
respectively. Marketing expense for the six months ended December 31, 2016 and December 31, 2015 was approximately
$113,000
and
$480,000
, 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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017-04, "Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). The update requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for
annual periods beginning after December 15, 2019, including interim periods within those periods. The Company does not expect the update to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). The update provides a criteria for determining when an integrated set of assets and activities is not a business. The criteria requires that when substantially all of the fair value of gross assets are acquired in concentrated into a single identifiable asset or a group of similar identifiable assets, the integrated sets of assets and activities is not a business. Even if this criteria is not met, this update requires that the set of assets and activities must include an input and substantive processes that together significantly contribute to creating an output, at a minimum, and removes the evaluation of whether a market participant could replace the missing elements. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expect the update to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2016-18"). This update requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods for those years. The Company does not expect the standard to have a material impact on its consolidated financial statements.
In October 2016, the 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; non-cash 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 consolidated 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 consolidated 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 represented 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.
|
|
•
|
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 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Wetpaint
|
|
Choose Digital
|
|
DDGG
|
|
Total
|
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
External revenues
|
$
|
834
|
|
$
|
530
|
|
|
$
|
—
|
|
$
|
217
|
|
|
$
|
256
|
|
$
|
243
|
|
|
$
|
1,090
|
|
$
|
990
|
|
Inter-segment revenues (1)
|
—
|
|
—
|
|
|
|
668
|
|
|
—
|
|
—
|
|
|
—
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, net of income taxes (2)
|
(1,585
|
)
|
(28,478
|
)
|
|
(47
|
)
|
(3,645
|
)
|
|
(715
|
)
|
(1,533
|
)
|
|
(2,347
|
)
|
(33,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
Wetpaint
|
|
Choose Digital
|
|
DDGG
|
|
Total
|
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
|
2016
|
2015
|
External revenues
|
$
|
1,206
|
|
$
|
1,046
|
|
|
$
|
58
|
|
$
|
415
|
|
|
$
|
361
|
|
$
|
326
|
|
|
$
|
1,625
|
|
$
|
1,787
|
|
Inter-segment revenues (1)
|
—
|
|
—
|
|
|
—
|
|
1,219
|
|
|
—
|
|
—
|
|
|
—
|
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, net of income taxes (2)
|
(3,662
|
)
|
(30,338
|
)
|
|
(448
|
)
|
(4,120
|
)
|
|
(1,467
|
)
|
(1,507
|
)
|
|
(5,577
|
)
|
(35,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
Reconciliation of revenues attributable to reportable segments to consolidated revenues from continuing operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues attributable to reportable segments
|
$
|
1,090
|
|
|
$
|
990
|
|
|
$
|
1,625
|
|
|
$
|
1,787
|
|
Licensing revenues related to SFX licensing agreement
|
125
|
|
|
125
|
|
|
250
|
|
|
250
|
|
Other revenues
|
—
|
|
|
667
|
|
|
—
|
|
|
1,218
|
|
Revenues per Consolidated Statements of Operations
|
$
|
1,215
|
|
|
$
|
1,782
|
|
|
$
|
1,875
|
|
|
$
|
3,255
|
|
Reconciliation of net loss for reportable segments, net of income taxes to consolidated net loss from continuing operations, net of income taxes (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net loss for reportable segments, net of income taxes
|
$
|
(2,347
|
)
|
|
$
|
(33,656
|
)
|
|
$
|
(5,577
|
)
|
|
$
|
(35,965
|
)
|
Other net gain (loss)
|
2,184
|
|
|
(88
|
)
|
|
(429
|
)
|
|
(297
|
)
|
|
(163
|
)
|
|
(33,744
|
)
|
|
(6,006
|
)
|
|
(36,262
|
)
|
|
|
|
|
|
|
|
|
Stock compensation related to corporate financing activities (1)
|
(137
|
)
|
|
(4,250
|
)
|
|
(161
|
)
|
|
(8,500
|
)
|
Corporate expenses allocated to discontinued operations (2)
|
—
|
|
|
(650
|
)
|
|
—
|
|
|
(1,791
|
)
|
Interest expense (3)
|
(2,471
|
)
|
|
(926
|
)
|
|
(4,121
|
)
|
|
(1,783
|
)
|
Consolidated net loss from continuing operations, net of income taxes
|
$
|
(2,771
|
)
|
|
$
|
(39,570
|
)
|
|
$
|
(10,288
|
)
|
|
$
|
(48,336
|
)
|
|
|
|
|
|
|
|
|
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 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
Wetpaint
|
$
|
21,234
|
|
|
$
|
8,495
|
|
Choose Digital
|
5,226
|
|
|
5,416
|
|
DDGG
|
3,713
|
|
|
3,740
|
|
Total assets for reportable segments
|
$
|
30,173
|
|
|
$
|
17,651
|
|
Reconciliation of assets attributable to reportable segments to consolidated assets of continuing operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
Total assets for reportable segments
|
$
|
30,173
|
|
|
$
|
17,104
|
|
Other assets (1)
|
1,614
|
|
|
5,896
|
|
Total consolidated assets, net of current and non-current assets of discontinued operations
|
$
|
31,787
|
|
|
$
|
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
December 31, 2016
the Company has transferred
$1,096,000
to the DDGG subsidiary. A portion of these transfers, or
$500,000
, 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.
On July 12, 2016, to enhance the Company's digital publishing business, the Company 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
$5,110,000
,
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
$130,000,000
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
$1,000,000
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
$593,000
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
$1,300,000
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 approximately
$1,060,000
on this transaction, net of transaction fees associated with the sale of the Viggle rewards business.
Results of operations classified as discontinued operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues
|
$
|
—
|
|
|
$
|
2,330
|
|
|
$
|
—
|
|
|
$
|
5,909
|
|
Cost of watchpoints and engagement points
|
—
|
|
|
(1,209
|
)
|
|
—
|
|
|
(3,231
|
)
|
Selling, general and administrative expenses
|
—
|
|
|
(6,224
|
)
|
|
(36
|
)
|
|
(12,408
|
)
|
Loss before income taxes
|
—
|
|
|
(5,103
|
)
|
|
(36
|
)
|
|
(9,730
|
)
|
|
|
|
|
|
|
|
|
Income taxes (see Note 13, Income Taxes)
|
—
|
|
|
(21
|
)
|
|
—
|
|
|
(43
|
)
|
Net loss
|
$
|
—
|
|
|
$
|
(5,124
|
)
|
|
$
|
(36
|
)
|
|
$
|
(9,773
|
)
|
Current assets and non-current assets used in discontinued operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 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 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
2,703
|
|
|
$
|
2,634
|
|
Reward points payable
|
—
|
|
|
—
|
|
Current portion of loan payable
|
—
|
|
|
217
|
|
Current liabilities of discontinued operations
|
$
|
2,703
|
|
|
$
|
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 our acquisition of Choose Digital, the Company was required to make a contingent payment, which was due within
five
business days after June 24, 2015, of
$4,800,000
, which the Company failed to make timely. As a result, the Company entered into a Forbearance Agreement with AmossyKlein Family Holdings, LLLP (“AmossyKlein”), as representative of the former shareholders of Choose Digital Inc. (the “Stockholders”). The Forbearance Agreement provided that the Company would make monthly installment payments to the Stockholders and the Company agreed to deliver an affidavit of confession of judgment to be held in escrow by AmossyKlein s counsel in the event that 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
$1,800,000
. The Forbearance Agreement provides that the Company would make a payment of approximately
$300,000
by May 18, 2016, and thereafter, the Company would make monthly payments of
$100,000
, plus interest, until the remaining amount is paid in full. In addition, the Company pledged
100,000
shares of common stock held in Perk.com, Inc. as collateral for these obligations. As of the date of this filing,
$354,000
is owed and the
100,000
shares have been released. Finally, the Company agreed if we consummate 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 agreed to amend the confession of judgment. These payments under the amended forbearance agreement will create additional strain on the Company's limited cash resources. In addition, the requirement to accelerate payments on a sale of a substantial part of the Company's assets or from a public equity offering may hinder its access to additional cash. During the three months ended December 31, 2016, the Company paid approximately
$318,000
under the Forbearance Agreement.
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
$234,000
due September 29, 2015, (c) a promissory note in the amount of
$1,875,000
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
$16,000
due September 29, 2015 and (c) a promissory note in the amount of
$125,000
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
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
$250,000
due and paid on September 29, 2015 and in the aggregate principal amount of
$2,000,000
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$2,000,000
in payments at the due
date and on March 24, 2016 converted
$825,000
of the promissory notes to common stock and
$110,000
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
$940,000
remaining due under the MGT Note. Under the Second MGT Exchange Agreement, the MGT Note shall be exchanged in full for (a)
$11,000
in cash representing accrued interest and (b)
132,092
shares of our common stock, subject to certain adjustments. Issuance of the shares was 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
$16,000
.
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
$550,000
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
$16,000
due and paid on September 29, 2015 and in the aggregate principal amount of
$125,000
due March 8, 2016. All such notes bear interest at a rate of
5%
per annum. The Company was not able to make the
$125,000
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
$71,000
in principal amount of a promissory note the Company owed to Kuusamo.
The outstanding balance of the Kuusamo Promissory Notes was
$0
and
$54,000
at December 31, 2016 and June 30, 2016, respectively. The Company recorded
$5,000
in interest expense for the year ended June 30, 2016. On September 21, 2016, the Company satisfied the Kuusamo Prommisory Note through the issuance of
8,410
shares of its common stock.
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
$75,000
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 required 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 approximately
$749,000
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
$3,500,000
and delivered the stock consideration of
$7,600,000
described below.
The
$3,000,000
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 by a third party valuation expert 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 (amounts in thousands):
|
|
|
|
|
Goodwill
|
$
|
7,589
|
|
Intangible assets
|
5,500
|
|
Total liabilities
|
(1,990
|
)
|
|
$
|
11,099
|
|
The goodwill allocated to the Rant acquisition is tax deductible.
7. Property and Equipment
Property and Equipment consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
(2,209
|
)
|
|
(2,055
|
)
|
Property and Equipment, net
|
$
|
1,260
|
|
|
$
|
1,414
|
|
Depreciation and amortization charged to selling, general and administrative expenses for the three months ended
December 31, 2016
and 2015 amounted to approximately
$77,000
and
$139,000
, respectively.
Depreciation and amortization charged to selling, general and administrative expenses for the
six
months ended
December 31, 2016
and 2015 amounted to
$154,000
and
$279,000
, respectively.
8. Intangible Assets and Goodwill
The summary of intangible assets and goodwill is a follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
|
Description (amounts in thousands)
|
|
Amortization
Period
|
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Wetpaint technology
|
|
60 months
|
|
$
|
4,952
|
|
|
|
$
|
(3,458
|
)
|
|
|
$
|
1,494
|
|
|
|
$
|
4,952
|
|
|
|
$
|
(3,276
|
)
|
|
|
$
|
1,676
|
|
|
Wetpaint trademarks
|
|
276 months
|
|
1,453
|
|
|
|
(438
|
)
|
|
|
1,015
|
|
|
|
1,453
|
|
|
|
(415
|
)
|
|
|
1,038
|
|
|
Wetpaint customer relationships
|
|
60 months
|
|
917
|
|
|
|
(837
|
)
|
|
|
80
|
|
|
|
917
|
|
|
|
(827
|
)
|
|
|
90
|
|
|
Choose Digital licenses
|
|
60 months
|
|
829
|
|
|
|
(589
|
)
|
|
|
240
|
|
|
|
829
|
|
|
|
(559
|
)
|
|
|
270
|
|
|
Choose Digital software
|
|
60 months
|
|
627
|
|
|
|
(257
|
)
|
|
|
370
|
|
|
|
627
|
|
|
|
(212
|
)
|
|
|
415
|
|
|
DraftDay tradename
|
|
84 months
|
|
180
|
|
|
|
(61
|
)
|
|
|
119
|
|
|
|
180
|
|
|
|
(38
|
)
|
|
|
142
|
|
|
Draftday non-compete agreements
|
|
6 months
|
|
30
|
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
30
|
|
|
|
(30
|
)
|
|
|
—
|
|
|
DraftDay internally generated capitalized software
|
|
60 months
|
|
1,498
|
|
|
|
(485
|
)
|
|
|
1,013
|
|
|
|
1,498
|
|
|
|
(303
|
)
|
|
|
1,195
|
|
|
DraftDay customer relationships
|
|
24 months
|
|
556
|
|
|
|
(556
|
)
|
|
|
—
|
|
|
|
556
|
|
|
|
(351
|
)
|
|
|
205
|
|
|
Rant trademarks
|
|
120 months
|
|
2,700
|
|
|
|
(124
|
)
|
|
|
2,576
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Rant content
|
|
24 months
|
|
650
|
|
|
|
(149
|
)
|
|
|
501
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Rant technology
|
|
60 months
|
|
1,500
|
|
|
|
(138
|
)
|
|
|
1,362
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Rant advertising relationships
|
|
24 months
|
|
650
|
|
|
|
(149
|
)
|
|
|
501
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
various
|
|
326
|
|
|
|
(24
|
)
|
|
|
302
|
|
|
|
326
|
|
|
|
(18
|
)
|
|
|
308
|
|
|
Total
|
|
|
|
$
|
16,868
|
|
|
|
$
|
(7,295
|
)
|
|
|
$
|
9,573
|
|
|
|
$
|
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
six
months ended
December 31, 2016
and 2015 amounted to approximately
$1,266,000
and
$2,123,000
, respectively.
Future annual amortization expense expected is as follows amounts in thousands):
|
|
|
|
|
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 December 31, 2016
|
$
|
18,859
|
|
9. Loans Payable
The summary of loans payable is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Maturity Date
|
Facility Amount
|
December 31, 2016
|
June 30, 2016
|
Convertible Debentures (the "Debentures"), net of discount
|
7/11/2017
|
$
|
4,444
|
|
$
|
3,629
|
|
$
|
—
|
|
Secured Convertible Promissory Note (the "Secured Convertible Note")
|
7/8/2017
|
3,000
|
|
3,400
|
|
—
|
|
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
|
5,900
|
|
3,465
|
|
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
|
|
Kuusamo Promissory Notes (the "Kuusamo Promissory Notes")
|
3/8/2016
|
141
|
|
—
|
|
55
|
|
Total Loans Payable, net
|
|
|
$
|
10,794
|
|
$
|
28,712
|
|
|
|
|
|
|
* As of June 30, 2016 the total facility amount on on the Grid Note was $10,000,000; however, in conjunction with the Exchange Agreement, this amount was reduced to $5,900,000.
|
Convertible Debentures
On July 12, 2016, the Company closed a private placement (the "Private Placement") of
$4,444,000
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
$4,000,000
before placement agent fees, original issue discount, and other expenses associated with the transaction.
$1,162,000
of the proceeds was used to repay the Grid Note. The placement agent fees of
$420,000
and original issue discount of
$444,000
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
$1,000,000
available in its commercial bank account or otherwise available in liquid funds. At any time when the Company's available funds fall below
$1,000,000
, Mr. Sillerman will provide (the “Sillerman Guaranty”) the amounts necessary to make-up the shortfall in an aggregate amount not to exceed
$6,000,000
; however, the first
$5,000,000
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
$1,000,000
million shall be provided by Sillerman.
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
$1,500,000
and the offset was recorded as a debt discount on the Convertible Debentures. The Warrants are recorded as a liability on the Consolidated Balance Sheets due to the adjustment of the exercise price due to subsequent common stock issuances and is being marked to market each reporting period. As of December 31, 2016, the balance of the debt discount related to the Warrants was
$812,500
. The fair value of the Warrants as of December 31, 2016 was determined to be
$410,000
. The change in fair value of
$1,090,000
was recorded as other income in the Consolidated Statements of Operations for the three months ended December 31, 2016.
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
$1,856,000
as of July 12, 2016 and the offset was recorded as a debt discount. As of December 31, 2016, the balance of the debt discount on the Debentures related to the Conversion feature was
$1,005,000
. The fair value of the
Conversion feature as of December 31, 2016 was determined to be
$1,256,000
. The change in fair value of
$600,000
was recorded as other income in the Consolidated Statements of Operations for the three months ended December 31, 2016.
On October 12, 2016, the first amortization payment in the amount of
$444,000
, plus accrued interest of approximately
$114,000
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. As a result of the event of default, the Company accrued
$739,000
to interest expense in the Consolidated Statements of Operations and the Current portion of loans payable on the Consolidated Balance Sheets for the three and six months ended December 31, 2016, which represents all interest that would have been earned through the one year anniversary of the original issue date. Additionally, $
667,000
was accrued to interest expense in the Consolidated Statements of Operations and the Current portion of loans payable on the Consolidated Balance Sheets representing the
15%
premium on the outstanding principal for the three and six months ending December 31, 2016. In December 2016, the Company made a payment of
$397,000
, which included
$383,000
of principal and
$14,000
of interest.
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. In addition, the Company is currently in default with respect to the amortization payment due in January 2017.
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
$696,000
, reflecting the principal amount of the Debenture plus interest through November 1, 2016. Interest will accrue at
18%
until this amount is satisfied.
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
$3,000,000
as part of the consideration for the purchase of the Rant Assets.
The
$3,000,000
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.
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. In addition, the Company is currently in default with respect to the Rant Note as a result of the failure to make the Debentures amortization payment due in January 2017.
The Company valued the Secured Convertible Note as of the acquisition date using the methods of fair value as described ASC 820. The fair value of the conversion feature in the Secured Convertible Note was determined to be
$500,000
at the acquisition date. As of December 31, 2016, the fair value of the conversion feature was determined to be
$400,000
. The
$100,000
change in fair value from September 30, 2016 to December 31, 2016 was recorded as other income in the Consolidated Statements of Operations for the three months ended December 31, 2016.
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
$30,000,000
. Pursuant to the Securities Purchase Agreement, the Company issued a Line of Credit Promissory Note (the “Note”), which provides for a
$20,000,000
line of credit to the Company (see Note 11, Stockholders' Equity, for a discussion of the remaining
$10,000,000
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
$1,000,000
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
$4,500,000
. On December 15, 2014, SIC III made an additional advance in the principal amount of
$15,500,000
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
$20,000,000
. 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
$19,666,000
, which includes accretion of the discount of
$266,000
(the
3%
discount of
$600,000
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
$4,500,000
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
$15,500,000
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
$2,049,000
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
$500,000
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
$1,000,000
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
$500,000
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
$1,000,000
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
$23,264,000
, 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
$0
and
$613,000
for the three months ended December 31, 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
$10,000,000
. 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) December 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 December 31, 2016 and June 30, 2016 the principal amount outstanding under the Grid Note was
$3,465,000
and
$4,563,000
, 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
$10,000,000
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
$2,000,000
of the outstanding principal balance of the Grid Note and the Company shall be entitled to draw up to an additional
$5,000,000
.
On August 22, 2016, the Company and SIC IV, entered into a Note Exchange Agreement pursuant to which
$3,150,000
, which represents all of the outstanding principal and accrued interest outstanding under the Grid Note other than
$900,000
, 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
December 31, 2016
was
$3,465,000
.
Interest expense on the Grid Note for the six months ended
December 31, 2016
and 2015 was
$148,000
and
$201,000
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
$1,500,000
. 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,
$1,500,000
had been advanced thereunder. Interest expense on the Secured Revolving Loan I was approximately
$27,000
for the six months ended December 31, 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
$500,000
. 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,
$500,000
had been advanced thereunder. Interest expense on the Secured Revolving Line of Credit was approximately
$9,000
for the six months ended December 31, 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
$500,000
. 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,
$500,000
had been advanced thereunder. Interest expense on the Secured Revolving Loan was
$9,000
for the six months ended December 31, 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
$500,000
. 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,
$500,000
had been advanced thereunder. Interest expense on the Secured Revolving Loan II was approximately
$9,000
for the six months ended December 31, 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
$1,200,000
. 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, approximately
$135,000
had been advanced thereunder. Interest expense on the Secured Revolving Loan III was approximately
$8,000
for the six months ended December 31, 2016.
On August 22, 2016, the Company and SIC VI entered into a Note Exchange Agreement pursuant to which
$3,608,000
, which represented 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
$300,000
(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 December 31, 2016 ,
$300,000
of principal was outstanding under the RI Convertible Note. Interest expense for the six months ended December 31, 2016 was approximately
$18,000
.
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
$234,000
due and paid on September 29, 2015 and in the aggregate principal amount of
$1,875,000
due March 8, 2016. The Company was not able to make the payment at the due date and on March 24, 2016 converted
$824,000
of the promissory notes to common stock and
$110,000
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
$940,000
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)
$11,000
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
$0
at
December 31, 2016
. The Company recorded interest expense of
approximately
$12,000
for the six months ended
December 31, 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 approximately
$16,000
.
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
$16,000
due and paid on September 29, 2015 and in the aggregate principal amount of
$125,000
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. On September 21, 2016, the Company satisfied the Kuusamo Promissory Note through the issuance of
8,410
shares of its common stock. The outstanding balance of the Kuusamo Promissory Notes was
$0
at
December 31, 2016
. The Company recorded interest expense of approximately
$1,000
for the six months ended
December 31, 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
$218,000
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
$110,000
, 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.
Interest expense on these notes issued in connection with vendor settlements was approximately
$7,000
and
$22,000
for the three and six months ended December 31, 2016, respectively.
10. Commitments and Contingencies
Litigation
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 Plaintiff has until April 7, 2017 to respond. 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 the Company's purchase of Rant on July 8, 2016. The Company is in settlement discussions.
On January 20, 2017, a Complaint (Case #3D-2017-00898658-CU-CO-CJC) was filed in the Superior Court of California, County of Orange, by Jamboree Center 4 LLC, the former landlord of Rant, Inc., relating to rent Jamboree Center claims is owed for the period after the Company purchased Rant. The Company believes this claim is without merit. as the Company did not assume this liability. The Company intends to vigorously defend this action and seek indemnification from the sellers of the Rant assets.
On January 31, 2017, a complaint (Case #650513/2017) was filed in New York County Supreme Court, New York by Outbrain, Inc. (“Outbrain”) against the Company and others, alleging failure to pay
$739,190
owed to Outbrain by Rant between July 2015 and January 2016. The Company believes this claim is without merit, as the Company did not assume the liability to Outbrain. The Company intends to vigorously defend this action and seek indemnification from the sellers of the Rant assets.
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
Common Stock
As of
December 31, 2016
there were
300,000,000
shares of authorized common stock and
3,244,275
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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•
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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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•
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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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•
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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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•
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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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•
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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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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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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 December 31, 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.
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•
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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 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
$125,000,000
.
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•
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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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•
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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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•
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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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•
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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
December 31, 2016
and June 30, 2016, there were
no
shares of Series B Convertible Preferred Stock outstanding.
Series C Convertible Preferred Stock
We amended the Certificate of Designation of our Series C Convertible Preferred Stock as of August 22, 2016. As amended, the designation, powers, preferences, and rights of the shares of Series C Preferred Stock and the qualifications, limitations and restrictions thereof are summarized as follows:
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•
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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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•
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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.
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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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The Series C Preferred Stock is not redeemable or convertible into common stock by the holder (except the Series C Preferred Stock held by Mr. Sillerman and affiliates remains subject to the Exchange Agreement and is convertible in accordance therewith).
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•
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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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•
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Until the August 22, 2016 amendment, the Series C Convertible Preferred Stock was classified as a component of mezzanine equity in the accompanying Consolidated Balance Sheets. As a result of the amendment, the Series C Preferred Stock is now classified as a component of stockholders’ (deficit) equity.
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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
$7,000,000
. 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
$30,175,000
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC III, SIC IV, and SIC VI other than
$900,000
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
December 31, 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.
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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.
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•
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Shares of Series D Convertible Preferred Stock are not entitled to a liquidation preference.
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•
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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.
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•
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The shares of Series D Convertible 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 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
December 31, 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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•
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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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•
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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
December 31, 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
$4,112,000
.
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 approximately
$378,000
, 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
December 31, 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 approximately
$133,000
and
$9,981,000
for the
six
months ended
December 31, 2016
and 2015, respectively. As of
December 31, 2016
, there was approximately $
239,000
in total unrecognized share-based compensation costs related to restricted stock. There were
65,318
shares of restricted stock granted during the six months ended December 31, 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
six
months ended
December 31, 2016
and 2015.
Compensation expense related to stock options of approximately
$13,000
and
$173,000
is included in the accompanying Consolidated Statements of Operations in selling, general and administrative expenses for the three months ended
December 31, 2016
and 2015, respectively. Compensation expense related to stock options of approximately
$28,000
and
$346,000
is included in the accompanying Consolidated Statements of Operations in selling, general and administrative expenses for the
six
months ended
December 31, 2016
and 2015, respectively. As of
December 31, 2016
, there was approximately $
107,000
of total unrecognized stock-based compensation cost which will generally be recognized over a
two
year period.
13. Income Taxes
For the three and
six
months ended
December 31, 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
December 31, 2016
the Company has a Net Operating Loss carryforward of approximately
$165,112,000
, which will begin to expire in 2030.
As a result of the Rant Asset Purchase in July 2016, the Company has goodwill of approximately
$7,589,000
that is not amortized for financial reporting purposes. However, these assets are tax deductible, and therefore amortized over
15
years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of these assets. The resulting deferred tax liability, which is expected to continue to increase over time, will have an indefinite life, resulting in what is referred to as a “naked tax credit.” This deferred tax liability could remain on the Company’s balance sheet permanently unless there is an impairment of the related assets (for financial reporting purposes), or the business to which those assets relate were to be disposed of. The Company recorded income tax expense of
$102,000
in the three and six months ended December 31, 2016 related to the "naked tax credit."
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. SFX was reorganized in bankruptcy on December 2, 2016.
The net balance due (to)/from SFX, including amounts related to the Sales Agency Agreement, discussed below, as of
December 31, 2016
and June 30, 2016 was approximately
$0
and
$142,000
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
$5,000,000
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
December 31, 2016
and 2015, the Company recognized
$125,000
and
$125,000
, respectively of revenue related to this agreement. For the six months ended
December 31, 2016
and 2015, the Company recognized
$250,000
and
$250,000
, 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
$1,500,000
. 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,
$1,500,000
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
$1,500,000
, 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.
$500,000 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
$500,000
. 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,
$500,000
had been advanced thereunder. On August 22, 2016, the Company and SIC VI entered into an Note Exchange Agreement pursuant to which
$500,000
, 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
$7,000,000
. 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
$10,000,000
, 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
$2,000,000
of the outstanding principal balance of the Grid Note and the Company shall be entitled to draw up to an additional
$5,000,000
.
$3,605,000
remains available to draw under the Grid Note and at the date of this filing, the current balance is
$2,950,000
.
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
$30,175,000
, 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
$900,000
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 approximately
$5,281,000
. 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
December 31, 2016
and 2015 to a fair value of $
10,000
and $
10,000
, respectively. The Company recorded gains/(losses) of
$0
and
$0
to other income, net in the Consolidated Statements of Operations for the six months ended
December 31, 2016
and 2015, respectively. The fair value of the warrant is classified as a current liability on the Consolidated Balance Sheets as of
December 31, 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 Statements of Operations.
The fair value of the warrants when issued was approximately $
1,023,000
. The warrants were marked to market as of
December 31, 2016
to a fair value of $
1,091,000
. The Company recorded a loss of approximately $
503,000
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 Sheets 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
$1,300,000
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 approximately
$2,195,000
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
$3,000,000
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 conversion feature of the Secured Convertible Note was approximately
$500,000
and the fair value of the Series E Preferred Stock was approximately
$7,600,000
. The Secured Convertible Note, the fair value of the conversion feature 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. As of December 31, 2016, the fair value of the conversion feature was determined to be approximately
$400,000
. The
$100,000
change in fair value from September 30, 2016 to December 31, 2016 was recorded as other income in the Consolidated Statements of Operations for the three months ended December 31, 2016.
On July 12, 2016, the Company closed the Private Placement of
$4,444,000
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 approximately
$1,856,000
and the fair value of the Warrants was
$1,500,000
. The Conversion feature and Warrants were recorded at the Private Placement closing date fair values with corresponding charges to debt discount of approximately
$1,856,000
for the Debentures and approximately
$1,500,000
for the Warrants in the Consolidated Balance Sheets at September 30, 2016. As of December 31, 2016, the fair value of the Conversion feature was determined to be approximately
$1,256,000
and the fair value of the Warrants was determined to be
$410,000
. The changes in fair value were recorded as other income in the Consolidated Statements of Operations for the three months ended December 31, 2016.
On August 22, 2016, the Company and SIC III, SIC IV, SIC VI entered into an Note Exchange Agreement pursuant to which
$30,175,000
, which represents all of the outstanding principal and accrued interest of certain notes held by SIC III, SIC IV, and SIC VI other than
$900,000
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
$28,500,000
. The Series C Convertible Preferred Stock was recorded at the exchange date fair value with a corresponding charge to additional paid-in capital of
$1,675,000
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 December 31, 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
$1,300,000
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 approximately
$2,195,000
in the Other Expense line item of the Consolidated Statements of Operations during 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
|
3,856
|
|
Changes to fair value
|
(1,790
|
)
|
Balance at December 31, 2016
|
$
|
2,076
|
|
16. Subsequent Events
Events of Default
The Company is currently in events of default under the Debentures issued in the Private Placement for failure to make amortization payments and for failure to maintain the Minimum Cash Reserve.
On October 12, 2016, the first amortization payment in the amount of
$444,000
, plus accrued interest of approximately
$114,000
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 paid, upon execution of the Waiver,
10%
of the Amortization Amount that became due on October 12, 2016 and paid 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 approximately
$696,000
, 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. In addition, the Company is currently in default with respect to the amortization payment due in January 2017.
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
$3,000,000
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. In addition, the Company is currently in default with respect to the Rant Note as a result of the failure to make the Debentures amortization payment due in January 2017.
Secured Lines of Credit
Since the three months ended December 31, 2016, the Company has borrowed an additional
$900,000
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
$4,115,000
and the Company is entitled to draw up to an additional
$885,000
under the Line of Credit.
Appointment of Chief Operating Officer
On January 19, 2017, the Company named Brian Rosin as its Chief Operating Officer. On January 26, 2017, the Company and Mr. Rosin agreed to the terms of a new employment agreement reflecting his new role.