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Item 2.01.
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Completion of Acquisition or Disposition of Assets.
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Transaction Summary
:
The acquisition
of Screen Media by the Company was consummated pursuant to an Agreement and Plan of Merger (“
Agreement
”), dated
November 3, 2017, by and among the Company, SMV Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary
of the Company (“
Merger Sub
”), Screen Media and Media V Holdings, LLC, a Delaware limited liability company
and the sole member of Screen Media (“
MV Holding
”).
Pursuant to the
Agreement, Merger Sub was merged with and into Screen Media, the separate corporate existence of Merger Sub ceased, and Screen
Media continued as the surviving limited liability company of the merger and a wholly owned subsidiary of the Company.
Immediately prior
to the closing of the merger, all subordinated indebtedness owed by Screen Media or any of its subsidiaries was transferred and
assumed by an entity owned and controlled by the former principal equity holder of Screen Media, and all obligations owed by Screen
Media with respect thereto were terminated, and the security interests related thereto were released.
Immediately prior
to the closing of the merger, the Company made a loan to MV Holding in the principal amount of $5,522,855 (“
MV Holding
Loan
”), which was evidenced by a promissory note. The proceeds of the MV Holding Loan were promptly contributed by MV
Holding to the capital of Screen Media and immediately used, in part, by Screen Media to pay the sum of $4,905,355 (“Bank
Loan Satisfaction Payment”) in full satisfaction of all principal and interest owed by Screen Media under all loans to its
banks, with the remainder of the MV Holding Loan proceeds used to pay certain transaction expenses and other liabilities of Screen
Media. The entirety of the MV Holding Loan was forgiven by the Company as part of the purchase price paid by the Company for the
acquisition of Screen Media. As a result of the foregoing transactions, Screen Media, as of the closing of the merger, had no indebtedness
for borrowed money.
In connection
with the transactions prescribed by the Agreement, the Company issued at closing Class Z warrants (“Kovacs Warrants”),
which are exercisable from the date of issuance through June 30, 2022, to purchase up to an aggregate of 50,000 shares of the Company’s
Class A common stock at $12.00 per share, to Joseph Kovacs, the former principal equity holder and chief executive officer of Screen
Media. The Kovacs Warrants are identical to the Class Z warrants issued by the Company in certain private placements in 2017. On
January 2, 2018, the Company issued 35,000 shares of the Company’s Class A common stock (“Kovacs Shares”) to
Mr. Kovacs.
The adjusted purchase
price paid by the Company for all the outstanding equity ownership interests of Screen Media totaled $5,329,905 and was comprised
of the Bank Loan Satisfaction Payment and the fair value of the Kovacs Warrants and the Kovacs Shares.
Screen Media and
an entity controlled by Mr. Kovacs also entered into a two-year consulting agreement, pursuant to which Mr. Kovacs shall provide
Screen Media with advice and assistance in connection with the transition of ownership of Screen Media to the Company. Mr. Kovacs’
entity will be paid an annual consulting fee of $200,000.
The summaries
of the agreements and transactions set forth in this Current Report as originally filed and as amended hereby, do not purport to
be a complete statement of the terms of such document. The summary is qualified in its entirety by reference to the full text of
the document, a copy of which has been filed with the Original Form 8-K as Exhibit 2.1, and is incorporated herein by reference.
Screen Media Ventures
:
Screen Media is a strategic acquisition for the Company. It accelerates the Company’s entry into
the direct-to-consumer online video market through Popcornflix, an operating subsidiary of Screen Media. In addition, Screen Media’s
distribution capabilities across all media allows the Company to distribute its produced television series directly and eliminate
the distribution fees (as much as 30% of revenues) that the Company currently pays to third parties for distribution of the rights
the Company retains when it produces series with its sponsors. The Company believes that the cost savings from Screen Media’s
distribution capabilities will enhance the Company’s revenues and profits from the Company’s produced television series.
Screen Media
generates meaningful revenue and Adjusted EBITDA and is estimated to have recognized net revenue in 2017 of approximately $12.0
million and Adjusted EBITDA of approximately $5.0 million. These updated figures are consistent with net revenue of $12.0 million
and EBITDA of $5.0 million estimated by the Company in the Current Report on Form 8-K originally filed on November 6, 2017 announcing
the Screen Media transaction (see “
Use of Non-GAAP Financial Measures
” below). Furthermore, the purchase price
paid by the Company for the acquisition of Screen Media is significantly less than (a) an independent third-party valuation of
Screen Media and its content library and Popcornflix previously obtained by Screen Media in connection with bank financing it
had undertaken prior to the acquisition (which bank financing was repaid prior to the acquisition) and (b) a more recent independent
third-party valuation recently obtained by the Company. The most recent independent third-party appraisal was completed in January
2018 and exceeded $27.9 million for the value of film rights and other assets owned by Screen Media and Popcornflix. The fair
values of the total assets acquired were approximately $31.4 million. The gain on bargain purchase is over $22.0 million, up from
the $10.0 million estimated by the Company in the Current Report on Form 8-K as originally filed on November 6, 2017.
Use of Non-GAAP Financial Measures
:
In addition to the results reported
in accordance with GAAP, Screen Media uses non-GAAP financial measures, which are not recognized under GAAP, as a supplemental
indicator of its operating performance. The non-GAAP financial measures are provided to enhance the readers understanding of Screen
Media’s historical and current financial performance. Management believes that this measure provides useful information in
that it excludes amounts that are not indicative of its core operating results and ongoing operations and provides a more consistent
basis for comparison between periods. The non-GAAP financial measures that Screen Media currently uses are Adjusted EBITDA and
EBITDA which are defined as follows:
“Adjusted EBITDA” means
earnings before interest, taxes, depreciation, amortization, non-cash share-based compensation expense and adjustments for other
identified charges that are non-recurring in nature. Adjusted EBITDA is not an earnings measure recognized by GAAP and does not
have a standardized meaning prescribed by GAAP; accordingly, Adjusted EBITDA may not be comparable to similar measures presented
by other companies. Screen Media believes that Adjusted EBITDA is a meaningful indicator of its performance and provides useful
information regarding its financial condition and results of operations. The most comparable GAAP measure is operating income.
“EBITDA” means earnings
before interest, taxes, depreciation and amortization. EBITDA is not an earnings measure recognized by GAAP and does not have a
standardized meaning prescribed by GAAP; accordingly, EBITDA may not be comparable to similar measures presented by other companies.
Screen Media believes that EBITDA is a meaningful indicator of its performance that provides useful information regarding its financial
condition and results of operations. The most comparable GAAP measure is operating income.