ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. The management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our Annual Report, as updated in subsequent filings we have made with the SEC that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Basis of Presentation
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
As a result of the Contribution (as defined below) and the related change in our business and operations, a discussion of our past financial results is not pertinent, and under applicable accounting principles the historical financial results of CÜR Media, LLC (formerly Raditaz, LLC), the accounting acquirer, prior to the Contribution, are considered the historical financial results of the Company.
The audited financial statements for our fiscal year ended December 31, 2016, contained in our Annual Report, include a summary of our significant accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in these audited financial statements. All such adjustments are of a normal recurring nature.
References in this section to “CÜR Media,” “we,” “us,” “our,” “the Company” and “our Company” refer to CÜR Media, Inc., and its consolidated subsidiary, CÜR Media, LLC.
General Overview
We were incorporated in the State of Delaware as Duane Street Corp. on November 17, 2011. Our original business was manufacturing and marketing baby products. Prior to the Contribution (as defined below), our board of directors determined to discontinue operations in this area and to seek a new business opportunity.
On January 28, 2014, we consummated a contribution transaction with CÜR Media, LLC, a limited liability company organized in the State of Connecticut on February 15, 2008 (the “Contribution”), pursuant to a Contribution Agreement by and among the Company, CÜR Media, LLC, and the holders of a majority of CÜR Media, LLC’s limited liability company membership interests (the “Contribution Agreement”). In connection with the Contribution, and in accordance with the terms and conditions of the Contribution Agreement, all outstanding securities of CÜR Media, LLC were exchanged for securities of ours.
Prior to the Contribution, CÜR Media, LLC’s activities since inception had been devoted primarily to the development and commercialization of Raditaz, a DMCA compliant internet radio product. Raditaz was launched in early 2012 and the platform was continually developed and improved through November 2013 when its iOS, Android and web products were removed from the market, to allow us to focus on the further development of our CÜR Music product.
The Raditaz music streaming platform and products were under development since 2010 and, prior to the 2014 PPO (as defined below), were financed primarily from angel investments in the aggregate amount of approximately $4,858,000, $150,000 of financing from a promissory note from CT Innovations, Incorporated, and a $100,000 promissory note and a $100,000 grant from the State of Connecticut Department of Economic Development.
As a result of the Contribution, CÜR Media, LLC became our wholly owned subsidiary, and we adopted the business of CÜR Media, LLC, which is to develop and commercialize a streaming music experience for listening on the web and mobile devices, as our sole line of business (the “Music Streaming Business”).
On January 31, 2014, we changed our name to CÜR Media, Inc., a name that more accurately represents our new business focus. In connection with the name change, we changed our OTC trading symbol to “CURM.”
In addition, on January 31, 2014, we increased our number of authorized shares to 310,000,000 shares, consisting of (i) 300,000,000 shares of common stock, par value $0.0001 per share (“Common Stock”), and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”).
Further, on January 31, 2014, our board of directors authorized a 1.26953123-for-1 forward split of our Common Stock, in the form of a dividend, pursuant to which each shareholder of our Common Stock as of the record date received 1.19260815 additional shares of Common Stock for each one share owned.
In a private placement financing we conducted with respect to which closings occurred on January 28, 2014, March 14, 2014 and March 28, 2014 (the “2014 PPO”), we sold an aggregate of 744,756 shares of our Common Stock, and warrants to purchase an aggregate of 744,756 shares of our Common Stock at an exercise price of $26.00 per share for a term of five (5) years (“PPO Warrants”), for gross proceeds of approximately $9,680,000 (before deducting placement agent fees and expenses of the 2014 PPO estimated at approximately $1,529,000).
The placement agent for the 2014 PPO and its sub-agent were paid an aggregate commission of approximately $968,000 and were issued warrants to purchase an aggregate of 74,483 shares of our Common Stock at an exercise price of $13.00 per share for a term of five (5) years (“Broker Warrants”).
On April 6, 2015, we consummated an offer to amend and exercise the PPO Warrants (the “Offer to Amend and Exercise Warrants”). The PPO Warrants of holders who elected to participate in the Offer to Amend and Exercise Warrants were amended to, among other things, remove the price-based anti-dilution provisions contained therein and reduce the exercise price from $26.00 to $6.50 per share of Common Stock. Pursuant to the Offer to Amend and Exercise Warrants, an aggregate of 497,548 PPO Warrants were amended and exercised by their holders, for gross proceeds of approximately $3,234,000 (before deducting warrant agent fees and expenses of the Offer to Amend and Exercise estimated at approximately $417,000).
Effective on or prior to April 6, 2015, the Company and the holders of (a) 113,469 PPO Warrants, that chose not to participate in the Offer to Amend and Exercise Warrants (“Non-Participating Original Warrants”), and (b) all 74,483 Broker Warrants, approved an amendment to remove the price-based anti-dilution provisions in their warrants. As a result, the price-based anti-dilution provisions contained in these Non-Participating Original Warrants and Broker Warrants have been removed and are of no further force or effect as of April 6, 2015.
The warrant agent for the offer to Amend and Exercise Warrants was paid an aggregate commission of approximately $323,350 and was issued warrants to purchase an aggregate of 49,752 shares of our Common Stock at an exercise price of $6.50 per share for a term of five (5) years (“Warrant Agent Warrants”).
Certain securities we issued in the 2014 PPO had price-based anti-dilution protection (“Anti-Dilution Rights”), if, within twenty-four (24) months after the final closing of the 2014 PPO, we issue additional shares of Common Stock or Common Stock equivalents (subject to customary exceptions) for a consideration per share less than $13.00. Of the 744,756 PPO Warrants, 133,739 still remained with these priced-based anti-dilution rights. With the consummation of the exercise and amendment of the PPO Warrants and the issuance of the Warrant Agent Warrants to the Warrant Agent, the anti-dilution provisions were triggered and the non-participating warrant holders received (i) an aggregate of 17,180 additional shares of Common Stock (ii) a reduction in the price of their PPO Warrants from $26.00 per share to $23.01 per share, and (iii) an aggregate of 17,180 additional warrants to purchase shares of Common Stock of the company at an exercise price of $23.01 per share.
On October 20, 2015, October 26, 2015, November 13, 2015, November 24, 2015, November 30, 2015, December 30, 2015 and January 14, 2016 we entered into Securities Purchase Agreements (in this case, the “Purchase Agreements”) with certain “accredited investors (the “Unsecured Buyers”), pursuant to which the Unsecured Buyers purchased 12% Unsecured Convertible Promissory Notes of the Company (the “Unsecured Notes”) in the aggregate principal amount of $2,113,500 (the “First Convertible Note Offering”). The aggregate gross proceeds to the Company were $2,113,500 (before deducting expenses related to the purchase and sale of the Unsecured Notes of approximately $45,000), of which $586,000 in proceeds were from members of our board of directors.
The Unsecured Notes have an aggregate principal balance of $2,113,500 and a stated maturity date of 5 years from the date of issuance. The principal on the Unsecured Notes bears interest at a rate of 12% per annum, which is also payable on maturity. On April 12, 2016, with the closing of the Secured Convertible Notes Offering (as defined below), certain terms of the Unsecured Notes were amended. Under the new terms of the Unsecured Notes, upon the closing of $15,000,000 in equity securities (“Equity Financing Securities”) by the Company (in this case, a “Qualified Offering”) all of the outstanding principal amount of the Unsecured Notes, together with accrued and unpaid interest due thereon, will automatically convert (in this case, a “Mandatory Conversion”) into units of our securities (the “Unsecured Note Conversion Units”) at a conversion price per Unsecured Note Conversion Unit equal to the lesser of (i) $5.60 or (ii) a 20% discount to the price per share of the Equity Financing Securities. Each Unsecured Note Conversion Unit will consist of one share (the “Unsecured Note Conversion Unit Shares”) of our Common Stock, and one five-year warrant (the “Unsecured Note Conversion Unit Warrants”) to purchase one additional share (the “Unsecured Note Conversion Unit Warrant Shares”) of our Common Stock at an exercise price of 125% of the Qualified Offering unit price. The terms of the amendment were in exchange for the Unsecured Note holders’ subordination to the Secured Note holders.
The Unsecured Note Conversion Unit Warrants, to be received upon conversion of the Unsecured Notes, provide for the purchase of shares of our Common Stock at an exercise price equal to (a) 125% of the price at which the Company’s Equity Financing Securities are sold in a Qualified Offering. The Unsecured Note Conversion Unit Warrants are exercisable for cash only, for a term of 5 years from the date of issuance. The number of shares of Common Stock to be deliverable upon exercise of the Unsecured Note Conversion Unit Warrants is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events.
The Company agreed to use its commercially reasonable efforts to file a registration statement (“Registration Statement”) to register the Unsecured Note Conversion Unit Shares and Unsecured Note Conversion Unit Warrant Shares no later than (i) the date that is ninety (90) calendar days after the final closing under the Qualified Offering, or (ii) the date which is ninety (90) calendar days after the first optional conversion of the Unsecured Notes. The Company agreed to use its commercially reasonable efforts to have the Registration Statement declared effective no later than one hundred and eighty (180) calendar days after the Registration Statement is first filed with the SEC.
With the issuance of Unsecured Notes, the Anti-Dilution Rights were triggered and the holders of the Non-Participating Original Warrants received, or are entitled to receive (i) an aggregate of 18,674 additional shares of Common Stock, (ii) a reduction in the price of their PPO Warrants from $23.01 per share to $20.50 per share, and (iii) an aggregate of 18,674 additional warrants to purchase shares of Common Stock of the Company at an exercise price of $20.50 per share.
In early 2016, the Company entered into agreements (“Music Label Agreements”) with certain music labels including Universal Music Group (“UMG”), Sony Music Entertainment (“SME”) and Warner Music Group (WMG and, together with UMG and SME, the “Music Labels”), pursuant to which the Company was provided limited, non-exclusive licenses to digitally distribute certain sound recordings and related materials owned or controlled by the Music Labels in connection with CÜR Music, the music streaming product we are developing (“CÜR Music”), within the United States and its territories, commonwealths, and possessions. However, we defaulted on the Music Label Agreements as a result of our failure to pay advances due to the Music Labels pursuant to such agreements, and two of the Music Label Agreements were subsequently terminated.
On February 16, 2016, we effected a 1-for-13 reverse stock split (the “Reverse Stock Split”). Upon effectiveness of the Reverse Stock Split, every thirteen (13) outstanding shares of our Common Stock (“Old Common Stock”) were, without any further action by us, or any holder thereof, combined into and automatically became one share of our Common Stock. Any fractional shares have been rounded up to one whole common share. All shares of Common Stock eliminated as a result of the Reverse Stock Split have been cancelled such that they were returned to our authorized and unissued capital stock, and our capital has been reduced by an amount equal to the par value of the Old Common Stock so retired.
On April 12, 2016, April 15, 2016, May 26, 2016, June 7, 2016 and July 20, 2016 the Company entered into Securities Purchase Agreements (in this case, the “Purchase Agreements”) with certain “accredited investors” (the “Secured Buyers”), pursuant to which the Secured Buyers purchased 12% Senior Secured Convertible Promissory Notes of the Company (the “Secured Notes”) in the aggregate principal amount of $2,515,000 (before deducting placement agent fees and expenses of $282,454) (the “Second Convertible Note Offering”).
The Company used the net proceeds from the Second Convertible Note Offering for certain payments to content owners, and working capital and general corporate purposes.
The Secured Notes are secured by a security interest in and lien on all now owned or hereafter acquired assets and property, real and personal, of the Company and its subsidiaries, including the Company’s intellectual and technology property pursuant to the terms of a security agreement (in this case, the “Security Agreement”) among the Company and the Secured Buyers. The security interest in and liens on all assets and property of the Company will be a first priority security interest.
The Secured Notes have an aggregate principal balance of $2,515,000, and a stated maturity date of 6 months from the date of issuance. The principal on the Secured Notes bears interest at a rate of 12% per annum, which is also payable on maturity. The Secured Notes will rank senior to all existing indebtedness of the Company, except as otherwise set forth in the Secured Notes. Upon the closing of a financing (in this case, a “Qualified Offering”) by the Company during the term of the Secured Notes involving the sale of at least $15,000,000 in Equity Financing Securities, all of the outstanding principal amount of the Secured Notes, together with accrued and unpaid interest due thereon, will automatically convert (in this case, a “Mandatory Conversion”) into units of the Company’s securities (the “Second Units”) at a conversion price per Second Unit equal to the lesser of (a) 80% of the price per share of the Equity Financing Securities sold in the Qualified Offering, or (b) $2.00. At any time prior to a Mandatory Conversion, the holders of the Secured Notes may convert all or part of the outstanding principal amount of the Secured Notes, together with accrued and unpaid interest due thereon, into Second Units at a conversion price of $2.00 per Unit (in this case, an “Optional Conversion”). Each Second Unit will consists of one share (the “Second Unit Shares”) of the Company’s Common Stock, and one five-year warrant (the “Second Unit Warrants”) to purchase one additional share (the “Second Unit Warrant Shares”) of the Company’s Common Stock at an exercise price equal to (a) 125% of the price at which the Company’s equity securities (or securities convertible into or exercisable for equity securities) are sold in a Qualified Offering in the event of a Mandatory Conversion, or (b) 125% of $2.00 in the event of an Optional Conversion. Upon failure by the Company to pay any principal amount or interest due under the Secured Notes within 5 days of the date such payment is due, or the occurrence of other event of default under the terms of the Secured Notes, the entire unpaid principal balance of the Secured Notes, together with any accrued and unpaid interest thereon, will become due and payable, without presentment, demand, protest or notice of any kind. In the event of any liquidation, dissolution or winding up of the Company, each holder of a Secured Note will be entitled to receive, pari passu with the other holders of the Secured Notes, and in preference to the holders of the Company’s other outstanding securities, an amount equal to two times the principal amount of, and any accrued and unpaid interest on, such holder’s Secured Note. The conversion price and number of Second Units issuable upon conversion of the Secured Notes will be subject to adjustment from time to time for subdivision or consolidation of shares and other standard dilutive events. On November 16, 2017, simultaneous with the Initial Closing discussed in Note 12 and in Item 3, the holders of all of the Company’s existing 12% senior secured convertible promissory notes, in the aggregate principal amount of $2,515,000, with accrued and unpaid interest in the aggregate of $561,203, assigned, conveyed, transferred and set over to CÜR Holdings Inc. all of the Secured Noteholders’ right, title, interest and obligations in, to and under the Secured Notes, and all claims, suits, causes of action and any other rights thereunder, in exchange for units of securities of CÜR Holdings Inc., at an exchange rate of $2.00 of principal and interest due under the Secured Notes per unit, in a transaction intended to be exempt from registration under the Securities Act, pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D promulgated thereunder.
Pursuant to the terms of a Placement Agency Agreement (in this case, the “Placement Agency Agreement”) between the Company and the placement agent for the Second Convertible Note Offering (in this case, the “Placement Agent”), in connection with the closing of the Second Convertible Note Offering, the Placement Agent was paid a commission of an aggregate of $236,500. In addition, the Placement Agent, or its designees, received warrants to purchase a number of shares of Common Stock equal to 10% of the number of Second Unit Shares into which Secured Notes sold in the Second Convertible Note Offering to Secured Buyers introduced to the Second Convertible Note Offering by the Placement Agent, and 8% of the number of Second Unit Shares into which Secured Notes sold in the Second Convertible Note Offering to Secured Buyers introduced to the Second Convertible Note Offering by the Company or its representatives, are converted upon a Mandatory Conversion, with a term of 5 years and an exercise price per share equal to the exercise price of the Second Unit Warrant Shares issued to Secured Buyers introduced to the Second Convertible Note Offering by the Placement Agent upon a Mandatory Conversion (“Placement Agent Warrants”).
The Second Unit Warrants, to be received upon conversion of the Secured Notes, provide for the purchase of shares of the Company’s Common Stock an exercise price equal to (a) 125% of the price at which the Company’s Equity Financing Securities are sold in a Qualified Offering in the event of a Mandatory Conversion, or (b) 125% of $2.00 in the event of an Optional Conversion. The Second Unit Warrants are exercisable for cash only, for a term of 5 years from the date of issuance. The number of shares of Common Stock to be deliverable upon exercise of the Second Unit Warrants is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events.
The Company granted registration rights to each Secured Buyer with respect to the Second Unit Shares and Second Unit Warrant Shares, and to the Placement Agent, with respect to the Common Stock issuable upon exercise of the Placement Agent Warrants, in each case on a pari passu basis with, and upon substantially the same terms as the registration rights granted to, the investors in a Qualified Offering.
As of August 2016, we had laid off all of our employees and ceased significant operations, other than capital raising activities intended to continue our Music Streaming Business. These capital-raising activities were led by our Founder and then-sole director, Thomas Brophy.
As of June 30, 2017, we had devoted substantially all of our efforts to product development, raising capital and building our technology infrastructure. As of that date, we did not receive any material revenues from our planned principal operations.
Our Strategy
Our CÜR Music product is a new streaming music experience that combines the listening experience of free internet radio products with an on-demand listening experience for listening on web and mobile devices, beginning at $1.99 per month. We plan to launch our CÜR Music product in the second or third quarter of 2018. We will face competition from larger and more established media service providers, which include traditional offline music distribution competitors and larger media companies like Apple, Google, Spotify, Amazon and others, and from other online digital music services. We will compete on the basis of a number of factors, including quality of experience, relevance, acceptance and diversity of content, ease of use, price, accessibility, perceptions of ad load, brand awareness and reputation. CÜR Music will target consumers who are seeking a more comprehensive music streaming service than current free, ad-supported music streaming products. We believe that the CÜR Music product will include a hybrid model that includes many features that free, ad-supported internet radio products provide, without interruptive advertising, with a limited on-demand offering, and will include a social toolset that enables consumers to curate certain aspects their playlists at a price point that is unmatched in the industry.
In addition to revenue from subscriptions, our business plan includes a second revenue stream of personalized advertising, which will not interrupt a stream, but will target a user’s listening habits. The advertising may be in the form of display ads, email and text messages.
Our business plan further includes a third revenue stream from the sale of music, concert tickets and merchandise through our music streaming service, to be tailored to each listeners taste based on prior listening trends. We plan to sell advertising, music downloads and concert tickets and merchandise in the future subsequent to launch.
In addition, our business plan includes distributing our music streaming service through Apple’s iTunes App Store to iOS devices, Google’s Google Play Store to Android devices and the internet, among other distribution channels and platforms. At launch, we plan to have an iOS application, Android application and a CÜR Music website. The CÜR Music application was previously submitted to and approved by the iTunes app store and the Google Play store and we anticipate it will be approved again upon resubmission.
We plan to source our music from MusicNet, Inc. d/b/a Media Net Digital, Inc. We also plan to use Amazon web services to support certain of the technological needs of the business.
As of June 30, 2017, we continued to pursue sources of equity and/or debt financing to support our operations. We were not successful in raising the necessary funds as of June 30, 2017. We cannot launch our music streaming product and platform until we have raised the necessary funds.
Recent Developments
Six-Month Line of Credit Promissory Note
On July 6, 2017, we entered into a Six-Month Line of Credit Promissory Note (the “Line of Credit Note”) with CUR Holdings, LLC, a New York limited liability company. The Line of Credit Note has a principal balance of $685,000, and a stated maturity date of December 6, 2017. The principal on the Line of Credit Note does not bear interest. The Line of Credit Note is not convertible. The Line of Credit Note ranks junior to the Company’s existing Secured Notes.
In connection with the Initial Closing (as defined below) of the Preferred Stock Unit Offering (as defined below), the Line of Credit Note was assigned and transferred to Holdings (as defined below) in exchange for 194,175 Unit Shares of Holdings and Unit Warrants to purchase 1,263,827 shares of common stock of Holdings issued to CUR Holdings, LLC. As a result, Holdings became the payee under the Line of Credit Note. Upon completion of the transaction, CUR Media is now required to pay Holdings.
The assignment did not alter the obligation of the Company under the original Line of Credit Note.
Receipt of Wells Notice
On July 19, 2017, we received a “Wells Notice” from the staff (the “Staff”) of the SEC. The Wells Notice provides notification to the Company that the Staff has made a preliminary determination to recommend that the SEC institute administrative proceedings (“Administrative Proceedings”) against the Company pursuant to Sections 12(j) and 12(k) of the Exchange Act, based solely upon our failure to comply with our reporting obligations under Section 13(a) of the Exchange Act. Sections 12(j) grants the SEC the right, after notice and opportunity for a hearing, to revoke the registration of a security. Section 12(k) grants the SEC the right to suspend trading in a security.
In accordance with SEC rules, on August 25, 2017, we made a written submission to the SEC in response to the Wells Notice, in which, among other things, we conveyed our present intention to file the delinquent reports and become current with its SEC filing requirements and, as such, set forth the reasons why the proposed enforcement action should not be filed. While no assurances can be made, we believe that, as a result of making these filings, the SEC will have no further reason to institute the proposed Administrative Proceedings, or, if instituted, to continue such proceedings. However, there can be no assurance that the SEC will not bring an enforcement action against the Company, which could result in a trading suspension of our Common Stock and the de-registration of our securities under the Exchange Act. Administrative Proceedings, if instituted, will be held before an administrative law judge.
We have filed all three of the delinquent reports for the fiscal year ended December 31, 2016 and the first quarter of 2017. Subsequent to this filing, we plan to file the remaining delinquent report for the fiscal year ended December 31, 2017 as soon as practicable.
Transactions and Proposed Additional Transactions with Holdings
On September 11, 2017, we entered into a term sheet (the “Term Sheet”) with CUR Holdings, Inc., a Delaware corporation, formed on August 14, 2017, for the purpose of raising capital to effectuate a transaction with the Company, or another company in the music streaming space (“Holdings”), pursuant to which the Company and Holdings agreed to consummate either a Merger (as defined below) or an Asset Transfer (as defined below), under certain circumstances. Pursuant to the Term Sheet, in the event the Company receives notification from the SEC that it will not institute the proposed Administrative Proceedings, or, if instituted, will discontinue such proceedings (“SEC Clearance”), Holdings will, subject to any required shareholder approval, merge with and into the Company, with the Company continuing as the surviving entity (the “Merger”);
provided, however
, that the board of directors of the Company and Holdings may mutually agree to proceed with the Merger prior to receipt of SEC Clearance. If, however, the SEC commences the proposed Administrative Proceedings against the Company, and such proceedings result in the revocation of the registration of our Common Stock under the Exchange Act (“SEC Revocation”), the Company and Holdings will, subject to any required shareholder approval, enter into a fair value asset purchase and sale transaction, pursuant to which Holdings will acquire all of the intellectual property and other assets and liabilities constituting our Music Streaming Business (the “Asset Transfer” and, together with the Merger, a “Combination Transaction”);
provided, however
, that the board of directors of the Company and Holdings may mutually agree to proceed with the Asset Transfer any time commencing on the ninety-first (91st) day after the effective date of the Term Sheet.
On November 16, 2017, Holdings consummated an initial closing (the “Initial Closing”) of its private placement offering (the “Preferred Stock Unit Offering”), to certain “accredited investors” (each, a “Unit Purchaser” and, collectively, the “Unit Purchasers”), intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D and/or Regulation S promulgated thereunder, of a minimum of $6,000,000 (the “Minimum Amount”) of units of securities of Holdings (each, a “Preferred Stock Unit” and, collectively, the “Preferred Stock Units”), at a purchase price of $5.15 per Preferred Stock Unit (other than with respect to the assignment and transfer to Holdings of the Line of Credit Note, as defined below), with each Preferred Stock Unit consisting of (a) one (1) share of Series A convertible preferred stock of Holdings (each, a “Unit Share” and collectively, the “Unit Shares”), and (b) a 5-year warrant (each, a “Unit Warrant” and collectively, the “Unit Warrants”) to purchase 6.5087 shares of common stock of Holdings, at an exercise price of $1.00 per each full share.
In connection with the Initial Closing of the Preferred Stock Unit Offering, CUR Holdings issued 1,195,033 Preferred Stock Units to the Unit Purchasers, consisting of 1,195,033 Unit Shares and 7,778,119 Unit Warrants, in consideration for (a) gross proceeds of $5,154,361 from the Preferred Stock Unit Offering.
In connection with the Initial Closing of the Preferred Stock Unit Offering, a U.S. broker-dealer registered with FINRA, engaged on a non-exclusive basis as placement agent for the Preferred Stock Unit Offering (the “Placement Agent”), received a cash commission of $115,436, and warrants (“Placement Agent Warrants”) to purchase (a) 22,415 shares of Series A Preferred Stock of Holdings, with a term of five (5) years and an exercise price of $5.15 per share, and (b) 145,893 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $1.00 per share.
Simultaneously with the closing of the Preferred Stock Unit Offering, Holdings consummated a private placement offering (the “$2.5 Million Note Offering” and, together with the Preferred Stock Unit Offering, the “CUR Holdings Offerings”), to one “accredited investor” (the “New Note Purchaser”), intended to be exempt from registration under the Securities Act, pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D promulgated thereunder, of (a) a 12% senior secured promissory note of Holdings, in the principal amount of $2,500,000 (the “New Note”), with a term of twelve (12) months, at a purchase price of 100% of the face value amount of the New Note, and (b) 10-year warrants (the “New Note Warrants”) to purchase 1,000,000 shares of common stock of Holdings, at an exercise price per share of $0.0001.
In connection with the closing of the $2.5 Million Note Offering, the Placement Agent received a cash commission of $250,000, and warrants (“Second Placement Agent Warrants”) to purchase 383,800 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $0.0001 per share.
The net proceeds from the Holdings Offerings, in the aggregate amount of $6,932,288 (after deducting fees and expenses related to the Holdings Offerings in the aggregate amount of $722,074 (including placement agent fees, legal fees and expenses and fees payable to the escrow agent)) are to be used to pay the required Label Advances (as defined below) to the Music Labels sufficient to allow Holdings and/or the Company to proceed with soliciting subscriptions for CÜR Music, and to extend a line of credit to the Company (the “Post-Closing Line of Credit Note”), for up to the full amount of the aggregate net proceeds from the Holdings Offerings (1) to enable the Company to pay outstanding accounts payable, to be negotiated into structured settlements, employee deferred compensation, and monthly payments due by the Company under the New Note, and (2) for working capital and general corporate purposes. The process for requesting and approving drawdowns on the Post-Closing Line of Credit Note is to be determined, and will be reflected in the definitive documentation for the transaction.
On November 16, 2017, the board of directors of Holdings increased the number of members constituting the board of directors from one (1) to three (3). The board of directors of Holdings then appointed Thomas Brophy, our President, Chief Executive Officer, Interim Chief Financial Officer and Treasurer, and a member of our board of directors, and Edward P. Swyer, a member of our board of directors, as members of the board of directors of Holdings.
Immediately following the Initial Closing of the Preferred Stock Unit Offering, Holdings issued one (1) share of its Series B voting preferred stock (“Series B Preferred Stock”) to William F. Duker, the President and Treasurer of Holdings, and a member of the board of directors of Holdings. Pursuant to the Certificate of Designation of Series B Voting Preferred stock of Holdings (the “Series B Certificate of Designation”), Mr. Duker, the holder of the Series B Preferred Stock, has the right (a) to elect the number of directors on the board of directors of Holdings constituting the majority, and (b) to approve any merger (including the Merger), asset sale (including the Asset Transfer), or other fundamental transaction to be effected by Holdings.
Agreements with Content Providers
As previously reported, the Company had entered into agreements (“Music Label Agreements”) with certain music labels (“Music Labels”), pursuant to which the Company has been provided limited, non-exclusive licenses to digitally distribute certain sound recordings and related materials owned or controlled by the Music Labels in connection with the Company’s CÜR-branded Internet music service, CÜR Music, to be composed of three progressively priced and increasingly functional tiers, within the United States and its territories, commonwealths, and possessions. The Company had also entered into agreements (“Publishing Agreements”) with certain music publishing companies (“Music Publishers”) either directly or through a third party, pursuant to which the Company had been provided the non-exclusive right and license to use certain musical works owned, controlled and/or administered by the Music Publishers in connection with CÜR Music, within the United States and its territories, commonwealths, and possessions. The Music Label Agreements and Publishing Agreements may be collectively referred to herein as the “Content Agreements,” and the Music Labels and Music Publishers may be collectively referred to herein as the “Content Providers.”
The Company was not able to make the initial payments when due on January 31, 2016. As a result, the company’s Music Label Agreements with Sony Music Entertainment (“SME”) and UMG Recordings, Inc. (“UMG”) were terminated as a result of the company’s failure to pay SME and UMG the advances due pursuant to such agreements, respectively. The Company also defaulted on its Music Label Agreement with Warner Music, Inc. (“WMG”) as a result of the Company’s failure to pay WMG the advance due pursuant to such agreement. WMG did not initiate termination of their agreement.
Prior to the Initial Closing of the Preferred Stock Unit Offering, and as a condition thereto, Holdings renegotiated the content licensing agreements (“New Music Label Agreements”). Upon consummation of the Initial Closing of the Preferred Stock Unit Offering, Holdings paid Label Advances due to the Music Labels pursuant to the New Music Label Agreements. The Company joined one of the New Music Label Agreements, while the other New Music Label Agreements provide Holdings with the right to sublicense its rights under such agreement to the Company. The New Music Label Agreements enable the Company to digitally distribute sound recordings and related materials owned or controlled by the Music Labels in connection with the Company’s Internet music service, CÜR Music. The New Music Label Agreements released the Company of prior obligations under the original Music Label Agreements. At the current time, the Company does not have a contract with Holdings which requires payment for sublicenses and access to the sound recordings and related materials.
The Company and Holdings are required to pay certain minimum content fees over the term of the Content Agreements with Content Providers as follows: $15,100,000 in the first year of the agreements, $24,500,000 in the second year of the agreements, and $18,400,000 in the third year of the agreements.
Default on Secured Notes
On October 12, 2016, October 15, 2016, November 26, 2016, December 7, 2016, December 20, 2016 and January 20, 2017, the principal and any accrued and unpaid interest on our outstanding Secured Notes in the principal amount of an aggregate of $2,515,000 became due and payable. We were unable to repay the noteholders at that time. Pursuant to the terms of the Secured Notes, our failure to pay any principal or interest within five (5) days of the date such payment was due constituted an event of default. Following the occurrence of an event of default, among other things, the interest rate on the Secured Notes increased to 15%. In addition to other remedies available to the noteholders, our obligation to repay amounts due under the Secured Notes is secured by a first priority security interest in and lien on all of our assets and property, including our intellectual property.
At the effective time of the Initial Closing of the Preferred Stock Unit Offering, the holders (the “Secured Noteholders”) of all of the Company’s Secured Notes, with accrued and unpaid interest in the aggregate of $561,203, assigned, conveyed, transferred and set over to Holdings all of the Secured Noteholders’ right, title, interest and obligations in, to and under the Secured Notes, and all claims, suits, causes of action and any other rights thereunder, in exchange for units (each, a “Secured Note Conversion Unit” and, collectively, the “Secured Note Conversion Units”) of securities of Holdings, at an exchange rate of $2.00 of principal and interest due under the Secured Notes per unit, in an transaction intended to be exempt from registration under the Securities Act, pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D promulgated thereunder (the “Secured Note Assignment Transaction”). Each Secured Note Conversion Unit consisted of (a) one (1) share of common stock of Holdings (each, a “Secured Note Conversion Share” and, collectively, the “Secured Note Conversion Shares”), and (b) a 5-year warrant (each, a “Secured Note Conversion Warrant” and, collectively, the “Secured Note Conversion Warrants”) to purchase one (1) share of common stock of Holdings for every share of common stock of Holdings received upon exchange, at an exercise price per share equal to $1.00.
In connection with the Secured Note Assignment Transaction, (a) Holdings issued 1,538,102 Secured Note Conversion Units, consisting of 1,538,102 Secured Note Conversion Shares, and 1,538,102 Secured Note Conversion Warrants, and (b) Holdings became the sole payee under the Secured Notes.
In connection with the Secured Note Assignment Transaction, the Placement Agent, received warrants (“Third Placement Agent Warrants”) to purchase (a) 86,377 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $2.00 per share, and (b) 86,377 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $1.00 per share.
Settlement Agreement and Mutual Release
As previously reported, the Company defaulted under its Master Multiple Services Agreement (the “Digitas Agreement”) with Digitas, Inc., a Massachusetts corporation (“Digitas”), as a result of the Company’s failure to pay Digitas past due balances for the services Digitas provided under the Digitas Agreement. Digitas filed a claim against the Company for damages in the aggregate amount of $650,000 (the “Claimed Amount”), together with pre-judgment interest, post-judgment interest, costs, and attorneys’ fees. On November 15, 2017, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Digitas, pursuant to which the Company agreed to pay Digitas an aggregate of $400,000, in full settlement of any and all claims arising from or relating to amounts due under the Master Multiple Services Agreement (the “Claims”). Digitas agreed to release the Company from any further Claims, subject only to the Company meeting its payment obligations under the Settlement Agreement and the Digitas Note (as defined below).
Simultaneously with the execution of the Settlement Agreement, the Company issued a Promissory Note to Digitas (the “Digitas Note”) in the principal amount of $400,000. Pursuant to the Digitas Note, the Company is required to pay Digitas (a) $100,000 on or before November 17, 2017 (the “First Payment”), $100,000 on the eight (8) month anniversary of the First Payment, and (c) $200,000.00 on the one (1) year anniversary of the First Payment. If the Company defaults on its payment obligations under the Digitas Note, after notice and failure to cure, Digitas may file a Consent Judgment for the full Claimed Amount, less payments already made, if any, together with post-judgment interest and reasonable attorneys’ fees and costs incurred by Digitas for purposes of collection.
At the effective time of the Initial Closing of the Preferred Stock Unit Offering (as defined below), the Company made the First Payment of $100,000 to Digitas.
Proposed Additional Transactions with Holdings
As mentioned above, if the Company receives SEC Clearance (or, at the discretion of the board of directors of the Company and Holdings, as described above), the Company and Holdings will consummate the Merger. The Company and Holdings anticipate that the Merger, if consummated, will qualify as a tax-free reorganization under the U.S. Internal Revenue Code. The Company and CUR Holdings also anticipate that, if the Merger is consummated:
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the stockholders of Holdings will receive, in exchange for all of their issued and outstanding shares of capital stock of Holdings (including all issued and outstanding shares of preferred stock of Holdings), shares of the Company’s capital stock (including shares of Preferred Stock of the Company), at an exchange rate of 1-for-1, with appropriate adjustments and, otherwise, on their original terms and conditions;
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outstanding warrants to purchase shares of common stock of Holdings will be exchanged for warrants to purchase shares of the Company’s Common Stock, at the same ratio at which shares of outstanding capital stock of Holdings are exchanged for shares of the Company’s capital stock, with appropriate adjustments and, otherwise, on their original terms and conditions;
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the principal and any accrued and unpaid interest due under the Company’s existing Unsecured Notes will convert into units of the Company’s securities, at a conversion price of $2.00 of principal and interest due under said note per unit, each consisting of (a) one (1) share of the Company’s Common Stock, and (b) a 5-year warrant to purchase one (1) share of the Company’s Common Stock for every share of the Company’s Common Stock received upon conversion, at an exercise price equal to $1.00 per share;
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the Standard Holdings Note will be assigned and transferred to the Company, and the Company will become the payee under such note;
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the Line of Credit Note, the Secured Notes, and the Post-Closing Line of Credit Note will be forgiven and canceled by Holdings;
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the Company will assume the obligations under the $2,500,000 New Note; and
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the Company will assume the New Music Label Agreements with the Music Labels, if possible.
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As mentioned above, if there is an SEC Revocation of the Company’s Common Stock under the Exchange Act (or, at the discretion of the Board of Directors of the Company and Holdings, as described above), the Company and Holdings will consummate the Asset Transfer. The Company and Holdings anticipate that, if the Asset Transfer is consummated:
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the Company’s stockholders will receive, in exchange for all of the assets and liabilities constituting the Company’s Music Streaming Business, shares of capital stock of Holdings, at a rate of 1-for-1 of equivalent classes of preferred and common stock, with appropriate adjustments and, otherwise, on their original terms and conditions;
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outstanding warrants and stock options to purchase shares of the Company’s Common Stock will be exchanged for warrants and stock options to purchase shares of common stock of Holdings, at the same ratio at which shares of the Company’s outstanding capital stock are exchanged for shares of capital stock of Holdings, with appropriate adjustments and, otherwise, on their original terms and conditions;
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if necessary, the board of directors of Holdings will adopt an Equity Incentive Plan (the “Holdings EIP”) with such number of shares available under the Holdings EIP that equals 15% of the fully diluted capitalization of Holdings after giving effect to the Asset Transfer, covering outstanding stock options to purchase shares of the Company’s Common Stock, and for the future issuance, at the discretion of the board of directors of Holdings, of incentive awards to officers, key employees, consultants and directors;
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the principal and any accrued and unpaid interest due under the Company’s existing Unsecured Notes will convert into units of securities of Holdings, at a conversion price of $2.00 per unit, each unit consisting of (a) one (1) share of common stock of Holdings, and (b) a 5-year warrant to purchase one (1) share of common stock of Holdings for every share of common stock of Holdings received upon conversion, at an exercise price equal to $1.00 per share;
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the Standard Holdings Note will remain payable to Holdings;
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the Line of Credit Note, the Secured Notes, and the Post-Closing Line of Credit Note will be forgiven and canceled by Holdings as partial consideration for the transfer to Holdings of the assets and liabilities constituting the Company’s Music Streaming Business;
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Holdings will remain responsible for the obligations under the $2,500,000 New Note; and
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any sublicenses under the relevant New Music Label Agreements with the Music Labels will terminate.
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Simultaneously with the closing of the Holdings Offerings, shareholders representing at least fifty-one percent (51%) of the voting capital stock of each of the Company and Holdings, and of the Unit Purchasers in the Preferred Stock Unit Offering and Secured Noteholders in the Secured Note Assignment transaction, entered into voting agreements, pursuant to which they agreed to vote in favor of the Combination Transaction, as applicable.
Defaults on Vendor Agreements
We entered into an agreement (the “Rovi Data License and Service Agreement”) with Rovi Data Solutions and Veveo, Inc. (“Rovi”) on July 1, 2014, a leading music data company, to utilize their platform for generating music playlists for CÜR Music users. Pursuant to the agreement, the Company acquired the limited, non-exclusive, non-transferable right to use, display, communicate, reproduce and transmit Rovi’s data. In addition, Rovi was to provide custom development of search and voice capabilities to provide a robust music experience. The Rovi Data License and Service Agreement was to remain in effect through and including December 31, 2017. Under the Rovi Data License and Service Agreement, the Company had the option to extend the term of this agreement for additional, indefinite, one-year periods. During the term of the Rovi Data License and Service Agreement, and as consideration for the grant of rights and license of Rovi’s data, the Company had agreed to pay Rovi a monthly minimum charge during the development period that is the period where data will be used for internal, non-public, non-commercial uses. In addition, the Company had agreed to pay Rovi a minimum per month during the first initial term, subsequent to the proposed launch date, until March 14, 2016. For each subsequent term, consideration to be paid would depend on the number of subscribers to the Company’s CÜR Music product. As of September 27, 2016, our Rovi Data License and Services Agreement with Rovi terminated as a result of our failure to pay Rovi past due balances for the services they provided under the Agreement. Now that the Holdings Offerings have been completed, we plan to contract with Gracenote, Inc. (“Gracenote”) for these services.
We entered into an agreement (the “MediaNet Service Agreement”) with MusicNet, Inc. d/b/a MediaNet Digital, Inc. (“MediaNet”) on November 10, 2014, from which we were to source our music. Pursuant to the agreement, MediaNet was to provide the Company a catalog of sound recordings and metadata that would enable and provide for the delivery of sound recordings to end users of the Company’s CÜR Music application. The MediaNet Service Agreement was to remain in effect for a period of three years following the effective date of November 7, 2014. The MediaNet Service Agreement was to automatically renew for successive one-year terms unless terminated by MediaNet or the Company. Pursuant to the MediaNet Service Agreement, the Company was to pay a set-up fee to MediaNet prior to launch. In addition, the Company agreed to pay MediaNet a monthly technology licensing fee during the initial term, a monthly usage fee, and will pay for any additional professional services and technical assistance or customization. The Company is in default under the MediaNet Service Agreement with MediaNet as a result of the Company’s failure to pay MediaNet past due balances for the services they provided under the MediaNet Service Agreement. To date, the Company has not received a notice of default from MediaNet. Now that the Holdings Offerings have been completed, we plan to enter into a line of credit agreement with Holdings and cure the default under the MediaNet Service Agreement.
We entered into an agreement (“Zuora Master Subscription Agreement”) with Zuora, Inc. (“Zuora”) on July 31, 2014. Pursuant to the Zuora Master Subscription Agreement, we planned to use Zuora’s technology platform to administer the subscription process related to credit card billing and collection. In accordance with the Zuora Master Subscription Agreement, Zuora was to provide the Company a non-exclusive, non-transferable worldwide limited license to use Zuora’s online integrated subscription management, billing, and data analysis services. The initial order form covered the implementation and development period ending October 31, 2014. In addition, the Company agreed to an initial 36-month service term, subsequent to implementation through October 31, 2017. On October 12, 2016, the Company received a notice of default from Zuora, confirming that the Company was in default under its Zuora Master Subscription Agreement as a result of its failure to pay Zuora past due balances for the services they provided under the Zuora Master Subscription Agreement. On July 31, 2017, the Company and Zuora signed a new order form (“New Order Form”) under the Zuora Master Subscription Agreement, providing for the full settlement and release of the parties from all obligations under the old order form, dated July 31, 2014, in consideration for entering into the New Order Form. Pursuant to the New Order Form, the Company will pay Zuora $150,000 for the first year of the three-year agreement for Zuora to provide subscription services to the Company.
We are in default under our Sponsorship Agreement (the “Live Nation Sponsorship Agreement”) with Live Nation Marketing, Inc. (“Live Nation”) as a result of the Company’s failure to pay Live Nation past due balances for the services they provided under the Live Nation Sponsorship Agreement. To date, we have not received a notice of default from Live Nation. The Company intends to cure the default once it is adequately funded.
As of this date, we are in default of all of our vendor agreements as a result of not making the required payments.
Results of Operations
Three-Month Period Ended June 30, 2017 Compared to Three-Month Period Ended June 30, 2016
Revenues
We have not generated any material revenues for the three months ended June 30, 2017 or 2016.
Operating Expenses
Overview
Total operating expenses for the three-month periods ended June 30, 2017 and 2016 were $167,421 and $2,708,329, respectively. The decrease in total operating expenses of $2,540,908, or approximately 94%, was primarily related to the curtailment of the business in August 2016. Operating expenses in the second quarter of 2017 related primarily to legal expenses, financing activities and runout of vendor contractual obligations.
Research and Development Expenses
For the three-month periods ended June 30, 2017 and 2016, research and development expenses were $38,444 and $1,223,466, respectively. Research and development expenses decreased by $1,185,022 or approximately 97%, primarily due to a decrease in compensation costs of $547,133 related to the termination of all of our employees in August 2016.
General and Administrative Expenses
For the three-month periods ended June 30, 2017 and 2016, general and administrative expenses were $127,914 and $1,408,924 respectively. General and administrative expenses decreased by $1,281,000, or approximately 91%, primarily due to an decrease in distribution partner costs of $732,998, decrease in marketing and communications of $202,328, a decrease in wages of $176,737, a decrease in legal costs of $78,920 and a decrease in accounting related fees of $54,714. The decrease in all expenses related to the curtailment of operations in 2016. In 2017, expenses were for legal costs related to fundraising and the run out of vendor contracts.
Stock based Compensation Expenses
For the three-month periods ended June 30, 2017 and 2016, stock based compensation expense were $0 and $71,000, respectively, a decrease of $71,000. The decrease was due to forfeiture of stock options when all of our employees were terminated in August 2016.
Other Income (Expense)
For the three-month periods ended June 30, 2017 and 2016, other expense was $1,782,122 and $2,255,526, respectively. Other expense decreased due to a $1,015,355 decrease in interest expense partially offset by an increase in the fair value of derivative liabilities of $662,851.
Six-Month Period Ended June 30, 2017 Compared to Six-Month Period Ended June 30, 2016
Revenues
We have not generated any material revenues for the six months ended June 30, 2017 or 2016.
Operating Expenses
Overview
Total operating expenses for the six-month periods ended June 30, 2017 and 2016 were $320,602 and $4,981,102, respectively. The decrease in total operating expenses of $4,660,500, or approximately 94%, was related to a decrease in both general and administrative and research and development expenses due to curtailment of the business in August 2016.
Research and Development Expenses
For the six-month periods ended June 30, 2017 and 2016, research and development expenses were $80,656 and $2,889,067, respectively. Research and development expenses decreased by $2,808,411, or approximately 97%, primarily due to a decrease in compensation costs related to our employee base and other expenses as we terminated all employees in August 2016 and curtailed operations.
General and Administrative Expenses
For the six-month periods ended June 30, 2017 and 2016, general and administrative expenses were $237,081 and $1,934,006, respectively. General and administrative expenses decreased by $1,696,925, or approximately 88%, primarily due to distribution partner costs of $732,998, decrease in marketing and communications of $217,328, a decrease in wages of $276,737, a decrease in legal costs of $353,476 and a decrease in accounting related fees of $83,472. The decrease in all expenses related to the curtailment of operations in 2016. In 2017, expenses were for legal costs related to financing activities and the run out of vendor contracts.
Stock based Compensation Expenses
For the six-month periods ended June 30, 2017 and 2016, stock based compensation expense were $0 and $147,966, respectively. Stock based compensation expenses decreased by $147,966, or 100%, due to the forfeiture of unvested stock options in August of 2016 related to the termination of employees.
Other Income (Expense)
For the six-month periods ended June 30, 2017 and 2016, other expense was $2,585,090 and $988,972, respectively. Other expense increased $1,275,808, or 129% due primarily to an increase in the fair value of derivative liabilities of $2,286,344 offset by a decrease in interest expense of $886,899.
Liquidity and Capital Resources
Sources of Liquidity
As of June 30, 2017, cash and cash equivalents were approximately $3,681, as compared to $1,508 at December 31, 2016.
As of June 30, 2017, we had a working capital deficit of $11,030,832. As of December 31, 2016, we had a working capital deficit of $8,664,956. The increase of $2,365,876, or approximately 27%, in our working capital deficit was attributable to an increase in accounts payable, accrued and other current liabilities, and derivative liabilities.
On April 12, 2016, April 15, 2016, May 26, 2016, June 7, 2016 and July 20, 2016, we entered into Purchase Agreements with certain Secured Note Buyers, pursuant to which the Secured Buyers purchased Secured Notes in the aggregate principal amount of $2,515,000 (before deducting placement agent fees and expenses of approximately $282,454). On November 16, 2017, simultaneous with the Initial Closing of the Preferred Stock Unit Offering, the Secured Noteholders, assigned, conveyed, transferred and set over to Holdings Inc. all of the Secured Noteholders’ right, title, interest and obligations in, to and under the Secured Notes, in the aggregate principal amount of $2,515,000, with accrued and unpaid interest in the aggregate of $561,203, and all claims, suits, causes of action and any other rights thereunder, in exchange for units of securities of Holdings, at an exchange rate of $2.00 of principal and interest due under the Secured Notes per unit.
The net proceeds from the Holdings Offerings, in the aggregate amount of $6,932,288 (after deducting fees and expenses related to the Holdings Offerings in the aggregate amount of $722,074 (including placement agent fees, legal fees and expenses and fees payable to the escrow agent)) will be used to pay the required Label Advances to the Music Labels sufficient to allow Holdings and/or the Company to proceed with soliciting subscriptions for CÜR Music, the Company’s Internet music service, and to extend the Post-Closing Line of Credit Note, for up to the full amount of the aggregate net proceeds from the Holdings Offerings for up to the full amount of the aggregate net proceeds from the Holdings Offerings (1) to enable the Company to pay outstanding accounts payable, employee deferred compensation, and monthly payments due by the Company under the New Note, and (2) for working capital and general corporate purposes.. The process for requesting and approving drawdowns and drawdown principal and interest payments on the Post-Closing Line of Credit Note is to be determined, and will be reflected in the definitive documentation for the transaction.
Our original agreements with Universal and Sony have been terminated and we were in default of our agreement with Warner. At the time of the Initial Closing of the Preferred Stock Unit Offering, Holdings and the Company entered into revised agreements with Universal, Sony and Warner. We also plan to enter into content licensing agreements with certain independent music labels, music publishers and publisher rights organizations. The cost of entering into our previous content licensing agreements with major music labels, publisher rights organizations and publishers, including legal and consulting fees was approximately $9,000,000, the majority of which was to be paid through initial prepayments to the content providers. Under the New Music Label Agreements, the initial prepayments to content providers were significantly lower than the previous $9,000,000. If we are able to secure adequate financing, we intend to have a dedicated team of software engineers, led by our Chief Technology Officer and Chief Operating Officer, working on enhancing the technology platform, as well as the iOS and Android applications and the CÜR Music website.
Not including non-cash expenses, we have spent approximately $22.3 million on research and development, sales and marketing and general and administrative costs to complete the development of the CÜR Music in the time period since the Contribution in January 2014 and through the second quarter of 2017. Of the total $22.2 million, approximately $16.0 million was related to research and development and approximately $6.3 million was related to general and administrative costs. In addition to the aforementioned costs, we expect to pay approximately $3.0 million as prepayments in connection with the agreements that we plan to have with the major music labels, independent labels and publishers
We expect to bring CÜR Music to market in the second or third quarter of 2018. As of June 30, 2017, we continued to pursue sources of equity and/or debt financing to support our operations. While were not successful in raising the necessary funds as of June 30, 2017, we gained access to capital to support our launch with the closing by Holdings of the Preferred Stock Unit Offering (discussed above). We need to raise a substantial amount of capital, to fully implement our business plan, market CÜR Music, for additional content license costs, and for general working capital. There can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all. If we are unsuccessful at raising sufficient funds, for whatever reason, to fund our operations, we may be forced to seek a buyer for our business or seek a similar transaction. If all of these alternatives fail, we expect that we will be required to seek protection from creditors under applicable bankruptcy laws.
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was $2,172 for the six-month period ended June 30, 2017, as compared to net cash used of $2,622,446 for the six-month period ended June 30, 2016. The decrease of $2,624,618, or approximately 100%, in net cash used in operations was primarily due to an increase in accrued and other current liabilities of $807,782, an increase in accounts payable of $1,232,550, an offset by a decrease of $2,637,402 in change in fair value of derivative liabilities and a decrease in wages and benefits of $1,928,300.
Net Cash Provided by (Used in) Investing Activities
During the six-month periods ended June 30, 2017 and 2016, net cash provided by and used in investing activities was $0 and $1,423, respectively. The current year decrease was due to the company not spending any funds on equipment.
Net Cash Provided by Financing Activities
During the six-month periods ended June 30, 2017 and 2016, we received $0 and $2,506,000, respectively, in proceeds from the sale of convertible notes. In the six months ended June 30, 2017 and 2016, payments on notes payable were $0 and $5,833, respectively.
Going Concern
Our independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Note 2 of our financial statements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.