NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Simon Worldwide, Inc. (the
“Company” or “Simon”) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes in accordance with
accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2012. Certain prior period amounts were reclassified to conform to current period presentation.
The Company
consolidates all entities that we control by ownership of a majority voting interest as well any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. We eliminate from our financial results all intercompany
transactions, including the intercompany transactions with any consolidated VIEs.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting only of those considered necessary for fair presentation of the Company’s financial position, results of operations, and cash flows at the dates and for the periods
presented.
Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001,
McDonald’s Corporation (“McDonald’s”), the Company’s principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from
McDonald’s promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a
majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. As a result of these
efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date.
The Company is currently managed by the Chief Executive Officer, Greg Mays, and principal financial officer, Anthony Espiritu, together with an acting general counsel. The Board of Directors has
considered various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions. On March 22,
2013, the Company announced in a current report of Form 8-K that it, together with Richard Beckman, Joel Katz and OA3, LLC (“OA3”) had entered into the limited liability company agreement (the “LLC Agreement”) of Three Lions
Entertainment, LLC (“Three Lions”) on March 18, 2013. Pursuant to the LLC Agreement, the Company made an initial capital contribution of $3.15 million with respect to membership units currently representing 60% of the interest in the
economic returns of Three Lions, a variable interest entity, including certain preferences with respect to common holders on operating returns and on a liquidation or sale of Three Lions. The Company made a second capital contribution to Three Lions
in the amount of $1.85 million on April 26, 2013. The Company has the ability to, but is not required to, make a third and final capital contribution to Three Lions of $3.5 million. If the Company does not make this final $3.5 million
contribution, OA3, an affiliate of the Company’s controlling shareholder, is obligated to make such contribution to Three Lions. If OA3 makes such contribution, OA3 will receive a proportionate economic interest in Three Lions, and the
Company’s economic interest will be reduced proportionately, subject to certain provisions that entitle the Company to a disproportionate share of the voting power represented by the combined membership interests held by the Company and OA3.
The Company cannot predict whether its investment in Three Lions will be successful. The business and operations of Three Lions is managed and directed by a five person Executive Board, three of whom the Company has the power to designate. The
Executive Board governs under majority vote, subject to certain major decisions that require the unanimous approval of either the members of Three Lions or its Executive Board (“Special Approval”).
The operating results for the three and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full
year.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Under certain criteria as provided for in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810, “Consolidation,” the Company may consolidate a partially-owned
affiliate. To determine whether to consolidate a partially-owned affiliate, the Company first determines if the entity is a variable interest entity (VIE). An entity is considered to be a VIE if it has one of the following characteristics: 1) the
entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses or do not participate fully in the entity’s residual economics; or 4) the entity was
7
established with non-substantive voting. If the entity meets one of these characteristics, the Company then determines if it is the primary beneficiary of the VIE. The party with the power to
direct activities of the VIE that most significantly impact the VIE’s economic performance and the potential to absorb benefits or losses that could be significant to the VIE is considered the primary beneficiary and consolidates the VIE.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. ASU 2013-02 does not
change the current requirements for reporting net income or other comprehensive income in financial statements. Instead, the new amendments require an organization to: 1) Present (either on the face of the statement where net income is presented or
in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income — but only if the item reclassified is required under U.S. generally accepted accounting principles
(U.S. GAAP) to be reclassified to net income in its entirety in the same reporting period; and 2) Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be
reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet instead of
directly to income or expenses.
ASU No. 2013-02 was effective for the Company beginning January 1, 2013, and its adoption did not
have a material effect on the Company’s consolidated statements of financial position or results of operations.
2. Operations
Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual
obligations, and pending litigation. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the
promotions business and defending and pursuing litigation with respect thereto. In essence, the Company discontinued its promotions business and changed the nature of its operation to focus on its pending litigation and winding down its contracted
obligations. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date. As of both June 30, 2013 and December 31, 2012,
the Company had 4 employees.
Three Lions intends to pursue the development, production, distribution and other exploitation of shows and
events that are broadcast on television and other means of communications. These shows and events initially include branded awards shows that will be created to be aired on television. The Company cannot predict whether such course of action will be
successful.
The Company closely monitors and controls its expenditures within a reasonably predictable range. Cash used in operating
activities was $1.5 million and $1.9 million for the years ended December 31, 2012 and 2011, respectively. The Company incurred losses in 2012 and continues to incur losses in 2013 for the general and administrative expenses incurred to manage
the affairs of the Company. By utilizing cash available at June 30, 2013 to maintain its scaled back operations, management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.
3. Variable Interest Entity (“VIE”)
VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest,
and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is
generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that
could be significant to the VIE.
Three Lions meets the definition of a variable interest entity as the total equity investment at risk in
Three Lions is not sufficient to permit Three Lions to finance its activities without further subordinated financial support by any parties, including the equity holders. Management determined both at the date of the Company’s initial
contribution and its second contribution that the entity was a variable interest entity primarily based on the current equity investment at risk in Three Lions totaling $5.3 million, which consists of two contributions by the Company of $3.1 million
on March 18, 2013 and $1.9 million on April 26, 2013 and founder contributions of $.3 million, compared to capital in excess of that amount deemed necessary to develop and produce content, market and air the first revenue-generating event
in 2014. Future capital contributions are required by the Company (or OA3) and the founders of Three Lions by August 30, 2013. The Company has the option, but not the obligation, to make a third contribution of $3.5 million by August 30,
2013, and if the Company does not make such contribution, OA3 is obligated to do so. The Company has already contributed $5.0 million and the founders have contributed $.3 million. In total, the Company’s (or the Company’s and OA3’s)
contributions will total $8.5 million and the founders’ contributions will total $.5 million.
8
As the Company does not currently have sufficient cash on hand to make the final contribution, the Company
will seek to raise capital through an offering of Simon Worldwide, Inc.’s common stock, subject to the registration statement for such offering being declared effective by the U.S. Securities Exchange Commission. If the rights offering is
either not consummated, or is consummated but the participation rate in the offering is less than 75% of the total offering amount of approximately $5 million, then it is likely that, without additional financing, the Company will not have
sufficient funds to make its final $3.5 million scheduled capital contribution to Three Lions, pay for the offering expenses and have sufficient funds remaining to fund the Company’s near-term operating expenses. In the event that Simon cannot
make the last contribution of $3.5 million, OA3 LLC has committed to provide such contribution to Three Lions in exchange for a proportionate economic interest in Three Lions, and the Company’s economic interest would be reduced
proportionately, as discussed in more detail below under
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — General
.
The Company’s equity interest in Three Lions represents a variable interest in a VIE. Due to certain requirements under the LLC Agreement of Three Lions, the Company, through its voting rights
associated with its LLC units, does not have the sole power to direct the activities of Three Lions that most significantly impact Three Lion’s economic performance and the obligation to absorb losses of Three Lions that could potentially be
significant to Three Lions or the right to receive benefits from Three Lions that could potentially be significant to Three Lions. Specifically, the Company shares power with the founders who control the common units of Three Lions to approve
budgets and business plans and make key business decisions all of which require unanimous consent from all the executive board members (e.g., three members under Simon’s control and the two founders). As a result, the Company is not the primary
beneficiary of Three Lions and thus does not consolidate it. However, the Company has significant influence over Three Lions and therefore, accounts for its ownership interest in Three Lions under the equity method of accounting.
Through June 30, 2013, the Company’s total contributions of $5.0 million are reduced by Simon’s absorption of its share of Three
Lions’ operating losses from the period March 18 to June 30, 2013, which brings the carrying value of its Three Lions investment to $4.1 million. Also, the Company caused to be issued a cash collateralized bank letter of credit on
April 12, 2013 in the amount of $.2 million and with an expiration date of April 15, 2014, to guarantee payments on an office lease obtained by Three Lions. The Company’s investment, and guarantee, related to Three Lions totaled $5.2
million at June 30, 2013, representing the Company’s maximum exposures to loss.
A summary of the assets and liabilities as of
June 30, 2013 and operating results for the three months and 13 days then ended (since March 18, 2013, the date of the LLC Agreement), related to Three Lions are as follows (in thousands):
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,162
|
|
|
Prepaid expenses and other current assets
|
|
|
9
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,171
|
|
|
Non-current assets
|
|
|
674
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,845
|
|
|
Accounts payable and other current liabilities
|
|
|
42
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
General and administrative expenses
|
|
|
1,491
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,491
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,491
|
)
|
|
|
|
|
|
|
Creditors of Three Lions do not have recourse against the general credit of the Company, regardless of whether Three
Lions is accounted for as a consolidated entity.
4. Earnings Per Share
The Company calculates its earnings per share in accordance with ASC 260-10, “Earnings Per Share.” There were 50,625,121 and
50,618,536 weighted average shares outstanding for the three and six months ended June 30, 2013, respectively, and 50,611,879
9
weighted average shares outstanding for the three and six months ended June 30, 2012. In addition, there were 36,538 and 45,718 weighted average shares related to stock options exercisable
for the three months and six months ended June 30, 2013. However, all such stock options either were exercised or expired during the three months ended June 30, 2013. The effect of the stock options exercised is included in the calculation
of weighted average shares outstanding for the three and six months ended June 30, 2013. There were 55,000 weighted average shares related to stock options exercisable for the three and six months ended June 30, 2012, that were not
included in the computation of diluted earnings per share because to do so would have been antidilutive as the Company had a net loss.
5. Income Taxes
The Company had a current state provision for income taxes of $4,000 for the six months ended June 30, 2013 and 2012.
The Company annually evaluates the positive and negative evidence bearing upon the realizability of its deferred tax assets. The Company, however, has
considered results of current operations and concluded that it is more likely than not that the deferred tax assets will not be realizable. As a result, the Company has determined that a valuation allowance of $32.0 million and $31.4 million is
required at June 30, 2013 and December 31, 2012, respectively. The valuation allowance increased primarily due to an increase in deferred tax assets arising from current year’s net operating losses. The tax effects of temporary
differences that gave rise to deferred tax assets as of June 30, 2013, and December 31, 2012, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
29,371
|
|
|
$
|
28,824
|
|
|
Capital losses
|
|
|
3,907
|
|
|
|
3,907
|
|
|
Other asset reserves
|
|
|
261
|
|
|
|
268
|
|
|
Accrued expenses
|
|
|
57
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
33,596
|
|
|
|
33,018
|
|
|
Valuation allowance
|
|
|
(31,969
|
)
|
|
|
(31,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,627
|
|
|
|
1,586
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
State deferreds
|
|
|
(1,627
|
)
|
|
|
(1,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,627
|
)
|
|
|
(1,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, the Company had federal NOLs of approximately $73.6 million that will expire from 2021
through 2032. The Company had post-apportionment state NOLs of approximately $42.4 million that will expire from 2013 through 2032. The Company also has pre-apportionment NOLs from New York State and New York City totaling $105.1 million at
December 31, 2012. Since the Company has no revenue-generating operations, the apportionment factor is zero and thus no deferred tax asset is recognized. The NOLs from New York State and New York City carry forward for 20 years (expiring
between 2020 and 2032). If the Company were to commence operations in New York State or New York City in future years, the apportionment factor would exceed zero resulting in deferred tax assets for which realization would be assessed.
The Company completed a review of any potential limitation on the use of its net operating losses under Section 382 of the Internal Revenue Code on
August 9, 2008, and an update to this review on June 7, 2013. Based on such reviews, the Company does not believe Section 382 of the Internal Revenue Code will adversely impact its ability to use its current net operating losses to
offset future taxable income, if any, including any income from Three Lions.
The following is a reconciliation of the statutory federal income
tax rate to the actual effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Federal tax (benefit) rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
|
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
State income taxes
|
|
|
(5.8
|
)
|
|
|
(5.8
|
)
|
|
Change in valuation allowance
|
|
|
34.5
|
|
|
|
39.2
|
|
|
Permanent differences
|
|
|
5.3
|
|
|
|
0.6
|
|
|
Minimum tax
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
10
6. Related Party Transactions
In April 2012, the Company began providing limited accounting and administrative services to another company controlled by an affiliate
of the Company’s largest shareholder. The Company also began providing accounting services to Three Lions in May 2013. The Company earned $61,000 and $70,000, for the three and six months ended June 30, 2013, and $16,000 for the three and
six months ended June 30, 2012, related to the services provided. The arrangements entail providing these services through an undetermined end date, including payments totaling approximately $74,000 for the third quarter. The Company does not
consider these arrangements to be part of its recurring operations.
7. Subsequent Event
On July 12, 2013, the members of Three Lions entered into a Member Acknowledgement, Consent and Waiver which extended the deadline
for the third capital contributions, including that to be made by the Company (or OA3) to Three Lions in the amount of $3.5 million, from 120 to 165 days after March 18, 2013.