Item 1. Condensed Financial Statements
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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|
|
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|
|
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June 30,
2014
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|
December 31,
2013
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|
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|
(Unaudited)
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|
|
|
|
ASSETS
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,266
|
|
|
$
|
1,643
|
|
|
Restricted cash
|
|
|
236
|
|
|
|
236
|
|
|
Prepaid expenses and other current assets
|
|
|
83
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,585
|
|
|
|
2,004
|
|
|
Investment in Three Lions Entertainment, LLC
|
|
|
4,308
|
|
|
|
5,987
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|
|
Other assets
|
|
|
258
|
|
|
|
282
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|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
4,566
|
|
|
|
6,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,151
|
|
|
$
|
8,273
|
|
|
|
|
|
|
|
|
|
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|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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|
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|
|
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Accounts payable
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$
|
18
|
|
|
$
|
32
|
|
|
Accrued expenses and other current liabilities
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|
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46
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
64
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|
|
|
83
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|
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|
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Stockholders’ equity:
|
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Common stock, $.01 par value; 100,000,000 shares authorized;
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74,501,559 shares outstanding net of 4,002,070 treasury shares at par value at June 30, 2014 and December 31, 2013
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|
745
|
|
|
|
745
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|
|
Additional paid-in capital
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|
|
156,064
|
|
|
|
156,064
|
|
|
Accumulated Deficit
|
|
|
(150,731
|
)
|
|
|
(148,632
|
)
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|
Accumulated other comprehensive income
|
|
|
9
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
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Total stockholders’ equity
|
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|
6,087
|
|
|
|
8,190
|
|
|
|
|
|
|
|
|
|
|
|
|
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$
|
6,151
|
|
|
$
|
8,273
|
|
|
|
|
|
|
|
|
|
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|
See the accompanying Notes to Condensed Consolidated Financial Statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in
thousands, except loss per share data)
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For the Three Months
Ended June 30,
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For the Six Months
Ended June 30,
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2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
General and administrative expenses
|
|
|
267
|
|
|
|
322
|
|
|
|
559
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating loss
|
|
|
(267
|
)
|
|
|
(322
|
)
|
|
|
(559
|
)
|
|
|
(608
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)
|
|
Interest income
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
2
|
|
|
Other income, net
|
|
|
74
|
|
|
|
61
|
|
|
|
147
|
|
|
|
70
|
|
|
Equity in losses of Three Lions Entertainment, LLC
|
|
|
(841
|
)
|
|
|
(637
|
)
|
|
|
(1,679
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)
|
|
|
(880
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loss before income taxes
|
|
|
(1,034
|
)
|
|
|
(897
|
)
|
|
|
(2,091
|
)
|
|
|
(1,416
|
)
|
|
Income tax provision
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(4
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss
|
|
$
|
(1,037
|
)
|
|
$
|
(897
|
)
|
|
$
|
(2,099
|
)
|
|
$
|
(1,420
|
)
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|
|
|
|
|
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Net loss per share – basic and diluted:
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|
|
|
|
|
|
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|
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|
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Loss per common share
|
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$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
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|
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|
|
|
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|
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Weighted average shares outstanding
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74,502
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|
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|
50,625
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74,502
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50,619
|
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|
|
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|
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See the accompanying Notes to Condensed Consolidated Financial Statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in
thousands)
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For the Three Months
Ended June 30,
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|
For the Six Months
Ended June 30,
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|
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|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Net loss
|
|
$
|
(1,037
|
)
|
|
$
|
(897
|
)
|
|
$
|
(2,099
|
)
|
|
$
|
(1,420
|
)
|
|
|
|
|
|
|
|
Other comprehensive (loss) gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments
|
|
|
(1
|
)
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) gain
|
|
|
(1
|
)
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,038
|
)
|
|
$
|
(882
|
)
|
|
$
|
(2,103
|
)
|
|
$
|
(1,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Condensed Consolidated Financial Statements.
5
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
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|
|
|
|
|
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|
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|
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For the Six Months
Ended June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,099
|
)
|
|
$
|
(1,420
|
)
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Equity in loss of Three Lions Entertainment, LLC
|
|
|
1,679
|
|
|
|
880
|
|
|
Increase in restricted cash
|
|
|
—
|
|
|
|
(200
|
)
|
|
Deferred income tax benefit
|
|
|
3
|
|
|
|
—
|
|
|
Increase (decrease) in cash from changes in working capital items:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
59
|
|
|
|
20
|
|
|
Accounts payable
|
|
|
(14
|
)
|
|
|
39
|
|
|
Accrued expenses and other current liabilities
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(377
|
)
|
|
|
(688
|
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Investment in Three Lions Entertainment, LLC
|
|
|
—
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Equity issuance costs
|
|
|
—
|
|
|
|
(143
|
)
|
|
Proceeds from stock option exercises
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(377
|
)
|
|
|
(5,827
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,643
|
|
|
|
7,267
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,266
|
|
|
$
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
SIMON WORLDWIDE, INC.
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, 2013 (“2013 10-K”). Certain prior period amounts were reclassified to conform to current period presentation.
The Company
consolidates all entities that it controls by ownership of a majority voting interest as well any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company eliminates from its 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 managed by the Chief Executive Officer, Greg Mays, and Chief 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 on 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 contributed $3.15 million to Three Lions in exchange for membership units representing 60% of the economic
returns of Three Lions, including certain preferences with respect to common holders on operating returns and on a liquidation or sale of Three Lions. In respect of such previously issued membership units, the Company made a second capital
contribution to Three Lions in the amount of $1.85 million on April 26, 2013, and a third and final capital contribution to Three Lions in the amount of $3.5 million on October 2, 2013. As a result of these transactions, the Company’s
business substantially consists of acting as the majority equityholder of, and holding a membership interest in, Three Lions. The Company cannot predict whether its investment in Three Lions will be successful. The business and operations of Three
Lions are 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”).
On May 7, 2014, the Company entered into a Pledge Agreement with
SunTrust Bank (“SunTrust”) wherein the Company pledged all of its equity interests in Three Lions (and all proceeds of such interests) to SunTrust as security for Three Lions’ obligations under a revolving credit facility that Three
Lions obtained from SunTrust. The Company’s pledge of its equity interests in Three Lions will terminate only upon the payment in full and termination of Three Lions’ obligations under the revolving credit facility. The Pledge Agreement
provides that SunTrust shall not have any claim, remedy, or right to proceed against the Company for any deficiency in payment or performance by Three Lions from any source other than the Company’s equity interests in Three Lions.
The operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the full year.
7
2. Variable Interest Entity (“VIE”)
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 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.
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 at the date of the Company’s third contribution that the entity was a variable interest entity
primarily based on the current equity investment at risk in Three Lions totaling $9.0 million, which consists of three contributions by the Company of $3.1 million on March 18, 2013, $1.9 million on April 26, 2013, and $3.5 million on
October 2, 2013, and founder contributions of $.5 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. The Company’s contributions
total $8.5 million and the founders’ contributions total $.5 million. As the Company did not have sufficient cash on hand to make its third contribution, the Company raised capital through an offering of its common stock to its shareholders.
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. 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, 2014, the Company’s total contributions of $8.5 million are reduced by Simon’s absorption of its share of Three Lions’
operating losses from the period March 18, 2013, through June 30, 2014, which brings the carrying value of its Three Lions investment to $4.3 million. The Company’s contributions to Three Lions is greater than its share of Three
Lions’ net assets. This excess represents equity method goodwill which totaled $4.2 million at June 30, 2014. Also, the Company was required to issue a cash collateralized bank letter of credit on April 12, 2013 in the amount of $.2
million with an expiration date of April 15, 2015, to guarantee payments on an office lease obtained by Three Lions. The Company’s investment, and guarantee, related to Three Lions totaled $8.7 million at June 30, 2014, representing
the Company’s maximum exposures to loss.
8
A summary of the assets and liabilities as of June 30, 2014 and operating results for the six months then
ended, related to Three Lions are as follows (in thousands):
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
2,690
|
|
|
Prepaid expenses and other current assets
|
|
|
2,468
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,158
|
|
|
Noncurrent assets
|
|
|
537
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
5,695
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
3,729
|
|
|
Revolving credit facility
|
|
|
386
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,115
|
|
|
Noncurrent liabilities
|
|
|
54
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,169
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
1,526
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
General and administrative expenses
|
|
|
2,763
|
|
|
Depreciation and amortization
|
|
|
29
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,792
|
)
|
|
Interest income
|
|
|
2
|
|
|
Interest expense
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,798
|
)
|
|
|
|
|
|
|
3. Long-term Investment
The Company holds an investment in an available-for-sale equity security with a fair value of approximately $31,000 and $37,000 at
June 30, 2014, and December 31, 2013, respectively, which is included in other assets in the accompanying consolidated balance sheets. The cost basis in this available-for-sale security was approximately $19,000 at June 30, 2014 and
December 31, 2013. Total unrealized gains in accumulated other comprehensive income totaled approximately $12,000 and $18,000 at June 30, 2014, and December 31, 2013. This investment is recorded at fair value using quoted prices in
active markets for identical assets or liabilities (Level 1).
4. Loss Per Share Disclosure
The Company calculates its earnings per share in accordance with ASC 260-10, “Earnings Per Share.” There were 74,501,559 weighted
average shares outstanding for the three and six months ended June 30, 2014 and 50,625,121 and 50,618,536 weighted average shares outstanding for the three and six months ended June 30, 2013, respectively. 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.
9
5. Income Taxes
The Company had a provision for income taxes for the six months ended June 30, 2014 and 2013 that consisted of the following (in
thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
State
|
|
|
5.3
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5.3
|
|
|
|
4.0
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
Federal
|
|
|
2.1
|
|
|
|
—
|
|
|
State
|
|
|
.4
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2.5
|
|
|
|
—
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
Federal
|
|
|
2.1
|
|
|
|
—
|
|
|
State
|
|
|
5.7
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.8
|
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
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 $32.1 million
and $31.9 million is required at June 30, 2014, and December 31, 2013, 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 at June 30, 2014, and December 31, 2013, were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
30,291
|
|
|
$
|
28,973
|
|
|
Capital losses
|
|
|
4,153
|
|
|
|
4,153
|
|
|
Other asset reserves
|
|
|
(1,165
|
)
|
|
|
1
|
|
|
Accrued expenses
|
|
|
21
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
33,300
|
|
|
|
33,150
|
|
|
Valuation allowance
|
|
|
(32,067
|
)
|
|
|
(31,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,233
|
|
|
|
1,219
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
State deferreds
|
|
|
(1,233
|
)
|
|
|
(1,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,233
|
)
|
|
|
(1,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014, the Company has federal net operating losses (“NOLs”) of approximately $80.2 million and
post-apportionment state NOLs of approximately $33.4 million, respectively. The federal NOLs carry forward for 20 years and being to expire in 2021 through 2035. The state post-apportioned NOLs are from various states and begin to expire in 2014
through 2035.
10
The Company also has pre-apportionment NOLs from the two jurisdictions of New York State and New York City
totaling $110.2 million at June 30, 2014. Since the Company has no revenue-generating operations in New York State and New York City, management has determined that none of the NOLs should be recognized. If the Company were to commence
operations in New York State or New York City in future years, the realizability of the NOLs and related deferred tax assets will be assessed at such time. The NOLs from New York State and New York City carry forward for 20 years and begin to
expire in 2021 through 2035.
The federal and state NOLs may be subject to certain limitations under Section 382 of the Internal Revenue Code, which
could significantly restrict the Company’s ability to use the NOLs to offset taxable income in subsequent years. The Company completed a review of any potential limitation on the use of its net operating losses under Section 382 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,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
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
|
|
|
34.6
|
|
|
|
34.5
|
|
|
Permanent differences
|
|
|
5.3
|
|
|
|
5.3
|
|
|
Minimum tax
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the financial condition and results of operations of the Company for the three and six months ended
June 30, 2014, as compared to the same periods in the previous year. This discussion should be read in conjunction with the condensed consolidated financial statements of the Company and related Notes included elsewhere in this Form 10-Q.
Forward-Looking Statements and Associated Risks
From
time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company’s plans and objectives, including certain information provided below. These forward-looking
statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control. The Company wishes to caution readers that actual results may differ
materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in Item 1A. Risk Factors included in the 2013 10-K for purposes of the
“Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.
General
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.
Since August 2001, the Company has concentrated its
efforts on reducing its costs and settling numerous claims, contractual obligations, and pending litigation related to its prior business operations. 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.
11
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 on Form 8-K, as amended by Amendment
No. 1 thereto filed by the Company on July 15, 2013, by Amendment No. 2 thereto filed by the Company on August 7, 2013, and by Amendment No. 3 thereto filed by the Company on August 23, 2013 (the “TLE 8-K”),
that it, together with Richard Beckman, Joel Katz and OA3 had entered into the LLC Agreement of Three Lions. As described in more detail in the TLE 8-K, pursuant to the LLC Agreement, the Company made an initial capital contribution of $3.15 million
to acquire 600,000 investor membership units, or investor units, representing 60% of the voting power of Three Lions, subject to certain major decisions that require the unanimous approval of either the members of Three Lions or its Executive Board.
The other two initial members of Three Lions, Richard Beckman and Joel Katz, were granted a total of 35,294 investor units in respect of their combined initial capital contributions of $185,294, and a total of 364,706 common units in respect of
their establishment of and contributions of property to Three Lions, which investor units and common units represent 40% of the voting power of Three Lions, subject to such unanimous approval provisions.
The 600,000 investor units the Company acquired in respect of its initial capital contribution currently represent a 60% interest in the economic returns of
Three Lions, including the right to receive along with the other holders of investor units, in preference over holders of common units, certain priority distributions of 100% of available proceeds of any sale or liquidation transactions and not less
than 75% of available cash from operations, in each case as determined by the Executive Board, until such time as the respective capital contributions made by the Company and the other members holding investor units have been recouped in full, at
which time the holders of common units would be entitled to receive certain catch-up distributions thereafter until aggregate distributions made match the respective pro rata 63.5%/36.5% percentage interest split between the investor units and the
common units. An employee incentive equity pool of non-voting units representing approximately 10% of the fully diluted economic interests of Three Lions has also been established in the LLC Agreement. Any issuance of such incentive units or other
economic participation rights to Three Lions employees could result in a proportionate dilutive reduction in the Company’s 60% interest in the economic returns of Three Lions of up to 6% in the aggregate, after the return of the Company’s
aggregate capital contributions to Three Lions. As of June 30, 2014, none of the employee incentive units in the pool had been issued, however, Three Lions has granted to certain of its executive employees pursuant to their respective
employment agreements certain economic participation rights in the event of (a) a sale or disposition of all or substantially all of the assets and business operations of Three Lions or of all of the equity ownership interests in Three Lions,
or (b) a liquidation of Three Lions that is not the result of the transactions described in the preceding clause (a) (any such transaction described in clause (a) or (b), a “Covered Transaction”). These contractual economic
participation rights entitle these executive employees, subject to the conditions set forth in the next sentence, to an aggregate total of nine percent (9%) of the excess net proceeds received by Three Lions and its members from a Covered
Transaction above the sum of (A) all loans, debts and similar liabilities owed by Three Lions to its creditors (including members), (B) all capital contributions made to Three Lions by its members (less any non-tax related distributions
received by such members), (C) all costs and expenses incurred by Three Lions and its members in connection with the Covered Transaction and (D) any amounts paid in exchange for services, non-competition agreements or other services,
assets or items of value required to be performed or provided by Three Lions or its members in connection with the Covered Transaction. These participation rights are subject to vesting in three equal annual installments beginning on the first
anniversary date of the commencement of the recipient’s employment with Three Lions (which first anniversary dates currently range from March 19, 2014 through May 2, 2014), subject to (i) the recipient’s continued employment
with Three Lions and (ii) possible acceleration of such vesting by one year in the event of the occurrence of, or Three Lions enters into a binding obligation to engage in, a Covered Transaction prior to the next vesting date.
Pursuant to the LLC Agreement, the Company made a second capital contribution to Three Lions in the amount of $1,850,000, and Messrs. Beckman and Katz made
additional capital contributions to Three Lions totaling $108,824, in April 2013. The Company made a third and final capital contribution to Three Lions of $3.5 million on October 2, 2013, and Messrs. Beckman and Katz made final capital
contributions to Three Lions totaling $205,882. The Company made this $3.5 million capital contribution to Three Lions following the closing of its rights offering. OA3, an affiliate of the Company’s controlling shareholder, is obligated under
the LLC Agreement (as amended by the First Amendment) to make available to Three Lions, the OA3 Loan Facility for the purpose set forth in the First Amendment filed on Form 8-K by the company with the Securities and Exchange Commission on
May 13, 2014.
The LLC Agreement provides that for so long as the Company holds at least 51% of the voting membership units in Three Lions (or
510,000 investor units), the Company will control at least 51% of the voting power of the members of Three Lions, subject to certain major decisions that require the unanimous approval of either the members of Three Lions or its Executive
12
Board which effectively requires the Company to obtain the approval of Messrs. Beckman and Katz in these cases since both are members of Three Lions and of its Executive Board. Additionally, the
LLC Agreement provides that the Company has the right to appoint three of the five members of the Executive Board of Three Lions. For so long as the Company holds not less than 75% of the membership units that it held as of October 4, 2013, the
Company shall continue to be entitled to appoint and remove three of the five members of the Executive Board of Three Lions, which governs the business and operations of Three Lions. The Executive Board governs under simple majority vote, subject to
certain significant decisions that require Special Approval as described in more detail in the TLE 8-K.
In addition, in April 2012, the Company began
providing limited accounting and administrative services to a 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 arrangements entail
providing these services through an undetermined end date, including payments totaling approximately $74,000 expected for the third quarter. The Company does not consider these arrangements to be part of its recurring operations.
As of both June 30, 2014 and December 31, 2013, the Company had 4 employees. The Company is currently managed by the Chief Executive Officer, Greg
Mays, and Chief Financial Officer, Anthony Espiritu, together with an acting general counsel.
Outlook
The lack of any operating revenue has had and, notwithstanding the Company’s active involvement in Three Lions, will continue to have a substantial
adverse impact on the Company’s cash position. The Company incurred losses within its continuing operations in 2013 and continues to incur losses in 2014 for the general and administrative expenses incurred to manage the affairs of the Company.
In the near term, the primary source of current and future working capital is expected to be cash on hand and proceeds from the sale of its remaining long-term investment. Management believes it has sufficient capital resources and liquidity to
operate the Company for at least one year.
Considering our current cash position of $1.3 million at June 30, 2014, and our average spending to
support continuing operations, management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.
RESULTS OF OPERATIONS
Three Months Ended
June 30, 2014, Compared to Three Months Ended June 30, 2013
The Company generated no revenue or gross profits during the three months ended
June 30, 2014 and 2013.
General and administrative expenses totaled $.3 million during the three months ended June 30, 2014, which is
consistent with the $.3 million during the three months ended June 30, 2013.
Due to both the founders and the Company sharing the power to direct
the significant activities that impact the economic performance of Three Lions, the Company currently does not consolidate Three Lions. If consolidated by the Company, Three Lions will significantly increase the Company’s losses from operations
as Three Lions is not expected to generate revenues until the second half of 2014.
Six Months Ended June 30, 2014, Compared to Six Months Ended
June 30, 2013
The Company generated no revenue or gross profits during the six months ended June 30, 2014 and 2013.
General and administrative expenses totaled $.6 million during the six months ended June 30, 2014, which is consistent with the $.6 million during the
six months ended June 30, 2013.
Due to both the founders and the Company sharing the power to direct the significant activities that impact the
economic performance of Three Lions, the Company currently does not consolidate Three Lions. If consolidated by the Company, Three Lions will significantly increase the Company’s losses from operations as Three Lions is not expected to generate
revenues until the second half of 2014.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $1.5 million and $1.9 million at June 30, 2014, and December 31, 2013, respectively.
13
Net cash used in operating activities during the six months ended June 30, 2014 totaled $.4 million
primarily due to a net loss of $2.1 million partially offset by equity in the losses of Three Lions of $1.7 million. Net cash used in operating activities during the six months ended June 30, 2013, totaled $.7 million primarily due to a loss
from operations of $1.4 million and an increase in restricted cash of $.2 million partially offset by the Company’s investment loss in Three Lions of $.9 million and a net change in working capital items.
There were no investing activities during the six months ended June 30, 2014. Net cash used in investing activities during the six months ended
June 30, 2013, totaled $5.0 million due to the Company’s payments for acquiring membership units in Three Lions.
There were no financing
activities during the six months ended June 30, 2014. Net cash used in financing activities during the six months ended June 30, 2013, totaled $.1 million primarily due to an increase in equity issuance costs.
At June 30, 2014, the Company has letters of credit totaling approximately $236,000 and are considered restricted. Of this amount, $36,000 supports the
Company’s periodic payroll obligations and $.2 million guarantees payments on an office lease obtained by the Company’s Three Lions subsidiary.
The Company’s contributions to Three Lions total $8.5 million. The contributions from noncontrolling interest holders total $.5 million. In addition,
Three Lions has available a revolving credit facility in a principal amount not to exceed $8.0 million. If these amounts are insufficient to meet Three Lions’ start-up, operating and production expenses, Three Lions may need or choose to obtain
additional financing by selling securities or by entering into additional credit agreements.