Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1 – Organization and Description of Business
Propel Media, Inc. (“Propel”), a Delaware
corporation, is a diversified online advertising company. Propel generates revenues through the sale of advertising to advertisers
who want to reach consumers in the United States and internationally to promote their products and services. Propel is a holding
company for Propel Media LLC (“Propel Media”), a California limited liability company, Kitara Media Corp. (“Kitara”),
a Delaware corporation, and DeepIntent Technologies, Inc. (“DeepIntent”), a Delaware corporation. Propel, Propel Media,
Kitara, DeepIntent and their respective subsidiaries are collectively referred to herein as the “Company”.
Propel delivers advertising via its real-time, bid-based, online
advertising platform called Propel Media Platform. This technology platform allows advertisers to target users and deliver video,
display and text based advertising. Propel and its Propel Media Platform provide advertisers with an effective way to serve, manage
and maximize the performance of their online advertising purchasing. Propel offers both a self-serve platform and a managed services
option that give advertisers diverse solutions to reach online users and acquire customers.
Propel primarily serves its advertising to users
who are part of its owned and operated member-based network or the member-based networks of its third-party application partners.
Propel provides its user base with access to its premium content for free and obtains the users’ permission to serve advertising
to them while they peruse content on the web. In the owned and operated model, advertising units are served directly to users
through a browser extension or other software installed on the user’s computer. Under the third-party application model,
Propel serves advertising through its partners who are providing a variety of applications free of charge and such partners receive
permission from their users to serve ads to them.
Propel’s offerings to its advertising customers
will increasingly leverage DeepIntent’s integrated data and programmatic buying platform. This platform provides a data-driven
approach to programmatic advertising that integrates into its data management platform traditional first-party data (such as client
CRM data) and cookie-based third-party user data in order to build an enriched profile of a brand’s target audiences. Leveraging
DeepIntent’s artificial intelligence tools, these profiles are supplemented with real-time consumer interest data using
DeepIntent’s proprietary Natural Language Processing (NLP) algorithms. With a holistic view of each user’s interests
and behaviors, DeepIntent’s demand side platform provides tools to accurately price the value of each user with respect
to the goals of the advertiser while simultaneously providing brands with the confidence that their ads will appear in a “brand
safe” environment. Additionally, this acquisition gives the Company the ability to offer its advertisers programmatic inventory
across all screens, including desktop, mobile, tablet and connected TV.
Propel also provides solutions to advertisers through its publisher
business model with a channel of direct publishers, networks and exchanges. These supply channels expand the Company’s ability
to serve advertising. In this model, the advertising units are served to users through a website, and the Company serves advertising
units to the user in coordination with the publisher, network or exchange.
Note 2 – Liquidity and Capital Resources
As of June 30, 2018, the Company’s cash on hand was $3,425,000.
The Company had a working capital deficit of $7,215,000 as of June 30, 2018. The Company recorded net income of $11,725,000 and
$15,697,000 for the three and six months ended June 30, 2018, respectively. The Company has historically met its liquidity requirements
through operations.
As further discussed in Note 6, on May 9, 2018, the Company
entered into an amendment to the agreement with the Company’s former term loan lenders which resulted in a payment to the
Lenders of $3,000,000 in full satisfaction of the $12,500,000 Deferred Fee obligation. Also, as further discussed in Note 6, on
May 30, 2018, the Company entered into a new term loan and revolver with a maturity date of May 30, 2023 and in connection therewith,
fully satisfied all obligations under the existing term loan and revolving loan. As of June 30, 2018, the revolving loan was fully
drawn at $7,000,000.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 2 – Liquidity and Capital Resources, continued
Cash flows used in financing activities for the six months ended
June 30, 2018 were $12,363,000 and were most significantly impacted by the refinancing of the term and revolving loans, consisting
of net proceeds of $49,000,000 and $6,860,000 from the Company’s MGG Term Loan and MGG Revolving Loan, respectively. These
proceeds were offset by $401,000 of cash refinancing costs, the payoff of $58,382,000 and $3,000,000 of the principal balance and
Deferred Fee, respectively, under the former term loan. Furthermore, cash of $6,440,000 was used to satisfy a portion of the outstanding
obligations to the Transferors (See Note 5). Pursuant to the Financing Agreement, the Company is subject to a leverage ratio requirement
as of the end of each calendar quarter. The Company was in compliance with such leverage ratio requirement as of June 30, 2018.
The Company’s operating cash flows are currently heavily dependent upon being able to cost effectively
acquire and maintain a base of user audience to whom the Company serves advertising from its customers. On June 12, 2018, Google
announced policy changes that affect how developers of Chrome extensions, such as our company, can acquire users. These policy
changes are being implemented in two phases. Effective as of June 12, 2018, all new Chrome extensions must be installed from
the Chrome Web Store (“CWS”) rather than using the inline installation method which the Company currently utilizes
and which allows the user to install the extension directly from the Company’s website landing pages. This means that
a developer of Chrome extensions, such as our company, would be required to promote its content on the web and drive a new user
to the CWS for the final installation of the extension instead of allowing the user to install the extension from the developer’s
landing page promoting the extension. As of September 12, 2018, all existing Chrome extensions will similarly be required
to be installed from the CWS and no inline installations will be allowed. This change has created uncertainty in the user
acquisition install flow for developers of Chrome extensions, such as our company, and it is currently unclear how this change
will affect the volume and cost to acquire users for the Company’s owned and operated properties. Since the announcement,
the Company has been doing extensive testing of a variety of installation flows to acquire new users. The financial impact
to the Company from these Google policy changes, if any, is still unknown. As a result, these policy changes could result in increased
user acquisition costs, as well as challenges in maintaining user base levels sufficient to support demand by advertisers, which
could result in lower revenues, lower margins and decreased profitability for the Company’s business.
Based upon the Company’s current projections, including its best estimates of the impact of the
Google policy changes discussed above, and its remediation and/or responses to such matters, management believes that the Company’s
cash balances on hand and cash flows expected to be generated from operations and borrowings available under the Company’s
Revolving Loan will be sufficient to fund the Company’s net cash requirements through August 2019.
Note 3 – Business Acquisition
Acquisition of DeepIntent
On June 21, 2017 (“DeepIntent Closing Date”), pursuant
to a stock purchase agreement (“DeepIntent Acquisition Agreement”) with the former stockholders of DeepIntent, Propel
purchased 100% of the equity interests of DeepIntent, consisting of the issued and outstanding shares of Class A common stock,
Class B common stock and Class C common stock of DeepIntent. The purchase price, which is subject to an adjustment for working
capital, consisted of $4,000,000 paid at closing, $500,000 paid on December 21, 2017 and, $500,000 paid on June 21, 2018 (collectively,
the “DeepIntent Deferred Payments”). In addition, the sellers may earn up to an aggregate of $3,000,000 of additional
consideration upon the achievement of certain performance levels during the years ending December 31, 2019 and 2020 (collectively,
the “Earnouts”).
Propel entered into employment agreements for the period from
the DeepIntent Closing Date through December 31, 2020 and restrictive covenant agreements through June 20, 2021 with DeepIntent’s
founders and former principal shareholders. Propel’s obligation to remit the DeepIntent Deferred Payments is contingent
upon the continued employment of both of DeepIntent’s founders through the date that any such DeepIntent Deferred Payment
is required to be made.
The Company accounted for the acquisition of DeepIntent as a
business combination. The contingent DeepIntent Deferred Payments are being accounted for as compensation for financial reporting
purposes and are accreted ratably over the deferred period. During the three and six months ended June 30, 2018, accretion of this
DeepIntent Deferred Payment was $211,000 and $449,000, respectively, and is reflected within salaries, commissions, benefits and
related expenses within the condensed consolidated statements of income. On June 21, 2018, the company fully paid its DeepIntent
Deferred Payment obligation.
The results of DeepIntent have been included within the Company’s
condensed consolidated financial statements since June 21, 2017. Included within the Company’s results for the three months
ended June 30, 2018, DeepIntent generated revenues of $515,000 and incurred an operating loss of $1,129,000. Included within the
Company’s results for the six months ended June 30, 2018, DeepIntent generated revenues of $813,000 and incurred an operating
loss of $2,334,000.
On February 21, 2018, DeepIntent formed a wholly owned subsidiary,
DeepIntent India Private Ltd., from which DeepIntent will conduct a material portion of the software development for its advertising
platform and data analysis.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 3 – Business Acquisition, continued
Unaudited Pro Forma Information
The following table provides unaudited pro forma information
for the three and six months ended June 30, 2017 as if DeepIntent had been acquired as of January 1, 2017. The pro forma results
do not include any anticipated cost synergies or other effects of the integration of DeepIntent or recognition of compensation
expense or fair value of the Earnouts. Pro forma amounts are not necessarily indicative of the results that actually would have
occurred had the acquisition been completed on the dates indicated, nor is it indicative of the future operating results of the
combined company.
|
|
For the Three Months Ended June 30,
2017
|
|
|
For the Six Months Ended June 30,
2017
|
|
Pro forma revenues
|
|
$
|
21,732,000
|
|
|
$
|
40,615,000
|
|
Pro forma net income
|
|
$
|
2,979,000
|
|
|
$
|
5,186,000
|
|
Pro forma net income per share
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Note 4 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of
America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”)
regarding unaudited interim financial information. In the opinion of management, the accompanying unaudited interim condensed consolidated
financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation
of the Company’s condensed consolidated balance sheets, statements of income and cash flows for the interim periods presented.
Operating results for the interim periods presented are not necessarily indicative of the results of operations to be expected
for the full year due to seasonal and other factors. Certain information and footnote disclosures normally included in the condensed
consolidated financial statements in accordance with US GAAP have been omitted in accordance with the rules and regulations of
the SEC. Accordingly, these unaudited interim condensed consolidated financial statements and footnotes should be read in conjunction
with the audited consolidated financial statements and accompanying notes thereto for the year ended December 31, 2017, included
in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018.
Principles of Consolidation
The unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated
in the accompanying unaudited condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the June 30, 2018 presentation.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Summary of Significant Accounting Policies, continued
Use of Estimates
The Company’s unaudited condensed consolidated
financial statements are prepared in conformity with US GAAP, which requires management to make estimates and assumptions that
affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. Actual
results could differ materially from these estimates. The Company’s most significant estimates relate to the accounts receivable
allowance, the forfeiture of customer deposits, the valuation allowance on deferred tax assets, valuation of goodwill and intangibles,
recognition of revenue, and the valuation of stock-based compensation.
Foreign Currency Translation
The reporting currency of the Company, including its subsidiaries,
is the United States dollar. The financial statements of subsidiaries located outside of the U.S. are measured in their functional
currency, which is the local currency. The functional currency of DeepIntent India Private Ltd. is the Indian Rupee. Monetary
assets and liabilities of these subsidiaries are translated at the exchange rates at the balance sheet date. Income and expense
items are translated using average monthly exchange rates. Non-monetary assets are translated at their historical exchange rates.
Translation adjustments are included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets.
Accounts Receivable
Accounts receivable are stated at a gross invoice amount less
an allowance for doubtful accounts.
The Company estimates its allowance for doubtful accounts by
evaluating specific accounts where information indicates the Company’s customers may have an inability to meet financial
obligations, such as customer payment history, credit worthiness and receivable amounts outstanding for an extended period beyond
contractual terms. The Company uses assumptions and judgment, based on the best available facts and circumstances, to record an
allowance to reduce the receivable to the amount expected to be collected. These allowances are re-evaluated and adjusted as additional
information is received.
The allowance for doubtful accounts as of June 30, 2018 and December
31, 2017 was $504,000 and $256,000, respectively.
Property and Equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the estimated
useful lives of the assets, generally, three years for computer equipment and purchased software, three to five years for furniture
and equipment, the shorter of the useful life and the term of the lease for leasehold improvements. Depreciation expense for the
three months ended June 30, 2018 and 2017 was $469,000 and $368,000, respectively, and $865,000 and $764,000 for the six months
ended June 30, 2018 and 2017, respectively.
Intangible Assets
The Company’s long-lived intangible assets, other than
goodwill, are assessed for impairment when events or circumstances indicate there may be an impairment. These assets were initially
recorded at their estimated fair value at the time of acquisition and assets not acquired in acquisitions were recorded at historical
cost. However, if their estimated fair value is less than the carrying amount, other intangible assets with indefinite life are
reduced to their estimated fair value through an impairment charge to our condensed consolidated statements of income.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Summary of Significant Accounting Policies, continued
Intangible Assets, continued
Intangible assets as of June 30, 2018 and December 31, 2017
were $1,069,000 and $1,201,000, respectively. Intangible assets at June 30, 2018 consisted of the DeepIntent intellectual property
of $1,320,000 net of accumulated amortization of $271,000 and the Propel Media trade name at a cost of $20,000. Amortization expense
was $66,000 and $8,000 for the three months ended June 30, 2018 and 2017, respectively, and $132,000 and $8,000 for the six months
ended June 30, 2018 and 2017, respectively.
The following is an annual schedule of approximate future amortization
of the Company’s intangible assets:
Years Ending December 31,
|
|
Amount
|
|
2018 (six months)
|
|
$
|
132,000
|
|
2019
|
|
|
264,000
|
|
2020
|
|
|
264,000
|
|
2021
|
|
|
264,000
|
|
2022
|
|
|
125,000
|
|
|
|
$
|
1,049,000
|
|
Capitalization of Internally Developed
Software
The Company capitalizes certain costs related to its software
developed or obtained for internal use in accordance with ASC 350-40. Costs related to preliminary project activities and post-implementation
activities are expensed as incurred. Internal and external costs incurred during the application development stage, including upgrades
and enhancements representing modifications that will result in significant additional functionality, are capitalized. Software
maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment and are
amortized on a straight-line basis over the software’s estimated useful life ranging from 12 months to 36 months. The Company
evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of
these assets. Based upon management’s assessment of capitalized software, the Company recorded impairment charges of $0 and
$20,000 for the three and six months ended June 30, 2018 and 2017, respectively, to write off the book value of certain internally
developed capitalized software. These impairment charges were included in the impairment of software and intangible assets within
the condensed consolidated statements of income.
Revenue Recognition
Propel generates revenue from advertisers by serving
their ads to a user base consisting of the Company’s owned and operated network, users of our third-party application partners’
properties and users from our publisher driven traffic, as well as from advertising sold through the Company’s demand-side
platform.
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update “ASU” No. 2014-09, Revenue from Contracts with Customers (Topic
606) which was subsequently amended by ASU 2015-14, ASU 2016-08, ASU 2016- 10, ASU 2016-12, and ASU 2017-13. These ASUs outline
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. The guidance includes a five-step framework that
requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and
(v) recognize revenue when the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of
ASU 2014-09 to annual reporting periods beginning after December 15, 2017. A full retrospective or modified retrospective approach
is required. The Company has adopted ASU No. 2014-09 effective January 1, 2018.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Summary of Significant Accounting Policies, continued
Revenue Recognition, continued
Pursuant to ASC 606, revenue is recognized when
(or as) the Company satisfies performance obligations. Performance obligations are satisfied when an advertisement is served by
the Company or when a user action occurs based on the advertisement the Company served (i.e., a view, a click, a conversion action,
etc.). There is a specific transaction that triggers a billable instance for fulfilment of that performance obligation. Revenue
is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange
for the serving of advertising. Contracts with advertising customers typically consist of insertion orders or other written contracts.
Within the Company’s business model, customer orders are fulfilled at a point in time and not over a period of time.
The Company has elected to apply the modified retrospective
method and the impact was determined to be immaterial on the condensed consolidated financial statements. Accordingly, the new
revenue standard has been applied prospectively in our condensed consolidated financial statements from January 1, 2018 forward
and reported financial information for historical comparable periods will not be revised and will continue to be reported under
the accounting standards in effect during those historical periods.
The Company has performed an analysis and identified
its revenues and costs that are within the scope of the new guidance. The Company determined that its methods of recognizing revenues
have not been significantly impacted by the new guidance.
The amounts on deposit from customers are recorded as an advertiser
deposit liability in the accompanying condensed consolidated balance sheets.
The following table presents our revenues disaggregated by
geographical region:
|
|
For the Three Months ended June 30,
|
|
|
For the Six Months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Americas
|
|
$
|
19,587,000
|
|
|
$
|
19,402,000
|
|
|
$
|
39,860,000
|
|
|
$
|
36,662,000
|
|
Europe
|
|
|
362,000
|
|
|
|
1,385,000
|
|
|
|
656,000
|
|
|
|
2,465,000
|
|
Middle East
|
|
|
285,000
|
|
|
|
717,000
|
|
|
|
629,000
|
|
|
|
997,000
|
|
Other
|
|
|
24,000
|
|
|
|
11,000
|
|
|
|
32,000
|
|
|
|
23,000
|
|
Total
|
|
$
|
20,258,000
|
|
|
$
|
21,515,000
|
|
|
$
|
41,177,000
|
|
|
$
|
40,147,000
|
|
Cost of Revenues
Costs of revenue consists of marketing expenses to obtain new
users for the Company’s owned and operated properties, publisher costs of third-party networks and properties, transaction
costs and revenue-sharing costs to third party application developer partners, as well as costs of advertising purchased through
the Company’s demand-side platform.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Summary of Significant
Accounting Policies, continued
Concentration of Credit Risk and
Significant Customers
The Company’s concentration of credit risk includes its
concentrations from key customers and vendors. The details of these significant customers and vendors are presented in the following
table for the three and six months ended June 30, 2018 and 2017:
|
|
For
the Three Months Ended
June 30,
|
|
For
the Six Months Ended
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
The
Company’s largest customers are presented below as a percentage of the Company’s aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
None
over 10%
|
|
None
over 10%
|
|
None
over 10%
|
|
None
over 10%
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
None
over 10%
|
|
12%
of accounts receivable from one customer
|
|
None
over 10%
|
|
12%
of accounts receivable from one customer
|
|
|
|
|
|
|
|
|
|
The Company’s
largest vendors are presented below as a percentage of the Company’s aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s
largest vendors reported in cost of revenues are presented as a percentage of the Company’s aggregate cost of revenues
|
|
40%
of cost of revenues from one vendor
|
|
18%,
17% and 10% of cost of revenues, or 45% of cost of revenues in the aggregate
|
|
41%
and 11% of cost of revenues, or 52% of cost of revenues in the aggregate
|
|
21%
and 20% of cost of revenues, or 41% of cost of revenues in the aggregate
|
|
|
|
|
|
|
|
|
|
The Company’s
largest vendors reported as a percentage of accounts payable
|
|
44%
of accounts payable to one vendor
|
|
17%
and 14% of accounts payable, or 31% of accounts payable in the aggregate
|
|
44%
of accounts payable to one vendor
|
|
17%
and 14% of accounts payable, or 31% of accounts payable in the aggregate
|
Financial instruments that potentially subject the Company
to concentrations of credit risk consist of cash and accounts receivable. Cash is deposited with a limited number of financial
institutions. The balances held at any one financial institution may be in excess of Federal Deposit Insurance Corporation (“FDIC”)
insurance limits. Accounts are insured by the FDIC up to $250,000. As of June 30, 2018 and December 31, 2017, the Company held
cash balances in excess of federally insured limits.
The Company extends credit to customers based on an evaluation
of their financial condition and other factors. The Company generally does not require collateral or other security to support
accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful
accounts and sales credits.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Summary of Significant Accounting Policies, continued
Net Income (Loss) per Share
Earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential
common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants. For the three
and six months ended June 30, 2018, the Company excluded potential common shares resulting from the exercise of stock options
(17,661,875 potential common shares) and of warrants (6,363,636 potential common shares) as their inclusion would be anti-dilutive.
For the three and six months ended June 30, 2017, the Company excluded potential common shares resulting from the exercise of
stock options (21,230,000 potential common shares) and of warrants (6,363,636 potential common shares) as their inclusion would
be anti-dilutive.
Foreign Currency Translation
The reporting currency of the Company, including its subsidiaries,
is the United States dollar. The financial statements of subsidiaries located outside of the U.S. are measured in their functional
currency, which is the local currency. The functional currency of the parent is the United States dollar. Monetary assets and
liabilities of these subsidiaries are translated at the exchange rates at the balance sheet date. Income and expense items are
translated using average monthly exchange rates. Non-monetary assets are translated at their historical exchange rates. Translation
adjustments are included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets.
Subsequent events
The Company has evaluated events that occurred subsequent to
June 30, 2018 through the date these condensed consolidated financial statements were issued. Management has concluded that other
than as disclosed in Note 13, there were no subsequent events that required disclosure in these condensed consolidated financial
statements.
Recent Accounting Pronouncements
In February 2016, the FASB issued
ASU 2016-02—Leases (Topic 842) (“ASU-2016-02”), which requires an entity to recognize right-of-use assets and
lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting
guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption,
with early adoption permitted. The Company is currently evaluating the effect this guidance will have on its condensed consolidated
financial statements and related disclosure, and anticipates the guidance to result in increases in its assets and liabilities
as most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and lease
liabilities.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 – Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements,
continued
In January 2017, the FASB issued ASU No. 2017-04
“Intangibles-Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).
To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. In computing
the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment
testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be
required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the
amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value
of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill
allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on
the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated
the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it
fails that qualitative test, to perform Step 2 of the goodwill impairment test. The provisions of this update are effective for
annual and interim periods beginning on or after December 15, 2019. Based upon the Company’s preliminary assessment, the
adoption of this new standard is not expected to have a material impact on the Company’s condensed consolidated financial
position or its results of operations.
In May 2017, the FASB issued ASU No. 2017-09 “Compensation-Stock
Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The amendments in this update provide
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. An entity should account for the effects of a modification unless all of the following are met: The fair
value of the modified award is the same as the fair value of the original award immediately before the original award is modified,
the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the
original award is modified and the classification of the modified award as an equity instrument or a liability instrument is the
same as the classification of the original award immediately before the original award is modified. The provisions of this update
are effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company has
adopted ASU 2017-09 effective January 1, 2018 and such adoption did not have a material impact on the Company’s condensed
consolidated financial position or its results of operations.
In June 2018, the FASB issued ASU
2018-07 Compensation-Stock Compensation (Topic 718) (“ASU 2018-07”). The amendments in this Update expand the scope
of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply
the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution
of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that
Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts
with Customers. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim periods
within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. Based upon the Company’s
preliminary assessment, the adoption of this new standard is not expected to have a material impact on the Company’s condensed
consolidated financial position or its results of operations.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 - Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements,
continued
In July 2018, the FASB issued ASU
2018-10 Codification Improvements to Topic 842, Leases (Topic 842) (“ASU-2018-10”), which contains amendments (related
to Update 2016-02) to the Codification regarding leases. Fourteen areas of improvement where amendments were applied include the
following:
|
●
|
Residual Value Guarantees
|
|
●
|
Rate implicit in the lease
|
|
●
|
Lessee reassessment of lease classification
|
|
●
|
Lessor reassessment of lease term and
purchase option
|
|
●
|
Variable lease payments that depend
on index or a rate
|
|
●
|
Lease term and purchase option
|
|
●
|
Transition guidance for amounts previously
recognized in business combinations
|
|
●
|
Certain transition adjustments
|
|
●
|
Transition guidance for leases previously
classified as capital leases under Topic 840
|
|
●
|
Transition guidance for modifications
to leases previously classified as direct financing or sales-type leases under topic 840
|
|
●
|
Transition guidance for sale and lease
back transactions
|
|
●
|
Impairment of net investment in lease
|
|
●
|
Unguaranteed residual asset
|
ASU 2018-10 is effective for annual
reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified
retrospective adoption, with early adoption permitted. The Company is currently evaluating the effect that this guidance will have
on its condensed consolidated financial position and its results of operations.
In July 2018, the FASB issued ASU 2018-11-Leases
(Topic 842) (“ASU-2018-11”), which requires an entity to separate lease components from nonlease components (for example,
maintenance services or other activities that transfer a good or service to the customer other than the right to use the underlying
asset) in a contract. The lease components shall be accounted for in accordance with the new leases standard. An entity should
account for the nonlease components in accordance with other Topics (for example, Topic 606, Revenue from Contracts with Customers,
for lessors). The consideration in the contract is allocated to the lease and nonlease components on a relative standalone price
basis (for lessees) or in accordance with the allocation guidance in the new revenue standard (for lessors). The new leases standard
also provides lessees with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated
lease component. If a lessee makes that accounting policy election, it is required to account for the nonlease components together
with the associated lease component as a single lease component and to provide certain disclosures. Lessors are not afforded a
similar practical expedient. The amendments in this Update address stakeholders’ concerns about the requirement for lessors
to separate components of a contract by providing lessors with a practical expedient, by class of underlying asset, to not separate
nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical
expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the
new revenue guidance and both (1) the timing and pattern of transfer are the same for the nonlease component(s) and associated
lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease. The amendments
in this Update also clarify which Topic (Topic 842 or Topic 606) applies for the combined component. Specifically, if the nonlease
component or components associated with the lease component are the predominant component of the combined component, an entity
should account for the combined component in accordance with Topic 606. Otherwise, the entity should account for the combined component
as an operating lease in accordance with Topic 842. An entity that elects the lessor practical expedient also should provide certain
disclosures. ASU 2018-11 is effective for annual reporting periods beginning after December 15, 2018, including interim periods
within that reporting period, and requires a modified retrospective adoption, with early adoption permitted The Company is currently
evaluating the effect that this guidance will have on its condensed consolidated financial position and its results of operations.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 5 – Reverse Business Combination and Recapitalization
The Transactions
and Merger Agreement
On January 28, 2015, Propel consummated the “reverse
merger” (the “Reverse Merger” or the “Transactions”) as contemplated by (i) the Agreement and Plan
of Reorganization (the “Merger Agreement”), dated as of October 10, 2014, by and among Kitara, Propel, which was previously
a wholly-owned subsidiary of Kitara, and Kitara Merger Sub, Inc. (“Merger Sub”), which was previously a wholly-owned
subsidiary of Propel, and (ii) the Unit Exchange Agreement (the “Exchange Agreement”), dated as of October 10, 2014
and amended as of December 23, 2014, April 29, 2015, January 26, 2016, May 9, 2018 and May 30, 2018, by and among Kitara, Propel,
Propel Media and the former members of Propel Media (“Transferors”).
Pursuant to the Exchange Agreement, and as discussed
in further detail below, the Company incurred deferred payment obligations to the Transferors, consisting of (i) $10,000,000 to
the Transferors (“Deferred Obligation”) and (ii) $6,000,000 payable in cash immediately after the payment of certain
fees to the Lenders on or about January 28, 2019 (the “Deferred Payment to Transferors”).
The amendment to the Exchange Agreement dated May
30, 2018, provided that $5,000,000 of the Deferred Obligation shall be paid to such Transferors in cash on or prior to June 13,
2018 and that the remaining $5,000,000 of the Deferred Obligation shall be repaid in connection with an equity capital raise, which
the Company shall use its reasonable best efforts to complete prior to June 30, 2023 (the “Equity Financing Period”),
out of the Company’s earnings, as permitted under the Facility (See Note 6), or out of the Company’s available working
capital as determined by the Company’s board of directors in its sole discretion, provided any applicable consent of the
Company’s lenders is obtained. On May 31, 2018, the Company satisfied this obligation with a $5,000,000 cash payment to the
Transferors. Furthermore, with regard to the remaining $5,000,000 obligation, the Company’s board of directors, at least
two times per year during the Equity Financing Period, is obligated to determine, in its sole and absolute discretion, the amount,
if any, of the Company’s working capital available to be used to pay all or a portion of the $5,000,000 Deferred Obligation
in cash, taking into account such factors as it may deem relevant. If the Company’s board of directors determines that there
is available working capital to pay all or a portion of the $5,000,000 Deferred Obligation, the Company must use its reasonable
best efforts to promptly obtain any required lender consent and, if such consent is obtained, must promptly pay to the Transferors
an amount in cash equal to such available working capital. Finally, Jared Pobre, one of the former members of Propel Media, on
behalf of the Transferors, is permitted to elect, during the ten-day period following each December 31st during the Equity Financing
Period, commencing December 31, 2016, to receive any unpaid amount of the $5,000,000 Deferred Obligation in shares of the Company’s
common stock. For such issuance, each share of the Company’s common stock will be valued at the closing market price of the
Company’s common stock as reported on NASDAQ or such other national securities exchange on which the Company’s Common
Stock is listed (or if not so listed, the bid price on the OTC Pink Market) on the date on which such shares are issued to the
Transferors (and if a closing price or bid price, as applicable, is not reported on such day, then the stock shall be valued at
the last closing price or bid price, as applicable, reported).
Pursuant to an amendment to the Exchange Agreement dated May 9, 2018, the Transferors and the lenders
agreed that the Company could fully satisfy the obligation for the Deferred Payment to Transferors with a cash payment of $1,440,000.
This cash payment of $1,440,000 was made on May 9, 2018, which fully satisfied the obligation for the Deferred Payment to Transferors.
Of the Company’s liability, net of discount, to Transferors for the Deferred Payment to Transferors, in the amount of $5,581,000
as of May 9, 2018, $4,141,000 was forfeited by the Transferors and the amount of $1,440,000 was paid in cash to the Transferors.
The full satisfaction of the Deferred Payment to the Transferors was accounted for as an extinguishment, and as such, the gain
on extinguishment of $4,141,000 was credited to additional paid-in capital, representing an adjustment of the distribution to the
Transferors, as former owners of the Company.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 5 – Reverse Business Combination and Recapitalization,
continued
The Transactions
and Merger Agreement, continued
The following represents
the obligations to Transferors under the Exchange Agreement:
|
|
As
of
|
|
|
|
June
30,
2018
|
|
|
December 31,
2017
|
|
Deferred Obligation
|
|
$
|
5,000,000
|
|
|
$
|
10,000,000
|
|
Deferred Payment to Transferors
|
|
|
-
|
|
|
|
6,000,000
|
|
Total, gross
|
|
|
5,000,000
|
|
|
|
16,000,000
|
|
Less: discount
|
|
|
(132,000
|
)
|
|
|
(797,000
|
)
|
Total, net
|
|
|
4,868,000
|
|
|
|
15,203,000
|
|
Less: current portion
|
|
|
-
|
|
|
|
-
|
|
Long-term portion
|
|
$
|
4,868,000
|
|
|
$
|
15,203,000
|
|
As a result of the Transactions, immediately after
the closing, the Transferors collectively owned 154,125,921 shares of Propel common stock, representing 61.7% of Propel’s
outstanding common stock, and the former stockholders of Kitara owned the remaining 95,884,241 shares of Propel common stock, representing
38.3% of Propel’s outstanding common stock.
During the three months ended June 30, 2018 and 2017, the Company
recorded discount amortization of $22,000 and $156,000, respectively. For the six months ended June 30, 2018 and 2017, the Company
recorded discount amortization of $53,000 and $308,000, respectively. The balance of unamortized discount was $132,000 as of June
30, 2018 and $797,000 as of December 31, 2017.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 – Financing Agreements
January 2015 Financing Agreement
On January 28, 2015, in connection with the closing of the
Reverse Merger, Propel, Kitara and Propel Media as “Borrowers” and certain of their subsidiaries as “Guarantors”
entered into a financing agreement (“Financing Agreement”) with certain financial institutions as “Lenders.”
The Financing Agreement provided the Borrowers with (a) a term
loan in the aggregate principal amount of $81,000,000 (the “Term Loan”) and (b) a revolving credit facility in an
aggregate principal amount not to exceed $15,000,000 at any time outstanding (the “Revolving Loan” and, together with
the Term Loan, the “Loans”). Pursuant to their terms, the Loans were originally scheduled to mature on January 28,
2019 (“Final Maturity Date”). As discussed below, the Loans were repaid and refinanced with new loans on May 30, 2018.
The Financing Agreement provided for certain fees to be paid,
including (i) a closing fee of $2,880,000 (“Closing Fee”) which was withheld from the proceeds of the Term Loan and
was accounted for as an original issue discount and was amortized to interest expense using the interest method over the term of
the Term Loan and (ii) a (“Deferred Fee”) of $12,500,000 which was due upon the fourth anniversary of the inception
of the Term Loan, the obligation of which the Company has been accreting using the effective interest method as a finance charge
over the term of the Loans. In addition, the Company incurred debt issuance costs of $916,000 in connection with the Loans which
has been accounted for as debt discount and was amortized using the effective interest method over the term of the Term Loan.
On May 9, 2018, the Company and the Lenders agreed to reduce
to $3,000,000 the Deferred Fee and on May 9, 2018, the Company paid to the Lenders $3,000,000 in full satisfaction of the Deferred
Fee obligation. The accreted obligation for the Deferred Fee was $10,438,000 as of May 9, 2018. Please see explanation and table
below showing the components of the gain on extinguishment. Also, on May 9, 2018, the Company made a voluntary principal prepayment
of the Term Loan in the amount of $2,000,000.
Accounting Analysis of the Reduction
of the Deferred Fee
The obligation for the Deferred Fee was considered a component
of the original obligation under the terms of the January 2015 Financing Agreement. As such, upon the Final Maturity Date, the
Company would be obligated to the remit to the Lenders the sum of the remaining outstanding principal on the Term Loan, along
with the full amount of Deferred Fee.
As of May 9, 2018, the Company evaluated the discounted cash
flows under the terms of the obligations for the Term Loan, both before and after the effect of the reduction in the Deferred Fee
in order to determine whether this change should be accounted for as a loan extinguishment (deemed repayment of the original loan
and entering into a new modified loan) or as a modification (for which the new terms would be accounted for prospectively). The
Company determined that the transaction was an extinguishment, since the difference between the discounted cash flows of approximately
$8,173,000 exceeded 10%. Accordingly, pursuant to the guidance for extinguishment accounting, the Company deemed the existing term
loan to have been fully extinguished and then to have entered into a new loan for the remaining contractual term.
For purposes of the analysis, the $2,000,000 decrease in principal
and the $3,000,000 payment of the Deferred Fee were reflected as a day-one cash outflows for the deemed new debt in the 10% test.
Upon recording the extinguishment, the unamortized Closing Fee
and debt issuance costs, as well as the accreted Deferred Fee were expensed.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 – Financing Agreements, continued
January 2015 Financing Agreement, continued
Debt extinguishment
The components of the gain on extinguishment of $6,861,000
are presented below:
|
|
Original
Terms
|
|
|
Amended
Terms
|
|
|
Gain
on Extinguishment
|
|
Remaining term loan payments
|
|
$
|
53,160,000
|
|
|
$
|
53,160,000
|
|
|
$
|
-
|
|
Deferred fee
|
|
|
10,438,000
|
|
|
|
3,000,000
|
|
|
|
7,438,000
|
|
Closing fee
|
|
|
(440,000
|
)
|
|
|
-
|
|
|
|
(440,000
|
)
|
Debt issuance costs
|
|
|
(137,000
|
)
|
|
|
-
|
|
|
|
(137,000
|
)
|
Total
|
|
$
|
63,021,000
|
|
|
$
|
56,160,000
|
|
|
$
|
6,861,000
|
|
The Company recorded amortization through the extinguishment
date of the closing fee as interest expense of $67,000 and $175,000, for the three months ended June 30, 2018 and 2017, and $228,000
and $352,000, for the six months ended June 30, 2018 and 2017, respectively. The Company recorded as interest expense through the
extinguishment date accretion of the Deferred Fee of $310,000 and $767,000 for the three months ended June 30, 2018 and 2017, and
$1,038,000 and $1,536,000, for the six months ended June 30, 2018 and 2017, respectively.
The Company recorded as interest expense amortization of the
debt issuance costs through the extinguishment date of $21,000 and $55,000 for the three months ended June 30, 2018 and 2017, and
$72,000 and $112,000 for the six months ended June 30, 2018 and 2017, respectively.
May 2018 MGG Term and Revolving Loans
On May 30, 2018, the Company entered into a new senior secured
credit facility (the “Facility”) with certain affiliates of MGG Investment Group, LP (“MGG”). The Facility
provides for a senior secured term loan in the aggregate principal amount of $50,000,000 (the “MGG Term Loan”) and
a revolving credit facility in an aggregate principal amount not to exceed $7,000,000 at any time outstanding (the “MGG Revolver”).
In connection with the closing of the Facility, the Company terminated all outstanding commitments and paid all outstanding loans
under that certain Financing Agreement dated as of January 28, 2015.
Upon the closing of the Facility, the MGG Term Loan, in the
aggregate principal amount of $50,000,000 was borrowed in full and $7,000,000 was also borrowed in full under the MGG Revolving
Loan. The proceeds of the Loans were used (i) to repay existing debt under the Existing Financing Agreement, (ii) to pay fees and
expenses related to the Facility and the transactions contemplated therein, (iii) to pay $5,000,000 to the Transferors (as defined
below) and (iv) for general working capital purposes.
The Facility matures five years from the closing date. The Company
may borrow, repay, and re-borrow the Revolver prior to maturity, subject to the terms, provisions, and limitations set forth in
the Facility.
The Company’s obligations under the Facility are secured
by first priority security interests granted to MGG on substantially all of the Company’s tangible and intangible assets.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 – Financing Agreement, continued
May 2018 MGG Term and Revolving Loan, continued
The Facility provides for certain fees to be paid, including (i) a closing fee of $1,000,000 (“MGG
Closing Fee”) which was withheld from the proceeds of the MGG Term Loan and was accounted for as an original issue discount
and is being amortized to interest expense using the effective interest method over the term of the Term Loan and (ii) a closing
fee of $140,000 which was withheld from the proceeds of the MGG Revolving Loan and was accounted for as deferred financing costs
and is presented within other assets on the condensed consolidated balance sheet. The closing fee for the MGG Revolving Loan is
being amortized to interest expense using the straight-line method over the term of the MGG Revolving Loan. In addition, the Company
incurred legal, accounting, and other fees, attributable to the (i) MGG Term Loan of $352,000 which were accounted for as debt
discount and are being amortized to interest expense using the effective interest method over the term of the Term Loan and (ii)
MGG Revolving Loan of approximately $49,000 which were accounted for as deferred financing costs and are presented within other
assets on the condensed consolidated balance sheet. These fees and expenses are being amortized to interest expense using the straight-line
method over the term of the MGG Revolving Loan.
The Company recorded amortization of the MGG closing Fee as
interest expense under the MGG Term Loan and MGG Revolving Loan of $24,000 for the three and six months ended June 30, 2018. The
balance of the MGG Closing Fee attributable to the MGG Term Loan and accounted for as original issue discount was $978,000 as of
June 30, 2018, and is reflected within the Term Loan obligations on the condensed consolidated balance sheet. The balance of the
MGG Closing Fee attributable to the MGG Revolving Loan and accounted for as deferred financing cost was $138,000 as of June 30,
2018.
The Company recorded as interest expense amortization of deferred
financing costs under the MGG Term Loan and MGG Revolving Loan of $9,000 for the three and six months ended June 30, 2018. The
balance of the deferred financing costs charged to debt discount and presented within Term Loan obligations and deferred financing
costs presented within other assets, were $344,000 and $48,000, respectively, within the condensed consolidated balance sheets
as of June 30, 2018.
The Facility and related loan documents contain customary representations
and warranties and affirmative and negative covenants, including covenants that restrict the Company’s ability to, among
other things, create certain liens, make certain types of borrowings, engage in certain mergers, acquisitions, consolidations,
or asset sales, make capital expenditures, enter into affiliate transactions, pay dividends or other distributions, and make certain
payments affecting subsidiaries. The covenants require the Company to maintain a Total Leverage Ratio as of each calendar quarter
end. Total Leverage Ratio is defined as the ratio of certain debt on such date to Adjusted EBITDA, as defined, for the trailing
12-month period.
Under this covenant, the Company is required to maintain a total
leverage ratio of no more than 2.25:1.00 as of June 30, 2018. The Company’s total leverage ratio as of such date was 1.57:1.00.
The total leverage ratio that the Company must maintain remains at 2.25:1.00 through March 31, 2019, decreasing to 2.00:1.00 as
of June 30, 2019 and remains at 2.00:1.00 for each quarter thereafter. The Facility also provides that the Company is subject to
annual mandatory prepayments apart from the scheduled quarterly principal payments based on the Company’s excess cash flow.
Commencing December 31, 2018, the Company shall prepay 75% of its excess cash flow during that fiscal year (and decreases to 50%
of excess cash flow when the leverage ratio is less than 1.25:1.00. The Facility provides for customary events of default, including,
among other things, if a change of control of the Company occurs. The maturity of the Facility may be accelerated upon the occurrence
of an event of default.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 – Financing Agreement, continued
May 2018 MGG Term and Revolving Loan, continued
The outstanding principal amount of the MGG Term Loan shall
be repayable in consecutive quarterly installments of $1,250,000 on the last day of each March June, September, and December commencing
on September 30, 2018. The remainder of the MGG Term Loan is due and payable on the maturity date, except in certain limited circumstances.
Subject to the terms of the Facility, the MGG Term Loan or any
portion thereof shall bear interest on the principal amount thereof from time to time outstanding, from the date of the Term Loan
until repaid, at a rate per annum equal to the London Interbank Offered Rate (“LIBOR”) rate (but not less than 1% or
more than 5%) for the interest period in effect for the Term Loan (or such portion thereof) plus 9.00%.
The following represents the Company’s term loan obligations:
|
|
As
of
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
2018
MGG Term Loan
|
|
|
2015
Lenders Term Loan (paid off May 2018)
|
|
Principal
|
|
$
|
50,000,000
|
|
|
$
|
58,382,000
|
|
Discounts
|
|
|
(1,322,000
|
)
|
|
|
(877,000
|
)
|
Accreted value of the Deferred Fee ($12,500,000)
|
|
|
-
|
|
|
|
9,401,000
|
|
Net
|
|
|
48,678,000
|
|
|
|
66,906,000
|
|
Less: Current portion
|
|
|
(4,664,000
|
)
|
|
|
(6,181,000
|
)
|
Long-term portion
|
|
$
|
44,014,000
|
|
|
$
|
60,725,000
|
|
For the years ended December 31,
|
|
Term
Loan
|
|
2018 (six months)
|
|
$
|
2,500,000
|
|
2019
|
|
|
5,000,000
|
|
2020
|
|
|
5,000,000
|
|
2021
|
|
|
5,000,000
|
|
Thereafter
|
|
|
32,500,000
|
|
Total, gross
|
|
|
50,000,000
|
|
Less: debt discount
|
|
|
(1,322,000
|
)
|
Total, net
|
|
|
48,678,000
|
|
Less: current portion
|
|
|
(4,664,000
|
)
|
Long-term debt
|
|
$
|
44,014,000
|
|
MGG Revolving Loan
The Borrowers may borrow, repay and reborrow the MGG Revolving
Loan prior to the Final Maturity Date, subject to the terms, provisions and limitations set forth in the Financing Agreement. The
outstanding principal amount of advances may not at any time exceed $7,000,000.
Subject to the terms of the Facility, each MGG Revolving Loan
shall bear interest on the principal amount thereof from time to time outstanding, from the date of such Loan until repaid, at
a rate per annum equal to the three month LIBOR rate for the interest period in effect for such Loan plus 9.00%. As of June 30,
2018, the balance of the revolving loan was $7,000,000.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 7 – Related-Party Transactions
The Company has outsourced technology development services
and other administrative services to a technology company in Eastern Europe (“Technology Vendor”). The Technology
Vendor is owned by an individual who is affiliated with a trust, which is a shareholder of the Company. The technology development
services and other administrative services provided to the Company by the Technology Vendor during the three months ended June
30, 2018 and 2017, totaled $1,253,000 and $886,000, respectively, and $2,644,000 and $1,745,000 during the six months ended June
30, 2018 and 2017, respectively. These amounts were included in property and equipment and operating expenses, as applicable,
in the accompanying condensed consolidated balance sheets and condensed consolidated statements of operations. Certain of the
costs incurred for the technology development services described above were for the development of internal-use software, which
were capitalized and amortized over the estimated useful life. In addition, the Company had amounts due to this entity of $327,000
and $8,000 as of June 30, 2018 and December 31, 2017, respectively, which are reported within accrued expenses in the condensed
consolidated balance sheets.
During the three months ended June 30, 2018 and 2017, the Company
has incurred a total of $45,000 for each period, and during the six months ended June 30, 2018 and 2017 the Company has incurred
a total of $90,000 for each period, to a firm owned by the Company’s Interim Chief Financial Officer for financial advisory
and accounting services provided to the Company. There was no balance due to this firm as of June 30, 2018 and December 31, 2017.
Note 8 – Commitments and Contingencies
Employment Agreements
On June 21, 2018, the Company entered into new employment
agreements with each of Marv Tseu, the Company’s Chief Executive Officer, and David Shapiro, the Company’s Chief
Operating Officer, and, on June 22, 2018, the Company entered into an employment agreement with Daniela Nabors, the
Company’s Chief Revenue Officer (each an “Executive” and together, the “Executives” and as to
all or each Executive, the “Employment Agreement”). The Employment Agreements are effective as of April 1,
2018.
Each of the Employment Agreements is for a term of three years. The Employment Agreements provide for
a base salary and an annual performance bonus, with annual target amounts determined pursuant to the Cash Bonus Plan (see Note
12) as determined by the Company’s board of directors (the “Board”). The Executives also are eligible to receive
long-term incentive awards from the Company, as well as salary and bonus compensation, and continued health care coverage, upon
termination, under certain circumstances. With respect to these agreements, at June 30, 2018, aggregated annual base salaries would
be $1,600,000.
Each of the Employment Agreements restricts the Executive from
disclosing confidential information concerning the business of the Company.
Operating leases
Rent expense totaled $130,000 and $106,000 during
the three months ended June 30, 2018 and 2017, respectively, and $261,000 and $212,000 for the six months ended June 30, 2018 and
2017, respectively. The following is a schedule of approximate future minimum rental payments required under the Company’s
current and expiring lease agreement and its new lease agreement (the reduced amount in 2019 is due to the effect of the nine-month
deferral for the start of rent payments under the November 2017 lease):
Years Ending December 31,
|
|
Amount
|
|
2018 (six months)
|
|
$
|
162,000
|
|
2019
|
|
|
268,000
|
|
2020
|
|
|
651,000
|
|
2021
|
|
|
670,000
|
|
Thereafter
|
|
|
3,665,000
|
|
|
|
$
|
5,416,000
|
|
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 8 – Commitments and Contingencies, continued
Litigation
From time to time, the Company may be involved in
litigation relating to claims arising out of our operations in the normal course of business. Other than as set forth below, at
June 30, 2018, there were no material pending legal proceedings to which the Company was a party or to which any of its property
was subject that were expected, individually or in the aggregate, to have a material adverse effect on us.
In December 2013, an action entitled Intrepid Investments,
LLC (“Intrepid”) v. Selling Source, LLC (“Selling Source”), et al., Index No. 65429/2013 was filed in the
Supreme Court of the State of New York, County of New York. This is an action commenced by Intrepid against Selling Source and
a number of other defendants, including Kitara Media LLC (“Kitara Media”), one of the Company’s subsidiaries,
to collect on a Junior Secured Promissory Note signed by Selling Source in the original principal sum of $28,700,000 (the “Note”).
Kitara Media was a subsidiary of Selling Source at the time the Note was issued. Kitara Media is not a signatory to the Note, but
like all of the subsidiaries of Selling Source at such time, on August 31, 2010 Kitara Media pledged all of its assets as collateral
for all of the indebtedness of Selling Source, including the Note, which is the most junior obligation in Selling Source’s capital
structure. In connection with the merger of Kitara Media into a subsidiary of Kitara, with Kitara Media surviving as a wholly owned
subsidiary of Kitara, the senior lenders of Selling Source exercised their authority to release all liens on the assets of Kitara
Media, including the liens associated with the Note.
In the action, Intrepid seeks to foreclose on the
security interest. Both Selling Source’s and Kitara Media’s obligations to Intrepid under the Note and Security Agreement
were subordinate to obligations Selling Source had to two groups of prior lenders (“Senior Lenders”). The right of
Intrepid to compel payments under the Note and/or foreclose the lien created by the Security Agreement was subject to an Intercreditor
Agreement by and between the Senior Lenders and Intrepid. Under the terms of the Intercreditor Agreement, Intrepid could not take
steps to compel Selling Source to make payment on the Note or foreclose the Security Agreement so long as the obligations to the
Senior Lenders remained outstanding. In addition, under the terms of the Intercreditor Agreement, the Senior Lenders had the right
to have the lien released on any of the collateral pledged as security under the Security Agreement. In the New York action, Intrepid
has challenged the Senior Lenders’ authority to release the lien and also challenged the enforceability of the Intercreditor
Agreement generally. The Court has not yet ruled on the merits of that challenge, but discovery on this lawsuit has been completed
and, Intrepid and the defendants are expected to complete briefing on cross-motions for summary judgment August 13, 2018. In addition,
Selling Source’s obligations to the Senior Lenders remains outstanding.
The second matter is Intrepid Investments, LLC v.
Selling Source, LLC et al., Index No. 654309/2013, which was filed in the Supreme Court of the State of New York, County of New
York. This matter was originally limited to claims asserted by Intrepid against Selling Source regarding an earn-out calculation
entered into between it and Selling Source, and confirmed by an arbitrator earlier in 2017. In August, 2014, Intrepid amended its
complaint to include various breach of contractor claims against a variety of those defendants, including Kitara. The new defendants,
including Kitara, answered the amended complaint on November 7, 2014, denying liability for all claims. On February 19, 2015, the
Court entered an order granting Selling Source’s motion to affirm the arbitration results. On March 3, 2015, Selling Source
filed a motion for partial summary judgment seeking dismissal of eleven of Intrepid’s remaining claims, and, in September
2015, the New York Supreme Court granted this motion for summary judgment. The claims asserted against Kitara were not among those
addressed in Selling Source’s motion. For the claims remaining, the parties have exchanged pleadings and Selling Source has
provided documents and written interrogatory responses to Intrepid.
Based on these facts, Propel believes Intrepid’s
claims are without merit and intends to defend them vigorously. In any event, Selling Source has acknowledged an obligation to
indemnify and defend Kitara Media from any liability to Intrepid arising out of the Note and Security Agreement. Selling Source
owns 22.5 million shares of the common stock of Propel and our Chairman of the board of directors is also a director of Selling
Source.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 9 - Defined Contributions Plans
The Company maintains a defined contribution plan under Section
401(k) of the Internal Revenue Code (the “Plan”). Participating employees may defer a percentage of their eligible
pre-tax earnings up to the Internal Revenue Service’s annual contribution limit. All full-time employees of the Company are
eligible to participate in the Plan.
The Plan does not permit investment of participant contributions
in the Company’s common stock. The Company’s matching contributions to the Plan are discretionary. The Company recorded
contribution expense of $65,000 and $76,000 during the three months ended June 30, 2018 and 2017, respectively, and $146,000 and
$149,000 during the six months ended June 30, 2018 and 2017, respectively, which is recorded in salaries, commissions, benefits
and related expenses on the condensed consolidated statements of operations.
Note 10 – Income Taxes
The Company’s income tax provision for interim periods
is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account
in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate and, if the Company’s
estimated tax rate changes, it makes a cumulative adjustment in that period.
The effective income tax rate for the six months ended June
30, 2018 and 2017 was 15.7% and 36.9%, respectively, resulting in $2,921,000 and $3,364,000 income tax expense, respectively. The
effective income tax rate for the six months ended June 30, 2018 is lower than the effective income tax rate for the six months
ended June 30, 2017. This lower 2018 effective income tax rate was attributable principally to the U.S Tax Cuts and Jobs Act (the
“Tax Act”), which was enacted on December 22, 2017, among other things, reduced the US statutory corporate income tax
rate to 21% effective January 1, 2018. In addition, as discussed further in Note 5, the Company recognized an additional deferred
tax asset from the step up in basis recognized as a result of making further distributions to the Transferors, resulting in the
recognition of a tax benefit of $1,462,000 being recorded for the three and six months ended June 30, 2018.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB
118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information
available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax
effects of the Tax Act. As we collect and prepare necessary data and interpret the Tax Act and any additional guidance issued by
the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those
adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments
are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
Note 11 - Stock-Based Compensation
Equity Incentive Plans
2014 Long-Term Incentive Equity Plan
On October 9, 2014, Propel and its then sole stockholder approved
the 2014 Long-Term Incentive Plan (“2014 Plan”), pursuant to which a total of nine percent of the fully-diluted shares
of the Company’s common stock outstanding as of the closing of the Transactions (or 26,172,326 shares) became available for
awards under the plan upon such closing. Kitara’s stockholders approved the plan as of January 26, 2015.
2012 and 2013 Long-Term Incentive Equity
Plans
On May 14, 2012 and December 3, 2013, Kitara adopted the 2012
Long-Term Incentive Equity Plan (“2012 Plan”) and the 2013 Long-Term Incentive Equity Plan (“2013 Plan”),
respectively. The 2012 Plan and 2013 Plan provide for the grant of stock options, stock appreciation rights, restricted stock and
other stock-based awards to, among others, the officers, directors, employees and consultants of the Company.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 11 - Stock-Based Compensation, continued
Equity Incentive Plans, continued
2012 and 2013 Long-Term Incentive Equity
Plans, continued
Effective January 28, 2015, Propel assumed the 2012 Plan and
2013 Plan, and all outstanding stock options thereunder. Propel amended the plans so that no further awards may be issued under
such plans after the closing of the Reverse Merger.
Stock Option Award Activity
The following table is a summary of stock option awards:
|
|
Number of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
|
Weighted Average Remaining Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
20,490,000
|
|
|
$
|
0.49
|
|
|
$
|
0.27
|
|
|
|
5.69
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited, expired or canceled
|
|
|
2,828,125
|
|
|
|
0.21
|
|
|
|
0.14
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
17,661,875
|
|
|
$
|
0.53
|
|
|
$
|
0.29
|
|
|
|
5.94
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
14,734,382
|
|
|
$
|
0.52
|
|
|
$
|
0.28
|
|
|
|
5.76
|
|
|
$
|
-
|
|
The aggregate intrinsic value is calculated as the difference
between the weighted average exercise price of the underlying outstanding stock options and the fair value of the Company’s
common stock, based upon the closing price of the Company’s common stock as reported on the OTC Pink Market on June 30, 2018.
The Black-Scholes method option pricing model was used to estimate the fair value of the option awards using the following range
of assumptions. The simplified method was used to determine the expected life of grants to employees, as these granted options
were determined to be “plain-vanilla” options. The full term was used for the expected life for options granted to
consultants.
The fair value of stock options is amortized
on a straight-line basis over the requisite service periods of the respective awards. Stock based compensation expense related
to stock options was $241,000 and $227,000 for the three months ended June 30, 2018 and 2017, respectively and $488,000 and $456,000
for the six months ended June 30, 2018 and 2017, respectively. The expense was reflected in selling, general and administrative
expenses on the accompanying condensed consolidated statements of operations. As of June 30, 2018, the unamortized value of options
was $655,000. As of June 30, 2018, the unamortized portion will be expensed through November 2019 and the weighted average remaining
amortization period was 0.6 years.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 12 – Executive Bonus Plan
On June 21, 2018, the Company also adopted an Incentive Cash
Bonus Plan (the “Cash Bonus Plan”), pursuant to which the Company may grant performance cash bonuses to its employees.
Each participant in the Cash Bonus Plan will have an annual target bonus as established by the Board. The bonuses will be paid
on a quarterly basis. Effective on April 1, 2018, the Cash Bonus Plan replaced the Propel Media Executive Bonus Plan (the “Executive
Bonus Plan”). Bonus expense for earned bonuses under the Cash Bonus Plan and the Executive Bonus Plan amounted to $393,000
and $482,000 for the three months ended June 30, 2018 and 2017, respectively, and $879,000 and $772,000 for the six months ended
June 30, 2018 and 2017, respectively. The bonuses are included in salaries, commissions, benefits and related expenses within the
Company’s condensed consolidated statements of operations. At June 30, 2018 and December 31, 2017, the accrued executive
bonuses were $403,000 and $511,000, respectively, and the amounts were included in accrued expenses within the condensed consolidated
balance sheets.
Note
13 – Subsequent Events
Amendment
to Exchange Agreement
On
August 13, 2018, the Company entered into Amendment No. 6 to the Exchange Agreement. Pursuant to the amendment, the Transferors
have agreed to waiv
e their right to receive shares of common stock in lieu of the cash payment owed to them for the remaining
Deferred Obligation for the ten days following December 31, 2018. Furthermore, for any such election for payment of the Deferred
Obligation to be received in shares after such date, if the Company’s common stock is no longer registered and the Company
is not reporting with the SEC, the Transferors and the Company will mutually select a valuation consultant who will determine
the fair value of the shares of common stock for such exchange.
Announcement of Intention to Deregister
and Suspend Reporting Obligations to the SEC
On August 13, 2018, the Company announced
its intention to deregister its common stock and suspend its reporting obligations with the SEC. The required documentation to
deregister Propel Media’s common stock and suspend its reporting obligations is expected to be filed with the SEC on or
about September 4, 2018.