The accompanying notes
are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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 March 31, 2018, the Company’s cash on hand was $8,764,000
and the Company had a working capital deficit of $63,265,000. The working capital was in a deficit position as of March 31, 2018
because the full balance of the Term Loan of $66,095,000, which becomes due in January 2019, is being reflected as a current liability.
Please see Note 6 – Financing Agreement, for descriptions and definitions of the Lenders, the Term Loan, the Revolving Loan
and the Deferred Fee, as well as the terms of these financing arrangements. As of March 31, 2018, the balance of the Term Loan
consists of $56,632,000 representing the face amount of the loan, less $665,000 representing the unamortized balance of the closing
fee, plus $10,128,000 representing the accreted balance of the Deferred Fee (which has a face value of $12,500,000 when fully accreted).
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. Also, on May 9, 2018, the Company made a voluntary
principal prepayment of the Term Loan in the amount of $2,000,000. See discussion below regarding the Company’s plans to
refinance the remaining balance under the Term Loan.
The Company recorded net income of $3,972,000 for the three
months ended March 31, 2018. The net income for the three months ended March 31, 2018 reflected an income before income tax of
$5,229,000 and an income tax expense of $1,257,000. The Company has historically met its liquidity requirements through operations.
As of March 31, 2018, the borrowing base and outstanding balance
under the Revolving Loan were approximately $5,963,000 and $0, respectively, leaving $5,963,000 available to be drawn under the
arrangement.
Cash flows used in financing activities for the three months
ended March 31, 2018 consisted of a $1,750,000 principal repayment on the Company’s Term Loan.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 2 - Liquidity and Capital Resources, continued
Pursuant to the Financing Agreement (See Note 6), 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 March 31, 2018.
Management has evaluated relevant conditions and events with
respect to its liquidity requirements for the twelve month period after the Company’s March 31, 2018 financial statements
are expected to be filed. The Company’s Term Loan and Revolving Loan become due in January 2019. The Company will not have
sufficient liquidity to satisfy these repayment obligations when they become due without refinancing the Term Loan and/or raising
equity capital. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management
of the Company has established a plan, which has been approved by its Board of Directors, to refinance the Term Loan and Revolving
Loan. Management believes that its plans, when implemented, will result in a refinancing of these instruments. However, there are
risks that such refinancing may not be able to be consummated under terms and amounts acceptable to the Company, or at all.
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 which was paid on December 21, 2017 and, $500,000 payable upon the one
year anniversary of the DeepIntent Closing Date (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, 2018, 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 months ended March 31, 2018, accretion of this DeepIntent
Deferred Payment was $238,000, and is reflected within salaries, commissions, benefits and related expenses within the condensed
consolidated statements of income. As of March 31, 2018, $289,000 of accrued DeepIntent Deferred Payment obligation was included
in accrued expenses in the condensed consolidated balance sheets.
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 March 31, 2018, DeepIntent generated revenues of $298,000 and incurred an operating loss of $1,205,000.
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 months ended March 31, 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
March 31,
2017
|
|
|
|
|
|
Pro forma revenues
|
|
$
|
18,883,000
|
|
Pro forma net (loss) income
|
|
$
|
2,206,000
|
|
Pro forma net (loss) income per share
|
|
$
|
0.01
|
|
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 condensed 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 March 31, 2018 presentation.
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.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 - Summary of Significant Accounting Policies, continued
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 March 31, 2018 and December
31, 2017 was $362,000 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 March 31, 2018 and 2017 was $396,000 and $397,000, 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.
Intangible assets as of March 31, 2018 and December 31, 2017
were $1,135,000 and $1,201,000, respectively. Intangible assets at March 31, 2018 consisted of the DeepIntent intellectual property
of $1,320,000 net of accumulated amortization of $205,000 and the Propel Media trade name at a cost of $20,000. Amortization expense
was $66,000 and $0 for the three months ended March 31, 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 (nine months)
|
|
$
|
198,000
|
|
2019
|
|
|
264,000
|
|
2020
|
|
|
264,000
|
|
2021
|
|
|
264,000
|
|
2022
|
|
|
125,000
|
|
|
|
$
|
1,115,000
|
|
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 months ended March 31, 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.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 - Summary of Significant Accounting Policies, continued
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.
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 March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Americas
|
|
$
|
20,274,000
|
|
|
$
|
17,260,000
|
|
Europe
|
|
|
294,000
|
|
|
|
1,080,000
|
|
Middle East
|
|
|
344,000
|
|
|
|
280,000
|
|
Other
|
|
|
8,000
|
|
|
|
12,000
|
|
Total
|
|
$
|
20,920,000
|
|
|
$
|
18,632,000
|
|
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.
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 months ended March 31, 2018 and 2017:
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, continued
|
|
|
For the Three Months Ended March 31,
|
|
|
|
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%
|
|
|
|
|
|
|
Accounts receivable
|
|
|
None over 10%
|
|
11% 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
|
|
|
41% and 14% or 55% of cost of revenues in the aggregate
|
|
21%, 18% and 14% of cost of revenues, or 53% of cost of revenues in the aggregate
|
|
|
|
|
|
|
The Company’s largest vendors reported as a percentage of accounts payable
|
|
|
34% of accounts payable from one vendor
|
|
31% of accounts payable from one vendor
|
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 March 31, 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
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
months ended March 31, 2018, the Company excluded potential common shares resulting from the exercise of stock options (20,380,000
potential common shares) and of warrants (6,363,636 potential common shares) as their inclusion would be anti-dilutive. For the
three months ended March 31, 2017, the Company excluded potential common shares resulting from the exercise of stock options (23,330,000
potential common shares) and of warrants (6,363,636 potential common shares) as their inclusion would be anti-dilutive.
Subsequent events
The Company has evaluated events that occurred subsequent to
March 31, 2018 through the date these condensed consolidated financial statements were issued. Management has concluded that other
than as disclosed in Notes 2, 5 and 6, there were no subsequent events that required disclosure in these condensed consolidated
financial statements.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4 - Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements
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 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 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 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.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 5 - Reverse Merger and Obligations to Transferors
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 and January 26, 2016 by and among Kitara, Propel, Propel Media and the former members of Propel
Media (“Transferors”).
Pursuant to the Exchange Agreement, the Company incurred a deferred
payment obligation of (i) $10,000,000 to the Transferors (“Deferred Obligation”), which is payable in cash and/or stock
not later than, June 30, 2019 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 Company can pay the Deferred Obligation from
an equity financing or from available working capital. See discussion below regarding the agreement reached on May 9, 2018 between
the Company and the Transferors which reduced the amount of the Deferred Payment. The Company is required to use its reasonable
best efforts to complete equity financings that would raise sufficient net proceeds to pay the $10,000,000 Deferred Obligation
in cash to the Transferors on or before June 30, 2019 (the “Equity Financing Period”). In addition, 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 $10,000,000 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 $10,000,000 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 $10,000,000 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).
The following represents the obligations to Transferors under
the Exchange Agreement:
|
|
As of
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Amount due on or before June 30, 2019 (pursuant to amendment dated January 26, 2016)
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Amount due January 28, 2019 (see discussion below)
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Total, gross
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
Less: discount
|
|
|
(632,000
|
)
|
|
|
(797,000
|
)
|
Total, net
|
|
|
15,368,000
|
|
|
|
15,203,000
|
|
Less: current portion
|
|
|
(5,522,000
|
)
|
|
|
-
|
|
Long-term portion
|
|
$
|
9,846,000
|
|
|
$
|
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 March 31, 2018 and 2017,
the Company recorded discount amortization of $165,000 and $152,000, respectively. The unamortized discount was $632,000 as
of March 31, 2018 and $797,000 as of December 31, 2017.
On May 9, 2018, the Company and the Transferors reached an agreement
to reduce the Deferred Payment to Transferors obligation to $1,440,000 from $6,000,000. On May 9, 2018, the Company paid the $1,440,000
amount to the Transferors in full satisfaction of the Deferred Payment to Transferors obligation.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 - 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”). The Loans will mature on January 28, 2019 (“Final Maturity
Date”).
The Financing Agreement provided for certain fees to be paid,
including (i) a closing fee of $2,880,000 which was withheld from the proceeds of the Term Loan and was accounted for as an original
issue discount and is being amortized to interest expense using the interest method over the term of the Term Loan and (ii) a (“Deferred
Fee”) of $12,500,000 payable to the Lenders and due upon the fourth anniversary of the inception of the Term Loan. See Note
2 for a discussion of the May 9, 2018 reduction of the Deferred Fee.
The Company has been accreting the Deferred Fee of $12,500,000
as a finance charge over the full term of the Term Loan.
The Company recorded amortization of the closing fee as interest
expense of $160,000 and $177,000, for the three months ended March 31, 2018 and 2017, respectively. The balance of the closing
fee original issue discount was $508,000 and $668,000 as of March 31, 2018 and December 31, 2017, respectively, and is reflected
within the Term Loan obligations on the condensed consolidated balance sheets. The Company recorded as interest expense accretion
of the Deferred Fee of $727,000 and $769,000 for the three months ended March 31, 2018 and 2017, respectively. The balance of the
accreted Deferred Fee as of March 31, 2018 and December 31, 2017 was $10,128,000 and $9,401,000, respectively, and is reflected
within the Term Loan obligations on the condensed consolidated balance sheets.
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 is being amortized using the effective interest
method over the term of the Term Loan. The Company recorded as interest expense amortization of the debt issuance costs of $50,000
and $56,000 for the three months ended March 31, 2018 and 2017, respectively. The balance of the unamortized debt issuance costs
of $158,000 and $209,000, respectively, is reflected within the Term Loan obligations on the condensed consolidated balance sheets
as of March 31, 2018 and December 31, 2017, respectively.
The Financing Agreement and other loan documents contain customary
representations and warranties and affirmative and negative covenants, including covenants that restrict the Borrowers’ ability
to, among other things, create certain liens, make certain types of borrowings and engage in certain mergers, acquisitions, consolidations,
asset sales and affiliate transactions. The Company is also subject to a leverage ratio requirement as of the end of each calendar
quarter. The Financing Agreement provides for customary events of default, including, among other things, if a change of control
of Propel occurs. The Loans may be accelerated upon the occurrence of an event of default. As of March 31, 2018, the Company was
in compliance with the covenants and the leverage ratio requirement under the Financing Agreement.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 - Financing Agreement, continued
Term Loan
The outstanding principal amount of the Term Loan shall be repayable
in consecutive quarterly installments in equal amounts of $1,750,000 on the last day of each March, June, September and December.
The Company is subject to an annual excess cash flow sweep requirement pursuant to which on April 11, 2018 the Company remitted
$1,472,000 to the lenders. The remainder of the Term Loan is due and payable on the maturity date, except in certain limited circumstances.
Subject to the terms of the Financing Agreement, the 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 9.00% plus either (i) the London Interbank Offered Rate (“LIBOR”)
(but not less than 1% and not more than 3%) for the interest period in effect for the Term Loan (or such portion thereof), or (ii)
the bank’s reference rate. For each interest period, the Company may choose to pay interest under either the LIBOR or reference
rate method. During the three months ended March 31, 2018, interest on the Term Loan bore an effective interest rate per annum
of (10.60)%.
The following represents the obligation under the Term Loan:
|
|
As of
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Principal
|
|
$
|
56,632,000
|
|
|
$
|
58,382,000
|
|
Discounts
|
|
|
(665,000
|
)
|
|
|
(877,000
|
)
|
Accreted value of the Deferred Fee ($12,500,000) (See Note 2)
|
|
|
10,128,000
|
|
|
|
9,401,000
|
|
Net
|
|
|
66,095,000
|
|
|
|
66,906,000
|
|
Less: Current portion
|
|
|
(66,095,000
|
)
|
|
|
(6,181,000
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
60,725,000
|
|
The future minimum payments on the Company’s Term Loan
are as follows:
For the Years Ended December 31,
|
|
Term Loan
|
|
2018 (nine months)
|
|
$
|
5,250,000
|
|
2019
|
|
|
51,382,000
|
|
Total, gross
|
|
|
56,632,000
|
|
Less: debt discount
|
|
|
(665,000
|
)
|
Plus: accreted value through March 31, 2018 of the Deferred Fee ($12,500,000)
|
|
|
10,128,000
|
|
Total, net
|
|
|
66,095,000
|
|
Current portion of Long-term debt
|
|
$
|
66,095,000
|
|
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 - Financing Agreement, continued
Revolving Loan
As of March 31, 2018, the outstanding balance
of the Revolving Loan was $0, with $5,963,000 available for future borrowing.
Subject to the terms of the Financing Agreement, the Company
may have multiple revolving loans under the revolving loan arrangement. Each 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 6.00% plus
either (i) the LIBOR for the interest period in effect for such Loan (but LIBOR may not be less than 1%) (the total effective rate
per annum for LIBOR borrowings was 7.6% during the three months ended March 31, 2018), or (ii) the bank’s reference rate
(the effective annual reference rate was approximately 10.5% during the three months ended March 31, 2018). For each revolving
loan, the Company can choose to borrow either at the LIBOR or the reference rate.
As of March 31, 2018, the Company was in compliance with all
covenants under the Financing Agreement and other loan documents.
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 March
31, 2018 and 2017, totaled $1,391,000 and $859,000, 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 income.
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 $406,000 and $8,000 as of March 31, 2018 and December 31, 2017, respectively, which are reported within accrued expenses
in the condensed consolidated balance sheets.
During the three months ended March 31, 2018 and 2017 the Company
incurred $45,000 in 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 March 31, 2018 and December 31, 2017.
Note 8 - Commitments and Contingencies
Operating leases
Rent expense totaled $131,000 and $106,000 during the three
months ended March 31, 2018 and 2017, respectively.
The following is an annual 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 (nine months)
|
|
$
|
317,000
|
|
2019
|
|
|
268,000
|
|
2020
|
|
|
651,000
|
|
2021
|
|
|
670,000
|
|
Thereafter
|
|
|
3,665,000
|
|
|
|
$
|
5,571,000
|
|
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 March 31,
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 all the defendants intend to file
motions for summary judgement within the next few months. 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 $81,000 and $73,000 during the three months ended March 31, 2018 and 2017, respectively, which was recorded
in salaries, commissions, benefits and related expenses on the condensed consolidated statements of income.
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 three months ended March
31, 2018 and 2017 was 23.8% and 37.3%, respectively, resulting in $1,257,000 and $1,425,000 of income tax expense, respectively.
The effective income tax rate for the three months ended March 31, 2018 is lower than the effective income tax rate for the
three months ended March 31, 2017 primarily due the U.S Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on
December 22, 2017. Among other things, the Tax Act reduces the US statutory corporate income tax rate to 21% effective January
1, 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.
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.
Propel Media, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 11 - Stock-Based Compensation, continued
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 January 1, 2018
|
|
|
20,490,000
|
|
|
$
|
0.49
|
|
|
$
|
0.27
|
|
|
|
5.7
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, expired or canceled
|
|
|
110,000
|
|
|
|
0.55
|
|
|
|
0.33
|
|
|
|
-
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
20,380,000
|
|
|
$
|
0.49
|
|
|
$
|
0.27
|
|
|
|
5.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
16,429,068
|
|
|
$
|
0.47
|
|
|
$
|
0.26
|
|
|
|
5.0
|
|
|
$
|
-
|
|
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 March 31,
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
$247,000 and $229,000 for the three months ended March 31, 2018 and 2017, respectively, and was reflected in selling, general and
administrative expenses on the accompanying condensed consolidated statements of income. As of March 31, 2018, the unamortized
value of options was $925,000, including the effect of the mark-to-market adjustment for unvested awards granted to consultants.
As of March 31, 2018, the unamortized portion will be expensed through November 2019 and the weighted average remaining amortization
period was 0.7 years.
Note 12 - Executive Bonus Plan
Effective January 1, 2016, the Propel Media Executive Bonus
Plan (the “Executive Bonus Plan”) became effective for certain employees of the Company. The Executive Bonus Plan provides
for bonuses based on the performance of the Company. Bonus expense for earned bonuses under the Executive Bonus Plan amounted to
$485,000 and $290,000 for the three months ended March 31, 2018 and 2017, respectively. The bonuses are included in salaries, commissions,
benefits and related expenses within the Company’s condensed consolidated statements of income. At March 31, 2018 and December
31, 2017, the accrued executive bonuses were $485,000 and $511,000, respectively, and the amounts were included in accrued expenses
within the condensed consolidated balance sheets.