| 4. ACQUISITION OF 42WEST | On March 30, 2017,
the Company entered into a Membership Interest Purchase Agreement (the Purchase
Agreement), by and among the Company and the Sellers. Pursuant to the Purchase Agreement, on March 30, 2017, the Company
acquired from the Sellers 100% of the membership interests of 42West and 42West became a wholly-owned subsidiary of the Company.
42West is an entertainment public relations agency offering talent publicity, strategic communications and entertainment content
marketing. The consideration
paid by the Company in connection with the 42West Acquisition was $18,666,666 (less, the amount of 42Wests transaction expenses
paid by the Company and payments by the Company of certain 42West indebtedness) in shares of Common Stock, determined based on
the Companys 30-trading-day average stock price prior to the closing date of $4.61 per share, plus the potential to earn
up to an additional $9.3 million (less payment of certain taxes) in shares of Common Stock, determined based on $4.61 per share.
As a result, the Company (i) issued 1,230,280 shares of Common Stock to the Sellers on the closing date
(the Initial Consideration), (ii) (a) issued 344,550 shares of Common Stock to certain current 42West employees and
a former 42West employee on April 13, 2017, to settle change in control provisions in their pre-existing employment and termination
agreements (the Change in Control Provisions), (b) may issue up to 118,655 shares of Common Stock as employee stock
bonuses (the Employee Bonus Shares) upon the effectiveness of a registration statement on Form S-8 promulgated under
the Securities Act of 1933, as amended (the Securities Act), registering the Employee Bonus Shares, and (c) will
issue approximately 1,535,125 shares of Common Stock to the Sellers, and 426,696 shares of Common Stock to certain current and
former 42West employees to settle the Change in Control Provisions, on January 2, 2018 (the "Post-Closing Consideration"),
and (iii) potentially may issue up to approximately 1,712,828 shares of Common Stock to the Sellers, and 250,298 shares to certain
current and former 42West employees in accordance with the Change in Control Provisions, based on the achievement of specified
42West financial performance targets over a three-year period beginning January 1, 2017 and ending December 31, 2019 as set forth
in the Purchase Agreement (the "Earn-Out Consideration", and together with the Initial Consideration and the Post-Closing
Consideration, (the "Stock Consideration"). The Purchase Agreement allows for a working capital adjustment to be calculated
within 30 days of the closing of the transaction. On April 13, 2017, the Company agreed to issue 100,000 shares of Common Stock
as a provisional working capital adjustment until certain information is agreed to between the Sellers and the Company. None of
the Common Stock included in the Stock Consideration have been registered under the Securities Act. The Company also
agreed to pay the Sellers transaction costs and assumed certain tax liabilities incurred or to be incurred by the Sellers
based on the proceeds they receive. The issuance of 118,655
Employee Bonus Shares and the potential issuance of 235,575 shares as part of the Earn-Out Consideration to current employees (the
Employee Earn-Out Shares) are conditioned on the employees remaining employed by the Company up to the date the shares
become issuable. If an employee does not remain employed for the requisite service period, the shares they forfeit will be allocated
among and issued to the Sellers. The Employee Bonus Shares and Employee Earnout Shares are not considered part of the accounting
consideration transferred to acquire 42West. The Employee Bonus Shares will be accounted for under ASC 718, CompensationStock
Compensation The Purchase Agreement
contains customary representations, warranties, covenants and indemnifications. Also in connection
with the 42West Acquisition, on March 30, 2017, the Company entered into put agreements (the Put Agreements) with
each of the Sellers. Pursuant to the terms and subject to the conditions set forth in the Put Agreements, the Company has granted
the Sellers the right, but not obligation, to cause the Company to purchase up to an aggregate of 2,374,187 of their shares of
Common Stock received as Stock Consideration for a purchase price equal to $4.61 per share during certain specified exercise periods
set forth in the Put Agreements up until December 2020 (the Put Rights). During the three months ended June 30, 2017,
the Sellers exercised their Put Rights, in accordance with the Put Agreements, and caused the Company to purchase 151,837 shares
of Common Stock for an aggregate amount of $700,000. Each of Leslee Dart,
Amanda Lundberg and Allan Mayer (the Principal Sellers) has entered into employment agreements with the Company to
continue as employees of the Company for a three-year term after the closing of the 42West Acquisition. Each of the employment
agreements of the Principal Sellers contains lock-up provisions pursuant to which each Principal Seller has agreed not to transfer
any shares of Common Stock in the first year, except pursuant to an effective registration statement on Form S-1 or Form S-3 promulgated
under the Securities Act (an Effective Registration Statement) or upon exercise of the Put Rights pursuant to the
Put Agreement, and, except pursuant to an Effective Registration Statement, no more than 1/3 of the Initial Consideration and Post-Closing
Consideration received by such Principal Seller in the second year and no more than an additional 1/3 of the Initial Consideration
and Post-Closing Consideration received by such Principal Seller in the third year, following the closing date. The non-executive
employees of 42West are expected to be retained as well. In addition, in connection with the 42West
Acquisition, on March 30, 2017, the Company entered into a registration rights agreement with the Sellers (the Registration
Rights Agreement) pursuant to which the Sellers are entitled to rights with respect to the registration under the Securities
Act. All fees, costs and expenses of underwritten registrations under the Registration Rights Agreement will be borne by the Company.
At any time after the one-year anniversary of the Registration Rights Agreement, the Company will be required, upon the request
of such Sellers holding at least a majority of the Stock Consideration received by the Sellers, to file a registration statement
on Form S-1 and use its reasonable efforts to affect a registration covering up to 25% of the Stock Consideration received by the
Sellers. In addition, if the Company is eligible to file a registration statement on Form S-3, upon the request of such Sellers
holding at least a majority of the Stock Consideration received by the Sellers, the Company will be required to use its reasonable
efforts to affect a registration of such shares on Form S-3 covering up to an additional 25% of the Stock Consideration received
by the Sellers. The Company is required to effect only one registration on Form S-1 and one registration statement on Form S-3,
if eligible. The right to have the Stock Consideration received by the Sellers registered on Form S-1 or Form S-3 is subject to
other specified conditions and limitations. The provisional acquisition-date
fair value of the consideration transferred totaled $24,099,349, which consisted of the following:
Common Stock issued at closing and in April 2017 (1,574,830 shares) $ 6,693,028
Common Stock issuable on January 2, 2018 (1,961,821 shares) 8,337,739
Contingent Consideration 3,627,000
Put Rights 3,800,000
Sellers transaction costs paid at closing 260,000
Sellers tax liabilities assumed 786,000
Working capital adjustment 595,582
$ 24,099,349 The fair values of
the 1,574,830 shares of Common Stock issued at closing and in April 2017 and the 1,961,821 shares of Common Stock to be issued
on January 2, 2018 were determined based on the closing market price of the Companys Common Stock on the acquisition date
of $4.25 per share. The Earn-Out
Consideration arrangement requires the Company to pay up to
1,727,551 shares of Common Stock to the Sellers and one former employee of 42West (the Contingent Consideration), on
achievement of adjusted EBITDA targets based on the operations of 42West over the three-year period beginning January 1,
2017. The provisional
fair value of the Put Rights at the acquisition date was estimated using Black-Scholes Option Pricing Model, which
incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined
in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect managements own
assumptions about the assumptions that market participants would use in valuing the Put Rights as of the acquisition date.
The key assumptions in applying the Black Scholes Option Pricing Model are as follows: a discount rate range of 0.12% to
1.70% based on U.S Treasury obligations with a term similar to the exercise period for each of the rights to put shares to
the Company as set forth in the Put Option agreements, and an equity volatility estimate of 75% based on the stock price
volatility of the Company and certain publicly traded companies operating in the advertising services industry. The Sellers
tax liabilities assumed relates to the New York City Unincorporated Business Tax the Sellers will incur on the Initial Consideration,
Post-Closing Consideration and potential Earn-Out Consideration received or to be received by them in connection with the 42West
Acquisition. The Companys obligation to pay the Sellers tax liabilities is a mutually agreed upon amount of $786,000,
which was based on the Sellers estimates at the closing date of the 42West Acquisition of the amount of taxes to be owed,
based on a 4% tax rate and the Sellers estimated taxable income. The estimated fair value of the Sellers tax liabilities
assumed may change during the measurement period, pending receipt by the Company from the Sellers of an updated tax liability accrual,
and ultimately the Sellers preparation of the related income tax returns related to the Initial Consideration. Therefore,
the estimated fair value of the Sellers tax liabilities assumed is provisional. The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, March 30, 2017. Amounts in the table are provisional estimates that may change, as described below.
Cash $ 273,625
Accounts receivable 1,706,644
Property, equipment and leasehold improvements 1,087,962
Other assets 265,563
Indemnification asset 300,000
Intangible assets 9,110,000
Total identifiable assets acquired 12,743,794
Accounts payable and accrued expenses (731,475 )
Line of credit and note payable (1,025,000 )
Settlement liability (300,000 )
Other liabilities (902,889 )
Tax liabilities (22,000 )
Total liabilities assumed (2,981,364 )
Net identifiable assets acquired 9,762,430
Goodwill 14,336,919
Net assets acquired $ 24,099,349 Of
the provisional fair value of the $9,110,000 of acquired identifiable intangible assets, $5,980,000 was assigned to customer
relationships (10-year useful life), $2,760,000 was assigned to the trade name (10-year useful life), and $370,000 was
assigned to non-competition agreements (3-year useful life), that were recognized at fair value on the acquisition date. The estimated fair
value of accounts receivable acquired is $1,706,644, with the gross contractual amount being $1,941,644. The Company expects $235,000
to be uncollectible. The estimated fair value of accounts receivable is provisional, pending the Company obtaining additional evidence
of the actual amounts which will be collected. The fair values of
property and equipment and leasehold improvements of $1,087,962, and other assets of $265,563, are based on 42Wests carrying
values prior to the acquisition, which approximate their fair values. The estimated fair
value of the settlement liability of $300,000 relates to 42Wests contingent liability to the Motion Picture Industry Pension
Individual Account and Health Plans (collectively the Plans), two multiemployer pension funds and one multiemployer
welfare fund, respectively, that are governed by the Employee Retirement Income Security Act of 1974, as amended (the Guild
Dispute). The Plans intend to conduct an audit of 42Wests books and records for the period June 7, 2011 through August
20, 2016 in connection with the alleged contribution obligations of 42West to the Plans. Based on a recent audit for periods prior
to June 7, 2011, the Company estimates that the probable amount the Plan may seek to collect from 42West is approximately $300,000,
as of the acquisition date, in pension plan contributions, health and welfare plan contributions and union dues once the audit
is completed. Accordingly, the Company has recorded a $300,000 settlement accrual liability for the probable amount of the liability
it may incur due to the Motion Picture Industry Pension audit of the period from March 25, 2012 through August 20, 2016 (see Note
21). The Company has not recorded a liability as of the acquisition date for any exposure for additional settlement obligations
related to the period from August 20, 2016 through March 30, 2017, as the Company has not reached a conclusion that a loss for
that period is probable. Therefore, the ultimate amount related to the settlement liability as of March 30, 2017 may vary from
the amount recorded, and therefore the estimated fair value of the settlement liability is provisional. In accordance with
the terms of the Purchase Agreement, the Sellers indemnified the Company with respect to the Guild Dispute for losses incurred
related the Companys alleged contribution obligations to the Plans for the period between March 25, 2012 through March 26,
2016. The Company has recorded an indemnification asset related to the recorded settlement liability, measured at fair value on
the same basis as the settlement liability. The indemnification asset represents the estimated fair value of the indemnification
payment expected to be received from Sellers, related to the indemnification by the Sellers of the estimated settlement liability.
As the estimated fair value of the settlement liability is provisional, so too is the estimated fair value of the indemnification
asset. The deferred tax
liability related to 42West is a provisional estimate pending the completion of an analysis of deferred income taxes. Based on the provisional
fair values related to certain assets acquired and liabilities assumed discussed above, the $14,336,919 of goodwill is also provisional.
The goodwill was assigned to the Entertainment Publicity reporting unit, which at the same level as the Entertainment Publicity
segment (see Note 20). The goodwill recognized is attributable primarily to expectations of continued successful efforts to obtain
new customers, buyer specific synergies and the assembled workforce of 42West. The goodwill is expected to be deductible for income
tax purposes. The Company expensed
$207,564 and $745,272 of acquisition related costs in the three months and six months ended June 30, 2017, respectively. These
costs are included in the condensed consolidated statements of operations in the line item entitled acquisition costs. The revenue and net
income of 42West included in the consolidated amounts reported in the condensed consolidated statements of operations for the three
and six months ended June 30, 2017 are as follows:
For the three months ended June 30, 2017 For the six months ended June 30, 2017
Revenue $ 5,137,556 $ 5,137,556
Net income 244,764 244,764 The three- and six-month
amounts above are the same, as the amounts of 42Wests revenue and earnings for the one day between the acquisition date
(March 30, 2017) and March 31, 2017 were de minimis. The following represents
the pro forma consolidated operations for the three and six months ended June 30, 2017 and June 30, 2016, respectively, as if 42West
had been acquired on January 1, 2016 and its results had been included in the consolidated results of the Company beginning on
that date:
Pro Forma Consolidated Statements of Operations
Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
Revenues $ 7,831,652 $ 4,550,913 $ 13,054,074 $ 9,476,356
Net income (loss) (1,381,361 ) (7,794,338 ) 4,562,242 (10,582,396 )
Earnings (Loss) per share:
Weighted average shares - Basic 18,643,324 8,823,665 17,322,369 7,553,754
Weighted average shares – Fully diluted 18,643,324 8,823,665 19,821,375 7,553,754
Loss per share - Basic $ (0.07 ) $ (0.88 ) $ 0.26 $ (2.09 )
Loss per share – Fully diluted $ (0.07 ) $ (0.88 ) $ (0.09 ) $ (2.09 ) The pro forma amounts
have been calculated after applying the Companys accounting policies to the financial statements of 42West and adjusting
the combined results of the Company and 42West to reflect (a) the amortization that would have been charged assuming the intangible
assets had been recorded on January 1, 2006, (b) the reversal of 42Wests income taxes as if 42West had filed a consolidated
income tax return with the Company beginning January 1, 2016, and (c) to exclude $207,564 and $795,272 of acquisition related costs
that were expensed by the Company during the three months ended June 30, 2017 and by the Company and 42West on a combined basis
during the six months ended June 30, 2017, respectively. The following table
summarizes the original and revised estimated fair values of the assets acquired and liabilities assumed at the acquisition date
of March 30, 2017 and the related measurement period adjustments to the fair values recorded during the three months ended June
30, 2017:
March 31, 2017 (As initially
reported) Measurement Period Adjustments June 30, 2017 (As adjusted)
Cash $ 273,625 $ - $ 273,625
Accounts receivable 1,706,644 - 1,706,644
Property, equipment and leasehold improvements 1,087,962 - 1,087,962
Other assets 265,563 - 265,563
Indemnification asset - 300,000 300,000
Intangible assets 9,110,000 - 9,110,000
Total identifiable assets acquired 12,443,794 300,000 12,743,794
Accounts payable and accrued expenses (731,475 ) - (731,475 )
Line of credit and note payable (1,025,000 ) - (1,025,000 )
Settlement liability (300,000 ) - (300,000 )
Other liabilities (902,889 ) - (902,889 )
Tax liabilities (22,000 ) - (22,000 )
Total liabilities assumed (2,981,364 ) - (2,981,364 )
Net identifiable assets acquired 9,462,430 - 9,762,430
Goodwill 13,996,337 340,582 14,336,919
Net assets acquired $ 23,458,767 $ 640,532 $ 24,099,349 The above estimated
fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition date
to estimate the fair value of assets acquired and liabilities assumed. As of March 31, 2017, the Company recorded the identifiable
net assets acquired of $9,462,430 as shown in the table above in its condensed consolidated balance sheet. During the three months
ended June 30,2017, the Companys measurement period adjustments of $640,532 were made and, accordingly, the Company recognized
these adjustments in its June 30, 2017 condensed consolidated balance sheet to reflect the adjusted identifiable net assets acquired
of $9,762,430 as shown in the table above. The changes to the provisional amounts did not result in changes to the Companys
previously reported condensed consolidated income statement for the three months ended March 31, 2017. The following is
a reconciliation of the initially reported fair value to the adjusted fair value of goodwill:
Goodwill originally reported at March 31, 2017 $ 13,996,337
Changes to estimated fair values:
Contingent Consideration 86,000
Put Rights (200,000 )
Sellers tax liabilities assumed 159,000
Working capital adjustment 595,582
Indemnification asset (300,000 )
340,582
Adjusted goodwill $ 14,336,919 The provisional
estimated fair value of Contingent Consideration increased from the originally reported amount primarily due to changes in
the estimated risk-adjusted EBITDA figures expected to be achieved during the earn-out period, changes to the risk-free
discount rates and recalibration of the asset volatility estimate, which are inputs to the Monte Carlo simulation model used
to calculate the fair value. The provisional
estimated fair value of the Put Rights decreased from the originally reported amount primarily due to a decrease in the
annual asset volatility assumption. The provisional
estimated fair values of the working capital adjustment and indemnification asset were initially determined subsequent to the
issuance by the Company of its condensed consolidated financial statements for the three months ended March 31, 2017. |
