10-Q 1 a15-11939_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2015,

 

or

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 001-36119

 


 

SFX ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

90-0860047

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

902 Broadway, Fifteenth Floor
New York, NY 10010

(Address of principal executive offices, including zip code)

 

(646) 561-6400

(Registrant’s telephone number, including area code)

 


 

Indicate by check whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer o

 

Accelerated filer x

Non-accelerated Filer o (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

 

As of August 7, 2015, the registrant had outstanding 97,651,046 shares of common stock.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Balance Sheets (unaudited) as of June 30, 2015 and December 31, 2014

3

 

 

 

 

Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2015 and 2014

4

 

 

 

 

Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 2015 and 2014

5

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2015

6

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014

7

 

 

 

 

Notes to the Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

38

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3.

Defaults Upon Senior Securities

40

 

 

 

Item 4.

Mine Safety Disclosure

41

 

 

 

Item 5.

Other Information

41

 

 

 

Item 6.

Exhibits

41

 

 

 

 

Signatures

43

 

2



Table of Contents

 

SFX Entertainment, Inc.

 

Consolidated Balance Sheets

(in thousands except share data)

Unaudited

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

(See Note 2)

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

52,224

 

$

63,270

 

Restricted cash

 

13,107

 

849

 

Accounts receivable - net of allowance of $1,104 and $1,955, as of June 30, 2015 and December 31, 2014, respectively

 

19,825

 

12,859

 

Prepaid expenses

 

16,402

 

9,656

 

Due from related parties

 

2,872

 

1,635

 

Other current assets

 

12,606

 

10,486

 

Total current assets

 

117,036

 

98,755

 

Property, plant and equipment, net

 

24,312

 

16,268

 

Goodwill

 

252,950

 

265,794

 

Intangible assets, net

 

197,632

 

219,732

 

Equity investments in non-consolidated affiliates

 

75,595

 

89,262

 

Other assets

 

21,730

 

24,825

 

Total assets

 

$

689,255

 

$

714,636

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

68,933

 

$

57,678

 

Revolver and notes payable, current

 

24,404

 

404

 

Label and royalty payables

 

10,307

 

12,571

 

Deferred revenue

 

46,092

 

26,600

 

Due to related parties

 

4,613

 

3,694

 

Other current liabilities

 

34,827

 

28,704

 

Total current liabilities

 

189,176

 

129,651

 

Deferred tax liabilities

 

5,652

 

6,956

 

Notes payable, long-term, including $10,000 to Sillerman in 2014

 

295,190

 

295,320

 

Acquisition related contingencies

 

12,077

 

13,173

 

Mandatorily redeemable non-controlling interest

 

43

 

43

 

Other long-term liabilities

 

3,155

 

3,351

 

Total liabilities

 

505,293

 

448,494

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Redeemable common stock, $.001 par value, 2,905,846 shares outstanding at June 30, 2015 and December 31, 2014

 

27,247

 

27,247

 

Redeemable non-controlling interest

 

 

4,322

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value, 300,000,000 authorized, 94,717,848 and 89,694,985 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

94

 

89

 

Preferred stock, $0.001 par value, 100,000,000 authorized, 0 shares issued and outstanding at June 30, 2015 and December 31, 2014

 

 

 

Additional paid-in capital

 

550,736

 

515,542

 

Accumulated other comprehensive loss

 

(52,169

)

(28,650

)

Accumulated deficit

 

(342,778

)

(253,209

)

Total SFX stockholders’ equity

 

155,883

 

233,772

 

Non-controlling interest in subsidiaries

 

832

 

801

 

Total stockholders’ equity

 

156,715

 

234,573

 

Total liabilities and stockholders’ equity

 

$

689,255

 

$

714,636

 

 

See accompanying notes to the unaudited consolidated financial statements

 

3



Table of Contents

 

SFX Entertainment, Inc.

 

Consolidated Statements of Operations

(in thousands except per share data)

Unaudited

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

(See Note 2)

 

 

 

(See Note 2)

 

Revenue:

 

 

 

 

 

 

 

 

 

Service revenue

 

$

98,427

 

$

60,842

 

$

137,434

 

$

81,991

 

Sale of products

 

22,628

 

20,780

 

35,807

 

32,957

 

Total revenue

 

121,055

 

81,622

 

173,241

 

114,948

 

Direct costs:

 

 

 

 

 

 

 

 

 

Cost of services

 

85,951

 

48,529

 

111,331

 

63,590

 

Cost of products sold

 

13,117

 

13,004

 

21,898

 

20,767

 

Total direct costs

 

99,068

 

61,533

 

133,229

 

84,357

 

Gross profit

 

21,987

 

20,089

 

40,012

 

30,591

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

40,264

 

41,931

 

80,009

 

78,547

 

Depreciation

 

1,881

 

846

 

2,403

 

1,485

 

Amortization

 

7,727

 

7,513

 

15,289

 

14,315

 

Operating loss

 

(27,885

)

(30,201

)

(57,689

)

(63,756

)

Interest expense, net

 

(8,827

)

(5,688

)

(16,297

)

(12,287

)

Other (expense)/income, net

 

(5,566

)

10,684

 

(10,062

)

(7,864

)

Equity in loss of non-consolidated affiliates

 

(5,247

)

(1,463

)

(5,397

)

(998

)

Loss before income taxes

 

(47,525

)

(26,668

)

(89,445

)

(84,905

)

Provision for income tax

 

(329

)

(8,552

)

(37

)

(6,290

)

Net loss

 

(47,854

)

(35,220

)

(89,482

)

(91,195

)

Less: Net income attributable to non-controlling interest

 

177

 

47

 

87

 

112

 

Net loss attributable to SFX Entertainment, Inc.

 

$

(48,031

)

$

(35,267

)

$

(89,569

)

$

(91,307

)

 

 

 

 

 

 

 

 

 

 

Loss per share - basic & diluted

 

$

(0.52

)

$

(0.40

)

$

(0.98

)

$

(1.05

)

Weighted average shares outstanding - basic & diluted

 

91,712

 

87,626

 

91,428

 

87,190

 

 

See accompanying notes to the unaudited consolidated financial statements

 

4



Table of Contents

 

SFX Entertainment, Inc.

 

Consolidated Statements of Comprehensive Loss

(in thousands)

Unaudited

 

 

 

Three months ended June
30,

 

Six months ended June
30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

(See Note 2)

 

 

 

(See Note 2)

 

Net loss

 

$

(47,854

)

$

(35,220

)

$

(89,482

)

$

(91,195

)

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

5,869

 

854

 

(23,519

)

7,189

 

Comprehensive loss

 

(41,985

)

(34,366

)

(113,001

)

(84,006

)

Comprehensive income attributable to non-controlling interest, net of tax

 

177

 

47

 

87

 

112

 

Comprehensive loss attributable to common stockholders of SFX Entertainment, Inc., net of tax.

 

$

(42,162

)

$

(34,413

)

$

(113,088

)

$

(84,118

)

 

See accompanying notes to the unaudited consolidated financial statements

 

5



Table of Contents

 

SFX Entertainment, Inc.

 

Consolidated Statement of Changes in Stockholders’ Equity

(in thousands except share data)

Unaudited

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

other

 

Non-

 

Total

 

 

 

Common Stock

 

paid-in-

 

Accumulated

 

comprehensive

 

controlling

 

stockholders’

 

 

 

Shares

 

Amount

 

capital

 

deficit

 

loss

 

interest

 

equity

 

Balance at December 31, 2014 (See Note 2)

 

89,694,985

 

$

89

 

$

515,542

 

$

(253,209

)

$

(28,650

)

$

801

 

$

234,573

 

Net (loss)/income

 

 

 

 

(89,569

)

 

87

 

(89,482

)

Share-based payments

 

980,308

 

1

 

4,359

 

 

 

 

4,360

 

Non-cash stock-based compensation

 

700,000

 

 

15,839

 

 

 

 

15,839

 

Proceeds from sale of common stock

 

3,342,555

 

4

 

14,996

 

 

 

 

15,000

 

Distribution to non-controlling interest

 

 

 

 

 

 

(59

)

(59

)

Foreign currency translation adjustment

 

 

 

 

 

(23,519

)

3

 

(23,516

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

94,717,848

 

$

94

 

$

550,736

 

$

(342,778

)

$

(52,169

)

$

832

 

$

156,715

 

 

See accompanying notes to the unaudited consolidated financial statements

 

6



Table of Contents

 

SFX Entertainment, Inc.

 

Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

 

 

Six months ended June 30,

 

 

 

2015

 

2014

 

 

 

 

 

(See Note 2)

 

Cash flow from operating activities:

 

 

 

 

 

Net loss

 

$

(89,482

)

$

(91,195

)

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

2,403

 

1,485

 

Amortization

 

15,289

 

14,315

 

Stock-based compensation expense

 

15,839

 

19,712

 

Non-cash interest expense

 

1,894

 

3,221

 

Fair value remeasurement for contingent consideration

 

(739

)

(7,676

)

Provision for doubtful accounts

 

124

 

139

 

Provision for deferred income taxes

 

37

 

6,290

 

Loss on extinguishment of debt

 

 

16,240

 

Equity loss and dividends received in non-consolidated affiliates

 

5,397

 

998

 

Foreign currency transactions and other

 

8,392

 

(743

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Restricted cash

 

(2,258

)

 

Accounts receivable

 

(6,495

)

1,699

 

Due from related parties

 

(1,901

)

692

 

Prepaid expenses

 

(10,703

)

(10,266

)

Other current assets

 

(2,736

)

258

 

Other assets

 

1,175

 

(5,493

)

Accounts payable & accrued expenses

 

13,559

 

8,613

 

Label and royalty payables

 

(1,512

)

632

 

Deferred revenue

 

22,786

 

38,426

 

Due to related parties

 

1,210

 

(631

)

Other current liabilities

 

15,599

 

(5,558

)

Other liabilities

 

(283

)

130

 

Deferred tax liabilities

 

(279

)

(203

)

Net cash used in operating activities

 

(12,684

)

(8,915

)

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(11,414

)

(2,795

)

Purchases of software and other intangibles

 

(2,139

)

(2,130

)

Acquisition of businesses and equity investments, net of cash acquired

 

(6,353

)

(114,408

)

Insurance proceeds, net of disposed assets

 

 

91

 

Dividends received from non-consolidated affiliates

 

 

32

 

Net cash used in investing activities

 

(19,906

)

(119,210

)

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

Proceeds from borrowings, net of fees

 

23,570

 

210,321

 

Proceeds from common stock transactions

 

15,000

 

30

 

Restricted cash

 

(10,000

)

16,056

 

Payment of borrowings and notes

 

(45

)

(89,462

)

Payments and contingent considerations related to acquisitions

 

(4,022

)

(591

)

Distribution to non-controlling interest shareholders

 

(317

)

(458

)

Repurchase of common stock

 

 

(1,704

)

Net cash provided by financing activities

 

24,186

 

134,192

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(2,642

)

154

 

 

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(11,046

)

6,221

 

Cash and cash equivalents, beginning of period

 

63,270

 

52,654

 

Cash and cash equivalents, end of period

 

$

52,224

 

$

58,875

 

 

 

 

 

 

 

Supplemental non-cash disclosures (investing and financing activities):

 

 

 

 

 

Issuance of common stock in connection of acquisitions

 

$

4,626

 

$

8,657

 

Issuance of warrants in connection of acquisitions

 

$

 

$

411

 

 

See accompanying notes to the unaudited consolidated financial statements

 

7



Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

1. PREPARATION OF THE INTERIM FINANCIAL STATEMENTS

 

The unaudited interim consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted. Accordingly, these unaudited interim consolidated financial statements and accompanying footnotes should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2014 of SFX Entertainment, Inc. (“SFX” or the “Company”). In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations and financial condition for the interim periods shown including normal recurring accruals and other items.

 

Cash, cash equivalents and restricted cash

 

The Company considers cash deposits in all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company’s cash deposits are held at multiple high credit quality financial institutions. The Company’s cash deposits at these institutions often exceed the federally insured limits. Restricted cash represents cash not available for immediate and general use by the Company. As of June 30, 2015, included in cash and cash equivalents is $13,600 of cash proceeds held on behalf of third party ticketing clients, additionally, included in restricted cash is $10,000 of cash held in a collateral account required to collateralize the Company’s Credit Agreement (as defined below).

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual and interim periods beginning after December 15, 2016, and early adoption of the standard is not permitted. The guidance should be applied retrospectively, either to each prior period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative-effect adjustment as of the date of adoption. In July 2015, the FASB deferred the guidance effective date by one year, but will allow early adoption as of the original adoption date. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company will adopt this standard on January 1, 2018, and it is currently assessing which implementation method it will apply and the impact its adoption will have on its financial position and results of operations.

 

In June 2014, the FASB issued guidance that requires a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period be accounted for as a performance condition. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within that year, and early adoption is permitted. The guidance should be applied on a prospective basis to awards that are granted or modified on or after the effective date. The guidance may be applied on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the date of adoption. The Company has not granted these type of awards, but will adopt this guidance on January 1, 2016 and will apply it prospectively to any awards granted on or after January 1, 2016 that include these terms.

 

In August 2014, the FASB issued final guidance that requires management of all entities to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company will adopt this standard on December 31, 2016.

 

In February 2015, the FASB issued new guidance for evaluating whether a reporting organization should consolidate certain legal entities. This guidance is effective for annual and interim periods beginning after December 15. 2015, and early adoption is permitted. The guidance should be applied either using a modified retrospective approach or retrospectively. The Company will adopt this standard on January 1, 2016, and is currently assessing the implementation method and the impact its adoption will have on the Company’s financial position and results of operations.

 

8



Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

In April 2015, the FASB issued new guidance to simplify presentation of debt issuance costs which would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This guidance is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The Company does not plan to early adopt.

 

2. RETROSPECTIVE ADJUSTMENTS

 

During 2014, the Company finalized the valuation studies for a) the 2013 related acquisitions and b) certain 2014 related acquisitions. In addition, during the six months ended June 30, 2015, the valuation study was finalized for the equity investment in Rock World S.A. Accordingly, the Consolidated Balance Sheet as of December 31, 2014, the Consolidated Statement of Operations for the three and six months ended June 30, 2014, and the Consolidated Statement of Comprehensive Loss for the three and six months ended June 30, 2014 have been retrospectively adjusted to include the effect of the measurement period adjustments as required under Accounting Standards Codification (“ASC”) 805. The aforementioned adjustments resulted in a retrospective adjustment to the Consolidated Balance Sheet as of December 31, 2014, with an increase in equity investment by non-consolidated affiliates by $4,305, an increase in accumulated other comprehensive loss by $637 and a decrease to accumulated deficit by $4,942. The Consolidated Statement of Operations for the three and six months ended June 30, 2014 includes a decrease to (i) service revenue by $336 and $336, respectively, (ii) amortization expense by $8,380 and $15,600, respectively, (iii) other expense by $0 and $283, respectively, (iv) equity in loss of non-consolidated affiliates by $1,593 and $2,640, respectively, and a (v) income tax benefit by $1,223 and $2,242, respectively. The Consolidated Statement of Comprehensive Loss for the three and six months ended June 30, 2014 includes an increase to foreign currency adjustments by $2,297 and $7,139, respectively.

 

As a result of these adjustments, the net loss and loss per share for the three and six months ended June 30, 2014 were decreased from the amounts previously reported by $8,414 and $15,945, respectively, and $0.10 and $0.18 per share, respectively.

 

3. INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Intangible,

 

Accumulated

 

Intangible,

 

Intangible,

 

Accumulated

 

Intangible,

 

(in thousands)

 

Gross

 

Amortization

 

Net

 

Gross 

 

Amortization

 

Net

 

Fan database

 

$

2,300

 

$

(2,267

)

$

33

 

$

2,300

 

$

(1,895

)

$

405

 

Supplier and label relationship

 

22,772

 

(3,767

)

19,005

 

23,969

 

(2,973

)

20,996

 

Trademarks

 

183,262

 

(36,137

)

147,125

 

191,478

 

(28,026

)

163,452

 

Management agreements

 

17,160

 

(7,684

)

9,476

 

17,160

 

(5,968

)

11,192

 

Non-compete agreements

 

6,234

 

(2,354

)

3,880

 

6,496

 

(1,772

)

4,724

 

Other intellectual property

 

26,881

 

(8,768

)

18,113

 

25,202

 

(6,239

)

18,963

 

Total

 

$

258,609

 

$

(60,977

)

$

197,632

 

$

266,605

 

$

(46,873

)

$

219,732

 

 

4. GOODWILL

 

The following table presents the changes in the carrying amount of goodwill in each of the Company’s reportable segments for the six months ended June 30, 2015:

 

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Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

(in thousands)

 

Live Events

 

Platform

 

Total

 

Balance as of December 31, 2014

 

$

235,544

 

$

30,250

 

$

265,794

 

Foreign exchange

 

$

(10,615

)

$

 

$

(10,615

)

Disposal

 

$

(679

)

$

(1,550

)

$

(2,229

)

Balance as of June 30, 2015

 

$

224,250

 

$

28,700

 

$

252,950

 

 

5. NOTES PAYABLE

 

The Company’s notes payable at June 30, 2015 and December 31, 2014 were comprised as follows:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2015

 

2014

 

Second Lien Senior Secured Notes

 

$

295,000

 

$

295,000

 

Other long term debt

 

190

 

320

 

 

 

295,190

 

295,320

 

 

 

 

 

 

 

Revolving credit facility

 

24,200

 

 

Other short term note

 

204

 

404

 

Total notes payable

 

$

319,594

 

$

295,724

 

 

Credit Facility Second Amendment

 

On March 16, 2015, the Company entered into Amendment No. 2 (the “Second Amendment”) to the credit agreement dated February 7, 2014, with the lenders party thereto and Barclays Bank PLC, as administrative agent, letter of credit issuer and swingline lender (the “Credit Agreement”), by removing the maximum total leverage ratio and minimum interest coverage ratio financial covenants and eliminating the incurrence tests to which certain exceptions to the negative covenants were subject. Furthermore, the applicable margin for any base rate loan and Eurodollar loan under the Credit Agreement was set at 3.00% per annum and 4.00% per annum, respectively. Additionally, the Company will not be able to borrow loans or request letters of credit under the Credit Agreement unless an amount equal to 105% of the amount of the loan or letter of credit, as applicable, is deposited into a deposit account of Sillerman Investment Company III LLC (“Sillerman Investment”), an entity controlled by Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, that is subject to a first priority lien in favor of the administrative agent under the Credit Agreement.

 

In connection with the Second Amendment, on March 16, 2015, the Company entered into a commitment letter with Sillerman Investment, pursuant to which and subject to the terms and conditions set forth therein, Sillerman Investment committed to cash collateralize any credit extensions under the Company’s credit facility in an aggregate amount of up to $31,500 for a period of one year, provided that Sillerman Investment, may in its sole discretion, extend such period under certain circumstances. Pursuant to the commitment letter, among other things, on March 16, 2015, the Company paid Sillerman Investment a commitment fee of $630. In addition, the Company will pay Sillerman Investment a fee at a rate of 12% per annum on the amount of cash collateral actually posted, payable quarterly in arrears. The Company is also required to pay interest quarterly to Sillerman Investment on any outstanding cash collateral that is foreclosed upon, together with accrued interest thereon, in arrears at a rate of 13% per annum, with such interest rate to be increased by 2% with respect to each 360 day period thereafter. The Company has also agreed to pay the reasonable costs and expenses, including reasonable legal fees, of Sillerman Investment and Mr. Sillerman in connection with the negotiation and documentation of the cash collateral arrangement and related agreements. The commitment letter was approved by a special committee of independent directors. For the six months ended June 30, 2015, Sillerman Investment contributed cash collateral of $25,450 into the specified collateral account. As of June 30, 2015, the Company has drawn $24,200 under the terms of the Credit Agreement. For the three and six months ended June 30, 2015, the Company has paid $74 to Sillerman Investment.

 

The Company believes that it may need to raise additional sources of cash or financing in order to meet its planned operating and working capital needs for the next six months of the year ending December 31, 2015.  The Company cannot be certain or provide any assurance that additional funds will be available on favorable terms when required, or at all.

 

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Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

6. OTHER INFORMATION

 

Equity investments in non-consolidated affiliates

 

Included in equity investments in non-consolidated affiliates as of June 30, 2015 and December 31, 2014, is the Company’s 50% investment in Rock World S.A. of $42,327 and $52,353, respectively. For the three and six months ended June 30, 2015 and 2014 the Company recognized a loss of $(5,570) and $(1,270), respectively and $(5,704) and $(2,063), respectively.

 

In addition, included as of June 30, 2015 and December 31, 2014 is the Company’s 50% investment in ID&T BVBA of $12,343 and $13,523, respectively.  For the three and six months ended June 30, 2015 and 2014, the Company recognized a loss of $0 and $0, respectively and $(313) and $(625), respectively.

 

Further, included as of June 30, 2015 and December 31, 2014 is the Company’s 50% investment in ALDA of $16,465 and $18,126, respectively. For the three and six months ended June 30, 2015, the Company recognized a gain of $104 and $0, respectively.

 

Other assets and liabilities

 

 

 

As of June 30,

 

As of December

 

(in thousands)

 

2015

 

31, 2014

 

 

 

 

 

 

 

The following details the components of “Other current assets”:

 

 

 

 

 

Merchants cash advance receivable

 

$

4,962

 

$

2,042

 

Accrued service revenue

 

2,787

 

1,727

 

VAT receivables

 

765

 

177

 

Inventory

 

861

 

1,051

 

Other

 

3,231

 

5,489

 

Total other current assets

 

$

12,606

 

$

10,486

 

 

 

 

 

 

 

The following details the components of “Accounts payable and accrued expenses”:

 

 

 

 

 

Accounts payable

 

$

33,363

 

$

27,860

 

Accrued expenses

 

35,570

 

29,818

 

Total accounts payable and accrued expenses

 

$

68,933

 

$

57,678

 

 

 

 

 

 

 

The following details the components of “Other current liabilities”:

 

 

 

 

 

Deferred purchase price related liabilities

 

$

14,506

 

$

22,534

 

Content advances

 

10,000

 

 

Other

 

10,321

 

$

6,170

 

Total other current liabilities

 

$

34,827

 

$

28,704

 

 

Accumulated other comprehensive loss

 

The following table discloses the components of “Accumulated other comprehensive loss” net of tax as of June 30, 2015 and December 31, 2014, respectively:

 

 

 

As of June 30,

 

As of December 31,

 

(in thousands)

 

2015

 

2014

 

Cumulative currency translation adjustment, net of tax of $78 and $78, respectively

 

$

(52,169

)

$

(28,650

)

Total accumulated other comprehensive loss

 

$

(52,169

)

$

(28,650

)

 

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Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

7. CAPITAL STOCK AND COMMON STOCK WARRANTS

 

Common stock

 

As of June 30, 2015, the Company has issued and outstanding 97,623,694 shares of its $.001 par value common stock, of which 2,905,846 shares are classified as temporary equity as a result of certain repurchase rights related to these shares.

 

During the three and six months ended June 30, 2015, the Company issued 4,314,389 and 5,022,863, shares of common stock, respectively.

 

Temporary Equity - Redeemable non-controlling interest

 

The following table presents the changes in the carrying amounts and activity for redeemable non-controlling interest and common stock for the six months ended June 30, 2015:

 

 

 

Redeemable

 

 

 

Non-controlling

 

Common stock

 

 

 

 

 

interest

 

shares

 

Common stock

 

Balance at December 31, 2014

 

$

4,322

 

2,905,846

 

$

27,247

 

Distribution to non-controlling interest holder

 

(53

)

 

 

Reclassification of MMG non-controlling interest

 

(4,269

)

 

 

Balance at June 30, 2015

 

$

 

2,905,846

 

$

27,247

 

 

MMG Nightlife Exercised Put Right

 

Nightlife Holdings LLC is the 20% non-controlling interest holder in SFX-Nightlife Operating LLC (“MMG”), a subsidiary of the Company. On January 16, 2015, Nightlife Holdings LLC exercised its put right to require the Company to acquire its 20% non-dilutable interest in MMG. As of June 30, 2015, the Company made advanced payments of $2,250 to Nightlife Holdings LLC following its exercise of such put right with $6,766 (including $903 in shares of the Company) remaining to be paid, of which $4,500 was formerly in dispute. Of the aggregate amount, $2,294 is recognized as of June 30, 2015 and $4,500 will be recognized subsequent to June 30, 2015.

 

8. STOCK-BASED COMPENSATION

 

The Company recorded $7,206 and $15,839 of stock-based compensation expense for the three and six months ended June 30, 2015, respectively. The Company recorded $9,627 and $19,712 of stock-based compensation expense for the three and six months ended June 30, 2014, respectively. Stock-based compensation expense is recorded as part of selling, general and administrative expenses.

 

As of June 30, 2015, there was $34,202 of total unrecognized compensation cost related to stock-based compensation arrangements for stock options and restricted share awards. This cost is expected to be recognized over a weighted-average period of 1.6 years.

 

9. LOSS PER SHARE OF COMMON STOCK

 

Basic net loss per share of common stock is computed as net loss attributable to the Company divided by the weighted-average number of shares of common stock outstanding during the period.

 

Diluted net loss per share of common stock reflects the potential dilution that could occur if equity securities or other contracts to issue common stock were exercised or converted into common stock. However, since the Company had a net loss for the three and six months ended June 30, 2015 and 2014, diluted loss per share of common stock is the same as basic loss per share of common stock, as any potentially dilutive securities would reduce the loss per share. The following table shows securities excluded from the calculation of diluted loss per share because such securities are anti-dilutive:

 

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Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

 

 

As of June 30,

 

 

 

2015

 

2014

 

 

 

(shares in thousands)

 

Options to purchase shares of common stock

 

25,875

 

24,495

 

Restricted stock awards - non-vested

 

2,135

 

1,633

 

Warrants

 

439

 

600

 

 

 

 

 

 

 

Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding

 

28,449

 

26,728

 

 

10. FAIR VALUE MEASUREMENT

 

The Company has certain contingent consideration obligations and guarantees related to acquisitions, which are measured at fair value using Level 3 inputs as defined by the FASB as unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data. The amount due for the contingent consideration is based on the achievement of a financial performance metric, EBITDA, in future periods. The Company recorded these liabilities at the time of acquisition at fair value. Subsequent to the date of acquisition, the Company updates the original valuation to reflect current projections of future results of the acquired companies, the passage of time, changes in the value of the Company’s common stock, and the change in exchange rates between the Euro and U.S. Dollar. Accretion of and changes in the valuations are recognized in the results of the Company’s earnings.

 

The Company recognized $89 and $(739) in other expense/(income) due to the change in fair value for the three and six months ended June 30, 2015, respectively and recognized $(9,780) and $(7,676) in other (income) due to the change in fair value for the three and six months ended June 30, 2014, respectively.

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Liabilities:

 

 

 

 

 

Contingent consideration - Noncurrent

 

$

12,077

 

$

13,173

 

Total

 

$

12,077

 

$

13,173

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

 

 

Earn-out and

 

 

 

Guarantee

 

As of December 31, 2014

 

$

13,173

 

Gains on revaluation

 

(739

)

Included in other comprehensive income/loss

 

(357

)

As of June 30, 2015

 

$

12,077

 

 

Due to their short maturity, the carrying amounts of accounts receivable, accounts payable and accrued expenses, and other short-term liabilities approximate their fair values at June 30, 2015 and December 31, 2014.

 

11.  INCOME TAXES

 

The income tax provision for continuing operations for the three and six months ended June 30, 2015 was $329 and $37, respectively. The income tax provision for continuing operations for the three and six months ended June 30, 2014, was $8,552 and $6,290, respectively. The Company is required to calculate its interim tax provision using the estimated annual effective tax rate (“EAETR”) method prescribed by ASC 740-270, and as such, excludes losses in jurisdictions where the Company cannot benefit from those losses or where no tax is imposed on earned income in deriving its worldwide EAETR. A separate effective tax rate (“ETR”) is computed and applied to ordinary loss in the loss jurisdiction (US) as required by ASC 740-270-30-36 (a). The Company’s annual effective tax rate may be affected by the mix of earnings in the U.S. and foreign jurisdictions and such factors as changes in tax laws, rates or regulations, changes in business, changing interpretation of existing laws or regulations, the impact of accounting for stock-based

 

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Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

compensation, as well as the impact of accounting for business combinations. The Company’s full year estimated income taxes are primarily related to foreign operations and deferred taxes related to the tax amortization of goodwill. Additionally, during the second quarter of 2015 the Company recorded true-up adjustments related to income tax returns filed in Australia and the Netherlands.

 

As a result of retrospective adjustments (see Note 2), the provision for income tax for the three and six months ended June 30, 2014 were decreased from the amounts previously reported by $1,223 and $2,242, respectively.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that either some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, tax-planning strategies, and available carry-back capacity in making this assessment, therefore, the Company has recorded a valuation allowance on its net domestic deferred tax assets, excluding deferred tax liabilities that are not expected to serve as a source of income for the recognition of deferred tax assets due to their indefinite reversal period (tax amortization of goodwill).

 

As of June 30, 2015, the Company did not record any tax liabilities for uncertain income tax positions and concluded that all of its tax positions are either certain or are not material to the Company’s financial statements. The Company is currently not under audit in any jurisdiction in which it conducts business.

 

12.          RELATED PARTIES

 

Robert Sillerman

 

The Company’s chief executive officer and chairman, Mr. Sillerman, beneficially owns shares, in the aggregate, representing approximately 36.9% of the Company’s outstanding capital stock as of June 30, 2015.

 

On June 17, 2015, the Company entered into a securities purchase agreement with Sillerman Investment, an entity controlled by Mr. Sillerman, and two additional purchasers unaffiliated with the Company, pursuant to which the Company agreed to sell 1,037,345 shares of common stock to Sillerman Investment and 2,305,210 shares of common stock to the unaffiliated purchasers for aggregate consideration of $15,000. As a condition precedent to the unaffiliated purchasers’ entry into the purchase agreement, Mr. Sillerman entered into a letter agreement granting each unaffiliated purchaser a right to sell to him some or all of the shares issued under the purchase agreement at a price of $5.25 per share, subject to certain terms and conditions set forth in the letter agreement. On July 31, 2015, in connection with the formation of ESFX LLC (“ESFX”), a new investment company of which Mr. Sillerman is the manager, Sillerman Investment contributed all of the 1,037,345 shares acquired on June 18, 2015 to ESFX as a capital contribution.  Also on July 31, 2015, ESFX acquired 1,152,605 shares from one of the unaffiliated purchasers for $5,000 and the put right held by such unaffiliated purchaser with respect to such shares was cancelled.

 

In addition, in June 2015, Sillerman Investment made two payments on behalf of the Company in connection with certain of the Company’s financial obligations to third-parties. On June 4, 2015, Sillerman Investment paid $1,000 to the sellers of React Presents, Inc., as an advance of the earnout payments owed to them by the Company under the applicable acquisition agreement. On June 5, 2015, Sillerman Investment paid $1,000 to ID&T BVBA to cover certain expenses of the Tomorrowland and TomorrowWorld festivals, which the Company is obligated to fund under its agreement with its partners in these festivals. The two payments made by Sillerman Investment were approved by a special committee of independent directors.

 

In addition, on September 24, 2014, the Company issued in a private placement an aggregate principal amount of $10,000 of the Company’s 9.625% notes due in 2019 (the “Sillerman Notes”) to Sillerman Investment. The Sillerman Notes were issued under the same indenture as the Company’s existing 9.625% notes due in 2019 that were issued on February 4, 2014 and September 24, 2014.

 

On March 16, 2015, the Company entered into the Second Amendment to the Credit Agreement. Refer to footnote 5 for further details.

 

MJX, LLC

 

In prior periods, MJX, LLC (“MJX”), a company owned 100% by Mr. Sillerman, funded certain expenses incurred by the Company’s consultants and employees who were assisting in meeting with potential acquisition targets. In addition, in the three and six months ended June 30, 2015 and 2014, certain employees of the Company provided services to MJX, primarily tax and administrative in nature. Total expenses incurred by the Company for services provided by MJX for the three months ended June 30, 2015, and 2014 were $3 and $0, respectively, and for the six months ended June 30, 2015, and 2014 were $7 and $0, respectively. Total expense reimbursements recorded by the Company for the three months ended June 30, 2015, and 2014 were $28 and $0, respectively, and for the six months ended June 30, 2015, and 2014 were $55 and $0, respectively. The balance due from MJX was $205 and due to MJX was $7 as of June 30, 2015.

 

14



Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

Viggle, Inc.

 

The Company has a shared services agreement with Viggle, Inc. (“Viggle”), a company whose chief executive officer and controlling shareholder is Mr. Sillerman. Costs incurred by the Company under the agreement during the three months ended June 30, 2015 and 2014 were $274 and $187, respectively. Costs incurred by the Company under the agreement during the six months ended June 30, 2015 and 2014 were $594 and $386, respectively. Total revenue recorded by the Company for the three months ended June 30, 2015 and 2014 were $22 and $17, respectively. Total revenue recorded by the Company for the six months ended June 30, 2015 and 2014 were $40 and $44, respectively. As of June 30, 2015, the balance due to and due from Viggle was $643 and $40, respectively.

 

On March 10, 2014, the Company entered into a software license and service agreement with Viggle. Under the terms of the agreement, the Company paid $5,000 for a ten-year non-exclusive, fully paid license to exploit certain audio recognition software owned by Viggle to be used in the Company’s business. Viggle is required to pay the Company a royalty equal to 50% of the net revenue paid to Viggle by third parties who license the audio recognition software.

 

On January 22, 2015, the Company entered into a sales agency agreement (the “Sales Agency Agreement”) with Viggle. Pursuant to the Sales Agency Agreement, the Company offered employment to approximately twenty-five Viggle employees to serve in the Company’s brand partnership group. Such employees sell the Company’s services and also are the exclusive agent for the sale of Viggle services worldwide. The Company receives a sales commission equal to 25% of the net revenues arising from such sales, pursuant to the terms and conditions of the Sales Agency Agreement. For the three and six months ended June 30, 2015, the Company recorded revenue of $295 and $426, respectively for services provided under the Sales Agency Agreement. As of June 30, 2015, Viggle owed the Company $426 under the Sales Agency Agreement.

 

Donnie Estopinal

 

The Company was indebted to the former owner of Disco Productions, Inc., Donnie Estopinal, who is an employee of the Company. On April 15, 2015, the Company settled the final working capital adjustment of $640.

 

White Oak Securities LLC

 

On February 13, 2015, the Company entered into an investment banking agreement with White Oak Securities LLC (“White Oak”) pursuant to which White Oak will assist the Company for a two-year period as its non-exclusive agent in connection with debt capital market transactions. Pursuant to this agreement, the Company will pay White Oak a fixed fee of $825. The Company paid $0 and $515 in the three and six months ended June 30, 2015, respectively, and will pay the balance by making three payments of $103 on each of July 31, 2015, January 29, 2016 and July 29, 2016. White Oak is controlled by its managing member, Timothy J. Crowhurst, who served as an executive officer of the Company from June 2013 through June 2015. For the three and six months ended June 30, 2015, the Company recorded an expense of $103 and $172, respectively.

 

Former owners of acquired entities

 

The Company has certain balances due to and from former owners of companies that the Company acquired during 2014 and 2013. These balances primarily relate to payments made to or received on behalf of the Company in connection with rent, advances, insurance and event proceeds. At June 30, 2015 and 2014, the Company recorded a receivable of $873 and $63, respectively, and a payable of $33 and $265, respectively to these former owners collectively. For the three months ended June 30, 2015 and 2014, the Company recorded an expense of $197 and $129, respectively and revenues of $802 and $5, respectively. For the six months ended June 30, 2015 and 2014, the Company recorded an expense of $805 and $209, respectively and revenue of $252 and $7, respectively.

 

Non-consolidated affiliates

 

The Company regularly engages in business activities with its non-consolidated affiliates in the production and operation of events. At June 30, 2015 and 2014, the total balance due to the Company from these non-consolidated affiliates was $1,329 and $265, respectively, and the total balance payable to these affiliates was $1,227 and $1,988, respectively.  For the three months ended June 30, 2015 and 2014, the Company recorded an expense of $1,179 and $463, respectively and revenues of $89 and $1, respectively. For the six months ended June 30, 2015 and 2014, the Company recorded an expense of $1,221 and $209, respectively and revenues of $158 and $3, respectively.

 

Other

 

In March 2015, the Company entered into a master services agreement with CrowdRX, Inc. (“CrowdRX”) for the provision of comprehensive medical and consulting services at its festivals and events. The term of the agreement is one year, unless terminated earlier. Andrew N. Bazos is the principal and founder of CrowdRX and is also a director of the Company and serves as Chairman of the Company’s Medical Procedure & Safety Committee. Under this agreement, CrowdRX provides baseline services, similar to those previously provided by Sports & Entertainment Physicians, for a fixed fee and additional services at agreed upon prices. For the three and six months ended June 30, 2015 the Company incurred expenses of $50 and of

 

15



Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

$100, respectively. At June 30, 2015, the balance owed to CrowdRX was $17.

 

13.          COMMITMENTS AND CONTINGENCIES

 

Legal matters

 

During the normal course of business, the Company is occasionally involved with various claims and litigation. Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. As of June 30, 2015, no material reserves were recorded. No reserves are established for losses that are only reasonably possible. The determination of probability and the estimation of the actual amount of any such loss is inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. Based upon the Company’s experience, current information and applicable law, the Company does not believe it is reasonably possible that any proceedings or possible related claims will have a material effect on its financial statements other than as provided in the litigations summary below.

 

Pferdmenges

 

On June 12, 2012, a lawsuit was commenced against Made, Mike Bindra, Laura De Palma, and Sala Corporation by Henri Pferdmenges and NRW, Inc., in the Circuit Court of the Eleventh Judicial Circuit in and for Miami Dade County, Florida. The lawsuit, as amended on September 17, 2012, alleged claims of (i) breach of joint venture agreement, (ii) breach of fiduciary duty, (iii) declaratory action regarding certain rights related to the 2011, 2012 and future editions of the Electric Zoo Festival and certain rights to intellectual property associated with the Electric Zoo Festival, (iv) unjust enrichment, (v) promissory estoppel, (vi) contract implied in fact and (vii) fraud in the inducement with respect to the ownership of the Electric Zoo Festival. The Company has adequate contractual indemnification rights from the sellers of Made for any losses resulting from this litigation. On July 11, 2013, after removal to the United States District Court for the Southern District and transfer to the United States District Court for the Southern District of New York, the Court granted the defendants’ motion to dismiss plaintiff’s Second Amended Complaint in full, and the Court dismissed all of the plaintiff’s claims against all of the defendants. However, on August 29, 2013, the Court permitted the plaintiff to file a Third Amended Complaint regarding its breach of contract, alter ego and fraudulent transfer claims. Plaintiff filed its Third Amended Complaint alleging the foregoing causes of action on September 27, 2015. The Third Amended Complaint sought monetary damages of $10,000, plus ownership interests, costs and an accounting of the festival for the years 2009 through 2013 and the sale of Made to SFX. The Third Amended Complaint was subsequently amended by virtue of the filing of the Fourth Amended Complaint, which was only allowed to allege facts to properly invoke diversity jurisdiction, and otherwise alleged the same causes of action and relief as set forth in the Third Amended Complaint. On September 10, 2014, the Court granted in part and denied in part the defendants’ motion to dismiss. Subsequently, the plaintiff made a motion for leave to again amend its complaint to re-plead similar causes of action against the defendants and to add claims of declaratory judgment that plaintiff is an equity owner in the festival and that NRW is entitled to the following 50% of the proceeds from the sale, 50% of the profits from the 2009-2013 festivals and 50% of the value of the trademark and associated intellectual property rights of the festival; and further alleged fraud in the inducement, and unjust enrichment against the defendants. Plaintiff’s proposed Fifth Amended Complaint also sought ownership, future rights to profits and other declaratory rights and relief, and attempted to increase its damage award on its proposed breach of contract, alter ego, fraudulent transfer, fraudulent inducement and unjust enrichment claims to no less than $28,000, plus an accounting, interest, costs and attorneys’ fees. On June 16, 2015, the Court denied plaintiff’s request to file its Fifth Amended Complaint and held that “[t]he operative pleading remains the claims from the Fourth Amended Complaint that survived the Court’s September 10 Opinion.” The Court has ordered that the parties complete all discovery, including expert discovery and submit any pre-motion letters by October 1, 2015, and that the parties appear for a post-discovery conference on October 15, 2015. The Company is confident of the defendants’ defense, its indemnification protections, and believes that it will not suffer any significant losses as a result of this litigation.

 

Moreno

 

On February 5, 2014, Paolo Moreno, Lawrence Vavra and Gabriel Moreno filed suit against the Company, and, in their individual capacities, Mr. Sillerman and Mr. Sheldon Finkel, in the United States District Court for the Central District of California. The complaint alleged, among other things, causes of action for breach of joint venture/partnership agreement, breach of implied joint venture/partnership agreement, breach of fiduciary duty owed to joint ventures/partners, constructive fraud, breach of contract, breach of implied contract, promissory estoppel, fraudulent inducement, promissory fraud, unfair competition, quantum merit, breach of fiduciary duty owed to principals and interference with prospective economic advantage. The plaintiffs seek over $100,000 in damages, as well as compensatory and punitive damages, and equitable relief. Mr. Finkel has since been dismissed and plaintiffs’ claims for breach of fiduciary duty owed to principals

 

16



Table of Contents

 

Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

and interference with prospective economic advantage have also been dismissed. The parties have completed the discovery phase of this litigation, and a trial date is set for October 6, 2015. On April 7, 2015, the defendants filed a motion for summary judgment to dismiss all claims and the court denied this motion on July 29, 2015. The Company believes this lawsuit is without merit and intends to vigorously defend against it. At this time, the Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any, but based upon expected insurance recoveries and potential contributions from the non-Company defendant, the Company does not believe it is reasonably probable that the claims will have a material effect on its financial statements.

 

Merger litigation

 

The Company has been named as a defendant in multiple putative stockholder class action complaints challenging the proposal by Mr. Sillerman and his affiliates to acquire all of the outstanding shares of our common stock not presently held, directly or indirectly, by Mr. Sillerman and his affiliates in a merger with the Company. All of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated into a single proceeding as In re SFX Entertainment, Inc. Stockholders Litigation on July 9, 2015. The defendants named in the consolidated complaint are the Company, SFXE Acquisition LLC, SFXE Merger Sub, Inc., Sillerman Investment Company III LLC, and the directors of the Company. The lawsuit was premised on allegations that the price offered in the merger is inadequate and that the defendants have breached their fiduciary duties to the Company’s stockholders in connection with the merger. The plaintiffs seek, among other things, preliminary and permanent injunctive relief enjoining the merger and payment of damages and costs incurred as a result of the merger. The outcome of the lawsuit is uncertain. An adverse judgment for monetary damages could have an adverse effect on the operations and liquidity of the Company. A preliminary injunction could delay or jeopardize the completion of the merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the merger. The defendants believe that the claims asserted against them in the lawsuits are without merit.

 

Lease commitments

 

The Company leases its office and warehouse facilities under non-cancellable operating lease agreements. Future minimum rent commitment amounts for the Company’s foreign subsidiaries were translated from the foreign subsidiaries’ functional currency to the U.S. Dollar reporting currency using the foreign exchange rate as of June 30, 2015.

 

Future minimum rent commitments as follows:

 

 

 

Remainder of 2015

 

$

4,798

 

2016

 

7,714

 

2017

 

6,614

 

2018

 

5,695

 

2019

 

5,640

 

2020

 

3,997

 

Total

 

$

34,458

 

 

14.          SEGMENT REPORTING

 

The Company has determined that it has two operating segments: i) Live Events, which is the production and promotion of the Company’s live events and includes revenue from ticket sales, concessions of food, beverages and merchandise, ticketing fees and commissions, promoter and management fees, event-specific sponsorships and advertising and ii) Platform, which is the Company’s 365-day per year engagement with the Company’s fans outside of live events, and currently includes the sale of professional-quality audio files, merchandise and certain marketing and digital activities.

 

In 2014, the Company assessed its business units in consideration of its acquisitions and determined that the Company’s ticketing operations should be moved from Platform to the Live Events segment based upon how the Company’s chief operating decision maker reviews and makes decisions related to the operations and financial results of these businesses. The Company has restated the segment disclosures for the three and six months ended June 30, 2014 to reflect this change.

 

Corporate expenses, including stock-based compensation, and all line items below operating loss are managed on a total Company basis. The Company eliminates inter-segment activity within “Corporate and Eliminations,” and the chief operating

 

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Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

decision maker manages assets on a consolidated basis. Accordingly, segment assets are not reported to or used to allocate resources or assess performance of the segments, and therefore, total segment assets have not been disclosed.

 

 

 

 

 

 

 

Corporate and

 

 

 

(in thousands)

 

Live Events

 

Platform

 

Eliminations

 

Consolidated

 

Three months ended June 30, 2015

 

 

 

 

 

 

 

 

 

Revenue

 

$

107,639

 

$

14,380

 

$

(964

)

$

121,055

 

Direct costs

 

90,481

 

9,263

 

(676

)

99,068

 

Gross profit

 

17,158

 

5,117

 

(288

)

21,987

 

Selling, general and administrative

 

16,696

 

9,050

 

14,518

 

40,264

 

Depreciation

 

1,500

 

64

 

317

 

1,881

 

Amortization

 

5,422

 

2,130

 

175

 

7,727

 

Operating loss

 

$

(6,460

)

$

(6,127

)

$

(15,298

)

$

(27,885

)

Three months ended June 30, 2014 (See Note 2)

 

 

 

 

 

 

 

 

 

Revenue

 

$

67,387

 

$

14,479

 

$

(244

)

$

81,622

 

Direct costs

 

52,594

 

8,942

 

(3

)

61,533

 

Gross profit

 

14,793

 

5,537

 

(241

)

20,089

 

Selling, general and administrative

 

16,250

 

4,834

 

20,847

 

41,931

 

Depreciation

 

579

 

236

 

31

 

846

 

Amortization

 

5,568

 

1,913

 

32

 

7,513

 

Operating loss

 

$

(7,604

)

$

(1,446

)

$

(21,151

)

$

(30,201

)

Six months ended June 30, 2015

 

 

 

 

 

 

 

 

 

Revenue

 

$

147,925

 

$

26,379

 

$

(1,063

)

$

173,241

 

Direct costs

 

117,054

 

16,871

 

(696

)

133,229

 

Gross profit

 

30,871

 

9,508

 

(367

)

40,012

 

Selling, general and administrative

 

30,510

 

17,095

 

32,404

 

80,009

 

Depreciation

 

1,865

 

145

 

393

 

2,403

 

Amortization

 

10,887

 

4,065

 

337

 

15,289

 

Operating loss

 

$

(12,391

)

$

(11,797

)

$

(33,501

)

$

(57,689

)

Six months ended June 30, 2014 (See Note 2)

 

 

 

 

 

 

 

 

 

Revenue

 

$

88,573

 

$

26,587

 

$

(212

)

$

114,948

 

Direct costs

 

67,206

 

17,209

 

(58

)

84,357

 

Gross profit

 

21,367

 

9,378

 

(154

)

30,591

 

Selling, general and administrative

 

29,385

 

8,790

 

40,372

 

78,547

 

Depreciation

 

954

 

481

 

50

 

1,485

 

Amortization

 

10,485

 

3,769

 

61

 

14,315

 

Operating loss

 

$

(19,457

)

$

(3,662

)

$

(40,637

)

$

(63,756

)

 

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Notes to the Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

 

15.          SUBSEQUENT EVENTS

 

Content Agreement

 

On July 15, 2015, the Company entered into a Content License Agreement (the “Content Agreement”) with Spotify AB, a Swedish public limited company (“Spotify”), providing for the distribution of Beatport and other Company content and programming through Spotify. Under the terms of the Content Agreement, Spotify advanced $10,000, which the Company received as of June 30, 2015, and such amount is recoupable against all fees and royalties to be paid to the Company by Spotify during the term of the Content Agreement. If the Content Agreement is terminated by either party and the full amount of the advance has not been recouped, the Company is obligated to repay to Spotify the amount of the unrecouped advance. If the Company defaults on this payment obligation, it will be required to issue a number of shares of common stock of the Company to Spotify equal in value to the amount of the unrecouped advance. The shares shall be issued at the average of the volume weighted average prices of the common stock for the five consecutive trading days on any national securities or similar exchange upon which the common stock is trading in the United States immediately preceding the date of the default notice. The number of shares to be issued, if any, cannot exceed the cap set forth in NASDAQ Stock Market, Equity Rule 5635(d) unless shareholder approval is obtained. Additionally, prior to the closing of any acquisition of the Company resulting in the shares of common stock of the Company or its successor being removed from public trading in the United States, but only to the extent the advance is capable of being recouped by Spotify at the time of or at any time following such closing, the Company and Spotify have agreed that the obligation to issue the shares shall terminate provided that the Company has granted security to Spotify, in a form reasonably acceptable to Spotify, having an objective fair value no less than the amount of the outstanding and unrecouped advance.

 

Sillerman Proposed Acquisition

 

On July 30, 2015, the special committee of independent directors delivered noticed to Mr. Sillerman as to provide by August 13, 2015, fully executed commitment letters describing the terms and conditions for the financing of 100% of the aggregate amount to be paid pursuant to the merger agreement (“Merger Agreement”) dated May 26, 2015, by and among the Company and affiliates of Sillerman Investment, an entity controlled by Mr. Sillerman. Pursuant to the Merger Agreement, each share of the Company’s common stock issued and outstanding will be converted into the right to receive $5.25 in cash, other than shares held by Sillerman Investment and its affiliates. Subject to the satisfaction or permitted waiver of the closing conditions set forth in the Merger Agreement, the Merger is expected to be consummated before the end of the fourth quarter of the fiscal year ending December 31, 2015.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014 (the “Form 10-K”). In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions that are made only as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties. Given these uncertainties, you should read this Quarterly Report on Form 10-Q completely with the understanding that our actual future results may be materially different from what we expect. Unless otherwise stated, or the context otherwise requires, references to “SFX,” “the Company,” “we,”“us,”“our” refer to SFX Entertainment, Inc. together with our consolidated subsidiaries.

 

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Additional information regarding the risks associated with forward-looking statements can be found in our Form 10-K.

 

In addition, On May 26, 2015, the Company announced that it had entered into an Agreement and Plan of Merger with SFXE Acquisition LLC and SFXE Merger Sub Inc., affiliates of Sillerman Investment Company III LLC, an entity controlled by Robert F.X. Sillerman. The potential merger  presents additional risks and uncertainties that could cause the actual results to differ from those expressed or implied by forward looking statements including the risk that the pending merger may not be consummated due to a failure to obtain stockholder or other approval or for any other reason; the risk that the closing of the merger will be delayed; uncertainties concerning the effect of the transaction on relationships with customers, employees and suppliers of the Company; and the risk that the transaction may involve unexpected costs or unexpected liabilities.

 

OVERVIEW

 

We believe we are the largest global producer of live events and digital entertainment content focused exclusively on the electronic music culture (“EMC”) and other world-class festivals. We view EMC as a global generational movement driven by a rapidly developing community of avid electronic music followers among the millennial generation. Our mission is to enable this movement by providing our fans with the best possible live experiences, music discovery and digital content. Our strategy remains to leverage our unique portfolio of assets to reach EMC fans through the live concert experience and engage them 365 days a year by way of our online offerings, allowing fans to connect to influencers and other fans, discover and stream music, and access exclusive news and content, among other things. As we bring our events to new markets, we also grow ticket sales and enhance our sponsorship, marketing and similar streams of revenue. We believe that we are well-positioned to fulfill our mission to EMC fans, and we remain optimistic about our long-term potential as we continue to implement our strategy and optimize our acquired companies and brands.

 

We present leading EMC festivals and events, many of which have more than a decade of history, passionate followers and vibrant social communities. Our live events and leading brands include Tomorrowland, TomorrowWorld, Mysteryland, Sensation, Disco Donnie Presents, Life in Color, Stereosonic, Decibel, Nature One, Ruhr-in-Love, Electric Zoo, React Presents, Awakenings, Q-Dance, Beatport, Paylogic, Flavorus and many others. In addition, we own a 40% interest in the popular Rock in Rio festival brand and a 50% interest in ALDA, a European concept developer and producer for some of the industry’s leading DJ tours and festivals. We have significant and growing scale with our global live events.

 

We believe the broad appeal of EMC beyond festival attendance is demonstrated by the deep engagement of our fans, which is evidenced by the time they devote to EMC-related social media and digital activities. We are addressing the demand from the growing EMC community for music, engaging content and social connectivity between and around our live events. A key component of this initiative is our subsidiary Beatport, LLC (“Beatport”), which is the principal source of music for EMC DJs and enthusiasts.

 

Our History

 

SFX Entertainment, Inc. was incorporated in the State of Delaware on June 5, 2012. Between June 5, 2012 and February 13, 2013, we were named SFX Holding Corporation. We started our business on July 7, 2011 as SFX EDM Holdings Corporation (f/k/a SFX Entertainment Inc.), which is now our wholly owned subsidiary.

 

On October 15, 2013, we completed our initial public offering and became a publicly traded company on The Nasdaq Global Select Market, trading under the symbol “SFXE.” Our founder Robert F.X. Sillerman and our senior management team have extensive global experience in entertainment, consumer Internet and music-related businesses, including experience working with creative talent, producing and promoting live events and acquiring and integrating companies. Our team also includes a new generation of promoters, producers and executives who are innovators and leaders in the EMC community with established businesses and experience in creating spectacular events that host tens of thousands of people. These team members

 

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are generally managers or former owners of our acquired companies who received equity in our company as consideration when we acquired their businesses.

 

SECOND QUARTER 2015 EVENTS

 

Merger Agreement

 

On May 26, 2015, we entered into an Agreement and Plan of Merger (as subsequently amended on July 10, 2015, the “Merger Agreement”) with SFXE Acquisition LLC, a Delaware limited liability company (“Purchaser”) and SFXE Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Purchaser (“Merger Sub” and, together with Purchaser, the “Purchaser Parties”), providing for the merger of Merger Sub with and into us (the “Merger”), with the Company as the surviving corporation. Purchaser and Merger Sub are affiliates of Sillerman Investment Company III LLC (“Sillerman Investment”), an entity controlled by Robert F.X. Sillerman, the Chairman and Chief Executive Officer of the Company. Subject to the satisfaction or permitted waiver of the closing conditions set forth in the Merger Agreement, the Merger is expected to be consummated before the end of the fourth quarter of the fiscal year ending December 31, 2015.

 

At the effective time of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to such effective time, other than certain excluded shares and the shares held by Sillerman Investment and its affiliates (collectively, including Mr. Sillerman and the Purchaser Parties, the “RS Investors”), will be converted into the right to receive $5.25 in cash, without interest (the “Cash Merger Consideration”), except that each person who is a holder of record of the Company’s common stock prior to a specified election deadline will be entitled to make an election (a “Stock Election”) to receive, in lieu of the Cash Merger Consideration, one share of non-voting Class B common stock, par value $0.0001 per share, of the surviving corporation of the Merger (the “Stock Merger Consideration” and, together with the Cash Merger Consideration, the “Merger Consideration”) pursuant to the election procedures set forth in the Merger Agreement. Each share of common stock of the Company held by the RS Investors will be converted into the right to receive one share of voting Class A common stock, par value $0.0001 per share, of the surviving corporation of the Merger and will not be entitled to receive Cash Merger Consideration.

 

If the number of record holders (not counting the RS Investors) making valid Stock Elections (the “Stock Electing Holders”) exceeds 275, the 275 record holders in respect of which valid Stock Elections have been made (and not revoked) with respect to the greatest number of shares of the Company’s common stock will receive the Stock Merger Consideration for the shares with respect to which Stock Elections were made; the Stock Elections of the remaining Stock Electing Holders will be deemed withdrawn and their shares will be converted into the right to receive the Cash Merger Consideration.

 

Our stockholders will be asked to vote on the adoption of the Merger Agreement and the Merger at a special stockholders meeting that will be held on a date to be announced. The closing of the Merger is subject to a non-waivable condition that the Merger Agreement be adopted by the affirmative vote of the holders of (1) at least a majority of all outstanding shares of common stock and (2) at least a majority of all outstanding shares of common stock held by stockholders other than the RS Investors (together, the “Company Stockholder Approvals”). Consummation of the Merger is subject to certain customary conditions. The Merger Agreement does not contain a financing condition.

 

Pursuant to the terms of a “go-shop” provision in the Merger Agreement, during the period that began on May 26, 2015 and expired at 5:01 p.m. on July 24, 2015, the Company and its subsidiaries and their respective representatives had the right to initiate, solicit and encourage alternative acquisition proposals from third parties, provide nonpublic information to such third parties and participate in discussions and negotiations with such third parties regarding any such alternative acquisition proposals. Subject to certain limitations, under the terms and conditions set forth in the Merger Agreement, before the Company Stockholder Approvals, our board of directors may change its recommendation of the Merger Agreement or the transactions contemplated thereby, including in order to approve, and authorize the Company to enter into, an alternative acquisition proposal if the special committee appointed by our board of directors determines in good faith, after consultation with outside counsel and its financial advisors, that such alternative acquisition proposal would be more favorable from a financial point of view to the Company’s stockholders (other than the RS Investors), taking into account all of the terms and conditions of such proposal.

 

The special committee has delivered a notice to the Purchaser Parties pursuant to the Merger Agreement that requires Purchaser by 10:00 a.m. on August 13, 2015 to deliver to the special committee fully executed commitment letters describing the terms and conditions for the financing of 100% of the aggregate amount of the Cash Merger Consideration.

 

The Merger Agreement contains certain termination rights for the Company and the Purchaser Parties. Among such rights, and subject to certain limitations, either the Company or the Purchaser Parties may terminate the Merger Agreement if the Merger is not completed by January 5, 2016.

 

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Table of Contents

 

Additional information about the Merger Agreement is set forth in our current reports on Form 8-K  filed with the SEC on May 27, 2015, July 13, 2015, July 27, 2015, and July 30, 2015.

 

Segment Overview

 

We have two reportable segments: i) Live Events, which consists of the production of our live events and includes revenue from ticket sales, concessions of food, beverages and merchandise, ticketing fees and commission, promoter and management fees, event-specific sponsorships and advertising and ii) Platform, which is our 365-day per year engagement with our fans outside of live events and currently includes the sale of professional-quality audio files, merchandise and certain marketing and digital activities including, without limitation, exploitation of audiovisual content and music streaming.

 

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

 

We currently generate revenue from sales of services and sales of products. Service revenue includes ticket sales, concessions fees related to the sale of food, beverages and merchandise, license and management fees, ticketing commissions from our ticketing platform, sponsorships and marketing partnership related revenue. Sales of products primarily relate to the sale of professional-quality audio files, merchandise and food and beverage sales, including those from live events.

 

Service costs consist primarily of musical talent costs and event production costs. Musical talent costs are fees paid to artists performing at festivals and venues. Production costs consist of costs incurred to produce events, including crew and material costs associated with staging and construction, and the costs of venue, promotions and transportation. Sales of product costs mostly consist of Beatport’s royalty payments and other digital music sales and streaming-related expenses and also include the cost of merchandise and food and beverages sold.

 

As we continue to integrate the businesses we have acquired, we anticipate meaningful growth in our service revenue, primarily due to the growing number of large festivals we offer around the world and increasing the total number of attendees at such festivals and other events. For example, we exported the Tomorrowland brand outside of Belgium for the first time with the TomorrowWorld festivals held outside of Atlanta in September 2013 and 2014, and we debuted Tomorrowland in Brazil in May 2015. We also have brought and will continue to bring our other highly successful brands to new international locations, including Mysteryland in Bethel Woods, New York, in May 2014 and 2015, Electric Zoo in Mexico City in May 2014 and Japan in May 2015, and Sensation in Dubai in 2014 for its first ever outdoor edition, which is planned to return in 2015. We have also unveiled several new events and festivals in 2015, such as ALDA’s sold-out The Flying Dutch festival in the Netherlands in May and One Tribe camping festival set to take place outside of Los Angeles this September.

 

We also plan to increase revenue streams around these events, including concessions, sponsorships and marketing partnership related revenue. Any revenue growth related to establishing our brands in new countries and locations for the first time may be offset by losses resulting from the initial productions of the applicable festival or event. We expect the gross margin for our service revenue to increase in the near and medium term as festivals become more established.

 

The majority of our product revenues are derived from the sale of professional-quality audio files via Beatport, which DJs require to produce and perform electronic music tracks. In addition, we have generated sponsorship and merchandise revenue. We believe that in the near and medium term, revenue from our online platform properties, including Beatport, will experience growth as we introduce new content, products and offerings. For instance, in the first quarter of 2015, Beatport launched a comprehensive new interface with multiple new and innovative functionalities, including a streaming music service with a catalogue of over 2.0 million tracks. Also, in July 2015 we entered into a content distribution arrangement with Spotify AB, one of the leading streaming services, providing for the distribution of music and video content from Beatport and other SFX brands through Spotify.

 

We continue to pursue the sale of global and local sponsorships and marketing and similar partnerships, both domestically and internationally. Our goal is to continue to drive growth in this area, both by engaging new partners and by expanding our arrangements and offerings with our current partners. In 2015 and beyond, we plan to utilize our relationships with current and future marketing partners and sponsors in order to introduce new ways for fans of EMC to enjoy the music they love 365 days a year. Such future arrangements, in some cases, will replace historical event-level arrangements to enable a broader involvement with our fans. During this transition process, we have foregone and may continue to forgo short-term event-level sponsorship revenue to facilitate broader arrangements. We have attracted multiple, well-known corporate brand partners for multi-event and repeat sponsorships and have entered into marketing and similar partnerships with other partners. In 2015 and beyond, we believe that we have a unique opportunity to engage in additional partnerships and expand upon current partnerships, in

 

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particular in connection with the revamped Beatport platform, to increase our revenue and to provide our fans with more memorable experiences and further integrate into the EMC community. Following are a few examples:

 

·                  a global strategic alliance and multi-year joint venture agreement with MasterCard that establishes MasterCard as our exclusive global sponsor in the financial services category;

 

·                  our sponsorship and marketing partnership with viagogo AG in which viagogo serves as our exclusive authorized secondary ticket marketplace for 80 SFX events and festivals taking place across the globe over a five-year period;

 

·                  our multi-faceted marketing and partnership arrangement with Anheuser-Busch InBev and its affiliate companies, pursuant to which we organized and continue to organize two separate series of bespoke beach-themed dance music events in 2014 and throughout 2015 focusing on the Corona and Skol brands, respectively, and which arrangement also includes sponsoring an international DJ contest competition through Beatport and sponsorship of several of our largest events including Tomorrowland and TomorrowWorld for multiple editions.

 

·                  our partnership with Clear Channel (now iHeartMedia) through which we (a) will produce a national music talent contest promoted on select Clear Channel stations nationwide in 2015, (b) launched in August 2014 a weekly EMC radio show featuring our Beatport brand airing in approximately 90 markets and (c) will host one or more new EMC festivals near Halloween in 2015; and

 

·                  our sponsorship and promotional agreements with T-Mobile, which include T-Mobile’s sponsorship of certain SFX festivals and events; charter partnership, alignment and integration benefits with Beatport, including its online platform, mobile apps, live events offerings and sponsorship of our streaming initiatives; media placement by T- Mobile on certain of our properties; and execution by us of on-site activations at certain SFX festivals and events.

 

Our results of operations, and in particular the revenue we generate from a given activity, vary substantially from quarter to quarter. We expect most of our largest festivals to occur outdoors, primarily in warmer months. For example, our North American and European brands stage most of their festivals and events in late summer and early fall, while in the Southern Hemisphere most of our festivals take place in September, November and December. As such, we expect our revenues from these festivals to be higher during the third and fourth quarters, and lower in the first and second quarters. Further, because we expect to conduct a limited number of large festivals and other events, small variations in this number from quarter to quarter can cause our revenue and net income to vary significantly for reasons that may be unrelated to the performance of our core business. Other portions of our business, such as our club and artist management businesses, are generally not subject to seasonal fluctuation or experience much lower seasonal fluctuation.

 

In the future, we expect these fluctuations to change and perhaps become less pronounced as we grow our business and stage more festivals and events in the Southern Hemisphere. We believe our cash needs will vary significantly from quarter to quarter, depending on among other things, the timing of festivals and events, cancellations, ticket on-sales, capital expenditures,  seasonal and other fluctuations in our business activity, the timing of guaranteed payments under our sponsor and marketing partnerships and receipt of ticket sales and fees, financing activities, acquisitions and investments.

 

RESULTS OF OPERATIONS

 

Substantial portions of our business assets were acquired in the (i) fourth quarter of 2013 following our initial public offering and (ii) the second and third quarters of 2014. As such, we have not provided a comparative discussion of our results of operations for the three months ended June 30, 2015 and 2014 and six months ended June 30, 2015 and 2014, because such a comparison would not be meaningful.

 

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Table of Contents

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

Service revenue

 

$

98,427

 

$

60,842

 

$

137,434

 

$

81,991

 

Sale of products

 

22,628

 

20,780

 

35,807

 

32,957

 

Total revenue

 

121,055

 

81,622

 

173,241

 

114,948

 

Direct costs:

 

 

 

 

 

 

 

 

 

Cost of services

 

85,951

 

48,529

 

111,331

 

63,590

 

Cost of products sold

 

13,117

 

13,004

 

21,898

 

20,767

 

Total direct costs

 

99,068

 

61,533

 

133,229

 

84,357

 

Gross profit

 

21,987

 

20,089

 

40,012

 

30,591

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

40,264

 

41,931

 

80,009

 

78,547

 

Depreciation

 

1,881

 

846

 

2,403

 

1,485

 

Amortization

 

7,727

 

7,513

 

15,289

 

14,315

 

Operating loss

 

(27,885

)

(30,201

)

(57,689

)

(63,756

)

Interest expense, net

 

(8,827

)

(5,688

)

(16,297

)

(12,287

)

Other (expense)/income, net

 

(5,566

)

10,684

 

(10,062

)

(7,864

)

Equity in loss of non-consolidated affiliates

 

(5,247

)

(1,463

)

(5,397

)

(998

)

Loss before income taxes

 

(47,525

)

(26,668

)

(89,445

)

(84,905

)

Provision for income tax

 

(329

)

(8,552

)

(37

)

(6,290

)

Net loss

 

(47,854

)

(35,220

)

(89,482

)

(91,195

)

Less: Net income attributable to non-controlling interest

 

177

 

47

 

87

 

112

 

Net loss attributable to SFX Entertainment, Inc.

 

$

(48,031

)

$

(35,267

)

$

(89,569

)

$

(91,307

)

 

During 2014, we finalized the valuation studies for a) certain 2013 acquisitions and b) certain 2014 acquisitions. In addition, during the three months ended March 31, 2015, the Company finalized the valuation studies for the equity investment in Rock World S.A. Accordingly, the Consolidated Statement of Operations for the three and six months ended June 30, 2014 has been retrospectively adjusted to include the effect of the measurement period adjustments as required under Accounting Standards Codification (“ASC”) 805.

 

Three months ended June 30, 2015

 

Revenue

 

Revenue for the three months ended June 30, 2015 totaled $121.1 million. This revenue was composed of $98.4 million in service revenue (81.3% of total revenue) from festival and live events that were produced, promoted, licensed or managed by us and sponsorship related activities. During the three months ended June 30, 2015, we produced and promoted a total of 267 events, including 29 festivals of greater than 10,000 attendees, attracting a total of over 1,384,000 attendees. Sales of products revenue for the three months ended June 30, 2015 totaled $22.6 million (18.7% of total revenue) and was predominantly from the sale of audio files, merchandise, food and beverages.

 

Direct costs

 

Direct costs for the three months ended June 30, 2015 totaled $99.1 million. Cost of services was $86.0 million (86.8% of total direct costs) and cost of products sold was $13.1 million (13.2% of total direct costs). Cost of products sold is primarily attributable to merchandise, food and beverage, royalty and other digital music sales-related expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2015 totaled $40.3 million. These costs are primarily attributable to salaries and wages related to employees of $18.2 million, non-cash stock-based compensation of $7.2 million, legal, accounting and professional fees of $5.5 million and other general operating expenses of $9.4 million.

 

Depreciation and amortization

 

Depreciation expense is associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets from the date of acquisition. For the three months ended June 30, 2015, depreciation and amortization were $1.9 million and $7.7 million, respectively, primarily related to intangible assets acquired in business acquisitions.

 

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Table of Contents

 

Interest expense, net

 

Interest expense, net for the three months ended June 30, 2015 totaled $8.8 million. Interest expense was primarily related to the 9.625% Notes issued in February 2014 and September 2014.

 

Other expense, net

 

Other expense, net for the three months ended June 30, 2015 totaled $5.6 million. This balance was mainly attributable to the disposal of certain non-core businesses of $3.5 million and loss on the fair value remeasurement of our contingent payments of $2.1 million.

 

Equity in loss of non-consolidated affiliates

 

Equity in loss of non-consolidated affiliates for the three months ended June 30, 2015 totaled $5.2 million. The loss was mainly attributable to our equity investment in Rock World S.A.

 

Provision for income taxes

 

Provision for income taxes for the three months ended June 30, 2015 totaled $0.3 million and was primarily attributable to the application of the annualized effective tax rate to a year-to-date loss before income taxes.

 

Three months ended June 30, 2014

 

Revenue

 

Revenue for the three months ended June 30, 2014 totaled $81.6 million. This revenue was composed of $60.8 million in service revenue (74.5% of total revenue) from festival and live events that were produced, promoted, licensed or managed by us and sponsorship related activities. During the three months ended June 30, 2014, we produced and promoted a total of 228 events, including 17 festivals of greater than 10,000 attendees, attracting a total of over 1,026,000 attendees. Sales of products revenue for the three months ended June 30, 2014, totaled $20.8 million (25.5% of total revenue) and was predominantly from the sale of audio files by Beatport (57.9% of total sale of product revenue).

 

Direct costs

 

Direct costs for the three months ended June 30, 2014 totaled $61.5 million. Cost of services was $48.5 million (78.9% of total direct cost) and cost of products sold was $13.0 million (21.1% of total direct cost). Cost of products sold is attributable to Beatport’s royalty, other digital music sales-related expenses, and merchandise.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2014 totaled $41.9 million. These costs are primarily attributable to salaries and wages related to employees of $17.1 million, non-cash stock-based compensation of $9.6 million, legal, accounting and professional fees of $5.7 million incurred in connection with our acquisitions and other expenses of $9.5 million.

 

Depreciation and amortization

 

Depreciation expense is associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets from the date of acquisition. For the three months ended June 30, 2014, depreciation and amortization were $0.8 million and $7.5 million, respectively, primarily related to intangible assets acquired in business acquisitions.

 

Interest expense, net

 

Interest expense, net for the three months ended June 30, 2014 totaled $5.7 million. Interest expense was primarily related to the 9.625% Notes issued on February 4, 2014.

 

Other income, net

 

Other income, net for the three months ended June 30, 2014 totaled $10.7 million. This balance was mainly attributable to the gain on the fair value remeasurement of our contingent payments of $9.8 million.

 

Equity in loss of non-consolidated affiliates

 

Equity in loss of non-consolidated affiliates for the three months ended June 30, 2014 totaled $1.5 million. The loss was mainly attributable to our equity investment in Rock World S.A.

 

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Table of Contents

 

Provision for income taxes

 

Provision for income taxes for the three months ended June 30, 2014 totaled $8.6 million.

 

Six months ended June 30, 2015

 

Revenue

 

Revenue for the six months ended June 30, 2015 totaled $173.2 million. This revenue was composed of $137.4 million in service revenue (79.3% of total revenue) from festival and live events that were produced, promoted, licensed or managed by us and sponsorship related activities. During the three months ended June 30, 2015, we produced and promoted a total of 518 events, including 41 festivals of greater than 10,000 attendees, attracting a total of over 2,136,000 attendees. Sales of products revenue for the three months ended June 30, 2015 totaled $35.8 million (20.7% of total revenue) and was predominantly from the sale of audio files, merchandise, food and beverages.

 

Direct costs

 

Direct costs for the six months ended June 30, 2015 totaled $133.2 million. Cost of services was $111.3 million (83.6% of total direct costs) and cost of products sold was $21.9 million (16.4% of total direct costs). Cost of products sold is primarily attributable to merchandise, food and beverage, royalty and other digital music sales-related expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2015 totaled $80.0 million. These costs are primarily attributable to salaries and wages related to employees of $35.5 million, non-cash stock-based compensation of $15.8 million, legal, accounting and professional fees of $10.9 million and other general operating expenses of $17.8 million.

 

Depreciation and amortization

 

Depreciation expense is associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets from the date of acquisition. For the six months ended June 30, 2015, depreciation and amortization were $2.4 million and $15.3 million, respectively, primarily related to intangible assets acquired in business acquisitions.

 

Interest expense, net

 

Interest expense, net for the six months ended June 30, 2015 totaled $16.3 million. Interest expense was primarily related to the 9.625% Notes issued in February 2014 and September 2014.

 

Other expense, net

 

Other expense, net for the six months ended June 30, 2015 totaled $10.1 million. This balance was mainly attributable to the disposal of certain non-core businesses $3.5 million, loss on the fair value remeasurement of our contingent payments of $2.1 million and unrealized foreign exchange losses of $4.5 million.

 

Equity in loss of non-consolidated affiliates

 

Equity in loss of non-consolidated affiliates for the six months ended June 30, 2015 totaled $5.4 million. The loss was mainly attributable to our equity investment in Rock World S.A.

 

Provision for income taxes

 

Provision for income taxes for the six months ended June 30, 2015 totaled $0.0 million and was primarily attributable to the application of the annualized effective tax rate to a year-to-date loss before income taxes.

 

Six months ended June 30, 2014

 

Revenue

 

Revenue for the six months ended June 30, 2014 totaled $114.9 million. This revenue was composed of $82 million in service revenue (71.3% of total revenue) from festival and live events that were produced, promoted, licensed or managed by us and sponsorship related activities. During the six months ended June 30, 2014, we produced and promoted a total of 354 events, including 26 festivals of greater than 10,000 attendees, attracting a total of over 1,416,000 attendees. Sales of products revenue for the six months ended June 30, 2014, totaled $33.0 million (28.7% of total revenue) and was predominantly from the sale of audio files by Beatport (71.6% of total sale of product revenue).

 

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Table of Contents

 

Direct costs

 

Direct costs for the six months ended June 30, 2014 totaled $84.4 million. Cost of services was $63.6 million (75.4% of total direct cost) and cost of products sold was $20.8 million (24.6% of total direct cost). Cost of products sold is primarily attributable to Beatport’s royalty and other digital music sales-related expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2014 totaled $78.5 million. These costs are primarily attributable to salaries and wages related to employees of $31.1 million, non-cash stock-based compensation of $19.7 million, legal, accounting and professional fees of $10.8 million incurred in connection with our acquisitions and other expenses of $16.9 million.

 

Depreciation and amortization

 

Depreciation expense is associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets from the date of acquisition. For the six months ended June 30, 2014, depreciation and amortization were $1.5 million and $14.3 million, respectively, primarily related to intangible assets acquired in business acquisitions.

 

Interest expense, net

 

Interest expense, net for the six months ended June 30, 2014 totaled $12.3 million. Interest expense was primarily related to the 9.625% Notes issued on February 4, 2014 and the then existing first lien term loan facility, which we repaid in February 2014.

 

Other expense, net

 

Other expense, net for the six months ended June 30, 2014 totaled $7.9 million. These expenses were mainly attributable to the extinguishment of the then existing first lien term loan facility of $16.2 million and offset by the gain on the fair value remeasurement of our contingent payments of $7.7 million.

 

Equity in loss of non-consolidated affiliates

 

Equity in loss of non-consolidated affiliates for the six months ended June 30, 2014 totaled $1.0 million. The loss was mainly attributable to our equity investment in Rock World S.A.

 

Provision for income taxes

 

Provision for income taxes for the six months ended June 30, 2014 totaled $6.3 million.

 

SEGMENT OVERVIEW

 

Operating segments include components of the enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer. We have determined that we have two operating and reportable segments, which are (i) Live Events, consisting of the production of our live events and includes revenue from ticket sales, ticketing fees and commissions, food, beverages and merchandise, license fees, event specific sponsorships and advertising and (ii) Platform, which is our 365-day per year engagement with our fans outside of live events and currently includes the sale of professional-quality audio files, merchandise and certain marketing and digital activities.

 

Certain corporate expenses, including stock-based compensation, and all line items below operating loss are managed on a consolidated basis. We eliminate inter-segment activity within “Corporate and Eliminations,” additionally, we manage our assets and working capital on a consolidated basis. Accordingly, segment assets are not reported to, or used by, our management to allocate resources or assess performance of the segments; and therefore, we have not disclosed total segment assets.

 

Live Events results of operations

 

Our Live Events segment operating results for the three and six months ended June 30, 2015 and 2014, respectively, were as follows:

 

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Table of Contents

 

 

 

Three months ended

 

Six months ended

 

(in thousands)

 

June 30, 2015

 

June 30, 2014

 

June 30, 2015

 

June 30, 2014

 

Revenue

 

$

107,639

 

$

67,387

 

$

147,925

 

$

88,573

 

Direct costs

 

90,481

 

52,594

 

117,054

 

67,206

 

Gross profit

 

17,158

 

14,793

 

30,871

 

21,367

 

Selling, general and administrative expenses

 

16,696

 

16,250

 

30,510

 

29,385

 

Depreciation and amortization

 

6,922

 

6,147

 

12,752

 

11,439

 

Operating loss

 

$

(6,460

)

$

(7,604

)

$

(12,391

)

$

(19,457

)

 

Three months ended June 30, 2015

 

Revenue

 

Our Live Events segment generated revenue of $107.6 million for the three months ended June 30, 2015. This included $58.6 million, or 54.5%, from ticket sales, $19.7 million, or 18.3%, from merchandising and concessions fees of food and beverages, $5.2 million, or 4.8%, from ticketing fees, $11.2 million, or 10.4%, of sponsorship and media sales and $12.9 million, or 12%, from other sources, including license and promoter fees. For the three months ended June 30, 2015, we produced and promoted a total of 267 live events, including 29 festivals of greater than 10,000 attendees, attracting a total of over 1,384,000 attendees. Our Live Events segment had a gross profit margin of 15.9% for the period.

 

Direct costs

 

For the three months ended June 30, 2015, direct costs associated with live events that we produced, promoted or managed totaled $90.5 million. These costs consisted primarily of $18.7 million, or 20.6%, in musician and artist costs, $53.4 million, or 59%, in production costs, $4.0 million, or 4.4%, in event promotion costs and $14.4 million, or 16%, in other expenses associated with revenue earned from our live events.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2015 totaled $16.7 million. These costs were primarily attributable to salaries and wages related to employees of $10.8 million and $5.9 million of other general expenses, including advertising costs.

 

Depreciation and amortization

 

Depreciation and amortization for the Live Events segment totaled $6.9 million for the three months ended June 30, 2015. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

Three months ended June 30, 2014

 

Revenue

 

Our Live Events segment generated revenue of $67.4 million for the three months ended June 30, 2014. This included $39.4 million, or 58.4%, from ticket sales, $6.7 million, or 10.0%, from ticketing fees, $10.1 million, or 15.0%, from merchandising and concession fees of food and beverages and $11.2 million, or 16.6%, from other sources, including sponsorship, license and promoter fees. For the three months ended June 30, 2014, we produced and promoted a total of 229 live events, including 17 festivals of greater than 10,000 attendees, attracting a total attendance of over 1,033,000 attendees. Our Live Events segment had a gross profit margin of 22% for the period.

 

Direct costs

 

For the three months ended June 30, 2014, direct costs associated with live events that we produced, promoted or managed totaled $52.6 million. These costs consisted primarily of $16.1 million, or 30.7%, in musician and artist costs, $25.0 million, or 47.5%, in production costs, $2.6 million, or 4.9%, in event promotion costs and $8.9 million, or 16.9%, in other expenses associated with revenue earned from our live events.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2014 totaled $16.3 million.

 

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Table of Contents

 

Depreciation and amortization

 

Depreciation and amortization for the Live Events segment totaled $6.1 million for the three months ended June 30, 2014. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

Six months ended June 30, 2015

 

Revenue

 

Our Live Events segment generated revenue of $147.9 million for the six months ended June 30, 2015. This included $74.9 million, or 50.7%, from ticket sales, $23.8 million, or 16.1%, from merchandising and concessions fees of food and beverages, $10.1 million, or 6.8%, from ticketing fees, $21.7 million, or 14.7%, of sponsorship and media sales and $17.4 million, or 11.7%, from other sources, including license and promoter fees. For the six months ended June 30, 2015, we produced and promoted a total of 518 live events, including 41 festivals of greater than 10,000 attendees, attracting a total of over 2,136,000 attendees. Our Live Events segment had a gross profit margin of 20.9% for the period.

 

Direct costs

 

For the six months ended June 30, 2015, direct costs associated with live events that we produced, promoted or managed totaled $117.1 million. These costs consisted primarily of $25.8 million, or 22.0%, in musician and artist costs, $67.3 million, or 57.4%, in production costs, $5.5 million, or 4.7%, in event promotion costs and $18.5 million, or 15.9%, in other expenses associated with revenue earned from our live events.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2015 totaled $30.5 million. These costs were primarily attributable to salaries and wages related to employees of $20.6 million and $9.9 million of other general expenses, including advertising costs.

 

Depreciation and amortization

 

Depreciation and amortization for the Live Events segment totaled $12.8 million for the six months ended June 30, 2015. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

Six months ended June 30, 2014

 

Revenue

 

Our Live Events segment generated revenue of $88.6 million for the six months ended June 30, 2014. This included $49.9 million, or 56.3%, from ticket sales, $6.7 million, or 7.6% from ticket fees, $11.0 million, or 12.4%, from merchandising and concession fees of food and beverages and $21.0 million, or 23.7%, from other sources, including sponsorship, license and promoter fees. For the six months ended June 30, 2014, we produced and promoted a total of 356 live events, including 26 festivals of greater than 10,000 attendees, attracting a total attendance of over 1,426,000 attendees. Our Live Events segment had a gross profit margin of 24.1% for the period.

 

Direct costs

 

For the six months ended June 30, 2014, direct costs associated with live events that we produced, promoted or managed totaled $67.2 million. These costs consisted primarily of $21.0 million, or 31.2%, in musician and artist costs, $29.0 million, or 43.2%, in production costs, $2.9 million, or 4.3%, in event promotion costs and $14.3 million, or 21.3%, in other expenses associated with revenue earned from our live events.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2014 totaled $29.4 million.

 

Depreciation and amortization

 

Depreciation and amortization for the Live Events segment totaled $11.4 million for the six months ended June 30, 2014. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

Platform results of operations

 

Our Platform segment is primarily composed of Beatport, sponsorship and marketing activities. In 2014, we moved our ticketing business from the Platform segment to the Live Events segment. This change has been retrospectively applied in the

 

29



Table of Contents

 

segment discussion and disclosures. Our Platform segment operating results for the three and six months ended June 30, 2015 and 2014, respectively, were as follows:

 

 

 

Three months ended

 

Six months ended

 

(in thousands)

 

June 30, 2015

 

June 30, 2014

 

June 30, 2015

 

June 30, 2014

 

Revenue

 

$

14,380

 

$

14,479

 

$

26,379

 

$

26,587

 

Direct costs

 

9,263

 

8,942

 

16,871

 

17,209

 

Gross profit

 

5,117

 

5,537

 

9,508

 

9,378

 

Selling, general and administrative expenses

 

9,050

 

4,834

 

17,095

 

8,790

 

Depreciation and amortization

 

2,194

 

2,149

 

4,210

 

4,250

 

Operating loss

 

$

(6,127

)

$

(1,446

)

$

(11,797

)

$

(3,662

)

 

Three months ended June 30, 2015

 

Revenue

 

Our Platform segment generated revenue of $14.4 million for the three months ended June 30, 2015. This included $9.0 million, or 62.5%, from the sale of digital music files, $2.5 million, or 17.4%, from sponsorship and media sales and $2.9 million, or 20.1%, from other sources, including certain marketing services. Our Platform segment had a gross profit margin of 35.6% for the period.

 

Direct costs

 

For the three months ended June 30, 2015, direct costs associated with the Platform segment totaled $9.3 million. This includes costs related to Beatport’s royalty and other digital music sales-related expenses of $6.0 million, or 64.5%, and $3.3 million, or 35.5%, of other expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2015 totaled $9.1 million. These costs were primarily attributable to salaries and wages related to employees of $5.1 million and other general expenses of $4.0 million.

 

Depreciation and amortization

 

Depreciation and amortization for the Platform segment totaled $2.2 million for the three months ended June 30, 2015. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

Three months ended June 30, 2014

 

Revenue

 

Our Platform segment generated revenue of $14.5 million for the three months ended June 30, 2014. This included $12.0 million, or 82.8%, from the sale of digital music files, and $2.5, or 17.2% from other sources, including certain marketing services. Our Platform segment had a gross profit margin of 38.2% for the period.

 

Direct costs

 

For the three months ended June 30, 2014, direct costs associated with the Platform segment totaled $8.9 million. These costs primarily relate to Beatport’s royalty and other platform related expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2014 totaled $4.8 million.

 

Depreciation and amortization

 

Depreciation and amortization for the Platform segment totaled $2.1 million for the three months ended June 30, 2014. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

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Table of Contents

 

Six months ended June 30, 2015

 

Revenue

 

Our Platform segment generated revenue of $26.4 million for the six months ended June 30, 2015. This included $17.9 million, or 67.8%, from the sale of digital music files, $4.1 million, or 15.4%, from sponsorship and media sales and $4.4 million, or 16.8%, from other sources, including certain marketing services. Our Platform segment had a gross profit margin of 36.0% for the period.

 

Direct costs

 

For the six months ended June 30, 2015, direct costs associated with the Platform segment totaled $16.9 million. This includes costs related to Beatport’s royalty and other digital music sales-related expenses of $12.0 million, or 70.9%, and $4.9 million, or 29.1%, of other expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2015 totaled $17.1 million. These costs were primarily attributable to salaries and wages related to employees of $10.4 million and other general expenses of $6.7 million.

 

Depreciation and amortization

 

Depreciation and amortization for the Platform segment totaled $4.2 million for the six months ended June 30, 2015. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

Six months ended June 30, 2014

 

Revenue

 

Our Platform segment generated revenue of $26.6 million for the six months ended June 30, 2014. This included $23.6 million, or 88.7%, from the sale of digital music files, and $3.0, or 11.3% from other sources, including certain marketing services. Our Platform segment had a gross profit margin of 35.3% for the period.

 

Direct costs

 

For the six months ended June 30, 2014, direct costs associated with the Platform segment totaled $17.2 million. These costs primarily relate to Beatport’s royalty and other platform related expenses.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the six months ended June 30, 2014 totaled $8.8 million.

 

Depreciation and amortization

 

Depreciation and amortization for the Platform segment totaled $4.3 million for the six months ended June 30, 2014. Depreciation expense was associated with property, plant and equipment additions with depreciable lives ranging from three to seven years. Amortization expense represents the amortization of intangible assets.

 

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Table of Contents

 

Reconciliation of segment results

 

 

 

 

 

 

 

Corporate and

 

 

 

(in thousands)

 

Live Events

 

Platform

 

Eliminations

 

Consolidated

 

Three months ended June 30, 2015

 

 

 

 

 

 

 

 

 

Revenue

 

$

107,639

 

$

14,380

 

$

(964

)

$

121,055

 

Direct costs

 

90,481

 

9,263

 

(676

)

99,068

 

Gross profit

 

17,158

 

5,117

 

(288

)

21,987

 

Selling, general and administrative

 

16,696

 

9,050

 

14,518

 

40,264

 

Depreciation

 

1,500

 

64

 

317

 

1,881

 

Amortization

 

5,422

 

2,130

 

175

 

7,727

 

Operating loss

 

$

(6,460

)

$

(6,127

)

$

(15,298

)

$

(27,885

)

Three months ended June 30, 2014

 

 

 

 

 

 

 

 

 

Revenue

 

$

67,387

 

$

14,479

 

$

(244

)

$

81,622

 

Direct costs

 

52,594

 

8,942

 

(3

)

61,533

 

Gross profit

 

14,793

 

5,537

 

(241

)

20,089

 

Selling, general and administrative

 

16,250

 

4,834

 

20,847

 

41,931

 

Depreciation

 

579

 

236

 

31

 

846

 

Amortization

 

5,568

 

1,913

 

32

 

7,513

 

Operating loss

 

$

(7,604

)

$

(1,446

)

$

(21,151

)

$

(30,201

)

Six months ended June 30, 2015

 

 

 

 

 

 

 

 

 

Revenue

 

$

147,925

 

$

26,379

 

$

(1,063

)

$

173,241

 

Direct costs

 

117,054

 

16,871

 

(696

)

133,229

 

Gross profit

 

30,871

 

9,508

 

(367

)

40,012

 

Selling, general and administrative

 

30,510

 

17,095

 

32,404

 

80,009

 

Depreciation

 

1,865

 

145

 

393

 

2,403

 

Amortization

 

10,887

 

4,065

 

337

 

15,289

 

Operating loss

 

$

(12,391

)

$

(11,797

)

$

(33,501

)

$

(57,689

)

Six months ended June 30, 2014

 

 

 

 

 

 

 

 

 

Revenue

 

$

88,573

 

$

26,587

 

$

(212

)

$

114,948

 

Direct costs

 

67,206

 

17,209

 

(58

)

84,357

 

Gross profit

 

21,367

 

9,378

 

(154

)

30,591

 

Selling, general and administrative

 

29,385

 

8,790

 

40,372

 

78,547

 

Depreciation

 

954

 

481

 

50

 

1,485

 

Amortization

 

10,485

 

3,769

 

61

 

14,315

 

Operating loss

 

$

(19,457

)

$

(3,662

)

$

(40,637

)

$

(63,756

)

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have funded our operations from inception through June 30, 2015, including our acquisitions, through operations and net proceeds raised from the issuance of equity and the incurrence of debt. For the three month period ended June 30, 2015, we closed a private placement transaction in which we issued (i) 2,305,210 shares of our common stock to two investors at a price per share of $4.338 for $10.0 million in net proceeds and (ii) 1,037,345 shares of our common stock to Sillerman Investment at a price per share of $4.82 for $5.0 million in net proceeds. We have experienced net losses and negative cash flow from operations since inception, and as of June 30, 2015, had an accumulated deficit of $(342.8)million.

 

As of June 30, 2015, we had cash and cash equivalents totaling $52.2 million, which included $13.6 million of cash proceeds held on behalf of third party ticketing clients.

 

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In June, July, and August of 2015, the sellers of certain of our acquired businesses agreed to extend the terms of certain earnout and put right payments they were entitled to receive from us pursuant to the terms of applicable agreements.

 

In connection with our acquisition of Monumental Productions B.V. in September 2014, we agreed to pay to the seller an earnout of cash and stock based on the performance of the acquired business during fiscal year 2014. On June 4, 2015, we and the seller agreed to amend the earnout payment terms such that the cash portion of the earnout would be payable in three installments. The first two installments of €2.0 million and €1.35 million were paid on June 11, 2015 and July 15, 2015, respectively, and the final installment of €1.35 million is payable on or prior to September 15, 2015.

 

In connection with our acquisition of the assets of React Presents, Inc. and Clubtix Inc. in April 2014, we agreed to pay to the sellers an earnout of cash and stock based on the performance of the acquired businesses during fiscal year 2014. On June 4, 2015, $1.0 million of the cash portion of the earnout was advanced to sellers. On July 7, 2015, we and sellers agreed to amend certain earnout payment terms such that the remaining cash portion of the earnout would be payable in five installments as follows: (i) $1.0 million was paid on July 14, 2015; (ii) $2.0 million on or before September 1, 2015; (iii) $2.0 million on or before November 2, 2015; (iv) $3.0 million on or before January 4, 2016; and (v) the balance of approximately $2.8 million  on or before March 1, 2016. We issued the sellers a promissory note evidencing our obligation to pay the remaining cash portion of the earnout. Further, up to $7.0 million of our obligation under the aforementioned note was personally guaranteed by Mr. Sillerman.

 

In connection with our acquisition of the assets of Nightlife Holdings LLC and its subsidiaries in December 2012, the sellers were granted the right to put their 20% non-controlling interest in SFX-Nightlife Operating LLC to us, which right was exercised on January 16, 2015. We made advance cash payments to sellers of $1.25 million and $1.0 million on January 30, 2015 and June 19, 2015, respectively. On August 7, 2015, we and sellers agreed that the remaining cash portion of the put right consideration will be payable as follows: (i) $1.36 million on or before August 31, 2015; (ii) $0.75 million on or before October 15, 2015; (iii) $0.75 million on or before January 15, 2016; (iv) $0.75 million on or before April 15, 2016; (v) $0.75 million on or before July 15, 2016; (vi) $0.75 million on or before October 17, 2016; and (vii) $0.75 million on or before January 16, 2017.

 

We believe we will be required to make earnout, redemption payments, capital calls or similar payments of up to $35.0 million in cash during the third and fourth quarters of 2015 pursuant to the terms of applicable agreements. To the extent we do not have available cash on hand on the payment date for each payment, we will be required to negotiate for extensions or other modifications of the payment terms.

 

Borrowings

 

9.625% Second Lien Senior Secured Notes due 2019

 

On February 4, 2014, we issued $220.0 million aggregate principal amount of 9.625% second lien senior secured notes due  2019 (the “Notes”). In connection with the issuance of the Notes, we and certain subsidiaries and U.S. Bank National Association, as trustee (in such capacity, the “Trustee”) and collateral agent, entered into the Indenture, which governs the  Notes. The Notes are second-priority lien senior secured obligations of the Company and are fully and unconditionally guaranteed by the Company’s present and future wholly-owned domestic subsidiaries that guarantee the indebtedness under our credit agreement dated February 7, 2014, with the lenders party thereto and Barclays Bank PLC, as administrative agent, letter of credit issuer and swingline lender (the “Credit Agreement”), as well as our non-wholly owned domestic subsidiary, SFX- Nightlife Operating, LLC (collectively, the “Guarantors”). The Notes and the guarantees thereof are secured by a second-  priority lien on substantially all of the present and future assets of ours and the Guarantors, subject to certain exceptions and permitted liens. The Notes will mature on February 1, 2019 and accrue interest at a rate of 9.625% per annum, which is payable semi-annually in arrears on February 1 and August 1 of each year, with the first payment having occurred on August 1, 2014.

 

On September 24, 2014, we issued $65.0 million aggregate principal amount of our 9.625% second lien senior secured notes due 2019 (the “New Notes”) in a private offering exempt from registration under the Securities Act of 1933, as amended. We used the net proceeds of the New Notes for working capital and general corporate purposes, including repaying all borrowings under our Revolver and funding acquisitions, including certain acquisitions which closed simultaneously with the closings of the New Notes issued in September 2014, and paying related fees and expenses. The New Notes constitute an additional issuance of and were issued under the Indenture and the New Notes issued in September 2014 are part of the same series as the existing Notes. In addition, on September 24, 2014, we issued $10.0 million aggregate principal amount of our 9.625% second lien senior secured notes due 2019 in a private placement to Sillerman Investment, an entity controlled by Mr. Sillerman. Such notes constituted an additional issuance of and were issued under the same Indenture as our existing notes issued on February 4, 2014 and September 24, 2014. Except as to certain issuance-related matters, the New Notes and the notes issued to Sillerman Investment issued in September 2014 have identical terms to the existing Notes.

 

Unless the context requires otherwise, for the remainder of this section the capitalized term “Notes” shall include the Notes issued February 4, 2014, the New Notes and the notes issued to Sillerman Investment.

 

Optional Redemption and Mandatory Offer to Purchase.  At any time on or after February 1, 2016, we may redeem all or any portion of the Notes at the redemption prices set forth in the Indenture. Prior to February 1, 2016, we may redeem the Notes, in

 

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whole or in part, at a price equal to 100% of the principal amount thereof plus any accrued or unpaid interest thereon and a “make-whole” premium. In addition, at any time before February 1, 2016, we may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of certain equity offerings, subject to certain conditions, at a redemption price of 109.625% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the date of redemption.

 

The holders of the Notes have the ability to require that we repurchase all or any part of the Notes if the Company experiences specific kinds of changes in control or engages in certain asset sales, in each case at the repurchase prices and subject to the terms and conditions set forth in the Indenture.

 

Covenants.  The Indenture contains certain covenants that are customary with respect to non-investment grade debt securities, including limitations on our and its restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred shares, pay dividends, make any distribution in respect of, redeem or repurchase stock, make certain investments or other restricted payments, enter into certain types of transactions with affiliates, incur liens, apply proceeds from certain asset sales or events of loss, and consolidate or merge with or into other entities or otherwise dispose of all or substantially all of their assets. These covenants are subject to a number of important limitations and exceptions.

 

Events of Default.  The Indenture provides for customary events of default, including cross payment defaults to other specified debt of ours and certain of our subsidiaries. In the case of an event of default arising from specified events of bankruptcy, insolvency or reorganization with respect to us, then the principal, premium, if any, and accrued and unpaid interest, if any,  with respect to all of the Notes will become due and payable without any declaration or act on the part of the Trustee or any holder of the Notes. If any other event of default occurs and is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal, premium, if any, and accrued and unpaid interest, if any, of all the Notes due and payable. In the case of a declaration of the acceleration of the Notes because an event of default has occurred, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes may rescind and annul such declaration and its consequences if, among other conditions set forth in the Indenture, we have paid or deposited with the Trustee a sum sufficient to pay all  sums paid or advanced by the Trustee under the Indenture and all overdue interest on all the Notes, and all events of default (other than the non-payment of principal of the Notes that has become due solely by such declaration of acceleration) have been cured or waived.

 

Credit Agreement

 

On February 7, 2014, we entered into the Credit Agreement with the lenders party thereto and Barclays Bank PLC, as administrative agent, letter of credit issuer and swingline lender, which provides for a $30.0 million revolving credit facility (the “Revolver”), which includes a $10.0 million subfacility for loans in certain approved currencies other than U.S. dollars and a $7.5 million subfacility for letters of credit. Commitments under the Revolver may be increased by an aggregate amount of up  to the sum of (A) the greater of (1) $30.0 million and (2) 100% of Consolidated EBITDA (as defined in the Credit Agreement) of ours and our subsidiaries for the four-quarter period ending immediately on or prior to the date of such increase, plus (B) all interest (including interest that, but for the filing of a petition in bankruptcy with respect to our or our subsidiaries that are guarantors, would have accrued, whether or not a claim is allowed against us or such subsidiary for such interest in the related bankruptcy proceeding), fees, expenses, indemnification or other amounts owed to the lenders under the Credit Agreement and all hedging obligations related thereto less (C) the aggregate commitments under the Credit Agreement then outstanding, subject to certain terms and conditions specified in the Credit Agreement. The Revolver will mature on February 7, 2017, subject to its extension pursuant to the terms of the Credit Agreement.

 

As of June 30, 2015, we have drawn an aggregate amount of $24.2 million under the Revolver and have $5.8 million of availability.

 

Amendments.  On August 15, 2014, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement. Among other things, the Amendment modified the Credit Agreement by amending the definition of “Consolidated EBITDA” to allow our Consolidated EBITDA for purposes of the Credit Agreement to be increased by (i) incremental contributions to Consolidated EBITDA that we reasonably believe in good faith could have been realized or achieved from the guaranteed payments provided under one or more Qualified Marketing Agreements (as defined in the Credit Agreement) entered into after the period for which Consolidated EBITDA is being calculated and before the relevant date of determination had such   Qualified Marketing Agreements been effective as of the beginning of such period and (ii) incremental contributions to Consolidated EBITDA that we reasonably believe in good faith will be achieved from the end of the relevant period through December 31, 2015 from recoupments under an agreement with M&M Management Vennootschap BVBA (“M&M”), related to start-up investments made in connection with a live event in which M&M is a minority partner; provided that any contributions to Consolidated EBITDA from such recoupments may not exceed $7.7 million less recoupments already reflected

 

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in our historical consolidated financial statements. The Amendment also modified certain financial covenants in the Credit Agreement that require us to comply with a maximum total leverage ratio and a minimum interest coverage ratio on a quarterly basis. Upon effectiveness of the Amendment, such financial covenants are only applicable to us if any revolving loan,   swingline loan or letter of credit obligation is outstanding as of the last day of any fiscal quarter.

 

On March 16, 2015, we entered into Amendment No. 2 (the “Second Amendment”) to the Credit Agreement. Among other things, the Second Amendment modified the Credit Agreement, as previously amended, by removing the maximum total leverage ratio and minimum interest coverage ratio financial covenants and eliminating the incurrence tests to which certain exceptions to the negative covenants were subject. Furthermore, the applicable margin for any base rate loan and Eurodollar loan under the Credit Agreement is 3.00% per annum and 4.00% per annum, respectively. Additionally, we will not be able to  borrow loans or request letters of credit under the Credit Agreement unless an amount equal to 105% of the amount of the loan or letter of credit, as applicable, is deposited into a deposit account of Sillerman Investment, an entity controlled by Robert F.X. Sillerman, our Chairman and Chief Executive Officer, that is subject to a first priority lien in favor of the administrative agent under the Credit Agreement.

 

In connection with the Second Amendment, on March 16, 2015, we entered into a commitment letter with Sillerman Investment pursuant to which, and subject to the terms and conditions set forth therein, Sillerman Investment committed to cash collateralize any credit extensions under our credit facility in an aggregate amount of up to $31.5 million for a period of one year, provided that Sillerman Investment, may in its sole discretion, extend such period under certain circumstances. Pursuant to the commitment letter, among other things, on March 16, 2015, we paid Sillerman Investment a commitment fee of $0.63 million. In addition, we will pay Sillerman Investment a fee at a rate of 12% per annum on the amount of cash collateral actually posted, payable quarterly in arrears. In addition, we will be required to pay interest quarterly to Sillerman Investment on any outstanding cash collateral that is foreclosed upon, together with accrued interest thereon, in arrears at a rate of 13% per annum, with such interest rate to be increased by 2% with respect to each 360-day period thereafter. For the six months ended June 30, 2015, Sillerman Investment contributed cash collateral of $25.4 million into the collateral account, of which $15.4 million belonged to Sillerman Investment and $10.0 million belonged to the Company.

 

Security/Guarantors. The Revolver is guaranteed by the Guarantors. The Revolver is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the assets and property of ours and the Guarantors. If we or any of the Guarantors provide additional guarantees or collateral to support all notes issued under the Indenture, the same guarantees or collateral must be provided to support the obligations owing under the Credit Agreement.

 

Mandatory Prepayments. On any date on which the aggregate principal amount of the total borrowings under the Credit Agreement exceeds the aggregate commitments by the lenders under the Credit Agreement, we must immediately pay to the administrative agent an amount equal to such excess. In addition, if the administrative agent notifies us at any time that the outstanding amount of all loans under the Credit Agreement denominated in certain approved currencies other than U.S. dollars exceeds a specified limit then in effect, which is initially $10.0 million, we must prepay loans in an aggregate amount sufficient to reduce such outstanding amount to an amount no greater than such limit.

 

Covenants. The Credit Agreement contains customary affirmative covenants including covenants related to financial statements and other information, collateral reporting, notices of material events, conduct of the business, payment of obligations, maintenance of properties and insurance, submission to certain inspections, compliance with laws and agreements, use of proceeds and letters of credit, subsidiary guarantees, cash management, and additional collateral and further assurances. The Credit Agreement also contains customary negative covenants that, subject to certain exceptions, qualifications and “baskets,” generally limit the ability to incur debt, create liens, make restricted payments, make certain investments, prepay or redeem certain debt, enter into certain transactions with affiliates, change fiscal year, enter into restrictions on distributions from subsidiaries, and enter into certain merger or asset sale transactions.

 

Events of Default. The Credit Agreement contains customary events of default for an agreement of this type. If an event of default under the Credit Agreement occurs and is continuing, the administrative agent may, and at the request of lenders holding more than 50.0% of the sum of the outstanding amounts and unused commitments under the Revolver, will take any or all of the following actions: (i) declare all outstanding obligations under the Credit Agreement to be immediately due and payable and require us to cash collateralize all outstanding letters of credit issued under the Credit Agreement, (ii) terminate all commitments under the Credit Agreement or (iii) exercise the rights and remedies available under the Credit Agreement and any related loan documents. In addition, if, among other things, we or any of our restricted subsidiaries, as defined in the Credit Agreement, do not pay our debts as such debts become due or any bankruptcy, insolvency, liquidation or similar proceeding is instituted by or against any such party, then any outstanding obligations under the Credit Agreement (including obligations to cash collateralize outstanding letters of credit issued under the Credit Agreement) will automatically become immediately due and payable without any further act by the administrative agent or any lender.

 

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CASH FLOWS

 

 

 

For the six months ended June 30,