Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization and Description of Business
Propel
Media, Inc. (“Propel”), a Delaware corporation, is a diversified online advertising company. Propel generates revenues
through the sale of advertising for advertisers who want to reach consumers in the United States and internationally to promote
their products and services. Propel is a holding company for Propel Media LLC (“Propel Media”), a California limited
liability company, Kitara Media Corp. (“Kitara”), a Delaware corporation, and DeepIntent Technologies, Inc. (“DeepIntent”),
a Delaware corporation. Propel, Propel Media, Kitara, DeepIntent and their respective subsidiaries are collectively referred to
herein as the “Company”.
Propel
delivers advertising via its real-time, bid-based, online advertising platform called Propel Media Platform. This technology platform
allows advertisers to target users and deliver video, display and text based advertising. Propel and its Propel Media Platform
provide advertisers with an effective way to serve, manage and maximize the performance of their online advertising purchasing.
Propel offers both a self-serve platform and a managed services option that give advertisers diverse solutions to reach online
users and acquire customers. As of September 30, 2017, Propel has more than 1,100 advertiser customers and serves millions of
ads per day.
Propel
primarily serves its advertising to users who are part of its owned and operated member-based network or the member-based networks
of its third party application partners. Propel provides its user base with access to its premium content for free and obtains
the users’ permission to serve advertising to them while they peruse content on the web. In the owned and operated model,
advertising units are served directly to users through a browser extension or other software installed on the user’s computer.
Under the third party application model, Propel serves advertising through its partners who are providing a variety of applications
free of charge in exchange for the ability to serve ads to their users.
Through
the technology of DeepIntent, which the Company acquired in June 2017 as described below, Propel’s offerings to its advertising
customers will increasingly be able to leverage DeepIntent’s integrated data and programmatic buying platform. This platform
provides a data-driven approach to programmatic advertising that integrates into its data management platform traditional first-party
data (such as client CRM data) and cookie-based third-party user data in order to build an enriched profile of a brand’s
target audiences. Leveraging DeepIntent’s artificial intelligence tools, these profiles are supplemented with real-time
consumer interest data using DeepIntent’s proprietary Natural Language Processing (NLP) algorithms. With a holistic view
of each user’s interests and behaviors, DeepIntent’s demand side platform provides tools to accurately price the value
of each user with respect to the goals of the advertiser while simultaneously providing brands with the confidence that their
ads will appear in a “brand safe” environment. Additionally, this acquisition gives the Company the ability to offer
its advertisers programmatic inventory across all screens, including desktop, mobile, tablet and connected TV.
Propel
also provides solutions to advertisers through its publisher business model with a channel of direct publishers, networks and
exchanges. These supply channels expand the Company’s ability to serve advertising. In this model, the advertising units
are served to users through a website, and the Company serves advertising units to the user in coordination with the publisher,
network or exchange.
On
June 21, 2017 (“DeepIntent Closing Date”), pursuant to a stock purchase agreement (“DeepIntent Acquisition Agreement”)
with the former stockholders of DeepIntent, Propel purchased 100% of the equity interests of DeepIntent, consisting of the issued
and outstanding shares of Class A common stock, Class B common stock and Class C common stock of DeepIntent. The purchase price,
which is subject to an adjustment for working capital, consisted of $4,000,000 paid at closing, $500,000 payable upon the six
month anniversary of the DeepIntent Closing Date and, $500,000 payable upon the one year anniversary of the DeepIntent Closing
Date (collectively, the “Deferred Payments”). In addition, the sellers may earn up to an aggregate of $3,000,000 of
additional consideration upon the achievement of certain performance levels during the years ending December 31, 2018, 2019 and
2020 (collectively, the “Earnouts”) (See Note 3).
Note
2 – Liquidity and Capital Resources
As
of September 30, 2017, the Company’s cash on hand was $2,556,000. The Company had working capital deficits of $1,596,000
and $3,714,000 as of September 30, 2017 and December 31, 2016, respectively. The Company recorded net income of $3,008,000 and
$8,761,000 for the three and nine months ended September 30, 2017, respectively. The Company has historically met its liquidity
requirements through operations.
As
of September 30, 2017, the borrowing base and outstanding balance under the Revolving Loan (as defined in Note 6) were approximately
$6,516,000 and $0, respectively, leaving $6,516,000 available to be drawn under the arrangement.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 – Liquidity and Capital Resources, continued
Cash
flows used in financing activities for the nine months ended September 30, 2017 consisted of $7,399,000 in principal repayments
on the Company’s Term Loan, consisting of $5,250,000 representing scheduled quarterly principal repayments and $2,149,000
paid pursuant to an annual excess cash flow sweep as provided for under the Financing Agreement (See Note 6).
Pursuant
to the Financing Agreement, the Company is subject to a leverage ratio requirement as of the end of each calendar quarter. The
Company was in compliance with such leverage ratio requirement as of September 30, 2017.
Management
believes that the Company’s cash balances on hand, cash flows expected to be generated from operations and borrowings available
under the Company’s Revolving Loan will be sufficient to fund the Company’s net cash requirements through November
2018.
Note
3 – Acquisition of DeepIntent
On
June 21, 2017, Propel purchased 100% of the equity interests of DeepIntent. The purchase price, which is subject to a working
capital an adjustment, consisted of $4,000,000 paid at closing, the Deferred Payments and the Earnouts. Propel entered into employment
agreements for the period from the DeepIntent Closing Date through December 31, 2020 and restrictive covenant agreements through
June 20, 2021 with DeepIntent’s founders and former principal shareholders. Propel’s obligation to remit the Deferred
Payments is contingent upon the continued employment of both of DeepIntent’s founders through the date that any such Deferred
Payment is required to be made.
The
Company accounted for the acquisition of DeepIntent as a business combination. The contingent Deferred Payments shall be accounted
for as compensation for financial reporting purposes and is accreted ratably over the deferred period. During the three and nine
months ended September 30, 2017, accretion of this Deferred Payment was $238,000 and $264,000, respectively, and is reflected
within salaries, commissions, benefits and related expenses within the condensed consolidated statements of operations. As of
September 30, 2017, $264,000 of accrued Deferred Payment obligation was included in accrued expenses in the condensed consolidated
balance sheets.
The
aggregate purchase price was $4,196,000, consisting of a $4,000,000 purchase price, an estimated working capital adjustment of
$134,000 and the fair value of the Earnout of $62,000. The Company prepared forecasts of expected results for DeepIntent under
expected, less than expected and greater than expected scenarios for the Earnout years of 2018, 2019 and 2020. These scenarios
were analyzed and then weighted in order to determine the fair value of the Earnouts. On October 23, 2017, the Company paid $69,000
to the sellers representing an installment toward the working capital adjustment.
The
assets and liabilities of DeepIntent have been recorded in the Company’s condensed consolidated balance sheet at their fair
values at the date of acquisition. As part of the purchase of DeepIntent, the Company acquired an identifiable intangible
asset representing developed technology. This intangible asset was assigned a fair value of $1,320,000, has a definite life and
will be amortized over a period of five years.
The
following details the preliminary allocation of the purchase price for the acquisition of DeepIntent:
|
|
Fair Value
|
|
Accounts receivable
|
|
$
|
362,000
|
|
Security deposit
|
|
|
4,000
|
|
Intangible asset – developed technology
|
|
|
1,320,000
|
|
Goodwill
|
|
|
3,188,000
|
|
Accounts payable
|
|
|
(107,000
|
)
|
Accrued expenses
|
|
|
(121,000
|
)
|
Deferred tax liability, net
|
|
|
(450,000
|
)
|
|
|
|
|
|
Net fair values assigned to assets acquired and liabilities assumed
|
|
$
|
4,196,000
|
|
The
following presents a summary of the purchase price consideration for the purchase of DeepIntent:
Cash
|
|
$
|
4,084,000
|
|
Working capital holdback adjustment
|
|
|
50,000
|
|
Fair value of earnout
|
|
|
62,000
|
|
Total Purchase Price Consideration
|
|
$
|
4,196,000
|
|
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Acquisition of DeepIntent, continued
The
results of operations for DeepIntent for the period June 21, 2017 through September 30, 2017 are reflected in the Company’s
results for the three and nine months ended September 30, 2017 in the accompanying condensed consolidated statements of operations.
The
goodwill acquired will not be deductible for income tax purposes. The Company cited the following reasons for the acquisition
of DeepIntent: DeepIntent provides a technology platform and experience in data science and algorithms that enables Propel to
provide an innovative additional advertising solution to its suite of solutions, and offer these solutions to its existing customers,
and to new advertisers, as well as to leading brand advertisers and their advertising agencies. The DeepIntent acquisition also
provides the Company with the tools to supplement its current offerings with programmatic inventory, as well as provides diversification
and leverage to the business that is expected to be accretive to long-term enterprise value.
Unaudited
Pro Forma Information
The
following table provides unaudited pro forma information as if DeepIntent had been acquired as of January 1, 2016. The pro forma
results do not include any anticipated cost synergies or other effects of the integration of DeepIntent or recognition of compensation
expense or fair value of the Earnouts. Pro forma amounts are not necessarily indicative of the results that actually would have
occurred had the acquisition been completed on the dates indicated, nor is it indicative of the future operating results of the
combined company.
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Pro forma revenues
|
|
$
|
22,207,000
|
|
|
$
|
13,747,000
|
|
|
$
|
62,822,000
|
|
|
$
|
45,135,000
|
|
Pro forma net income (loss)
|
|
$
|
3,008,000
|
|
|
$
|
(354,000
|
)
|
|
$
|
8,194,000
|
|
|
$
|
(683,000
|
)
|
Pro forma net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.00
|
)
|
Note
4 – Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited interim condensed consolidated financial statements and footnotes have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US GAAP”) and applicable rules and regulations
of the Securities and Exchange Commission (the “SEC”) regarding unaudited interim financial information. In the opinion
of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the Company’s condensed consolidated balance
sheets, statements of operations and cash flows for the interim periods presented. Operating results for the interim periods presented
are not necessarily indicative of the results of operations to be expected for the full year due to seasonal and other factors.
Certain information and footnote disclosures normally included in the condensed consolidated financial statements in accordance
with US GAAP have been omitted in accordance with the rules and regulations of the SEC. Accordingly, these unaudited interim condensed
consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements
and accompanying notes thereto for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K
filed with the SEC on March 30, 2017.
Principles
of Consolidation
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
inter-company balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.
Use
of Estimates
The
Company’s unaudited condensed consolidated financial statements are prepared in conformity with US GAAP, which requires
management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial
statements and the accompanying notes. Actual results could differ materially from these estimates. The Company’s most significant
estimates relate to the accounts receivable allowance, the forfeiture of customer deposits, the valuation allowance on deferred
tax assets, valuation of goodwill and intangibles, recognition of revenue, and the valuation of stock options.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
4 – Summary of Significant Accounting Policies, continued
Accounts
Receivable
Accounts
receivable are stated at a gross invoice amount less an allowance for doubtful accounts.
The
Company estimates its allowance for doubtful accounts by evaluating specific accounts where information indicates the Company’s
customers may have an inability to meet financial obligations, such as customer payment history, credit worthiness and receivable
amounts outstanding for an extended period beyond contractual terms. The Company uses assumptions and judgment, based on the best
available facts and circumstances, to record an allowance to reduce the receivable to the amount expected to be collected. These
allowances are re-evaluated and adjusted as additional information is received.
The
allowance for doubtful accounts as of September 30, 2017 and December 31, 2016 was $527,000 and $266,000, respectively.
Property
and Equipment
Property
and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization expense
are computed using the straight-line method over the estimated useful lives of the assets, generally, three years for computer
equipment and purchased software, three to five years for furniture and equipment, the shorter of the useful life and the term
of the lease for leasehold improvements. Depreciation expense for the three months ended September 30, 2017 and 2016 was $372,000
and $525,000, respectively, and $1,137,000 and $1,684,000 for the nine months ended September 30, 2017 and 2016, respectively.
Intangible
Assets
The
Company’s long-lived intangible assets, other than goodwill, are assessed for impairment when events or circumstances indicate
there may be an impairment. These assets were initially recorded at their estimated fair value at the time of acquisition and
assets not acquired in acquisitions were recorded at historical cost. However, if their estimated fair value is less than the
carrying amount, other intangible assets with indefinite life are reduced to their estimated fair value through an impairment
charge to our condensed consolidated statements of operations. On June 21, 2017, the Company recorded an intangible asset representing
the patent, and other intellectual property acquired in connection with the DeepIntent acquisition. This intangible asset was
recorded at its fair value on the DeepIntent Closing Date.
Intangible
assets as of September 30, 2017 and December 31, 2016 were $1,267,000 and $20,000, respectively. Intangible assets at September
30, 2017 consisted of the DeepIntent intellectual property of $1,320,000 net of accumulated amortization of $73,000 and the Propel
Media trade name at a cost of $20,000. Amortization expense was $66,000 and $0 for the three months ended September 30, 2017 and
2016, respectively, and $73,000 and $39,000 for the nine months ended September 30, 2017 and 2016, respectively.
Capitalization
of Internally Developed Software
The
Company capitalizes certain costs related to its software developed or obtained for internal use in accordance with ASC 350-40.
Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external
costs incurred during the application development stage, including upgrades and enhancements representing modifications that will
result in significant additional functionality, are capitalized. Software maintenance and training costs are expensed as incurred.
Capitalized costs are recorded as part of property and equipment and are amortized on a straightline basis over the software’s
estimated useful life ranging from 12 months to 36 months. The Company evaluates these assets for impairment whenever events or
changes in circumstances occur that could impact the recoverability of these assets. Based upon management’s assessment
of capitalized software, the Company recorded impairment charges of $0 and $20,000 for the three and nine months ended September
30, 2017, respectively, to write off the book value of certain internally developed capitalized software.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
4 – Summary of Significant Accounting Policies, continued
Revenue
Recognition
Propel
generates revenue from advertisers by serving their ads to a user base consisting of the Company’s owned and operated network,
users of our third party application partners’ properties and users from our publisher driven traffic, as well as from advertising
sold through the Company’s demand-side platform. In all cases, the Company’s revenue is generated when an advertisement
is served by the Company or when a user action occurs based on the advertisement the Company served (i.e., a view, a click, a
conversion action, etc.). There is a specific transaction that triggers a billable instance.
The
Company recognizes revenue in accordance with ASC Topic 605, “Revenue Recognition” (“ASC 605”). Accordingly,
the Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists, no significant
Company obligations remain, collection of the related receivable is reasonably assured and the amounts are fixed and determinable.
The gross advertising campaign revenue is recognized in the period that the advertising impressions, clicks or actions occur,
provided that all other revenue recognition criteria have been met. The Company’s agreements do not require a guaranteed
minimum number of impressions, clicks or actions.
With
respect to advertising campaign activities, the Company acts as a principal in that it is the primary obligor to the advertiser
customer.
The
amounts on deposit from customers are recorded as an advertiser deposit liability in the accompanying unaudited condensed consolidated
balance sheets.
Cost
of Revenues
Costs
of revenue consists of marketing expenses to obtain new users for the Company’s owned and operated properties, publisher
costs of third-party networks and properties, transaction costs and revenue-sharing costs to third party application developer
partners, as well as costs of advertising purchased through the Company’s demand-side platform.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
4 – Summary of Significant Accounting Policies, continued
Concentration
of Credit Risk and Significant Customers
The
Company’s concentration of credit risk includes its concentrations from key customers and vendors. The details of these
significant customers and vendors are presented in the following table for the three and nine months ended September 30, 2017
and 2016:
|
|
For
the Three Months Ended
September 30,
|
|
For
the Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
The
Company’s largest customers are presented below as a percentage of the Company’s aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
None
over 10%
|
|
None
over 10%
|
|
None
over 10%
|
|
None
over 10%
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
None
over 10%
|
|
None
over 10%
|
|
None
over 10%
|
|
None
over 10%
|
|
|
|
|
|
|
|
|
|
The
Company’s largest vendors are presented below as a percentage of the Company’s aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s largest vendors reported in cost of revenues are presented as a percentage of the Company’s aggregate
cost of revenues
|
|
22%
and 18% of cost of revenues, or 40% of cost of revenues in the aggregate
|
|
14%
and 14% of cost of revenue, or 28% of cost of revenues in the aggregate
|
|
20%
and 16% of cost of revenues, or 36% of cost of revenues in the aggregate
|
|
17%,
15%, and 14% of cost of revenue, or 46% of cost of revenues in the aggregate
|
|
|
|
|
|
|
|
|
|
The
Company’s largest vendors reported as a percentage of accounts payable
|
|
23%
of accounts payable to one vendor
|
|
None
over 10%
|
|
23%
of accounts payable to one vendor
|
|
None
over 10%
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable.
Cash is deposited with a limited number of financial institutions. The balances held at any one financial institution
may
be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Accounts are insured by the FDIC
up to $250,000. As of September 30, 2017 and December 31, 2016, the Company held cash balances in excess of federally insured
limits.
The
Company extends credit to customers based on an evaluation of their financial condition and other factors. The Company generally
does not require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations
of its customers and maintains an allowance for doubtful accounts and sales credits.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
4 – Summary of Significant Accounting Policies, continued
Net
Income (Loss) per Share
Earnings
(loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive,
potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable
upon the exercise of stock options and warrants. For the three and nine months ended September 30, 2017, the Company excluded
potential common shares resulting from the exercise of stock options (21,230,000 potential common shares) and of warrants (6,363,636
potential common shares) as their inclusion would be anti-dilutive. For the three and nine months ended September 30, 2016, the
Company excluded potential common shares resulting from the exercise of stock options (23,517,500 potential common shares) and
of warrants (6,363,636 potential common shares) as their inclusion would be anti-dilutive.
Subsequent
events
The Company has evaluated events that occurred subsequent to
September 30, 2017 through the date these condensed consolidated financial statements were issued. Management has concluded that,
other than as disclosed in Notes 3 and 6, there were no subsequent events that required disclosure in these condensed consolidated
financial statements.
Recent
Accounting Pronouncements
On
March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718). This update requires
that all excess tax benefits and tax deficiencies arising from share-based payment awards should be recognized as income tax expense
or benefit on the condensed consolidated statements of operations. The amendment also states that excess tax benefits should be
classified along with other income tax cash flows as an operating activity. In addition, an entity can make an entity-wide accounting
policy election to either estimate the number of awards expected to vest or account for forfeitures as they occur. The provisions
of this update are effective for annual and interim periods beginning or after December 15, 2016. The Company has adopted ASU
2015-16 effective January 1, 2017 and such adoption did not have a material impact on the Company’s condensed consolidated
financial position and results of operations.
In
April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606), “Identifying Performance
Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying
performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. ASU
2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017,
with early application permitted. Based upon the Company’s preliminary assessment, the adoption of this new standard is
not expected to have a material impact on the Company’s condensed consolidated financial statements.
In
May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”, “Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition
of 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 provisions of this update are effective for annual
and interim periods beginning after December 15, 2017, with early application permitted. Based upon the Company’s preliminary
assessment, the adoption of this new standard is not expected to have a material impact on the Company’s condensed consolidated
financial statements.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
4 – Summary of Significant Accounting Policies, continued
Recent
Accounting Pronouncements, continued
In
January 2017, the FASB issued ASU No. 2017-04 “Intangibles-Goodwill and other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2014-04”). To simplify the subsequent measurement of goodwill, the Board eliminated Step 2
from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures
to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities)
following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business
combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if
applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform
a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.
Therefore,
the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated
to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative
assessment for a reporting unit to determine if the quantitative impairment test is necessary. The provisions of this update are
effective for annual and interim periods beginning after December 15, 2019, with early application permitted after January 1,
2017. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial
statements.
In
December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers”, (“ASU 2016-20”). The purpose of ASU 2016-20 is to amend certain narrow aspects of
the guidance issued in ASU 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-period
performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities,
advertising costs and the clarification of certain examples. The Company is currently evaluating the impact the adoption of this
standard will have on its condensed consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”). The amendments in this update provide guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the
effects of a modification unless all of the following are met: The fair value of the modified award is the same as the fair value
of the original award immediately before the original award is modified, the vesting conditions of the modified award are the
same as the vesting conditions of the original award immediately before the original award is modified and the classification
of the modified award an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified. The provisions of this update are effective for annual and interim periods beginning after
December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard
will have on its condensed consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11 “Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815)” (“ASU 2017-11”) to address narrow issues identified as a result of the
complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics
of liabilities and equity. Part I of the amendment changes the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified
instruments. Part II of the update re-characterizes the indefinite deferral of certain provisions of Topic 480 that
now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
Part I of ASU 2017-11 is effective for public business entities for fiscal years, and interim period within those fiscal
years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact the adoption
of this standard will have on its condensed consolidated financial statements.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
5 – Reverse Merger and Obligations to Transferors
On
January 28, 2015, Propel consummated the “reverse merger” (the “Reverse Merger” or the “Transactions”)
as contemplated by (i) the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of October 10,
2014, by and among Kitara, Propel, which was previously a wholly-owned subsidiary of Kitara, and Kitara Merger Sub, Inc. (“Merger
Sub”), which was previously a wholly-owned subsidiary of Propel, and (ii) the Unit Exchange Agreement (the “Exchange
Agreement”), dated as of October 10, 2014 and amended as of December 23, 2014, April 29, 2015 and January 26, 2016 by and
among Kitara, Propel, Propel Media and the former members of Propel Media (“Transferors”).
Pursuant
to the Exchange Agreement, the Company incurred a deferred payment obligation of (i) $10,000,000 to the Transferors (“Deferred
Obligation”), which is payable in cash and/or stock not later than, June 30, 2019 and (ii) $6,000,000 payable in cash immediately
after the payment of certain fees to the Lenders on or about January 28, 2019, (the “Deferred Payment”). The Company
can pay the Deferred Obligation from an equity financing or from available working capital. The Company is required to use its
reasonable best efforts to complete equity financings that would raise sufficient net proceeds to pay the $10,000,000 Deferred
Obligation in cash to the Transferors on or before June 30, 2019 (the “Equity Financing Period”). In addition, the
Company’s board of directors, at least two times per year during the Equity Financing Period, is obligated to determine,
in its sole and absolute discretion, the amount, if any, of the Company’s working capital available to be used to pay all
or a portion of the $10,000,000 Deferred Obligation in cash, taking into account such factors as it may deem relevant. If the
Company’s board of directors determines that there is available working capital to pay all or a portion of the $10,000,000
Deferred Obligation, the Company must use its reasonable best efforts to promptly obtain any required lender consent and, if such
consent is obtained, must promptly pay to the Transferors an amount in cash equal to such available working capital. Finally,
Jared Pobre, one of the former members of Propel Media, on behalf of the Transferors, is permitted to elect, during the ten day
period following each December 31st during the Equity Financing Period, commencing December 31, 2016, to receive any unpaid amount
of the $10,000,000 Deferred Obligation in shares of the Company’s common stock. For such issuance, each share of the Company’s
common stock will be valued at the closing market price of the Company’s common stock as reported on NASDAQ or such other
national securities exchange on which the Company’s Common Stock is listed (or if not so listed, the bid price on the OTC
Pink Market) on the date prior to the date on which such shares are issued to the Transferors.
The
following represents the outstanding obligations to the Transferors under the Exchange Agreement:
|
|
As of,
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Amount due on or before September 30, 2019
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Amount due January 28, 2019
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Total, gross
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
Less: discount
|
|
|
(962,000
|
)
|
|
|
(1,431,000
|
)
|
Total, net
|
|
$
|
15,038,000
|
|
|
$
|
14,569,000
|
|
During
the three months ended September 30, 2017 and 2016, the Company recorded discount amortization of $161,000 and $148,000, respectively.
For the nine months ended September 30, 2017 and 2016, the Company recorded discount amortization of $469,000 and $493,000, respectively.
The unamortized discount was $962,000 as of September 30, 2017 and $1,431,000 as of December 31, 2016.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 – Financing Agreement
On
January 28, 2015, in connection with the closing of the Reverse Merger, Propel, Kitara and Propel Media as “Borrowers”
and certain of their subsidiaries as “Guarantors” entered into a financing agreement (“Financing Agreement”)
with certain financial institutions as “Lenders.”
The
Financing Agreement provided the Borrowers with (a) a term loan in the aggregate principal amount of $81,000,000 (the “Term
Loan”) and (b) a revolving credit facility in an aggregate principal amount not to exceed $15,000,000 at any time outstanding
(the “Revolving Loan” and, together with the Term Loan, the “Loans”). The Loans will mature on January
28, 2019 (“Final Maturity Date”).
The
Financing Agreement provided for certain fees to be paid, including (i) a closing fee of $2,880,000 which was withheld from the
proceeds of the Term Loan and was accounted for as an original issue discount and is being amortized to interest expense using
the interest method over the term of the Term Loan and (ii) a (“Deferred Fee”) of $12,500,000 payable to the Lenders
and due upon the fourth anniversary of the inception of the Term Loan.
On
May 30, 2017, the Company and the parties to the Financing Agreement had agreed that, subject to certain conditions, if the amounts
owed under the Financing Agreement are repaid in full at any time through and including September 30, 2017, the Deferred Fee would
have been reduced to an amount equal to 5.0% times the aggregate principal amount of the loans repaid on said date. The Company
did not repay such amounts by September 30, 2017. On November 10, 2017, the Company and the parties to the Financing Agreement
entered into a new agreement which, subject to certain conditions, provides that if the amounts owed under the Financing Agreement
are repaid in full at any time through and including January 15, 2018, the Deferred Fee would be reduced to an amount equal to
5.0% times the aggregate principal amount of the loans repaid on said date. Otherwise, the Deferred Fee will continue to be due
as originally contemplated ($12,500,000 to be paid on the fourth anniversary of the closing date of the Financing Agreement).
The Company is accreting the Deferred Fee of $12,500,000 as a finance charge over the full term of the Term Loan.
The
Company recorded amortization of the closing fee as interest expense of $172,000 and $190,000, for the three months ended September
30, 2017 and 2016, respectively, and $524,000 and $577,000 for the nine months ended September 30, 2017 and 2016, respectively.
The balance of the closing fee original issue discount was $836,000 and $1,360,000 as of September 30, 2017 and December 31, 2016,
respectively, and is reflected within the Term Loan obligations on the condensed consolidated balance sheets. The Company recorded
as interest expense accretion of the Deferred Fee of $765,000 and $806,000, for the three months ended September 30, 2017 and
2016, respectively, and $2,301,000 and $2,431,000 for the nine months ended September 30, 2017 and 2016, respectively. The balance
of the accreted Deferred Fee as of September 30, 2017 and December 31, 2016 was $8,646,000 and $6,344,000, respectively, and is
reflected within the Term Loan obligations on the condensed consolidated balance sheets.
In
addition, the Company incurred debt issuance costs of $916,000 in connection with the Loans which has been accounted for as debt
discount and is being amortized using the effective interest method over the term of the Term Loan. The Company recorded as interest
expense amortization of the debt issuance costs of $54,000 and $60,000 for the three months ended September 30, 2017 and 2016,
respectively, and $166,000 and $184,000 for the nine months ended September 30, 2017 and 2016, respectively. The balance of the
unamortized debt issuance costs of $262,000 and $428,000, respectively, is reflected within the Term Loan obligations on the condensed
consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
On
June 21, 2017, the Borrowers entered into an amendment to the Financing Agreement (“Amendment No. 2”), the purpose
of which was to allow for the Company’s consummation of the DeepIntent Acquisition Agreement. The Company paid an amendment
fee (“Amendment Fee”) of approximately $752,000 on October 2, 2017, in connection with this Amendment No. 2. The Amendment
Fee was accrued on June 21, 2017 and was subsequently paid on October 2, 2017. The amendment fee has been reflected as interest
expense, net, within the condensed consolidated statement of operations.
The
Financing Agreement and other loan documents contain customary representations and warranties and affirmative and negative covenants,
including covenants that restrict the Borrowers’ ability to, among other things, create certain liens, make certain types
of borrowings and engage in certain mergers, acquisitions, consolidations, asset sales and affiliate transactions. The Company
is also subject to a leverage ratio requirement as of the end of each calendar quarter. The Financing Agreement provides for customary
events of default, including, among other things, if a change of control of Propel occurs. The Loans may be accelerated upon the
occurrence of an event of default. As of September 30, 2017, the Company was in compliance with the covenants and the leverage
ratio requirement under the Finance Agreement.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 – Financing Agreement, continued
Term
Loan
The
outstanding principal amount of the Term Loan shall be repayable in consecutive quarterly installments in equal amounts of $1,750,000
on the last day of each March, June, September and December. The Company is subject to an annual excess cash flow sweep requirement
(See Note 2). The remainder of the Term Loan is due and payable on the maturity date, except in certain limited circumstances.
Subject
to the terms of the Financing Agreement, the Term Loan or any portion thereof shall bear interest on the principal amount thereof
from time to time outstanding, from the date of the Term Loan until repaid, at a rate per annum equal to 9.00% plus either (i)
the London Interbank Offered Rate (“LIBOR”) (but not less than 1% and not more than 3%) for the interest period in
effect for the Term Loan (or such portion thereof), or (ii) the bank’s reference rate. For each interest period, the Company
may choose to pay interest under either the LIBOR or reference rate method. During the three and nine months ended September 30,
2017, interest on the Term Loan bore an effective interest rate of approximately 10.2% and 10.0%, respectively, per annum.
The
following represents the obligations outstanding under the Term Loan:
|
|
As of
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Principal
|
|
$
|
60,132,000
|
|
|
$
|
67,531,000
|
|
Discounts
|
|
|
(1,097,000
|
)
|
|
|
(1,787,000
|
)
|
Accreted value of the Deferred Fee ($12,500,000)
|
|
|
8,645,000
|
|
|
|
6,344,000
|
|
Net
|
|
|
67,680,000
|
|
|
|
72,088,000
|
|
Less: Current portion
|
|
|
(6,158,000
|
)
|
|
|
(6,089,000
|
)
|
Long-term portion
|
|
$
|
61,522,000
|
|
|
$
|
65,999,000
|
|
The
future minimum payments on the Company’s Term Loan are as follows:
For the years ended December 31,
|
|
Term Loan
|
|
2017 (three months)
|
|
|
1,750,000
|
|
2018
|
|
|
7,000,000
|
|
2019
|
|
|
51,382,000
|
|
Total, gross
|
|
|
60,132,000
|
|
Less: debt discount
|
|
|
(1,097,000
|
)
|
Plus: accreted value through September 30, 2017 of the Deferred Fee ($12,500,000)
|
|
|
8,645,000
|
|
Total, net
|
|
|
67,680,000
|
|
Less: current portion
|
|
|
(6,158,000
|
)
|
Long-term debt
|
|
$
|
61,522,000
|
|
Revolving
Loan
As
of September 30, 2017, the outstanding balance of the Revolving Loan was $0, and $6,516,000 was available for future borrowing
under the Revolving Loan.
Subject
to the terms of the Financing Agreement, the Company may have multiple revolving loans under the revolving loan arrangement. Each
revolving loan shall bear interest on the principal amount thereof from time to time outstanding, from the date of such Loan until
repaid, at a rate per annum equal to 6.00% plus either (i) the LIBOR for the interest period in effect for such Loan (but LIBOR
may not be less than 1%) (the total rate per annum for LIBOR borrowings was approximately 7.0% during the nine months ended September
30, 2017), or (ii) the bank’s reference rate (the reference rate was approximately 10.25% during the nine months ended September
30, 2017). For each revolving loan, the Company can choose to borrow either at the LIBOR or the reference rate.
As
of September 30, 2017, the Company was in compliance with all covenants under the Financing Agreement and other loan documents.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
7 – Related-Party Transactions
The
Company has outsourced technology development services and other administrative services to a technology company in Eastern Europe
(“Technology Vendor”). The Technology Vendor is owned by an individual who is affiliated with a trust, which is a
shareholder of the Company. The technology development services and other administrative services provided to the Company by the
Technology Vendor during the three months ended September 30, 2017 and 2016, totaled $955,000 and $838,000, respectively, and
$2,701,000 and $2,353,000 during the nine month ended September 30, 2017 and 2016, respectively. These amounts were included in
property and equipment and operating expenses, as applicable, in the accompanying condensed consolidated balance sheets and condensed
consolidated statements of operations. Certain of the costs incurred for the technology development services described above were
for the development of internal-use software, which were capitalized and amortized over the estimated useful life. In addition,
the Company had amounts due to this entity of $5,000 and $7,000 as of September 30, 2017 and December 31, 2016, respectively,
which are reported within accrued expenses in the condensed consolidated balance sheets.
During
the three months ended September 30, 2017 and 2016, the Company has incurred a total of $45,000 and $47,000, respectively, and
during the nine months ended September 30, 2017 and 2016, the Company has incurred a total of $135,000 and $149,000, respectively,
to a firm owned by the Company’s Interim Chief Financial Officer for financial advisory and accounting services provided
to the Company. There was no balance due to this firm as of September 30, 2017 and December 31, 2016.
Note
8 – Commitments and Contingencies
Operating
leases
Rent
expense totaled $122,000 and $106,000 during the three months ended September 30, 2017 and 2016, respectively, and $334,000 and
$323,000 for the nine months ended September 30, 2017 and 2016, respectively. The following is an annual schedule of approximate
future minimum rental payments required under the operating lease agreement for the Company’s Irvine, California lease location:
Years Ending December 31,
|
|
Amount
|
|
2017 (three months)
|
|
$
|
153,000
|
|
2018
|
|
|
458,000
|
|
|
|
$
|
611,000
|
|
Litigation
From
time to time, the Company may be involved in litigation relating to claims arising out of our operations in the normal course
of business. Other than as set forth below, at September 30, 2017, there were no material pending legal proceedings to which the
Company was a party or to which any of its property was subject that were expected, individually or in the aggregate, to have
a material adverse effect on us.
In December 2013, an action entitled Intrepid Investments, LLC
(“Intrepid”) v. Selling Source, LLC (“Selling Source”), et al., Index No. 65429/2013 was filed in the Supreme
Court of the State of New York, County of New York. This is an action commenced by Intrepid against Selling Source and a number
of other defendants, including Kitara Media LLC (“Kitara Media”), one of the Company’s subsidiaries, to collect
on a Junior Secured Promissory Note signed by Selling Source in the original principal sum of $28,700,000 (the “Note”).
Kitara Media was a subsidiary of Selling Source at the time the Note was issued. Kitara Media is not a signatory to the Note, but
like all of the subsidiaries of Selling Source at such time, on August 31, 2010 Kitara Media pledged all of its assets as collateral
for all of the indebtedness of Selling Source, including the Note, which is the most junior obligation in Selling Source's capital
structure. In connection with the merger of Kitara Media into a subsidiary of Kitara, with Kitara Media surviving as a wholly owned
subsidiary of Kitara, the senior lenders of Selling Source exercised their authority to release all liens on the assets of Kitara
Media, including the liens associated with the Note.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
8 – Commitments and Contingencies, continued
Litigation,
continued
In
the action, Intrepid seeks to foreclose on the security interest. Both Selling Source’s and Kitara Media’s obligations
to Intrepid under the Note and Security Agreement were subordinate to obligations Selling Source had to two groups of prior lenders
(“Senior Lenders”). The right of Intrepid to compel payments under the Note and/or foreclose the lien created by the
Security Agreement was subject to an Intercreditor Agreement by and between the Senior Lenders and Intrepid. Under the terms of
the Intercreditor Agreement, Intrepid could not take steps to compel Selling Source to make payment on the Note or foreclose the
Security Agreement so long as the obligations to the Senior Lenders remained outstanding. In addition, under the terms of the
Intercreditor Agreement, the Senior Lenders had the right to have the lien released on any of the collateral pledged as security
under the Security Agreement. In the New York action, Intrepid has challenged the Senior Lenders’ authority to release the
lien and also challenged the enforceability of the Intercreditor Agreement generally. The Court has not yet ruled on the
merits of that challenge. In addition, Selling Source’s obligations to the Senior Lenders remains outstanding.
The
second matter is Intrepid Investments, LLC v. Selling Source, LLC et al., Index No. 654309/2013, which was filed in the Supreme
Court of the State of New York, County of New York. This matter was originally limited to claims asserted by Intrepid against
Selling Source regarding an earn-out calculation entered into between it and Selling Source, and confirmed by an arbitrator. In
August, 2014, Intrepid amended its complaint to include various breach of contractor claims against a variety of those defendants,
including Kitara. The new defendants, including Kitara, answered the amended complaint on November 7, 2014, denying liability
for all claims. On February 19, 2015, the Court entered an order granting Selling Source’s motion to affirm the arbitration
results. On March 3, 2015, Selling Source filed a motion for partial summary judgment seeking dismissal of eleven of Intrepid’s
remaining claims, and, in September 2015, the New York Supreme Court granted this motion for summary judgment. The claims asserted
against Kitara were not among those addressed in Selling Source’s motion.
Based
on these facts, Propel believes Intrepid’s claims are without merit and intend to defend them vigorously. In any event,
Selling Source has acknowledged an obligation to indemnify and defend Kitara Media from any liability to Intrepid arising out
of the Note and Security Agreement. The parties have exchanged pleadings and Selling Source has provided documents and written
interrogating responses to Intrepid. Selling Source owns 22.5 million shares of the common stock of Propel and one of the directors
of Propel is also a director of Selling Source.
Note
9 – Defined Contributions Plans
The
Company maintains a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “Plan”). Participating
employees may defer a percentage of their eligible pre-tax earnings up to the Internal Revenue Service’s annual contribution
limit. All full-time employees of the Company are eligible to participate in the Plan.
The
Plan does not permit investment of participant contributions in the Company’s common stock. The Company’s matching
contributions to the Plan are discretionary. The Company recorded contribution expense of $59,000 and $41,000 during the three
months ended September 30, 2017 and 2016, respectively, and $207,000 and $178,000 during the nine months ended September 30, 2017
and 2016, respectively, which is recorded in salaries, commissions, benefits and related expenses on the condensed consolidated
statements of operations.
Note
10 – Income Taxes
The
Company’s income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted
for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate
of the annual effective tax rate and, if the Company’s estimated tax rate changes, it makes a cumulative adjustment in that
period.
The
effective income tax rate for the nine months ended September 30, 2017 and 2016 was 37.4% for each period, resulting in $5,161,000
and $1,887,000 of income tax expense, respectively. The income tax expense for the nine months ended September 30, 2017 and 2016
differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to the
effect of state income taxes, which can differ from period to period.
Propel
Media, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
11 – Stock-Based Compensation
Equity
Incentive Plans
2014
Long-Term Incentive Equity Plan
On
October 9, 2014, Propel and its then sole stockholder approved the 2014 Long-Term Incentive Plan (“2014 Plan”), pursuant
to which a total of nine percent of the fully-diluted shares of the Company’s common stock outstanding as of the closing
of the Transactions (or 26,172,326 shares) became available for awards under the plan upon such closing. Kitara’s stockholders
approved the plan as of January 26, 2015.
2012
and 2013 Long-Term Incentive Equity Plans
On
May 14, 2012 and December 3, 2013, Kitara adopted the 2012 Long-Term Incentive Equity Plan (“2012 Plan”) and the 2013
Long-Term Incentive Equity Plan (“2013 Plan”). The 2012 Plan and 2013 Plan provide for the grant of stock options,
stock appreciation rights, restricted stock and other stock-based awards to, among others, the officers, directors, employees
and consultants of the Company.
Effective
January 28, 2015, Propel assumed the 2012 Plan and 2013 Plan, and all outstanding stock options thereunder. Propel amended the
plans so that no further awards may be issued under such plans after the closing of the Reverse Merger.
Stock
Option Award Activity
The
following table is a summary of stock option awards:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2016
|
|
|
23,351,875
|
|
|
$
|
0.49
|
|
|
$
|
0.27
|
|
|
|
6.9
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited, expired or canceled
|
|
|
2,121,875
|
|
|
|
0.55
|
|
|
|
0.29
|
|
|
|
-
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
21,230,000
|
|
|
$
|
0.49
|
|
|
$
|
0.27
|
|
|
|
5.99
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
14,969,066
|
|
|
$
|
0.46
|
|
|
$
|
0.25
|
|
|
|
5.37
|
|
|
$
|
-
|
|
The
aggregate intrinsic value is calculated as the difference between the weighted average exercise price of the underlying outstanding
stock options and the fair value of the Company’s common stock, based upon the closing price of the Company’s common
stock as reported on the OTC Pink Market on September 30, 2017. The Black-Scholes method option pricing model was used to estimate
the fair value of the option awards using the following range of assumptions. The simplified method was used to determine the
expected life of grants to employees, as these granted options were determined to be “plain-vanilla” options. The
full term was used for the expected life for options granted to consultants.
The
fair value of stock options is amortized on a straight line basis over the requisite service periods of the respective awards.
Stock based compensation expense related to stock options was $262,000 and $240,000 for the three months ended September 30, 2017
and 2016, respectively and $717,000 and $1,412,000 for the nine months ended September 30, 2017 and 2016, respectively. The expense
was reflected in selling, general and administrative expenses on the accompanying condensed consolidated statements of operations.
As of September 30, 2017, the unamortized value of stock options was $1,462,000, including the effect of the mark-to-market adjustment
for unvested awards granted to consultants. As of September 30, 2017, the unamortized portion will be expensed through November
2019 and the weighted average remaining amortization period was 1.2 years.
Note
12 – Executive Bonus Plan
Effective
January 1, 2016, the Propel Media Executive Bonus Plan (the “Executive Bonus Plan”) became effective for certain employees
of the Company. The Executive Bonus Plan provides for bonuses based on the performance of the Company. Bonus expense for earned
bonuses under the Executive Bonus Plan amounted to $482,000 and $237,000 for the three months ended September 30, 2017 and 2016,
respectively, and $1,254,000 and $600,000 for the nine months ended September 30, 2017 and 2016, respectively. The bonuses are
included in salaries, commissions, benefits and related expenses within the Company’s condensed consolidated statements
of operations. At September 30, 2017 and December 31, 2016, the accrued executive bonuses were $480,000 and $268,000, respectively,
and the amounts were included in accrued expenses within the condensed consolidated balance sheets.