All statements other than statements of
historical fact included in this Annual Report on Form 10-K (this “Form 10-K”) including, without limitation, statements
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our
financial position, business strategy and the plans and objectives of management for future operations, are forward looking statements.
When used in this Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,”
“intend” and similar expressions, as they relate to us or our management, identify forward looking statements. Such
forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available
to, our management. Actual results could differ materially from those contemplated by the forward looking statements as a result
of certain factors detailed in our filings with the Securities and Exchange Commission (the “SEC”). All subsequent
written or oral forward looking statements attributable to us or persons acting on our behalf are qualified in their entirety
by this paragraph.
In assessing forward-looking statements
contained herein, readers are urged to carefully read those statements. Among the factors that could cause actual results to differ
materially are: inability to protect our intellectual property; inability to comply with the covenants in our credit facility;
inability to obtain necessary financing; inability to effectively manage our growth; inability to effectively comply with the
policies and procedures of Google, Microsoft and other leading industry companies; failure to effectively integrate the operations
of acquired businesses; competition; loss of key personnel; increases of costs of operations; continued compliance with government
regulations; and general economic conditions.
PART I
ITEM
1. BUSINESS.
Propel is a holding company for Propel
Media, Kitara and DeepIntent.
Propel is a diversified online advertising
company. Propel generates revenues through the sale of advertising to advertisers who want to reach consumers in the United States
and internationally to promote their products and services.
Propel delivers advertising, including
via its real-time, bid-based, online advertising platform called Propel Media Platform. This technology platform allows advertisers
to target audiences 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 audiences and acquire
customers. As of December 31, 2017 Propel had over 1,100 advertiser customers and served millions of ads per day.
Propel primarily serves its advertising
to users who are part of our owned and operated member-based network or the member-based networks of our third party application
partners. Propel provides its audience 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 this model, Propel also serves advertising through partners
who acquire users by providing a variety of applications free of charge and such partners receive permission from their users
to serve ads to them. In this model, advertising units are served directly to users through a browser extension or other software
installed on the user’s computer.
Propel’s offerings to its advertising
customers will increasingly leverage DeepIntent’s integrated data and programmatic buying platform, which the Company acquired
in connection with the acquisition of DeepIntent in January 2017, to improve performance for its advertisers. The DeepIntent 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, DeepIntent’s platform provides the Company
with 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
our ability to serve advertising. In this model, the advertising units are served to users through a website, and we serve advertising
units to the user in coordination with the publisher, network or exchange.
Propel’s principal executive office
is located at 2010 Main Street, Suite 900, Irvine, CA 92614. Its telephone number at that location is (949) 251-0640.
History and Structure of Our Company
Overview
Propel was incorporated in Delaware on
October 7, 2014 for the purpose of completing the Transactions (as defined below). Prior to the completion of the Transactions,
Propel had no assets and did not conduct any material activities other than those incidental to its formation. Upon completion
of the Transactions, the businesses of Propel Media and Kitara became the business of Propel. In February 2015, Propel’s
common stock began trading on the OTC Pink Market, operated by OTC Markets Group (“OTC Pink Market”) under the trading
symbol “PROM.”
Business Combination
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 Media, 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, in
addition to the consideration paid in connection with the closing of the Transactions and the earn-out payable if the Company
reaches certain financial performance thresholds for the fiscal years 2015 to 2018 (none of which have been met to date), 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 Transferors,
on behalf of the Transferors, is permitted to elect, during the ten day period following each December 31st during the Equity
Financing Period, commencing December 31, 2016, to receive any unpaid amount of the $10,000,000 Deferred Obligation in shares
of the Company’s common stock. For such issuance, each share of the Company’s common stock will be valued at the closing
market price of the Company’s common stock as reported on NASDAQ or such other national securities exchange on which the
Company’s Common Stock is listed (or if not so listed, the bid price on the OTC Pink Market) on the date on which such shares
are issued to the Transferors (and if a closing price or bid price, as applicable, is not reported on such day, then the stock
shall be valued at the last closing price or bid price, as applicable, reported).
Acquisition of DeepIntent
On June 21, 2017 (“DeepIntent Closing
Date”), pursuant to a stock purchase agreement (“DeepIntent Acquisition Agreement”) with the former stockholders
of DeepIntent, Propel purchased 100% of the equity interests of DeepIntent, consisting of the issued and outstanding shares of
Class A common stock, Class B common stock and Class C common stock of DeepIntent. The purchase price, which is subject to an
adjustment for working capital, consisted of $4,000,000 paid at closing, $500,000 which was paid on December, 21, 2017 and, $500,000
payable on June 21, 2018 (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”).
Debt Financing
On January 28, 2015, in connection with
the closing of the Transactions, Propel, Kitara and Propel Media, as “Borrowers,” and certain of their subsidiaries,
as “Guarantors,” entered into a financing agreement, as amended on December 23, 2016, May 30, 2017, June 21, 2017
and November 10, 2017 (“Financing Agreement”), with certain financial institutions as lenders (“Lenders”),
HPS Investment Partners, LLC (formerly known as Highbridge Principal Strategies, LLC) (“Highbridge”), as collateral
agent for the Lenders (“Collateral Agent”), and PNC Bank, National Association (“PNC”), as a Lender and
administrative agent for the Lenders (“Administrative Agent”).
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 company intends to refinance the obligation under the Loans.
The outstanding principal amount of the
Term Loan is repayable in consecutive quarterly installments in equal amounts of $1,750,000 on the last day of each March, June,
September and December commencing on March 31, 2015, except that the payment due on March 31, 2015 was $1,219,000. The Term Loan
is subject to an annual excess cash flow sweep, pursuant to which a principal payment of $2,149,000 was made in April 2017. The
remaining balance of the Term Loan and the Revolving Loan are due and payable on the Final Maturity Date, except in certain limited
circumstances.
The Borrowers may borrow, repay and reborrow
the Revolving Loan prior to the Final Maturity Date, subject to the terms, provisions and limitations set forth in the Financing
Agreement. The outstanding principal amount of advances may not at any time exceed the lesser of $15,000,000 or the borrowing
base.
Subject to the terms of the Financing Agreement,
outstanding amounts under the Term Loan bear interest, 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.
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%), or (ii)
the bank’s reference rate. For each revolving loan, the Company can choose to borrow either at the LIBOR or the reference
rate.
The obligations of the Borrowers under
the Financing Agreement are secured by first priority security interests granted to the Lenders on all of the Borrowers’
and Guarantors’ tangible and intangible property, including accounts receivable, intellectual property and shares and membership
interests of the Borrowers (other than Propel) and the Guarantors.
The Financing Agreement and other loan
documents provide for certain customary fees and other amounts to be paid to the Lenders at the closing of the Financing Agreement
(approximately $3,000,000), during the term of the Financing Agreement (approximately $900,000) and on the fourth anniversary
of the closing date of the Financing Agreement ($12,500,000).
On June 21, 2017, the Borrowers (as defined
below) 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. In connection with Amendment No. 2, on October 2,
2017 we paid an amendment fee (“Amendment Fee”) of $752,000. The Amendment Fee has been reflected as interest expense,
net, within the 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 Financing Agreement also contains a financial
covenant, as discussed in Item 7 below. 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.
Subsidiaries
Propel Media
Propel Media was formed in September 2008
as a California limited liability company. Upon completion of the Transactions (as described above), Propel Media became a wholly
owned subsidiary of Propel.
Kitara
Kitara was incorporated in Delaware on
December 5, 2005 under the name “Ascend Acquisition Corp.” From Kitara’s inception until February 29, 2012,
it was a blank check company and did not engage in active business operations other than the search for, and evaluation of, potential
business combination opportunities.
On December 30, 2011, Kitara entered into
a Merger Agreement and Plan of Reorganization with Andover Games LLC (“Andover Games”) and the members of Andover
Games. On February 29, 2012, pursuant to such agreement, Andover Games became a wholly-owned subsidiary of Kitara. As a result,
Kitara’s business became the business of Andover Games. Andover Games’ principal business was focused on developing
mobile games for iPhone and Android platforms prior to June 30, 2013.
On June 12, 2013, Kitara entered into a
Merger Agreement and Plan of Reorganization, as amended on July 1, 2013, with Kitara Media, NYPG and the former holders of all
of the outstanding membership interests of Kitara Media and all of the outstanding shares of common stock of NYPG. On July 1,
2013, pursuant to such agreement, Kitara Media and NYPG became wholly owned subsidiaries of Kitara. In connection with the transactions,
Kitara ceased the operations of Andover Games. On July 1, 2013, Kitara’s operations became entirely those of Kitara Media
and NYPG. On August 19, 2013, Kitara changed its name from “Ascend Acquisition Corp.” to “Kitara Media Corp.”
On December 3, 2013, Kitara entered into
a Merger Agreement and Plan of Reorganization with Health Guru Media and the holders of a majority of the outstanding shares of
capital stock of Health Guru Media, and simultaneously consummated the transactions contemplated thereby. At the closing, Health
Guru Media became Kitara’s wholly-owned subsidiary. On April 27, 2016, Propel sold substantially all of the operating assets
of the Health Guru Media business, and subsequently changed the name of Health Guru Media to “Tek Array, Inc.”
Upon completion of the Transactions (as
described above), Kitara became a wholly owned subsidiary of Propel.
DeepIntent
On June 21, 2017, pursuant to the 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.
Opportunity
We believe the online advertising market
is well positioned for growth with expanded ways in which audiences can connect to the Internet across a variety of devices. Market
forecasts are anticipating significant growth in advertising spending across all major digital ad formats as follows:
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U.S. mobile advertising
spending in 2018 is forecasted to be $70.05 billion growing to $82.31 billion in 2019. (eMarketer)
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U.S. display advertising
spending in 2018 is forecasted to be $48.42 billion growing to $54.68 billion in 2019. (eMarketer)
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U.S. video advertising
spending in 2018 is forecasted to be $15.42 billion growing to $17.56 billion in 2019. (eMarketer)
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U.S. native advertising
spending in 2018 is forecasted to be $25.2 billion growing to $28.9 billion in 2019. (Business Insider Intelligence)
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Propel is positioning itself to take advantage
of these major industry growth trends.
Strategy
Propel participates in the online advertising
market where advertisers reward providers who can deliver performance and return on advertising investment. The fundamental strategy
of the business is to drive advertiser performance across all media and geographies. Key elements of the Propel strategy include:
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Increasing quality
inventory from supply sources that deliver improved advertiser performance. This includes increasing Propel’s owned
and operated member-based network through increased investment in media buying to acquire users.
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Expanding revenues
that come from video advertisers. As more advertiser budget moves from television to online, we see opportunities to increase
the revenue we generate from distributing video advertisements on behalf of our advertisers.
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Expanding revenues
that come from display advertisers. As display advertising budgets continue to increase, we see the opportunity to increase
revenues we generate from distributing display advertisements on behalf of our advertisers.
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4.
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Expanding ad inventory
by increasing our publisher-based syndication program to expand supply for video and display advertisements.
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Migrating into
the mobile market to take advantage of advertiser demand for this segment of the market.
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Business
Overview
Propel generates revenue by selling advertising
to advertisers and serving the advertising to users while they browse the Internet. We have two monetization models.
In one model (which we sometimes refer
to herein as the “member-based business”), we have a direct relationship with users who have installed an extension
in the users’ browsers or software that allows us to serve them advertising through their browsers as an overlay image on
the content that they are viewing or in a new browser window or tab. In this model, we have no publisher relationship and as a
result no publisher payments. We acquire a relationship with users in two ways: (i) through our owned and operated properties
and (ii) through properties developed by our third party application partners. In each case, a user who is offered free access
to our owned and operated property or to the third party application partner’s property agrees to receive advertisements
served by us from advertisers using our Propel Media Platform as they browse the Internet. This allows us or our third party application
partners to install an extension to the user’s browser or download software onto the user’s computer. The extension
or software allows us to travel with the user as the user views content on the Internet. We capture the URLs and keywords of certain
browsing pages viewed, and in real time determine if we have advertisers who have bid on keywords or the URL being browsed. If
so, we serve the relevant advertising. In some situations, we have advertisers who wish to have us serve advertising on a run-of-network
basis, which then permits us to serve ads across our user base without targeting parameters being established.
During 2017, as we focused on growing our
user base via the marketing of our owned and operated properties, such as free casual games and free lifestyle content. We continue
to have a distinct media buying organization that purchases advertising on various online ad platforms and is dedicated to developing
the user base acquired through our owned and operated properties for our member-based business model.
In the second model (which we sometimes
refer to herein as the “publisher business model”), we develop publisher based syndication supply channels through
relationships with web publishers, exchanges and other supply channels. In this model, there is a direct publisher relationship
and we use the traffic from publishers as the user base to whom we serve ads. No extension or software is downloaded or otherwise
used. In this model, we enter into a revenue share or CPM (as defined below) payment model with the publisher.
Propel’s offerings to its advertising
customers will increasingly leverage DeepIntent’s integrated data and programmatic buying platform to improve performance
for its advertisers. The DeepIntent 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, the DeepIntent
platform provides the Company with the ability to offer its advertisers programmatic inventory across all screens, including desktop,
mobile, tablet and connected TV.
Advertiser Sales and Account Management
Propel is focused on building relationships
with digital advertisers.
Propel currently services over 1,100 advertisers
and its advertiser clients include, but are not limited to, direct advertisers, affiliate advertisers, lead generation advertisers,
leading advertising agencies and advertising networks and exchanges representing premium brands.
Propel’s sales team and account management
organization are comprised, collectively, of 24 employees. They call on and support advertisers and their advertising campaigns.
The sales and account management teams are responsible for acquiring new advertisers, developing campaign goals and strategies
with advertisers or their agents and working with the clients to establish the ad formats that will run. They are also responsible
for developing the return on investment metrics with the advertiser that will be used to help the account management organization
or the advertiser understand performance as the campaign is running and will allow the account management organization, the salesperson
and the advertiser to optimize campaigns to meet campaign goals.
Campaigns are set up and managed by either
the salesperson, account manager or the advertiser themselves. These activities are executed through the Propel Media Platform.
This platform allows Propel to work with advertisers to:
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Process advertiser
applications;
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Accept or reject
advertiser applications;
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Record advertiser
information, payment terms and semi-automate the advance payment process through credit card or wire transfer, if required;
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Set up campaigns
including:
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Specifying
the ad units to be employed for the campaign, which include:
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Video
ads –Video ads are served to its audience on a run-of-network basis and the advertiser is charged when the ad is displayed
(this is priced on a Cost Per Thousand Impressions, or CPM).
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Display ads –
These are traditional box ads combining graphical images with ad copy. These ads are served based on targeted keywords. The
advertiser is charged when the ad is displayed (this is referred to as Cost Per View, or CPV).
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Textlink ads –
Ads that appear when the consumer places the mouse cursor over the targeted keyword. If the user clicks on the ad, the user
is taken to the advertiser’s offer landing page that provides more information. The advertiser is only charged if the
consumer clicks on the ad (this is referred to as Cost Per Click, or CPC).
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Establishing targeting
parameters by keywords and URLs that the advertiser chooses.
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Establishment of
bid price for keywords and URLs. As the Propel Media Platform is a bid-based platform, the advertiser’s ad will be displayed
if its bid price wins over other advertisers who are also bidding to serve their ads.
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Establish links
to ad creative that will run in each campaign.
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Generate reports
and metrics that allow real time campaign performance management.
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Audience Development
Propel advertisers’ campaigns are
dependent on having an audience to receive the advertising. Propel’s model is to reach its audience either directly or via
partners.
Propel reaches audiences for its advertisers
through two different business models:
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The member-based
business model acquires a relationship with users in two ways:
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Owned and Operated
Properties
. Propel develops and distributes multiple free casual gaming, lifestyle and other content properties. In this
method, Propel buys media and advertises these gaming sites and lifestyle content properties on various online destinations,
including casual gaming and social media portals. Propel provides its audience with access to its premium gaming and lifestyle
content for free and obtains the user’s permission to serve advertising to them while they peruse content on the web.
Propel incurs media costs to acquire audiences in this manner.
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Application
Partners’ Properties
. Propel partners with third party application developers who have their own audience bases
and are seeking to serve advertising to them. In this instance, Propel partners with these third party application developers
to increase the total audience that Propel’s advertisers can reach with their advertisements. Propel operates under
a revenue share model with its partners in this distribution model.
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The publisher business
model serves advertising through publisher based syndication supply channels. In this model, Propel develops direct relationships
with publishers, networks and exchanges for supply and then purchases impressions from these supply sources. Propel operates
under a revenue share model or on a fixed CPM with its partners in this distribution model.
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During 2017, as we further transitioned
away from the declining revenues from third party application partners, we focused on growing our user base via the marketing
of our owned and operated properties, such as free casual games and lifestyle content. This led to 84% of our 2017 revenue being
generated by our owned and operated audience. Our revenue mix is expected to continue to be heavily weighted to supply coming
from owned and operated audience and publisher business as opposed to our third party application partners.
Solutions, Technology & Services
Propel offers advertisers the ability to
reach audiences in which performance is measured by their willingness to view an ad or click through to the advertisers’
landing pages for more information or to complete a conversion action as defined by the advertiser. Typical conversions might
include, for example, making a purchase, filling out an automobile test drive form, taking a survey or filling out a request for
more information from online education providers. Superior performance is achieved by having engaging ad units that target the
right audiences and are served at the right scale and frequency. Although most creative work is done by the client, Propel offers
design services to help improve campaign performance through more impactful creative ads and landing pages. Propel offers video,
display and text link ad units that are designed for maximum impact and conversions.
Audience targeting is achieved through
keywords and URLs. Advertisers bid on keyword and URL targets which they believe will be relevant to the content that their audiences
will be consuming. An advertiser will bid on anywhere from a few to thousands of keywords and URLs at varying bid prices based
on the importance of the keyword or URL and the competition from other advertisers for that same keyword or URL. Advertisers may
raise or lower keyword or URL bid prices as they see how effective various keywords or URLs perform for their campaigns. If a
keyword or URL target is performing well for an advertiser, the advertiser may want to increase the number of individuals clicking
on the advertiser’s advertisements. This is accomplished by raising the bid price the advertiser is willing to pay to have
the advertiser’s ad served, which in turn will generate more impressions and, hopefully, increased conversions. Conversely,
if a keyword or URL is not performing, bid prices might be lowered in order to not spend advertising budget on underperforming
keywords or URLs.
Propel’s proprietary ad serving technologies
are geared toward optimizing direct response advertiser campaigns to ensure that the desired performance criteria are generated
within advertiser defined cost parameters. It is through Propel’s ad serving technologies that Propel matches advertisers
with targeted audiences in a real time auction environment. Propel’s ad serving technologies determine if there are relevant
keywords or URLs on the webpage that an audience member is perusing and that an advertiser or advertisers are targeting. It then
evaluates the parameters for serving an ad, including the number of times an audience member has been exposed to a particular
ad, the time intervals between ads, the competitive bid prices, the conversion data, time of day parameters that the advertiser
has chosen to show ads and other relevant segmenting options. The ad server then decides which advertiser’s ad to serve,
if any, to a particular audience member. This generally takes place in the 150 milliseconds that it generally takes a webpage
to load on a computer and occurs tens of millions of times per day.
Propel Media Platform is the Propel advertiser
interface platform that registers campaign input parameters that drive its ad serving to carry out campaigns as defined by the
advertiser. The Propel Media Platform interface allows advertisers to establish and direct what and where creative assets (ads)
are to be found, the keyword, URL and geographic targets for each campaign, the bid price for each keyword and URL target, day
part serving parameters, serving intervals between ad impressions, budget parameters on a daily basis and other segmenting options.
Key benefits of the platform are:
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Comprehensive –
Self-serve platform, with managed account solutions
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Cost Effective
– Bid Based, Cost per Click (CPC), Cost per View (CPV) and Cost Per Thousand (CPM) pricing
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Targeted Data –
Capable of targeting based on a variety of attributes, such as frequency caps and time of day
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Performance Goal
Oriented – Designed for direct response, performance driven advertisers and brand marketers based on defined event results
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Diverse Solutions
– Interactive Advertising Bureau (IAB) standard Display and Video formats available
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Scalable –
Capable of handling thousands of advertisers and billions of ad impressions monthly
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The Propel Media Platform provides an easy
to use self-service interface that allows for the building of customized ad campaigns with contextually targeted ads. The platform
also provides performance traffic and budget management capabilities to meet key goals.
The platform is currently servicing over
1,100 advertisers. Propel solutions deliver effective results for advertisers that allow them to target and reach mass audiences
with high performance results across text, display and video formats. The reporting and analytics interface allows advertisers
to see campaign performance in real-time. Campaign optimization and management is all performed through the Propel Media Platform
interface.
Video Offerings
In 2017, Propel focused on expanding its
video offerings to existing and new advertisers on our user network (the member-based business model) and on our expanding syndication
network of publishers, exchanges and marketplaces (the publisher business model).
Propel is focused on delivering a set of
comprehensive solutions supported by industry leading services and a proven video advertising technology platform.
Propel’s objective is to ensure that
every online advertising campaign dynamically achieves key performance metrics through brand-safe delivery to the right audience
against relevant content in engaging interactive video ad formats. We believe consumers are spending more time online watching
video content and advertisers are increasingly shifting budgets from television to online platforms.
The Propel video solutions are designed
to address the needs of traditional direct relationships with brands and their agencies as well as the expanding evolution of
programmatic advertisers. We believe that regardless of how online advertising campaigns are executed, whether by media buying
or through programmatic automation, the same elements of relevant content, audiences and performance are required to optimize
brand value.
Competition
Propel operates in a dynamic and competitive
market, influenced by trends across multiple industries, including, but not limited to, the digital advertising industry, the
video content marketing industry and the digital publishing industry. We expect that competition in Propel’s industry will
continue to intensify in the future as a result of industry consolidation, the continuing maturation of the industry and low barriers
to entry.
The display, video, desktop application
and online advertising solutions market is highly competitive, with many companies providing competing solutions. Propel competes
with Google, RythmOne, Criteo, IAC, Facebook, The Trade Desk, Vibrant and many demand side advertiser platforms, supply side advertising
platforms, ad networks, exchanges and desktop and mobile applications.
We believe that Propel competes favorably
with an emphasis on key competitive factors, including strong relationships with online advertisers, publishers and third party
application developers, an advanced and scalable technology platform, effective audience engagement and goal-based performance,
data driven benchmarks and brand and campaign metrics for advertising campaigns, brand safety and proven performance. With respect
to these factors, we believe that Propel’s effective, scalable and stable goal based performance platform well positions
Propel as an independent provider of online advertising solutions.
Technology and Development
Propel’s technology and development
efforts are focused on investing in its Propel Media Platform and a suite of complementary services. Much of its technology and
development is conducted through a consulting arrangement with Bravo Studio d.o.o., which arrangement dates back to 2009. Pursuant
to the consulting arrangement, Bravo Studio d.o.o. provides Propel with ongoing software and technology development services and
support. Any intellectual property that is created within the scope of the consulting arrangement is owned by Propel. The consulting
arrangement is terminable by either party upon 15 days’ prior written notice to the other party. Development efforts are
also conducted through the Company’s DeepIntent operations, with development personnel located both in the United States
and in India. Propel has incurred approximately $4,021,000 and $3,488,000 in technology and development expense during the years
ended December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, the Company capitalized software
development costs of $1,596,000 and $1,224,000, respectively.
Propel continues to develop a robust platform
to enable automation and optimization of online advertising and publisher inventory. Propel’s strategy incorporates enhanced
optimization management capabilities for video, display and text ad units. Capitalizing on proprietary and third-party data tools
and reporting functionality, Propel will continue to analyze audience insights and offer reporting functionalities to provide
Propel and its advertisers, publishers and third party application developers with a transparent understanding of Propel’s
performance.
Intellectual Property
Propel’s ability to protect its intellectual
property, including its technologies, will be an important factor in the success and continued growth of its business. Propel
has established business procedures designed to maintain the confidentiality of its proprietary information such as the use of
license agreements with customers and its use of confidentiality agreements and intellectual property assignment agreements with
its employees, consultants, business partners and advisors where appropriate. These methods, however, may not afford complete
protection for Propel’s intellectual property and there can be no assurance that others will not independently develop technologies
similar or superior to those of Propel.
Propel currently has secured one patent
which expires on July 16, 2033, and has multiple trademarks protecting its intellectual property and its brands.
Government Regulation
Propel is subject to numerous U.S. and
foreign laws and regulations that are applicable to companies engaged in the online advertising business. In addition, many areas
of law that apply to Propel’s business are still evolving, and could potentially affect its business to the extent they
restrict its business practices or impose a greater risk of liability. We are aware of several ongoing lawsuits filed against
companies in Propel’s industry alleging various violations of privacy or data security related laws.
Privacy
Privacy and data protection laws and regulations
play a significant role in Propel’s industry. In the United States, at both the state and federal level, there are laws
that govern activities such as the collection, use and disclosure of data by companies like Propel.
Online advertising activities in the United
States have primarily been subject to regulation by the Federal Trade Commission (the “FTC”), which has regularly
relied upon Section 5 of the Federal Trade Commission Act, or Section 5, to enforce against unfair and deceptive trade
practices. Section 5 has been the primary regulatory tool used to enforce against alleged violations of consumer privacy
interests. In addition, as Propel continues expanding into other foreign countries and jurisdictions, Propel increasingly becomes
subject to additional laws and regulations that may affect how it conducts business. In particular, European data protection laws
can be more restrictive regarding the collection, use and disclosure of data than those in the United States.
Additionally, U.S. and foreign governments
have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’
ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent
required before a company can employ cookies or other electronic tools to track people online.
The European Union (the “EU”),
and some EU member states have already implemented legislation and regulations, including the General Data Protection Regulation
(“GDPR”), which was adopted by the EU in 2016 and becomes effective May 25, 2018, requiring advertisers to obtain
specific types of notice and consent from individuals before using cookies or other technologies to track individuals and their
online behavior and deliver targeted advertisements. It remains a possibility that additional legislation and regulations may
be passed or otherwise issued in the future.
Propel also participates in industry self-regulatory
programs under which, in addition to other compliance obligations, it provides consumers with notice about its use of cookies
and its collection and use of data in connection with the delivery of its offerings. The rules and policies of the self-regulatory
programs that Propel participates in are updated from time to time and may impose additional restrictions upon it in the future.
Any failure, or perceived failure, by Propel
to comply with U.S. federal, state, or international laws or regulations pertaining to privacy or data protection, or other policies,
self-regulatory requirements or legal obligations could result in proceedings or actions against it by governmental entities or
others.
Advertising Content
Even though Propel’s advertisers
create the content of their ads and Propel receives contractual protections from its advertisers, Propel may nevertheless be subject
to regulations concerning the content of their ads. Federal and state laws governing intellectual property or other third-party
rights could apply to the content of ads Propel places even if it has no part in the creation of the ad. Laws and regulations
regarding unfair and deceptive advertising, sweepstakes, advertising to children and other consumer protection regulations, may
also apply to the ads Propel places on behalf of clients.
Employees
As of December 31, 2017, Propel had 54
full-time employees and 1 part-time employee. None of Propel’s employees are represented by a labor union or covered by
a collective bargaining agreement. Propel considers its relationship with its employees to be good.
Internet Address/Availability of Reports
Propel is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and files or furnishes annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with
the SEC. Such reports and other information filed by Propel with the SEC will be available free of charge on Propel’s website
at http://www.propelmedia.com as soon as reasonably practicable after Propel electronically files such material with, or otherwise
furnishes it to, the SEC. The public may also read and copy any materials filed by Propel with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents
of these websites are not incorporated into this filing. Further, Propel’s references to website URLs are intended to be
inactive textual references only.
ITEM
1A. RISK FACTORS
The following discussion of risk factors
contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-K.
The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7 of Part II of this Form 10-K and the consolidated financial statements and related
notes in Item 8 of Part II of this Form 10-K.
Propel’s business, financial condition
and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to
those described below, any one or more of which could, directly or indirectly, cause Propel’s actual financial condition
and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any
of these factors, in whole or in part, could materially and adversely affect Propel’s business, financial condition, operating
results and stock price.
Because of the following factors, as
well as other factors affecting Propel’s financial condition and operating results, past financial performance should not
be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results
or trends in future periods.
Risks Related to Our Business
Any material reduction in spending by our key advertisers
and/or our inability to retain such key advertisers could adversely impact our business and results of operations.
Our success requires us to sell advertising
through each of our Propel Media and DeepIntent platforms, to maintain and expand our relationships with our existing advertisers
and ad agencies and to develop new relationships with other advertisers and ad agencies. These advertising sources generally do
not include long-term obligations requiring them to purchase from us and are cancelable at any time or upon short notice and without
a termination penalty. As a result, we have limited visibility as to our future advertising revenue streams from our advertisers,
even if they have been long-standing advertisers. Our advertisers’ usage may decline, fluctuate or cease all together as
a result of a number of factors, including, but not limited to:
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the performance
of their ad campaigns and their perception of the efficacy and efficiency of their advertising campaign utilizing our solutions;
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changes in the
economic conditions of advertisers, whether it is economic conditions specific to the advertiser or the advertiser’s
particular industry or the economy in general;
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changes in the
advertisers’ business models and marketing strategies that do not include us in their forward marketing plans;
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our access to relevant
ad serving opportunities and ad inventory;
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our ability to
deliver ad campaigns in full;
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their satisfaction
with our solutions and our client support;
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the ability of
our optimization algorithms underlying our solutions to deliver better rates of return on ad spend dollars than competing
solutions;
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seasonal patterns
in advertisers’ spending, which tend to be discretionary;
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the pricing of
our solutions and competing solutions; and
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reductions in spending
levels or changes in advertisers’ strategies and budgets regarding spending levels for online advertising.
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If a major advertiser decides to materially
reduce its use of our services, it could do so on short or no notice. We cannot ensure that our advertisers will continue to use
our services or that we will be able to replace in a timely or effective manner departing advertisers with new advertisers from
whom we generate comparable revenue.
Seasonal fluctuations in digital advertising activity
could adversely affect our cash flows.
Many advertisers devote a disproportionate
amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing.
Accordingly, our revenue tends to be seasonal in nature with the fourth quarter of each calendar year historically representing
the largest percentage of our total revenue for the year. Our operating cash flows could also fluctuate materially from period
to period as a result of these seasonal fluctuations.
Our revenues are impacted by seasonal fluctuations and
decreases or delays in audience acquisition and advertising spending which make any forecasting of our operating results inherently
uncertain.
Our revenues are subject to seasonal fluctuations
due to both our ability to acquire audiences and advertiser spend. Further, expenditures by advertisers and direct marketers tend
to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns. Our revenue could be materially
reduced and our ability to grow our revenues could be negatively impacted by a decline in our audience, a decline in the economic
prospects of advertisers or a decline in the economy in general. Due to such risks, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indicator of our future results. Further, forecasting economic activity is
inherently difficult, and the nature of our business provides only limited visibility for our future operating results. In addition,
we do not generally have long-term contracts with our advertiser customers. Accordingly, our ability to forecast future operating
results is limited, any such forecasts would be inherently uncertain and our quarterly results could be quite volatile.
Our sales efforts and relationships with advertisers,
publishers, third party application developers and other partners require significant time and expense, which may adversely affect
our operating results if we are unable to secure substantial commitments from them.
Attracting new advertisers, third party
application developers, publishers, and other partners requires substantial time and expense, and we may not be successful in
establishing new relationships or in maintaining or advancing our current relationships. With respect to advertisers and agencies,
it may be difficult to identify, engage and market to potential advertisers and agencies who do not currently spend on contextual,
display or digital video advertising or are unfamiliar with our current solutions. Furthermore, many of our advertiser and agency
customers’ purchasing and buying decisions typically require input from multiple internal constituencies. As a result, we
must identify those persons involved in the purchasing decision and devote a sufficient amount of time to presenting our solutions
to each of those persons. With respect to our publishers and third party application developers, we seek to establish long-term
relationships to ensure audience reach for our advertisers. As a result, we invest significant time in cultivating relationships
with our third party application developers, publishers and other partners to ensure they understand the potential benefits of
monetization of their inventory or applications with us rather than other parties. The relationship building process can take
many months and may not result in us winning an opportunity with any given advertiser, agency, third party application developer,
publisher or other potential partner. Moreover, even when opportunities are won, the contractual obligation may be short-term
and terminable by the other party upon short or no notice. For example, many of our advertising sources are direct advertisers
and ad exchanges that programmatically bid and buy without obligation or commitment and can terminate or stop buying immediately.
Therefore, we may invest significant resources into winning an opportunity only to result in a short-term commitment from our
clients.
Our solutions and business model are relatively
unique and often require us to spend substantial time and effort educating potential advertisers, third party application developers,
publishers and other partners about our solutions, including providing demonstrations. This process can be costly and time-consuming.
If we are not successful in targeting, supporting and streamlining our sales processes, our ability to grow our business may be
adversely affected.
We operate in a highly competitive industry, and we may
not be able to compete successfully.
The digital advertising market is highly
competitive, with many companies providing competing solutions. We compete with Google, RythmOne, Criteo, IAC, Facebook, The Trade
Desk, Vibrant and many demand side advertiser platforms, supply side advertising platforms, ad networks and exchanges, and desktop
and mobile applications. Many of our competitors are significantly larger than we are and have more capital to invest in their
businesses. Furthermore, our competitors may establish or strengthen cooperative relationships with their digital media property
partners, advertisers or other parties, thereby limiting our ability to promote our solutions and generate revenue. Competitive
pressures could require us to lower our prices for our advertisers or increase the prices we pay to publishers and third party
application developers.
Additionally, some large advertising agencies
that represent our current advertising customers have their own relationships with digital media properties and can directly connect
advertisers with digital media properties. Our business will suffer to the extent that our advertisers and publishers purchase
and sell inventory directly from one another or through other companies that act as intermediaries between them. Other companies
that offer analytics, mediation, exchange or other third party solutions have or may become intermediaries between our clients
and thereby compete with us. In addition, we also compete with many of the same large scale competitors set forth above in the
acquisition of audiences. As competition for audience increases, the cost of acquiring audiences could rise.
Any of these developments would make it
more difficult for us to sell our solutions and could result in increased pricing pressure, reduced profit margins, increased
sales and marketing expenses or the loss of market share. Accordingly, we may not be able to compete successfully against our
current and future competitors.
We and our distribution partners rely on the ability
to offer our audience downloadable applications which allows us and our distribution partners to offer services and advertising
to our audience. Should we or our distribution partners be unable in the future to profitably acquire new audiences due to an
inability to distribute downloadable applications via the Internet, our ability to generate revenues could be significantly negatively
impacted.
Our ability to serve ads from our advertisers
and to generate revenues is dependent on our ability to provide the appropriate audiences for our advertisers’ campaigns.
We acquire audiences in a variety of ways including offering free downloadable applications ourselves or via our distribution
partners that audiences agree to install and which allow us to serve advertising to them. If our ability to acquire audiences
through this value exchange is disrupted, our advertising business model could be impaired. Possible reasons for such disruption
could include audiences not valuing the offered application, costs of marketing the software being too high, the lifetime value
of the acquired audiences not covering the cost of acquiring the audiences, or ad blockers, anti-virus protection blockers or
other applications preventing our applications from being installed or our ads from being served.
The dominant players in our industry, including Microsoft
and Google, have modified their guidelines and policies to prevent or limit the ability to offer downloadable applications or
to serve advertising to audiences that have installed downloadable applications. This may negatively impact our ability to generate
revenues and could cause a material adverse effect on our financial results.
In an effort to protect their audiences
from unwanted applications or unwanted behaviors while using their software and to control the computing experience, the dominant
industry players who control access to audiences via their browsers and operating systems are regularly updating their policies
and procedures to regulate the applications that may be installed on a computer. We cannot predict the changes that these players,
such as Google or Microsoft, might implement. If they implement changes to their policies and procedures that limit our ability
or third party application developers’ or other partners’ abilities to distribute their applications online, or if
they disable our applications or the applications of our third party application developers, our member-based business will have
difficulties acquiring audiences at the scale that is required to meet the demands of our advertisers. This could materially affect
our financial results.
We are subject to payment-related risks with our advertisers
and ad agencies and, if our advertising customers dispute or do not pay their invoices, this could adversely impact our business
and results of operations.
Some of our contracts with advertising
agencies state that the agency is not obligated to pay us if the agency’s advertiser does not pay the agency. Entering into
such contracts may subject us to greater credit risk than if we were to contract directly with advertisers. This credit risk may
vary depending on the nature of an advertising agency’s advertiser base. In addition, we may be involved in disputes with
agencies and their advertisers over the operation of our Propel Media and DeepIntent platforms, the terms of our agreements or
ad-serving discrepancies between each party’s reporting. If we are unable to resolve disputes with our customers, we may
lose some of them or they may decrease their spending with us and our financial performance may be adversely affected as a result.
If we are unable to collect or are required to make adjustments to bills for customers, we could incur write-offs for bad debt,
which could harm our results of operations. Even if we are not paid by our clients on time or at all, we may still have incurred
costs for the advertising campaign, and as a consequence, our results of operations would be adversely impacted.
In order to maintain our revenue and grow our member
based network, we need to continuously acquire and reach new audiences and maintain audience engagement with our application products
through advertising campaigns.
Our member-based business model depends
on reaching audiences through relationships with third party application developers and distribution partners as well as through
direct media buying for our owned and operated properties. In all cases, our growth is dependent on our ability to reach, maintain
and expand audiences. The market to generate audiences for applications is highly competitive, and we experience significant competition
for audience engagement with our applications from other vendors who use application advertising and search business models. We
generate the substantial majority of revenues associated with our audiences during the first year after an application is installed.
In order to maintain our current revenues and grow our business, we need to continuously engage in marketing campaigns aimed at
maintaining audience engagement with our applications and acquiring new audiences. If we fail to conduct such marketing campaigns
or any of our marketing campaigns prove less successful than anticipated, either because we are not able to accurately project
the number of completed installations of the applications or otherwise, we expect that our audience engagement would decline materially,
which would have a material adverse effect on our operating results.
Our business and prospects would also be
harmed if new versions or upgrades of operating systems and Internet browsers adversely impact the process or platform by which
audiences install our applications and audiences view our advertisements. The application installation process for our solutions
is currently straightforward and includes detailed information about our products and services. In the future, operating systems,
Internet browsers, ad blockers, and security programs could introduce new features or limitations that would make it more difficult
to install applications and serve advertising, and may negatively impact the growth of our audience base and adversely impact
our business and prospects.
Any significant decline in desktop personal computer
audiences accessing the Internet could significantly diminish the value of our solutions in our user-based business model and
cause us to lose revenue since most of our revenue generating solutions are currently not usable on competing platforms.
We focus primarily on the market related
to personal computers, or “PCs.” To the extent that there is an even more significant shift by the market from PCs
to mobile or tablet devices, we could experience a substantial reduction in revenues. Recently, the number of individuals who
access the Internet through devices other than PCs, such as mobile phones and tablets, has increased dramatically. Our services
are not yet available on these alternative platforms and devices. If this trend accelerates, and if we fail to successfully develop
a mobile offering, we may fail to capture a sufficient share of an increasingly important portion of the market for online services,
and our services will become less relevant and may fail to attract advertisers and web traffic.
Additionally, mobile devices are more controlled
by the mobile device manufacturers and the providers of their operating systems. To the extent that these hardware and software
providers use their position to advantage their own or other offerings, our opportunities could be more limited.
If we fail to adapt and respond effectively to rapidly
changing technology, evolving industry standards and advertiser needs, our solutions may become less competitive or obsolete.
The market for display, video, desktop
application, mobile application and other online advertising solutions is characterized by rapid technological change, evolving
industry standards and frequent new product and service introductions. Our future success will depend on our ability to adapt
and innovate. To attract new digital advertisers, third party application developers, digital publishers and other partners, and
increase spending by our existing advertisers, we will need to expand and enhance our solutions to meet advertiser needs, add
functionality and address technological advancements. If we fail to develop new solutions that address our advertisers’
needs, or fail to enhance and improve our solutions in a timely manner or conform to industry standards, we may not be able to
achieve or maintain adequate market acceptance of our solutions, and our solutions may become less competitive or obsolete.
Our ability to grow is also subject to
the risk of future technologies. If new technologies emerge that are able to deliver advertising solutions at lower prices or
more efficiently or effectively than our solutions, such technologies could adversely impact our ability to compete. Keeping pace
with new and changing technology and evolving industry standards may require significant expenditures of financial and other resources.
We cannot guarantee that such efforts will be successful.
A loss of the services of our senior management and other
key personnel could adversely affect the execution of our business strategy.
We depend on the continued services of
our senior management team. The loss of the services of these personnel could create a gap in management and could result in the
loss of expertise necessary for us to execute our business strategy and thereby adversely affect our business.
Further, our ability to execute our business
strategy also depends on our ability to continue to attract, retain and motivate qualified and skilled technical and creative
personnel and skilled management, marketing and sales personnel. Competition for well-qualified employees in our industry is intense
and our continued ability to compete effectively depends, in part, upon our ability to retain existing key employees and to attract
new skilled employees as well. If we cannot attract and retain additional key employees or lose one or more of our current key
employees, our ability to develop or market our products and attract or acquire new users could be adversely affected. Although
we have established programs to attract new employees and provide incentives to retain existing employees, particularly senior
management, we cannot be assured that we will be able to retain the services of senior management or other key employees, or that
we will be able to attract new employees in the future who are capable of making significant contributions.
Our substantial debt and deferred obligations could adversely
affect our liquidity and results of operations.
As of December 31, 2017, we had indebtedness
and other commitments that principally consisted of $58,382,000 for our Term Loan (bearing effective interest 10.2% per annum)
and $0 for our Revolving Loan (bearing effective interest of 7.2% per annum for loans based upon the LIBOR and 10.00% effective
annual reference rate loans). Our Term Loan and Revolving Loan become due in January 2019 and must be refinanced prior to that
time. In addition, we have $10,000,000 (which can be satisfied with cash or stock as per the terms of the Exchange Agreement)
and $6,000,000 of deferred payment obligations to the Transferors, and a $12,500,000 obligation due to the Lenders pursuant to
the Financing Agreement. We may not be able to generate sufficient cash to service our debt or sufficient earnings to cover fixed
charges in future years. If new debt is added to our current debt levels, the related risks for us could intensify.We may not
be able to refinance our current debt under similar terms, or at sufficient levels to provide adequate liquidity to our business.
Our substantial debt and other commitments
could have important consequences. In particular, it could:
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require us to dedicate
a substantial portion of our cash flow from operations to payments on our indebtedness and other commitments (in addition
to interest payments, we are required to pay $1,750,000 at the end of each quarter as a principal reduction on our Term Loan,
and annually, we are required to pay a principal reduction on the term loan pursuant to an excess cash flow sweep.), thereby
reducing the availability of our cash flow to fund capital expenditures and other general corporate purposes;
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limit, along with
the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds;
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limit our flexibility
in planning for, or reacting to, changes in our businesses and the industries in which we operate;
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increase our vulnerability
to general adverse economic and industry conditions; and
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place us at a competitive
disadvantage compared to our competitors that have less debt.
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Our debt agreements contain restrictive and financial
covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities and failure to
comply with these covenants may have a material adverse effect on our business.
The Financing Agreement contains restrictive
covenants that limit our ability to, among other things:
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incur or guarantee
additional debt or incur or suffer to exist additional liens;
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merge with another
entity or dispose of our assets;
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change the nature
of our business;
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make capital expenditures
in excess of certain limits;
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make certain payments
and distributions; and
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make certain investments.
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In addition, the Financing Agreement contains
a financial covenant that requires us to maintain a certain Total Leverage Ratio (as defined in the Financing Agreement) as of
each calendar quarter end. Under this covenant, we were required to maintain a Total Leverage Ratio of no more than 2.40:1.00
as of December 31, 2017. Our Total Leverage Ratio as of such date was 1.69:1.00. The Total Leverage Ratio that we must maintain
decreases to 2.30:1.00 as of March 31, 2018, and remains at 2:30:1.00 for each quarter thereafter. If we were to default on this
financial covenant, such default, if not waived by our Lenders, could result in the Lenders terminating their commitments to lend
and/or accelerating the loans and declaring all amounts borrowed due and payable. This could have a material adverse effect on
our ability to conduct our business, as we have historically relied upon the Revolving Loan facility as a source of borrowing
for our operations. Furthermore, our Lenders could foreclose on their security interests in our assets, including the equity interests
in our material subsidiaries. Borrowings under any other debt instruments of ours that contain cross-acceleration or cross-default
provisions may also be accelerated and become due and payable. Should any of these events occur, we may not be able to find alternative
sources of financing, and we may not be able to pay our liabilities and expenses when due, which could result in the suspension
of some or all of our current operations. It could also adversely affect the willingness of our vendors and employees to continue
to work with us.
Our ability to comply with these provisions
may be affected by events beyond our control. Complying with these covenants also may have a material adverse effect on our financial
condition.
If we are unable to make payments as they come due or
comply with the restrictions and covenants in our debt agreements, there could be a default under the terms of such agreements,
which could result in an acceleration of repayment. Failure to maintain existing financing or to secure new financing could have
a material adverse effect on our liquidity and financial position.
If we are unable to make payments as they
come due or comply with the restrictions and covenants in the Financing Agreement, there could be a default under the terms of
the agreement. In such event, or if we are otherwise in default under the Financing Agreement, including pursuant to the cross-default
provisions of the Financing Agreement, the Lenders could terminate their commitments to lend or accelerate the loans and declare
all amounts borrowed due and payable. Furthermore, our Lenders could foreclose on their security interests in our assets, including
the equity interests in our material subsidiaries. Borrowings under any other debt instruments of ours that contain cross-acceleration
or cross-default provisions may also be accelerated and become due and payable. If any of those events occur, our assets might
not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even
if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us. Additionally, we may
not be able to amend the Financing Agreement or obtain needed waivers on satisfactory terms or without incurring substantial costs.
Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.
If our Lenders foreclose on their security interests
in our assets, they will have the right to sell those assets in order to satisfy our obligations to them.
Our obligations under the Financing Agreement
are secured by a lien on substantially all of our assets, including the equity interests in our material subsidiaries. In the
event of foreclosure, liquidation, bankruptcy or other insolvency proceeding relating to us or to our subsidiaries that have guaranteed
our debt, the Lenders will have prior claims on our assets. Those claims include the right to foreclose and take possession of
our assets, including equipment that is necessary for the conduct of our operations, which would restrict our ability to continue
to conduct business. There can be no assurance that we would receive any proceeds from a foreclosure sale of our assets that constitute
collateral following the satisfaction of the secured lenders’ priority claims.
We rely on our outsourced technology development partner
for our software and technology development services and support.
Much of our technology and development
is conducted through a consulting arrangement with Bravo Studio d.o.o. Pursuant to the consulting arrangement, Bravo Studio d.o.o.
provides us with ongoing software and technology development services and support. The consulting arrangement is terminable by
either party upon 15 days’ prior written notice to the other party. If Bravo Studio d.o.o. were to terminate our relationship,
we would be adversely and materially affected and our revenues and results of operations would be negatively impacted.
We have a few key vendors from whom we obtain necessary
services to continue our business, which may adversely affect our ability to replace such vendors and minimize our costs.
We have a few key vendors from whom we
obtain necessary services to continue to efficiently and effectively operate our business. For example, our three largest cost
of revenue vendors accounted for 18.2%, 15.6% and 14.0% of our cost of revenues for the year ended December 31, 2017. Our three
largest cost of revenue vendors accounted for 18.0%, 17.1% and 15.6% of our cost of revenues for the year ended December 31, 2016.
Such concentration exposes us to increased risk in the event any one of these vendors becomes unable or unwilling to provide us
with the services we need or significantly increases the cost of such services. In such event, we cannot guarantee that we will
be able to find a replacement vendor to provide services on terms comparable to our current arrangements. If our vendor costs
increase, we may be required to pass the increased cost on to our clients, which may harm our competitive position. The inability
to replace our key vendors or significant increases in cost for the services provided by our key vendors would adversely and materially
affect our revenues and results of operations.
Our business depends on our ability to collect and use
data to deliver ads, and to disclose data relating to the performance of our ads, and any limitation on these practices could
significantly diminish the value of our solutions and cause us to lose customers and revenue.
Our ability to optimize the placement and
scheduling of advertisements for our advertisers and the targeting of advertisements, and accordingly our ability to grow our
revenue, depends on our ability to successfully leverage certain data that we collect. Our ability to successfully leverage such
data, in turn, depends on our ability to collect and obtain rights to utilize such data. This data includes data from advertisers
and device users and it also includes data from our publishers and third parties such as data providers. When we deliver an ad
to an Internet-connected device, we are able to collect information about the placement of the ad and the interaction of the user
with the ad, such as whether the user clicked on an ad, visited a landing page or watched a video. We are also able to collect
information about the user’s IP address, device and some demographic characteristics. We may also contract with one or more
third parties to obtain additional anonymous information about the user who is viewing a particular ad, including information
about the user’s interests. As we collect and aggregate this data provided by billions of ad impressions, we analyze it
in order to optimize the placement and scheduling of ads across the advertising opportunities available to us. Any interruptions,
failures, or defects in our data collection, mining, analysis, and storage systems could limit our ability to aggregate and analyze
user data from our clients’ advertising campaigns. If that happens, we may not be able to optimize the placement of advertising
for the benefit of our advertisers, which could make our solutions less valuable, and, as a result, we may lose clients and our
revenue may decline.
Our business practices with respect to data could give
rise to liabilities, restrictions on our business or reputational harm as a result of evolving governmental regulation, legal
requirements or industry standards relating to consumer privacy and data protection.
In the course of providing our solutions,
we transmit and store information related to Internet-connected devices, user activity and the ads and other content we place.
Federal, state and international laws and regulations govern the collection, use, processing, retention, sharing and security
of data that we collect across our solutions. The U.S. government, including the FTC and the Department of Commerce, has also
announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation
aimed at restricting some targeted advertising practices. The FTC has also adopted revisions to the Children’s Online Privacy
Protection Act that expand liability for the collection of information by operators of websites and other electronic solutions
that are directed to children.
We strive to comply with all applicable
laws, regulations, policies and legal obligations relating to privacy and data collection, processing use and disclosure. However,
the applicability of specific laws may be unclear in some cases and domestic and foreign government regulation and enforcement
of data practices and data tracking technologies is expansive, not clearly defined and rapidly evolving. In addition, it is possible
that these requirements may be interpreted and applied in a manner that is new or inconsistent from one jurisdiction to another
and may conflict with other rules or our practices. Complying with any new regulatory requirements could also force us to incur
substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability
to effectively pursue our growth strategy. Any actual or perceived failure by us to comply with U.S. federal, state or international
laws, including laws and regulations regulating privacy, data, security or consumer protection, or disclosure or unauthorized
access by third parties to this information, could result in proceedings or actions (including class actions) against us by governmental
entities, private parties or others. Any such proceedings or actions could hurt our reputation, result in significant expense
to defend, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately
result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless our clients
from the costs or consequences of litigation resulting from using our solutions or from the disclosure of confidential information,
which could damage our reputation among our current and potential clients, require significant expenditures of capital and other
resources and cause us to lose business and revenue.
The data we collect from consumers, advertisers and publishers
may decrease, which may make our solutions less valuable and adversely affect our business.
We participate in industry self-regulatory
programs under which, in addition to other compliance obligations, we provide consumers with notice about our use of cookies and
our collection and use of data in connection with the delivery of targeted advertising. In addition, consumers can currently opt
out of the placement or use of our cookies for online targeted advertising purposes by either deleting or disabling cookies on
their browsers, visiting websites that allow consumers to place an opt-out cookie on their browsers, which instructs advertisers
and their service providers not to use certain data about the consumer’s online activity for the delivery of targeted advertising,
or by downloading browser plug-ins and other tools that can be set to: (1) identify cookies and other tracking technologies used
on websites; (2) prevent websites from placing third-party cookies and other tracking technologies on the consumer’s browser;
or (3) block the delivery of online advertisements on websites and applications. U.S. and foreign governments have also enacted
or are considering enacting legislation related to digital advertising and we may see an increase in regulation related to our
industry, including the use of geo-location data to inform advertising, the collection and use of non-identifiable or identifiable
Internet user data and unique device identifiers, such as IP address or mobile unique device identifiers, and other data protection
and privacy-related regulation. If there is a material increase in the number of consumers who choose to opt out or are otherwise
using browsers where they need to, and fail to, configure the browser to accept cookies (or similar tracking technologies), or
if any government entity (domestic or foreign) restricts our collection and use of advertising data, our ability to collect valuable
and actionable data may be impaired, which may make our solutions less valuable and adversely affect our business.
Furthermore, in order to effectively operate
our advertising campaigns, we collect data from advertisers, publishers, and other third parties. If we are not able to obtain
sufficient rights to data from these third parties, we may not be able to utilize such data in our solutions. Although our arrangements
with advertisers and publishers generally permit us to collect non-personally identifiable and aggregate data from advertising
campaigns, sometimes an advertiser or publisher declines to permit the use of this data. For example, publishers may not agree
to permit us to place our data collection tags on their sites or agree to provide us with the data generated by interactions with
the content on their sites. The inability to collect or use data from advertisers and publishers may limit the usefulness of the
data that we do collect and use. In addition, advertisers may request that we discontinue using data obtained from their campaigns
that have already been aggregated with other advertisers’ campaign data. It would be difficult, if not impossible, to comply
with these requests, and complying with these kinds of requests could cause us to spend significant amounts of resources. Interruptions,
failures or defects in our data collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions
regarding the collection, use and processing of data, could also limit our ability to aggregate and analyze the data from our
customers’ advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit
of our advertising customers, which could make our solutions less valuable, and, as a result, we may lose customers and our revenue
may decline.
New laws and regulations applicable to Internet advertising,
privacy and data collection and protection, and uncertainties regarding the application or interpretation of existing laws and
regulations, could harm our business.
Our business is conducted through the Internet
and therefore, among other things, we are subject to the laws and regulations that apply to online businesses around the world.
These laws and regulations are becoming more prevalent in the United States, Europe and elsewhere and may impede the growth of
Internet marketing; and consequently our services. These regulations and laws may cover user privacy, data collection and protection,
content, use of “cookies”, access changes, “net neutrality,” pricing, intellectual property, distribution,
protection of minors, consumer protection and taxation.
Many areas of the law affecting the Internet
remain largely unsettled, even in areas where there has been legislative action. This uncertainty can be compounded when services
hosted in one jurisdiction are directed at users in another jurisdiction. Therefore, it is difficult to determine whether and
how existing laws, such as those governing intellectual property, privacy and data collection and protection, libel, marketing,
data security and taxation, apply to the Internet and our business.
For example, how personal data is defined
within the European Union, or EU, and elsewhere may also impact us. In October 2016, the Court of Justice of the European
Union ruled that IP addresses in certain circumstances are “personal data” under current EU law, at least when such
IP addresses collected by website operators can be combined with information held by ISPs and other companies that have the ability
to identify a user’s real-life identity. In addition, the GDPR, which applies to any company inside or outside the EU that
collects and uses personal data in connection with the offering of goods or services to individuals in the EU or the monitoring
of the behavior of individuals in the EU, will come into effect in May 2018. The GDPR clarifies that the definition of “personal
data” under the current EU data protection framework includes online identifiers provided by individuals’ devices,
applications, and protocols, and individuals’ location data, if there is potential that individuals can be identified by
such data. The GDPR also enhances data protection obligations for controllers of personal data and for service providers processing
personal data. These enhancements may bring about significant changes in the way the advertising technology industry operates
in the EU, and some companies may have difficulty adapting their businesses and technology. Preparing to meet the GDPR’s
requirements before it becomes effective, and maintaining compliance with the GDPR thereafter, may require significant time, resources
and expense, and may increase operating costs, or limit our ability to operate or expand our business.
If we fail to detect fraud or other actions that impact
ad campaign performance, we could lose the confidence of advertisers or agencies, which would cause our business to suffer.
Our business relies on effectively and
efficiently delivering advertising campaigns for advertisers. We may in the future be subject to fraudulent and malicious activities
such as the use of bots, non-human traffic delivered by machines that are designed to simulate human users and artificially inflate
user traffic. These activities could overstate the performance of any given ad campaign and could harm our reputation. It may
be difficult to detect fraudulent or malicious activity because we do not rely solely on our own content and rely in part on publisher
partners for controls with respect to such activity. While we routinely assess the campaign performance on our digital media properties’
websites and our partner publishers’ websites, such assessments may not detect or prevent fraudulent or malicious activity.
If fraudulent or other malicious activity is perpetrated by others, and we fail to detect or prevent it, the affected advertisers
may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraudulent or
malicious activity could lead to dissatisfaction with our solutions, refusals to pay, refund demands or withdrawal of future business.
If we fail to detect fraud or other actions that impact the performance of our ad campaigns, we could lose the confidence of our
advertisers or agencies, which could cause our business to suffer.
Technological errors and system failures could significantly
disrupt our operations and cause us to lose clients.
Our success depends on the continuing and
uninterrupted performance of our solutions, which we utilize to place advertisements, monitor the performance of advertising campaigns,
manage our ad opportunities and content inventory and respond to advertiser, publisher, third party application developer and
other partner needs. Our revenue depends on our ability to categorize video content, deliver ads and other content and target,
as well as measure, ad campaigns on a real-time basis. Factors that may adversely affect the performance of our solutions include:
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Inability to accurately
process data and extract meaningful insights and trends;
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Faulty or out-of-date
algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at scale;
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Technical or infrastructure
problems causing advertisements not to function, display properly or be placed next to inappropriate context;
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Inability to control
video completion rates, maintain user attention or prevent end users from skipping advertisements; and
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Unavailability
of standard digital video audience ratings and brand receptivity measurements for brand advertisers to effectively measure
the success of their campaigns.
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Sustained or repeated technological errors
or system failures that interrupt our ability to deliver advertisements and provide access to our solutions, including technological
failures affecting our ability to deliver advertising quickly and accurately and to process viewers’ responses to video
content or fill publisher content requests, could significantly reduce the attractiveness of our solutions and reduce our revenue.
Any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing
technological errors and system failures. Any such technological errors or system failures could harm our ability to attract potential
clients and retain and expand business with existing clients and, as a result, our business, financial condition and operating
results could be adversely affected.
Defects or errors in our solutions could harm our reputation,
result in significant costs to us, impair our ability to deliver advertising campaigns and impair our ability to meet our obligations
to our partners, publishers and content providers.
The technology underlying our solutions,
including our proprietary technology and technology provided by third-parties, may contain material defects or errors that can
adversely affect our ability to operate our business and cause significant harm to our reputation. This risk is compounded by
the complexity of the technology underlying our solutions and the large amounts of data we utilize. Although we test technologies
before incorporating them into our solutions, we cannot guarantee that all of the technologies that we incorporate will not contain
errors, bugs or other defects. Errors, defects, disruptions in service or other performance problems in our solutions could result
in the incomplete or inaccurate delivery of an ad campaign or other content, including serving an ad campaign in an incomplete
or inaccurate manner. Any such failure, malfunction, or disruption in service could result in damage to our reputation, our clients
withholding payment to us, advertisers, third party application developers, other partners, publishers, content providers or other
partners making claims or initiating litigation against us, and our giving credits to our clients toward future services.
We depend on third party Internet and telecommunication
providers to operate our business. Temporary failure of these services, including catastrophic or technological interruptions,
would reduce our revenues and damage our reputation, and securing alternate sources for these services could significantly increase
our expenses.
Each of our third party Internet and telecommunication
providers may not continue to provide services to us without disruptions in services, at the current cost or at all. Moreover,
as technology advances occur, we will need to upgrade our systems, infrastructure and technologies. Although there may be overlap
between the companies that provide such services, any such disruption in services, even if temporary, may negatively impact our
performance.
Our servers and communications systems
could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism,
acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions. Any of these events could cause
deterioration in performance or interruption in these systems, delays, loss of critical data and lost revenues. Further, because
our California headquarters and server location site are in seismically active areas, earthquakes present a particular serious
risk of business disruption.
Security breaches, computer viruses and computer hacking
attacks could harm our business and results of operations.
We collect, store and transmit advertising
information relating to our audience, advertisers, third party application developers, publishers, content providers and other
partners and we store information about our employees and the company (such as contracts and company confidential information).
We take steps to protect the security, integrity and confidentiality of such information, but there is no guarantee that inadvertent
or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite
our efforts. Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry and may
occur on our systems or those of our information technology vendors in the future. Security breaches, computer viruses or other
harmful software code and computer hacking attacks could result in the unauthorized disclosure, misuse, or loss of information,
legal claims and litigation, indemnity obligations, regulatory fines and penalties, contractual obligations and liabilities, and
other liabilities. In addition, if our security measures or those of our vendors are breached or unauthorized access to data otherwise
occurs, our solutions may be perceived as not being secure and advertisers, third party application developers, publishers, content
providers and other partners may reduce the use of or stop using our solutions, a government entity may bring a claim for inadequate
data protection and our own employees may bring claims against our company for breaches of confidentiality. Any of the foregoing
could damage our reputation among our current and potential clients, require significant expenditures of capital and other resources
and cause us to lose business and revenue.
Our failure to protect our intellectual property rights
could diminish the value of our services, weaken our competitive position and reduce our revenue.
We regard the protection of our intellectual
property as critical to our success. We strive to protect our intellectual property rights by relying on contractual restrictions.
We enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements
with third parties with whom we conduct business in order to limit access to, and disclosure and use of, our intellectual property
and proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual
property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies
by others. In addition, we have licensed in the past, and may license in the future, some of our proprietary rights to third parties.
These licensees may take unauthorized actions that diminish the value of our proprietary rights or harm our reputation
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We may, in the future, seek to protect our intellectual property in new ways, such as by registering our trademarks and
copyrights or applying for patents for technology we develop. Effective trade secret, copyright, trademark, domain name and patent
protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs
of defending our rights. Protecting our intellectual property through federal and state filings in the future may prove expensive
and time-consuming.
Monitoring unauthorized use of our intellectual
property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation
of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce,
our intellectual property rights. Our competitors may also independently develop similar technology. The laws in the United States
and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property rights. Our failure
to meaningfully protect our intellectual property could result in competitors offering services that incorporate our most technologically
advanced features, which could significantly reduce demand for our solutions. In addition, we may in the future need to initiate
infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and
may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation
results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be
able to stop our competitors from infringing upon our intellectual property rights.
Our business may suffer if it is alleged or determined
that our solutions or another aspect of our business infringes the intellectual property rights of others.
Companies in the online advertising industry
are often required to defend against litigation claims that are based on allegations of infringement or other violations of intellectual
property rights. Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being
able to resolve claims of intellectual property infringement or misappropriation without major financial expenditures or adverse
consequences. In the future, we may face claims by third parties that we infringe upon or misappropriate their intellectual property
rights, and we may be found to be infringing upon or to have misappropriated such rights. Such claims may be made by competitors
or other parties. Regardless of whether claims that we are infringing patents or infringing or misappropriating other intellectual
property rights have any merit, these claims are time-consuming and costly to evaluate and defend, and can impose a significant
burden on management and employees. The outcome of any litigation is inherently uncertain, and we may receive unfavorable interim
or preliminary rulings in the course of litigation. There can be no assurances that favorable final outcomes will be obtained
in all cases. We may decide to settle lawsuits and disputes on terms that are unfavorable to us. Some of our competitors have
substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a
greater degree and for longer periods of time than we could. Claims that we are infringing patents or other intellectual property
rights could:
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subject us to significant
liabilities for monetary damages, which may be tripled in certain instances, and the attorneys’ fees of others;
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prohibit us from
developing, commercializing or continuing to provide some or all of our solutions unless we obtain licenses from, and pay
royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially
favorable terms, or at all;
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subject us to indemnification
obligations or obligations to refund fees to, and adversely affect our relationships with, our current or future advertisers,
agencies, third party application developers, publishers, content providers and other partners;
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result in injunctive
relief against us, or otherwise result in delays or stoppages in providing all or certain aspects of our solutions;
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cause advertisers,
agencies, third party application developers, publishers, content providers and other partners to avoid working with us;
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divert the attention
and resources of management and technical personnel; and
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require technology
or branding changes to our solutions that would cause us to incur substantial cost and that we may be unable to execute effectively
or at all.
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We rely on data, other technology, and intellectual property
licensed from other parties, the failure or loss of which could increase our costs and delay or prevent the delivery of our solutions.
We utilize various types of data, other
technology, and intellectual property licensed from unaffiliated third parties in order to provide certain elements of our solutions.
Licensed technology, data, and intellectual property may not continue to be available on commercially reasonable terms, or at
all. Any loss of the right to use any of these on commercially reasonable terms, or at all, could result in delays in producing
or delivering our solutions until equivalent data, other technology, or intellectual property is identified and integrated, which
delays could harm our business. In this situation we would be required to either redesign our solutions to function with technology,
data or intellectual property available from other parties or to develop these components ourselves, which would result in increased
costs. Furthermore, we might be forced to limit the features available in our current or future solutions. If we fail to maintain
or renegotiate any of these technology or intellectual property licenses, we could face significant delays and diversion of resources
in attempting to develop similar or replacement technology, or to license and integrate a functional equivalent of the technology
or intellectual property. The occurrence of any of these events may have an adverse effect on our business, financial condition
and operating results.
Our business will suffer if we are unable to successfully
integrate acquired companies into our business or otherwise manage the growth associated with multiple acquisitions.
Part of our overall growth strategy is
to acquire businesses, personnel and technologies that are complementary to our existing business and expand our employee base
and the breadth of our offerings. Our ability to grow through future acquisitions will depend on the availability of suitable
acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates and
the availability of financing to complete larger acquisitions. Future acquisitions or investments could result in potential dilutive
issuances of equity securities, use of significant cash balances or incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could adversely affect our financial condition and results
of operations. The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain
that any particular acquisition or investment will produce the intended benefits.
Integration of a new company’s operations,
assets and personnel into ours will require significant attention from our management. The diversion of our management’s
attention away from our business and any difficulties encountered in the integration process could harm our ability to manage
our business. Future acquisitions will also expose us to potential risks, including risks associated with any acquired liabilities,
the integration of new operations, technologies and personnel, unforeseen or hidden liabilities, information security vulnerabilities,
the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue
to offset the costs and expenses of acquisitions, and potential loss of, or harm to, our relationships with employees, customers,
partners and suppliers as a result of the integration of new businesses.
We may need additional capital in the future to meet
our financial obligations and to pursue our business objectives. Additional capital may not be available on favorable terms, or
at all, which could compromise our ability to meet our financial obligations and grow our business.
We may need additional capital in the future
to expand our marketing and sales and technology development efforts, to make acquisitions or to pay the $16,000,000 of deferred
payment obligations to the Transferors under the Exchange Agreement, and to refinance our Term Loan obligations, which become
due on January 28, 2019. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available
on acceptable terms, we may be unable to fund the expansion of our marketing and sales and technology development efforts or take
advantage of acquisition or other opportunities, which could harm our business and results of operations.
Financing, if any, may be in the form of
debt or additional sales of equity securities, including common or preferred stock. The incurrence of debt or the sale of preferred
stock may result in the imposition of operational limitations and other covenants and payment obligations, any of which may be
burdensome to us. The sale of equity securities, including common or preferred stock, would result in dilution to the current
stockholders’ ownership.
Our results of operations and financial condition may
be adversely impacted by worldwide economic conditions.
In the event that the United States and/or
Europe experiences an economic downturn or the current economic climate worsens, our advertisers’ ability to spend on Internet
advertising could be reduced. A reduction in spending on Internet advertising could reduce the use of our products and services,
which would adversely impact our sales and revenue generation, margins and operating expenses, and consequently have a material
adverse effect on our business, results of operations and financial condition.
Geo-political uncertainties and instabilities may have
negative impacts on our ability to operate and/or grow.
As we expand our business globally, we
depend on a stable geo-political environment in the regions in which we operate. Should there be instabilities in regions where
we sell, wish to sell or have outsourced development operations, we may find it difficult to maintain or grow our business. As
we expand our advertiser base to cover Asia, the Middle East, Africa and Latin America, geo-political instabilities could have
an adverse impact on our business. Additionally, we outsource our technology development to an engineering firm located in Bosnia
and Herzegovina. The region has a history of geopolitical unrest and should a period of instability ensue, our technology development
capabilities could be jeopardized.
Risks Related to Our Company and Our Securities
The majority of our common stock is beneficially owned
by certain former members of Propel Media, which makes it possible for them to determine the outcome of all matters submitted
to our stockholders for approval. This control may be alleged to conflict with our interests and the interests of our other stockholders.
Certain former members of Propel Media
collectively own approximately 61.7% of our outstanding common stock. As a result of their stock ownership, these former members
of Propel Media will be able to control all matters requiring approval by our stockholders, including, but not limited to:
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the election of
directors;
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mergers, consolidations
or acquisitions, the sale of all or substantially all of our assets and other decisions affecting our capital structure; and
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our liquidation,
winding up and dissolution.
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The interests of these former members of
Propel Media may not be aligned with the interests of our other stockholders in these matters. In addition, this concentration
of stock ownership may have a material adverse effect on the trading price of our common stock because investors may perceive
disadvantages in owning shares in a company with significant stockholders. Such persons’ stock ownership also may discourage
a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could
reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Furthermore, under the stockholders’
agreement entered into between us and these former members of Propel Media, as long as these former members own at least 50% of
our outstanding common stock, they will have the right to designate a majority of the directors of our board and, as long as they
own at least 20% of our outstanding common stock, they will have the right to designate at least 40% of the directors of our board.
As a result of their right to designate a majority of the directors, these former members of Propel Media will have even greater
influence over the management of our business.
We do not intend to pay cash dividends on our common
stock in the foreseeable future. Accordingly, any return on your investment will occur only through appreciation of our common
stock.
We have not paid any cash dividends on
our common stock to date and do not anticipate paying dividends in the foreseeable future. We expect to retain earnings to finance
the growth of our business. In addition, the Financing Agreement restricts our ability to pay dividends on our common stock. Therefore,
any return on investments will only occur if the market price of our common stock appreciates.
An active public market for our common stock may not
develop or be sustained, which could affect your ability to sell our common stock or depress the market price of our common stock.
Shares of our common stock are quoted on
the OTC Pink Market. However, an active public market for our common stock may not develop or be sustained, which could affect
your ability to sell, or depress the market price of, our common stock. We are unable to predict whether an active trading market
for our common stock will develop or will be sustained.
The public price and trading volume of our common stock
may be volatile.
The price and volume of our common stock
may be volatile and subject to fluctuations. Some of the factors that could cause fluctuations in the stock price or trading volume
of our common stock include:
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general market
and economic conditions and market trends, including in the digital media advertising industry and the financial markets generally;
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the political,
economic and social situation in the United States, including privacy laws;
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actual or expected
variations in operating results;
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announcements by
us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, or other business
developments;
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adoption of new
accounting standards affecting the industry in which we operate;
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operations and
stock performance of competitors;
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litigation or governmental
action involving or affecting us or our subsidiaries;
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recruitment or
departure of key personnel;
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purchase or sales
of blocks of our common stock; and
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operating and stock
performance of the companies that investors may consider to be comparable to us.
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There can be no assurance that the price
of our common stock will not fluctuate or decline significantly. The stock market in recent years has experienced considerable
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies
and that could materially adversely affect the price of our common stock, regardless of our operating performance. The market
prices of stock in technology and advertising companies have been especially volatile. You should also be aware that price volatility
might be worse if the trading volume of shares of the common stock is low.
We will have the ability to issue “blank check”
preferred stock, which could affect the rights of holders of our common stock.
Our certificate of incorporation allows
our board of directors to issue 1,000,000 shares of preferred stock and to set the terms of such preferred stock. The terms of
such preferred stock may materially adversely impact the dividend and liquidation rights of holders of our common stock.
The requirements of being a public company, including
the requirements of the Sarbanes-Oxley Act of 2002, may strain our resources and distract our management, and we may be unable
to comply with these requirements in a timely or cost-effective manner.
We are required to comply with certain
laws and regulations and reporting requirements that are not applicable to private companies, including the reporting obligations
of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and other laws,
regulations and rules of the SEC. In order to maintain compliance with these laws, rules and regulations, we must, among other
things:
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maintain a more
comprehensive compliance function;
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design, establish,
evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section
404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight
Board;
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establish and maintain
internal policies, such as those relating to disclosure controls and procedures and insider trading;
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prepare and file
periodic and annual reports; and
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disseminate material
information about our company.
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If we are unable to maintain compliance
with our public reporting requirements or the other requirements that apply to public companies, we may be subject to sanction
or investigation by the SEC. In addition, we incur significant expense to comply with these statutes, regulations and requirements,
as a result of expenses associated with director and officer liability insurance, investor relations, audit work, legal counsel,
regulatory requirements and the establishment and maintenance of heightened corporate governance measures and management oversight.
In addition, compliance occupies a significant portion of our board of directors’ and management’s time.
Our failure to achieve and maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act could result in a restatement of its financial statements, cause
investors to lose confidence in our financial statements and have a material adverse effect on our business and stock price.
As a public company, our internal accounting
controls, including those applicable to our subsidiaries, are required to meet all standards applicable to companies with publicly
traded securities. Effective internal controls are necessary for us to provide reliable financial reports, to help mitigate the
risk of fraud and to operate successfully as a publicly traded company. As a public company, we are required to document and test
our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and the related
rules and regulations of the SEC and the Public Company Accounting Oversight Board. Furthermore, we are required to include in
this Form 10-K and in our future annual reports an assessment by our management of the effectiveness of our internal control over
financial reporting and, if we cease to be a non-accelerated filer as defined under rules and regulations of the SEC, a report
by our independent registered public accounting firm that attests to our internal control over financial reporting. The requirement
for a report by our independent registered public accounting firm will apply starting with the annual report for the first fiscal
year in which we have a public float of at least $75,000,000 as of the end of the second fiscal quarter of such fiscal year.
In performing the required tests under
Section 404 of the Sarbanes-Oxley Act with respect to internal control over financial reporting, we may identify significant deficiencies
or errors that we may not be able to remediate in time to meet our deadline for compliance. In such event, we may not be able
to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404
of the Sarbanes-Oxley Act or our independent registered public accounting firm may not be able or willing to issue a favorable
assessment. If either our management is unable to conclude that we have effective internal control over financial reporting or
our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence
in our reported financial information and our company, which could result in a decline in the market price of our common stock,
and cause us to fail to meet our future reporting obligations, which in turn could impact our ability to raise additional financing
if needed in the future. If we fail to implement the requirements of Section 404 of the Sarbanes-Oxley Act with respect to internal
control over financial reporting in a timely manner, we may also be subject to sanctions or investigation by regulatory authorities
such as the SEC. In addition, testing and maintaining internal control over financial reporting can divert our management’s
attention from other matters that are important to our business.
We are not subject to certain corporate governance requirements
applicable to listed companies.
Because our securities are not listed on
a national securities exchange, we are not subject to corporate governance requirements that are applicable to listed companies.
For instance, we are not required to have a majority of independent directors, a separate audit committee comprised entirely of
independent directors or a separate compensation committee comprised entirely of independent directors. In addition, we are not
required to have our board nominees selected, or recommended for the board’s selection, either by a nominating committee
comprised entirely of independent directors or by a majority of our independent directors. Accordingly, our stockholders may not
have the same protections afforded to stockholders of companies that are subject to the corporate governance requirements applicable
to listed companies.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
Propel currently maintains its principal
executive office at 2010 Main Street, Suite 900, Irvine, California. It leases 19,594 square feet at this location, at a rate
of approximately $51,000 per month, pursuant to a lease that expires on September 30, 2018.
Effective on November 21, 2017, we entered
into a lease for a new principal executive office that we intend to move into during September 2018. This new office is located
at 18565 Jamboree Road, Irvine, California 92612 and contains 13,397 square foot, at a rate of approximately $52,000 per month.
This lease expires on December 31, 2026.
We also occupy a shared workspace in New
York, NY, for which our obligations are month to month.
We believe that our current and new facilities
are suitable and adequate to meet our current needs and we believe that additional space is available, on commercially reasonable
terms, as needed.
ITEM
3. LEGAL PROCEEDINGS.
From time to time, we 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
December 31, 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.
In the action, Intrepid seeks to foreclose
on the security interest. Both Selling Source’s and Kitara Media’s obligations to Intrepid under the Note and Security
Agreement were subordinate to obligations Selling Source had to two groups of prior lenders (“Senior Lenders”). The
right of Intrepid to compel payments under the Note and/or foreclose the lien created by the Security Agreement was subject to
an Intercreditor Agreement by and between the Senior Lenders and Intrepid. Under the terms of the Intercreditor Agreement, Intrepid
could not take steps to compel Selling Source to make payment on the Note or foreclose the Security Agreement so long as the obligations
to the Senior Lenders remained outstanding. In addition, under the terms of the Intercreditor Agreement, the Senior Lenders had
the right to have the lien released on any of the collateral pledged as security under the Security Agreement. In the New York
action, Intrepid has challenged the Senior Lenders’ authority to release the lien and also challenged the enforceability
of the Intercreditor Agreement generally. The Court has not yet ruled on the merits of that challenge, but discovery on this lawsuit
has been completed and all the defendants intend to file motions for summary judgement within the next few months.
In addition, Selling Source’s obligations to the Senior Lenders remains outstanding.
The second matter is Intrepid Investments,
LLC v. Selling Source, LLC et al., Index No. 654309/2013, which was filed in the Supreme Court of the State of New York, County
of New York. This matter was originally limited to claims asserted by Intrepid against Selling Source regarding an earn-out calculation
entered into between it and Selling Source, and confirmed by an arbitrator earlier in 2017. In August, 2014, Intrepid amended
its complaint to include various breach of contractor claims against a variety of those defendants, including Kitara. The new
defendants, including Kitara, answered the amended complaint on November 7, 2014, denying liability for all claims. On February
19, 2015, the Court entered an order granting Selling Source’s motion to affirm the arbitration results. On March 3, 2015,
Selling Source filed a motion for partial summary judgment seeking dismissal of eleven of Intrepid’s remaining claims, and,
in September 2015, the New York Supreme Court granted this motion for summary judgment. The claims asserted against Kitara were
not among those addressed in Selling Source’s motion. For the claims remaining, the parties have exchanged
pleadings and Selling Source has provided documents and written interrogatory responses to Intrepid.
Based on these facts, Propel believes Intrepid’s
claims are without merit and intends to defend them vigorously. In any event, Selling Source has acknowledged an obligation to
indemnify and defend Kitara Media from any liability to Intrepid arising out of the Note and Security Agreement. Selling Source
owns 22.5 million shares of the common stock of Propel and our Chairman of the board of directors is also a director of Selling
Source.
ITEM
4. MINE SAFETY DISCLOSURES
Not applicable.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 - Organization and Description of Business
Propel Media, Inc. (“Propel”), a Delaware corporation,
is a diversified online advertising company. Propel generates revenues through the sale of advertising to advertisers who want
to reach consumers in the United States and internationally to promote their products and services. Propel is a holding company
for Propel Media LLC (“Propel Media”), a California limited liability company, Kitara Media Corp. (“Kitara”),
a Delaware corporation, and DeepIntent Technologies, Inc. (“DeepIntent”), a Delaware corporation. Propel, Propel Media,
Kitara, DeepIntent and their respective subsidiaries are collectively referred to herein as the “Company”.
Propel delivers advertising via its real-time, bid-based, online
advertising platform called Propel Media Platform. This technology platform allows advertisers to target users and deliver video,
display and text based advertising. Propel and its Propel Media Platform provide advertisers with an effective way to serve, manage
and maximize the performance of their online advertising purchasing. Propel offers both a self-serve platform and a managed services
option that give advertisers diverse solutions to reach online users and acquire customers.
Propel primarily serves its advertising to users who are part
of its owned and operated member-based network or the member-based networks of its third party application partners. Propel provides
its user base with access to its premium content for free and obtains the users’ permission to serve advertising to them
while they peruse content on the web. In the owned and operated model, advertising units are served directly to users through
a browser extension or other software installed on the user’s computer. Under the third party application model, Propel
serves advertising through its partners who are providing a variety of applications free of charge and such partners receive permission
from their users to serve ads to them.
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.
Acquisition of DeepIntent
On June 21, 2017 (“DeepIntent Closing Date”), pursuant
to a stock purchase agreement (“DeepIntent Acquisition Agreement”) with the former stockholders of DeepIntent, Propel
purchased 100% of the equity interests of DeepIntent, consisting of the issued and outstanding shares of Class A common stock,
Class B common stock and Class C common stock of DeepIntent. The purchase price, which is subject to an adjustment for working
capital, consisted of $4,000,000 paid at closing, $500,000 which was paid on December 21, 2017 and, $500,000 payable upon the
one year anniversary of the DeepIntent Closing Date (collectively, the “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).
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Liquidity and Capital Resources
As of December 31, 2017, the Company’s cash on hand was
$5,081,000 and the Company had a working capital deficit of $1,249,000. The Company recorded a net loss of $363,000 for the year
ended December 31, 2017. The net loss for the year ended December 31, 2017 reflected an income before income tax of $17,782,000
and an income tax expense of $18,145,000. Income tax expense for the year ended December 31, 2017 reflected an additional charge
of $10,748,000 to adjust net deferred income tax assets for the effect of the Tax Cuts and Job Act, passed into law on December
22, 2017. The Company has historically met its liquidity requirements through operations.
As of December 31, 2017, the borrowing base and outstanding
balance under the Revolving Loan were approximately $7,226,000 and $0, respectively, leaving $7,226,000 available to be drawn
under the arrangement.
Cash flows used in financing activities for the year ended
December 31, 2017 consisted of $9,149,000 in principal repayments on the Company’s Term Loan, consisting of $7,000,000 representing
scheduled quarterly principal payments and $2,149,000 paid pursuant to an annual excess cash flow sweep as provided for under
the Financing Agreement (See Note 8).
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 December 31, 2017.
Management has evaluated relevant conditions and
events with respect to its liquidity requirements for the twelve month period after the Company’s December 31, 2017 financial
statements are filed. The Company’s Term Loan, Revolving Loan, and a deferred payment due to the Term Loan lender become
due in January 2019. The Company will not have sufficient liquidity to satisfy these repayment obligations when they become due
without refinancing the Term Loan and/or raising equity capital. These conditions initially raised substantial doubt about the
Company’s ability to continue as a going concern. Management of the Company has established a plan, which has been approved
by its Board of Directors, to refinance the Term Loan and Revolving Loan.
Management believes that its plan supports management’s
findings that it is probable that such plans, when implemented, will result in the refinancing deemed necessary by the Company
to mitigate the relevant conditions that raised substantial doubt about the entity’s ability to continue as a going concern
one year after the date the financial statements are issued. Accordingly, the Company has determined that as of December 31, 2017,
there was not a finding of substantial doubt regarding the Company’s ability to continue as a going concern.
Management believes that the Company’s cash balances
on hand, cash flows expected to be generated from operations borrowings available under the Company’s Revolving Loan and
the proceeds for the refinance term loan arrangement will be sufficient to fund the Company’s net cash requirements through
March 2019.
Note 3 - Business Acquisition
On June 21, 2017, Propel purchased 100% of the equity interests
of DeepIntent. The purchase price, which is subject to a working capital 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 are accreted ratably over the deferred period. During the year ended December 31, 2017, accretion of this Deferred Payment
was $551,000, and is reflected within salaries, commissions, benefits and related expenses within the consolidated statements
of operations. As of December 31, 2017, $51,000 of accrued Deferred Payment obligation was included in accrued expenses in the
consolidated balance sheets.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 - Business Acquisition, continued
The aggregate purchase price was $4,228,000, consisting of
a $4,000,000 purchase price, an estimated working capital adjustment of $166,000 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. On December 21, 2017, the Company paid $513,000 to the sellers, which consisted of a $13,000 additional
installment towards the working capital adjustment and $500,000 in Deferred Payments.
The assets and liabilities of DeepIntent have been recorded
in the Company’s 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 goodwill acquired
of $3,159,000 will not be deductible for income tax purposes.
The following details the preliminary
allocation of the purchase price for the acquisition of DeepIntent:
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Fair Value
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Accounts receivable
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$
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371,000
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Security deposit
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4,000
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Intangible asset – developed technology
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1,320,000
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Goodwill
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3,159,000
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Accounts payable
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(107,000
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)
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Accrued expenses
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(98,000
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)
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Deferred tax liability, net
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(421,000
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)
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Net fair values assigned to assets acquired and liabilities assumed
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$
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4,228,000
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The following presents a summary of the purchase price consideration
for the purchase of DeepIntent:
Cash
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$
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4,166,000
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Fair value of earnout
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62,000
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Total Purchase Price Consideration
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$
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4,228,000
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The results of operations for DeepIntent for the period June
21, 2017 through December 31, 2017 are reflected in the Company’s results for the year ended December 31, 2017 in the accompanying
consolidated statements of operations. Included within the Company’s results for the year ended December 31, 2017, DeepIntent
generated revenues of $831,000 and incurred an operating loss of $1,860,000.
The Company cited the following reasons for the acquisition
of DeepIntent: DeepIntent provides a technology platform and experience in data science and algorithms that enables Propel to
provide innovative additional advertising solutions to its suite of solutions, and offer these solutions to its existing customers
and to new advertisers, as well as to leading brand advertisers and their advertising agencies. The DeepIntent acquisition also
provides the Company with the tools to supplement its current offerings with programmatic inventory, as well as provides diversification
and leverage to the business that is expected to be accretive to long-term enterprise value.
On February 21, 2018, DeepIntent formed a wholly owned subsidiary,
DeepIntent India Private Ltd., from which DeepIntent will conduct a material portion of the software development for its advertising
platform and data analysis.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 - Acquisition of DeepIntent,
continued
UnauditedPro Forma Information
The following table provides unaudited pro forma information
as if DeepIntent had been acquired as of January 1, 2016. The pro forma results do not include any anticipated cost synergies
or other effects of the integration of DeepIntent or recognition of compensation expense or fair value of the Earnouts. Pro forma
amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on
the dates indicated, nor is it indicative of the future operating results of the combined company.
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For the Year Ended December 31,
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2017
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2016
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Pro forma revenues
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$
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89,135,000
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$
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61,999,000
|
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Pro forma net (loss) income
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$
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(929,000
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)
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$
|
558,000
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Pro forma net (loss) income per share
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$
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(0.00
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)
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$
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0.00
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Note 4 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 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 consolidated
financial information.
Principles of Consolidation
The 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
consolidated financial statements.
Use of Estimates
The Company’s 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 consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.
The Company’s most significant estimates relate to the accounts receivable allowance, the forfeiture of customer deposits,
the valuation allowance on deferred tax assets, valuation of goodwill and intangibles, recognition of revenue, and the valuation
of stock-based compensation.
Cash
The Company’s credit facility includes the Revolving
Loan. The Company classifies a negative balance outstanding under the Revolving Loan as cash, as this amount is legally owed to
the Company and is immediately available to be drawn upon by the Company.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 December 31, 2017
and 2016 was $256,000 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.
The Company periodically evaluates whether events and circumstances
have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed
assets should be evaluated for possible impairment. Long-lived assets and certain identifiable intangible assets with definite
lives are reviewed for impairment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 360 “Property, Plant, and Equipment” whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future net cash flows (undiscounted and without interest)
expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company uses an estimate of
the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
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 consolidated statements of operations. On June 21, 2017,
the Company recorded an intangible asset with a useful life of 5 years representing 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 December 31, 2017 and December 31,
2016 were $1,201,000 and $20,000, respectively. Intangible assets at December 31, 2017 consisted of the DeepIntent intellectual
property of $1,320,000 net of accumulated amortization of $139,000 and the Propel Media trade name at a cost of $20,000.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Summary of Significant Accounting Policies, continued
Capitalization of Internally Developed Software
The Company capitalizes certain costs related to its software
developed or obtained for internal use in accordance with ASC 350-40. Costs related to preliminary project activities and post-implementation
activities are expensed as incurred. Internal and external costs incurred during the application development stage, including
upgrades and enhancements representing modifications that will result in significant additional functionality, are capitalized.
Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment
and are amortized on a straight-line basis over the software’s estimated useful life ranging from 12 months to 36 months.
The Company evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability
of these assets. Based upon management’s assessment of capitalized software, the Company recorded impairment charges of
$20,000 and $54,000 for the year ended December 31, 2017 and 2016, respectively, to write off the book value of certain internally
developed capitalized software. These impairment charges were included in the impairment of software and intangible assets within
the consolidated statements of operations.
Goodwill
Goodwill represents the excess of purchase price over the fair
value of identifiable net assets of companies acquired. Goodwill and other intangible assets acquired in a business combination
and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. An entity
has the option to first assess qualitative factors to determine whether events or circumstances lead to a conclusion that is more
likely than not that the fair value of a reporting unit is greater than its carrying amount. If an entity determines that qualitative
factors indicate that it is more likely than not that the fair value of the entity exceeds the carrying amount, the two step quantitative
evaluation is not necessary. Under the two-step quantitative impairment test, the evaluation of impairment involves comparing
the current fair value of each reporting unit to its carrying value, including goodwill.
In the event the estimated fair value of the Company is less
than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the
reporting unit’s goodwill with the implied fair value of that goodwill. The implied fair value of goodwill is the excess
of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit
as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase
price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess would be recognized,
which could significantly and adversely impact reported results of operations and stockholders' equity.
On June 21, 2017, in connection with the purchase of DeepIntent,
the Company separately valued the intellectual property and other assets and liabilities acquired, and then determined Goodwill
as the residual of the purchase price less identified assets.
As of December 31, 2017 and 2016, the Company evaluated goodwill
for potential impairment. Pursuant to the accounting guidance, the Company elected to initially assess certain qualitative factors
in order to determine whether a quantitative analysis was required. Since the carrying amount of the Company’s reporting
unit was negative, in evaluating the qualitative factors, the Company was required to determine whether there were any adverse
qualitative factors pointing to a conclusion that an impairment of goodwill exists. If so, then the Company would need to conduct
the second step of the impairment test in order to measure the amount of impairment, if any. In its evaluation, the Company evaluated
macroeconomic, industry and market conditions, trends in financial performance, Company specific events which might adversely
impact the fair value of the reporting unit, as well as whether there were any significant differences between the carrying amounts
and the estimated fair values of the reporting unit's assets and liabilities, and/or the existence of significant unrecognized
intangibles. Based upon this qualitative evaluation, the Company determined that as of December 31, 2017, in the aggregate, such
factors did not point to a conclusion that an impairment of goodwill would exist. Based upon this evaluation, the Company concluded
that there was no goodwill impairment as of December 31, 2017 or 2016.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Summary of Significant Accounting Policies, continued
Debt Issuance Costs
Debt issuance costs (principally legal and other fees) are
charged as debt discounts and are amortized over the term of the related loan using the effective interest method. Amortization
of debt issuance costs amounted to $219,000 and $243,000 for the years ended December 31, 2017 and 2016, respectively, and is
included in interest expense within the accompanying consolidated statements of operations.
Advertiser Deposits
Advertiser deposits consist primarily of prepayment amounts
on deposit from advertiser customers and are recorded as an advertiser deposit liability which represents deferred revenue. These
deposits to the extent unused are contractually non-refundable if the advertiser elects not to continue with the Company’s
services after 6 months of inactivity. However, the Company has a practice of providing refunds or reactivations to customers
for which it does not have the contractual obligation to do so for business development purposes. Advertiser deposits which are
not expected to be refunded or re-applied are deemed forfeited and at such time are recognized as revenue.
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.
Effective January 1, 2018, the Company will adopt ASC Topic
606, “Revenue from Contracts with Customers,” and in connection therewith, adopt the modified retrospective method.
The Company expects that the implementation of ASC Top 606 will not result in any change in the manner in which the Company recognizes
revenue.
The amounts on deposit from customers are recorded as an advertiser
deposit liability in the accompanying 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.
Leases
The Company amortizes its office lease costs on a straight
line basis over the minimum lease term. The Company leases computer hardware and software and office equipment with varying lease
terms.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Summary of Significant Accounting Policies, continued
Technology, Development and Maintenance
Technology, development and maintenance costs are expensed
as incurred and are included in operating expenses. The Company incurred technology, development, and maintenance costs of $4,021,000
and $3,488,000 for the years ended December 31, 2017 and 2016, respectively.
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 years ended December 31, 2017 and 2016:
|
|
For
the year Ended
December 31,
|
|
|
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%
|
|
|
|
|
|
Accounts
receivable
|
|
11%
of accounts receivable from one customer
|
|
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
|
|
18%,
16%, and 14% of cost of revenues, or 48% of cost of revenues in the aggregate
|
|
18%,
17%, and 16% of cost of revenue, or 51% of cost of revenues in the aggregate
|
|
|
|
|
|
The
Company’s largest vendors reported as a percentage of accounts payable
|
|
27%
and 10% of accounts payable, or 37% of accounts payable in the aggregate
|
|
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 December 31, 2017 and 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 Consolidated Financial Statements
Note 4 - Summary of Significant Accounting Policies, continued
Income Taxes
The Company recognizes deferred tax liabilities
and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis
of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The
Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability
by tax jurisdiction.
A valuation allowance for such tax assets
and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset
will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation
allowance on such assets would be reduced. Tax benefits are recognized only for tax positions that are more likely than not to
be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater
than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded
for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
As of December 31, 2017 and 2016, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses
the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties
on uncertain tax positions as a component of income tax expense.
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 year
ended December 31, 2017, the Company excluded potential common shares resulting from the exercise of stock options (20,490,000
potential common shares) and of warrants (6,363,636 potential common shares) as their inclusion would be anti-dilutive. For the
year ended December 31, 2016, the Company excluded potential common shares resulting from the exercise of stock options (23,351,875
potential common shares) and of warrants (6,363,636 potential common shares) as their inclusion would be anti-dilutive.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Summary of Significant Accounting Policies, continued
Stock-based Compensation Policy
The Company accounts for stock-based compensation in accordance
with ASC 718, “Compensation - Stock Compensation” (“ASC 718”). ASC 718 establishes accounting for stock-based
awards exchanged for employee services. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally
the vesting period of the equity grant). The fair value of the Company’s common stock options are estimated using the Black
Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the
expected life. The Company calculates the expected volatility using the historical volatility for a pool of peer companies over
the most recent period equal to the expected term and evaluates the extent to which available information indicate that future
volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or
declare any cash dividends on its common stock. The risk-free rates for the expected terms of the stock options are based on the
U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on
stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards
issued using the simplified method. The simplified method assumes each vesting tranche of the award has a term equal to the midpoint
between when the award vests and when the award expires. The Company expenses stock-based compensation by using the straight-line
method.
The Company accounts for stock options granted to consultants
pursuant to the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”).
Stock-based compensation cost is measured at the grant date and at the end of each reporting period for unvested awards, based
on the fair value of the award, and is recognized as expense over the consultant’s requisite service period (generally the
vesting period of the equity grant). The fair value of the Company’s stock options granted to consultants are estimated
using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest
rate and the expected life. In accordance with ASC 505-50, the Company recorded adjustments at the end of each reporting period
to reflect the mark-to-market adjustment of the fair value of unvested awards granted to consultants. In connection with the mark-to-market
adjustments at December 31, 2017 and 2016, the Company utilized the closing price of the Company’s common stock, as published
on the OTC Pink Market, operated by OTC Markets Group (“OTC Pink Market”), as an input to the Black Scholes option-pricing
model for the fair value of its common stock.
Subsequent events
The Company has evaluated events that occurred subsequent to
December 31, 2017 through the date these consolidated financial statements were issued. Other than as disclosed in Note 2, management
has concluded that there were no subsequent events that required disclosure in these consolidated financial statements.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Summary of Significant Accounting Policies, continued
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 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 consolidated financial position and results of operations.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers (Topic 606) which has subsequently been amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12,
and ASU 2017-13. These ASUs outline a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance includes
a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations
in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In July 2015, the FASB deferred
the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. Early adoption will be permitted
as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods.
A full retrospective or modified retrospective approach is required. In addition, the new guidance will require enhanced disclosures,
including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement
and recognition.
The Company has elected to apply the modified retrospective
method and the impact was determined to be immaterial on the consolidated financial statements. Accordingly, the new revenue standard
will be applied prospectively in our consolidated financial statements from January 1, 2018 forward and reported financial information
for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect
during those historical periods.
The Company has performed an analysis and identified its revenues
and costs that are within the scope of the new guidance. The Company anticipates that its current methods of recognizing revenues
will not be significantly impacted by the new guidance.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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. 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 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.
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 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. 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
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.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 on
which such shares are issued to the Transferors (and if a closing price or bid price, as applicable, is not reported on such day,
then the stock shall be valued at the last closing price or bid price, as applicable, reported).
The following represents the outstanding obligations to the
Transferors under the Exchange Agreement:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Amount due on or before June 30, 2019 (pursuant to amendment dated January 26,
2016)
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Amount due January 28, 2019
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Total, gross
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
Less: discount
|
|
|
(797,000
|
)
|
|
|
(1,431,000
|
)
|
Total, net
|
|
$
|
15,203,000
|
|
|
$
|
14,569,000
|
|
As a result of the Transactions, immediately after the closing,
the Transferors collectively owned 154,125,921 shares of Propel common stock, representing 61.7% of Propel’s outstanding
common stock, and the former stockholders of Kitara owned the remaining 95,884,241 shares of Propel common stock, representing
38.3% of Propel’s outstanding common stock.
During the years ended December 31, 2017 and 2016, the Company
recorded discount amortization of $634,000 and $645,000, respectively. The unamortized discount was $797,000 as of December 31,
2017 and $1,431,000 as of December 31, 2016.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 - Property and Equipment, Net
Property and equipment, net, consists of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Leasehold improvements
|
|
$
|
751,000
|
|
|
$
|
751,000
|
|
Furniture and equipment
|
|
|
2,266,000
|
|
|
|
2,213,000
|
|
Computer software
|
|
|
7,539,000
|
|
|
|
7,250,000
|
|
Equipment and construction in progress
|
|
|
1,768,000
|
|
|
|
-
|
|
|
|
|
12,324,000
|
|
|
|
10,214,000
|
|
Less: Accumulated depreciation
|
|
|
(9,009,000
|
)
|
|
|
(8,620,000
|
)
|
|
|
$
|
3,315,000
|
|
|
$
|
1,594,000
|
|
Depreciation expense for the years ended December 31, 2017
and 2016 was $1,521,000 and $2,102,000, respectively.
Note 7 - Intangibles, Net
Intangible assets consisted of the value received in connection
with the acquisition of DeepIntent, which included DeepIntent’s intellectual property and software as well as the Propel
media trade name.
Intangible assets are comprised of the following:
|
|
As of December 31
|
|
|
|
2017
|
|
|
2016
|
|
Propel Media trade name (indefinite life)
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
DeepIntent software & technology (60 months)
|
|
|
1,320,000
|
|
|
|
-
|
|
Total Intangible Assets
|
|
|
1,340,000
|
|
|
|
20,000
|
|
Less: Accumulated amortization
|
|
|
(139,000
|
)
|
|
|
-
|
|
Net
|
|
$
|
1,201,000
|
|
|
$
|
20,000
|
|
Amortization expense for the years December 31, 2017 and 2016
was $139,000 and $40,000 respectively.
Note 8 - 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.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 - Financing Agreement, continued
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 $692,000 and $762,000, for the years ended December 31, 2017 and 2016, respectively. The balance of the closing fee
original issue discount was $668,000 and $1,360,000 as of December 31, 2017 and 2016, respectively, and is reflected within the
Term Loan obligations on the consolidated balance sheets. The Company recorded as interest expense accretion of the Deferred Fee
of $3,056,000 and $3,227,000 for the years ended December 31, 2017 and 2016, respectively. The balance of the accreted Deferred
Fee as of December 31, 2017 and 2016 was $9,401,000 and $6,344,000, respectively, and is reflected within the Term Loan obligations
on the 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 $219,000
and $243,000 for the years ended December 31, 2017 and 2016, respectively. The balance of the unamortized debt issuance costs
of $209,000 and $428,000, respectively, is reflected within the Term Loan obligations on the consolidated balance sheets as of
December 31, 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 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 December
31, 2017, the Company was in compliance with the covenants and the leverage ratio requirement under the Finance Agreement.
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 year ended December 31, 2017, interest on the Term Loan bore an effective interest rate per
annum of 10.2%.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 - Financing Agreement, continued
Term Loan, continued
The following represents the obligations
outstanding under the Term Loan:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Principal
|
|
$
|
58,382,000
|
|
|
$
|
67,531,000
|
|
Discounts
|
|
|
(877,000
|
)
|
|
|
(1,787,000
|
)
|
Accreted value of the Deferred Fee ($12,500,000)
|
|
|
9,401,000
|
|
|
|
6,344,000
|
|
Net
|
|
|
66,906,000
|
|
|
|
72,088,000
|
|
Less: Current portion
|
|
|
(6,181,000
|
)
|
|
|
(6,089,000
|
)
|
Long-term portion
|
|
$
|
60,725,000
|
|
|
$
|
65,999,000
|
|
The future minimum payments on the Company’s Term Loan
are as follows:
For the years ended December 31,
|
|
Term Loan
|
|
2018
|
|
|
7,000,000
|
|
2019
|
|
|
51,382,000
|
|
Total, gross
|
|
|
58,382,000
|
|
Less: debt discount
|
|
|
(877,000
|
)
|
Plus: accreted value through December 31, 2017 of the Deferred Fee
($12,500,000)
|
|
|
9,401,000
|
|
Total, net
|
|
|
66,906,000
|
|
Less: current portion
|
|
|
(6,181,000
|
)
|
Long-term debt
|
|
$
|
60,725,000
|
|
Revolving Loan
As of December 31, 2017 and 2016, there was no balance outstanding
on the Revolving Loan. As of December 31, 2017, $7,226,000 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 effective
rate per annum for LIBOR borrowings was 7.2% during the year ended December 31, 2017), or (ii) the bank’s reference rate
(the effective annual reference rate was approximately 10.00% during the year ended December 31, 2017). For each revolving loan,
the Company can choose to borrow either at the LIBOR or the reference rate.
As of December 31, 2017, the Company was in compliance with
all covenants under the Financing Agreement and other loan documents.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 - 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 years ended December 31,
2017 and 2016, totaled $4,042,000 and $3,283,000 respectively. These amounts were included in property and equipment and operating
expenses, as applicable, in the accompanying consolidated balance sheets and 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
$7,500 and $7,000 as of December 31, 2017 and 2016, respectively, which are reported within accrued expenses in the consolidated
balance sheets.
During the years ended December 31, 2017 and 2016, the Company
has incurred a total of $181,000 and $194,000, 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 December 31,
2017 and December 31, 2016.
Note 10 - Commitments and Contingencies
Operating leases
On December 10, 2008, the Company entered into a non-cancelable
lease agreement for its Irvine, California office expiring on August 31, 2014. On March 30, 2011, the Company amended the agreement
to substitute the premises for a different Irvine location. This lease agreement is set to expire on September 30, 2018.
On November 21, 2017, the Company entered into a non-cancelable
lease agreement for its new Irvine location, which commences on November 1, 2018 and expires December 31, 2026. The lease agreement
for the new office facility provides for increases in future minimum annual rental payments. Based on the agreement, the Company
will not be obligated to pay any rent during the nine month period commencing on the first day of the first month of the lease
term. The agreement requires the Company to pay its portion of certain executory costs (real estate taxes, insurance, and repairs).
Rent expense totaled $464,000 and $430,000 during the years
ended December 31, 2017 and 2016, respectively.
The following is an annual schedule of approximate future minimum
rental payments required under the Company’s current and expiring lease agreement and its new lease agreement (the reduced
amount in 2019 is due to the effect of the nine month deferral for the start of rent payments under the November 2017 lease. :
Years Ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
458,000
|
|
2019
|
|
|
265,000
|
|
2020
|
|
|
651,000
|
|
2021
|
|
|
670,000
|
|
Thereafter
|
|
|
3,665,000
|
|
|
|
$
|
5,709,000
|
|
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 - Commitments and Contingencies, continued
Litigation
From time to time, the Company may be involved in litigation
relating to claims arising out of our operations in the normal course of business. Other than as set forth below, at December
31, 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.
In the action, Intrepid seeks to foreclose on the security interest.
Both Selling Source’s and Kitara Media’s obligations to Intrepid under the Note and Security Agreement were subordinate
to obligations Selling Source had to two groups of prior lenders (“Senior Lenders”). The right of Intrepid to compel
payments under the Note and/or foreclose the lien created by the Security Agreement was subject to an Intercreditor Agreement by
and between the Senior Lenders and Intrepid. Under the terms of the Intercreditor Agreement, Intrepid could not take steps to compel
Selling Source to make payment on the Note or foreclose the Security Agreement so long as the obligations to the Senior Lenders
remained outstanding. In addition, under the terms of the Intercreditor Agreement, the Senior Lenders had the right to have the
lien released on any of the collateral pledged as security under the Security Agreement. In the New York action, Intrepid has challenged
the Senior Lenders’ authority to release the lien and also challenged the enforceability of the Intercreditor Agreement generally.
The Court has not yet ruled on the merits of that challenge, but discovery on this lawsuit has been completed and all the defendants
intend to file motions for summary judgement within the next few months. In addition, Selling Source’s obligations to the
Senior Lenders remains outstanding.
The second matter is Intrepid Investments, LLC v. Selling Source,
LLC et al., Index No. 654309/2013, which was filed in the Supreme Court of the State of New York, County of New York. This matter
was originally limited to claims asserted by Intrepid against Selling Source regarding an earn-out calculation entered into between
it and Selling Source, and confirmed by an arbitrator earlier in 2017. In August, 2014, Intrepid amended its complaint to include
various breach of contractor claims against a variety of those defendants, including Kitara. The new defendants, including Kitara,
answered the amended complaint on November 7, 2014, denying liability for all claims. On February 19, 2015, the Court entered an
order granting Selling Source’s motion to affirm the arbitration results. On March 3, 2015, Selling Source filed a motion
for partial summary judgment seeking dismissal of eleven of Intrepid’s remaining claims, and, in September 2015, the New
York Supreme Court granted this motion for summary judgment. The claims asserted against Kitara were not among those addressed
in Selling Source’s motion. For the claims remaining, the parties have exchanged pleadings and Selling Source has provided
documents and written interrogatory responses to Intrepid.
Based on these facts, Propel believes Intrepid’s claims are
without merit and intends to defend them vigorously. In any event, Selling Source has acknowledged an obligation to indemnify
and defend Kitara Media from any liability to Intrepid arising out of the Note and Security Agreement. Selling Source owns 22.5
million shares of the common stock of Propel and our Chairman of the board of directors is also a director of Selling Source.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 - 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 $257,000 and $222,000 during the years ended December 31, 2017 and 2016, respectively, which was recorded
in salaries, commissions, benefits and related expenses on the consolidated statements of operations.
Note 12 - Income Taxes
Income tax expense is as follows:
|
|
For the Year Ended
December 31,
|
|
Current
|
|
2017
|
|
|
2016
|
|
Federal
|
|
$
|
5,429,000
|
|
|
$
|
1,374,000
|
|
State
|
|
|
378,000
|
|
|
|
140,000
|
|
Total current
|
|
|
5,807,000
|
|
|
|
1,514,000
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11,255,000
|
|
|
|
(585,000
|
)
|
State
|
|
|
1,083,000
|
|
|
|
2,968,000
|
|
Total deferred
|
|
|
12,338,000
|
|
|
|
2,383,000
|
|
Total Income Tax Expense
|
|
$
|
18,145,000
|
|
|
$
|
3,897,000
|
|
The difference between the Company's effective income tax rate
and the federal statutory corporate tax rate is as follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Statutory federal tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
|
1.6
|
%
|
|
|
2.1
|
%
|
Permanent differences:
|
|
|
|
|
|
|
|
|
Return to provision Adjustments
|
|
|
-
|
%
|
|
|
4.4
|
%
|
Change in expected state rate for reversal of deferred tax benefit
|
|
|
3.8
|
%
|
|
|
43.7
|
%
|
Change in future federal tax rate
|
|
|
60.4
|
%
|
|
|
-
|
%
|
Other
|
|
|
2.2
|
%
|
|
|
2.8
|
%
|
Total
|
|
|
102.0
|
%
|
|
|
87.0
|
%
|
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Income Taxes, continued
Significant components of deferred tax assets and liabilities
as of December 31, 2017 and 2016 is as follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
Intangible – Propel Media step-up
|
|
$
|
15,242,000
|
|
|
$
|
26,354,000
|
|
Net operating loss carryforward
|
|
|
998,000
|
|
|
|
1,775,000
|
|
Accrued vacation
|
|
|
122,000
|
|
|
|
146,000
|
|
Amortization of intangibles
|
|
|
-
|
|
|
|
380,000
|
|
Non-qualified stock options
|
|
|
753,000
|
|
|
|
1,081,000
|
|
Bad debt
|
|
|
58,000
|
|
|
|
96,000
|
|
Debt amortization
|
|
|
2,134,000
|
|
|
|
2,300,000
|
|
Depreciation
|
|
|
15,000
|
|
|
|
(18,000
|
)
|
Gross deferred tax assets
|
|
|
19,322,000
|
|
|
|
32,114,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
(51,000
|
)
|
|
|
-
|
|
Depreciation
|
|
|
(331,000
|
)
|
|
|
(423,000
|
)
|
Other
|
|
|
(8,000
|
)
|
|
|
-
|
|
Gross deferred tax liabilities
|
|
|
(390,000
|
)
|
|
|
(423,000
|
)
|
Net deferred tax assets
|
|
$
|
18,932,000
|
|
|
$
|
31,691,000
|
|
The U. S. Tax Cuts and Jobs Act (the “Tax Act”)
was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Among other things, the Tax Act reduces
the US statutory corporate income tax rate to 21% effective January 1, 2018. Under ASC 740, the effects of changes in tax
rates and laws are recognized in the period which the new legislation is enacted. Consequently, the Company has recorded a provisional
decrease in its deferred tax assets and liabilities of $10,748,000 with a corresponding net adjustment to deferred income tax
expense for the year ended December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB
118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information
available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax
effects of the Tax Act. As we collect and prepare necessary data and interpret the Tax Act and any additional guidance issued
by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts.
Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments
are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
As of December 31, 2017, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $4,752,000, which were acquired in connection with the
acquisition of Kitara. Internal Revenue Code (“IRC”) Section 382 limits the utilization of net operating loss carryforwards
upon a change in control of a company. Pursuant to IRC Section 382, changes in control occur when the stock ownership of one or
more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased on a cumulative
basis by more than 50 percentage points. Management cannot control the ownership changes occurring as a result of public trading
of the Company’s Common Stock. Accordingly, there is a risk of an ownership change beyond the control of the Company that
could trigger a limitation of the use of the loss carryover. In connection with the acquisition of Kitara, the Company prepared
an analysis under IRC Section 382 and determined that (i) there was a more than 50% ownership change on January 28, 2015 and (ii)
that of the $8,200,000 acquired net operating losses, only $6,535,000 would be eligible for carryover to future periods. The
net operating losses are expected to expire in the years 2029 through 2034.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Stock-Based Compensation
Equity Incentive Plans
2014 Long-Term Incentive Equity Plan
On October 9, 2014, Propel and its then sole stockholder approved
the 2014 Long-Term Incentive Plan (“2014 Plan”), pursuant to which a total of nine percent of the fully-diluted shares
of the Company’s common stock outstanding as of the closing of the Transactions (or 26,172,326 shares) became available
for awards under the plan upon such closing. Kitara’s stockholders approved the plan as of January 26, 2015.
2012 and 2013 Long-Term Incentive Equity Plans
On May 14, 2012 and December 3, 2013, Kitara adopted the 2012
Long-Term Incentive Equity Plan (“2012 Plan”) and the 2013 Long-Term Incentive Equity Plan (“2013 Plan”),
respectively. The 2012 Plan and 2013 Plan provide for the grant of stock options, stock appreciation rights, restricted stock
and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company.
Effective January 28, 2015, Propel assumed the 2012 Plan and
2013 Plan, and all outstanding stock options thereunder. Propel amended the plans so that no further awards may be issued under
such plans after the closing of the Reverse Merger.
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
|
|
|
2,861,875
|
|
|
|
0.55
|
|
|
|
0.30
|
|
|
|
-
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
20,490,000
|
|
|
$
|
0.49
|
|
|
$
|
0.27
|
|
|
|
5.69
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
15,516,880
|
|
|
$
|
0.46
|
|
|
$
|
0.25
|
|
|
|
5.18
|
|
|
$
|
-
|
|
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 December
31, 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.
Propel Media, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Stock-Based Compensation, continued
Stock Option Award Activity, continued
|
|
Weighted
Average
Mark-to-Market
Adjustments
for the Year
Ended
December 31,
2017
|
|
Average Stock Price
|
|
$
|
0.14
|
|
Average Exercise Price
|
|
$
|
0.55
|
|
Average Dividend Yield
|
|
|
0
|
%
|
Average Expected Volatility
|
|
|
61.3
|
%
|
Average Risk-free interest rate
|
|
|
2.1
|
%
|
Average Expected Life (in years)
|
|
|
7.94
|
|
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 $960,000 and $1,640,000 for the years ended December 31, 2017 and 2016, respectively. The expense was reflected in selling,
general and administrative expenses on the accompanying consolidated statements of operations. As of December 31, 2017, the unamortized
value of stock options was $1,153,000, including the effect of the mark-to-market adjustment for unvested awards granted to consultants.
As of December 31, 2017, the unamortized portion will be expensed through November 2019 and the weighted average remaining amortization
period was 1.0 years.
Note 14 - Equity
Preferred Stock
The Company has no preferred stock issued. The Company’s
amended and restated certificate of incorporation and amended and restated bylaws include provisions that allow the Company’s
Board of Directors to issue, without further action by the stockholders, up to 1,000,000 shares of undesignated preferred stock.
Warrant
On April 29, 2014 in connection with a private placement of
shares of Kitara’s common stock, the Company issued warrants to purchase an aggregate of 6,363,636 shares of common stock,
including to certain of the Company’s directors and/or their affiliates. The warrants are exercisable at a price of $0.825
per share and expire on April 30, 2019.
Common Stock
The Company has one class of common stock outstanding with
a total number of shares authorized of 500,000,000. As of December 31, 2017, the Company had outstanding 250,010,162 shares of
common stock.
Note 15 - 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 $1,894,000 and $871,000 for the years ended December 31, 2017 and 2016, respectively. The bonuses are included in
salaries, commissions, benefits and related expenses within the Company’s consolidated statements of operations. At December
31, 2017 and 2016, the accrued executive bonuses were $511,000 and $268,000 respectively, and the amounts were included in accrued
expenses within the consolidated balance sheets.